The Corporate Transparency Act (CTA) of 2021 will become effective from January 1, 2024. Enacted in response to the corruption exposed in the Panama Papers scandal, the CTA will bring about a significant shift in reporting obligations and transparency measures for family offices.
This insight discusses the bill, highlights key definitions and explores its implications for family offices.
What is the Corporate Transparency Act?
In an effort to fight financial crimes, the US Congress passed the Corporate Transparency Act (CTA) in 2021. The CTA Act has five main objectives:
- To establish a clear federal standard for incorporation practices.
- To safeguard critical national security interests.
- Protect interstate and foreign commerce and facilitate adequate national security, intelligence, and law enforcement.
- To combat money laundering, terrorism financing, and other illicit activities.
- To ensure compliance with international anti-money laundering and countering the financing of terrorism standards.
What is the historical background?
In 2016, the Panama Papers leak exposed the use of “shell companies” by political and business elites to hide the identity of their owners and engage in corrupt practices. Following this, the Obama administration proposed the creation of a national registry to document the actual owners of such companies, as well as other measures to combat offshore fraud and deception.
Currently, more corporations are created in the United States than in any other jurisdiction. In particular, Delaware receives over 600 new business registrations daily. That is because, in some cases, setting up a US company requires less identifying information than obtaining a library card. Congress wanted to address this issue by creating a national registry identifying the persons who own these companies or are in charge of their day-to-day operations.
In a press release, Secretary of the Treasury Janet L. Yellen expressed that the passing of the CTA “will make it harder for criminals, organised crime rings, and other illicit actors to hide their identities and launder their money through the financial system.”
What does the corporate transparency act require?
The CTA requires “Reporting Companies” with less than $5M gross receipts or sales and 20 or fewer employees to report Beneficial Ownership Information (BOI) and company applicants to the Financial Crimes Enforcement Network (FinCEN).
The Act defines a Reporting Company as any domestic or foreign corporation, LLC or similar entity registered to do business and filed with a secretary of state or other similar office and which does not fall within one of the 23 types of exempt entity types.
What is beneficial owner information (BOI)?
The CTA defines a beneficial owner as any entity or individual who, directly or indirectly, exercises substantial control over the entity or has 25% or more ownership interests in the Reporting Company. Determining what qualifies as “substantial control” depends on each case’s specific facts and circumstances.
In general, the key factor is whether the person has the authority to make significant decisions on behalf of the entity. For example, even without an ownership stake, senior executives or directors can be considered beneficial owners under the CTA. There are only five instances where a person normally considered a beneficial owner may be exempt.
Who is a company applicant?
A company applicant is any individual who (a) directly files the document that creates or registers the reporting company with a secretary of state or any similar office. Or (b) is primarily responsible for directing or controlling the filing of the document.
Domestic and foreign reporting companies created before January 1st 2024, are not required to provide the names of applicants who participated in creating the company.
Implications for family offices
Many family offices formed as a corporation or LLC may be required to report with FinCEN. However, some larger family offices may be exempt (see 23 types of exempt entity types).
Additionally, the family office must disclose information if it invests in a Reporting Company. That includes whether it exercises substantial control or has a 25% ownership interest.
How family offices can remain compliant
Family offices that qualify as a Reporting Company must disclose the following information regarding the entity: legal name, trade name, business address, jurisdiction information, and US Internal Revenue Service taxpayer identification number. In addition, they must submit beneficial owner information and company applicants (for companies registered after January 1st 2024).
Required disclosures regarding the beneficial owners and company applicants include legal name, date of birth, current address, and an image of an identification document with a unique identifying number (e.g., a passport). Any updates to information on the company or its beneficial owners must be updated within 30 days to FinCEN.
Failure to comply with the CTA may lead to civil penalties of up to $500 per day, with a maximum fine of $10,000. Or criminal penalties that could result in imprisonment for up to two years in a federal prison. Additionally, individual employees who are responsible for preparing and submitting reporting information may be held personally accountable for any false reports.
The Corporate Transparency Act has significant implications for family offices. It introduces a new era of accountability and transparency. Under the CTA, family offices must disclose sensitive information as a part of their reporting obligation. This includes disclosing legal names, addresses, and other personal details to FinCEN. Non-compliance can lead to hefty penalties and legal consequences. The act will place substantial pressure on the reporting operations of family offices in the future.