A fiduciary’s guide to the CTA

One of the US government’s most recent initiatives aimed at increasing transparency in the financial system comes by way of the Corporate Transparency Act (the Act). The Financial Crimes Enforcement Network (FinCEN) was tasked by the US Department of the Treasury (the Treasury) to implement and administer the Act. The US government believes that by shining a light on company beneficial ownership, it will help reduce or eliminate the misuse of the US legal and financial system.

Although the US government already has information about the beneficial ownership of many companies, such as information contained on their federal income tax and informational returns, it does not currently have a centralised store of beneficial ownership information. The Act facilitates the creation of a central repository of this beneficial ownership information in an easily accessible format that can be made available for law enforcement purposes. Notably, the beneficial ownership information is not publicly available.

Fiduciaries, such as trustees and service providers, should be proactive in reviewing their obligations under the Act. Acting in a capacity as a trustee of a trust or as an officer/director of a company may trigger important legal obligations under the Act.

The Act requires certain domestic and foreign companies, called ‘reporting companies’, to submit their beneficial ownership information to FinCEN, a subsidiary of the Treasury.[1] Beginning in 2024, a reporting company must file an initial beneficial ownership report with FinCEN containing information about itself, its company applicants and its beneficial owners, and subsequently update or correct its filings to the extent the reported information changes or is incorrect. For each beneficial owner, their name, date of birth, address, identification number and copy of an identification document must be reported. A beneficial owner is an individual who, directly or indirectly, either exercises substantial control over a reporting company or owns/controls at least 25 per cent of the ownership interests of the reporting company. Accordingly, it is not just equity ownership that needs to be reported to FinCEN; in some cases, individuals who control but do not own equity will need to be reported.

The Act as applied to trusts

If the Act applies to a company that is owned directly or indirectly by a trust, the trustee and company should identify the beneficial owners that are required to be disclosed to FinCEN. A ‘beneficial owner’ means any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25 per cent of the ownership interests of a reporting company.

As to substantial control, the Act’s regulations specify that a trustee of a trust can exercise substantial control over a reporting company through the exercise of their powers as a trustee over the corpus of the trust; for example, by exercising control rights associated with shares held in trust. With regard to ownership interests, an individual may, directly or indirectly, own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship or otherwise, including, with regard to a trust or similar arrangement that holds such ownership interest, as a:

• trustee of the trust or other individual (if any) with the authority to dispose of trust assets;
• beneficiary who is the sole permissible recipient of income and principal from the trust or has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
• grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.

Accordingly, determining ownership interests in a trust-owned company requires a detailed analysis of the trust instrument to identify who holds certain powers, such as the power to revoke the trust, demand distributions or otherwise appoint or dispose of trust assets, as well as which individuals have beneficial interests and rights to receive income and principal.

In addition, if a fiduciary appoints an individual to act as a director or officer of a company, the individual’s personal information may be disclosed in the FinCEN beneficial ownership report.

Importantly, a fiduciary must consider their legal and fiduciary obligations to the settlor and beneficiaries of the trust in deciding whether and how to disclose beneficial ownership. A fiduciary should also clarify its obligations to report and disclose information when there are changes in the structure that necessitate an updated filing, and whether it has a duty to monitor or otherwise ensure the information provided is and remains updated and correct.

Fiduciary’s compliance checklist

Although each trust and company structure is unique, in general, a fiduciary should consider the following when determining the applicable obligations under the Act.

The fiduciary should determine whether the company is a ‘reporting company’ by reviewing the corporate charter, bylaws and any other organisational or registration documents; identifying the state, country or tribal jurisdiction where the company was organised or registered to do business; and analysing whether the company meets any of the 23 exemptions.[2]

If the company is a ‘reporting company’, the fiduciary should determine which individual/s may exercise substantial control or own or control at least 25 per cent of the ownership interests.

The fiduciary should determine the initial filing deadline; where reporting companies are created or registered:

• before 1 January 2024, they must file by 1 January 2025;
• on or after 1 January 2024, and before 1 January 2025, they must file within 90 days; and
• on or after 1 January 2025, they must file within 30 days.

It should be considered how to practically obtain or provide personal information about beneficial owners. This means assessing whether the fiduciary is a company applicant.

It should also be determined whether an updated or corrected filing is required. Consider obligations to report or monitor substantial control, such as changes in the roles of president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer, regardless of official title, who performs a similar function.

Further, consider obligations to report or monitor ownership interests, such as:

• issuance of new stock or securities;
• issuance of capital or profit interests;
• vesting of equity interests;
• granting or exercise of options, puts, calls or similar rights;
• recapitalisations or reorganisations;
• gifts of ownership interests;
• death of a holder of an ownership interest;
• holder no longer being a ‘minor child’ in a jurisdiction;
• amendments or restatements of trust instruments involving an appointment or change of a trustee, trust protector or other power holder;
• powers of appointment;
• addition or removal of a beneficiary; and
• other changes in the trust’s terms that impact control or beneficial interests.

Given the short timeframes within which to act under the Act, fiduciaries should commence a comprehensive review of their trust and company structures and begin to communicate with their beneficiaries and other stakeholders about the applicable requirements.

On 1 March 2024, in National Small Business United v Yellen, the US District Court for the Northern District of Alabama ruled that the Act was unconstitutional. The government filed a Notice of Appeal on 11 March 2024. During the pendency of the appeal, FinCEN announced that it will continue to implement the Act, although it will not currently enforce the Act against the plaintiffs in that case. Fiduciaries should stay abreast of the developments of this case and other Act-related litigation.