In most cases, however, clients simply want counsel to protect their personal assets against creditors, or to achieve the best tax results. However, the Financial Crimes Enforcement Network (“FinCEN”) recently finalized rules (https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements) under 2020’s Corporate Transparency Act (“CTA”) that could complicate such routine planning. That law mandated reporting of ownership of firms not subject to other reporting or regulation.

As one major newspaper headlined, “US Shell Companies Won’t Be Able to Remain Anonymous.”(Formally, the CTA is found in Sections 6401 to 6403 of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub.L. No. 116-283 (H.R. 6395), 134 Stat. 338, 116th Cong. 2d Sess.) The CTA is contrary to typical disclosure laws, which regulate publicly traded firms. Instead, the CTA requires reporting by privately held firms. Its goals were to combat money laundering, financing of terrorism, and tax evasion. In Washington-speak, it was intended “to protect the U.S. financial system from illicit use and impede malign actors from abusing legal entities, like shell companies, to conceal proceeds of corrupt and criminal acts (which) abuses undermine U.S. national security, economic fairness, and the integrity of the U.S. financial system.”

Cutting through the jargon, the CTA tries to identify “beneficial ownership”— the human beings behind the corporate entities, to get to those who have “substantial,” actual control of a business — to be able to prosecute them for any abuses that may occur. To enforce the CTA, Congress put the reporting obligation on the law firms — and their paralegals — who file typical formation papers. (If Congress were subject to the same full disclosure rules, perhaps the CTA should have been called the “Rat Out Your Clients” Act.) How will law firms resolve ethical conflicts, between the duty of confidentiality, and the CTA disclosure mandate? Will this just be another reason to bill clients?

The law’s creators cited European legal concepts of a higher duty to the public. Fortunately, the CTA has many exemptions, generally involving those who already report information to a government agency. There are also exemptions for shell companies, and for large existing firms of 20 or more employees which pay taxes and have gross sales of $5 million or more. Of course, what rule designed to cut through legal ways of hiding ownership information would be complete without even more rules?

FinCEN’s “final” (late September 2022), rule announced several future additional rules. One will regulate access to the sensitive database that CTA reporting will create. Another will clarify financial institutions’ existing duty to vet their clients. The new rules provide affected firms time to comply — but not much. Firms in existence on the January 1, 2024, effective date will have one year to file their initial reports, by January 1, 2025. However, firms created after January 1, 2024, must make their initial report within 30 days of creation.Moreover, CTA reports will be confidential — as they should be. Not only will they contain identifying information, such as names and addresses. They will also have such critical nonpublic information as social security numbers and EINs, or a driver’s license.

Although January 1, 2025, seems a long way off, it is not too early to start planning your firm’s CTA reporting. In particular, if you must report, think about whether your ownership structure can be adjusted before that date.

For further information about the CTA or the proposed regulations, please contact Stanley Jaskiewicz of our Corporate Law Department at sjaskiewicz@sgrvlaw.com, or 215-241-8866.

Copyright 2022 Stanley P. Jaskiewicz, Esquire