At its core, the CTA seeks to peel back the layers of anonymity often afforded by shell companies, requiring entities to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). Beneficial owners are defined as individuals with substantial control or those who derive significant economic benefits from a legal entity, including those holding 25% or more of the entity’s equity interests.
The CTA’s scope is broad, encompassing corporations, limited liability companies (LLCs), and similar structures, though it exempts publicly traded companies and certain regulated entities. This requires a nuanced understanding among law firms, which must discern the Act’s applicability to their clients.
The act of compliance is multifaceted, involving client due diligence, secure data management, and ongoing monitoring of regulatory updates. For many law firms, this represents not just a challenge but an opportunity to expand their services, offering comprehensive compliance solutions to their clients.
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.
The CTA introduces significant administrative burdens for law firms. Navigating its complex reporting requirements demands resources, including staff training and technology investments. Moreover, the Act may strain client relationships, with some individuals reluctant to disclose sensitive information.
Another critical aspect is the evolving nature of regulations. As part of a global push for increased corporate transparency, law firms must stay abreast of both federal and state-level changes, adjusting their compliance strategies accordingly.
Identifying beneficial owners poses its own set of challenges. Law firms must engage in careful communication with clients to determine who qualifies as a beneficial owner, often erring on the side of caution. This task is complicated further for firms handling cross-border matters, where international regulations may also apply.
Starting January 1, 2024, newly established domestic reporting companies and entities that register as foreign reporting companies in a state must not only provide details about the company and its beneficial owners but also submit personally identifiable information about their company applicants.
It’s important for law firms involved in forming domestic entities or registering foreign entities to consider whether a lawyer, paralegal, or another employee could serve as a company applicant.
A company applicant is the person who directly submits the formation documents for a domestic reporting company or the registration documents for a foreign reporting company. This includes any individual primarily responsible for overseeing or managing the submission process when multiple people are involved.
Unlike the information required for beneficial owners, company applicants acting within their professional capacity may provide their business address instead of their residential address.
Scenario: Typically, document filing in legal firms involves two company representatives: the attorney handling the submission and a third-party service. If the attorney opts to file the documents themselves directly with the state, only one company applicant is involved. According to the Corporate Transparency Act (CTA), there is a limitation that no more than two individuals can apply on behalf of a company.
The responsibility for collecting and securely storing beneficial ownership information is a significant consideration. Firms must navigate the delicate balance between compliance and privacy, adhering to regulations such as the GDPR in addition to U.S. laws.
Technology plays a crucial role in managing this information, with many firms leveraging software solutions to track changes and ensure timely reporting. However, the cost implications for clients cannot be overlooked, prompting some firms to explore cost-effective technological solutions that facilitate compliance without imposing undue financial burdens.
As we navigate the post-CTA landscape, the role of law firms is indisputably central. The journey towards greater corporate transparency is ongoing, with law firms playing a critical role in shaping its trajectory. By staying informed with regulatory changes, law firms can guide their clients through the complexities of the CTA, ensuring transparency while safeguarding their interests.
