New Corporate-Transparency Laws to Require a ‘Mountain of Filings’

People looking for anonymity in their business dealings might be shocked to find they no longer can use limited liability companies (LLCs) to hide their ownership interests under the Corporate Transparency Act, a federal law aimed at curtailing money laundering that went into effect on January 1.

The feds aren’t the only ones going after shell companies. In December, New York Governor Kathy Hochul signed into law the New York LLC Transparency Act, a similar measure that requires beneficial owners of LLCs to file personal information with the New York Department of State. California’s legislature has its own version of the law in the works.

Compliance is going to be tricky. The Corporate Transparency Act (CTA) will apply to 32.6 million private companies, many of them small businesses and startups, as well as foreign entities with primary locations in the United States. A significant number haven’t even heard of this reporting requirement. And with fines of up to $10,000 and possible jail time on the line, noncompliance poses a not-insubstantial risk.

At a panel this week hosted by Berkeley Law’s executive education program, legal experts and startup advisers tried to allay some of the anxiety around the law by lifting the curtain on its head-spinning number of exemptions, provisions, and deadlines.

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, wants to know who ultimately owns and controls all of the the private corporations and limited liability partnerships registered to do business in the United States, mainly for law enforcement purposes.

While the U.S. has a stringent regulatory scheme set up to sanction foreign money laundering centers, it hasn’t been doing a very good job of keeping its own house in order.

“For too long, criminals have hidden behind anonymous shell companies to launder the proceeds of illicit activities like corruption and human trafficking through the U.S. economy. This dirty money flowing in from all over the world undermines fair business competition and poses risks to our country’s economic and national security,” Treasury Secretary Janet Yellen said in remarks last month promoting the CTA, which she said “makes tremendous progress toward changing this.”

Jai Ramaswamy, legal chief of the Silicon Valley venture capital firm Andreessen Horowitz, said the law is in part a response to mounting global pressure. “Many countries who were put on gray lists would point to the United States and say, ‘Hey, wait a sec. Do you realize that most shell corporations are incorporated in Delaware or elsewhere and that you have no idea of who your beneficial owners are of these companies? So, like, you’re as big a problem as anywhere else on the globe,’” he said. “So that became increasingly a bit of a black eye for the United States.”

Ramaswamy said the government is looking to build a database of people it can subpoena for information, if necessary, during a law enforcement investigation.

“What ends up happening is you’ll see a funky transaction, you’ll get the information about the corporation, and the only information you have is that it’s a Cayman Islands corporation or a Cook Islands corporation. And the incorporator is some unknown person. Then good luck getting information about anything from there,” he said.

“They want to know who the natural person is that they can subpoena for information. That’s ultimately what’s going on here.”

He added: “They want people who have actual information about the company. So somebody can’t turn around and say, ‘I don’t have any records here. I just incorporated the thing 15 years ago, but I have no idea what’s going on.’ And that’s effectively what these pieces of information are meant to get.”

Companies formed before January 1, 2024, have until the end of the year to file an official report on the FinCEN website listing the full names of all of their beneficial owners, those owners’ home addresses, and some form of official identification such as a passport or driver’s license. Companies will also need to file a report with FinCEN for up to two “company applicants” who were involved in the creation of the company.

The deadline for newer businesses is much tighter: Ninety days to file a beneficial ownership information report if the company is created or registered in 2024, and 30 days if it is created or registered after January 1, 2025. Companies also will have 30 days to update or correct previously filed reports.

“This is not meant to send anyone into a panic attack, but these are deadlines that you should respect and take seriously because they’re in the law for a reason. But, really, it’s about understanding the requirements and setting up some basic infrastructure so you can actually do this stuff,” said Jonathan Sagot, a partner at Fenwick & West who advises startups.

As startups grow and raise money, Sagot said, they’ll likely need to update their CTA files with the identities of their investors.

He said one aspect of the law that makes it a bit easier is that beneficial owners or company applicants can apply for a FinCEN ID so they don’t have to go through the whole process of filing a full beneficial ownership report every time they form a new company or need to make updates.

As with all reporting laws, there are exemptions—23 of them, in fact. Exempted entities include public companies, banks, credit unions, insurance companies, venture capital advisers, and tax-exempt entities (a full list is here).

Large companies that have a physical U.S. office, more than 20 U.S.-based employees, and US$5 million or more in U.S. income reported on their taxes qualify for a “large-company exemption.” Goodwin partner David Sikes said this exemption is the trickiest, as it’s not clear whether fully remote companies or companies operating out of co-working spaces qualify.

“Part of the reason why there’s been such urgency within the industry to make sure people understand the obligations here is because we are talking about just a mountain of filings that are going to be required. And so the preliminary cut on whether or not you’re exempt can be helpful,” Sikes said. “I think some companies may say, ‘Great, I don’t need to think about it,’ but a lot of others are going to have to do some thinking, and they may have to do it early on.”

And while the criminal penalties are scary, Sagot said, the bigger problem is the due diligence issue. “If you’re going out to raise money, or you’re going to sell the company, I think good investors and good buyers are going to ask, ‘Did you do your CTA file?’” he said. “There could be situations where an investor just says, ‘Hey, I’m not going to invest in your series A until you do this filing.’”

Sagot said that, as a startup lawyer, his job is to make sure founders are up to scratch on all the basic, check-the-box stuff so they can focus on talking with investors “about the business and what really matters. So doing the CTA is a box that you should check. Because you want to be putting yourself out there as a good, sophisticated, and responsible founder.”

Ramaswamy, who was chief risk and compliance officer at fintech company cLabs before joining Andreessen Horowitz, said it’s very unlikely that FinCEN is going to be policing companies on the CTA. The bigger risk is via “indirect enforcement” through banking regulators and agencies like the Securities and Exchange Commission (SEC).

“Where you’re going to have the biggest problems, candidly, if you haven’t complied with this is actually in interacting with the financial system,” he said. “I do think it behooves you to have your hygiene in order. Because as you interact with the financial system, these questions are going to be asked, whether or not you get it directly from FinCEN.

“And if you’re in a high-risk area—I spent some time, candidly, in the crypto world—if you’re a crypto company and you haven’t had your CTA filings, that’s just yet one more reason that you’re probably not going to get a bank account.”

From: Corporate Counsel