The Corporate Transparency Act (CTA) is part of US federal legislation that outlines how corporations, limited liability corporations, and other legal entities are required to report information about their beneficial owners. The law is enforced by the US Treasury’s Financial Crimes Enforcement Network (FinCEN) as part of a broad government effort to crack down on illicit financing and enhance corporate transparency.

Compliance with the CTA is mandatory for corporations subject to the terms of the law. Failure to comply with the act will result in steep penalties. Deliberate false reporting or fraudulent activity can result in fines of up to $10,000 to the owners of the corporation, and the possibility for two years of incarceration in federal prison. The CTA does allow penalties on false or misleading statements to be corrected if the controller who submitted the initial reports files a supplementary amendment within 90 days.

FTX: a case of corporate transparency gone wrong

Before diving into the specifics of entity corporate compliance, let’s first pull the bad apple out of the bunch. Here’s an example of how not to comply with the laws and risk financial bankruptcy.

FTX is a cryptocurrency trading firm that made recent headlines for mismanagement of their corporate finances. FTX founder and former CEO Sam Bankman-Fried triggered a global cryptocurrency crisis when it was discovered that customer funds had been misappropriated by funneling up to $4 billion of customer purchases into self-directed entities, operating in conjunction with FTX. Bankman-Fried’s alleged intent was to rescue his established trading firm, Alameda Research, from collapse amid higher costs imposed by rising interest rates.

Bankman-Fried was forced to step down from the company in November 2022, and John Ray III was appointed the new CEO of FTX in the wake of the company’s filing for Chapter 11. In a submission to a federal bankruptcy court, the new CEO described FDX’s corporate controls as “a complete failure.”

According to the information provided to the courts, FTX had 30-40 self-directed entities operating under FTX Group. The corporation is officially headquartered in the Bahamas and registered to conduct business in the United States.

However, many of the self-directed entities, particularly those in the Bahamas and other Caribbean countries, had no corporate governance or entity management in place. Some of the entities never established a Board of Directors, and they never had an official board or shareholder meeting. As a result, the lack of corporate structure created problems when due diligence was conducted by rival crypto exchange firm Binance, which intended to purchase FTX before discovering the extent of corporate malfeasance that occurred under Bankman-Fried’s tenure with the company.

What you need to know about complying with FinCEN

The FTX scandal has shed greater light on the need for corporate transparency and accountability across all sectors of the economy. Investors are entitled to know the truth about a corporation’s financial performance, and the purpose of legislation like the Corporate Transparency Act is to hold these corporations accountable.

Corporations designated as “reporting companies” under the CTA are bound by the legislation. A reporting company is a corporation, limited liability corporation, or other legal entity that has filed a corporate charter with the Secretary of State.

A corporate charter is part of the incorporation process in the United States, which describes how government regulators can contact representatives or shareholders of the corporation. Foreign-based corporations must also file a corporate charter to legally conduct business in the United States.

The purpose of transparency for reporting companies

The federal government enacted the CTA to crack down on corporate fraud, money laundering, and other financial crimes that cost the United States millions in lost tax revenue. The directive for FinCEN is to hold reporting companies accountable.

There’s also a practical business case for each reporting entity to comply with the mandate, aside from the fact that it is enforceable law with significant penalties for violating those laws. Corporate transparency reports submitted to federal regulators include structured organizational charts that illustrate the hierarchy of ownership and responsibility for the corporation.

These organizational charts allow corporations with sub-entities or complex corporate structures to provide a transparent representation for accountability. Org. charts expedite decision making by showcasing which parties are ultimately responsible for calling the shots.

Who is a “beneficial owner?”

Under the CTA, a beneficial owner is defined as any individual who has a legally binding contract to exercise substantial control over the corporation, or is recognized as a shareholder with no less than 25 percent of issued shares.

Proxies who act on behalf of shareholders are not recognized as beneficial owners of a corporation. Creditors owed debts from the company, as well as employees with small percentages of ownership in the corporation are also exempt from the terms of the CTA.

What information must be reported to FinCEN?

Unless special exemptions are administered to a corporation, the company must submit a detailed report to the Director of FinCEN. The report will contain personal information about each beneficial owner in the corporation, which includes:

1. The full legal name of the beneficial owner

2. Their recognized date of birth

3. Current residential address and the address of their business (if separate from the residential address)

4. Identification number from a document issued by a state or local government, such as a passport number, driver’s license number, etc.

The information supplied to FinCEN must be current and accurate. If personal information about any beneficial owner changes, the corporation is legally required to submit a supplementary report with the updated information no later than one year after the changes have been made.

How subsidiary management software helps corporations avoid repeating the FTX scandal

Subsidiary management software assists corporations with financial transparency, organizational structuring, and minute book management. Corporations that use subsidiary management software maintain accurate and diligent records, enabling accurate reporting to FinCEN with no hassle.

With subsidiary management software, corporations can document exactly where they’re domiciled in the US, or in a foreign country. If the entity is foreign-based, filings that document the corporation’s right to conduct business in the United States are easily accessible.

Subsidiary management software includes built-in organizational chart templates that can be populated with the names and titles of beneficial owners. The platform also includes templates for documenting Boards of Directors, corporate committees, and even shareholder ledgers to document the issuance and transfer of shares among beneficial owners.

One of the contributions to the FTX scandal was that no due diligence had been conducted on the investors who became beneficial owners in the corporation. The lack of corporate governance and org. charts meant that venture capitalists would make investments without accountable oversight of the other investors. The lack of transparency meant the cash flow in the company was never fully reported.

Subsidiary management software prevents other corporations from falling into the FTX trap. All monetary transactions are recorded in diligent corporate records. Investors and other venture capitalists are recorded as beneficial owners of the corporation, allowing the company to remain transparent and accountable with federal regulators.

Can your corporation benefit from subsidiary management software? Join the MinuteBox revolution for a modernized approach to corporate governance and transparency that will keep federal regulators well-informed and out of your business.