The Corporate Transparency Act (CTA) represents a significant shift in corporate governance and compliance requirements. As a U.S. federal law, Corporate Transparent Act beneficial ownership disclosures are required to combat illicit activities such as money laundering and tax evasion. While its primary focus is on private companies, its implications for public companies remain an important topic for corporate governance teams and compliance officers. Understanding these nuances is critical for ensuring full regulatory adherence and avoiding potential legal or reputational risks.
What Is the Corporate Transparency Act?
The Corporate Transparency Act introduces new compliance measures aimed at increasing corporate transparency and preventing financial crimes. By requiring businesses to disclose beneficial ownership information, the CTA seeks to enhance regulatory oversight and close loopholes that have historically allowed anonymous corporate structures to engage in illicit activities.
The CTA was enacted as part of the National Defense Authorization Act in 2021. Its primary goal is to enhance corporate transparency by requiring businesses to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). By creating a centralized database of beneficial ownership information, the CTA aims to deter financial crimes that exploit anonymous corporate structures.
The law applies predominantly to privately held entities, requiring them to disclose information about their beneficial owners—individuals who own or control at least 25% of the company or exercise significant control over it. This information must be filed with FinCEN and updated upon any changes to meet corporate transparency act reporting requirements.
The CTA officially took effect on January 1, 2024. However, the Act was ordered to be put on temporary hold by the U.S. District Court for the Eastern District of Texas.
How Does the Corporate Transparency Act Affect Public Companies?
Although public companies are largely exempt from CTA requirements, they should still be aware of how the law may impact their subsidiaries, investments, and overall compliance efforts. Understanding these nuances ensures that corporate governance remains strong and potential reporting obligations are met.
General Exemptions
Most publicly traded companies are exempt entities, meaning they are exempt from the CTA’s reporting requirements. Entities that are subject to SEC reporting obligations—including those filing under the Securities Exchange Act of 1934—are not required to submit duplicate beneficial ownership data to FinCEN. This exemption acknowledges that public companies already provide detailed ownership information through SEC disclosures.
However, certain circumstances may still require a public company or its affiliated entities to comply with CTA requirements. Public companies that own non-reporting subsidiaries, joint ventures, or special purpose vehicles (SPVs) outside of SEC purview may need to ensure CTA compliance for these entities. Additionally, if a public company invests in private entities, those businesses may still need to file beneficial ownership information reports, indirectly affecting the parent company’s compliance responsibilities.
Overlapping Disclosures with SEC Filings
Public companies are already subject to various SEC disclosure requirements, many of which involve beneficial ownership reporting. However, it is essential to understand how these existing requirements align with or differ from the Corporate Transparency Act to ensure full compliance.
Comparison of Filings
Public companies already disclose significant ownership information through various SEC filings, such as Section 16 filings, which report executive ownership and insider trading activities, and 13D and 13G filings, which outline beneficial ownership stakes of 5% or more in publicly traded companies. These disclosures align with corporate transparency act reporting requirements.
Information Gaps
Despite these disclosures, the CTA may still demand additional personally identifiable information (PII), including residential addresses of beneficial owners, government-issued identification details, and direct control or influence over decision-making beyond stock ownership percentages.
Compliance Streamlining
Since SEC filings already contain significant beneficial ownership data, compliance teams can leverage beneficial ownership reporting software to maintain consistent records and ensure alignment across regulatory frameworks. This software can help streamline the reporting process and ensure accurate data tracking.
Risk Management and Corporate Governance Considerations
Public companies must assess their corporate structures to determine any indirect compliance risks posed by the CTA. Even if a company itself is exempt, its investments, subsidiaries, or affiliates could still fall under the law’s requirements, necessitating careful oversight.
Indirect Exposure
Even if a public company itself is exempt, its affiliated private entities, partnerships, or investment vehicles may still be required to report beneficial ownership information under the CTA. This indirect exposure necessitates corporate governance oversight to ensure compliance across all corporate structures.
Reputational & Legal Risks
Failing to comply with CTA obligations, even indirectly, can lead to fines, penalties, reputational damage, and legal liability. Non-compliance can result in significant fines or enforcement actions. Additionally, a lack of transparency can raise concerns among investors, regulators, and stakeholders. Officers and directors could also be held accountable for oversight failures within subsidiaries.
To mitigate risks, corporate boards should actively oversee compliance efforts and ensure governance structures address CTA-related obligations. Establishing clear protocols for tracking corporate transparency within the broader corporate structure is essential.
Corporate Transparency Act Best Practices for Compliance Teams
For compliance teams, staying ahead of regulatory obligations is critical. Implementing proactive measures and leveraging existing reporting frameworks can help streamline CTA compliance and minimize risk.
Internal Audit
Public companies should conduct a corporate structure review to identify any subsidiaries, joint ventures, or SPVs that may require CTA reporting. They should also assess ownership stakes in private businesses that could trigger disclosure obligations under corporate transparency act requirements.
Documentation & Data Collection
For entities that do not qualify for exemption, compliance teams should develop centralized ownership databases to track changes in beneficial ownership. Implementing secure storage for personally identifiable information (PII) is also essential to meet FinCEN reporting standards and corporate transparency act final regulations.
Coordinate with Legal and Tax Advisors
Given the complex nature of multi-jurisdictional ownership structures, companies should collaborate with legal counsel to assess compliance obligations and potential liabilities. Tax advisors can help navigate cross-border ownership disclosures, while regulatory experts can ensure the company stays ahead of evolving CTA interpretations and corporate transparency act exemptions.
Navigating the Future of Corporate Transparency
While public companies are largely exempt from the CTA, they should still assess their exposure to compliance risks through subsidiaries and affiliated entities. By proactively managing beneficial ownership tracking and aligning CTA requirements with existing SEC disclosures, compliance teams can ensure seamless regulatory adherence.
Public companies are generally exempt, but their subsidiaries and private investments may still fall under CTA rules due to corporate transparency act exemptions. Overlap with SEC filings can help streamline compliance, but some additional data collection may be required. Risk management and board oversight are critical to preventing legal and reputational risks. Best practices include conducting internal audits, strengthening documentation processes, and coordinating with legal advisors.
Companies should consult with compliance and legal teams to confirm their obligations and leverage advanced beneficial ownership reporting software for streamlined compliance management. As regulatory frameworks continue to evolve, staying ahead of corporate transparency act final regulations will be key to maintaining robust governance and regulatory compliance.
