Warner recently sponsored a workshop for the members of Foundations, Endowments and Family Offices (FEFO) in Grand Rapids on “Hot Topics for Family Offices in 2022.” The discussion included information on the Corporate Transparency Act (CTA) which became law on January 1, 2021, but has not yet been implemented.
If implemented in its current form, the CTA may raise privacy concerns for some families and place an administrative burden on family offices, as it includes a requirement that all “reporting companies” must file, with the Financial Crimes Enforcement Network (FinCEN), a report which identifies each “applicant” and each “beneficial owner” of the entity. This disclosure of information is intended to make it easier for intelligence and law enforcement agencies to investigate corporations and limited liability companies suspected of committing crimes including terrorism, trafficking, tax fraud, money laundering and financial fraud.
Who Will Be Required to Comply With the CTA?
The CTA defines a “reporting company” as a corporation, limited liability company or other similar entity that is created by a state filing or formed under the laws of a foreign country and registered to do business in the United States.
However, the CTA exempts some entities from the definition of “reporting company” (and therefore exempts them from the reporting requirements), including:
- Operating companies which meet the following criteria:
- More than 20 full-time employees in the U.S.
- A physical office in the U.S.
- More than $5 million in U.S. revenues.
- Entities that are regulated on some other basis, such as:
- Banks, financial institutions or insurance companies.
- Investment advisers and broker-dealers.
- Tax-exempt entities.
- Publicly traded companies.
What Information Must Generally Be Disclosed in the Report to FinCEN?
- Information on the reporting company — entity name (including assumed and d/b/a names), address, state of formation and TIN/EIN.
- Information on company “applicants” and “beneficial owners” — name, date of birth, address, unique identifying number (such as from a passport or driver’s license) and photo ID.
- If a beneficial owner of a reporting company is an entity that is itself exempt from reporting company status under the CTA, the reporting company is required to report the name of the exempt entity in its report, but it is not required to disclose any other information for the exempt entity.
Who Is Considered a Beneficial Owner or Applicant?
An “applicant” includes:
- The person forming an entity (incorporator/organizer).
- The person directing the filing of entity documents by another person.
A “beneficial owner” includes:
- A person owning or controlling 25% or more of the ownership interests (broadly defined) of the reporting company.
- A person having some control over the reporting company (e.g., senior officer, person having substantial influence over important matters).
- With respect to trusts, it can include the settlor, trustee and a sole beneficiary.
When Must Reports Be Submitted to FinCEN?
Currently existing entities will be required to submit a Report to FinCEN within one year after the effective date of the Secretary of Treasury’s regulations. Entities formed or registered after the effective date of the regulations will be required to submit a report within 14 calendar days of the date of formation or registration.
Any changes to reported information must be submitted to FinCEN in an updated report no later than 30 days after the date on which there is a change.
Where Does This Reported Information Go?
The reporting company’s report goes to FinCEN, and this network can include national security, intelligence and law enforcement agencies, the FDIC, the SEC and taxing authorities. Reported information is to be stored in a “secure non-public” database.
What Should We Be Doing Now?
Although we don’t know yet what the final CTA regulations will look like, one can assume that some reporting is going to be required in the future. Now is the time to:
- Gather the information listed above for each reporting company, each applicant and each beneficial owner.
- Make sure that your organizational documents allow you to collect and share the required information.
- Note that certain trust structures may permit beneficiaries to avoid disclosure (non-grantor multi-beneficiary trusts where beneficiaries do not possess withdrawal rights).
- Perhaps become an exempt entity.
Due to the large volume of comments offered during the public comment period on the CTA, we expect additional activity on these proposed regulations before implementation, and implementation seems unlikely until late 2022 or early 2023. This provides some time for pulling together the information on the family’s various reporting companies, applicants and beneficial owners. For more specific information on the CTA or for assistance in preparing for the CTA implementation, please contact Loren Andrulis at firstname.lastname@example.org or at 616.752.2182.