Mcle Self-study Article What Do I Need to Know About the Corporate Transparency Act?

• Publication year: 2022

MCLE SELF-STUDY ARTICLE WHAT DO I NEED TO KNOW ABOUT THE CORPORATE TRANSPARENCY ACT?

Written by Melissa Wiley, Esq.^*

I. INTRODUCTION

When I mention the Corporate Transparency Act (CTA) to most people, I tend to garner a lot of blank stares. Acronyms rarely make for exciting cocktail party conversation, especially when they come from the mouth of a tax lawyer. But there is good reason for lawyers to understand the CTA and prepare themselves to explain the law's requirements to their clients: under the CTA, tens of millions of entities will be required to report detailed ownership information to the Treasury Department, possibly as early as next year.

Enacted by Congress in January 2021 as part of the Anti-Money Laundering Act of 2020, the CTA aims to put an end to (or at least significantly curtail) the use of anonymous shell companies in connection with money laundering and other illegal activity. Specifically, the new law directs the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) to create a database of beneficial ownership information that will allow the government to identify the individual owners of all manner of privately held assets. Where will that data come from? Perhaps, it may come from you or your clients.

This article will address some of the most common questions I receive once practitioners realize the importance of the CTA, namely: Who will need to report? What information? When is reporting required? What are the penalties for non-compliance? Who gets access to this treasure trove of information?

II. HOW DID WE GET HERE?

A. International Criticism

For years, the international community has expressed its dismay at the state of financial secrecy laws in the United States. The country's shortcomings were perhaps most famously documented in the Financial Action Task Force's (FATF) 2016 Mutual Evaluation Report ("The Report").¹ FATF, the self-described "global money laundering and terrorist financial watchdog," is an inter-governmental organization with 37 country members and 2 regional organization members, including the United States, Australia, Brazil, Canada, China, France, Germany, India, Japan, Mexico, Russia, Switzerland, the United Kingdom, and the European Union. It further includes as observer organizations, groups such as the International Monetary Fund (IMF), Interpol, the Organization for Economic Cooperation and Development (OECD), various entities within the United Nations, and the World Bank.² In other words, FATF's opinions matter.

What did FATF have to say? In sum:
Lack of timely access to adequate, accurate, and current beneficial ownership (BO) information remains one of the fundamental gaps in the U.S. context. The [National Money Laundering Risk Assessment] identifies examples of legal persons being abused for ML [(money laundering)], in particular, through the use of complex structures to hide ownership. While authorities did provide case examples of successful investigations in these areas, challenges in ensuring timely access to and availability of BO information more generally raises significant concerns, bearing in mind risk and context.³

The Report further highlighted the very deficiency at which the CTA is directed, i.e., "the use of complex structures, shell or shelf corporations, other forms of legal entities, and trusts, to obfuscate the source, ownership, and control of illegal proceeds."⁴

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Of the 11 categories of effectiveness rated by FATF, the United States received a "Low" (the worst possible rating) in the "Legal persons and arrangements" category. The country received an "NC" (non-compliant, again the lowest possible rating) for compliance in the area of "Transparency & BO of legal persons."⁵

In part, this state of affairs was made possible by the decentralized way in which business entities—corporations, limited liability companies (LLCs), limited partnerships, and the like—are formed in the United States. Rather than having a single authority or nationally standardized process for entity formation, each state has developed its own rules, own processes, and own tolerance for secrecy. States such as Delaware, Nevada, and Wyoming have long been famous for permitting the formation of business entities with little to no disclosure of the identity of the beneficial owners; i.e., those individuals who exercise ultimate ownership or control over the enterprise.⁶ If you have ever tried to figure out the names of the people at the top of an endless chain of LLCs and turned up empty-handed, you will understand the need for the CTA.

Even states that historically required more robust disclosures of beneficial ownership information were not exempt from FATF's criticism, however:

The ability of the U.S. to use the States' formation processes as a means of ... timely access to accurate and adequate BO information is significantly impeded, because the States do not verify the information they collect on legal persons. The States consider their role in company formation to be administrative in nature without any control function. In keeping with the States' views on [money laundering/terrorist financing] risk generally, States do not consider that they have a significant AML/CFT [(anti-money laundering/counter-terrorist financing)] role during the company formation/registration process.⁷

Lastly, FATF expressed frustration about the lack of "meaningful sanctions" imposed for non-compliance with state-level reporting requirements and the absence of AML/CFT obligations imposed on the lawyers, accountants, company formation agents, and/or trustees who are involved in an entity's formation.⁸

FATF has not been alone in its criticism. The Tax Justice Network's 2018 and 2020 Financial Secrecy Index ranked the United States second among the countries "most complicit in helping individuals hide their finances from the rule of law." By 2022, the United States had achieved the not-so-coveted top spot on the list, besting the notable secrecy jurisdictions of Switzerland (#2), Singapore (#3), Hong Kong (#4), and Luxembourg (#5).⁹

Similarly, Transparency International, a global organization with chapters in more than 100 countries, issued a report in 2015 concluding that "[t]he US lacks an adequate definition of beneficial ownership and anti-money laundering laws have key loopholes."¹⁰ In that same year, the United States scored 76 points (out of 100) on the organization's Corruption Perceptions Index, ranking the country number 16 out of 168 (with 1 being best).¹¹ Six years later, on the 2021 index, the United States had sunk to number 27 out of 180, with a score of 67, putting it in the same corruption level band as the United Arab Emirates, Bhutan, Taiwan, the Bahamas, Qatar, and South Korea.¹²

B. The U.S. Response

It would be unfair to paint the United States as sitting idly by as international critiques piled up. On numerous occasions, beginning as early as 2008, Congress considered some version of the CTA, but lacked the necessary political power to turn any of the proposals into law.¹³ Most recently, Congresswoman Carolyn Maloney introduced the Corporate Transparency Act of 2019,¹⁴ forming the basis for the CTA that was enacted in January 2021. Fatefully, the framework proposed by Congresswoman Maloney was eventually included in the National Defense Authorization Act for Fiscal Year 2021 (NDAA) as part of the broader Anti-Money Laundering Act of 2020. Following its passage in the House (in July 2020) and the Senate (in November 2020), the NDAA was presented to the President on December 11, 2020. Twelve days later, the NDAA—including the long-awaited CTA—was vetoed.¹⁵

While its inclusion in the NDAA worked against the CTA on its journey to the President's desk, advocates of greater corporate transparency were quickly rewarded after both the House (in a 322-87 vote) and Senate (in an 81-13 vote) garnered the two-thirds majority necessary to override the President's veto.¹⁶ Finally, on January 1, 2021, the CTA became law.¹⁷

Congress made its intent regarding the CTA abundantly clear in the "sense of Congress" included in section 6402 of the NDAA, noting:

• more than 2,000,000 corporations and limited liability companies are being formed under the laws of the States each year."¹⁸
• most or all States do not require information about the beneficial owners of the corporations, limited liability companies, or other similar entities...."¹⁹
• malign actors seek to conceal their ownership of [such] entities in the United States to facilitate illicit activity...."²⁰

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• money launderers and others ... intentionally conduct transactions through corporate structures in order to evade detection ...."²¹
• Federal legislation providing for the collection of beneficial ownership information for ... entities formed under the law of the States is needed to— (A) set a clear, Federal standard for incorporation practices; ... (E) bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards."²²

Sound familiar?

C. Implementing Regulations

Codified at 31 USC, section 5336, the CTA provides the conceptual framework for the development of a national database of beneficial ownership information to be maintained by FinCEN. It begins by defining a series of key terms, most notably "beneficial owner," "applicant" and "reporting company," and proceeds to describe the information required to be reported to FinCEN and the required timing of such reporting.²³ The remainder of the statute is largely devoted to answering two questions of significant concern to those who will be required to report: who may access the database and for what reasons, and what are the penalties for non-compliance with this new set of complex reporting rules?²⁴ While the statute provides high-level guidance, it is purposefully fuzzy on the details of implementation.

It is therefore unsurprising that the CTA contains dozens of references to regulations to be...