Corporate Transparency Act creates privacy concerns for Family Offices and Private Trust Companies
The Corporate Transparency Act (the “Act”) became law on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021 (Pub. L. 116-283) when the Senate voted to override former President Trump’s veto of that bill. High-net-worth families for whom privacy is a paramount consideration may be concerned that the Act creates a risk of sensitive ownership information being exposed.
The Act generally imposes a reporting obligation on corporations, LLCs, and other “similar entities,” which appears likely to include limited partnerships and any other entities that are formed by filing a document with a state authority (e.g., statutory trusts, LLPs, LLLPs, etc.). Each reporting entity is required to disclose each of its “beneficial owners” to the Financial Crimes Enforcement Network of the US Department of the Treasury (“FinCEN”).
A “beneficial owner” generally means any individual who directly or indirectly “exercises substantial control over the entity” or “owns or controls not less than 25 percent of the ownership interests of the entity.” A person who willfully fails to complete or update beneficial ownership information with FinCEN may be subject to significant civil and criminal penalties. The Act will become effective for newly-formed entities when the regulations implementing the Act are effective, and those regulations are required to be issued by January 1, 2022. Entities existing before the regulations are issued will be required to comply no later than two years after the regulations are issued.
FinCEN and other federal agencies will be able to access and use the disclosures for law enforcement (including tax administration) purposes. Also, there will be a process for disclosure to state and local law enforcement, as well as foreign law enforcement in certain circumstances.
Exception for Regulated Private Trust Companies
Some entity types are exempt from reporting (by being excluded from the definition of “reporting company”), with the exemptions intended to exclude entities that are deemed to be of lower risk for use in criminal activity. One broadly applicable exemption is for an entity that (i) has more than 20 full-time employees, (ii) has more than $5 million in gross receipts (including receipts of entities owned by the entity), and (iii) has an operating presence at a physical office in the US.
Importantly, an entity that is considered a “bank” is also exempt from the reporting requirements. It appears that a state-regulated private trust company will fit into the definition of “bank” for these purposes. Also, the exemption for a “bank” extends to other entities “of which the ownership interests are owned or controlled, directly or indirectly” by a bank. It also appears that trusts themselves will generally not be subject to reporting requirements (although entities owned by trusts may need to report beneficial ownership unless otherwise exempt).
The Treasury Department is charged with making regulations to implement the Act, and hopefully, those regulations will help to clarify the extent to which a state-regulated private trust company along with its affiliated entities will qualify for exemption from reporting requirements. But based on the statutory text, it appears that a family using a regulated private trust company as a central part of its family office structure will be at an advantage in terms of ensuring privacy.