On demand 1h 23s Intermediate

Corporate Transparency Act: A Master Class for Company and Law Firm Leaders

4.8 out of 5 Excellent(5 reviews)
Start your free 7-day trial
* Claim credit(s) for one free course during your 7-day trial.
View all credits20 approved jurisdictions
Play video

Corporate Transparency Act: A Master Class for Company and Law Firm Leaders

The Corporate Transparency Act will cause one of the greatest changes in corporate governance in our lifetimes. If you are already familiar with the basic provisions of the CTA, this class will prepare you to lead your company or law firm through the transition. We will explore (1) the key exemptions for companies that will be relieved from a duty to file, (2) the corporate governance mechanisms companies should adopt now to prepare for the CTA, and (3) the record-keeping and data management tools that companies and law firms will need to implement before this new law takes effect.

Transcript

- Hello. My name is Jonathan Wilson. And this is a Quimbee presentation of the Corporate Transparency Act, a masterclass for company and law firm leaders. My name is Jonathan Wilson and I'm a partner at the Atlanta law firm of Taylor English Duma. And I'm also one of the founders of the FinCEN Report Company that you can find at FinCENReport.com. FinCENReport.com contains a lot of information about the Corporate Transparency Act and about the very practical steps that law firms and companies will very soon need to take in order to comply with the beneficial ownership reportings of the Corporate Transparency Act. What we're gonna cover today are just a few of the Corporate Transparency Act basics and then some master-level issues. The practical requirements of complying with the Corporate Transparency Act and some things that law firms, lawyers and companies should begin to do now in order to prepare. As you probably know by now, your corporate practice is about to change. In the past, we would often form a corporation or form a limited liability company and that later on figure out who the beneficial owners would be as we finalize the process of completing the company's shareholders agreements, initial offering of stock, or operating agreement. But as soon as the Corporate Transparency Act is implemented, all of that is going to change. Once the Corporate Transparency Act is implemented, every newly formed company will have only 14 calendar days to file their first beneficial ownership report. That beneficial ownership report will need to include personally identifiable data about every beneficial owner as well as every company applicant. And the meaning of company applicant will include both the individual client who directed the document to be filed that formed the entity as well as the lawyers and even non-attorney staff people who assisted in filing that document. The Corporate Transparency Act has very specific rules about what needs to be included and when the reports need to be filed. And there's a $500 per day penalty for failing to file on time. So for these reasons and many others, it is important that we all be aware of the requirements of the Corporate Transparency Act as soon as it becomes implemented into law. Now the Corporate Transparency Act was a law passed by Congress in December of 2020. It was done in response to a number of analyses that suggested that the United States had become the money laundering capital of the world. One investigative journalist said that the economic cost of money laundering operations is staggering. There was a United Nations agency that, in 2020, pegged the annual amount of money laundered at $800 billion worldwide, or somewhere between two and 5% of global gross domestic product. Clearly money laundering was a problem and it was particularly acute in the United States because of our practice of having anonymous corporations. As attorneys know, to form a corporation or an LLC, all that is required is a very simple document that is filed with the secretary of state or the corporations commission at the state level. That document contains little information about the company, other than the name of a registered agent and an address to reach that person, but it contains no information about who actually owns the company. As a result, when it comes time for law enforcement to track down the owners of accounts that are suspect of engaging in money laundering, identifying the true beneficial owners behind a corporation can be quite difficult. Well, the Corporate Transparency Act is Congress' attempt to bridge that gap. As we said, it was adopted in December of 2020. This was right after the 2020 presidential election and in the middle of the controversy around those elections, so the mainstream media did not cover the law very much. As a result, many business people, and even many lawyers are unaware that its requirements are pending and will soon be implemented by the Financial Crimes Enforcement Network or FinCEN, a bureau within the US Treasury Department. At this point in the middle of 2022, those regulations are not yet effective, but they have been issued in draft form. Our best guess is that these regulations will be implemented in the coming months and at that point we expect that the mainstream media will take notice and clients will begin contacting their lawyers about these new requirements. And it's for that reason that lawyers need to be aware of what the law requires. By way of background, the Corporate Transparency Act obligates reporting companies to file beneficial reports. The Transparency Act defines reporting company as a corporation, limited liability company, or other similar entity that is created by the filing of a document with the secretary of state. Or in the case of a non-US company, a company that is admitted and qualified to do business in the United States by the filing of a document with a secretary of state. It is the filing of the document that is the triggering event for an entity to become a reporting company. As a result, corporations are reporting companies, limited liability companies are reporting companies, even limited partnerships are reporting companies. In some states, a general partnership can be formed without the filing of a document and so those entities may be exempt. That's not the case in all 50 states, however. Similarly with trusts, most trusts can be formed without the filing of a document, except for certain types of trust, like the Delaware Statutory Trust, which is formed by the filing of a document with the secretary of state of Delaware. But that is the linchpin for becoming a reporting company under the act. If an entity is a reporting company, and if it is not exempt, and we'll get to that in a minute, it must file a beneficial ownership report. The beneficial ownership report needs to include five types of data for each person that is covered. The five pieces of data are the individual's full legal name, date of birth, current residential address, except for certain professionals who may use a business address. And then a unique identifying number, which could be a FinCEN identifier number or another type of acceptable identification number such as a passport or a driver's license. Then the company must also provide an image of the document that provides that unique identifying number. For example, a photocopy of a passport, or a photocopy of a driver's license. So those five pieces of data are required for every individual who is covered. So who is covered? For every company that is a reporting company and required to file, the five elements of data must be included for every company applicant and every beneficial owner. The company applicant is the person who filed the document, that created the reporting company in the first place, or who filed the document that qualified the non-US reporting company to first do business in the United States. In most cases, the company applicant will be the lawyer or accountant or paralegal or legal secretary who signed and filed the articles of incorporation. Importantly, the definitions define company applicant not merely as the last person in the chain of individuals who finally succeeded in filing the document, but every person who participated and the individual who ordered the filing of those documents. What does that mean in practice? Well, if you're an attorney and your client Joe calls you and says, I would like to form a new corporation, you take some information from your client Joe, you might hand off that information to an associate. The associate might retrieve the form of articles of incorporation, might do some other work, might sign the document as the incorporator, might hand the document off to a paralegal or a legal secretary. The paralegal, legal secretary might then file the document with the secretary of state. In that hypothetical, the company applicant is actually for people. The client Joe, who called you with the information, you, the partner who took the order and who passed it on to the associate, the associate who did the work to prepare the articles and who signed as incorporator, and then the paralegal or legal secretary who physically caused the document to be filed with the secretary of state. In that hypothetical, since all four individuals were a company applicant, the company's beneficial ownership report would need to have included the five elements of personal data for all of those individuals. So the Corporate Transparency Act is a far-reaching law that is going to have a great impact on clients, law firms, lawyers, and law firm staffers who are engaged in the process of forming new companies. Now realizing how far-reaching those rules can be in their draft regulations, FinCEN did provide a rule for what would happen in the case of a deceased company applicant. That rule is tentatively scheduled to be codified at Section 350 D34. And what the rule says is that if a reporting company was created or registered before the effective date of the regulations and any company applicant died one year before that effective date of the final regulations, then the beneficial ownership report of the company may recite that fact of that death as well as any of the information that the company might have about the deceased company applicant. Oh, okay, so this rule would give some relief to companies that existed before the date of the regulations with respect to company applicants who died more than one year prior to the effective date of the regulations, but it does not give any relief for companies that are filed after the effective date of the regulations or for company applicants who were deceased less than one year before the effective date of the regulations. As a result, one of my pro tips for lawyers and law firm administrators who are planning for the implementation of the Corporate Transparency Act is to put in place a system with your attorneys, your partners, your associates, and with all of your staffers who might play a role in forming or administering your client corporations and LLCs to make sure that you have their personal data in some kind of a secure system so that it's available for the benefit of your clients when they need that data for their CTA beneficial ownership reports. So we talked about the five elements of data. We said that those five elements are required for every company applicant and for every beneficial owner. We talked about what a beneficial owner was and some of the problems of keeping track of beneficial owners when they move on to other things. But what is a beneficial owner? Well, the act and the draft regulations that we have define a beneficial owner as any individual who owns 25% or more of the reporting company, directly or indirectly, or who exercises substantial control over the entity. Now 25% directly or indirectly is pretty easy. Substantial control is a more difficult topic to address, and we'll get to that in just a second. There is an exemption here though for certain types of beneficial owners. The definition in the draft of regs excludes five different categories of beneficial owner. The first are minor children. So if the beneficial owner's a minor child, that fact is gonna get noted on the report, but we do not need to include the five categories of data for the minor child. Second category, individuals who act as a nominee, intermediary, custodian, or agent on behalf of another individual. So for example, if the true beneficial owner keeps their shares in a trust account, for example, the trustee of that trust account who is acting only as an intermediary custodian or agent would not themselves personally be required to include their data. Only the ultimate beneficial owner would be required. The third category of exempt beneficial owner are individuals who are acting solely as an employee of a corporation, LLC or other entity, and whose control over, or economic benefits from such entity is derived solely from the employment status of the person. For example, imagine an LLC that has two members, equal 50/50 shares. One of those two members is a corporation. Corporation has several shareholders. An individual is a CEO of that corporation and has the power to make business decisions on behalf of the corporation. That CEO individually would not be counted as a beneficial owner with respect to that 50% LLC interest. They might if they were also a shareholder of the corporation, but simply by fact of their role as the CEO of the corporation, they would be acting solely as an employee and would therefore be exempt with respect to the beneficial ownership the corporation has in the underlying LLC. Category number four is an individual whose only interest in a corporation or LLC is through a right of inheritance. So persons who inherit their shares and who didn't affirmatively go out and acquire them are exempt from being covered in the beneficial ownership report. And finally, the fifth category of exempt owner are creditors of a corporation unless the creditor is otherwise an investor in the entity. So for example, a lender who might receive a pledge of an LLC interest as collateral for a loan, by virtue of that security interest, does not have a beneficial ownership in the underlying LLC, and the creditor itself would be exempt from being covered by the LLC's beneficial ownership report. So those are our five exemptions to the category of beneficial owner. Now we said beneficial owners are individual natural persons who own 25% or more, or who exercise substantial control over the entity, over the reporting company. So what is substantial control? This is probably one of the more controversial and tricky aspects of the Corporate Transparency Act. It was discussed at length in the draft regulations that FinCEN published a little over seven months ago. We don't know how the term will be treated in the final version of the regulations, because they haven't been released yet. But if the draft regulations were final, substantial control would be defined in four different ways. First, service as a senior officer of the reporting company, okay? Number two, having authority over the appointment or removal of any senior officer or a majority of the board of directors of a reporting company, okay? Number three, the direction, determination or substantial influence over important matters affecting the reporting company, such as reorganizations, major expenditures, termination of lines of business, compensation for senior officers, or the entry into, or termination of significant contracts. Those are all substantial, important matters, and an individual who had direction, or substantial influence over any of those types of decisions would then have substantial control over the reporting company. And finally, the fourth category of substantial control is just an open-ended catchall, any other form of substantial control. So who knows what that means? On a very practical level, I think that what this means is that almost every investor in a limited liability company or corporation that is a reporting company under the act is likely to have substantial control unless they can demonstrate that they do not have any influence over any of these types of major decisions that are listed in Section 3. Take, for example, your ordinary limited liability company operating agreement. The operating agreement almost always says that the board of managers or the manager or the LLC has the power to make the day to day decisions. And there's almost always a paragraph, often called major decisions, or fundamental decisions, that says that the manager cannot, or the board of managers cannot take any of the following actions, and they'll be listed there, unless a majority of the beneficial owners of the LLC agree or unless a super majority of the members of the LLC agree, something like that. Well, assuming that at least one of those major decisions falls into at least one of the categories of Section 3 of this definition of substantial control, wouldn't any member of the LLC whose vote was required or whose vote was going to be solicited in making a vote or a determination under that major decisions section of the operating agreement, wouldn't that individual have, in the language of the regulations, substantial influence over those important matters? Because their vote is required. This is what I think will be one of the more difficult points for lawyers to communicate to their clients. And yet it's very important, because the Corporate Transparency Act and the regulations we have so far do not give us any safe harbor for getting this right. The reporting company is obligated to report to FinCEN, the beneficial owners in the company, and in many companies, that is going to be dependent on this application of the definition of substantial control where any beneficial owner of the company who has substantial influence over important matters affecting the reporting company is, by definition, a person who has substantial control, and therefore a beneficial owner for reporting purposes. And I think that there is going to be a natural tendency, especially among business people to say, well, our LLC has 10 members. Each member has 10%. Substantial control cutoff is 25%, therefore we have no beneficial owners. And obviously that's not the right answer. You should know that, at this point, having been through the presentation, and read the regulations, but explaining that to clients is gonna be a lot more difficult. Take, for example, a situation where there's an LLC that has a manager that has maybe, let's say, 5% ownership of the company. And then there are 95 other members. Each of whom has only a very small 1% beneficial interest in the company, but the LLC operating agreement contains a major decisions provision in which it requires a majority of all the members of the company to approve a major decision like a merger, like a disposition of the assets, like borrowing money to acquire additional assets. So something like that. In that situation, I think that every one of those 95 1% members arguably has substantial influence over important matters, because their vote will be required in order for the company to take any of those actions. And because there is no safe harbor for getting this wrong and the penalties for getting it wrong can be so severe, I think that prudent counsel will advise their clients that in a situation like that, every member of the company who has an economic interest and whose vote would be part of the vote to approve an important matter or a major matter, I think every single one of those members of the LLC would be a person with substantial control who, for that reason, ought to be included in the company's report of its beneficial, where they work. So this is gonna be particularly acute because of the penalties that come to the reporting companies that need to comply with the Corporate Transparency Act. We talked about the timing rules. And after the regulations are finally made effective, again, we don't know when that will be, any company that existed the day before the regulations are finally adopted is going to have one year to get their first report done. So a fair amount of time to figure things out, collect all the data, get the report done. But any reporting company that is created on or after the effective date of the regulations will only have 14 calendar days. That's gonna be a very tight timeframe, so I expect that savvy lawyers and savvy clients are going to think through all of these issues and make sure they have all of the data collected before they actually file the document to create the reporting company in the first place, because that 14-day deadline is so short. It will be important because the statute itself has a $500 per day penalty attached with the failure to make a deadline. So it's very quickly going to add up. In addition, the draft regulations provide that a willful failure to file or the willful filing of any inaccurate information can be a felony. So people can conceivably be prosecuted and sent to prison for willfully filing wrong information or late information or no information. The importance of this compliance regime then is going to bring an awful lot of focus and a fair amount of client anxiety on the topic. And that's one of the reasons why I've been encouraging lawyers in their law firms to prepare in advance to get their ducks in a row so that they not only are educating clients about what the law requires, but they are assembling the data and developing the data management systems that law firms will need in order to comply with this new law on a very practical level. So one of the things that I've been encouraging lawyers to do after they introduce this topic to their clients is to perform a beneficial ownership study. Literally take the documents apart, take a look at the cap table and ask yourself, if you had to file the report today, who would be your beneficial owners? Make a list. And then for each of those beneficial owners, ask yourself, do we have all the information we would need to file that report? Almost always the question's going to be no, because law firms don't routinely collect photocopies of passports and driver's licenses from their clients and from the shareholders of the corporations that they represent. And then even more importantly, what systems do we have in place to track this data as it changes over times, as it changes over time? One of the special problems of the Corporate Transparency Act is that after the first report is filed, okay? If any piece of data that's covered by that first report should change, the company has only 14 calendar days to file an amendment to their report to reflect that change. So imagine the LLC that has successfully filed their first report, they collected everybody's five categories of data. They included them in the report. They got the report on file. Good job. The next day, one of those beneficial owners moved their apartment, have a change of residential address. Residential address is one of the five categories of data. Let's assume for the sake of argument that that particular beneficial owner knows that that data change triggers a duty on the part of the company to file an amendment. How is the company going to become aware that that beneficial owner has had a change in residential address? If the company does become aware of the residential address, will the right person at the company make the connection between that change in data and the company's duty to file the report? Will they know how to file the report? Great questions, as a practical matter, obviously, it's not going to be effective to educate the entire country on these data filing requirements. All we can do is build up a sensitivity to the idea of data changes and the duty to file amendments, but on a very practical level, companies and the law firms that support them are going to have to have data management systems to track changes in data and to realize and be able to execute when required the filing of amendments when the data changes in a way that triggers the need for an amendment. So we talked about reporting companies, company applicants, beneficial owners, the timing of report filing, the need to do a beneficial ownership study. We have not yet covered exemptions. So I mentioned when we first got started that a reporting company is one that was created by the filing of a document with the secretary of state or a non-US company that is qualified to do business by the filing of a document with the secretary of state. There are, however, 23 different categories of exempt entities. I'm not gonna try to list them all here. They are included in the course materials and are covered in detail in the regulations. But part of the process of getting ready for our first report filings should involve attorneys reviewing their list of companies, of company clients, to see which ones are going to be reporting companies and which ones are going to be exempt, because the Corporate Transparency Act is an anti-money laundering statute aimed at building a database of beneficial ownership for the benefit of law enforcement in tracking down the owners of bank accounts and company accounts. Those types of entities that are already the subject of regulation over their beneficial ownership are, generally speaking, exempt. Things like publicly traded companies, banks, bank holding companies, securities and exchange-clearing agencies, credit unions, nonprofit charitable organizations under Section 501c of the Internal Revenue Code, insurance companies, licensed broker dealers, public utilities and public accounting firms. All of these are examples of entities whose beneficial ownership is either tracked, recorded, or restricted in some way on a legal basis so that law enforcement could find out the true owner of the entity if they had to. And there are exemptions for all of those types and a few others. So that's gonna be part of the process for lawyers and companies as we prepare to comply with the law. One of the other exemptions is what I call the grandfathered private company exemption. It doesn't really have a name, but it's going to apply to a great many private companies in the United States, but complying with this exemption is quite tricky. This grandfathered private company exemption applies to a company that's otherwise a reporting company under the act, not otherwise exempt, that has 20 or more employees on a full-time basis in the United States. Two has filed at least one federal income tax return demonstrating for the past year more than 5 million in gross receipts, excluding sales made to subsidiaries and affiliates. And number three has a physical office within the United States. So if a reporting company has each of those three things, 20 full-time US employees, last year, filed a federal income tax return with gross receipts greater than five million and a physical office within the United States, they are exempt from filing. However, beware this exemption can fall away if you are a company that has exactly those three requirements met, and there's an economic downturn, so that you lose a couple of employees, and now you have fewer than 20 employees, you just lost your exemption. Under the rules, you have 14 days from any change in material data to file an amendment. In this case, file your first report. So this could very quickly become a trap for the unwary. An entity could be exempt with these three categories satisfied, suffer some kind of business downturn so that the employee headcount falls below the 20-employee threshold, and then have only 14 days to file a first beneficial ownership report. Obviously businesses of this size don't remain aware of legal compliance requirements like this on a day to day basis, and this would be exactly the type of lost exemption scenario that could easily surprise a small or medium-sized business. And it's gonna be up to us as lawyers to remain aware and to educate our clients as much as possible to watch out for these sorts of pitfalls. Another special exemption problem is the wholly-owned subsidiary exemption. Now we told you about the 23 different categories of exempt entities. One of those 23 categories is a wholly-owned subsidiary of an entity that is exempt. So a great example is publicly traded company. Publicly traded company is exempt. Publicly traded company has wholly-owned subsidiary. Wholly-owned subsidiary is also exempt. No need to file a report. But imagine publicly traded company with a wholly-owned subsidiary that hires a new CEO to build up the subsidiary and take the business plan forward? As part of that new employee, new CEO's compensation package, publicly traded company gives CEO securities, beneficial ownership over the subsidiary. It's now no longer 100% wholly owned by an exempt company because the CEO is not exempt. Now the entire subsidiary has to file a beneficial ownership report. It's not gonna have much to report, because it's gonna report about the CEO's ownership stake and then all the remaining stock is owned by the public company and it's exempt. And we don't have to report on all of the public company's exempt owners. But this is also a trap for the unwary where the exempt wholly-owned subsidiary could, by virtue of one individual's compensation package, all of a sudden cease to be exempt. So these are all examples of changes in status that can very quickly bring up a filing deadline. Again, only 14 days for most of these data changes. And as a very practical matter, especially for larger law firms, I think it is gonna be impossible for individual attorneys to keep track of the filing deadlines and the data status of all of the corporations for which they do work. I believe that attorneys and law firms are gonna have to either buy or build their own data management systems to track these data fields and changes to those data fields that might trigger the need to a report. So part of my pro tip here in the masterclass are five rules to consider implementing at your law firm or in your company for managing these timing rules. And number one is adopt a data management system that will securely store the five categories of PII and will segregate access to those data points to avoid inadvertent disclosures. Doesn't do any good to collect this data if it's not secure, if it could be misused for some improper purpose. Number two, have every one of your reporting companies appoint a compliance officer with personal responsibility to manage this procedure. If you diffuse the responsibility by simply handing out the usual law firm memo to everybody on the board of directors, it will be dually filed and forgotten by everyone. We've all seen those memos come around. And we see that if they're not specifically put on someone's radar, they are forgotten. So you need to have a compliance officer who gets paid for, and has it part of their job description to stay on top of these sorts of issues. And number three, you need to sensitize your stakeholders, regarding the need to report data changes. If you have a company that has 15 people who are covered as beneficial owners, I would include a letter or a memo to each of those 15, reminding them of the need to report data changes to the compliance officer. I wouldn't do it only once. I would give them a memo in the process of preparing for the first report. After the first report gets filed, send them a memo saying congratulations, we got it filed, but don't forget you need to report data changes. And then for the foreseeable future on some periodic basis, I would try to find a way to send my beneficial owners a reminder about changes in residential address, renewing their driver's license, renewing their passport, all of those sorts of things that could trigger the need to file an amendment. Number four, as part of the compliance officer's role, I would implement a procedure that conducts a periodic survey of beneficial owners and company applicants to catch any missed changes. Even if you get the first report right and you successfully communicate to all of the covered individuals that they need to report data changes, they're still gonna forget. Human beings still make mistakes. So in order to catch those mistakes and try to remedy them as quickly as possible, perhaps a periodic annual survey is required so that we require all of these beneficial owners and company applicants to resubmit their data every year so that we can check it against our last report to make sure that it's still accurate. And finally, I would make the compliance officer required to report to the board of directors on some periodic basis so that the board takes its own level of responsibility for compliance and so that the board is sensitized to the need to report data changes. If you put that on the board agenda for your quarterly or your semi-annual meeting, something like that, and make it become a regular thing in the same way that financial statements get reported out, you also report out your CTA compliance report. That way it becomes part of the cadence of ordinary corporate reporting and governance, and that is going to increase the likelihood that things get done right. Now we talked earlier about the penalties for non-compliance. When the report is due, whether on the first anniversary, the effective date or 14 days after the formation of the entity, if the entity is being formed after the effective date, there is a $500 per day fine for filing the report late. If it's willful, it could be fined by up to $10,000, and there can be imposed a penalty of imprisonment of up to two years. It's a felony conviction. But it's important to remember that these sorts of reporting errors, which are serious enough on their own, have a multiplier effect under the Corporate Transparency Act. The act provides that if a person intentionally violates these reporting requirements of the CTA while violating another law of the United States, or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, that person can be fined not more than $500,000 and imprisoned for not more than 10 years. Now the policy behind this is to amplify the penalties for truly bad actors and individuals engaged in money laundering and racketeering, who are intentionally hiding their identity by not filing accurate information in their FinCEN beneficial ownership reports or who are perhaps intentionally filing false information, but in any event, trying to avoid identifying themselves as part of a pattern of money laundering activity. $100,000 of course not a whole lot of money if you're truly in the money laundering business. You think about all the sorts of illicit finance that takes place. And those illicit actors are laundering much more than $100,000 in a 12-month period, but under the authority of the Corporate Transparency Act, individuals who are prosecuted for those sorts of crimes, and in combination with those crimes have engaged in intentional non-reporting or intentional misreporting of their beneficial ownership information under the CTA will have at risk, this amplified penalty, which can include up to 10 years imprisonment. You can certainly imagine some situations where even an innocent actor could back themselves into a corner if there was a cascade of failure that led to this sort of penalty being on the table, but it just underscores the importance of getting this stuff right, the importance of having council involved in making decisions about who is a beneficial owner and who is not. And I think also from a practice management point of view, council who are engaged by corporate clients in making these decisions ought to be especially scrupulous when communicating their legal advice to clients and when keeping records of the advice that they give. If you are in a position of advising a client that some individual does not need to be included, or that some particular facts can be omitted from a report under the act, I would be especially scrupulous in making sure that that advice was documented in the file, whether it in a letter to the client or something to that effect, so that council will be in a position to defend the advice they give if there ever is a question raised as to the accuracy and legality of that advice. Now the act itself, as well as the draft regulations we have so far include the idea that there is a safe harbor for self-correction. After all, FinCEN wants to build this great database of corporate beneficial ownership. They don't really wanna spend their time going out and policing the individuals who get it wrong. That's not why they're there. They're there to build a really big database so that they can find the money launderers when they think they're expecting it, when they think they're suspecting it. So the the safe harbor exists so that if a company has a reason to believe that any of its reports may no longer be accurate or may have been inaccurate at the time they were filed, they get a free pass basically within 90 days to file an amendment that corrects the discrepancy and corrects the record. So long as no one was intentionally misstating the facts when they filed the incorrect report, a self-corrected report within 90 days is within the safe harbor. Now unfortunately that's not a whole lot of self-help. 90 days is a good long period of time, but if you totally missed the boat on your initial filing, and you only have a once a year system for going back and reassessing, re-questioning all of your stakeholders, your one-year reassessment isn't gonna catch your problem within 90 days. Nevertheless, it's good to know that it's there. And I'm sure that there will be many companies and individuals who need to take advantage of that. So we talked about all the things that this law will require and we're all basically standing around waiting for FinCEN to finalize its regulations, give us an effective date by which everything is gonna start to change so that we can all start filing our reports. But what are things that we should do now? Well, part of my masterclass is to discuss with attorneys the idea that they talk to all their clients about, number one, getting that compliance officer in place and beginning the process, conducting a beneficial ownership survey and compiling all the data as if the report was due today. Implementing a system to support the compliance officer's efforts. Where is that data gonna go once it's compiled? You don't wanna put it in a file with everybody's name and address and social security number. You want it to be stored in some sort of encrypted, secured system where data is segregated to those persons who have a need to know it. You want that compliance officer to be properly supervised. In a corporate context, have that individual appointed by the board of directors and reporting to the board of directors so that the someone has supervisory control over the compliance officer and also so that the board has its own measure of responsibility. And finally, especially for companies that are actively involved in raising capital or who are actively involved in M&A activities, both on the buy side and the sell side, begin to consider how Corporate Transparency Act compliance is gonna factor into capital raising in M&A activities. There probably ought to be a section added to our due diligence checklists to ask about CTA compliance and the process involved. And in particular, to watch out for amendments to make sure that they were timely. In the course of capital raising, I would disclose this to prospective investors, disclose what the company's CTA compliance regime looks like. If the investors are ones whose data might be required, I think you probably ought to be disclosing that to investors in the fundraising process, collecting that data perhaps as part of the subscription process of collecting investments or through some other similar process so that investors come into the company with the expectation that the CTA compliance is going to be handled and that their data is either going to be included, organized in some way by the compliance officer. But those are all things that we can all be doing now even in advance of FinCEN giving us a final date for the implementation of their regulations. Now included in your materials is a model clause to be included in an LLC operating agreement to implement these concepts under the CTA. I'm gonna walk through the model clause for the LLC operating agreement. I've include in the materials also a similar clause that would go into a shareholder's agreement. I can imagine you might also, in some context, have a free-standing CTA compliance agreement with all of your beneficial owners. All of the concepts are gonna be basically the same, but I just choose to walk through the one with the LLC operating agreement. As you look at it, it's not all that large. I've included this in a number of transactions in the past few months. It has gone over without a hitch. Once I explain the new requirement to clients, they generally understand what they're gonna have to do. No one has really had much of a dispute with the language itself. What the clause says, as you can see, is that the LLC is gonna have a compliance officer. We describe how we're going to elect that person, what their jobs will be. We obligate the compliance officer to prepare written reports to the company's members from time to time, but no less than once per year. So beginning to institutionalize the idea of reporting and keeping everyone in the loop. We define what CTA data is for purposes of this contract, the five categories of data that we're gonna collect from all of our company applicants and our beneficial owner, and our beneficial owners. And we also include this concept of indirect ownership. As you know, the CTA requires that the beneficial ownership reporting go all the way up to the natural person, okay? So in the case of an LLC that has four members, all of which are corporations, we don't report the names of the corporations. We report the names of the shareholders of the corporations to the extent that they're beneficial owners, indirectly the LLC at the bottom of the pile. Since those individuals are not party to a contract with the LLC itself, they're just shareholders in the corporation, who is the member of the LLC. The LLC needs to obligate its members who are corporations to in turn collect from their shareholders all of the data that is required. And that is the indirect ownership data that is covered in subsection D of the model clause for the operating agreement. And finally, we define the idea of substantial control data. Remember substantial control for each reporting company exists when an individual has 25% or more, or when they fall into one of the other four categories of substantial control, including having substantial influence over the making of major decisions. So the compliance officer is authorized, by virtue of this paragraph in the operating agreement, to go out and collect all the data that might need to be collected to determine whether any individual has substantial control. In the case of most LLCs, your substantial control data is included inside the operating agreement, but that's not always the case. There could be LLCs, in particular, in the project finance context who, where different LLCs have management of one aspect of a project and an equity interest in a project level LLC at the bottom of the stack. And if you're looking at beneficial ownership of that entity at the bottom of the stack, all of the substantial control data might not be included in the operating agreement. You might have to look at the management agreement, the project development agreement, other project finance documents that are somewhere else in the data room, not just the operating agreement. And in some cases, individuals in a complex project financing might not have access to all those documents. And what subsection E of the model clause does is it empowers the compliance officer to go out and get the documents and data that they need. We include in the clause the definition of company applicant, and we require the compliance officer to go out and collect the five categories of data from our company applicants, since those can change over time. In subsection G, we require and empower the compliance officer to safeguard the CTA data and the substantial control data. Again, depending on what sort of data management system you have, this might be an easy task, or it might be a difficult task, but we put the responsibility for ensuring confidentiality and data integrity on the compliance officer. We then impose a new duty on each member of the LLC. Before now, in most LLC operating agreements, members of the LLC had relatively few duties. They might have a duty to fund a capital call. They might have a duty to keep their address on file so that the company can send them a K1 every year. In some cases they might even have confidentiality or non-competition duties, but that's about it. Being a member of an LLC doesn't really require you to do much. Well, all of that has changed under the CTA. Any change in data covered by a report triggers that 14-day obligation to file an amendment. So we need to compel every member of the LLC to promptly report in writing to the compliance officer any change in CTA data or substantial control data that has previously been provided by that member to the compliance officer. We put a contractual duty then on every member to make sure that they promptly report any item of data that the compliance officer might need in order to file the amendment. This is important because without affirmatively creating such a duty in the operating agreement, it's not exactly clear how an LLC that is a reporting company is going to compel its members to actually provide that data, even though it would be in their interest to ensure that their LLC is legally compliant. Finally, to make sure that that reporting duty has some teeth into it. We add an indemnification rule so that each member has to indemnify the company against any third-party claim, loss or expense as a result of any inaccuracy in any CTA data or substantial control data that they provide, any failure of them to provide amended CTA data or substantial control data within the time period that's required by this clause in the operating agreement. So that's the way I put it together. And that's the way I've been implementing it in lots of LLCs where I've been involved. I'm sure there are other ways, and I'd love to hear from you if you come up with a better way. In the meantime, feel free to copy this language and start using it in your own operating agreements, in your own practice. I think it covers the waterfront as far as all of the issues that come up under the CTA and will be really appreciative to get any feedback. You can contact me through FinCENReport.com and drop me a line and let me know how your experience goes in working with this new language. And finally, I mentioned that I'm a partner at a law firm in Atlanta. I'm also one of the founders of FinCENReport.com. You can find that on the web at F-I-N-C-E-NReport.com. And as you can see, just looking at the blog post there, I've been reading and writing about the CTA now for almost two years. And one of the things that we've done through the FinCENReport.com company is we have developed a filing solution to help companies and attorneys manage their data. You'll see that I've mentioned a few times the need to have a data management system. Most law firms, almost all law firms have a document management system that works kinda like a library. You put a document up on the shelf. Anyone who has access to the library can go up to the shelf and take down the document. If you treat your CTA data like that, you're basically making that CTA data available to every single person in your law firm who has access to the document management system. So law firms really should not be using their document management systems to organize CTA data. What they need is a unique CTA data system to keep data secure and to facilitate the filing of the reports. And that's what we do at FinCENReport.com. What you can do, and you can go right now to FinCENReport.com, go to the homepage, and there's a big button right in the middle. It says get started. Go ahead, and you can do it right now, press that button. And you'll see a page come up that asks for your name, your address, your phone number, your email, these sorts of things. And this data will get saved. It'll be encrypted in our cloud hosting system. And that will be your personal account. It's completely free and it lasts forever. So you can create your free personal account right now at FinCENReport.com. And here's how it will work. Once you've created your account, if you're also involved with a company that's gonna have to report, you can then create an account for the company. Again, there's no charge for creating the account. The company account will be created. And inside the company account, the company will have the power to identify who its beneficial owners are. The person with the company account can write down the beneficial owner's name and their email address. When the holder of the company account decides, they can then send a welcome message to each of those beneficial owners, telling them that they need to provide their data. They'll get a welcome email from FinCENReport.com and they'll have the ability to create their own personal accounts just like you did. Again, each of those individuals will own their own personal accounts and all of those personal accounts will be free, no charge for that. All the data in the personal accounts will be encrypted and it will be under the exclusive control of the individual who creates those accounts. When it comes time for the company to file its first beneficial ownership report, it will then have the ability to request each of those beneficial owners to include their personal data in the beneficial ownership report. A message will go out from the company to the beneficial owners asking for permission. If the beneficial owners give permission, the data will be included in the report. Now here's the important part. The individual who files the beneficial ownership report and who controls the company account, won't see the actual data of the beneficial owners. They'll know whether it was included or not, but they won't actually know the date of birth, the residential address. They won't actually be able to physically see those pieces of data. That'll be kept confidential inside the system. Once all the beneficial data has been required for all the people who are covered, then the company account will have the power to physically file the report with FinCEN through our system. At that point, there will be a charge. We're gonna charge a one-year subscription fee. It would begin at the time that the report is filed. We haven't figured out the pricing yet, but it is gonna be something in the range of $100 a year. Now once that report is filed, of course, we now have to watch out for data changes that could trigger a 14-day amendment rule. So let's imagine that you go through this process, you file that first report, one of your beneficial owners changes their residential address. They remember that there's a requirement, so they go to their personal account at FinCENReport.com and they type in a new address into their system. And they save that data. Once that data is saved, the system is gonna automatically notify your company that an item of previously reported data has changed and that there is now a need to file an amendment. The owner of the company account will then have the power with the click of a button to file the amendment with FinCEN at no additional charge and it'll be done right then. Of course our system is going to track every beneficial ownership report we file. We're gonna save the filing receipt that comes back from FinCEN and we're gonna have a full audit report inside the system that you would be able to show in the due diligence context to show that you've reported your beneficial ownership on a timely manner and you have stayed on top of all of your amendments. And that's what FinCENReport.com does. Like I said, it's up there today. You can go click on that button that says get started to create your own free account today. The data will be saved. It's gonna be encrypted in our system and not used for any other purpose. We are not going to try to sell you other stuff. We do not give access to this data to anyone. It is your data, it remains encrypted, and it is only used as you direct in connection with the beneficial ownership reports of the companies where you are associated somehow. So that's the end of the presentation. I hope that this has been helpful. As I said, I would love to hear from you about your own experience implementing the Corporate Transparency Act at your company and your law firm. And if you would like more information about FinCENReport.com, please reach out to me. I'd be happy to have a one-on-one conversation with you about it. That's the end of our presentation today. My name is Jonathan Wilson here for Quimbee and for FinCENReport.com. Thank you very much.

Presenter(s)

JW
Jonathan Wilson
Partner
Taylor English Duma LLP

Credit information

Jurisdiction
Credits
Available until
Status
Alabama
    Not Offered
    Alaska
    • 1.0 voluntary
    September 21, 2024 at 11:59PM HST Available
    Arizona
    • 1.0 general
    September 21, 2024 at 11:59PM HST Available
    Arkansas
    • 1.0 general
    September 21, 2024 at 11:59PM HST Approved
    California
    • 1.0 general
    September 21, 2024 at 11:59PM HST Approved
    Colorado
    • 1.0 general
    Unavailable
    Connecticut
    • 1.0 general
    September 21, 2024 at 11:59PM HST Available
    Delaware
      Not Offered
      Florida
      • 1.0 general
      Pending
      Georgia
      • 1.0 general
      Pending
      Guam
      • 1.0 general
      September 21, 2024 at 11:59PM HST Available
      Hawaii
      • 1.0 general
      September 21, 2024 at 11:59PM HST Approved
      Idaho
        Not Offered
        Illinois
        • 1.0 general
        September 25, 2024 at 11:59PM HST Approved
        Indiana
          Not Offered
          Iowa
            Not Offered
            Kansas
              Not Offered
              Kentucky
                Not Offered
                Louisiana
                • 1.0 general
                Pending
                Maine
                • 1.0 general
                December 31, 2026 at 11:59PM HST Self-apply
                Minnesota
                  Not Offered
                  Mississippi
                    Not Offered
                    Missouri
                    • 1.0 general
                    September 21, 2024 at 11:59PM HST Available
                    Montana
                      Not Offered
                      Nebraska
                        Not Offered
                        Nevada
                        • 1.0 general
                        December 31, 2025 at 11:59PM HST Approved
                        New Hampshire
                        • 1.0 general
                        September 21, 2024 at 11:59PM HST Available
                        New Jersey
                        • 1.2 general
                        January 16, 2025 at 11:59PM HST Approved
                        New Mexico
                          Not Offered
                          New York
                          • 1.0 areas of professional practice
                          September 21, 2024 at 11:59PM HST Available
                          North Carolina
                          • 1.0 general
                          Unavailable
                          North Dakota
                          • 1.0 general
                          September 21, 2024 at 11:59PM HST Available
                          Ohio
                          • 1.0 general
                          Unavailable
                          Oklahoma
                            Not Offered
                            Oregon
                            • 1.0 general
                            September 21, 2025 at 11:59PM HST Approved
                            Pennsylvania
                            • 1.0 general
                            Pending
                            Puerto Rico
                              Not Offered
                              Rhode Island
                                Not Offered
                                South Carolina
                                  Not Offered
                                  Tennessee
                                  • 1.0 general
                                  Pending
                                  Texas
                                  • 1.0 general
                                  April 30, 2025 at 11:59PM HST Approved
                                  Utah
                                    Not Offered
                                    Vermont
                                    • 1.0 general
                                    September 21, 2024 at 11:59PM HST Approved
                                    Virginia
                                      Not Offered
                                      Virgin Islands
                                      • 1.0 general
                                      September 21, 2024 at 11:59PM HST Available
                                      Washington
                                      • 1.0 law & legal
                                      September 21, 2027 at 11:59PM HST Approved
                                      West Virginia
                                        Not Offered
                                        Wisconsin
                                          Not Offered
                                          Wyoming
                                            Not Offered
                                            Credits
                                              Available until
                                              Status
                                              Not Offered
                                              Credits
                                              • 1.0 voluntary
                                              Available until

                                              September 21, 2024 at 11:59PM HST

                                              Status
                                              Available
                                              Credits
                                              • 1.0 general
                                              Available until

                                              September 21, 2024 at 11:59PM HST

                                              Status
                                              Available
                                              Credits
                                              • 1.0 general
                                              Available until

                                              September 21, 2024 at 11:59PM HST

                                              Status
                                              Approved
                                              Credits
                                              • 1.0 general
                                              Available until

                                              September 21, 2024 at 11:59PM HST

                                              Status
                                              Approved
                                              Credits
                                              • 1.0 general
                                              Available until
                                              Status
                                              Unavailable
                                              Credits
                                              • 1.0 general
                                              Available until

                                              September 21, 2024 at 11:59PM HST

                                              Status
                                              Available
                                              Credits
                                                Available until
                                                Status
                                                Not Offered
                                                Credits
                                                • 1.0 general
                                                Available until
                                                Status
                                                Pending
                                                Credits
                                                • 1.0 general
                                                Available until
                                                Status
                                                Pending
                                                Credits
                                                • 1.0 general
                                                Available until

                                                September 21, 2024 at 11:59PM HST

                                                Status
                                                Available
                                                Credits
                                                • 1.0 general
                                                Available until

                                                September 21, 2024 at 11:59PM HST

                                                Status
                                                Approved
                                                Credits
                                                  Available until
                                                  Status
                                                  Not Offered
                                                  Credits
                                                  • 1.0 general
                                                  Available until

                                                  September 25, 2024 at 11:59PM HST

                                                  Status
                                                  Approved
                                                  Credits
                                                    Available until
                                                    Status
                                                    Not Offered
                                                    Credits
                                                      Available until
                                                      Status
                                                      Not Offered
                                                      Credits
                                                        Available until
                                                        Status
                                                        Not Offered
                                                        Credits
                                                          Available until
                                                          Status
                                                          Not Offered
                                                          Credits
                                                          • 1.0 general
                                                          Available until
                                                          Status
                                                          Pending
                                                          Credits
                                                          • 1.0 general
                                                          Available until

                                                          December 31, 2026 at 11:59PM HST

                                                          Status
                                                          Self-apply
                                                          Credits
                                                            Available until
                                                            Status
                                                            Not Offered
                                                            Credits
                                                              Available until
                                                              Status
                                                              Not Offered
                                                              Credits
                                                              • 1.0 general
                                                              Available until

                                                              September 21, 2024 at 11:59PM HST

                                                              Status
                                                              Available
                                                              Credits
                                                                Available until
                                                                Status
                                                                Not Offered
                                                                Credits
                                                                  Available until
                                                                  Status
                                                                  Not Offered
                                                                  Credits
                                                                  • 1.0 general
                                                                  Available until

                                                                  December 31, 2025 at 11:59PM HST

                                                                  Status
                                                                  Approved
                                                                  Credits
                                                                  • 1.0 general
                                                                  Available until

                                                                  September 21, 2024 at 11:59PM HST

                                                                  Status
                                                                  Available
                                                                  Credits
                                                                  • 1.2 general
                                                                  Available until

                                                                  January 16, 2025 at 11:59PM HST

                                                                  Status
                                                                  Approved
                                                                  Credits
                                                                    Available until
                                                                    Status
                                                                    Not Offered
                                                                    Credits
                                                                    • 1.0 areas of professional practice
                                                                    Available until

                                                                    September 21, 2024 at 11:59PM HST

                                                                    Status
                                                                    Available
                                                                    Credits
                                                                    • 1.0 general
                                                                    Available until
                                                                    Status
                                                                    Unavailable
                                                                    Credits
                                                                    • 1.0 general
                                                                    Available until

                                                                    September 21, 2024 at 11:59PM HST

                                                                    Status
                                                                    Available
                                                                    Credits
                                                                    • 1.0 general
                                                                    Available until
                                                                    Status
                                                                    Unavailable
                                                                    Credits
                                                                      Available until
                                                                      Status
                                                                      Not Offered
                                                                      Credits
                                                                      • 1.0 general
                                                                      Available until

                                                                      September 21, 2025 at 11:59PM HST

                                                                      Status
                                                                      Approved
                                                                      Credits
                                                                      • 1.0 general
                                                                      Available until
                                                                      Status
                                                                      Pending
                                                                      Credits
                                                                        Available until
                                                                        Status
                                                                        Not Offered
                                                                        Credits
                                                                          Available until
                                                                          Status
                                                                          Not Offered
                                                                          Credits
                                                                            Available until
                                                                            Status
                                                                            Not Offered
                                                                            Credits
                                                                            • 1.0 general
                                                                            Available until
                                                                            Status
                                                                            Pending
                                                                            Credits
                                                                            • 1.0 general
                                                                            Available until

                                                                            April 30, 2025 at 11:59PM HST

                                                                            Status
                                                                            Approved
                                                                            Credits
                                                                              Available until
                                                                              Status
                                                                              Not Offered
                                                                              Credits
                                                                              • 1.0 general
                                                                              Available until

                                                                              September 21, 2024 at 11:59PM HST

                                                                              Status
                                                                              Approved
                                                                              Credits
                                                                                Available until
                                                                                Status
                                                                                Not Offered
                                                                                Credits
                                                                                • 1.0 general
                                                                                Available until

                                                                                September 21, 2024 at 11:59PM HST

                                                                                Status
                                                                                Available
                                                                                Credits
                                                                                • 1.0 law & legal
                                                                                Available until

                                                                                September 21, 2027 at 11:59PM HST

                                                                                Status
                                                                                Approved
                                                                                Credits
                                                                                  Available until
                                                                                  Status
                                                                                  Not Offered
                                                                                  Credits
                                                                                    Available until
                                                                                    Status
                                                                                    Not Offered
                                                                                    Credits
                                                                                      Available until
                                                                                      Status
                                                                                      Not Offered

                                                                                      Become a Quimbee CLE presenter

                                                                                      Quimbee partners with top attorneys nationwide. We offer course stipends, an in-house production team, and an unparalleled presenter experience. Apply to teach and show us what you've got.

                                                                                      Become a Quimbee CLE presenter image