The US Corporate Transparency Act: a guide for non-US lawyers

The United States is a global hub for business and investment, offering a favourable legal and financial environment. However, this openness has resulted in the misuse of corporate structures for illegal purposes, such as money laundering, terrorism financing and tax evasion. In response, the US enacted the Corporate Transparency Act (CTA), which became effective on 1 January 2024. The CTA requires entities to disclose their beneficial owners. For non-US lawyers whose clients have complex corporate structures with ties to the US, it is important to understand the reporting obligations under the CTA. The CTA is cited as 31 United States Code (USC) 5336.

An overview of the CTA

The CTA is designed to curb financial crimes by requiring certain business entities to disclose information about their beneficial owners. The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is the agency implementing the act and maintaining a secure database of beneficial ownership information (BOI). This database is accessible only to law enforcement agencies, regulators and financial institutions conducting customer due diligence.

The central purpose of the CTA is to prevent individuals from using anonymous corporate structures to hide illegal activities or obscure ownership. However, the law’s requirements create significant challenges for non-US lawyers advising foreign entities or trust-owned US entities.

Key provisions in the CTA

Beneficial ownership reporting requirements

The CTA mandates that ‘reporting companies’ provide information about their beneficial owners to FinCEN. A reporting company is any corporation, limited liability company (LLC), partnership or other similar entity formed under US state law or registered to do business in the US, including foreign-owned entities.

A beneficial owner is an individual who, directly or indirectly, exercises substantial control over the entity, or owns or controls at least 25% of the company’s ownership interests. This expansive definition is designed to identify the true persons in control, even if they do not possess formal ownership. Senior officers and managers and those serving on the board of directors are considered to have substantial control.

The entity itself is responsible for reporting, not any beneficial owner. For entities formed after 1 January 2024, the persons filing the formation documents must also be included in the report. This means that lawyers and staff members involved in preparing the documents and submitting them to the appropriate governmental agency must be identified.

Exempt entities

Certain entities are exempt from the CTA’s reporting requirements, including publicly traded companies, large operating companies with over 20 full-time US employees and over $5 million in annual gross receipts, and regulated entities, such as banks and insurance companies. Non-US owners are subject to reporting if their entity does not meet one of these exemptions.

Information required

Companies must provide FinCEN with the following details for each beneficial owner: full legal name, date of birth, residential or business address, and a unique identifying number from a government-issued form of ID (passport, driver’s licence, etc.). Individuals may obtain a FinCEN ID, which can then be used in filing a BOI report in lieu of providing the information listed above. Address or other changes must be reported within 30 days. To obtain a FinCEN ID: FinCEN ID | Financial Crimes Enforcement Network (FinCEN).

Filing deadlines 

For entities formed earlier than 1 January 2024, the BOI report must be filed before 1 January 2025. Entities formed in 2024 must file the report within 90 days of the date of formation. Starting on 1 January 2025, new entities have only 30 days to file. 

Penalties for non-compliance

Failure to comply with the CTA can result in civil penalties of up to $500 per day and criminal penalties including fines of up to $10,000 and/or imprisonment for up to two years.

To file a BOI report: BOI E-FILING (fincen.gov).

Trust-owned entities: unique reporting issues

Trust-owned entities present several challenges in determining beneficial owners under the CTA. The complexity of trust arrangements, where legal ownership, control and beneficial interests are usually held by multiple parties, means that lawyers must carefully analyse each trust’s structure to determine the reporting requirements. Here are some key considerations:

Who is the beneficial owner in a trust-owned entity? 

The CTA defines a beneficial owner as someone who exercises substantial control over the entity or holds at least 25% of the ownership interest. With entities owned by a trust, identifying the individuals who meet this definition can be difficult, as different parties (e.g., the trustee, beneficiaries or trust enforcer/protector) may have varying levels of control or economic interests.

When a trust owns a US entity, there are generally four categories of individuals who may need to be disclosed as beneficial owners:

• Trustees: trustees often have legal control over the trust assets, including any companies the trust owns. If a trustee has substantial control over the entity, it is considered a beneficial owner;
• Trust enforcer/protector: certain powers held by a trust enforcer may cause it to be considered a beneficial owner: the power to remove and replace a trustee, the power to modify the terms specifying the beneficiaries’ rights, and the required approval or veto rights over distributions;
• Beneficiaries: beneficiaries are the individuals who ultimately benefit from the trust’s assets. If a beneficiary has a right to more than 25% of the trust’s assets or income, the beneficiary may need to be reported as a beneficial owner, depending on their degree of control or economic interest; and
• Settlors: if the settlor retains any control over the trust or its assets, he or she may be considered a beneficial owner under the CTA.

Different types of trusts may affect the reporting requirements under the CTA:

• Revocable trusts: in a revocable trust, the settlor typically retains control over the trust’s assets during his or her lifetime and may also be the trustee. As a result, the settlor will be considered a beneficial owner, as will the trustee, if someone other than the settlor; and
• Irrevocable trusts: in an irrevocable trust, the settlor normally relinquishes control over the trust assets. In this case, the trustee and/or beneficiaries may be considered beneficial owners, depending on who has substantial control or entitlement to the trust’s assets.

Changes in beneficial ownership 

Changes in beneficial ownership, such as the replacement of a trustee or an increase in the interest of a beneficiary within a trust, must be reported to FinCEN within 30 days. Counsel should ensure that their clients monitor any changes in the trust’s structure or administration and submit timely updates to FinCEN to avoid penalties.

Privacy concerns for non-US clients 

Non-US clients, particularly those from jurisdictions with strong privacy protections or where secrecy is the norm, may have concerns about disclosing personal information as part of the CTA’s reporting requirements. Corporate entities and trusts are frequently used to shield ownership and provide asset protection, and clients may be uncomfortable with the extent of information required by the CTA.

FinCEN’s database is not public but is accessible to law enforcement and financial institutions for due diligence purposes. Lawyers should advise their clients on the importance of compliance and reassure them that the information is stored securely and used only for regulatory purposes.

Practical considerations for non-US lawyers advising on trust-owned entities

When advising clients with trust-owned entities, non-US lawyers should take several steps to ensure compliance with the CTA, outlined below.

Conduct a thorough analysis of the trust structure

Before filing any beneficial ownership reports, it is crucial to closely analyse the trust’s structure, including the roles of trustees, beneficiaries and settlors. 

Stay informed of changes in ownership

Trusts often evolve over time, with changes in trustees or beneficiaries altering the underlying entity’s beneficial ownership. Lawyers should advise their clients to establish processes for monitoring and reporting any such changes within the 30-day reporting window. 

Coordinate with US counsel

Given the complexity of US reporting requirements, non-US lawyers should collaborate with US counsel who are familiar with the CTA and FinCEN’s regulations, particularly as to trust ownership. This ensures that all required information is submitted accurately and on time.

Conclusion

The US Corporate Transparency Act imposes significant reporting obligations on most US privately held entities, and non-US lawyers must be prepared to help their clients navigate these complex rules. By understanding how the CTA applies to trust-owned entities, analysing trust structures and monitoring changes in beneficial ownership, non-US lawyers can ensure their clients with interests in US business entities remain compliant with US law and avoid potential penalties.