According to the introductory paragraph of the guidelines issued by the Financial Crimes Enforcement Network (“FinCEN”) of the United States Treasury, “[i]llicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system.” In an effort to combat this, a new law called the Corporate Transparency Act (the “CTA”) became effective on January 1, 2024. The CTA requires certain entities called “reporting companies” to file with FinCEN information regarding the identity of the entities’ beneficial owners as well as any changes to the beneficial owners. The potential penalties for not timely filing these beneficial ownership information (“BOI”) reports include fine and jail time.
The basic definition of a reporting company is a corporation, limited liability company, or other similar entity that is created or in the case of any foreign entity, registered to do business, by filing a document with a Secretary of State or similar office under the law of any United States State or Indian Tribe. This seemingly simple definition and the types of entities specifically from the definition actually are deceptively complex. However, as typical trusts are not created through the filing of any document with any state, such trusts clearly are not reporting companies.
However, the fact that trusts are not reporting companies for the purposes of the CTA does not mean that they, and, importantly, their creators, their beneficiaries, and their trustees are not impacted by the CTA.
Among the information that must be included in a reporting company’s BOI report is personal information of each beneficial owner of the reporting company. A “beneficial owner” is broadly defined as any individual who directly or indirectly (i) owns or controls at least 25% of the ownership interests in the reporting company; or (ii) exercises substantial control over the reporting company. While the 25% test seems straightforward, the substantial control test is intentionally broadly defined and almost any individual who can make important decisions impacting the reporting company.
It is the tracing of indirect ownership or control that implicates trusts which own interests in reporting companies. Depending on the specific circumstances, when a trust has an interest in a reporting company, the beneficial owners whose personal information must be reported to FinCEN could include a trustee, a direction advisor, a trust protector, a designated representative, a grantor, a beneficiary, any other individual acting on behalf of the trust, or a combination of any of these individuals.
The ultimate responsibility for filing BOI reports to FinCEN falls to the reporting company itself. However, this is complicated by the idea that a trustee of a trust which owns or controls the reporting company may have some duty to help the reporting company gather and report the required information.
A reporting company’s initial BOI report must be filed withing 90 days of the entity’s formation, or, in the case of a reporting company in existence before 2024, by January 1, 2025. In addition, the CTA requires reporting companies to file updated reports within 30 days if there is any change in beneficial ownership information. In the context of trusts, among many other examples, this could include (i) the change of address of a grantor, beneficiary, trustee, trust advisor, or trust protector; (ii) the resignation, removal, replacement, or appointment of a trustee, trust advisor, or trust protector; (iii) the death of a beneficiary; (iv) the transfer of an interest in the trust to another beneficiary; or (v) any combination of these examples. In most circumstances, the trustee would be in the best position to track these changes and alert the reporting company.
While the last thing a trustee may have considered is her or his role in combating money laundering or the financing of terrorism, the CTA now makes that consideration part of the job. Because of the nuances and complexities involved with determining who owns and controls a reporting entity in which a trust holds an interest, any trust or series of trusts with such interests must be carefully and continually reviewed in order to accurately report beneficial owners. And, time is of the essence.
To learn more about this topic or if you have questions, please reach out to David Brown at David.brown@saul.com
