Coming Anti-Corruption Law Will Impose New Duties on Business Founders

Morris Pearl calls the recently-adopted Corporate Transparency Act "the most sweeping anti-corruption reforms the country has seen in decades."  

Indeed, the Corporate Transparency Act will, once implemented, require all business to file a report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) that identifies each beneficial owner of the company.

This is a significant change from current practice, where most corporations, partnerships and limited liabilities are formed by the filing of a pro forma document with the Secretary of State of the applicable state of formation.  Those pro forma filings often provide little information beyond the company's name and address (which is often the address of the lawyer or other representative filing the form). To learn the names of the beneficial owners, law enforcement must obtain a subpoena and serve it on the company's registered agent with a demand for that information.

While Congress intended this change in policy to make it easier for law enforcement to identify the owners of corporations, partnerships and limited liability companies, the new law will increase the costs borne by businesses.  In the transactional world, the precise beneficial ownership of a newly-formed company is often not known until a transaction is actually closed, even though the legal entity may have been formed weeks or even months before the closing.

Transactional advisors will need to develop new procedures to comply with the CTA's requirements and to integrate compliance with the process of deal-making.