The United States has long sought better transparency in the ownership of legal entities.[1] Greater ownership transparency was needed to prevent the use of “shell” corporations and limited liability companies from facilitating terrorist funding, money laundering, selling narcotics, sex trafficking and other criminal conduct. The “shell” corporations and LLCs were also used for tax avoidance and kleptocratic corruption. Knowing who owned the legal entities could be critical in foiling their illicit activities. It was ironic that the United States should seek transparency when its own states were the source for many of the illicit “shell” corporations and LLCs. Bad actors could easily form U.S.-based entities because no system existed to record the beneficial ownership of state corporations and LLCs.[2]

That is changing. On Jan. 1, 2021, Congress passed the National Defense Authorization Act (NDAA). Included within the NDAA was the Corporate Transparency Act (CTA).[3] Through the CTA, Congress directed the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to establish and maintain a national registry of beneficial owners, managers and company applicants of entities that are deemed to be reporting companies.[4] The CTA was intended to make it more onerous for domestic and foreign individuals to operate shell companies for illicit purposes.[5] The ‎CTA required that implementing regulations be ‎promulgated by the end of 2021. On Dec. 7, 2021, FinCEN issued a notice ‎of proposed rulemaking (NPRM) requesting comment on the proposed regulations, with the comment period ending ‎Feb. 7, 2022.‎[6]

By requiring the reporting of beneficial ownership and management of nearly every legal entity formed or operating in the U.S., the CTA will have an enormous impact on companies and the lawyers who advise them. Lawyers will likely play a critical role in their clients’ reporting, and lawyers assisting in the formation of a corporation or LLC may find their personal information reported to the CTA database. This article discusses key aspects of the CTA and assesses its impact on lawyers who form legal entities.

DEFINING A REPORTING COMPANY AND EXEMPTIONS

Reporting Companies

Subject to a few exemptions, legal entities formed with a secretary of state filing must report.[7] In addition, legal entities operating in the U.S., regardless of when or where they were formed, must also report.[8] This will include all domestic corporations, LLCs and limited partnerships and foreign entities doing business in the U.S. FinCEN estimates there are approximately 30 million entities currently operating within the U.S. that will be subject to reporting, and more than three million new entities are formed annually that will be subject to reporting.[9]

The definition does include general partnerships, the formation of which does not require a secretary of state filing. It does include limited partnerships, limited liability partnerships and limited liability limited partnerships. It is unclear whether the definition would include entities such as business trusts, which are not formed by a secretary of state filing.[10] A separate series within a series LLC is not formed by a secretary of state filing. Whether such separate series falls within the definition of reporting company is unclear. The question may be resolved by later rulemaking.

Reporting Company Exemptions

Exempt from the definition of reporting company are 23 types of entities, most of which are currently subject to extensive regulation or are otherwise required to report their beneficial ownership information.[11] Those exemptions include, among others, Securities and Exchange Commission reporting companies, government authorities, public utilities, investment companies and advisors, banks, bank holding companies, credit unions, insurance companies and tax-exempt entities.[12] Three exemptions are of particular note: “large operating companies,” “subsidiaries of certain exempt entities” and “inactive entities.”

Large operating companies. Large operating companies are exempt from reporting. A large operating company is defined as an entity that 1) employs more than 20 full-time employees[13] in the United States, 2) has an operating presence at a physical office in the United States[14] and 3) filed in the previous year federal income tax returns demonstrating more than $5 million in gross receipts or sales (net of returns and allowances) on the entity’s annual income tax returns, excluding gross receipts or sales from sources outside the United States, as determined under federal income tax principles.[15] The large operating company exemption will not apply to newly formed companies. It will provide relief for many existing companies.

Subsidiaries of exempt entities. Entities whose ownership interests are directly or indirectly owned by an exempt entity are also exempt.[16] The proposed regulations limit this exemption to subsidiaries that are wholly owned by an exempt entity.[17] Thus, if a company has issued restricted stock or profit interests to service providers, for example, the entity would no longer qualify for this exemption.

Inactive entities. Inactive entities are also exempt from reporting. The proposed regulations define inactive entities as those that 1) were in existence before Jan. 1, 2020; 2) are no longer engaged in active business; 3) do not hold any assets (including ownership interests in other entities); 4) are not owned by a foreign person; 5) whose ownership has not changed during the immediately preceding 12-month period; and 6) have not sent or received more than $1,000 in the immediately preceding 12-month period.[18]

DEFINING ‘BENEFICIAL OWNER’ AND A ‘COMPANY APPLICANT’

Every reporting company will have at least one “beneficial owner” and “company applicant” whose personal information must be submitted to FinCEN along with that of the reporting company. The proposed regulations describe who is a beneficial owner and who is a company applicant.

Beneficial Owner (Including Managers)

Every reporting company is required to report certain information about each of its beneficial owners.[19] A beneficial owner is defined as any individual who 1) exercises substantial control over the reporting company or 2) owns or controls at least 25% of the reporting company’s ownership interests.[20]

Substantial control. Anyone who exercises direct or indirect substantial control over a reporting company is classified as a beneficial owner. A beneficial owner exercises direct or indirect substantial control over a reporting company by undertaking any of the following actions or retaining the following rights: 1) majority ownership of the reporting company, 2) substantial control rights in conjunction with certain financing arrangements, 3) controls intermediaries that retain the ability to exercise substantial control over the reporting company, 4) serving as a senior officer or board member, 5) the authority to appoint or remove the reporting company’s senior officers or a majority or dominant minority of the reporting company’s board of directors (or similar body), 5) the ability to direct, determine, decide or exercise substantial influence over important matters affecting the reporting company[21] or 7) exercising any other form of substantial control over the reporting company whether through financial or business relationships or any other contract, understanding or relationship.[22]

Twenty-five percent ownership. Anyone who owns or controls at least 25% of the reporting company’s ownership interests is classified as a beneficial owner. The percentage of such ownership interests that an individual owns or controls is determined by aggregating all of the individual’s ownership interests in comparison to the undiluted ownership interests of the company.[23] The proposed rules do not provide ways to calculate beneficial ownership on a pass-through basis for entities with multiple layers of investors.

Exceptions. The proposed regulations also provide five exceptions to the definition of beneficial owners. These exceptions relate to minor children, nominees or other intermediaries, employees, inheritors and creditors.[24]

Company Applicant

Every reporting company is also required to report certain information about each of its company applicants. A company applicant is defined as any individual who files an application to form an entity or registers an entity to do business in the U.S. Under the proposed rules, an applicant also includes “any individual who is primarily responsible for directing or controlling the filing if more than one individual is involved in the filing of the [formation] document.”[25]

Lawyers play a critical role in assisting their clients in the formation of reporting companies. Although there is some debate regarding the scope of a lawyer’s responsibility,[26] any lawyer who signs as an “organizer” or “incorporator” on behalf of the reporting company or otherwise controls the decision making regarding the reporting company’s formation could be classified as a company applicant resulting in their personal information being reported to the CTA database.[27]

REQUIRED DISCLOSURES

A reporting company must disclose information about itself, its beneficial owners, its management and the company applicants to FinCEN. The reporting is to be done through an online secured portal, which has not yet been released.[28] If the filer anticipates multiple filings, it can obtain a FinCEN identifier number (FIN) by providing the required information and simply submitting the FIN in lieu of the more extensive reporting.[29]

Reporting Company

For reporting companies, the following information concerning the reporting company must be included in the beneficial ownership report filed by the reporting company to the FinCEN database:

• The full name of the reporting company;
• Any trade name or “doing business as” name;
• The business street address;
• The state or tribal jurisdiction of formation;[30] and
• The IRS-issued taxpayer identification number (TIN), including the reporting company’s employer identification number (EIN).[31]

Beneficial Owners, Management and Company Applicants

Each individual who is a beneficial owner of such reporting company, [management] or a company applicant must submit an initial report to FinCEN that includes the following information:

• The full legal name of the individual;
• The date of birth of the individual;
• The complete current address consisting of:
  1. In the case of a company applicant, the company applicant’s business street address of such business; or
  2. In the case of a beneficial owner or management, the residential street address that the individual uses for tax residency purposes;
• A unique identifying number from one of the following documents:
  1. A passport;
  2. A state driver’s license or
  3. Other identification issued to the individual by a state, local government or Indian tribe; and
• An image of the document showing the unique identifying number.[32]

DUE DATES FOR REPORTING INFORMATION

Initial Reporting Requirements

Reporting companies formed or registered on or after Jan. 1, 2024, must submit the required beneficial ownership report within 30 calendar days of its formation date.[33] Reporting companies that have been formed or registered before Jan. 1, 2024, are required to submit to FinCEN the required beneficial ownership report no later than Jan. 1, 2025.[34] Exempt entities are required to submit the beneficial ownership report at the time such entity no longer meets such exemption criteria.[35]

Continuing Reporting Requirements

Reporting companies are required to update any beneficial ownership changes within 30 days after the date of such change.[36]

ACCESS TO THE REPORTED INFORMATION

FinCEN will be responsible for storing the information collected under the CTA in a secure, private database.[37] This database will not be publicly available. The beneficial ownership information will be available from a request only by:

• A federal law enforcement agency;
• A state, local or tribal law enforcement agency (if authorized by a court order);
• A federal agency on behalf of a foreign country (if the request is under an international agreement); or
• A financial institution for customer due diligence purposes but only if authorized by the reporting company.[38]

The information in the database of beneficial owners will be available to members of law enforcement without the requirement of a warrant or other Fourth Amendment protections. It is anticipated that bank loan documents will make this authorization routine.

PENALTIES FOR NONCOMPLIANCE

The CTA applies civil penalties of not more than $500 for each day that a violation continues, fines of up to $10,000 and imprisonment for up to two years for willful or fraudulent violations.[39] The CTA contains a safe harbor provision, allowing any person who submits inaccurate beneficial ownership information to file a correct beneficial ownership report within 14 calendar days after the date the reporting company becomes aware of the inaccuracy if that person 1) was not trying to evade the reporting requirement, 2) had no knowledge of the inaccuracy and 3) corrects the inaccuracy within 90 calendar days after the report is submitted.[40]

LAWYER RESPONSIBILITIES

Lawyers are ethically required to provide competent representation, which includes keeping abreast of changes in the law.[41] They are also required to keep their clients reasonably informed.[42] Adoption of the CTA is one of the most significant developments in entity law in decades. To comply with the CTA, lawyers must alter their practices when forming new entities. Lawyers should also advise their clients about the new duties the CTA imposes.

Notifying Existing Clients

Since the CTA applies to existing entities, lawyers must consider whether they will notify clients about the new reporting requirements and, if so, which clients they will notify.[43] For experienced transactional lawyers, the pool of clients receiving notice may be quite large. Lawyers may start by sorting the entities they have formed or advised, determining whether the entities are likely reporting companies and asking whether the entity would expect the lawyers to contact them and advise them about the CTA’s new requirements.[44] Clients with ongoing relationships would likely expect contact. Entities formed years ago with little subsequent contact may not expect notification.

Filing for a reporting company formed years ago may pose some difficulty. Presumably, the reporting company will report its current ownership and has no requirement to report historical ownership. Having an interest in the reporting company, current ownership should be motivated to cooperate in the process. That would not be true for prior ownership with no present interest. Under the final rules, existing reporting companies will file beneficial ownership information but no information for company applicants.[45]

Lawyers should also examine whether their role in advising the entity made them an applicant and, thus, a reporting person under the CTA.[46] As lawyers advise clients about their CTA reporting responsibilities, they should also disclose their possible role as applicants.

The Lawyers’ Role Under the CTA

The global push for greater transparency in the ownership of legal entities has long sought to impose greater responsibility on lawyers who assist in forming the entities. That push would insert lawyers as gatekeepers to prevent money laundering, tax evasion, terrorist funding and other misconduct. In other words, lawyers’ duties to the legal system and society at large would surpass thier duties to their clients.

The lawyer as gatekeeper is not a new concept. The Oklahoma Rules of Professional Conduct (ORPC) have several exceptions to client duties. For example, lawyers cannot assist a client in criminal or fraudulent activity.[47] Lawyers must disclose client confidences if necessary to prevent death or serious injury or, when using lawyers’ services, to mitigate actions that would harm the financial interests of another.[48] Disclosure of client confidences is also permitted “to comply with other law or court order.”[49]

The gatekeeper role is expanding. In the wake of the Enron scandal, Congress adopted the Sarbanes-Oxley Act of 2002, which obligates a lawyer to report to a publicly held client evidence that a material violation of the securities laws or fiduciary duties is reasonably likely. This “reporting up” starts with the chief legal officer or chief executive officer. If no appropriate response is received, the lawyer must report to the Board of Directors or the Audit Committee.[50] If the board fails to respond, the lawyer may “report out” the misconduct to the Securities and Exchange Commission without the client’s consent.[51] The reporting out is not mandatory, but even the discretion to do so was unprecedented at the time of adoption.[52]

In 2007, the ORPC were amended to accommodate the “reporting up” and “reporting out” rules of Sarbanes-Oxley. The rules provide that a lawyer who knows that a client entity is about to violate the law, resulting in substantial injury to the client, should report the matter to the client’s “highest authority.”[53] If the highest authority refuses to act, the lawyer may report the matter to a government authority if the lawyer believes substantial injury is about to occur.[54]

The reporting concepts fit with a lawyer’s duties of inquiry under the CTA and other anti-money laundering laws. The American Bar Association (ABA) has issued guidance in the area. In 2010, recognizing the global push for transparency, the ABA encouraged lawyers to adopt risk-based due diligence approaches when dealing with clients whose ownership or activities were murky.[55] The ABA followed with a formal ethics opinion. It objected to the role of lawyers as gatekeepers, but acknowledged that lawyers must act competently, which may require that they assess a client’s objectives before proceeding.[56] In the ABA’s most recent pronouncement, client due diligence became a mandatory obligation. “Where there is a high probability that a client seeks to use a lawyer’s services for criminal or fraudulent activity, the lawyer has a duty to inquire further to avoid advising or assisting such activity.”[57]

Under the CTA, lawyers’ duty of inquiry will most likely arise when discussing beneficial ownership with a client. The extent of the duty turns on the risk that the client will give false information.[58] Voluntary Guidance and Formal Ethics Opinion 491 provide hypotheticals illustrating how the risk assessment is made and when lawyers should make further inquiry. The risk-based inquiry or client due diligence will determine the extent to which the lawyer documents beneficial ownership. For a trusted, long-term client with individual owners, oral representation and the constituent documents may suffice to evidence ownership. A new client whose beneficial ownership is buried under several layers will require more. Lawyers should, at a minimum, review each owner’s constituent documents, match the owner’s existence with the secretary of state records and obtain an officer’s certificate attesting to ownership.[59] Lawyers might consider contacting the client’s bank to confirm that the bank’s documentation is consistent with the lawyer’s documentation.[60]

To Be or Not to Be an ‘Applicant’

The CTA will require lawyers to reassess their role in forming new client entities. Beyond advising clients about the choice of entity and drafting the constituent documents, lawyers must decide whether they will become an applicant under the CTA rules. The proposed rules define an applicant as “any individual who files an application to form an entity or registers an entity to do business in the U.S.” An applicant also includes “any individual who directs or controls the filing of [the formation] document by another person.”[61] Lawyers must decide whether they will gather the personal information for the client and file it with FinCEN and whether they will assume some role in updating the reports. These expanded roles will mean more professional risk to lawyers and higher costs for clients. These roles are new. Lawyers have no standard practices to guide them, and client expectations may vary. For these reasons, a written letter defining the scope of engagement is imperative for lawyers forming legal entities. The engagement letter should describe the client’s responsibilities under the CTA and state who will file the formation certificate; who will gather and file the FinCEN information for the reporting company, beneficial owners and applicants; and how updating the reports will be handled.[62]

Avoiding applicant role. To avoid filing their personal information in the FinCEN database and limit their professional risk, some lawyers will advise clients about the CTA’s requirements and leave compliance to the clients.[63] They will cease signing and filing the formation certificate with the secretary of state and shift that task to the client. To avoid any representation to FinCEN about beneficial ownership, they may advise clients about beneficial ownership and may assist in gathering the required information but will instruct clients to file the FinCEN reports. This approach reflects concerns about possible liability for reporting omissions, erroneous reported information or failure to update.[64] Lawyers may also take this approach if they sense a client may be untrustworthy.[65]

Accepting applicant role. Many lawyers will decide that clients expect and need them to take an active role in the entity formation. That may mean lawyers will prepare and file the formation certificates and thus become applicants under the CTA. Lawyers may also assume the tasks of determining beneficial ownership and gathering and filing the reporting information.[66] Lawyers’ expanded role may be warranted when clients are less sophisticated about legal matters or electronic filings. Clients may also want lawyers’ expertise to ensure their legal obligations are met.

Filing and Updating Reported Information

Among their new roles, lawyers must decide whether they will gather the required personal information and file it with FinCEN for their clients. Lawyers should have the information required for reporting companies. They would not customarily possess the required information for beneficial owners, such as home addresses and personal identification numbers. Gathering that information will be a new task for lawyers assuming the filing role.[67] Lawyers must also recognize that the beneficial owners may not be their clients and should advise them accordingly. If not a client, the beneficial owners will not enjoy the duties owed to clients, such as a duty of confidentiality. Lawyers may consider what steps, if any, they will take to protect the private information of the beneficial owners.[68]

Finally, lawyers must decide what role they will play in updating the FinCEN reports. The CTA requires reporting companies to report changes in beneficial ownership within 30 days.[69] While lawyers are unlikely to assume responsibility for verifying or updating reported information, some lawyers may undertake to remind clients periodically of their duty to update. Whatever role lawyers assume, it should be described in an engagement letter.

CONCLUSION

In preparation for the regulations taking effect, reporting companies, beneficial owners, company applicants and their counsel will want to take a variety of steps to ensure they comply. For reporting companies and beneficial owners formed before Jan. 1, 2024, taking the steps to gather information regarding each reporting company’s information and beneficial ownership information will be necessary to come into compliance before the deadline. For reporting companies formed after Jan. 1, 2024, the reporting companies, beneficial owners and company applicants will want to ensure they have processes in place to gather the required beneficial ownership information and ensure the beneficial owners and company applicants submit their ownership information to the FinCEN database (or, alternatively, the reporting company may obtain their consent to disclose the information). For lawyers, apprising their clients of the CTA obligations will be paramount.

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ABOUT THE AUTHORS

Gary W. Derrick is a partner at the Oklahoma City law firm of Derrick & Briggs LLP. He received a bachelor’s degree in 1976 from OSU and a J.D. in 1979 from the OU College of Law.

 

 

Jacob L. Fanning is an associate at the Oklahoma City law firm of Hartzog Conger Cason LLP. He received a bachelor’s degree in 2018 from OSU and a J.D. in 2021 from the OCU School of Law.

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[1] The U.S. was the first country to criminalize money laundering with the adoption of the Currency and Foreign Transactions Reporting Act of 1970. The act was amended by the USA PATRIOT Act of 2001 and other legislation. The legislative framework is commonly referred to as the Bank Secrecy Act (BSA). The BSA, passed in 2016, requires banks to collect information on the significant owners and senior management when a new account is opened. It is a precursor to the Corporate Transparency Act. The BSA is codified at 12 U.S.C. §1829(b), 12 U.S.C. §§1951-1959, 18 U.S.C. §§1956, 1957, and 1960, and 31 U.S.C. §§5311-5314 and §§5316-5332. The implementing regulations are at 31 C.F.R. chap. X.

[2] In its Financial Secrecy Index 2020, the Tax Justice Network ranked the U.S. as the second worst “secrecy jurisdictions,” only behind the Cayman Islands. Tax Justice Network (Feb. 18, 2020) (avail. at https://fsi.taxjustice.net/en/). Gaps in U.S. enforcement were made plain with the leaks of the so-called “Panama Papers,” which headlined the scope of illicit financial activity and tax evasion and highlighted the use of U.S. domestic entities. “Financial Transparency: The Biggest Loophole of All,” The Economist (Feb. 20, 2016).

[3] NDAA for Fiscal Year 2021, https://bit.ly/3U3yCRj.

[4] NDAA §6403(a).

[5] See NPRM Executive Summary.

[6] The NPRM rules cited in this paper are proposed and may change when adopted in final form.

[7] NDAA §6403(a)(11)(A); 31 C.F.R. §1010.380(c)(1). The definition includes legal entities formed or operating under tribal authority.

[8] Id.

[9] See NPRM, Section VI.

[10] The NPRM indicates that business trusts (aka statutory trusts) would be included, apparently on the assumption that business trusts are created by statute and a secretary of state filing. See NPRM, Section IV.D.i. That is true in Delaware, but not in many other states, including Oklahoma. An Oklahoma business trust is formed by the filing of the trust instrument (or a memorandum of trust) with the county clerk of the county in which the trust is located and a duplicate filing with the Oklahoma Tax Commission. See 68 OK Stat §68-1211 (2014).

[11] NDAA §§6403(a)(11)(B); 31 C.F.R. §1010.380(c)(2).

[12] Id. The CTA also includes an option for the secretary of the Treasury, with the written concurrence of the attorney general and the secretary of Homeland Security, to exclude by regulation additional types of entities. FinCEN stated in the NPRM that it does not anticipate additional exemptions beyond those specified by the CTA.

[13] 26 C.F.R. §§54.4980H-1(a) and 54.4980H-3. These regulations generally define a full-time employee as anyone employed, on average, at least 30 service hours per week or 130 service hours per month.

[14] 31 C.F.R. §1010.380(c)(2)(xxi). An entity “has an operating presence at a physical office within the United States” that the entity owns or leases and conducts its business at such physical location in the United States, that is not any individual’s place of residence and that is physically distinct from any unaffiliated entity’s place of business. Id. §1010.380(f)(6).

[15] The applicable amount for entities within an affiliated group of corporations filing a consolidated return shall be the amount reported on the group’s consolidated return. Id. §1010.380(c)(2)(xxi)(C).

[16] 31 C.F.R. §1010.380(c)(2)(xxii).

[17] FinCEN noted the reason was to stop partially owned entities from being exempt and being able to otherwise hide their beneficial owners.

[18] 31 C.F.R. §1010.380(c)(2)(xxiii).

[19] Lawyers should note that in most instances, their client is the reporting company and not its owners, officers or managers. See ORPC 1.13(a) (Duty to the Organization). The distinction is important because lawyers’ duties, such as the duty of confidentiality, are owed to the company, not the individuals.

[20] The scope of ownership interests is broad and includes all ownership interests of any class or type including traditional equity, such as shares in a corporation or interests in an LLC, and instruments that give rise to equity, such as profits interests, convertible debt, warrants or rights or other options or privileges to acquire equity, capital or other interests in a reporting company. Id. §1010.380(d)(3). The proposed regulations give a non-exhaustive list of examples to further emphasize that an individual can own or control ownership interests through a variety of means. Id. §1010.380(d)(3)(ii). For example, in the context of trust ownership, an individual may own or control ownership interests by way of the individual’s position as a grantor or settlor, beneficiary, trustee or another individual with authority to dispose of trust assets. Id.

[21] This includes but is not limited to 1) the nature, scope and attributes of the business of the reporting company, including the sale, lease, mortgage or other transfer of any principal assets of the reporting company; 2) the reorganization, dissolution or merger of the reporting company; 3) major expenditures or investments, issuances of any equity, incurrence of any significant debt or approval of the operating budget of the reporting company; 4) the selection or termination of business lines or ventures or geographic focus of the reporting company; 5) compensation schemes and incentive programs for senior officers; 6) the entry into or termination or the fulfillment or non-fulfillment of significant contracts; and 7) amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws and significant policies or procedures. Id. §1010.380(d)(1)(iii).

[22] Id. §1010.380(d)(1), (d)(2).

[23] Id. §1010.380(d)(3)(iii).

[24] NDAA §6403(a)(3)(B); 31 C.F.R. §1010.380(d)(4).

[25] 31 C.F.R. §1010.380(d)(3)(iii). This definition may include employees of business formation services, law firms or associates, agents or family members who file formation documentation on behalf of another individual.

[26] See Keith R. Fisher et al., “Ethics, Lawyer Liability, and the Corporate Transparency Act,” ABA Business Law Professional Responsibility Committee (2022) (stating that it is possible that lawyers could avoid being classified as a company applicant by avoiding accepting the role of company applicant altogether); see also Robert E. Ward, “The Corporate Transparency Act Will Change the Way You Practice,” Business Law Today (Feb. 9, 2022) (stating a company applicant is not only the lawyer or paralegal who files the formation documents but also a partner, senior lawyer or any other person directing the activity of the paralegal or associate undertaking the formation).

[27] Under this definition, lawyers who otherwise direct or control the filing process do not avoid becoming applicants simply by having their client sign as an “organizer” or “incorporator.” This issue is covered in greater detail in the “Lawyer Responsibilities” section of this paper.

[28] Lawyers assisting in entity formation must decide who will file the information: the reporting company or the lawyers. If the lawyers file, they should retain supporting documentation for the information reported to FinCEN. See discussion about the lawyers’ role in endnotes 41 to 69.

[29] Updates to the initial submission should apply to all reports by the FIN filer, which would avoid the filing of multiple updated reports.

[30] For a foreign reporting company, state or tribal jurisdiction where such company first registers.

[31] 31 C.F.R. §1010.380(b)(1)(i); see also Dun & Bradstreet, “What is a D-U-N-S Number?” (available at https://bit.ly/3fb7BMS); LEI Worldwide, “What is a Legal Entity Identifier?” (available at https://bit.ly/3SyKFVz).

[32] Id. §1010.380(b)(1)(ii).

[33] NDAA §6403(b)(1)(C); 31 C.F.R §1010.380(a)(1)(i).

[34] Id. §6403(b)(1)(B); 31 C.F.R. §1010.380(a)(1)(iii).

[35] Id. §6403(b)(2)(D); 31 C.F.R. §1010.380(a)(2).

[36] Id. §6403(b)(1)(D). Such changes include 1) qualifying for an exemption subsequent to the filing, 2) changes to address for existing beneficial owners or company applicants and 3) adding new beneficial owners or company applicants. 31 C.F.R. §1010.380(b)(4).

[37] NDAA §6403(c)(3).

[38] Id. §6403(c)(2)(B).

[39] Id. §6403(c)(3)(A).

[40] Id. §6403(c)(3)(C); see also 31 C.F.R. §1010.380(a)(3). A corrected report filed within this 14-day period shall be deemed to satisfy 31 U.S.C. 5336(h)(3)(C)(i)(I)(bb) if filed within 90 calendar days after the date on which an inaccurate report is filed.

[41] See Rule 1.1 (Competence) and Comment 1.1(6) of the Oklahoma Rules of Professional Conduct (ORPC), 5 O.S. Chap. 1, App. 3-A.

[42] Id. Rule 1.4 (Communication).

[43] The CTA application to existing entities is a transitional feature. Once existing entities have reported to the FinCEN database, only new entities or entities with amendments will report. Lawyers’ need to inform existing clients is likewise a one-time event. That is not to downplay the reporting by existing entities. FinCEN estimates that there are approximately 30 million entities currently operating within the U.S. that will be subject to reporting. See NPRM, Section VI. See also Section VI(B) (The Lawyers’ Role under the CTA) regarding the contents of such notice.

[44] Id. Comment 1.4(5) “The guiding principle is that the lawyer should fulfill reasonable client expectations for information consistent with the duty to act in the client's best interests, and the client's overall requirements as to the character of representation.”

[45] Fn. 45 NDAA §(b)(2)(iv).

[46] Lawyers who signed the certificate of incorporation as an incorporator or the articles of organization as an organizer are likely applicants and thus reporting persons under the CTA. 31 C.F.R. §1010. 380(d)(3)(iii). Under the proposed rules, lawyers who direct or control the filing process are also applicants. Id. A company may have more than one applicant. For example, the lawyer who supervised the formation of the entity and the paralegal who signed as an incorporator or organizer may both be applicants. The rules do not cover lawyers who merely act as registered agents. Responsibility for reporting is initiated by the reporting company. The applicant does not have an independent duty to report if the reporting company has not reported.

[47] Rule 1.2(d) of the ORPC, 5 O.S. Chap. 1, App. 3-A.

[48] Id. Rule 1.6(b)(1), (2) and (3).

[49] Id. Rule 1.6(b)(6).

[50] 17 C.F.R. §205 et seq.

[51] Id.

[52] In ABA Formal Ethics Opinion 463 (2013), the ABA wrote, “Mandatory reporting of suspicion about a client is in conflict with Rules 1.6 and 1.18, and reporting without informing the client is in conflict with Rule 1.4(a)(5).”

[53] Rule 1.13(b) of the ORPC, 5 O.S. Chap. 1, App. 3-A.

[54] Id. Rule 1.13(c).

[55] See “Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing,” ABA (2010) (Voluntary Guidance). The Voluntary Guidance paper was based on the “Risk Based Approach Guidance for Legal Professionals” by the Financial Action Task Force on Money Laundering (2008) (Lawyer Guidance).

[56] Formal Ethics Opinion 463, “Client Due Diligence: Money Laundering and Terrorist Financing,” ABA Ethics Committee (2013).

[57] Formal Ethics Opinion 491, “Obligations Under Rule 1.2(d) to Avoid Counseling or Assisting in a Crime or Fraud in Non-Litigation Settings,” ABA Ethics Committee (2020).

[58] See Section VII(B) (Lawyer’s Role Under The CTA), fn. 54, which identifies three major risk categories with regard to legal engagements: 1) country/geographic risk, 2) client risk and 3) service risk. Lawyers need to determine their exposure to each of these risk categories. Country/geographic risk relates to entities formed or operating in high-risk jurisdictions, such as those subject to sanctions or embargoes or to persons or entities on the List of Specially Designated Nationals and Blocked Persons administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) or in any executive order issued by the president of the United States and administered by the OFAC (the “OFAC List”). Lawyers dealing with U.S. clients would not typically encounter country/geographic risk but may pose some type of service risk. Service risk would exist when masking beneficial ownership, facilitating large cash transactions, moving money through lawyers’ accounts or in unusual or unconventional transactions.

[59] This information is in addition to the identity information for beneficial (individual) owners reported under the CTA. See Section III (Required Disclosures).

[60] In 2016, FinCEN adopted corporate due diligence rules for financial institutions to collect beneficial ownership information from account holders when the account is opened. See 31 CFR 1010.230 et seq. The bank due diligence rules are like the CTA rules.

[61] 31 C.F.R. §1010.380(d)(3)(iii). This definition may include employees of business formation services, law firms or associates, agents or family members who file formation documentation on behalf of another individual.

[62] The client would presumably be responsible for updating reports, but lawyers may undertake to remind clients periodically of their duty to update. Alternatively, the engagements letter could specifically negate any obligation of a lawyer to verify or update beneficial ownership.

[63] Lawyers can limit the scope of their engagement, which would include making the client responsible for the CTA reporting obligations. Rule 1.2 of the ORPC, 5 O.S. Chap. 1, App. 3-A.

[64] Keith R. Fisher et al., “Ethics, Lawyer Liability, and the Corporate Transparency Act,” ABA Business Law Professional Responsibility Committee (2022).

[65] Lawyers may not exclude from the engagement inquiry into the legality of the transaction. ABA Formal Ethics Opinion 491. Lawyers cannot avoid duties under laws prohibiting the aiding, abetting or committing violations of U.S. anti-money laundering laws (e.g., 18 U.S. Code §§1956 and 1957). A lawyer cannot assist in violating the law. Rule 1.2(d) of the ORPC, 5 O.S. Chap. 1, App. 3-A.

[66] Filers can obtain a FIN by providing the required information and avoiding repeated filings of previously filed information.

[67] Documenting the required information is important. The CTA rules require that the personal identification number be photographed or scanned and filed with the other reported information. In their client due diligence, lawyers may ask the client or the beneficial owner to certify the information to be reported.

[68] Oklahoma does not have a general data privacy statute that would compel lawyers to safeguard the personal information of non-clients, such as beneficial owners. The Oklahoma Constitution provides a right of privacy, which at common law would protect against intrusion on solitude or seclusion, the public disclosure of private facts, publicity tending to put a person in a false light and the appropriation of one’s name or likeness. See Oklahoma Constitution, Art. 2, §30 (Unreasonable Searches or Seizures; Issuance of Warrants) and McCormack v. Oklahoma Pub. Co., 1980 OK 98, 613 P.2d 737. While no case has extended the privacy right to protect third parties from a lawyer’s disclosures, prudence dictates that lawyers should implement measures to protect the confidentiality of beneficial owner information. ­

[69] Reporting companies have only 14 days to correct errors in the reported information. See Section VI (Penalties for Non-Compliance), fn. 40.