by Tori J. Osler and Jacqueline N. Walton

It’s here…  The Corporate Transparency Act (“the CTA”) is now in effect and its implementation will impact law firms, attorneys, and their personnel who are filing and registering entities on behalf of clients in the United States. Starting January 1, 2024, the CTA will require many companies formed or registered to do business in the U.S. to report the identities of their beneficial owners and company applicants to the U.S. Department of Treasury’s Financial Crimes and Enforcement Network (“FinCEN”). In this article, we will examine what the CTA is, who it applies to, how you can help your clients comply with the same, and some of the immediate practical implications attorneys and law firms should be aware of.

The CTA: What Is It and How Did We Get Here?^[i]

The CTA is intended to combat a lack of transparency that may facilitate money laundering, corruption, fraud, terrorism financing, tax fraud, trafficking, and other illicit activities.^[ii] The goal of the CTA is to prevent bad actors from utilizing complex corporate structures and shell companies to hide their identities and move money through the U.S. financial system.^[iii]

Although the CTA and its requirements will likely surprise a number of our clients, it has been a long time in the making. In 1990, the U.S. joined other countries in forming the Financial Action Task Force (“FATF”), which addresses money laundering and terrorist financing by creating international standards of practice.^[iv]Although the U.S. has been an active member of FATF since its inception, we have not kept pace with other countries in implementing the FATF’s recommendations.^[v] 

The enactment of the CTA and its related regulations – 31 CFR § 1010.100, et seq. (“Regulations”) – are the culmination of a multi-year effort to bring the U.S. into compliance with the FATF recommendations and into alignment with other major Western powers.^[vi] The CTA was enacted as a part of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”).^[vii]  While President Trump initially vetoed the NDAA, Congress overrode the veto on January 1, 2021.^[viii]

The U.S. Department of Treasury (“Treasury”) issued the final Regulations on reporting requirements under the CTA on September 30, 2022.^[ix]  Thereafter, on December 16, 2022, Treasury issued a notice of proposed rulemaking regarding access to and disclosure of beneficial ownership information.^[x]

The Details: Who It Applies to and How to Comply

While the principles and concepts behind the CTA are relatively straight forward, the implementation can be complex. 

Under the CTA, only those companies which meet the criteria for a “reporting company” must disclose the identity of their “beneficial owners.”^[xi]  A “reporting company” under the CTA is any corporation, limited liability company, or “other similar entity” which is formed through filing with a secretary of state (or similar) for domestic entities or through filing in accordance with applicable foreign law and then registering to do business in the U.S. through filing as a foreign entity in accordance with state law.^[xii]

While no definition of “other similar entities” currently exists under the CTA or Regulations, FinCEN has indicated that the requirement of “filing” with a secretary of state or foreign government is determinative – indicating that the phrase is intended to be interpreted broadly. 

Accordingly, limited, limited liability, and limited liability limited partnerships will probably qualify as “reporting companies;” whereas sole proprietorships, general partnerships, and some common law trusts may not qualify where no filing requirement for these entity types exists.^[xiii] Additionally, there are several types of entities that are exempted from the definition, the more critical of which include:

• Publicly traded companies,
• Political organizations,
• Banks and bank-type entities,
• Certain tax-exempt entities,
• Registered investment entities,
• Certain public accounting firms, but not law firms, and
• “Large operating companies.”

While the “large operating company” exception will not apply when such an entity is first formed, it may apply once the entity meets all three of the following requirements: (i) more than 20 employees in the U.S.;^[xiv] (ii) physical operating presence in the U.S.; and (iii) previous year’s federal tax filing showing at least $5 million in gross receipts or sales from U.S. sources.  This requirement can be met by receipts from subsidiaries or other entities through which the company operates.^[xv]

Once a determination is made that an entity is in fact a non-exempt “reporting company,” then the determination must be made as to which owners constitute “beneficial owners” for whom filings with FinCEN are required.  Under the CTA, a “beneficial owner” of a reporting company is defined as an individual who – directly or indirectly – through any contract, arrangement, understanding, relationship, or otherwise either:

• Exercises “substantial control” over the entity; or
• Owns or controls not less than 25% of the “ownership interests” of the entity.

“Substantial control” is defined under the Regulations as an individual who: (i) serves as a senior officer, (ii) has the authority over the appointment or removal of any senior officer or a majority of the board of directors; (iii) directs, determines, or has substantial influence over important decisions made by the reporting company, or (iv) has any “other form of substantial control” over the reporting company.^[xvi]

With the catchall of “any other form of substantial control,” direct or indirect control, no matter how labeled, will constitute “substantial control” for purposes of the filing requirements.^[xvii] Senior officers will likely always be deemed to have substantial control and include positions such as president, chief financial officer, general counsel,^[xviii] chief executive officer, chief operations officer, and any other “officer” who perform similar functions.^[xix]

Owning not less than 25% of the “ownership interests” in the company is the other standard for being considered a “beneficial owner.”  As one can imagine, the definition of “ownership interests” is complex, but is generally defined under 31 C.F.R. §1010.380(d)(2) as including any equity, stock, or similar instrument, interest in a joint venture, any capital or profit interest in an entity, any instrument convertible (with or without consideration into any share) or any warrant or right to purchase, sell or subscribe to a share or interest in a joint venture or an entity, a put, call, straddle, or other option or privilege, or any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

Notwithstanding all of the foregoing, the CTA and the Regulations both recognize certain exceptions to the definition of “beneficial owner” which include: a minor child, an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual, an employee of a reporting company (provided such person is not a senior officer), an individual whose only interest is a future interest through a right of inheritance, and a creditor of a reporting company.^[xx]

Company Applicants.  Every reporting company created after January 1, 2024 is required to have a “Company Applicant,” which is defined as any individual who: (a) with respect to a domestic reporting company, directly files the document that creates the domestic reporting company; (b) with respect to a foreign reporting company, directly files a document that first registers the foreign reporting company; and (c) whether for a domestic or a foreign reporting company, the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.^[xxi] Therefore, under the forgoing description, a legal assistant and the attorney who directs such legal assistant to file or register an Idaho limited liability company qualifies as a Company Applicant.

Reporting to FinCEN.  All non-exempt entities filed on or after January 1, 2024, will need to register within 90 days of formation with FinCEN.^[xxii] All entities filed before January 1, 2024, must file within FinCEN before January 1, 2025.^[xxiii] Reporting is technically the responsibility of the reporting company, but clients will likely rely on their counsel for help with compliance.^[xxiv] The first report to FinCEN for an entity must identify each beneficial owner and each Company Applicant by full legal name, birth date, residential or business address, and an identifier number from an “acceptable identification document” (or a FinCEN Identifier Number).^[xxv]

Penalties. Penalties for non-compliance are both civil and criminal.  Willful violations, providing false information, or failure to file complete and accurate reports, can result in imprisonment up to two years and/or a $500 per day fine, up to $10,000.   Unauthorized disclosure or unauthorized use of sensitive beneficial owner information can result in $500 per day penalties up to $250,000 and/or five years’ imprisonment – and if part of a larger pattern, penalties up to $500,000 – and 10-years’ imprisonment are included.^[xxvi]

The Immediate Practical Implications on Law Firms

The CTA represents one of the most significant changes to the laws regulating small businesses in recent times.  The new law will impact millions of companies across the U.S. As of the time of drafting this article (before January 1, 2024), the full spectrum of practical implications and impacts of the CTA on lawyers remains largely unknown.^[xxvii] However, lawyers from solo practitioners to the largest international firms will be expected by clients to create entities, bring existing entities into compliance, and advise and assist clients with their CTA filings and updating requirements. These implications will impact lawyers beyond the corporate practice.  As such, lawyers and law firms in all practices will need to know and consider the requirements of the CTA and its implications.

From a practical standpoint: lawyers should be thinking about meeting these ongoing compliance obligations; including whether requirements should be placed on clients and underlying beneficial owners to provide all required information to the firm registering entities on a client’s behalf and what to do when individual owners refuse to comply. Other items for consideration include client intake questions, ethics and conflict searches, and modifying standard engagement letters to delineate the scope of attorney’s duties with respect to advising on the CTA, forming entities, assisting with FinCEN filings, evaluating issues with existing entities, and assessing whether updates to filings will be required due to income levels of the entity, number of employees, or change in ownership percentages and control. 

Lawyers should also consider including clauses in operating agreements, shareholder agreements, joint venture agreements, and other corporate governance documents to ensure compliance with the CTA and to include remedies for non-compliance of the same. Finally, consideration should be paid to whether leases, loan documents, trust documents, estate planning documents, and other agreements should also include certain provisions to ensure compliance with CTA.  Likewise, law firms should also consider limiting the number of personnel and staff filing formation documents with state agencies so that the number of Company Applicants within the law firm are limited and experienced.