The Corporate Transparency Act of 2019 (“CTA”) (1) was enacted on January 1, 2021 as part of the Anti-Money Laundering Act of 2020 (“GwG”), which is part of the National Defense Authorization Act for Fiscal Year 2021 ( "NDAA"). (2) This article contains highlights (3) of the CTA, an outlook on upcoming regulations, and a note to lawyers in North Carolina about the potential impact on a commercial real estate practice.
One intention.
The purpose of the CTA is to “(A) establish a clear, federal standard for incorporation practices; (B) protect important United States national security interests; (C) protect interstate and foreign trade; (D) better facilitate critical national security, intelligence and law enforcement efforts to combat money laundering, terrorist financing and other illegal activities; and (E) bring the United States into compliance with international anti-money laundering and terrorist financing standards. "(4)
Due to the role of commercial real estate attorneys, which typically play in the formation and change of business units in the course of a closing or other commercial real estate transaction, the CTA may trigger reporting requirements if the role of the attorney is included in the definition of an "applicant" (defined below ).
B. Definitions.
To understand the CTA, you must first understand the legal definitions:
Applicant: | Applicant is an individual who either applies for a reporting company under the laws of North Carolina or Indian Tribe; or who registers or files an application for a foreign reporting company to do business in the US (5) |
Beneficial owner: | Contains: |
Register of beneficial owners or | A private database that is maintained by FinCEN (after implementation of the regulations). The beneficial owners database will not be public; access will be restricted to authorized users upon receipt of an approved request for disclosure. (7) |
Business unit: | See “Reporting Company” below. |
FinZEN: | US Treasury Department's Financial Crimes Enforcement Network |
Reporting company: | Corporations, limited liability companies, or other similar entities formed by filing constitutional documents with the NC Secretary of State or a legal entity registered outside of the state for the purpose of doing business with the NC Secretary of State. There are certain exceptions, which are described below. (8) |
C. Requirements.
According to the CTA, every applicant for the establishment of a business unit must submit a report to FinCEN in which the beneficial owner (s) is disclosed. The CTA also requires an annual filing by current beneficial owners, disclosing any changes made during the previous year.
D. Timeline.
The CTA is an evolving area of law. Although it came into effect on January 1, 2021, there is an extensive history of legislation and previous laws that have begun the process of requiring transparency from beneficial owners of business units. The promulgation of additional regulations is necessary in order to resolve many open questions. The following are the highlights of the timeline:
October 26, 1970 | Bank secrecy issuance (9) |
July 2006 | The International Financial Action Task Force on Money Laundering ("FATF") published a report criticizing the US for "failing to comply with an FATF standard for collecting information on beneficial ownership." (10) |
January 13, 2016 | FinCEN's first Geographical Targeting Orders (GTOs) directed to property insurance companies to collect and report certain ownership information on residential real estate purchased without loan in certain markets. (11) |
January 1, 2021 | Adoption of the CTA (12) |
May 5, 2021 | The deadline for comments was the Ministry of Finance (13) |
January 1, 2022 | Deadline for the promulgation of ordinances for the implementation of the CTA by the finance minister (with specified effective dates for these ordinances). (14) |
2023 | CTA is expected to be fully implemented |
E. Deadlines:
Reporting requirements for companies | 2 years after the regulation came into force (15) |
Reporting requirements for companies | At the time of formation (16) |
Reporting requirements for | Depending on whether the changes affect beneficial ownership or control, as will be clarified by pending regulations, reporting entities should be ready to provide updated reports at the time of the change. The language of the CTA calls for "timely" updated reporting; however, this specific period has yet to be finalized. (17) |
Safe Harbor Reporting Requirements | 90 days. (18) |
F. Exceptions.(19)
1. Reporting companies (20)
Large Employment / Sales Company employs more than 20 full-time employees in the US; Filed a tax return in the previous year that showed more than $ 5,000,000 in gross sales or income; and has a physical operational presence in the United States.
Insurance – companies defined as insurance companies under Section 2 of the Investment Company Act of 1940; or an insurance manufacturer that is licensed by a state and under the supervision of the Insurance Commissioner or similar official / agency of the state and has a physical office in the United States.
Exempt Corporations – Section 501 (c) corporations, certain political organizations, and charitable / split interest trusts.
Banks, bank holding companies, and credit unions – certain financial institutions as described in the relevant provisions of the Federal Deposit Insurance Act, Investment Company Act of 1940, Investment Advisors Act of 1940, Federal Credit Union Act, and Home Owners’ Loan Act.
To the S.E.C. Reporting Entities – Class issuers registered under Section 12 of the Securities Exchange Act of 1934; or any legal entity required to submit additional and regular information under Section 15 (d) of the Act.
Public Utilities – a provider of telecommunications, electricity, natural gas, or water and sewer services in the United States.
2. Beneficial owners (21)
Exclusive Creditor – while creditors are typically not considered beneficial owners of those companies by reporting companies unless otherwise qualified (substantial control or 25% ownership / control), arrangements in credit agreements that mandate control may be included If they are far-reaching, they will be sufficient to trigger substantial control. This essential control would remove a creditor from this exception and report it as a beneficial owner.
Minor Child – A child who is under the age of majority in the state in which the business was incorporated will not be considered a beneficial owner as long as the child's parent or guardian is reported.
Apparent Heir – an individual whose stake in a corporation, limited liability company, or similar entity is due to inheritance law.
G. Penalties.
The CTA imposes significant penalties for reporting violations, including criminal and civil penalties. (22) A willful violation of a reporting requirement such as a fine of no more than $ 10,000 and / or imprisonment.
H. Ethics:
The CTA combines legal services and ethics. Compliance with the CTA inevitably includes the disclosure of customer information that can be viewed as confidential by the customer. The CTA trumps a client's desire for confidentiality.
The North Carolina Code of Ethics already provides an exception to statutory disclosures. See Rule 1.6 Confidentiality of Information ("An attorney may disclose information that is protected from disclosure under paragraph (a) to the extent that the attorney reasonably deems it necessary: (1) to comply with professional rules, the law or court order … ”(emphasis added). In connection with the information required by the IRS on Form 1099, RPC 23 provided:
If Attorney L is required by tax law to provide certain information to the Internal Revenue Service, he can do so ethically. Since this is required by law, the client's consent is not required … Therefore, Lawyer L and other lawyers in a similar position should, as appropriate and appropriate, inform their clients and other data subjects if the lawyer is required to provide information to the Internal Revenue Service.
It appears that the reporting requirements under the CTA would fall under Rule 1.6 and RPC 23. Note that RPC 23 suggests that the attorney be required to notify the client that the attorney will make the required disclosure.
I. Representation agreements and the CTA:
Lawyers should consider the implications of the CTA when drafting agency agreements with clients.
1. Restricted area of representation
Until FinCEN provides further guidance through regulation, it is recommended to reduce the number of cases where constitutional documents are filed on behalf of new companies, limited liability companies and similar companies in order to avoid the lawyer being called "applicant" triggers reporting obligations in accordance with the CTA.
2. Abandonment of reliance on information and compensation
Due to potential civil and criminal penalties for willful reporting violations and unauthorized disclosure and use, attorneys should consider including provisions in agency agreements that allow clients to rely on explanations when the scope of the agency involves reporting FinCEN or using the registry the beneficial owner implies. In addition, attorneys may choose to include compensation provisions for deliberate client misrepresentation; However, attorneys should be sure that they are receiving information from an authorized and informed representative of the reporting company's client. With complex, multi-tier holding companies, the right sources of information may not be immediately clear. Proper identification is a critical step and implies an attorney's ethical due diligence and communication obligations.
3. Limitation of the role of the lawyer in the ongoing reporting requirements
Clearly communicate to the client that the attorney is not responsible for tracking changes in beneficial ownership and is not the party responsible for ongoing reporting to FinCEN.
4. If you act as applicant / submit founding documents, prepare a FinCEN report
Should attorneys elect to file constitutional documents on behalf of newly incorporated reporting companies, attorneys should be willing to meet all requirements to report attorney's information to FinCEN within one year of the ordinance being promulgated.
J. Unanswered Questions:
Since this is an evolving area of law, many questions remain unanswered. For example:
(1) What source of information can an attorney rely on to identify reporting information?
(2) How many levels need to be researched when a business entity has multiple levels of ownership?
(3) If an attorney used commercially reasonable inquiries to report the information, is an attorney liable for inaccurate information?
(4) Is an attorney required to update information?
(5) What is the duty of a lawyer if the lawyer no longer represents the company?
(6) If an attorney's role is merely to qualify a foreign legal entity to do business in North Carolina, does that trigger a reporting requirement (as the CTA only applies to a legal entity “incorporation” application)?
(7) If the CTA refers to an “individual”, does the CTA also refer to a company that is tasked with setting up a business unit?
Coming regulations should help to answer these and other questions.
K. Conclusion:
The reporting requirements are not yet complete, but remain in place and must become part of the routine for NC lawyers for commercial real estate. A CTA checklist that you can integrate into your practice is attached as Appendix A. The most important thing is to determine if you are the responsible party for reporting financial statements that involve the formation (or change) of a company that falls under the definition of a reporting company. Stay informed of the regulations as they are published.
APPENDIX A.
CTA checklist for commercial real estate attorneys
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(a) Representation agreement of the lawyer □ Did the agency agreement relate to the CTA and any required disclosures? □ Did the agency agreement contain an obligation for the customer to cooperate with any disclosure obligations? □ Does the representation agreement include compensation to the attorney for incorrect information provided by the client? |
(B) Role of the Closing Attorney □ Did the attorney start a business in North Carolina? □ Has the attorney qualified a foreign (international) business entity to do business in the United States? □ Has the lawyer changed beneficial ownership of an existing business entity? □ Otherwise, does the lawyer fit into the definition of an applicant? |
(C) Compliance requirement: Reporting companies □ Identify the beneficial owner (s): _____________________________ □ Identify applicant (s): __________________________________________________ |
(D) Compliance requirement: Information for each beneficial owner and / or applicant to be reported to FinCEN Full legal name: ______________________________________________________ Birth date: ________________________________________________________ Current residential or business address: ________________________________________________ ________________________________________________________________________________ Unique identification number from an acceptable identification document: _____________________ Acceptable ID (23) means: (i) a non-expired passport issued by the United States. (ii) a non-expired identification document issued by a state, local government, or Indian tribe (iii) an unexpired driver's license (iv) if an individual does not have any of the items listed above, a non-expired passport will be issued from a foreign government |
(e) Compliance requirement: Correction of accidental reporting errors □ Identify misreported information and the applicability of Safe Harbor □ Issue a revised report to FinCEN within 90 days |
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EXHIBITION B
bibliography
January 29, 2021 | Goldmann, Lawrence A. | "The Corporate Transparency Act: Extended federal anti-money laundering laws bring new reporting requirements for company property" (www.americanbar.org/groups/business_law/publications) |
April 16, 2021 | Downes, Robert W. | "The Corporate Transparency Act – preparation for the federal database with information on beneficial ownership" (www.americanbar.org/groups/business_law/publications) |
23 August 2021 | Zirogiannis, Lewis | "What you need to know about the Corporate Transparency Act" |
(1) Despite the name of the law, the CTA is not limited to “companies”. The CTA specifically includes limited liability companies and "other similar entities".
(2) William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. No. 116-283, https://www.congress.gov/116/bills/hr6395/BILLS-116hr6395enr.pdf. Since the CTA has not yet been codified in the United States Code, citations to the law refer to the sections of the CTA in public L. No. 116-283 as they are codified (hereinafter “CTA § (future USC section ) No.)").
(3) For a more detailed study of the CTA, legislative history and related laws, see the bibliography attached as Appendix B.
(4) CTA § 6402 (5) (A) to (E). (5) CTA § 5336 (a) (2). (6) CTA § 5336 (a) (3). (7) CTA § 6402 (7) (A). (8) CTA § 5336 (a) (11). (9) Banking Secrecy Act 1970, Pub. L. No. 91-508, 84 Stat. 1114-2 (Codified as amended in isolated sections of 12 U.S.C. and 15 U.S.C.)
(10) CTA, Section 2, Results, # 6. (11) The original GTOs for reporting title insurance companies included (1) all New York City counties; (2) Miami-Dade Counties and the two northern counties (Broward Counties and Palm Beach Counties); (3) Los Angeles County, California; (4) three counties that comprise part of the San Francisco area (San Francisco Counties, San Mateo Counties, and Santa Clara Counties); (5) San Diego County, California; and (6) the county that includes San Antonio, Texas (Bexar County). See FinCEN extends the reach of geographic targeting orders in real estate beyond Manhattan and Miami, Financial Crimes Enforcement Network, United States Dept. of the Treasury (July 27, 2016) https://www.fincen.gov/news/news-releases / fincen-expands-reach-real-estate-geographic-targeting-orders-beyond-manhattan. North Carolina did not include the original list in the two original GTOs and has still avoided being included in a GTO.
(12) See § 6401 ff. CTA. (13) Beneficial Ownership Information Reporting Requirements Advance Notice of Proposed Rule, 86 Fed. Registration number. 17557 (April 5, 2021) (to be codified at 31 CFR, item 1010).
(14) CTA § 5336 (b) (5). (15) CTA § 5336 (b) (1) (B). (16) CTA § 5336 (b) (1) (C). (17) CTA § 5336 (b) (1) (D). (18) CTA § 5336 (h) (3) (C). (19) CTA § 5336 (a) (11) (B). (20) This list is not exhaustive. (21) This list is not exhaustive. (22) CTA § 5336 (h). (23) CTA § 5336 (a) (1)