The “Corporate Transparency Act” and The Death of Privacy in America?
Urgent memo to all clients:
U.S. The Corporate Transparency Act
New federal regulations go into effect January 1, 2024, that dramatically impact the right to privacy for many individuals and families in the U.S.
The Corporate Transparency Act (“CTA”) directed the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to implement regulations to collect personal identifying information for individuals involved in common family wealth structures, including limited liability companies established to hold personal use property.
For decades, LLCs have been used both to enhance asset protection and to provide privacy for personal use holdings like vacation homes, non-mortgaged primary homes, or personal & family investment portfolios. It has been standard wealth planning practice to use trust-owned LLCs in robust privacy jurisdictions like Wyoming or South Dakota to allow affluent clients to hold real estate or other family assets in private structures, often within tax-advantaged irrevocable trusts. Financially and commercially successful individuals understandably seek to preserve their privacy and protect themselves and their family from curiosity seekers or from those with nefarious intent to harm the client or the client’s family.
FinCEN’s new regulations dramatically endanger this right to privacy.
Under the CTA regulations, all “reporting companies” must disclose beneficial ownership information to FinCEN beginning January 1, 2024. A beneficial owner is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the reporting company. The information includes each individual’s full legal name, date of birth, address, and a unique identifying number such as an EIN or Social Security number, or an identification number issued by FinCEN. FinCEN is ordered to create “a non-public, secure registry” to store the disclosed information. Regardless of whether the registry is “non-public” and “secure,” many clients will be reluctant to submit their personal information to a federal database within the Financial Crimes Enforcement Network. But the cost of non-compliance is highly punitive: Failure to disclose the required information to FinCEN may be subject to severe civil and criminal penalties, including a fine of up to $250,000 or imprisonment up to five years.
What is a “Reporting Company?”
The CTA regulations apply to “reporting companies,” which are further delineated as Domestic and Foreign Reporting Companies. It’s safe to assume that virtually any company established by filing organizational documents with a Secretary of State of any U.S. state is subject to the new reporting requirements. Even single member or trust-owned LLCs created anywhere in the U.S. will be subject to the new disclosure rules and the draconian penalties for non-compliance.
Almost all U.S. domestic LLCs will be Domestic Reporting Companies, even if they were only established for personal wealth structuring purposes.
A Foreign Reporting Company is an entity established outside the U.S. that is registered to do business with a Secretary of State (or equivalent office). Apparently, foreign companies that are not required to register to “do business” are NOT foreign reporting companies under the CTA regulations. The question then becomes, what causes a foreign company to need to register to do business in any particular state?
There is no universal answer to this question.
Each state’s statutes and the rules enacted by the various secretaries of state determine what level of activity constitutes “doing business” in the state. If a particular locality does not require a foreign company to register to do business, it does not appear that it will be a Foreign Reporting Company under the CTA regulations. Planning for non-disclosure of beneficial owner information to the FinCEN database will require analysis to determine if the foreign entity will be exempt from the disclosure rules. Clients who place a high premium on privacy and who wish to keep their personal information out of a “Financial Crimes” database should immediately seek legal counsel to determine if they wish to restructure their entities to find a reporting exemption before January 1, 2024.
What to do?
Individuals must decide how important this issue is to them. The reporting requirements are not optional and the penalties for non-compliance are severe. The CTA regulations apply to virtually every LLC created or registered in the U.S. and require disclosure of extensive personal identifying information. If you are unconcerned about disclosing your personal information to a federal Financial Crimes Enforcement Network database, you must take steps to ensure that your LLCs or other company entities are compliant with the regulations beginning January 1, 2024. If you are concerned about this issue, you must take steps immediately to explore restructuring your private family entities in order to be exempt from the disclosure rules.
If you would like to discuss this issue and what specific steps you might consider before the new CTA rules go into effect, please contact us immediately at [email protected].