The Corporate Transparency Act: A Missed Opportunity to Strengthen the Fight Against Financial Fraud

Scammers often use anonymous shell companies to launder proceeds from scams. These entities are instrumental in concealing their identity, creating the illusion of legitimacy, and transferring stolen funds across jurisdictions.

In the global effort to combat financial fraud, money laundering, and terrorist financing, the Corporate Transparency Act (CTA) of 2021 marked a significant step forward for the United States. By requiring businesses to disclose their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), the CTA aims to shed light on the murky world of anonymous shell companies that have long facilitated illicit financial activity.

However, the CTA has one glaring shortcoming: it places the onus of compliance solely on businesses. It fails to require financial institutions to verify whether their business account holders have fulfilled their reporting obligations. This omission represents a missed opportunity to fully leverage financial institutions' gatekeeping role to ensure a safer financial system for everyone.

What Is the Corporate Transparency Act (CTA) of 2021?

The Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act for Fiscal Year 2021, represents one of the most significant updates to U.S. anti-money laundering (AML) laws in decades. The CTA aims to combat the misuse of anonymous corporate structures often exploited for financial crimes such as money laundering, terrorist financing, tax evasion, and corruption.

Under the CTA, many corporations, limited liability companies (LLCs), and similar entities are required to report their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. This law seeks to enhance transparency in the U.S. financial system by creating a national database of beneficial owners that is accessible to authorized government authorities.

The Importance of Financial Institutions in Combating Financial Fraud

Financial institutions have always been at the forefront of the fight against financial crime. They serve as the critical gateways to the financial system, with regulatory obligations to detect and prevent suspicious activities. Under existing anti-money laundering (AML) regulations, financial institutions are required to:

1. Perform Customer Due Diligence (CDD): Verify the identities of their clients and understand the nature of their business relationships.

2. Monitor Transactions: Detect and report suspicious activity through Suspicious Activity Reports (SARs).

3. Collect Beneficial Ownership Information: Obtain and verify the beneficial ownership of legal entities under FinCEN's Customer Due Diligence (CDD) Rule.

   
   

Therefore financial institutions are uniquely positioned to enforce transparency and prevent the abuse of anonymous corporate structures. Requiring them to verify whether business account holders have complied with the CTA would have added a critical additional layer of accountability to the system.

Why Leaving Financial Institutions Out Was a Missed Opportunity

The CTA should had significantly enhanced its impact on financial fraud prevention by placing a verification responsibility on financial institutions. This is why the omission matters:

1. Financial Institutions Already Collect Key Information

Financial institutions already gather much of the same beneficial ownership information that the CTA mandates. However, without requiring verification of CTA compliance:

• Discrepancies may go unnoticed. Financial institutions might rely on client-provided information without knowing whether it matches what is reported to FinCEN.

• Criminals may exploit gaps. Entities that fail to report their BOI to FinCEN could still access financial services, undermining the transparency the CTA seeks to achieve.

  
  

2. Reduced Deterrence Against Non-Compliance

By not involving financial institutions in ensuring compliance, the CTA relies solely on self-reporting by businesses. This approach creates several risks:

• Low accountability: Businesses may ignore their obligations, particularly if they believe enforcement is unlikely.

• Weaker deterrence: Financial institutions verifying compliance would create a higher likelihood of detection.

  
  

3. Missed Opportunity for Proactive Detection

Financial institutions already have robust systems for conducting due diligence and detecting financial crime. By integrating CTA compliance into their onboarding and monitoring processes, institutions could:

• Flag entities that have failed to report to FinCEN, thereby preventing them from accessing the financial system. At the very least, this would create significant inconveniences and increase operating costs for scammers.

• Detect discrepancies in beneficial ownership information early in the relationship.

  
  

Instead, the CTA leaves enforcement to FinCEN, which has limited resources and depends on businesses voluntarily complying with the law.

Potential Challenges and Counterarguments

While some may argue that imposing a verification obligation on financial institutions would create additional burdens, the benefits far outweigh the drawbacks:

• Integration with Existing CDD Practices: Financial institutions already collect beneficial ownership data under the CDD Rule. Verifying CTA compliance could be seamlessly integrated into these existing procedures.

• Streamlining Reporting: Collaboration between FinCEN and financial institutions could lead to streamlined processes, such as automated BOI verification tools, reducing the compliance burden for institutions.

  
  

The argument that FinCEN’s database is designed for law enforcement rather than financial institutions is valid, but this siloed approach severely diminishes the practical value of FinCEN’s database in proactively preventing financial crime.

What Could Have Been Done Differently?

To close this critical gap, the CTA could have:

1. Required Financial Institutions to Verify CTA Compliance:

   • During onboarding, institutions could confirm whether a business has registered with FinCEN and cross-check the provided BOI.

   • This could be integrated into FinCEN’s database access system for authorized use by financial institutions.

2. Implemented a Feedback Loop:

   • Financial institutions could report discrepancies between BOI obtained during due diligence and FinCEN’s records, creating a feedback loop to improve data accuracy.

3. Incentivized Compliance Through Partnerships:

   • FinCEN could collaborate with financial institutions to share responsibility for enforcement, with clear guidelines to minimize the burden.

     
     

The Corporate Transparency Act missed a significant opportunity by not involving financial institutions in ensuring business account holders comply with its requirements. Financial institutions are uniquely positioned to enforce transparency and prevent the misuse of the financial system. Addressing this gap through future legislation or regulatory updates could transform the CTA into a far more effective tool for combating financial crime.