Lessons From Developing A CTA Compliance Application

Source: Law360

The Corporate Transparency Act, which was enacted in 2021 and went into effect in 2024, introduced a new set of compliance challenges for businesses and their legal counsel. In late 2023, during a meeting of our CTA working group, we grappled with the implications of assisting clients with these filings. The CTA’s severe penalties — up to two years in jail, a $10,000 criminal fine, and $500 per day in civil fines for noncompliance — sparked an intense debate about whether our firm should even prepare or assist with such filings. The potential liability raised significant concerns.

As the discussion progressed, we also faced the uncomfortable reality of David McCarville communicating these challenges to our clients. Some of our clients are family, friends and long-standing professional partners. How would we explain that compliance is mandatory, the penalties are severe, and yet we would not assist them? The prospect of these conversations pushed us to rethink our approach.

Ultimately, we decided that creating a robust compliance application — one that could mitigate risks, streamline processes and protect our clients — was the best way to support them and maintain our trusted relationships.

The CTA applies to any reporting company that undergoes changes to its reporting company or beneficial owner information, with a strict 30-day window to report such changes. This ongoing obligation underscores the immense size of the total addressable market, making the business opportunity undeniable.

Our evaluation of new CTA compliance applications revealed security shortcomings in handling clients’ personally identifiable information. Many vendors faced challenges obtaining SOC-2[1] or similar security certifications, compounded by the Financial Crimes Enforcement Network’s, or FinCEN’s, delay in issuing secure application programming interface keys.

These hurdles prompted us to adopt a new approach, ensuring that our proprietary solution met the highest security standards and addressed compliance requirements effectively.

Additionally, there were serious concerns raised about the protection of sensitive client data, making it difficult to commit to vendors without confidence in their processes. Ultimately, these challenges reinforced our resolve to develop an in-house solution.

Integration of Applications for a Proprietary Workflow

To create a unique and proprietary workflow, we integrated two specialized applications: one that provided know-your-customer, know-your-business and “liveness” checks, and another that was purpose-built for the CTA-required beneficial ownership information report filings. This integration enabled us to offer a seamless, secure, end-to-end compliance solution.

The first application ensured identity verification and compliance screening. Its features validated the identities of beneficial owners and reporting companies, flagged potential red flags under anti-money laundering protocols, and incorporated a liveness check to confirm the authenticity of identification documents. The aim was to reduce the risk of errors and ensure compliance with FinCEN’s stringent requirements.

The second application aimed to streamline the beneficial ownership information report filing process. By combining these two applications, we created a proprietary workflow that automated critical steps, from data collection and validation to the final submission of beneficial ownership information report filings.

The integration also addressed discrepancies by cross-referencing data from the know-your-customer/know-your-business system with publicly available records, with the goal of improving accuracy and consistency with state and federal databases.

The combination of these technologies allowed us to mitigate compliance risks, enhance data integrity and provide clients with a reliable solution tailored to their needs.

For firms exploring similar initiatives, below are some best practices and key decision-making processes, emphasizing the critical importance of obtaining buy-in at every level of the firm.

Best Practices for Building a Legal Compliance Application

Understand the legal landscape.

The starting point for any legal tech initiative is a deep understanding of the applicable law. Our team conducted thorough research into the CTA’s requirements and its implications for our clients. This involved collaboration among our attorneys — who have extensive experience in regulatory compliance — to anticipate potential pitfalls and ensure the application’s features aligned with the regulatory framework.

Engage stakeholders early.

One of the most valuable lessons we learned is the importance of engaging key stakeholders early. We began by obtaining buy-in from our CTA working group, which included attorneys, paralegals from various offices and our in-house counsel. Their input was instrumental in defining the project’s scope and objectives.

From there, we engaged our IT group to assess the technical feasibility of our ideas. This collaboration ensured that the proposed application was not only legally sound but also technically feasible.

Finally, we presented the initiative to our management committee, aligning the project’s goals with the firm’s broader strategic vision. Without these layers of buy-in, the project would have faced significant hurdles.

Set clear objectives.

A successful project requires clear goals.

For the CTA application, we prioritized (1) security through SOC II compliance and know-your-customer screening; (2) minimizing data entry errors by leveraging know-your-customer/know-your-business data to prefill beneficial ownership information reports where possible; and (3) ensuring regulatory compliance by presenting clients with public-facing data for review and revision to align beneficial ownership information report submissions with state DMV and corporation records.

These objectives influenced key aspects of the application, and we appreciated the intuitive and user-friendly interface provided by our tech partners.

Build the right team.

Developing a legal tech solution requires a diverse team of experts. We assembled a group that included attorneys and IT specialists, each bringing unique insights and skills. This collaborative approach ensured that the application addressed both legal requirements and user needs.

Deciding What to Automate

Start small, then scale.

Begin with a focused scope and expand as the application proves successful. For our CTA application, we started with core functionalities, such as automated data entry and error detection, and added advanced features like discrepancy mitigation and expiration detection based on user feedback.

Measure success holistically.

Success isn’t just about revenue. Metrics such as time savings, compliance accuracy and client satisfaction are equally important indicators of a project’s value.

Deciding what to automate, particularly in the context of legal tech applications, requires a thoughtful approach that balances strategic priorities, client needs and practical feasibility, ensuring that firms deliver innovative, client-focused solutions while maintaining high standards of service.

Identify routine tasks.

Automation is most effective for repetitive and time-consuming tasks. For our CTA application, we focused on automating data collection, validation and reporting, with the goal of reducing manual input and minimizing, and we minimized the risk of human error.

Incorporate advanced features.

Firms should consider integrating advanced features that streamline critical processes, such as robust know-your-customer/know-your-business screening for identity verification and documentation validation. Advanced capabilities can help prevent costly mistakes or delays by proactively identifying and addressing issues like expired or invalid documentation.

By adopting these features, firms can enhance compliance, reduce operational inefficiencies and deliver a smoother experience for their clients.

Balance cost and value.

While automation can be a significant investment, it’s essential to evaluate the return on investment. For our firm, the time savings, enhanced client experience and risk mitigation justified the development costs.

Conclusion

For firms exploring similar initiatives, the keys are to build consensus, foster collaboration and remain adaptable to change.

Legal tech has the potential to transform the practice of law by addressing both consumer and in-house counsel needs, such as cost efficiency, effective risk management and streamlined compliance processes.

Projects like these underscore the importance of innovation in delivering tailored solutions that drive measurable results for clients.

David McCarville is a director and chair of the technology committee at Fennemore Craig PC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] SOC 2 (System and Organization Controls 2) is a widely recognized auditing standard developed by the American Institute of Certified Public Accountants (AICPA). It is designed to assess the controls and processes an organization has implemented to ensure the security, availability, processing integrity, confidentiality, and privacy of data. SOC 2 reports are particularly relevant for technology and SaaS (Software as a Service) companies that handle sensitive customer data.

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