Entering into effect on the 1st of January, 2024, the Corporate Transparency Act (CTA) ushers in an era marked by heightened legal obligations for the stakeholders of American corporate entities. Mandating a more detailed disclosure of information relating to Beneficial Owners and controllers of most US domestic entities, its remit is indeed comprehensive.

This seismic regulation, which was passed as an integral element of the National Defense Authorization Act in 2021, commands corporations and limited liability companies to divulge details of their Beneficial Owners to the Financial Crimes Enforcement Network (FinCEN) immediately upon formation or registration. With a clear aim of countering shadowy activities such as money laundering and tax evasion, the CTA stands as a formidable deterrent against illicit practices in business.

Navigating the purlieus of this regulation demands an understanding of its potential implications on Family Offices, which will now be required to disclose their Beneficial Ownership Information (BOI). The intent of this article is to enlighten you on the potential paradigm shift ushered in by the CTA, and the actions required within your Family Office to navigate this change.

How would this affect your Family Office?

The rubric of the CTA prioritises action against entities deemed as a ‘Reporting Company’. This term encompasses any domestic or foreign corporation, limited liability company (LLC), limited partnership, or similar entity formed or registered to conduct business within any US state or tribal jurisdiction. This, by implication, means that Family Offices structured as corporations or LLCs will be subject to the reporting requirements of the CTA.

The act identifies a ‘Beneficial Owner’ as any individual who, whether directly or indirectly, exercises substantial control over a reporting company or owns or controls a significant portion – at least 25 per cent – of the ownership interests of a reporting company. For Family Offices, this translates to the principal owner or owners. This could, by extension, also include specific senior management personnel or trustees of trusts within which the trust holds ownership of a Reporting Company.

Upon the culmination of the regulation, Reporting Companies must accord the FinCEN the following information concerning their Beneficial Owners:

  • Full legal name
  • Date of birth
  • Residential street address
  • An unique identifying number from an acceptable identification document

It is worth noting that the reporting obligations set out by the CTA are accompanied by certain caveats. Minors, for instance, are exempt from reporting BOI if a parent's identification information is disclosed alternatively. Furthermore, the possibility of future inheritance does not necessitate a disclosure obligation.

The final amendments to the regulation were announced by FinCEN on the 29th of September 2022. With the rules due to take effect from 1st January 2024, Family Offices already in existence prior to the effective date will have a grace period up to the 1st of January, 2025, to file their initial BOI reports. However, for new entities established post the effective date of the regulation, the initial reports will need to be filed within 30 days of formation.

In the event of any changes, updated reports must be filed within a month after a change concerning the Family Office or its Beneficial Owners. Changes qualifying for such reports include modifications relating to name, address, or the identifying number on a document.

Exemptions and preparing your Family Office

While the CTA does encompass a broad scope, certain exemptions may still apply, offering a reprieve for Family Offices:

  • Entities previously subject to federal reporting requirements, such as registered investment advisers under the Investment Advisors Act of 1940, may be exempt. This could potentially benefit Multi-Family Offices.
  • Large Operating Companies, conditional to fulfilling the necessary requirements including staffing at least 20 full-time employees and maintaining a physical office in the US, along with procuring more than US$5 million in gross receipts, could potentially avoid obligations. Consequently, larger Family Offices could prove eligible.
  • Certain tax-exempt entities, including private foundations.
  • Inactive entities.

Traditionally, Family Offices are known for valuing privacy, so the news could be rather unpleasant for a lot of Family Office Principals. On a positive note, the implementation of the new rule is likely to prompt Family Offices to reevaluate their practices and embrace transparency. This may further the progress of professionalisation and institutionalisation of Family Offices in the US.

Failure to comply with the reporting requirements could result in both civil and criminal penalties. To prepare, Family Offices must familiarise themselves with the reporting obligations of the CTA and establish internal protocols and procedures for collecting BOI. We believe that in-house legal counsel and compliance professionals will play an instrumental role in assisting Family Offices to navigate the complexities of the CTA to ensure compliance.

Agreus, a full-service resource and recruitment consultancy dedicated to Family Offices globally – with a strong foothold in the US – is well positioned to support you in these unprecedented times. For a personalized conversation about the potential impact of the CTA on your Family Office and hiring assistance for compliance experts, please do not hesitate to reach out.