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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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If you have been paying attention to the news and your email inbox, no doubt you have received urgent warnings of an impending sea change in the rules of doing business in the United States: the Corporate Transparency Act (CTA).

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We reported on this in the March 2023 edition of the <em>Business Law Update</em> (“Corporate Transparency Act Requires Filing Reports with FinCEN in 2024”). The effective date is now upon us. Business entities in the United States must begin registering their beneficial ownership and control information with the Financial Crimes Enforcement Network (FinCEN) starting January 1, 2024.

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Part of federal anti-money laundering legislation enacted in 2021, the CTA represents a fundamental change in the role and use of business entities in this country and reflects similar changes in countries across the globe.

Much of this activity stems from the revelations coming out of scandals such as the release of the so-called Panama Papers, and other events highlighting the practice of using networks of shell and holding companies in various countries to hide money laundering and other corrupt financial activities. The lack of rules requiring disclosure of the ultimate beneficial ownership of entities made such practices possible. The disclosures resulting from these and similar events, showed how, and by whom, such entities were being used. This in large part prompted a worldwide push to require disclosure of beneficial ownership of certain types of business entities.

This type of disclosure has been required for many years in some countries and regions. As a young lawyer working in Switzerland for a time, I found this to be a major difference in the corporate laws there, as compared to the system I learned in law school. The shareholders, directors and officers of business entities in most European countries all are disclosed in a public record maintained by a commercial court in the districts where companies are located. This has the effect of enabling one to find out with whom one is doing business.

By the way, this system also provided a solution to the “apparent authority” question we have under U.S. business law, i.e., knowing whether the individuals one is dealing with have the authority to enter into binding obligations on behalf of a company. If the name is not recorded in the commercial register, then the person cannot sign on the dotted line.

The commercial registry system has not existed up to now in the United States and many other countries. Entities could be formed by intermediaries, such as lawyers, as holding companies for other entities up and down the chain of ownership, without recording anywhere who actually is behind the operation.

In many instances, such anonymity may serve a benign purpose. For example, a real estate investor may wish to form separate entities to acquire blocks of property when assembling a parcel for development, without disclosing until the right moment who is doing the buying. Obviously, such anonymity also can be used to disguise less salutary intentions.

When the CTA takes effect on January 1, 2024, that anonymity will become a thing of the past. The Act takes a relatively measured approach. Disclosure requirements are targeted at the sorts of shell and holding companies that may be used for money laundering and other illegal activity. There are a host of exceptions, meant to exempt from the disclosure requirements companies that have substantial numbers of employees and business revenues, or whose ownership and operations are otherwise fully disclosed, such as banks and publicly traded companies.

Still, the requirements will pick up a very large number of entities formed for purposes of holding real estate and other legitimate business purposes. By some estimates, as many as 34 million entities in the United States will have to be registered. The disclosure requirements are detailed, with tight timeframes and the requirement to update information promptly after any change in the ownership or control structure of a registered entity.

Also note that some of the states, including major commercial centers such as New York and California, are getting into the action with state corporate transparency laws of their own. How these laws will dovetail with the CTA remains to be seen. Readers should consult with your contacts at Thompson Hine, or other legal counsel, to determine whether you may have any reporting obligations under the CTA.

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<em>This newsletter may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgement of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions.</em>

Business Perspectives: Corporate Transparency Act Takes Effect January 1

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