CTA vs. FinCEN AML rules: What private market firms need to know

Understanding the difference: Corporate Transparency Act vs. FinCEN’s new AML rules for private market firms

Private equity and venture capital firms are no strangers to regulatory compliance. But with the advent of the Corporate Transparency Act (CTA) and the Financial Crimes Enforcement Network’s (FinCEN) new anti-money laundering (AML) rules, many are finding themselves navigating a maze of new requirements under the broader framework of the Bank Secrecy Act (BSA). While these regulations share a common goal of increasing financial transparency and reducing illicit activities, their scope, requirements, and implications for private market firms differ significantly. Here’s what you need to know.

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The CTA: Enhancing ownership transparency

The CTA, enacted as part of the Anti-Money Laundering Act of 2020, mandates certain businesses to disclose beneficial ownership information to FinCEN. This is a significant shift in the regulatory landscape, as it creates a federal database of beneficial owners designed to combat money laundering, terrorist financing, and other illicit financial activities.

Key points for private market firms: 

Who must file: 

• ^{Reporting companies, including many private equity-backed portfolio companies and venture capital-funded startups, must disclose information about their beneficial owners.}
• ^{Exceptions exist for larger entities, publicly traded companies, and certain regulated entities. See FinCEN's Beneficial Ownership Information FAQ for more info.}

What to disclose: 

• _{Beneficial owners with 25% or greater ownership names, dates of birth, addresses, and unique identifying number from government-issued IDs.}

Timeline and deadlines: 

• _{Effective January 13, 2025, companies created or registered prior to 2024 must file initial reports and new entities must file within 30 days of formation.}

Impact on private market firms: 

• _{Fund managers must ensure their portfolio companies understand and comply with the reporting obligations.}
• _{Failure to comply could result in significant penalties assessed daily, including fines and imprisonment for willfully providing incorrect information.}

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FinCEN's New AML Rules: Bringing private markets up to date with anti-money laundering and counter-terrorism‍

Separate from the CTA, FinCEN and the Securities and Exchange Commission (SEC) finalized in August 2024 its updated AML rules targeting investment advisers and fund managers more directly. These rules aim to align fund managers with the AML compliance standards traditionally applied to banks and other financial institutions.^‍

^‍Key points for private market firms:

Who is affected: ‍

• _{Registered investment advisors (RIAs) and exempt reporting advisors (ERAs), which make up many of the firms operating in private equity and venture capital.}

What is required: 

• _{Designating an AML Compliance Officer.}
• _{Establishing and implementing an AML program tailored to the firm's risk profile.}
• _{Annual anti-financial crime training for all firm employees.}
• _{Independent assessment of AML and combatting the financing of terrorism (CFT) program.}
• _{Conducting customer due diligence (CDD) to verify the identity of investors and their beneficial owners.}
• _{Filing suspicious activity reports (SARs) for transactions that appear unusual or suspicious.}
• _{Source of wealth (SoW) and source of funds (SoF) analysis for all investors.}

Timeline and deadlines: 

• _{Fund managers must comply with these requirements by January 1, 2026.}

Impact on private market firms: 

• _{Increased operational burden to maintain robust AML programs.}
• _{Integration of AML procedures into existing workflows for investor onboarding and compliance.}
• _{Potential for reputational and regulatory risks if firms fail to meet compliance standards.}

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Practical steps for compliance

To ensure your firm stays ahead of these regulatory shifts:

Understand your obligations: 

• _{Identify whether your firm, portfolio companies, or investors are subject to the CTA or the new SEC and FinCEN AML requirements.}

Leverage technology: 

• _{Utilize compliance tools that integrate beneficial ownership document collection, AML programs, and investor onboarding, like Passthrough.}

Engage legal and compliance experts: 

• _{Work with advisors to align your processes with regulatory requirements.}

Educate your team: 

• _{Provide training on the nuances of the CTA and FinCEN rules to ensure company-wide awareness.}

Stay updated: 

• _{Monitor regulatory updates and enforcement trends as compliance expectations evolve.}

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The bottom line

The CTA and new AML rules mark a big shift for private market firms, putting financial transparency and compliance front and center. It might feel overwhelming at first, but with some planning and the right tools, meeting these requirements doesn’t have to be a headacheFor private equity and venture capital firms who are not exempt from the CTA, you’ve probably already started handling reporting. But FinCEN’s rules? Those will take a bit longer to roll out, and 2026 will sneak up faster than you think. Starting now will make a world of differenceIf you’d like to tackle it with us, Passthrough has your back. Our AML Compliance Officer Package is built to check every box required by FinCEN’s new AML rules. Schedule time with our Financial Crimes team today.‍‍