If you have not heard of the Corporate Transparency Act (CTA), now is the time to become familiar. Millions of companies will be affected by its reporting requirements. With the effective date being right around the corner, all lawyers need to be thinking about the CTA. The CTA, which Congress passed as a component of the Anti-Money Laundering Act of 2020, was created to enable the government to prevent, detect, and combat money laundering, the funding of terrorism, and other prohibited activity by requiring certain companies to report their beneficial ownership information to the Financial Crimes Enforcement Network division of the U.S. Department of the Treasury (“FinCEN”). There are still some moving parts with the CTA. For example, the reporting form is not yet available. However, the ethical implications inherent in CTA compliance must be considered now.
Reporting Companies & Beneficial Ownership
Companies that are deemed to be “Reporting Companies” are required to report beneficial ownership to FinCEN. There are two types of ”Reporting Companies”: Domestic Reporting Companies and Foreign Reporting Companies. There are currently twenty-three (23) exceptions that exempt entities that would otherwise be considered a Reporting Company. Lawyers and law firms alike will want to consider whether they intend to assist clients in ascertaining whether the client is a “Reporting Company.”
A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests. However, the Reporting Company does not have to report an individual as a beneficial owner to FinCEN should that individual fall under one of the five qualifying exceptions to the beneficial owner definition. Similarly, lawyers will want to consider whether they intend to assist clients in determining whether an individual qualifies as a beneficial owner.
Of specific interest to attorneys – the CTA also requires up to two “company applicants” to be identified for entities formed after January 1, 2024. This may implicate law firms if they are involved in the preparation or filing or formation documents for clients. The lawyers or paralegals providing those services would have the corresponding obligation under the CTA to register with FinCEN as a company applicant for the client.
Timing & Penalties
If an entity was formed before January 1, 2024, its report must be filed with FinCEN no later than January 1, 2025. Entities that are formed on or after January 1, 2024, have only ninety calendar days to file the report. Companies only have thirty days to report a change. Lawyers who intend to prepare and file CTA reports, monitor for changes in “Beneficial Owners” that would trigger an update, or otherwise dive into CTA related representations, must bear in mind that the CTA includes stiff civil fines and criminal penalties, such as potential imprisonment. Failure to comply not only impacts clients but can lead to potential penalties for firms and for individual lawyers involved in violating its provisions.
Abundance of Ethical Considerations
The effect of the CTA is far reaching. Many practitioners will feel the impact it has on their practice, but all practitioners should know about it. Lawyers have a duty to stay abreast of changes to the law and the reporting requirements found in the CTA certainly qualify as a change. For example, the CTA likely implicates the provisions you want to include in employment agreements, shareholder agreements, or LLC operating agreements to require beneficial owners to provide the information needed by the entity to comply with the CTA’s reporting requirements. In addition, due diligence for loans, mergers and acquisitions will likely need to include CTA compliance.
Lawyers also have a duty to keep their current clients reasonably informed about the representation. While there is no duty to notify former clients, lawyers will want to be diligent in notifying current clients about the CTA. Now is the time to determine if the client is former or current.
Don’t wait until January to determine your firm’s capacity or desire to handle CTA related engagements and how it impacts various practice areas. Limitations on the scope of your representation will need to be clearly communicated with your clients. You will want to evaluate any third-party referrals for CTA filings and corporate formation filings. If your firm will play a role in corporate formations and filings, you will want to consider who will be responsible for such filings and how to track and update FinCEN registration for those individuals. Finally, you will want to start thinking of changes in firm policy and procedure that align with your level of involvement in CTA related representations, and ensure all staff are properly trained and supervised to comply accordingly.