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The U.S. Department of Treasury has announced the removal of a requirement mandating small businesses to disclose ownership information to the federal government, marking a notable shift in the ongoing discussion regarding the Corporate Transparency Act. This regulation, established in 2021, aimed to enhance transparency by compelling millions of businesses to identify their “beneficial owners.” The intention was to combat illicit financial activities often facilitated through opaque corporate structures.
Originally slated to go into effect on March 21, the rule faced multiple delays and potential financial penalties for noncompliance, which could reach thousands of dollars. However, the Financial Crimes Enforcement Network (FinCEN), a division of the Treasury, recently issued an interim final rule exempting all U.S. citizens and companies from these reporting obligations.
This interim rule invites public feedback and is anticipated to be finalized later in the year.
‘This absolutely waters down the rule’
Legal experts express concern that if the FinCEN rule remains in place, it significantly undermines the original intent of the Corporate Transparency Act. Critics argue that it creates various loopholes that could enable criminals to launder money through U.S. corporations without disclosure. Erin Bryan, a partner at Dorsey & Whitney, remarked, “This absolutely waters down the rule,” noting that many shell companies could avoid reporting their ownership details.
However, foreign companies operating in the U.S. will still be held to the reporting standard, according to FinCEN. The revised rules are estimated to affect roughly 20,000 entities in the first year, a steep decline from the previously projected figure of 32.6 million entities that included corporations, limited liability companies, and other business forms.
Bryan highlighted that many countries in the Western hemisphere have already implemented similar compliance regulations.
FinCEN did not provide additional commentary on this development.
A deregulatory push
This policy adjustment aligns with the deregulatory initiatives advocated by the Trump administration, as noted by FinCEN director Andrea Gacki, who took office in 2023. The prior administration had suspended enforcement of the beneficial ownership requirement earlier, setting the stage for this latest development. Potential civil penalties for noncompliance could have reached up to $591 per day, alongside severe criminal fines and imprisonment risks.
Gacki pointed out that the Treasury had reevaluated the balance between the benefits of collecting beneficial ownership data and the regulatory challenges posed by implementing the rule. Considerations included the risks of illicit finance, alternative information sources, the burdens associated with data collection, and the overarching public interest.
Potential loopholes
While there is still an obligation for specific foreign entities registered to operate in the U.S. to file reports, those that have a U.S.-based beneficial owner are now exempt from revealing that person’s information. Bryan noted that this exemption significantly narrows the scope of the reporting requirement.
Some experts worry that the interim rule will facilitate a scenario where criminals can easily bypass scrutiny. Scott Greytak, director of advocacy for Transparency International U.S., stated that the new regulations could enable illicit activities: “From this day forward, criminals can evade this national security law by simply starting and running those front companies inside the United States,” he asserted.
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