The Corporate Transparency Act (CTA), integrated within the Anti-Money Laundering Act as part of the 2021 National Defense Authorization Act, aims to combat money laundering, terrorism financing, organized crime, and related financial offenses by requiring numerous corporations, limited liability companies, and other entities to disclose beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN).

This additional reporting requirement, effective as of January 1, 2024, can seem onerous to many small business owners. We’re often asked, “Why does the government need even more information? They already have all this, don’t they?” This new regulation makes important business information, like who controls the company and who is making decisions, accessible to law enforcement, national security entities, and financial institutions.

For small business owners worried about even more government regulations, there’s nothing to worry about – as long as you file your BOI report and have nothing to hide, that is. That obfuscation, or hiding who influences or benefits from a business entity, is the reason the law came into being in the first place. Let’s take a look at why the new BOI reporting mandate matters.

Unveiling the Veil: How Shell Companies and Shadow Owners Evade Taxes and Regulations

While most businesses are helmed by decent, law-abiding, and civic-minded individuals, there are a few bad actors in the marketplace who exploit legal loopholes to obscure ownership and skirt regulatory oversight. Shell companies, also known as “mailbox” or “shelf” companies, are legal entities typically created for the purpose of holding assets, conducting transactions, or engaging in business activities. Their defining feature is their nominal ownership structure, wherein the true beneficiaries, known as beneficial owners, remain hidden behind layers of corporate veils.

While not all shell companies engage in illicit activities, their opacity creates fertile ground for tax evasion, money laundering, and regulatory evasion. Understanding the mechanics behind these entities illuminates the challenges faced by governments and regulatory bodies in combating financial misconduct.

These entities are often registered in jurisdictions with lax regulatory requirements and stringent secrecy laws, such as offshore tax havens or jurisdictions with low corporate taxes. The allure of anonymity and favorable tax treatment makes them attractive vehicles for individuals and corporations seeking to conceal wealth, evade taxes, or facilitate illicit financial activities. Shell companies enable tax evasion through various means, including:

• Profit Shifting: Multinational corporations exploit mismatches in tax codes across jurisdictions to artificially shift profits to low-tax or no-tax jurisdictions where their shell companies are domiciled.
• Masking Beneficial Ownership: The opaque ownership structure of shell companies conceals the identities of beneficial owners, hindering regulators’ ability to enforce anti-money laundering (AML) and know-your-customer (KYC) regulations.
• Avoiding Reporting Requirements: By operating in jurisdictions with minimal reporting requirements, shell companies evade disclosure obligations, enabling them to engage in illicit activities with impunity.
• Facilitating Illicit Transactions: Shell companies serve as conduits for illicit funds, allowing individuals and entities to launder money, finance terrorism, or engage in other illegal activities while maintaining anonymity.

These avenues for shady business are of serious concern to the federal government, which is working to enhance transparency, reform regulations, and develop technological solutions that allow it to combat illicit business activities more effectively. The new beneficial ownership information (BOI) reporting requirement is one such tool in the government’s arsenal. By requiring businesses to disclose who owns, or who directly or indirectly exerts significant control over a reporting company, there will be less room for individuals to conceal assets, evade taxes, or engage in nefarious activities behind a veil of anonymity.

I Know I Have to File a BOI Report…Now What?

The new BOI reporting requirements can be a bit confusing for some business owners, and it might not always be easy to identify who qualifies as a “beneficial owner.” But no worries! Propel can help. FinCEN authorizes external individuals to act on a reporting company’s behalf. We can help you gather the required information, submit your information accurately, and stay on top of any future reporting deadlines. Say hello and our team of business formation and compliance experts will step up to support. Let’s get your BOI report filed today!