The Corporate Transparency Act is legislation that is going to touch all high net worth clients in 2024. This is like KYC procedures on steroids and investors need to be aware of it. Attorney, STEPHEN LISS helps us understand the scope of the developing new regime.
The financial reporting system currently makes it cumbersome for regulators and law enforcement to track the asset ownership and cash flows. Lessons learned from the Panama Papers and Pandora Papers disclosures signaled the need for a change.
Congress passed the CTA legislation in 2022 to combat money laundering, tax evasion and other illegalities. After public input, final rules were recently promulgated. There are significant reporting responsibilities and criminal and financial penalties for non-compliance.
The impact of these initiatives takes hold in 2024- It’s becoming a point of emphasis for the legal, accounting and financial services communities.
It will be significant part of the estate planning process for HNW clients going forward.
With the expected “2026 avalanche of estate planning. Clients are in a for a surprising change in the standard procedures around standard techniques.
The concept of “Putting it in an LLC” or “putting it in a trust” is about to become more expensive, complicated and time-consuming- particularly in dealing with the law firms and especially financial institutions.
STEPHEN LISS is a partner at Dungey and Dougherty and is on the forefront of this legislation and its impact on clients. We’re going to talk about the scope of the CTA, it’s impact and why it’s important for HNW clients to start early and get ahead of these requirements when the planning avalanche comes.
Congress enacted the Corporate Transparency Act (“CTA”) under the Fiscal Year 2021 National Defense Authorization Act on January 1, 2021.
The requirements of the CTA are being implemented “to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on reporting entities.” That said, even FinCEN acknowledges the enormous reporting burden imposed by the CTA, which it most recently estimated to be over 118 million hours in 2024, with an annual burden of over 18 million hours thereafter.
The CTA added 31 USC §5336 to the Bank Secrecy Act with the title, “Beneficial ownership information reporting requirements”. The CTA has three core elements:
Reports to FinCEN
The CTA requires certain entities (each a “reporting company”) to identify itself, its primary owners and officers (each a “beneficial owner”), and certain professionals who helped to form or register the reporting company (each a “company applicant”). The reporting company must then report to the Financial Crimes Enforcement Network (“FinCEN”) information sufficient to identify the reporting company, its beneficial owners, and any company applicants (“beneficial owner information” or “BOI”).
Control Access to Information
FinCEN will provide BOI to government regulatory and investigatory bodies, but it will not be made available to the general public. In addition, there are specific procedural requirements for government actors to access this information, along with civil and criminal penalties for improperly accessing or using such information.
Revised Due Diligence Requirements
The Secretary of the Treasury is required to revise Customer Due Diligence requirements for financial institutions to conform to the CTA, and account for the ability of financial institutions to access beneficial ownership information.
What is the Corporate Transparency Act?
The purpose of the Act is to
Set a clear federal standard for incorporation practices
Protect U.S. national security and commerce
Enhance national security, intelligence, and law enforcement efforts to combat money laundering, terrorism financing, and other illicit activities
Bring the U.S. into compliance with international anti-money laundering and countering of terrorism financing standards
The Act does not create a public registry of business entities in the U.S.
What Does the Corporate Transparency Act Require?
•A Reporting Company must disclose information about the entity itself, the Company Applicant, and its Beneficial Owners to the Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury
•For each Beneficial Owner or Company Applicant, the disclosure must include
•Full legal name and date of birth
•Each Beneficial Owner’s current residential address, and each Company Applicant’s current business address
•An identification number (such as a driver’s license or passport number) or FinCEN Identifier number (available upon request from FinCEN after providing name, address, and date of birth) and a digital copy of the identifying document
•Effective January 1, 2024
A REPORTING COMPANY must also disclose its:
•Full legal name
•Any “doing business as” names
•A complete current business address
•The State, Tribal, or foreign jurisdiction of formation
•For a foreign reporting company, the State or Tribal jurisdiction where such company first registers
•The TIN of the reporting company or foreign equivalent if a foreign reporting company has not been issued a TIN by the IRS
•Provide the information that normally must shared with a Reporting Company and FinCEN will issue you an identifier number that can be provided to any Reporting Company.
•Any individual or entity with a FinCEN identifier must report to FinCEN within 30 days of any change in BOI or if they become aware or have reason to know any information was inaccurate.
•If a Reporting Company and an entity that owns it have the same beneficial owners, the Reporting Company can use the entity FinCEN identifier instead of disclosing BOI of the owners of that entity.
Protection of Beneficial Ownership Information
The CTA does not authorize public disclosure of BOI
FinCEN can disclose the information to:
•A Federal agency engaged in national security, intelligence, or law enforcement activity, for the use in furtherance of such activities;
•A State, local, or tribal law enforcement agency as part of a criminal or civil investigation, with court approval;
•A foreign government, to assist an investigation if a Federal agency requests the information;
•A financial institution with the consent of the reporting company, to facilitate compliance of the institution with customer due diligence; or
•A Federal regulator to determine compliance of a financial institution with their customer due diligence requirements.
Officers and employees of the Department of the Treasury can access “beneficial ownership information for tax administration purposes…” 5336(c)(5)(B)
The protocols are intended to:
•Protect the security and confidentiality of any BOI;
•Require requesting agencies to establish, maintain, and abide by a secure system that would store BOI;
•Limit the scope of information sought, consistent with the purpose of seeking the information;
•Restrict access to BOI to those who have undergone appropriate training, and who are authorized to access the information; and
•Establish an auditable system of records to track each request, purpose of the request, name of requesting individual, and any disclosure of information.
•Proposed regulations were issued December 16, 2022.
Penalties for Government Misuse of Information
•Any individual guilty of unauthorized disclosure or use of Beneficial Owner information
•Is liable for a civil penalty of $500 per day the violation continues or is not remedied and
•If found criminally liable shall be fined no more than $250,000, or imprisoned for 5 years, or both or
•If violating another law of the United States or any illegal activity involving more than $100,000 over a 12-month period, the maximum criminal fine increases to $500,000 or 10 years imprisonment.
What Does the Corporate Transparency Act Require?
A Reporting Company must disclose information about the entity itself, the Company Applicant, and its Beneficial Owners to the Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury
•The Act defines a Reporting Company as:
•A corporation, LLC, or other similar entity that is
1.Created by filing a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or
2.Formed under the law of a foreign country and registered to do business in the United States by the filing of a document with the secretary of state or a similar office under the laws of a State or Indian Tribe.
•LPs, LLPs and business trusts (statutory trusts) are “similar” entities
•Trusts and general partnerships are excluded from this definition
Exemptions for Companies
•The Act excludes 23 types of entities from qualifying as a Reporting Company.
A “Large Operating Company”
•With 20 or more full time employees in the United States
•30 hours a week or 130 hours per month
•With gross receipts or sales as reported on a federal income tax return of over $5 million
•Must be U.S. sourced income
•With an operating presence at a physical office within the United States
501(c) tax exempt charitable organizations and foundations
527(e)(1) political organizations
4947(a)(1) and (2) charitable and split interest trusts
Publicly traded organizations
Domestic governmental authorities
Banks, credit unions, depository institutions, and money transmitting businesses
Broker dealers and RICs
Public accounting firms registered under Section 102 of the Sarbanes-Oxley Act
Financial market utilities
Certain pooled investment vehicles
An entity wholly owned or controlled by an exempt entity is also exempt from the obligations of a reporting company unless the exempt entity was:
A money service business,
A pooled investment vehicle, or
An entity assisting a tax exempt entity.
An individual who directly files a document creating a domestic reporting company.
An individual who directly files the first document registering a foreign reporting company.
The individual primarily responsible for directing such filing.
There can be two Company Applicants, but no more.
Only applies to a reporting company formed or registered after January 1, 2024.
Who is a Company Applicant?
1.Attorney directs paralegal to form LLC and paralegal faxes required documents to secretary of state.
2.Attorney directs paralegal to form LLC and paralegal completes online form provided by Formation Co.
3.Attorney directs paralegal to form LLC and paralegal faxes form to Formation Co. Employee of Formation Co. then faxes that form to Secretary of State.
4.Partner tells associate to form LLC. Associate tells paralegal and paralegal faxes required documents to secretary of state.
Who is a Beneficial Owner?
|Beneficial Owner||Not a Beneficial Owner|
|An individual who||•A minor child (as defined in the State in which the entity is formed) if the information of the parent or guardian of the minor child is reported in accordance with the Act.|
|•Directly or indirectly •Through any contract, arrangement, understanding, relationship, or otherwise—||•An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual.|
|(i) Exercises substantial control over the entity; or||•An individual acting solely as an employee of reporting company and whose control over or economic benefits from such entity is derived solely from the employment status of the person. This does not apply to senior officers.|
|(ii) Owns or controls at least 25% of the ownership interests of the entity.||•An individual whose only interest in a reporting company is through a right of inheritance.|
|•A creditor of a reporting company, unless the creditor otherwise falls within the definition of a Beneficial Owner.|
Who Has Substantial Control?
Senior officers (Includes a president, CFO, general counsel, CEO, COO, or anyone who performs a similar function)
Those with authority to appoint or remove any senior officer
Those with authority to appoint or remove a majority of the board of directors (or equivalent)
Those who can direct, determine, or have a “substantial influence” over important decisions made by the reporting company.
What is an “Important Decision”?
The sale, lease, mortgage, or transfer of any principal asset
Reorganization, dissolution or merger
Major expenditures, investments, and issuance of equity or debt
Selection of business lines or geographic focus
Setting compensation for senior officers
Entering into significant contracts
Amendment of governance documents
Who is a 25% Owner?
Ownership interest is defined broadly to include equity, profit sharing agreements, voting trusts, convertible debt, and options.
Ownership interests can be direct or indirect, and can include a mere understanding or relationship.
Trust assets are attributed to:
-A trustee or other individual with authority to dispose of the asset.
-A beneficiary who is the sole income and principal beneficiary.
-A beneficiary who has the right to demand substantially all of the trust assets.
-A grantor if the trust is revocable or they otherwise have the right to withdraw trust assets regardless of form.
Calculating Ownership of a Reporting Company
-Any options or similar interests are treated as exercised.
-If there are capital and profits interests you compare the individuals interests to “the total outstanding capital and profit interest of the entity…”
-For corporations, it is the greater of the vote or value held by the individual.
-If an ownership interest cannot be calculated with “reasonable certainty” an individual is a beneficial owner when owning or controlling at least 25% of any class or type of ownership.
When is a Report Due?
Existing Reporting Companies- by January 1, 2025
Domestic Reporting Company formed January 1, 2024 and after—30 calendar days
Foreign Reporting Company registered January 1, 2024 and after—30 calendar days
Within 30 calendar days after there is any change to any information previously submitted to FinCEN.
Change in who the Beneficial Owners are
Minor reaching age of majority
Information related to a Beneficial Owner (like a change in address or change in drivers license number)
An entity becomes exempt from reporting OR is no longer exempt
If a Beneficial Owner dies, a change occurs when the estate is “settled.” That term is not defined.
Correcting A Report
If a Reporting Company becomes aware “or has reason to know” that information contained in a report is inaccurate they have 30 calendar days from that date to file a corrected report.
•An individual who willfully provides false or fraudulent information, or willfully fails to report complete or updated Beneficial Ownership information faces a civil penalty of $500/day the violation continues or is not remedied, and a criminal fine of up to $10,000, and/or 2 years imprisonment
•There is a 90-day safe-harbor if an individual voluntarily submits a report containing correct information
What Should You Be Doing Now?
Start Estate Planning Now
Budget 2x the Time needed to implement
Budget 2x for E&O insurance and administration costs
Address the CTA in your engagement letters.
Address the CTA in operating agreements.
Notify all your clients the CTA is coming January 1, 2024.
Decide- Will you provide CTA advice or will you find a vendor?
Most Advisors should obtain a FinCIN Identifier as soon as you can.