Another chapter in the Corporate Transparency Act has begun, leaving some parties that fall under it in limbo, including family offices.
The Act, a 2020 law that requires small businesses to share personal details about their owners with the government, went into effect on January 1.
Earlier this month, an Alabama federal judge ruled the CTA was unconstitutional and business groups in Ohio and Michigan have filed similar lawsuits. Stakeholders also are waiting for the Financial Crimes Enforcement Network to give them guidance on trusts — some of which are exempt from the law’s requirements.
How the legal battles will be resolved and when guidance will be finalized is unknown. The ruling in Alabama only granted injunctive relief for those plaintiffs. Attorneys say the CTA brings the U.S. up to international disclosure standards and that the law is unlikely to go away.
The CTA was created to better combat money laundering through anonymous companies in the U.S., which can be used to support corruption, drug trafficking, and terrorism. By giving law enforcement information about a company’s beneficial owner, such as an address or an identifying number from a passport or driver’s license — agencies can track down and investigate wrongdoers. “Unmasking shell corporations is the single most significant thing we can do to make our financial system inhospitable to corrupt actors,” Secretary of the Treasury Janet Yellen has said.
FinCen, a bureau of the Department of the Treasury, is collecting the CTA information, which is available to law enforcement agencies in a private searchable database.
Among those caught in the information dragnet are family offices, which are not eager to disclose any information about themselves. The offices are created in part to conceal the identity of a family — often for legitimate reasons.
“Requiring the disclosure of personally identifiable information is uncomfortable, and no one wants to do it, and when that information is tied to financial assets people get concerned that they are vulnerable,” said Melissa Goldstein, a former FinCEN attorney and current partner at Schulte Roth & Zabel focused on anti-money laundering and regulatory compliance.
Knowing that a wealthy individual is on the other side of a potential transaction could hurt their negotiating power. For example, consider a billionaire who might be interested in purchasing a property adjacent to one they already own. The seller then could raise the price or set terms to take advantage of the information.
Wealthy families say they also could be more susceptible to theft, extortion, kidnapping, and other crimes if their addresses are widely known.
Despite those concerns, as well as the recent lawsuits and FinCEN’s pending guidance, lawyers are advising family offices to get compliant with the CTA or risk facing stiff penalties. (Anyone willfully violating the requirements could face civil penalties of up to $500 for each day they aren’t compliant, and criminal penalties of up to two years imprisonment and a fine of up to $10,000.)
Family offices are generally not eligible for any of the 23 exemptions from the CTA. Some of the big family offices might be exempt as a large operating company, an entity with more than 20 employees and $5 million in gross receipts as of the previous year. But family offices of that size are not the norm. The average office has 14 employees.
A big family office that qualifies as a large operating company could potentially shield other family businesses from the disclosures. However, that is not a straightforward solution for families that don’t want their personal information in the FinCEN database, said Goldstein.
Entities essentially managed by the family office could be structured in a way that would qualify them for the large operating company and its subsidiary exemption, the trust company exemption or the registered investment advisor exemption “but that requires careful analysis and family offices should do that analysis before they explore restructuring,” Goldstein said.
A statutory trust, business trust, or foundation is only considered a reporting company and subject to the CTA if it was created by filing a document with a secretary of state or similar office. Not all states require trusts to file documents so they could be a way for family offices to avoid the beneficial owner disclosures. But lawyers say they want more information from FinCEN before they can confidently act regarding trusts.
In the meantime, Goldstein and her firm are advising family offices to get compliant with the act. Since the rules went into effect January 1, many offices might be required to report on their beneficial owners soon — or already be out of compliance. Companies created or registered in 2024 have 90 days to file after receiving a notice that its creation or registration is effective. Companies created or registered to do business before January 1, 2024, will have until January 1, 2025 to file an initial report. After that date they will have 30 days to file.
Katie Hausfield, a partner and the co-chair of the Global Compliance practice at DLA Piper, said her firm is telling clients required to file within the 90-day window to do it right away. “Unless you explicitly are a plaintiff in the Alabama case right now, we’re recommending that you still comply with the 90 days,” she said.
Once a family office has filed its beneficial owner information, it also needs to make sure it has the processes in place to keep the information current. It is likely they will have to keep filing in perpetuity. If they don’t have to file yet, there’s no rush — things could change.
“We’re still advising that clients keep all of that in mind and move towards that goal. But we’re also not recommending anybody file before the end of the year if they’re not obligated to do so because we don’t know where this is going to play out,” Hausfeld said.
