CTA Reporting Suspended but BSA Obligations and BOI Risks Remain

Following a series of legal challenges and court rulings, the future of the Corporate Transparency Act (CTA) and the Beneficial Ownership Information (BOI) repository at the Financial Crimes Enforcement Network (FinCEN) remain unclear.

The origins of the Corporate Transparency Act can be traced to the Financial Action Task Force (FATF) and its criticism of the United States in 2006 for not collecting beneficial ownership information and urged corrective action by July 2008. The CTA also mentions a December 2016 FATF evaluation, which found little progress over the preceding decade and identified the lack of timely access to adequate, accurate, and current beneficial ownership information as a fundamental gap in U.S. efforts to combat money laundering and terrorist financing.

FATF’s work extends beyond setting standards; it also includes monitoring and evaluating countries’ efforts in adopting and enforcing those standards. It assesses countries’ AML/CFT regimes through a rigorous peer review process, issuing reports that help guide improvements. FATF’s recommendations have been adopted globally, influencing regional and national regulatory frameworks. Additionally, FATF maintains a “grey list” and “blacklist” of jurisdictions that are deemed non-compliant with its standards, placing significant pressure on those nations to improve their financial regulations or face possible economic sanctions.

RegTech Insight spoke with Jill DeWitt, Senior Director – Compliance & Third-Party Risk Management Solutions at Moody’s to discuss where this latest development leaves firms’ BOI risk assessments.

“This law was designed to align the U.S. globally with financial transparency, especially around beneficial ownership of entities to help prevent terrorist organizations, organized criminals, and other bad actors from exploiting the U.S. financial system and hide their illicitly obtained financial gains,” she says.

While arguments against burdening small businesses with the requirements of beneficial-ownership compliance and of financial reporting are understandable, greater transparency would help raise financial institutions’ awareness of bad actors in their customer base and support them in avoiding onboarding bad actors who might have otherwise been hidden or overlooked.

A critical first step in compliance with the CTA—and FATF guidelines—is identifying the exact business entity you are engaging with, and who actually owns that business. Once you determine the true owners, you can properly assess risks—such as whether the entity is a shell company, whether a beneficial owner has a criminal background, or if they are subject to sanctions.

Without a complete understanding of beneficial ownership—from the organization’s name to its ultimate owners—it becomes difficult to conduct a thorough risk analysis. This, in turn, makes it even more challenging to operationalize risk mitigation at scale in a way that is both effective and efficient for the firm. However, finding the ultimate beneficial owners of third parties can be difficult due to complex ownership structures. Bad actors may use shell companies to hide true owners or illicit funds.

Moody’s analysis of 472 million companies identified seven indicators of shell company risk. As of November 2023, about 19 million companies raised one risk flag, and more than 900,000 companies raised two or more flags.

One flag, the age of company directors, revealed thousands of directors who are as young as zero or older than the world’s longest-living person on record. One listed director — at 943 years old — would have been born in the 11th century. Another flag, mass registration, showed that over 22,000 companies were registered to the Giza pyramid complex in Egypt, home to the Great Pyramid.

Moody’s offers a comprehensive suite of solutions designed to help organizations identify, verify, and monitor ultimate beneficial owners (UBOs) to ensure compliance with regulatory requirements and mitigate risks associated with opaque ownership structures.

The Orbis Database is a powerful resource containing information on over 450 million companies and entities worldwide. The database provides access to detailed corporate structures, including direct and indirect ownership, enabling users to identify UBOs and understand complex ownership hierarchies, and facilitates the calculation of ownership percentages and control relationships, aiding in the assessment of potential risks.

With the future of the CTA in a state of legal flux and several initial filing deadlines having already passed, FinCEN has issued an alert clarifying that there will be no liability for missed filings at this time. Given the ongoing uncertainty, businesses can either file with FinCEN voluntarily or continue assessing their filing obligations as the legal landscape develops, but the suspension—not the cancellation— of FinCEN filing obligations doesn’t relieve firms of their AML/CTF obligations under the existing Bank Secrecy Act (BSA) and the regulatory risks associated with unknown beneficial owners.