Over 99% of entities previously subject to the Corporate Transparency Act’s reporting requirements could be exempt after Treasury announced a shift in focus to foreign entities last week, said the FACT Coalition, a nonpartisan coalition aimed at combating illicit finance.
FACT and other groups — including the Conservative Political Action Conference (CPAC) and the Main Street Alliance — shared their concerns about Treasury’s action during a March 6 briefing. The consensus: law enforcement needs both domestic and foreign entity beneficial ownership reports to expose abuses by anonymous shell companies and keep communities safe.
The math.
FACT contends that “as many as 99.8 percent of all covered entities” will be exempt from the CTA’s reporting requirements if Treasury limits those requirements to foreign entities. The result of Treasury’s enforcement shift would be “effectively gutting the most significant anti-money laundering law in a generation,” it added.
FACT relies on estimates published alongside the September 2022 final rule on beneficial ownership information reporting requirements. In that rule preamble, Treasury’s Financial Crimes Enforcement Network (FinCEN) used tax filing data to compute the number of foreign entities currently registered to do business in the U.S. and estimate future numbers.
FinCEN looked at foreign partnership tax returns filings; filings of Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; and foreign pooled investment vehicles. Applying a growth factor, it estimated that 70,933 foreign entities would be subject to the CTA’s reporting requirements — including about 10,890 new foreign entities per year after 2024.
While that sounds like a large number, it is nowhere near the total number of entities that were subject to the reporting requirements before Treasury’s reversal. FinCEN projected that existing domestic entities would total 36,510,573 in 2024, while an additional 5,616,362 new companies would be subject to the requirement each year thereafter.
And the distinction between shell companies that are formed in the U.S. and those formed abroad “is completely divorced from the underlying risk,” said Transparency International’s Scott Greytak during the briefing. “The problem here is anonymous shell companies, regardless of where they are formed.”
Other groups weigh in.
Beyond just those focused on financial crimes, representatives from the CPAC and the Main Street Alliance are speaking out against Treasury’s plan.
Frank Russo of CPAC’s Center for Combating Human Trafficking explained that there are “organizations, both domestic and international, that are intended to harm your community for a profit of others.” But when it comes to combating crimes perpetuated by these organizations — like human trafficking, fentanyl poisoning, and violent crimes — “there’s a missing link in the chain,” said Russo.
The CTA, as originally intended, would provide law enforcement with the tools to uncover who is funding these organizations, added Russo. He called the CTA “the financial equivalent of installing street lights in a neighborhood.” Russo said that law enforcement groups like the National District Attorneys Association, the Fraternal Order of Police, the National Sheriffs Association, and the Federal Law Enforcement Officers Association all supported the beneficial ownership reporting requirements.
Russo called Treasury’s shift on the CTA’s reporting requirements “a huge step back.” He added that he hopes the Trump administration can “thread the needle back to where we began, which is giving this missing link to law enforcement.”
Shawn Phetteplace of the Main Street Alliance, a network of small business owners, emphasized that “the business groups pushing to gut the Corporate Transparency Act do not speak on behalf of all small business owners.”
Phetteplace explained that “small businesses suffer when they’re forced to compete with fraudulent and criminal enterprises.” To him, the CTA is “a pro-small business policy.”
“The vast majority of small businesses” are sole proprietors, Phetteplace said, and for them, “it is very easy to figure out who owns your business.” Firms like these can usually complete their beneficial ownership information reports “in about 15 minutes.”
Russo agreed, noting that the CTA is really about “identifying the bad actors in our community” and that “taking a small amount of time to fill out a form may be the difference.”
Tax enforcement implications.
The CTA also is “vitally important to enforce our nation’s tax system,” said FACT’s Ian Gary.
Gary explained that the wealthy and unscrupulous corporations currently can “erect walls of anonymous shell companies to hide their tracks and keep tax enforcers at bay.” The beneficial ownership database promised under the CTA would help the IRS and other agencies in their enforcement efforts.
But beyond Treasury’s latest move on the CTA, Gary noted the Trump administration’s IRS staffing cuts that “will negatively affect complex tax evasion investigations” and the reassignment of DOJ investigators “away from white collar crime and follow-the-money type cases.”
“This move against the Corporate Transparency Act may fit in with other moves to hobble efforts to go after financial crimes and to curb corruption,” Gary said.
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