ALERT to non-USA lawyers whose clients intend to do business in the USA or hold bank accounts there: The U.S. Corporate Transparency Act (CTA) will require clients wanting to form new business entities to divulge background information such as governmental identification documents and photographs, home addresses, etc. (“Profile”) in order form new business entities. Once implemented, it is anticipated that the regulations, which have yet to be finalized (referred to in this article as “proposed regulations” or merely “regulations”), will have immediate effect on new business entities. Old business entities (no matter how old) will have to divulge similar information in the future. The CTA is designed to prevent criminals from hiding assets in shell companies in an anonymous fashion. Divulging the ultimate beneficial owners of companies will enable foreign governments and US governmental agencies, including financial institutions, to access this information. The regulatory agency required to implement regulations is the Department of Treasury’s Financial Crimes Enforcement Unit (FinCEN). FinCEN has not established reasonable regulations to date and therefore the law in not in effect.

Recently, FinCEN proposed a second round of regulations in December of 2021, as the first ones from the spring of 2021 were not implemented. The second set of proposed regulations have not yet been implemented and many commentators feel that they will not be; however, they could be implemented at any time. Proposed transparency obligations create problems for US attorneys, foreign attorneys, and clients; while no regulations have been passed formally, the proposed regualtions may provide some understanding into what we may soon see:

PROBLEMS FOR THE USA AND FOREIGN LAWYERS:

1. Personal liability for improper filing or lack of filing of documents with FINCEN; (the foreign lawyer may be deemed to be directing the formation and therefore become liable for its accuracy, amendments and renewals);
2. Requirement to inform FinCEN of changes;
3. Ethical requirements to assist clients, and former clients, in updating client profiles and understanding the law;
4. Will it be possible to prevent the disclosure of information to the banks or to unscrupulous governmental regimes? Will clients have confidence in disclosure by the USA government to foreign governments and to financial institutions?
5. Will there be clarification as to exemptions for attorneys who no longer have an attorney-client relationship with the initial owner nor can confirm her/his current home address?
6. What can a lawyer do if the client demands that the attorney refrain from disclosure, especially based upon reasonable fears for the safety of the owner’s family? Commit an ethical breach and subject a client or former client to issues related to safety, or be subjected to a fine without a limit or criminal exposure.

PROBLEMS FOR CLIENTS:

1. How to maintain a discrete profile as to financial worth and prevent delivery of one’s financial profile as well as home address information to unscrupulous foreign government officials or financial institutions in which the client has no confidence?
2. If the client’s concern relates to a reasonable desire for maintaining a discrete profile, what is the alternative to investment in the USA? Continue investing and be subjected to higher estate taxes? (yes!) Continue investing and be subjected to higher transactional costs for real estate investments (yes!) Are there other offshore banking jurisdictions without the USA problems?
3. The lack of data security as shown by the hacking of banks, law firms, FinCEN, etc.

BACKGROUND:

The USA Government, through its Department of Treasury’s Financial Crimes Enforcement Unit (FinCEN), published a second round of proposed regulations to implement the Corporate Transparency Act, (CTA) passed in January 2021. The Act and regulations can be described as a law to rid the USA of its profile as an offshore haven for anonymous foreign investment; that is to say, a jurisdiction where individuals can form a business entity (described as a “shell”) to hide the identity of the ultimate beneficial owner. Entities in the USA are formed under one of various state laws: frequently, this would be a state without income taxes and with a tax pass through entity such as a limited liability company (LLC); hence, an “offshore” or “tax haven foreign entity”; the CTA and regulations are federal laws. Ownership of the business entity is established under state law and is not of public record, and the officer or manager need not be a physical person.

The CTA comes very late in the game of the Financial Action Task Force’s initiatives to provide worldwide corporate transparency. The CTA also comes after the United States’ decades-long inability to properly enforce Bank Secrecy Act (“Know your customer” regulations) and Patriot Act (“enhanced due diligence”) upon bank customers, notwithstanding a history of severely large fines against banks for violations of such laws.

The most recent round of proposed regulations have no grandfathering provision (an exemption for historically long operating companies) so the law will encompass divulging information, documents and records which may have been discarded not only by the U.S. lawyer but also by the foreign lawyer. It goes without stating that your clients or former clients might live at a location different than they did 20 years ago: the regulations give short deadlines for you to track down this information, without compensation. Finally, the regulations have no limit on the fines which a law firm or lawyer may suffer for inaccuracy of information or failing to file, and the proposed regulations may impose criminal penalties for inaccurate reporting or failure to file.

Foreign lawyers or individuals who directed the opening of a business entity in the USA will also have their Profiles included in this report to FinCEN. (Try explaining to a source of business that you will report his/her name and home address (i.e., Profile) to the U.S. Government’s financial crime unit!) What are the consequences to them for failing to do so?

While these regulations have been severely criticized in the legal community for myriad reasons, the banking community lobbied for them as a way to eliminate or mitigate liability under existing laws (Know Your Customer and enhanced due diligence) thereby transferring some of their obligations to lawyers. (Note that such Know Your Customer and enhanced due diligence requirements never imposed personal monetary penalties nor criminal penalties upon bankers notwithstanding their multi-million dollar budgets to comply with such requirements as well as the multi-billion dollars in fines for noncompliance!)

Treasury’s Financial Crimes Enforcement Network (FinCEN) to date has proposed two sets of regulations designed to implement the law. The first was published in the spring of 2021 and eventually discarded; the second set was proposed in December 2021 and severely criticized; however, legislators (who did little to define the law when it passed inside a defense spending bill during the Trump administration) are now pushing FinCEN to implement regulations and are requesting implementation by May 23, 2022 which date has obviously passed. The resulting obligations are still undefined. How do lawyers counsel their clients to prepare with respect to the formation of new entities and for the filing of reports for existing ones?

Initially, lawyers will need to gather information from their existing or former clients in advance of passage and justify the cost and rationale of doing so. Will the clients cooperate? Will the lawyers of clients be sanctioned in the event of noncompliance? Will USA lawyers have to emphasize to clients the need to consider forming their business entities and banking in other jurisdictions? While the U.S. banking industry will not like to hear this, it is essential for lawyers to raise these issues, particularly for those with exposure to unscrupulous jurisdictions. Will there be work-arounds for clients to hold title to real property and to do business in the USA? We feel there presently exist such work around. There are detailed paths in which this is possible for real property purchases in the future, but for prior purchases, it is a more problematic concern, due to income taxes. Stay tuned for a new set of regulations!

Miami, FL USA June 21, 2022

John and Robert Friedhoff render concierge legal services to ultra-wealthy individuals and their companies with a significant focus on Latin American investors, above and beyond their normal corporate practice and practice law with Fowler White Burnett in Miami, Florida.