Gatekeepers beware: the new US corporate transparency act could be a game-changer

The writer is a partner at Perkins Coie

As an anti-money laundering lawyer, I’ve frequently heard it said that the new US Corporate Transparency Act — which requires certain corporations, limited liability companies and similar entities to disclose beneficial ownership information to the US Department of the Treasury for the first time — won’t make a difference. The reason? The “Tony Sopranos” of this world aren’t going to report anyway. 

But this misunderstands perhaps the most important potential impact of the CTA, which goes into effect on January 1: dismantling the infrastructure that enables financial crimes by imposing liability on the corporate service providers or “gatekeepers” (lawyers, trustees, accountants and other corporate service providers) that allow (often unwittingly) the Sopranos to hide and launder billions of dollars. The law will result in substantial new enforcement risk for the organisations and individuals typically involved in supporting or helping to create US entities.

In 2014, an investigator posing as the representative of a corrupt foreign government met 16 Manhattan lawyers to request help moving millions in suspicious funds into the US. All but one in effect provided a road map on how to launder the money through shell corporations. 

While the results of the sting were shocking, there were no regulations or even ethical rules that clearly require lawyers — or other corporate service providers — to “know their customers”. The CTA changes this by creating a federal disclosure requirement necessitating, at least to some degree, that lawyers, trustees, accountants and others declare their association with the entities they create and, to some extent, understand their true owners.  

The CTA stipulates that individuals who create new entities be reported to the government as “company applicants”. This means corporate service providers will be associated in a federal database in perpetuity with the entities they create, and potentially with any future misdeeds of those entities.

Moreover, in the context of CTA filings, corporate service providers also face liability with respect to any failure or falsehood regarding the true ownership and control of the entities they support. 

Penalties for non-compliance with the CTA are steep, including daily accumulation of civil penalties and criminal sentences of up to two years’ imprisonment.

US authorities have stated that the scope of liability under the CTA encompasses any individual who can be said to have “caused” a violation of the act, including by submitting a false or fraudulent filing on behalf of an entity they assist. Yet significant ambiguities persist, including around how broadly regulators will interpret “wilfulness” or “wilful blindness” on the part of those involved in CTA filings.  

For instance, lawyers or corporate service providers filing false or incomplete information where there were obvious red flags as to an entity’s ownership or control by, for example, a Russian oligarch, could certainly come under fire. 

But what are regulators’ expectations of such firms? What best practices will they be expected to adopt in verifying that they know the true beneficial owners of entities in complex corporate webs spanning multiple jurisdictions? 

This is a new frontier for the corporate services industry. And, while it is easy for a lawyer such as myself with an anti-money laundering background to identify these risks, most of those involved in corporate formation and administration do not have experience with these issues. For this reason, there is not yet a robust appreciation throughout the industry of the multitude of risks that CTA reporting may lay bare.  

That’s why gatekeeper entities and individuals should take a close look at their vetting procedures and be vigilant about red flags as they gather ownership information to prepare CTA reports. These may range from the seemingly obvious — “why would someone with this amount of wealth have no internet presence?” — to more complex issues such as overly complicated ownership structures, extensive use of intermediaries and arrangements that involve “offshore” jurisdictions for no clear business or tax reason. 

Currently, there is confusion across the corporate services industry. The most responsible providers are implementing robust new vetting and compliance programmes while more lax competitors are still wondering, “what does this have to do with me?” You can guess which one is going to get the oligarch business next year — and then find themselves in the enforcement crosshairs in the years to come.