Corporate Transparency Act: How might it affect your family office or business?

Financial crimes such as money laundering remain prevalent both in the U.S. and globally. In fact, global enforcement actions for such crimes increased by more than 50% from 2021 to 2022.

In 2021, Congress passed the Corporate Transparency Act (CTA) to fight these crimes and prevent terrorist financing. Final rules were issued in 2022 and the CTA became effective on Jan. 1, 2024.

What is the Corporate Transparency Act?

The 2024 Corporate Transparency Act requires most U.S. domestic legal entities to disclose beneficial owner information (BOI) to the Financial Crimes Enforcement Network (FinCEN). Entities subject to the CTA include small businesses with a physical U.S. presence that have 20 or fewer full-time employees and $5 million or less in gross receipts or sales.

Importantly, family offices organized as a corporation, LLC or LLP are also subject to the legislation.

“The government wants to know more about who the owners of these entities are in order to combat money laundering and other financial crimes” - Rob Erickson, senior vice president and wealth strategist, Ascent Private Capital Management

Rob Erickson, senior vice president and wealth strategist with Ascent Private Capital Management, calls the CTA “a peek behind the curtain” into the ownership of small businesses and family offices.

“The government wants to know more about who the owners of these entities are in order to combat money laundering and other financial crimes,” Erickson says. “The CTA provides more teeth to existing anti-money laundering legislation.”

Who does the Corporate Transparency Act apply to?

FinCEN estimates that the CTA will affect nearly 33 million existing entities and an additional five million new entities every year. It requires qualifying entities formed on or after Jan. 1, 2024, to file an initial report to FinCEN within 30 days of formation (this is extended to 90 days during the first year.) Entities that existed before this date have until January 1, 2025, to file an initial report.

Any changes in beneficial ownership information, such as a new owner replacing a deceased owner, must be reported to FinCEN within 30 days.

There are exemptions to the 2024 Corporate Transparency Act. According to Erickson, larger entities aren’t subject to the CTA because they are subject to other federal reporting regulations that require the identification of beneficial owners. FinCEN has published a list of 23 specific types of entities that are exempt from the reporting requirements.

“Private trusts are largely exempt because there are no filing requirements,” adds Erickson.

What is a beneficial owner?

The CTA defines a beneficial owner as an individual who exercises substantial control over and owns or controls at least 25% of the company. Substantial control is broadly defined and may include serving as a senior officer (such as CEO, CFO and COO), having de facto control over key decisions and having direct or indirect authority to remove or appoint the governing body.

• Reporting companies must submit the following information to FinCEN:
• Legal name (DBA)
• Street address and jurisdiction
• Taxpayer Identification Number (TIN) or Employer Identification Number (EIN)

Beneficial owners must submit the following information to FinCEN:

• Full legal name and date of birth
• Street address
• Unique identifying number from a drivers’ license, passport or state identification, along with an image of the document

One takeaway from the final rules is that a family with a regulated private trust company (PTC) as a core element of its wealth structure may face lower reporting burdens than a family that doesn’t use a PTC. This is because for many irrevocable trusts, the trustee — not the grantors and beneficiaries — is deemed the owner of trust assets.

Also, state-supervised and examined PTCs, along with entities controlled or wholly owned by a PTC, should be exempt from the reporting requirements.

What family offices should know about the Corporate Transparency Act

While it’s been a few years since the CTA was passed, Erickson says many businesses and family offices he meets with aren’t aware of the law and its provisions.

“I’m starting to hear more about it now in meetings, but spreading the word is very important, because this is a departure from the norm,” he says.

One of the biggest concerns small businesses and family offices have about the CTA is the possibility of sensitive ownership information becoming public.

The legislation imposes strict confidentiality, security and access restrictions on the beneficial owner information collected by FinCEN. However, they are authorized to share this information with financial institutions, regulators and other government agencies as long as protocols are followed. FinCEN is developing the Beneficial Ownership Secure System (BOSS) to receive and store information securely.

It's worth noting that there will also be initial and ongoing compliance costs. FinCEN calculates that the total costs in the first year of BOI reporting will be a total of $21.7 billion for all reporting companies, dropping to $3.3 billion in year two and onward.

Steep penalties for CTA noncompliance

Erickson stresses that the Corporate Transparency Act is not a set of guidelines or recommended best practices. “Reporting is required by law,” he says.

Willfully failing to report beneficial owner information, or willfully supplying false information in a report, could lead to civil and criminal penalties of a $500 per day fine for every day the violation continues and up to two years in prison.

The legislation does provide a safe harbor if an entity believes it has submitted an inaccurate report. In this case, a corrected report must be submitted within 90 days of the original submission, not the date when the entity became aware of the error.

“Now is the time to determine if your family office or small business will be subject to the CTA’s beneficial owner reporting requirement,” says Erickson. “Start gathering the information you’ll need to report and coordinating with your accountant and attorney regarding who will file your report.”

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