The Corporate Transparency Act or an Expanded Customer Due Diligence Rule

In 2021, Congress passed the Corporate Transparency Act (“CTA”) to combat money laundering, terrorist financing, and other illicit activities by requiring certain business entities to report personal information about the individuals who own or control the business and those who helped create or register the business. The reported information will be held in a federal database controlled by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network and can be disclosed upon request by domestic and foreign governmental agencies and financial institutions. While the motivation behind the CTA is warranted due to the recent uncovering of illegal shell companies and reports of poor governmental policies and procedures, there are numerous issues with how the CTA is currently written. The definitions are overly broad and confusing to the average business owner and leave the door open for complex organizational structures to be exempt from compliance. Further, the CTA may intrude on many constitutional rights, such as the freedom of association, the right to privacy, and state sovereignty from the federal government. A potential solution to fix these issues would be to expand the already well-established Customer Due Diligence Rule (“CDD Rule”) to include the new CTA requirements. The CDD Rule requires financial institutions to collect similar beneficial ownership information from companies when the companies go to open a bank account. By requiring the financial institutions to collect and retain the beneficial ownership information from the companies, the burdens of compliance and monitoring shift from the individual business owners to the financial institutions. The financial institutions likely have more capital and resources to understand and comply with these complex requirements. In addition, by moving the relationship away from the federal government and to the financial institutions, the potential constitutional issues could vanish.