The Corporate Transparency Act (CTA), enacted in January 2021, seeks to improve transparency around corporate ownership in an effort to combat financial crimes such as money laundering and tax evasion. The Act requires certain US companies to report their “beneficial owners”—defined as individuals who exercise “substantial control” over the company or own a significant percentage of it—to the Financial Crimes Enforcement Network (FinCEN).
According to the American Bar Association (ABA), the CTA “creates a national registry of beneficial ownership information,” which will make it more difficult for individuals to “obscure their identities behind anonymous shell companies.” While the Act imposes reporting requirements on many small businesses, larger entities already under federal regulation are generally exempt.
As reported by market research firm IBISWorld, “there are 4,172 Cosmetic & Beauty Products Manufacturing businesses in the US as of 2023, an increase of 3.6% from 2023.” Under the US Small Business Administration (SBA)’s definition of a small business as having fewer than 500 employees, many of these businesses would fall into this category.
Despite its enactment in 2021, as the deadline for compliance with the CTA approaches at the end beginning of 2025, according to the US Treasury’s Financial Crimes and Enforcement Network (FinCEN), just five percent of eligible businesses have satisfied their requirements under the law.
To learn more about the potential impact of the CTA on US cosmetics and personal care product manufacturers, we spoke to Steven Friedman, CEO of legal filing service firm Platinum Filings for his insights.
Enhancing transparency and accountability in the cosmetics industry
According to Friedman, the CTA is designed to prevent individuals from hiding behind anonymous entities to conduct illicit financial activities, and the personal care industry is not exempt. The goal of the law is that bad actors shouldn’t be able to hide behind entities and conduct money laundering or financial crime activity,” he explained, as “the penalties are steep and must be taken seriously.
For cosmetics and personal care product manufacturers, the law represents a shift towards greater accountability, even if some businesses find the reporting requirements cumbersome.
Reporting beneficial owner information: What you need to know
As defined by FInCEN, “a reporting company is (1) any corporation, limited liability company, or other similar entity that was created in the United States by the filing of a document with a secretary of state or similar office (in which case it is a domestic reporting company), or any legal entity that has been registered to do business in the United States by the filing of a document with a secretary of state or similar office (in which case it is a foreign reporting company), that (2) does not qualify for any of the exemptions provided under the Corporate Transparency Act.”
One of the core elements of the CTA is the requirement for eligible companies to report beneficial owner information (BOI). According to Friedman, beneficial owners are individuals who either own 25% or more of a company or exercise “substantial control” over the entity, which typically includes officers of the company.
While the personal care industry may not seem like a prime target for financial crimes, Friedman noted that “any entity can be used for illicit activities, money laundering, and financial crimes…an entity in the personal care industry would be no different.”
The reporting process may be unfamiliar to many small and indie beauty brands, but it’s critical to comply before the deadline to avoid substantial penalties. Friedman emphasized that organizations like Platinum Filings offer easy-to-use, self-serve forms to help businesses submit their BOI information in compliance with the law.
“The fines are substantial—$591 per day on the civil end and two years’ imprisonment on the criminal end,” he warned. Failure to comply could lead to severe financial and legal consequences, with the fines accumulating daily for each entity that fails to report by the deadline. Therefore, Friedman advised companies to ensure they fully understand these requirements and begin the process as soon as possible to avoid last-minute complications.
“Unfortunately, many businesses are still unaware of this deadline, and some others aren’t taking it serious enough ” he noted, adding that FinCEN is a serious regulatory body, similar to its enforcement role in the cryptocurrency space.
While large corporations are more likely to have compliance systems in place, smaller cosmetics brands may face unique challenges. Many smaller businesses, particularly indie brands, may be unfamiliar with the concept of beneficial ownership or find the process of reporting burdensome.
This gap in awareness presents an opportunity for trade associations and industry groups to step in, and Friedman suggested these organizations play a key role in disseminating information to help businesses navigate compliance.
“This is a new annoying law…however it needs to be taken seriously because it is here to stay in one way, shape, or form,” said Friedman.
Deadlines for filing
According to FinCEN, the deadlines for reporting companies to file their initial BOI reports are as follows:
– Existing companies (those created or registered before January 1, 2024) must file by January 1, 2025.
– Newly created or registered companies (those created or registered in 2024) have 90 calendar days from receiving actual or public notice that their registration is effective to file their reports.
Looking ahead: The future of CTA compliance
While the CTA is still in its early stages, Friedman anticipates that the law is here to stay. He also noted that some states, such as New York, are enacting their own versions of corporate transparency laws, adding another layer of complexity to the compliance process.
For now, cosmetics and personal care companies should focus on meeting the federal requirements and monitoring any changes or updates to the law.
While the CTA may feel like a burden to some cosmetics manufacturers, it’s critical to take the law seriously. With the proper guidance and tools, companies can ensure compliance, avoid penalties, and perhaps even benefit from increased transparency and consumer trust.
Key takeaways for cosmetic manufacturers:
- Familiarize yourself with the CTA’s beneficial ownership reporting requirements. For more information, visit FinCEN’s FAQ section for BOI here.
- Ensure compliance by identifying beneficial owners and submitting the required information before the deadline.
- Stay informed about possible state-level transparency laws that could affect your business.
