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Seal Of The U.S. Treasury
The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department has released its final rule which requires the reporting of the beneficial ownership of corporations, limited liability companies, and other forms of business entities which are either formed in a U.S. jurisdiction or conduct business here. This rule is made pursuant to the Corporate Transparency Act (CTA) as found at 31 U.S.C. § 5336, the goal of which is to clamp down on money laundering and the holding of illicit assets (such as by oligarchs, kleptocrats and narco dealers, etc.) by way of the aforementioned business entities.
As stated in FinCEN’s accompanying rule fact sheet, the new rules will require business entities to file a Beneficial Ownership Information (BOI) form which, as the title suggests, will require business entities to disclose their beneficial owners. Those required to make disclosures will include folks who either have “substantial control” of a business entity, such a general partner or managing member of an LLC, and/or who have an ownership interest of at least 25%. The information to be provided includes the full name, address, birthdate and also a copy of some identifying document such as a driver’s license. These rules will go into effect on January 1, 2024.
A giant loophole in this reporting regime is that trusts are excluded. This is remarkable since, historically, and going at least as far back as ancient Roman law, trust have long been the method of choice for obfuscating the ownership of assets. Since trusts are often not required to be filed under state law, their very existence is difficult to find, as opposed to business entities which are created by filings with the local Secretary of State offices. Presumably, Congress and FinCEN are taking this a bite at a time, first going after business entities, with legislation and accompanying rules for trusts to follow later.
The purpose of this article, however, is not to discuss the new FinCEN rule itself but rather its potential effect on creditor-debtor law. Debtors frequently attempt to hide their activities and assets in business entities, just like oligarchs, kleptocrats and narcos. A frequent example is the real estate developer who is being chased on his personal guarantees from a previous deal gone bad; the real estate developer will frequently set up new LLCs and attempt to do new deals in those entities and hide the profits from creditors.
To the extent that creditors can obtain copies of the BOIs through discovery, this can be a game-changer in favor of creditors. The reason for this is that to establish that an entity is the alter ego of a debtor (referred to as reverse veil piercing), a creditor must establish a number of things including a commonality of ownership and control over the entity. If the debtor is designated as a “controlling person” of an entity in the BOI, then the control element is satisfied. If the debtor discloses ownership of more than 50% in the entity in the BOI, then commonality of ownership may be demonstrated. The point being that if such information is found in the BOI and the creditor gets a hold of it, the creditor will already be at third base in attempting a reverse veil piercing challenge.
Whether creditors will be able to discovery BOIs will thus be a big issue. The reports are submitted to FinCEN and it may be difficult to get the BOI from them, as it is to get information out of any federal agency. However, the entity itself ― of their registered agent ― will likely retain copies of their BOIs for compliance purposes, and they will be more amenable to discovery. Here, it is also important to note that the BOI is not a tax return, but a regulatory return, the difference being that tax returns are sometimes difficult or impossible to get in some states by statutes, but there often is no corresponding protection for regulatory returns.
Where this may affect asset protection planning the most is in the use of so-called nominees, which are basically persons put in place to conceal the real owning or controlling person. For instance, much has been made of the residence of the Island of Sark, one of the Channel Islands off the coast of France, who are frequently hired as nominees to allow their names to be used in place of the real owner or controlling person. Closer to home, folks will frequently use the name of their attorney, accountant, trustee employee, or third cousin twice removed as their nominees. By requiring the disclosure of the beneficial owner in the BOI, the practice of using nominees should fall off considerably.
The bottom line is that creditors now potentially have a powerful new tool to get to the bottom of the ownership and control of an entity. Conversely, debtors (and those engaged in asset protection planning against potential future creditors) face a difficult new hurdle. How all this plays out we’ll have to watch, so stay tuned.