New Treasury Department Rules Target Criminal Activities

The upcoming regulations from the U.S. Treasury Department are designed to curb fraud and money-laundering by requiring businesses to reveal their true owners.

This initiative is a result of the Corporate Transparency Act, passed several years ago, which mandates that over 30 million small businesses and corporations in the U.S. provide Beneficial Ownership Information (BOI) reports identifying key individuals with ownership stakes.

Preventing Illicit Activities Through Transparency

Often, organizations overlook verifying the identities of businesses and legal entities in money laundering investigations,” said Jennifer Pitt, Senior Fraud & Security Analyst at Javelin Strategy & Research. Prior to the Corporate Transparency Act of 2021, small businesses lacked the obligation to disclose such information.”

In the past, some LLCs would list only a single person as their statutory agent, making it difficult for authorities to trace ownership and leading money launderers to exploit this lack of transparency.

Impact on Small Businesses

While the new framework aims to minimize illegal activities, compliance challenges could arise for law-abiding small businesses. Non-compliance penalties are severe; businesses not submitting reports by January 1st could face daily civil fines of up to $591, while owners might incur criminal penalties including up to $10,000 and two years in prison.

These fines can be burdensome for small businesses that are already under financial strain,” noted Pitt. As of December 1st, only about a third of companies had completed their BOI filings.”

Regulations and Exemptions

The regulations are intended to protect small businesses, with provisions allowing corrections within 90 days post-January 1st to avoid penalties. Larger companies and financial institutions remain exempt since they already report ownership data.

Legal challenges have been mounted, notably in Texas, but compliance is still expected in most states. While small businesses may face short-term disruptions, the measures could benefit banks by enhancing Know-Your-Business (KYB) checks.

Transparency and Privacy Concerns

The need for transparency raises privacy concerns and potential government overreach. A federal court in Texas has ruled against enforcement, highlighting these issues.

Javelin will develop a KYB scorecard focusing on the importance of understanding beneficial ownership,” said Pitt. This could positively impact financial services providers while raising awareness about potential risks.”