The passage of the Corporate Transparency Act, or CTA, in January 2020 marked a sea change in collection of beneficial ownership information from U.S. entities, bringing the U.S. in line with much of the rest of the world. In December 2021, the Financial Criminal Enforcement Network, or FinCEN, issued proposed regulations outlining the reporting requirements for companies subject to the law. Now that the comment period on that proposed rule is closed, the contours of the law are becoming clearer. Though U.S. reporting companies will shoulder much of the compliance burden, the new law will also substantially increase the reporting burdens on trusts, including certain foreign trusts. This article explores the impact of the CTA on foreign trusts during a period of increased focus on transparency and illicit finance enforcement in the United States.
Once fully implemented, the CTA will require any reporting company—defined as a domestic company created by the filing of a document with a secretary of state or a foreign company registered to do business in any state through the filing of a document with a secretary of state—to provide FinCEN with identifying information about each of the individuals who own more than 25% of, or exercise substantial control over, the reporting company. FinCEN will keep the information in a secure, private registry for use in ongoing investigations. Once the registry is functional, reporting companies will have to keep beneficial ownership information updated regularly, and the penalties for anyone who willfully reports false information include up to two years’ imprisonment.
Most trusts will not have to report directly with FinCEN. Only a reporting company must report beneficial ownership to FinCEN. To be a reporting company, the trust would have to file a registration document with a secretary of state. Though some business trusts must register with a secretary of state and therefore would qualify as reporting companies, most revocable and irrevocable trusts used for estate planning are created by private contract and therefore will not have to report beneficial ownership information. Charitable trusts are also specifically exempt from reporting.
Even though most trusts will not qualify as reporting companies, the new law will have an impact on any entity with an ownership interest in a U.S. company, including foreign trusts. Under the proposed rule, reporting companies must report to FinCEN each owner that owns more than 25% of the company, including trusts, regardless of where the trust is domiciled and whether it is registered with any secretary of state. Thus, foreign trusts could find themselves having to provide information to FinCEN if they hold significant interests in U.S. companies.
The information that reporting companies must report about trust ownership is substantial. A reporting company must provide FinCEN with beneficial ownership information—including name, date of birth, address, and copy of an ID—for the trustee; any other individual with the authority to dispose of trust assets, which could include the trust protector in some circumstances; any beneficiary who is the sole permissible recipient of income and principal from the trust; any beneficiary who has the right to demand a distribution of or withdraw substantially all the assets from the trust; and any grantor or settlor who has the right to revoke the trust. In the case of corporate trustees, the reporting company must report the beneficial ownership of the corporate trustee. It is clear that FinCEN views the use of trusts with some skepticism. In its proposed rule on beneficial ownership reporting, FinCEN said that it considered a narrower reporting requirement for trusts that would have required trusts to report only the trustee as the beneficial owner but concluded that doing so “would promote the misuse of trusts to hide beneficial ownership interests and complicate the ability of reporting companies to comply with the CTA and the proposed rule.”
Foreign trusts will need to provide accurate beneficial ownership information to the reporting companies they own so that the reporting companies can provide accurate information to FinCEN, and failure to do so could result in criminal sanctions against the foreign trusts. Under the CTA, willfully providing inaccurate beneficial ownership information is punishable by criminal penalties of up to two years in prison. FinCEN’s regulations make clear that those sanctions apply not only to the individuals who provide the information directly to FinCEN but also to anyone who willfully causes that inaccurate information to be provided. Thus, foreign trust fiduciaries could be in the crosshairs if the information they provide to reporting companies regarding the trust’s trustees, settlors, and beneficiaries is inaccurate—though whether U.S. enforcement authorities could reach those individuals abroad is an open question, and jurisdictional defenses may be available.
The CTA’s beneficial ownership registry is just one component of an increased focus of U.S. regulators on transparency-related rules and illicit-finance enforcement that will have an impact on foreign trusts. FinCEN also recently began a rulemaking process regarding reporting requirements for certain real estate transactions. In that rulemaking, FinCEN cited a report that highlighted the use of shell companies and trusts “to obscure the true owners of the properties” and hinted that both U.S. and foreign trusts could be included among the legal entities that have to report real estate transactions.
Additionally, the Anti-Money Laundering Act of 2020, which was passed along with the CTA as part of the same law, included substantial increases in resources for investigations of financial crimes. And the administration hopes to add even more resources to combat illicit finance. For example, the version of the Build Back Better legislation that passed the House allocated $45 billion for IRS tax enforcement expenses, including hiring of enforcement agents and modernizing technology. The administration apparently expects a significant uptick in enforcement actions as a result of that investment because the legislation fact sheet estimates that the investment in enforcement expenses will result in $400 billion in added revenue. Combined with the broad reach of the CTA regulations, foreign trusts that hold interests in U.S. companies can expect to see increased attention from U.S. regulators in the coming years.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Ian Herbert, who is counsel with Miller & Chevalier, advises individuals and entities, including multinational corporations, offshore trustees and financial services companies on a range of issues, including foreign bribery, tax fraud, money laundering, and other financial crimes.
We’d love to hear your smart, original take: Write for Us