The year so far has been an eventful one for entity management. Mere weeks after the 

 went live and corporations started reporting beneficial ownership data to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), a U.S. District judge in Alabama ruled the act unconstitutional.

Does this mean the end of beneficial ownership reporting and that corporations can decrease their focus on this area?

Far from it. Here’s our view of the landscape and what we recommend for general counsel, chief legal officers, paralegals and legal operations.

, a powerful lobby, led the legal challenge against the CTA, citing an argument of governmental overreach. But even more powerful forces support the CTA and its resumption.

“Congress overwhelmingly voted to enact the bipartisan (CTA)… to crack down on illicit shell companies and combat financial crime,” a Treasury official told 

 The same article quoted a former FinCEN official as saying he does “not find the court’s opinion persuasive.” Reuters also pointed out that another small business group, Main Street Alliance, partnered with the nonpartisan FACT Coalition and Transparency International U.S. to file an amicus brief in support of the CTA.

While the next steps are still in progress, and FinCEN is complying with the injunction, the government is expected to appeal. Based on current sentiment, the appeal seems more a matter of when than if. And as the CTA’s provisions are reinstated, its tight filing deadlines will return as well — as short as 30 days in some cases.

But the seemingly inevitable return of FinCEN reporting isn’t the only reason to 

 in the area of beneficial ownership information (BOI) collection and management.

All of the work you’ve put into CTA compliance has not been in vain. As we 

, the CTA’s impact extends beyond legal compliance and promotes good corporate governance. The motivating purpose behind this act is to crack down on money laundering, tax evasion, fraud and other financial crimes — all risks your organization wants to avoid.

 monitoring by another name. By collecting detailed ownership data for entities and subsidiaries across jurisdictions and keeping this information current, you’re maintaining a sharper eye on who you’re doing business with. And that’s an important mission in today’s world of rising crime and corporate growth through mergers and acquisitions.

Loosen the reins in this important area, and your organization may face difficulties in opening bank accounts, obtaining licenses or engaging in certain financial transactions.

Collecting information on who owns a subsidiary or entity seems straightforward on the surface. But GCs, CLOs, paralegals and legal departments immersed in this work know that the reality of entity management is far more complicated.

Under CTA requirements, a beneficial owner is any individual with substantial control over 25% or more of an entity — which could mean several data points for each subsidiary. And the owner’s name is just the beginning of the information you must collect. You’ll also need date of birth, a residential or business address and a social security or passport number. After all of this information is gathered, it needs to be verified, stored securely and reported in whatever format a regulatory agency like FinCEN, a local jurisdiction or your board and executive leadership require.

Foreign-based companies with qualifying operational locations in the United States add even more complexity to the task. Within these troves of information, red flags could be lurking that could put your organization at severe financial, reputational and/or legal risk.

Buy yourself and your team a little convenience and a lot of peace of mind. If you’re still using manual systems, such as spreadsheets or paper files, now is the time for a change. A 

 can help, streamlining the task of gathering and verifying information, updating it as needed, maintaining data accuracy and meeting filing deadlines.

Whatever happens in the courts and Treasury department regarding the constitutionality of the Corporate Transparency Act, keep your reporting CTA- and AML-ready. Schedule a demo of 

Federal District Court declares CTA unconstitutional — but entity management still matters 

The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) heralds new obligations for corporations operating in the European Union (EU), with the European Parliament’s Committee on Legal Affairs (JURI) 

 of the Directive. In line with a growing trend towards scrutiny of 

environmental, social and governance (ESG)

 considerations throughout companies’ value chains, the CSDDD brings challenges for boards, Chief Compliance Officers and their teams.

The CSDDD, now poised for a full parliamentary vote in April, aims to hold corporations accountable for their impact on people and the planet. Compliance professionals will be responsible for managing social and environmental impacts along the entire value chain, including direct and indirect suppliers, their own operations, products and services.

In the course of my work, I have seen my share of challenging human rights situations. These have left me in no doubt that there’s a moral obligation to address ESG issues, and especially human rights abuses, in corporate value chains. 

— Ezekiel Ward, founder of North Star Compliance Ltd.

Diligent’s partners Steele and Ezekiel Ward, founder of North Star Compliance Ltd., wrote about the draft directive’s implications and noted:

“In the course of my work, I have seen my share of challenging human rights situations. These have left me in no doubt that there’s a moral obligation to address ESG issues, and especially human rights abuses, in corporate value chains.”

To respond effectively, companies will need to implement a program of seamless, comprehensive and global supply chain 

What is the Corporate Sustainability Due Diligence Directive?

On 23 February 2022, the European Commission adopted a proposal for a directive on Corporate Sustainability Due Diligence.

The Directive will require companies in scope to carry out 

environmental and human rights due diligence

“foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance.”

Importantly, the Directive will cover value chains inside and outside Europe, impacting corporations globally. It builds on — and interacts with — other regulations that focus on supply chain ESG, such as the 

, which aims to improve transparency in the sustainable investment product market, the 

Corporate Sustainability Reporting Directive (CSRD)

California Transparency in Supply Chains Act

Fighting Against Force and Child Labour in Supply Chains Act

, further underscoring the global emphasis on ethical supply chains.

The EU CSDDD underpins the European Union’s focus on driving a climate-neutral approach and increased supply chain sustainability. And it’s in line with corporate priorities; as companies realize the benefits of ESG, not just for the planet and for society, but from a commercial perspective as well. Indeed, a number of businesses in the apparel sector recently signed an open letter supporting the EU in its moves to introduce corporate sustainability due diligence.

What does EU CSDDD require companies to do?

The draft European Commission corporate sustainability due diligence legislation requires in-scope companies to manage their operations' environmental and social impacts along their entire value chain. This means within their own operations, as well as those of their subsidiaries and value chains both within and outside of Europe.

Whatever current [due diligence] setup you have in place, it may need ‘lifting’ or re-positioning to meet the draft directive’s requirements.

 — Ezekiel Ward, founder of North Star Compliance Ltd.

The Directive covers a broad range of issues that existing due diligence processes might not address. These issues include human rights, social and labor rights, and environmental impacts — essentially the entire ESG spectrum.

Issues like integrity and corruption will be in scope, meaning that, as Ezekiel Ward of North Star Compliance Ltd notes, “Whatever current [due diligence] setup you have in place, it may need ‘lifting’ or re-positioning to meet the draft directive’s requirements.”

So, who does the EU Corporate Sustainability Due Diligence Directive apply to?

The Commission proposes that it will be applicable to:

EU companies with more than 500 employees and a net worldwide turnover of more than €150 million

EU companies with more than 250 employees and a net worldwide turnover of more than €40 million, if more than half of their net turnover was generated in a high-risk sector (high-risk sectors being: the manufacturing of textiles, leather and related products; agriculture, forestry and fisheries; the extraction and manufacturing of mineral products)

Third-country (i.e., non-EU) companies that generate a net turnover of more than €150 million in the EU

Third-country companies that generate a net turnover of more than €40 million in the EU, and where at least half of their worldwide turnover is generated in one of the high-risk sectors identified above

It's important to note that, although small and medium-sized companies do not fall directly into the scope of the EU CSDDD, they are impacted indirectly, as they will need to meet standards in their role as suppliers to larger, in-scope businesses.

The EU due diligence directive will cover companies run as stock corporations, partnerships limited by shares, limited liability companies, regulated financial companies and insurance companies.

How does the EU CSDDD impact organizations outside the EU?

Though the Corporate Sustainability Due Diligence Directive comes from the EU, it will likely have a ripple effect around the globe, as certain companies that operate in the EU will need to comply.

As mentioned above, countries not headquartered in the EU are covered by the proposed EU due diligence directive if they meet certain criteria: doing a certain amount of business in the EU and/or making money in specific high-risk sectors.

Any organization meeting those thresholds must comply with the EU due diligence legislation without delay. In-scope third-country companies, for example, must designate an authorized representative within the EU.

Even if you fall out of scope of the EU CSDDD, growing pressure to align operations and supply chains with ESG objectives is likely to drive similar legislation in other jurisdictions. Getting your arms around your supply chain and reviewing your compliance with human rights and environmental requirements can only be a positive step.

What steps does your organization need to take to comply with CSDDD?

In-scope companies must take the following steps to comply:

Identify any actual or potential negative impacts on the environment and human rights within your operations and along your value (supply) chain.

Put in place measures to prevent, mitigate and remediate these impacts.

Fully integrate your supply chain due diligence into your company policies, management systems and internal controls.

Implement a complaints procedure that everyone along your supply chain can access.

If your annual turnover is more than €150 million, you must outline a transformation plan that intends to enable you to meet the Paris Climate Agreement emission reduction targets.

As mentioned above, if you’re an in-scope third-country company, designate an authorized representative located within the EU.

Publicly report on your organization’s success in fulfilling its supply chain due diligence obligations. This includes including relevant data in your annual report.

Failure to comply with the EU Corporate Sustainability Due Diligence Directive comes with penalties:

A relevant regulatory authority (designated by the EU Member States) will be able to impose sanctions, including fines and compliance orders.

Any victims of noncompliance with CSDDD obligations will have a right to apply for compensation for damages resulting.

Corporate Sustainability Due Diligence Directive timeline for compliance

Now that the EU has voted in favor of the Corporate Sustainability Due Diligence Directive, organizations will have varying timelines to comply. Here are the specifics:

Companies with over 5,000 employees and a turnover exceeding 1,500 million Euro

Companies with over 3,000 employees and a turnover above 900 million Euro

All other companies falling under the scope of the CSDDD

Due diligence software can be invaluable in helping you to comply with supply chain due diligence legislation — including the EU CSDDD.

A software-led approach to due diligence will enable you to gather the intelligence you need to make informed decisions and move beyond checkbox compliance with in-depth investigations into all partners along your value chain. Find out more about how 

 from Diligent can enhance your approach and ensure you comply with the upcoming EU Corporate Sustainability Due Diligence Directive along with other due diligence regulations.

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Federal District Court declares CTA unconstitutional — but entity management still matters

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Federal District Court declares CTA unconstitutional — but entity management still matters

How the EU Corporate Sustainability Due Diligence Directive (CSDDD) impacts your supply chain operations

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