Business

Family offices face regulatory hurdle with new transparency act

Family offices need to get ready to comply with the Corporate Transparency Act asking them, and other private entities, to confirm their beneficial ownership of US assets.

The measure is designed to make it harder for bad actors to fund money-laundering or terrorist, activities through anonymous shell companies. Publication of the final rules is imminent. 

William Kambas, partner at Withersworldwide, says: “Compliance with the law and participation in society is something that is important. And the CTA involves the type of thing to which most of my clients don’t really object.”

The Tax Justice Network ranked the US as the second for its financial secrecy just behind top-ranked Cayman Islands and ahead of Switzerland

He points out 11.9 million Pandora Papers documents belonging to the wealthy were leaked in 2021 leading to criticism of their behaviour and tax treatment. 

Kambas believes policymakers need to know that family enterprises are good stewards who earn their place in society.  CTA compliance and philanthropy are two illustrations of this. 

It may, however, be challenging for family enterprises to define beneficial ownership, equivalent to “substantial control” of an entity and/or 25% ownership. Some families believe the exercise will become an administrative headache, running counter to their liking of discretion. 

Technical CTA consultations end this week, paving the way for publication of the final rules. The measure is part of a National Defense Act which became law in 2021 with bipartisan support from the US senate and congress which overruled a veto by former President Trump.

The CTA evolved out of concerns expressed by the US Department of Justice, and lobby groups, that the US lags its global partners in terms of dealing with money laundering. 

Beneficial interest registers have been introduced elsewhere in the world, with Canada proposing its own register in 2021, after the US made its move. 

In 2020, the Tax Justice Network ranked the US as the second for its financial secrecy just behind top-ranked Cayman Islands and ahead of Switzerland, which has lately made strides in opening itself up. 

The legislation will discourage the use of shell companies and “dark money” that can be used to launder money, without showing any trace where it came from. Often issued in Delaware, they can also be used by politicians in receipt of anonymous donations. Donald Trump’s advisers used them for several transactions, including payments to his family and hush money to porn star Stormy Daniels.

The CTA expects beneficial owners to disclose their name, date of birth, address and data from official documents such as passports or drivers licences. The submission would be similar to Fatca tax compliance forms.

Non-compliance following the initial two year grace period would lead to a fine of up to $10,000 and a jail sentence. Future changes in beneficial ownership will need to be disclosed over the following year.

Domestic and international investors each need to declare beneficial ownership of US assets, although there are exceptions. These would include individuals and listed companies which are already regulated, plus individuals whose only interest in a US asset is through a right of inheritance.

A “beneficial owner” is an individual who has substantial control of an asset through ownership of 25%, or more, of it through entities including private companies and family offices. Lawyers say partnerships and trusts will need to check their ownership positions carefully.

Special-purpose vehicles used by families for acquisitions, structured finance and bankruptcy deals will need to comply, according to legal firm White & Case, although most are legitimate and created by professionals. According to Kambas, many family enterprises are navigating the issue. 

Many family offices and advisers say the entire exercise will be worthwhile if it prevents bad practice. 

According to Stephen Martiros of Martiros Strategies: “While no one welcomes the extra work, being able to drill down to understand control persons – and entities – is an essential step in the diligence process.” 

A multi-family office said money laundering laws needed tightening, but added that some families could find the new law intrusive.

Libertarian families see no benefits: “I don’t see how reporting beneficial owners can be a deterrent for bad actors wanting to do harm to the United States. And I am not easy about the authorities wanting my data.” 

The data will be collected by the Treasury Department’s Financial Crimes Enforcement Network. The legislation says FinCEN should only be permitted to share information with law enforcement officers,  as opposed to the tax authorities and the general public.

An adviser said: “I’m sure a lot of people will find it annoying and more expensive to comply with than the government says. People could find all sorts of ways to divide their stakes to minimize or eliminate disclosure requirements.”

Kambas says compliance with the law is essential but adds that the definition of substantial control will need to be carefully defined.

“Family enterprises can be so diverse, so unique and you need to answer some questions.

“How do you calculate a 25% ownership? Do you have a tiered structure, or a pool of discretionary beneficiaries who don’t know whether they are going to get some percentage interest, or not?

“How do you judge whether different directors, committees, fiduciaries, protectors or trustees should rise to the level of substantial control?

“How do you account for the next generation, the broader family enterprise? They may not control anything or receive much of a beneficial interest. They shouldn’t be considered as controlling assets, but they are still beneficiaries.”

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