CTA to Impose Reporting Obligations, Penalties on Many Fla. LLCs, Corporations

February 3, 2021Articles Daily Business Review

With recent headlines dominated by the ongoing pandemic and the raid on Capitol Hill, many practitioners may have missed Congress’ recent enactment of the Corporate Transparency Act (CTA) as part of the most sweeping anti-money laundering legislation in decades. Practitioners in Florida should be familiar with the reporting obligations and potential penalties under the CTA as it will apply to many of the estimated 756,588 domestic Florida corporations and 1,473,881 Florida limited liability companies in the State of Florida as of Oct. 5, 2020.

On Jan. 1, 2021, Congress passed its annual National Defense Authorization Act for Fiscal Year 2021 (NDAA), a national defense-spending bill, over President Donald Trump’s veto. The NDAA includes the Anti-Money Laundering Act of 2020 (AML Act), which significantly reforms current anti-money legislation, including the Bank Secrecy Act (BSA). The AML Act, in turn, includes the CTA, which is aimed at combatting the use of holding or “shell” companies to finance terrorism, launder money and commit other crimes.

Under the CTA, each “reporting company” will be required to disclose certain information regarding its “beneficial owners” with a beneficial ownership registry maintained by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The information required to be disclosed to FinCEN will include the name, address, date of birth, and driver’s license or other identification number of beneficial owners, but not any financial or business information of reporting companies. The FinCEN database is not public, but will be available to law enforcement agencies and other regulators. Financial institutions may also receive this information with the consent of reporting companies.

A “reporting company” is broadly defined under the CTA as a corporation, limited liability company or other “similar entity” that is created under state law or formed under laws of a foreign jurisdiction and registered to do business in the United States. It is unclear whether a “similar entity” includes partnerships or trusts. However, under the CTA, a “reporting company” does not include companies that: employ more than 20 people, filed a tax return reporting gross receipts in excess of $5 million and have a physical presence in the United States are regulated by the federal government such as banks and public companies, are dormant, not owned by a foreign person and do not hold assets; and (iv) are nonprofit tax-exempt charitable and political organizations. The broad definition of “reporting company” under the CTA will likely capture most existing Florida limited liability companies and corporations.

A “beneficial owner” of a reporting company under the CTA is defined as an individual who owns at least 25% of, or exercises “substantial control” over, the reporting company. The CTA does not explain what constitutes “substantial control” and it is anticipated that the implementing regulations that will be issued by FinCEN will provide some clarity in this regard.

Notably, the following individuals are not considered “beneficial owners” under the CTA: individuals acting as agents, intermediaries, or custodians on behalf of another; an employee of a reporting company whose control or economic benefit with respect to the entity is derived solely from their employment; minors, if the required information of their parent or guardian is disclosed; individuals whose only interest in the entity is a right through inheritance; and creditors of the reporting company (unless the creditor owns 25% or more of, or exercises “substantial control” over, the reporting company).

Reporting companies, and their beneficial owners and advisors should be aware of the penalties imposed for willful failure to report, or the submission of a report containing false or fraudulent beneficial ownership information. Any person that violates these provisions is subject to a $500 per day penalty and/or a maximum $10,000 penalty and up to two years imprisonment. The CTA contains a safe harbor from civil or criminal liability for the submission of inaccurate information if the person “voluntarily and promptly” (and no later than 90 days after the submission of the original inaccurate report) submits a report containing corrected information.

The CTA will take effect on the effective date of the implementing regulations prescribed by the Secretary of the U.S. Treasury, which will be promulgated within one year. Once the regulations take effect, new reporting companies will have to disclose the required information of their beneficial owners at the time of formation. Existing reporting companies will have two years from the effective date of the regulations to comply. Reporting companies will also have ongoing obligations to disclose any changes in beneficial ownership information.

The CTA was enacted following the “Panama Papers” scandal where documents leaked from the former Panamanian law firm Mossack Fonseca revealed the ease in which offshore and U.S. “shell companies” were utilized by bad actors for illicit purposes such as purchasing expensive homes in South Florida. FinCEN has attempted to crack down on the use of illicit funds to purchase residential real estate in South Florida and other “hot spots” through its geographic targeting orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind shell companies used in all-cash purchases of residential real estate. The purchase amount threshold remains $300,000 as of the date of this publication for South Florida. The GTOs are in addition to the Bank Secrecy Act in effect prior to the enactment of the AML Act, which requires banks and certain other financial institutions to maintain and implement anti-money laundering programs for purposes of conducting due diligence on their customers and verifying the beneficial owners of corporate account holders. Congress, apparently believing that existing anti-money laundering legislation was not sufficient, wanted to impose reporting obligations on reporting companies and their beneficial owners in addition to title companies and certain financial institutions, leading to the enactment of the CTA.

The introductory provisions of the CTA make clear that Congress is concerned about the relative ease in which criminals can hide behind shell companies formed under laws of many States, including Florida and Delaware, which do not require disclosure of beneficial ownership. For example, the Florida Revised Limited Liability Company Act only requires that the articles of organization of a Florida limited liability company state the name of the company, the street and mailing address of the company’s principal office, and the name, street address in this state, and the written acceptance of the company’s initial registered agent. Unlike the laws of many foreign jurisdictions, an individual can form a Florida limited liability company in a matter of minutes by paying a nominal fee and filing a form with the Florida Secretary of State’s website without disclosing any beneficial ownership information.

Time will tell if the CTA and its implementing regulations will be an effective tool in the fight against money laundering or an invasion of privacy and administrative burden on small, legitimate companies as argued by critics. In any event, practitioners and advisors who routinely form Florida limited liability companies and corporations for their clients will need to inform them of the CTA and be ready to comply with the implementing regulations once they go into effect.

Reprinted with permission from the February 3 issue of the Daily Business Review. (c) 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.