The Corporate Transparency Act is legislation that is going to touch all high net worth clients in 2024.  This is like KYC procedures on steroids and investors need to be aware of it. Attorney, STEPHEN LISS helps us understand the scope of the developing new regime.

The financial reporting system currently makes it cumbersome for regulators and law enforcement to track the asset ownership and cash flows.  Lessons learned from the Panama Papers and Pandora Papers disclosures signaled the need for a change. 

Congress passed the CTA legislation in 2022 to combat money laundering, tax evasion and other illegalities.  After public input, final rules were recently promulgated. There are significant reporting responsibilities and criminal and financial penalties for non-compliance.

The impact of these initiatives takes hold in 2024- It’s becoming a point of emphasis for the legal, accounting and financial services communities.

It will be significant part of the estate planning process for HNW clients going forward.

With the expected “2026 avalanche of estate planning. Clients are in a for a surprising change in the standard procedures around standard techniques.

The concept of “Putting it in an LLC” or “putting it in a trust” is about to become more expensive, complicated and time-consuming- particularly in dealing with the law firms and especially financial institutions.

STEPHEN LISS is a partner at Dungey and Dougherty and is on the forefront of this legislation and its impact on clients. We’re going to talk about the scope of the CTA, it’s impact and why it’s important for HNW clients to start early and get ahead of these requirements when the planning avalanche comes.

Background

Congress enacted the Corporate Transparency Act (“CTA”) under the Fiscal Year 2021 National Defense Authorization Act on January 1, 2021.

The requirements of the CTA are being implemented “to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on reporting entities.” That said, even FinCEN acknowledges the enormous reporting burden imposed by the CTA, which it most recently estimated to be over 118 million hours in 2024, with an annual burden of over 18 million hours thereafter.

The CTA added 31 USC §5336 to the Bank Secrecy Act with the title, “Beneficial ownership information reporting requirements”. The CTA has three core elements:

Reports to FinCEN

The CTA requires certain entities (each a “reporting company”) to identify itself, its primary owners and officers (each a “beneficial owner”), and certain professionals who helped to form or register the reporting company (each a “company applicant”). The reporting company must then report to the Financial Crimes Enforcement Network (“FinCEN”) information sufficient to identify the reporting company, its beneficial owners, and any company applicants (“beneficial owner information” or “BOI”).

Control Access to Information

FinCEN will provide BOI to government regulatory and investigatory bodies, but it will not be made available to the general public. In addition, there are specific procedural requirements for government actors to access this information, along with civil and criminal penalties for improperly accessing or using such information.

Revised Due Diligence Requirements

The Secretary of the Treasury is required to revise Customer Due Diligence requirements for financial institutions to conform to the CTA, and account for the ability of financial institutions to access beneficial ownership information.

Outline

What is the Corporate Transparency Act?

The purpose of the Act is to

Set a clear federal standard for incorporation practices

Protect U.S. national security and commerce

Enhance national security, intelligence, and law enforcement efforts to combat money laundering, terrorism financing, and other illicit activities

Bring the U.