A new Act that affects Small and Medium Enterprises has become effective last January 2024. Entitled, “The Corporate Transparency Act” has the goal of curbing money laundering and financial fraud. They aim to do this by capturing more ownership information for specific U.S. businesses operating in or accessing the country’s market. The CTA requires companies to disclose the identities of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). They are those who directly or indirectly have a significant ownership stake in a company—one that has a major influence on the reporting company’s decisions or operations, owns at least 25% of the company’s shares, or has a similar level of control over the company’s equity. This requirement is designed to peel back the layers of anonymity that have traditionally shielded the true ownership of corporate entities, making it harder for illicit activities to hide behind complex corporate structures.
While the Act seems like just an additional requirement of paperwork, it does have its financial and accounting implications for Small and Medium Enterprises (SMEs). Let us explore these effects below.
Increased Risk Assessment Procedures
An increase in risk assessment procedures and due diligence is required in order to ensure that company records are current with the accounting firm and in the FinCEN database. Utmost attention should be given to this because any failure in this area could result to high penalties and even imprisonment.
Increased Compliance Costs
One of the immediate effects of the CTA on SMEs is the potential increase in compliance costs. Companies may need to invest in new systems and processes to collect, verify, and report the required ownership information. For many SMEs, particularly those operating on tight margins, these additional expenses can be a significant burden.
Enhanced Due Diligence Requirements
The CTA also necessitates enhanced due diligence on the part of SMEs. Businesses must now take extra steps to identify and verify the identity of their beneficial owners. This process may require additional financial and human resource investments to ensure compliance.
While these may all seem overwhelming, there are ways to make the transition easier for your business. Let us now discuss the different Strategies for SMEs to Navigate the CTA.
Invest in Technology Solutions
Leveraging technology can help SMEs efficiently manage the collection, verification, and reporting of beneficial ownership information. Automated systems and software can streamline these processes, reducing the burden on internal resources.
Seek Professional Advice
Navigating the complexities of the CTA may require specialized knowledge. SMEs should consider seeking advice from legal and financial experts who can guide compliance strategies and best practices.
Foster a Culture of Compliance
Embedding a culture of compliance within the organization is crucial. Training staff on the importance of the CTA and ensuring compliance procedures are followed can mitigate the risk of non-compliance.
Plan for Long-Term Compliance
Compliance with the CTA is not a one-time effort. SMEs should develop long-term strategies to ensure that they remain compliant with evolving regulations. Regular reviews of compliance processes and beneficial ownership information will be essential.
The Corporate Transparency Act introduces significant changes to the regulatory landscape for SMEs, with notable implications for finance and accounting practices. While the Act poses challenges in terms of compliance costs and administrative burdens, it also offers an opportunity for businesses to bolster their transparency and credibility. By adopting strategic approaches to compliance, investing in technology, and fostering a culture of adherence to regulatory requirements, SMEs can navigate the complexities of the CTA and emerge stronger in the new era of corporate transparency.