Many in the business community celebrated the sudden March announcement that US-based companies would be exempt from reporting under the Corporate Transparency Act. But Jamie A. Schafer of Perkins Coie offers a different perspective: FinCEN could instead make tweaks — rather than wholesale changes — that could help the US maintain its progress on preventing money laundering and other financial crimes.
Business owners and general counsel across the US — and beyond — breathed a sigh of relief when the FinCEN in March exempted all US companies and persons from beneficial ownership information reporting requirements under the Corporate Transparency Act (CTA).
Enacted in 2021 to combat anonymous shell companies and illicit money flows, the CTA requires millions of companies to report their beneficial ownership details, or BOI, to FinCEN. FinCEN’s analysis estimated that the costs across filing entities could total $3.3 billion annually. The CTA also raises conflicting interests between personal privacy and national security, imposing a byzantine reporting scheme that leaves entities with complex ownership structures often struggling to understand who, what, when, how and why they are required to report. For many, the rollout of the CTA over the past year and a half has been an unmitigated mess.
Yet those celebrating the proposed rollback — which would essentially suspend the CTA — are cheering a pyrrhic victory. It is paramount that the public and officials appreciate the long-term consequences of gutting BOI reporting. The current proposal would prolong the legal uncertainty surrounding CTA reporting, increase long-term compliance burdens as US states enact their own BOI rules and still leave the door wide open for a revival of some or all CTA provisions if policy and political winds change. The proposal could also seriously jeopardize the United States’ reputation internationally for failing to address money laundering, tax evasion, drug trafficking and other financial crimes the CTA was designed to combat.
The good news? There’s still time to avert disaster by adjusting the rule to close loopholes that would allow the greatest source of risk — foreign-owned US shell entities — to exploit transparency gaps.
A framework that does not work
The new proposal limits CTA application to entities formed under non-US law that are registered to do business here — roughly 11,000 entities, or fewer than 1% of the 33 million companies FinCEN previously estimated would come under the CTA’s purview.
Despite FinCEN commentary suggesting the current proposal unburdens US businesses while targeting foreign bad actors who are hiding assets in the United States, the rule would actually exempt from reporting the overwhelming majority of foreign owners of US assets and accounts. Rather than registering a foreign entity, for a host of tax and other reasons, such individuals typically form a US domestic entity to transact through — and US domestic entities, even those with foreign owners, are fully exempt from reporting under the current proposed rule.
For all the talk of the risks posed by US “shell companies” owned by foreign nationals, the rule FinCEN has proposed would do nothing to capture the beneficial ownership of those entities, nor would it provide a path to enforcement against the “gatekeepers” that form and administer US entities on behalf of those foreign owners.
CTA: How Did We Get Here?
With its dramatic reversal early this month and newly issued interim rule, the Treasury Department has carved a clear fork in the road for the Corporate Transparency Act. But that’s far from the only sudden shift in the CTA’s bumpy history. Richard L. Hathaway of law firm Kane Russell Coleman Logan explores the law’s tumultuous past and looks to its murky future.
Read moreDetailsMore uncertainty and greater compliance burdens to come
After a flurry of court challenges and injunctions, the US Supreme Court allowed the law to take effect in January 2025. FinCEN has continued to defend the CTA’s constitutionality while simultaneously proposing to narrow its scope almost beyond recognition. And we can expect more regulatory whiplash to come.
While the statute provides some executive-branch discretion to exempt entities from reporting on a risk-basis, the CTA is an act of Congress, and a rollback of this magnitude begs for a legal challenge. Anti-corruption advocacy groups and local law enforcement who were counting on the CTA database will likely take up that call, plunging the CTA’s future back into uncertainty for years to come. Notably, after the Supreme Court’s landmark 2024 decision in Loper Bright, courts will no longer defer to FinCEN’s interpretation of the CTA — one that seems at odds with Congress’s intentions.
States may attempt to fill the gap by imposing their own mini-CTAs on entities formed and registered to do business in those jurisdictions. New York state’s LLC Transparency Act goes into effect in 2026; this could be broadened and other states could soon follow, resulting in a patchwork of uncoordinated regulations.
The Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, views the CTA as a linchpin in US efforts to address gaps in anti-money laundering controls that nearly all other member states have already closed. Hollowing out the CTA would be yet another blow to the country’s reputation abroad in an already volatile geopolitical moment.
A risk-based solution offers a path forward
The upshot for business? Corporate transparency requirements aren’t going away in the long term — and compliance with patchwork and constantly shifting laws could become even more onerous if the proposed rule is adopted as final. The solution: sane corporate transparency rules that focus on entities that represent the most significant practical risks, while avoiding unnecessary burdens — and uncertainty — for US businesses.
Thankfully, the die is not yet cast. FinCEN’s proposal is open to public comment until May 27. Expanding the final rule to impose BOI reporting on foreign-owned US entities represents a well-calibrated, risk-based approach to avoiding the myriad negative consequences of gutting the CTA. Any such expansion should be coupled with further targeted exemptions addressing some of the flaws of the existing rule. For example, the CTA exempts “large operating companies” but almost invariably — and nonsensically — requires affiliated entities with identical ownership, such as holding companies and sister companies, to report.
The reality is that shell companies formed in the US pose serious risks we must address if we are to stem the tide of money laundering, sanctions evasion, corruption and fraud. If the interim rule becomes final, we should expect the corporate transparency pendulum to continue to swing wildly from one extreme to another for years to come — to the great detriment of US business and national security interests.
Jamie A. Schafer is a partner in the Washington, D.C. office of Perkins Coie. She represents clients in complex domestic and international criminal and regulatory matters and advises on the FCPA, anti-money laundering laws and regulations and embargoes administered by the US Department of the Treasury and Office of Foreign Assets Control. She is also the firmwide co-chair of the sports industry group. 
