Treasury scraps reporting rule for U.S. small business owners

The U.S. Department of Treasury has made a significant decision to scrap a requirement for U.S. small businesses to report information about their owners to the federal government. This move marks the latest development in a back-and-forth saga surrounding the Corporate Transparency Act, which was passed in 2021 with the intention of combating criminal activity and illicit finance conducted through opaque shell companies.

The Corporate Transparency Act mandated that millions of businesses disclose basic information about their “beneficial owners,” with the goal of increasing transparency and accountability in the business world. The rule was slated to go into effect on March 21 after facing multiple delays in court, and noncompliance could result in hefty financial penalties.

However, on March 21, the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury, issued an interim final rule exempting all U.S. citizens and companies from the reporting requirement. This decision has raised concerns among legal experts, who believe that it could create loopholes for criminals to continue money laundering activities through U.S. entities.

Erin Bryan, a partner at Dorsey & Whitney, expressed her apprehension about the watering down of the rule, stating that many shell companies would now be exempt from reporting their beneficial owners. This deviation from the original intent of the Corporate Transparency Act has raised alarms about the potential for criminals to exploit the system.

While some foreign companies conducting business in the U.S. will still be required to file reports, the revised reporting requirement is expected to apply to only about 20,000 entities in the first year, a significant reduction from the initial estimate of 32.6 million entities subject to the rule. Despite this exemption for U.S. entities, reporting requirements remain in place for certain foreign companies operating in the U.S.

Critics of the interim rule argue that it could create loopholes that enable criminals to evade detection and continue their illicit activities. Scott Greytak, director of advocacy for Transparency International U.S., warned that the new rule could allow criminals to establish front companies within the U.S. to evade national security laws.

The decision by FinCEN to exempt U.S. citizens and companies from reporting their beneficial owners has sparked debate about the effectiveness of the Corporate Transparency Act and the implications of this deregulatory push. As the rule undergoes public comment and finalization later this year, the implications for financial transparency and combating illicit finance remain uncertain.