Understanding the Corporate Transparency Act: A Compliance Guide for Law Firms

The Corporate Transparency Act (CTA), part of the Anti-Money Laundering Act of 2020, represents a significant shift in reporting for  U.S. businesses, including law firms. Designed to increase transparency and combat illicit financial activities, the CTA requires many business entities to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). This introduces new compliance obligations for law firms that, if not correctly managed, could result in severe penalties. This guide provides an in-depth look at what the CTA entails, its implications for law firms, and how to ensure compliance while maintaining your firm’s ethical standards.

What is the Corporate Transparency Act?

The Corporate Transparency Act is a legislative measure aimed at preventing the use of shell companies for illegal activities, such as money laundering and terrorist financing. By requiring certain entities to disclose their beneficial owners, the CTA is intended to bring more transparency to business operations. Beneficial owners own or control 25% or more of a company or exercise substantial control over it.

Scope and Applicability

The CTA applies to various entities, including corporations, limited liability companies (LLCs), and similar entities created or registered to do business in the United States. However, certain entities, such as those with a significant physical presence in the U.S., operating histories, and regulatory oversight, are exempt. For law firms, especially those structured as LLPs or professional corporations, understanding whether you fall within the scope of the CTA is crucial.

Key Compliance Requirements

Beneficial Ownership Reporting

Under the CTA, law firms that qualify as reporting companies must disclose specific information about their beneficial owners. This includes:

• Full Legal Name: The complete name of each beneficial owner.
• Date of Birth: The exact birthdate of each beneficial owner.
• Residential or Business Address: A valid address for each beneficial owner.
• Unique Identifying Number: This could be a U.S. passport number, driver’s license number, or a similar identification number from a government-issued document.

This information must be kept accurate and up-to-date. Any changes to beneficial ownership must be reported within a short timeframe, usually 30 days.

Deadlines and Reporting Timelines

The timeline for compliance under the CTA varies depending on when the entity was formed:

• Existing Entities (formed before January 1, 2024): Must submit beneficial ownership information by January 1, 2025.
• New Entities (formed on or after January 1, 2024): Must submit beneficial ownership information within 30 days of formation or registration.

Given these strict deadlines, law firms must implement processes to ensure timely and accurate reporting.

Submission Process

Law firms must submit beneficial ownership information electronically through FinCEN’s secure online portal. Establishing a compliance protocol that includes verifying the information before submission is essential to avoid discrepancies that could lead to penalties.

Penalties for Non-Compliance

Civil and Criminal Penalties

The consequences of non-compliance with the CTA could be severe. Failure to report beneficial ownership information accurately or on time can result in civil penalties, including fines of up to $500 per day of non-compliance. In more serious cases, criminal penalties may apply, including fines of up to $10,000 and imprisonment for up to two years.

Mitigating Risks

Law firms should take a proactive approach to CTA compliance to avoid these penalties. This includes establishing clear internal protocols, conducting regular reviews of beneficial ownership information, and ensuring that all submissions to FinCEN are accurate and timely. By doing so, firms can mitigate the risk of penalties and maintain their reputation for ethical business practices.

Practical Steps for Law Firms

Internal Compliance Protocols

Developing and implementing internal compliance protocols is essential for ensuring CTA compliance. These protocols should outline the processes for collecting, verifying, and submitting beneficial ownership information. They should also include procedures for regular audits to ensure ongoing compliance.

Training and Awareness

It is crucial to educate partners, associates, and staff about the CTA and its implications. This training should cover the legal requirements of the CTA, the ethical considerations involved, and the firm’s specific compliance protocols. Regular updates and refresher courses can help keep everyone informed of any changes to the law or the firm’s procedures.

Ongoing Monitoring and Updates

Compliance is not a one-time task but an ongoing process. Law firms should regularly review their compliance practices and update them as necessary to reflect changes in the law or the firm’s structure. This includes monitoring any changes in beneficial ownership and ensuring that these are reported promptly to FinCEN.

Case Studies and Examples

Examples of Law Firm Compliance

Consider a mid-sized California law firm structured as an LLP. The firm thoroughly reviewed its ownership structure and identified three partners who met the criteria for beneficial owners. The firm then established a compliance team responsible for gathering the required information, verifying its accuracy, and submitting it to FinCEN. By implementing a clear compliance protocol, the firm was able to meet the CTA’s requirements well before the deadline, avoiding any potential penalties.

Lessons Learned from Non-Compliance

In contrast, a smaller firm with less formalized compliance procedures overlooked the need to report a change in beneficial ownership following the retirement of a senior partner. This oversight led to a significant delay in reporting the updated information, resulting in substantial fines. The firm subsequently revised its compliance protocols and conducted a firm-wide training session to prevent future issues.

Wrapping Up

The Corporate Transparency Act introduces new challenges for law firms, but with careful planning and adherence to the guidelines outlined in this guide, and with the advice of qualified legal counsel, your firm can navigate these requirements effectively. By prioritizing compliance, you protect your firm from potential penalties and reinforce your commitment to transparency and ethical business practices.

This summary is a reference only and is not a substitute for getting legal advice on whether your firm is subject to the reporting requirements of the CTA and, if so, how best to comply. Don’t rely on this summary or any other summary. Consult qualified legal counsel to determine if the CTA reporting requirements apply to your law firm and how you should report.

Contact Information

For legal advice on CTA compliance, law firms can contact O’Rielly & Roche LLP, which focuses its practice on advice and counsel to law firms and has extensive experience advising law firms on regulatory matters.