Regardless the steps traditionally taken by the United States of America in order to meet the highest international standards in terms of safeguards designed to prevent the flow of illicit money and contrast illicit activities, including money laundering, the financing of terrorism, human and drug trafficking, the U.S. still present in comparative terms some frailties.
In order to tackle such deficiencies, the Corporate Transparency Act (CTA), enacted into law as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), updated and amended the country’s anti-money laundering laws. In particular it directed the Treasury to promulgate rules that require certain “regulated entities” to file information concerning beneficial owners and company applicants with the Financial Crimes Enforcement Network (FinCEN) so that the data can be aggregated in a database available to law enforcement, the IRS, certain other agencies and select financial services companies.
In the U.S. corporations, partnerships, limited liability companies are mostly defined and governed by state law, with initial formation detail typically maintained by a secretary of state’s office (or equivalent). Once FinCEN’s final regulations come into effect on 1st January 2024, there will exist a robust federal overlay to what has historically been a fragmented, state-regulated function.
FinCEN has recently issued its final rule which clarifies who must file a report, what information must be provided, and when a report is due.
Two are the categories of reporting companies that must file reports with FinCEN: domestic reporting companies and foreign reporting companies. It belongs to the former category any entity that is created by the filing of a document with a secretary of state or similar office of a jurisdiction within the U.S. Certain entities, such as trusts, sole proprietorships or general partnerships, typically are formed or created without filing documents with a government entity and therefore generally will not be reporting companies and not be subject to the disclosure and filing requirements under the CTA. A notable exception with regards of some States are business trusts.
The second category of reporting entities is constituted by the “foreign reporting companies” and includes any entity formed under the law of a foreign jurisdiction that is registered to do business within the U.S..
With regards to any reporting company it is mandatory to disclose its beneficial owner(s), being any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise exercises substantial control over the entity and/or owns or controls not less than 25 percent of the ownership interests of the entity.
Such “substantial control” and/or “ownership interests” may occur in multiple ways, also via a trust.
The final rule identifies the trustee as an individual who will be deemed to control trust assets but, in addition, other individuals with authority to control or dispose of trust assets are considered to own or control the ownership interests: under some circumstances, beneficiaries and / or grantors or settlors do.
Hence depending on the specifics of the trust arrangement, the ownership interests held in trust could be considered simultaneously as owned or controlled by multiple parties. As trusts arrangements can vary significantly in form, FinCEN acknowledged that the examples set out in the final rule do not address all applications of the general principle and that it will consider the need for guidance or FAQs to evaluate particular circumstances as they arise.
FinCEN’s regulations implementing the CTA will go enter into force on 1st January 2024 and failure to provide the required information, which perhaps previously would have resulted (at worst) in a state-level administrative fine, will then constitute a federal crime subject to both federal civil penalties and, in serious cases, criminal prosecution.
In conclusion, the efforts that the U.S. are finally putting in place in order to contrast money laundering, terrorism financing, human and drug trafficking are highly appreciable. Given the complexity that the regulations entail especially when trust structures are involved though the novelties also imply that it is advisable for anyone who might be concerned to seek professional advice in order to make sure to be prepared when the time comes.
By Michele Cecchi
LAWYER, LL.M., TEP
Trust and Wealth Planning