As a professional fiduciary, it is crucial to stay up-to-date with legislative changes that impact your role and the way you conduct business. The recently enacted Corporate Transparency Act (CTA) is one such development that warrants your attention. With newly enforced compliance requirements, increased responsibilities, and changes to client communications, fiduciaries have welcomed the Act with mixed emotion.
Here we cover the key aspects of the CTA and explore its implications for fiduciaries and trusts. By understanding this Act, you will be better equipped to navigate the evolving landscape of corporate transparency and ensure compliance with the law.
The Corporate Transparency Act Final Regulations
The Corporate Transparency Act (CTA), enacted in January 2021, is a significant piece of legislation aimed at combating money laundering, terrorism financing, and other illicit activities through enhanced corporate transparency. Under this Act, certain corporations and limited liability companies are required to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCen), an agency of the U.S. Department of the Treasury.
Starting January 1, 2024, the Act requires all small private businesses to submit an annual report to FinCen providing information on large equity holders, or “beneficial owners”. Beneficial owners are individuals who have significant control over the entity (25% or more of the entity’s equity) or who receive substantial economic benefit from the business.
There are, however, some entities that are exempt from disclosing this information, including:
- Public companies
- Nonprofit organizations, political organizations, and certain tax-exempt trusts
- U.S. based operating companies with more than 20 full-time employees and at least $5 million in gross revenue
- Entities that are already subject to similar reporting requirements, like banks and insurance companies)
- Dormant entities with no assets
You may have noticed trusts do not fall under the exempt entities of the CTA. Trusts are not exempt from the CTA’s beneficial ownership reporting requirements, as trusts have the ability to own a share or the entirety of a business.
Trusts are only exempt if:
- The trust is established as a charitable trust
- The trust owns a share or the entirety of a corporation who qualifies as exempt
What Fiduciaries Need to Do
While the enactment of the Corporate Transparency Act wasn’t necessarily hush hush, it may catch many business owners, or fiduciaries in this circumstance, off guard.
This major change will only impact you and your clients if the trust contains ownership stake of at least 25% of a non-exempt business or if the beneficial owner receives substantial economic benefit from the business. FinCEN nor the Act itself have put parameters around what nominal value constitutes as “substantial economic value”, but we can speculate that those parameters will likely be made clear as more reporting submissions are received and reviewed.
If the trusts you oversee do not have at least 25% ownership of a non-exempt business or receive substantial economic value of a non-exempt business, you do not need to take any additional steps.
Beneficial Owner
If you oversee a trust that is not exempt from the reporting requirements, you may have some questions on who should be reported as the beneficial owner.
According to Suzanne Sheir of LP Legal, the trust itself cannot be named as beneficial owner. Instead, fiduciaries should review the terms of the trust and the constituent parties. The beneficial owner will likely be the trustee, beneficiary, or you as the fiduciary. Here’s how you can decipher who should be reported as beneficial owner:
- Any individual who, directly or indirectly, exercises substantial control over the trust, including through positions such as a trustee, settlor, protector, or similar positions.
- Any individual who, directly or indirectly, is a beneficiary or receives substantial economic benefits from the trust. The CTA requires identifying beneficiaries with a substantial interest in the trust.
Implications for Fiduciaries
The Corporate Transparency Act introduced a new layer of transparency that affects your fiduciary duty. As fiduciary, your primary responsibility is to act in the best interest of your clients. With the new CTA requirements, fiduciaries are taking on a whole host of responsibilities that were previously considered to go against one’s fiduciary duty – specifically, releasing private information on behalf of the trust.
Here are the two most notable changes that impact fiduciaries and their role today.
Due Diligence
The CTA underscores the importance of thorough due diligence on your clients and their trust structure. Fiduciaries must now obtain and verify beneficial ownership information from their clients, who are often the trustee or beneficiary, ensuring compliance with the CTA’s reporting requirements. Adding this step into your onboarding process will help prevent the unwitting facilitation of money laundering or other illicit activities.
Reporting
The fiduciary must report the “beneficial owner(s)” to FinCen starting January 1, 2024. FinCEN has yet to open their reporting portal, however, you can expect to report the beneficial owner’s full name, social security number, date of birth, current residential address or business physical address.
Though the Corporate Transparency Act now requires fiduciaries to divulge personal trust information, it does not impact the privacy related to the trust’s assets. The information reported as part of CTA is only shared with FinCEN and only FinCEN will have access to the reporting registry. There are, however, instances where FinCen, by order, must report registry information, such as a U.S. federal law enforcement agency investigation or state or local law enforcement court order.
Non-exempt entities should expect to file within two years following the Act effective date of January 1, 2024. Entities that are formed following the enactment will need to file with FinCen upon formation. Fiduciaries will only need to file subsequent reports on beneficial owners if changes have been made to the previously reported information. You should expect to file any changes within 1 year after the change has been confirmed.
Reporting companies that provide false information or fail to file may be subject to a $500/day fine (up to $10,000) until the reporting is correctly filed or imprisonment for up to two years.
Be on the lookout for cyber or cold call scams as FinCEN has recently reported an uptick in fraudulent attempts to solicit personal information under the guise of the Corporate Transparency Act.
Impact on Client Relationships
With these CTA requirements, fiduciaries should consider implementing risk mitigation strategies to enhance client onboarding and maintain compliance.
Risk Mitigation Strategies
First, consider developing clear policies and procedures for client identification and due diligence. Implement a risk-based approach that considers factors such as trust type, jurisdiction, and business relationships to determine the level of due diligence required.
Next, maintain detailed records of your onboarding processes, including the collection and verification of beneficial ownership information. This documentation will demonstrate your commitment to compliance and serve as evidence of your due diligence efforts.
Calling on your network of professionals can also help reduce risk. Legal advisors can provide necessary guidance on compliance, while a financial advisor may help your clients pivot their financial approach to better meet regulatory requirements.
Client Communication
Effective communication with clients is crucial. Unless familiar with the CTA, you may need to educate your clients about the new reporting requirements, need for transparency, and address any concerns about privacy or asset protection. Consider sharing an update on the CTA via email or personal outreach that highlights the new requirements, any changes to your personal policies, and create an open forum for questions or concerns.
Transparent and open dialogue can help maintain trust and compliance, while also acknowledging your commitment to staying current with matters that impact your clients.
Adapting to Regulatory Changes
The Corporate Transparency Act represents a significant shift in the regulatory landscape for fiduciaries.
As a professional fiduciary, it is crucial to familiarize yourself with the Act’s provisions and adapt your client onboarding processes accordingly. By implementing effective strategies and collaborating with legal and financial experts, like Prudent Investors, you can navigate the complexities of the CTA, maintain compliance, and protect the best interests of your clients.
Stay informed, stay compliant, and continue to serve as a trusted fiduciary in an era of evolving corporate transparency. If you have any lingering questions on the Corporate Transparency Act or whether your clients are exempt, contact Prudent Investors to speak with an experienced financial advisor.
