Law firm operational considerations for the Corporate Transparency Act

Understanding the Corporate Transparency Act

Background and context

The Corporate Transparency Act is a response to growing concerns over the misuse of anonymous shell companies for illegal purposes. It represents a significant departure from existing corporate reporting requirements in the United States. The Act mandates that certain entities must report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.

Beneficial ownership reporting requirement

One of the central provisions of the CTA is the requirement for companies to disclose their beneficial owners when they are formed and, when there are changes, to make updates within 30 calendar days of the changes. Beneficial owners are individuals who, directly or indirectly, exercise substantial control over or receive substantial economic benefits from a legal entity. This includes individuals who own 25% or more of the entity's equity interests or have significant managerial control.

Covered entities

The CTA applies to a broad range of entities, including corporations, limited liability companies (LLCs), and other similar structures. However, certain types of entities are exempt, such as publicly traded companies, registered investment companies, and certain regulated entities. Law firms should be aware of the exemptions to determine whether their clients fall under the CTA's purview.

Upcoming deadline for beneficial ownership information report filing

As a reminder, for entities created or registered before January 1, 2024, the deadline to file beneficial ownership information without incurring a penalty is January 1, 2025. Entities that fail to comply with this requirement may face significant penalties, including fines of up to $591 per day and potential criminal charges. It is crucial to ensure that all beneficial ownership information is accurately reported to the Financial Crimes Enforcement Network (FinCEN) by this date to avoid any penalties.

General CTA policies and procedures for law firms

Law firms understand the need to develop new policies and procedures or update existing ones to ensure compliance, due in part to the stiff penalties being imposed for non-compliance. For example, willful failure to report beneficial ownership information within 90 days of formation or registration for reporting companies created or registered in 2024 or 30 days of formation or registration for reporting companies created or registered in 2025 and beyond, or willfully providing false or fraudulent BOI information may result in a maximum civil penalty of $591 per day, imprisonment of up to two years, or both. An area of concern for law firms is exactly who can be held criminally liable — whether it is the law firm, the business entity, the company applicant, or all three. Also, the person filing the BOI report must certify that the report is true, correct, and complete.

Law firms may face liability if they are found to have facilitated non-compliance or failed to report suspicious activity. Some firms see the new reporting work as an opportunity to grow their business, while others see it as too risky, too time-consuming, and/or too expensive for their clients. This is leading some firms to consider outsourcing the filing of the initial BOI report and ongoing compliance work to a third-party service company or to the client itself.

For law firms that see this as an opportunity to grow their business, many are in the process of establishing or updating robust compliance protocols that include client due diligence, record-keeping, and reporting mechanisms. In addition, there will continue to be a need to monitor developments related to the CTA and update internal policies to reflect changes in regulatory requirements.

Corporate Transparency Act challenges and concerns for law firms

Administrative burden

The CTA imposes additional administrative burdens on law firms, as they are now required to navigate complex reporting and compliance processes. This may require the allocation of resources, training of staff, and the implementation of new software or systems to manage client data securely.

Client relations

The Act may strain client relationships, as some clients may be hesitant to disclose beneficial ownership information. Law firms must balance their obligations under the CTA with maintaining trust and confidence among their clients.

Evolving regulations

The CTA is part of a broader global trend toward greater corporate transparency. Law firms should anticipate further regulatory developments in this area, both at the federal and state levels, and adapt their compliance measures accordingly.

Identifying beneficial owners and company applicants

Attorneys should communicate with their clients to make them aware of their status as a potential beneficial owner. If it is unclear whether an individual has or exercises substantial control, attorneys may consider erring on the side of caution and reporting those individuals who may be a beneficial owner.

There is the question of who should be responsible for gathering beneficial ownership information. Will it be the law firm or the entity? At what stage (intake/engagement, formation, post-formation) should the personal data be collected? Firms that engage in cross-border work are accustomed to gathering beneficial ownership information at the intake/engagement stage because of the BOI laws that already exist in other countries.

Educating attorneys on the risks of non-compliance will be key to ensuring the proper collection of beneficial ownership information.

Data collection and storage

A firm who makes the decision to gather beneficial ownership information for their client will need to be diligent regarding protecting and storing the information in a secure manner. How does a firm safely collect and store private data such as driver’s licenses and passports all while complying with privacy laws, such as the European Union’s General Data Protection Regulation (GDPR) and various state and federal privacy regulations in the United States?

In light of this new regulation, firms should review their current policies and procedures to ascertain existing controls involving access to private client data.

Management of company and beneficial ownership data

Law firms that decide to gather reporting company and beneficial ownership information will also need to establish a process for keeping track of that information. These firms will also have to decide if they will handle the ongoing compliance requirements, which require reporting changes within 30 days.

Existing third-party entity management software can be enhanced to assist with the ongoing compliance when changes to the beneficial owner or reporting company occur. This technology can also be used to help manage costs.

Another consideration is the ongoing issue of budgetary constraints for many law firm clients. Clients may not want the added expense of paying lawyers to file BOI reports or to handle the ongoing compliance. To help clients save on costs, some law firms are looking at technology solutions that could handle both company and BOI reporting as well as the ongoing compliance in reporting changes within the 30 days. Tech-savvy firms and service companies, such as CT Corporation, are creating online questionnaires that can be added to a workflow to help determine whether an entity is a reporting company.

Related resource: The transformative power of Entity Management Systems: Ensuring compliance with the Corporate Transparency Act

Reporting deadlines

There are many changes to a business entity that can necessitate a year-end compliance action. This year will be complicated further by the new CTA requirements.

Any upcoming transactions that will require the creation of a new entity should take into account the 90-day reporting deadline for entities formed in 2024 versus the January 1, 2025, deadline for entities already in existence prior to January 1, 2024.

Related resource: The Corporate Transparency Act's impact on law firms

Conclusion

The Corporate Transparency Act represents a significant shift in the landscape of U.S. corporate law, aimed at enhancing transparency and combating illicit financial activities. Law firms play a pivotal role in ensuring their clients' compliance with this legislation while navigating the challenges it presents. By staying informed, and developing robust compliance protocols, law firms can fulfill their obligations under the CTA while maintaining the trust of their clients and mitigating potential liabilities. As the regulatory environment continues to evolve, law firms must remain vigilant and adaptable to meet the demands of an increasingly transparent corporate world.

Corporate Transparency Act resources

If you would like more information about this topic or to sign-up for CTA updates, visit our Corporate Transparency Act resource page.