The Corporate Transparency Act (CTA) is a significant piece of legislation aimed at combating financial crimes such as money laundering and fraud. While designed to target large corporations, the CTA also has implications for small accounting firms.
This article will explore the CTA, its key provisions, and how it affects small accounting firms.
What is the Corporate Transparency Act?
The Corporate Transparency Act became law in January 2021 as part of the National Defense Authorization Act. Its main objective is to identify and disclose the beneficial ownership of companies, adding an extra layer of transparency to combat illicit financial activities.
The Act requires certain companies to provide detailed information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a U.S. Department of the Treasury bureau.
Key Provisions of the Corporate Transparency Act
Beneficial Ownership Reporting: The CTA mandates that certain companies must disclose beneficial ownership information, including names, addresses, birthdates, and identification numbers, to FinCEN. Beneficial owners are individuals who directly or indirectly control a company or have a substantial interest in its profits.
Reporting Requirements: Companies falling under the CTA's scope are obligated to file reports within one year of the legislation's effective date or upon formation. Additionally, any changes to beneficial ownership must be reported promptly.
- Reporting begins: January 1, 2024
- Entities formed before January 1, 2024, must file before January 1, 2025
- Entities formed after January 1, 2024, must file within 90 days of company formation
- Changes of Information (COI) must be filed within 30 days of the “change”
- Previously exempt reporting companies must file a BOI report within 30 days of the “non-exempt date”
Penalties for Non-Compliance: Failure to comply with the reporting requirements of the CTA can result in substantial penalties. Companies could face civil penalties of up to $500 per day or criminal penalties of up to $10,000 and imprisonment for up to two years.
Individuals may also be subject to civil or criminal penalties for willfully causing a company not to file a required BOI report or by providing incomplete or false information.
Impact on Small Accounting Firms
While the CTA primarily targets large corporations, it also affects small accounting firms that provide services to covered companies. Here are some ways the CTA impacts small accounting firms:
Increased Compliance Responsibilities: Small accounting firms may have to educate themselves on the intricacies of the CTA and familiarize themselves with the reporting requirements to assist their clients in fulfilling their obligations.
Additional Due Diligence: Companies covered by the CTA will rely on their accounting firms to gather and verify beneficial ownership information. This places an added burden on small accounting firms to implement rigorous due diligence procedures and ensure accurate reporting.
Potential Business Growth Opportunities: Small accounting firms with expertise in compliance and reporting can seize the opportunity to offer specialized services to companies affected by the CTA. This could lead to new business prospects and increased revenue streams.
Liability and Reputation Risks: Failure to properly comply with the CTA's reporting requirements can expose accounting firms to legal and reputational risks. Small firms must navigate the compliance landscape carefully, seek legal counsel if needed, and maintain the highest standards of accuracy and transparency.
Impact on Professional Liability Insurance Coverage
The implementation of the Corporate Transparency Act (CTA) has raised concerns among accountants regarding the impact on their professional liability insurance coverage.
The key question for accountants is whether their professional liability insurance policy covers CTA. Here are some key factors to consider:
Policy Wording: It is crucial to thoroughly review the policy wording and consider whether preparing BOI forms would fall within the definition of covered professional services. Certain policies may have specific language that excludes or includes explicit coverage for this type of work.
Scope of Services: Policies typically define the scope of covered services. If preparing BOI forms is considered within the normal scope of services for accountants, it may be covered under the policy. However, if the policy explicitly excludes this activity or imposes limitations, coverage might be excluded.
Exclusions and Endorsements: Professional liability policies often contain exclusions for specific activities or circumstances. Accountants should carefully review the exclusions section of their policy to determine if preparing BOI forms falls within any stated exclusions. Additionally, endorsements or amendments to the policy may explicitly address coverage for CTA-related activities.
Updates and Policy Amendments: The implementation of the CTA is relatively recent, and insurance providers may respond in the future by updating policy language or issuing endorsements to address coverage for preparing BOI forms. As of now, there do not appear to be any updates or amendments relating to the CTA.
Specific Policy Endorsements: In the future, some insurers may offer optional endorsements tailored to the CTA's requirements. These endorsements can provide explicit coverage for preparing BOI forms and filling any potential gaps in the base policy coverage.
Concluding thoughts about The Corporate Transparency Act
The Corporate Transparency Act aims to enhance corporate transparency and combat financial crimes. While primarily targeting large corporations, the Act also imposes obligations on small accounting firms that serve covered companies.
Accountants' concerns about the impact of the Corporate Transparency Act on their professional liability insurance coverage are well-founded.
While policy updates, endorsements, or amendments may address coverage gaps, seeking expert advice and reviewing policy limits are essential in ensuring sufficient insurance protection.
By taking proactive measures to evaluate their coverage, accountants can navigate the evolving landscape and protect themselves against potential professional liability risks under the CTA.