Providing Peace Of Mind

WEBINAR: Important Corporate Transparency Act Update – June 2024

by | Jun 28, 2024 | Firm News

Transcription below:

Good afternoon. Thank you for joining us for an important Corporate Transparency Act update. My name is Amy Rizzo and I am the marketing manager here at Kelleher and Holland. Our speaker today is Jonathan Fox, the co-chair of the corporate department here at Kelleher and Holland. He has almost 30 years of experience in corporate law and has consistently been at the forefront of developments concerning this Corporate Transparency Act. staying ahead of the curve to provide timely, insightful analysis on the latest legal trends and news. John, with that, I will turn it over to you. Hello, everyone. You’re in for a riveting and exciting 30 minutes. Let’s get right to it. For those of you that aren’t aware, the Corporate Transparency Act became effective as of January 1st of this year.

It was about three years in the works. And they did finally pass it and approve it. And it actually went live and online as expected and predicted as of January 1st this year. Generally speaking, the purpose of the Corporate Transparency Act, I think, as far as the general public goes, is a little bit misunderstood, certainly from the standpoint of the fact that much of the information that you’re required to report under the Corporate Transparency Act and we’ll get into that very, very briefly today, is very similar to the information that you’ve already provided if you already own and operate a business and you have either commercial insurance or a bank account of some kind that has a line of credit or you’ve borrowed money from the SBA or other financial institutions, including your daily bank.

So if you have privacy concerns or you have questions about the privacy aspect of this, just for now anyway, take my word for it, that the information that you’re going to disseminate or be required to disseminate through this process is much, much more secure than the manner in which you’ve already given that information to banks and insurance companies. As far as who has to report, they made it fairly simple in that regard. If your company existed prior to January 1st of this year, you have until the end of this year, December 31st, to get your CTA reporting done. If your company is just coming online this year and it’s been registered with the Secretary of State, the same thing applies to a previously existing company.

This only applies to businesses registered with the Secretary of State. Then in 2024, you have 90 days to report from the date you actually organized and registered. Effective January 1st of next year, if you were to create a new entity and register it, it reverts back to a 30-day reporting period. It’s easy maybe to let the date slide, but we encourage you that if you are in a situation where you need to report, that you don’t delay and you don’t put it off. Any company that was formed, like I said, with the Secretary of State will need to file. For example, if you’re a sole proprietor, You’re not a corporation, you’re not a limited liability company, you’re not a limited partnership, you haven’t registered with the Secretary of State, you do not have to report.

If your company has less than 21 full-time employees or you generate less than $5 million in annual gross receipts, you also do not have to report. If you happen to have an LLC, for example, that owns real estate and really does nothing else but hold that real estate, You are not exempt. You still have to report. So it’s not a question of is this an active company or a passive company, although you are going to see in a few minutes where that may very well become a bright line test. Are you doing business or not doing business with respect to whether you have to report? But for now, it doesn’t matter. Willful violations, there are potential civil and criminal penalties. to be clear uh the likelihood of a criminal penalty can lead to imprisonment, but we’re talking about a situation where you have been willful in your disregard for your obligation to report.

If you’ve made mistakes in in the reporting, but you’ve attempted, in other words, good faith may be your saving grace, but clearly if you have multiple entities and you are ignoring the obligation, I believe that’s going to rise to the level of a willful violation. and you may very well be looking at some criminal ramifications. okay so here’s the the real issue that we were we’re here today to discuss, because there are there’s a a prevailing thought out there that the corporate transparency act is unconstitutional. And believe it or not, the leading case and as far as i know, as of today, the only case in the united states Challenging the Corporate Transparency Act was in Alabama. I don’t know if there are any other lawyers on the phone here, but in Illinois, for example, we have certain districts down in the southern part of the state.

And when their appellate court comes out with a ruling up here in what I refer to as Illinois, we kind of chuckle because we know that those rulings up here really have no effect. They just simply get ignored and the districts up here do what they want. Alabama on a national scale is kind of the same way, except in this particular instance, this court did a phenomenal job in their analysis and managed to avoid, as I think at the end of the day was appropriate, all of the constitutional arguments that were made and decided the case in favor of the plaintiffs based on a very practical and logical analysis that we’ll get to. To be clear, and as the slide indicates, part of the challenge that was made and what’s listed here are all references to either specific terminology in the Constitution or conceptual interpretations of the Constitution and sections of the Constitution that may be used according to what the plaintiff argued as a defense or a basis to argue that the Corporate Transparency Act is unconstitutional.

that foreign affairs and national security issues really aren’t impacted by this, that the Commerce Clause prevents this from happening because it really falls under the jurisdiction or the auspices of other areas of government, that this really is over and above Congress’s taxing power under the Necessary and Proper Clause. And for those of you that remember all of the years of intense litigation over the Affordable Care Act, one of the major arguments was that the Affordable Care Act in some respects was actually a tax. The tax being that if you didn’t have insurance, if you opted out of any insurance whatsoever, that there was a penalty, if you will. And the argument was that that was a tax. The United States Supreme Court said, no, that’s not a tax.

The government has the power. to require certain things and to penalize you if you don’t. But the short version is in terms of the Alabama case is this. There was a plaintiff that was part of an association. And the association filed a lawsuit on behalf of this individual and on behalf of itself as well. And there was a lot of discussion the appellate level in this Alabama case as to whether there was proper standing, meaning proper authority for the individual in the first place and the organization in the second place, and then the organization on behalf of the individual in the third place had constitutional basis, had the authority, if you will, to file and bring this lawsuit. The court quickly dispensed with that objection and said, yes, they do.

What they argued, as I said, were all of these constitutional arguments. But the Appellate Court of Alabama took a look at all the constitutional arguments and instead focused on the concept that the issue with the Corporate Transparency Act and that the problem that they had with it was that you can go through the activity of registering an entity with the Secretary of State, and never operate the entity. For example, when we’re engaged in a commercial real estate acquisition and we’re representing the buyer, we will often set up a limited liability company to take title to that property. But maybe one out of every 50 of those transactions never gets to closing, but the entity has already been registered with the Secretary of State.

It is not conducting business. It is not in commerce yet. It is not collecting money. If it has no money, then it can’t be money laundering. And the whole purpose of the Corporate Transparency Act is an anti-terrorism, anti-money laundering preventative law that gives the enforcement division of the Department of the Treasury the opportunity to use it as a tool to investigate money laundering. and as a general rule, it is smaller companies that are the culprits. Big companies and public companies are under too much scrutiny or too much in the public eye on a as a general rule. There are always exceptions to be engaging in the illicit activity of money laundering and terrorism. So that’s exactly what the Alabama court said is we take issue with the fact that you are asking for and imposing on businesses that may never even exercise their authority to conduct business, and yet they have to report. So there’s a hidden suggestion in this Alabama case. Nothing’s happened yet, but there’s a hidden suggestion here to Congress and to FinCEN that maybe you ought to tweak the Corporate Transparency Act and make it effective once a business actually engages in whatever it was organized to do in the first place. And I could actually see the Congress or FinCEN taking it even one step farther that you would actually have to open a bank account and begin to actually receive some kind of money. Otherwise, how can you ever money launder? And that’s really what they’re looking for. Now what’s unique about this case is that the Alabama appellate court until another court in another jurisdiction takes up this case is limited to Alabama because of the way our system works.

However, FinCEN also came out and it’s on its website and said, we are limiting We are taking the position also that this Alabama case only applies to the specific plaintiffs in that case. So it doesn’t even apply, according to FinCEN, to the rest of the Alabama citizenry that might have a registered entity with fewer than 21 employees or less than $5 million in gross revenue if they don’t belong to this particular organization. So it’s very, very limited in scope. What I find interesting about the FinCEN proclamation, if you will, is that FinCEN has no authority to make that proclamation. They’re just being arbitrary. And the hope is that in so doing, they will stick their guns. But at any time and any moment that they feel like withdrawing that proclamation. In theory, they could and they could say, no, we take it back. And we’re saying it does apply across the board. Obviously, that would be contrary to the whole purpose of the Corporate Transparency Act. So it’s very unlikely that FinCEN is going to withdraw that position. I think what’s going to have to happen is another state, another jurisdiction is going to have to have some kind of case and some kind of ruling that either concurs or is in opposite to what Alabama says, and if another jurisdiction or even Alabama decides that there is another constitutional argument, then it’s very likely that this will make it into the federal courts and ultimately we’ll have some resolution. With everything else that the Supreme Courts and the federal appellate courts have to deal with, I don’t think we’re going to have a solid, clear defining line or definition.

or clarity on this issue for probably three, four years. But we’ll see. So somebody’s asked, if you have less than 21 employees or less than $5 million in gross receipts per the earlier slide, do you have to file or not file? Well, that’s the point. That is the bright line test. If you have less than 21 employees or your business generates less than $5 million in gross receipts, you must report. So you could have a thousand employees and make less than $5 million in your reporting. You could make $10 million and be a one employee company and you are reporting. Oops, sorry about that. And I want to be clear also that the Corporate Transparency Act, the United States version is really a catch up.

The European Union has been on the United States for over two decades to pass this kind of legislation because the European Union has been way ahead of the curve through Interpol and other international agencies in tracking terrorism and tracking money that’s used for illicit purposes related to terrorism. And what they discovered, and it just goes without saying, it’s common sense, is that all of their efforts resulted in all of those same terrorists just simply coming to the United States and opening small businesses here that were shells and shams and money laundering. So it doesn’t matter which side of the political aisle you are on, neither side has addressed that issue in two decades and has turned the United States into a honeypot of terrorist money.

We can get into what’s on the slide here, but it’s really esoteric and going to take us on a deeper dive, so I’ll just cover it briefly. Again, as I said before, there was standing. They found out that there was standing because the association can bring suit on behalf of its members. One of the benefits of the affiliation, if you will, is belonging, and if you kind of give a wink and a nod to the organization that they can stand in your shoes, then the court was fine with them standing in that individual’s shoes. Next slide, please. So again, this is what I said before about what the Alabama court ultimately ruled. It’s that simply triggering the recording by registering, it’s not right.

There’s no… it doesn’t match up with the intended purpose. The purpose is to report business activity so the data there’s a database created so that if they can make a connection between the illicit activity and possibly your particular business, then they can go investigate. They don’t want finsen simply having access to, it’s approximately 36 and a half million businesses that fall under those two thresholds. and simply being able to go on a fishing expedition and mine all of that data and start cherry picking who they want to go after. Next. And as i said, the court did not address and the analysis might differ under other applications. And there was some brief discussion about what if you’re a foreign entity that then incorporates here?

What if you set up a just a brick and mortar because you want to sell in the United States, but your company is actually in Brazil, for example. My opinion, you better register. There’s no connection. There’s no safe harbor because the brick and mortar or whatever activity you’re doing in the US that required you or that you simply desired to insulate from liability by creating an entity, a corporation, a limited liability company, that that’s not a valid excuse not to have reported. So the 36 and a half million businesses, I’m not sure contemplate that, although they probably do. So there’s going to be a lot of foreign companies who set the shop up here that don’t necessarily know about this that are probably going to get in a little bit of hot water.

Again, this kind of gives you a very brief summary of what the constitutional arguments were and what the Alabama court really, what was their conclusion. The disclosure provisions and the taxing power, they just weren’t found to be sufficiently, to provide sufficient justification to allow the CTA to use that as a basis to do what they want to do. The necessary and proper clause is really linked to Congress’s enumerated powers, and since there is no enumeration in the Constitution for this, that clause doesn’t really bridge the gap, and it really doesn’t also at the same time apply. In other words, the CTA, they didn’t necessarily, no pun intended, see it as necessary and proper, But they also didn’t see that it needed to be necessary and proper in order to accomplish the objective that they wanted to. So I don’t think that argument works on either side of the equation. The plaintiffs argued that this expands the federal authority under the taxing power. And as I mentioned before, although they didn’t talk about it much, there is definitely an analogy, I believe, between this and the penalty, so to speak. under the Affordable Care Act. The government can charge and they can do things that put requirements on you that are non-monetary. And the other part of the government’s argument about why this is justifiable under the taxing authority is because the IRS will have access through subpoena to the database. So the government argued, well, there’s your taxing power. It’s not to actually collect tax. It’s to enable the IRS to be more effective in enforcing the tax regulations.

And in that instance, the court said, the IRS already has subpoena power. The IRS already has its own enforcement vehicles. It can do whatever it wants. It doesn’t need FinCEN and that reporting requirement to pile on to be able to do what it does. The appellate court in Alabama also said that FinCEN also has access to a lot of this information through its other information gathering and through the other institutions or areas of business that already require the collection of this information. As I said at the outset, your banks and your insurance providers have been collecting this information for years, if not decades. The appellate court was implying, if not saying expressly, if you have an issue and you think ABC Corporation is engaging in illicit activity that may have a relationship to terrorism, subpoena the business, find out where their bank is, find out who their insurance carrier is and go subpoena those records.

or ask the company through a subpoena to disclose the same information that you’re getting through FinCEN. However, just note again, you still have to report, okay? So what’s the conclusion? What’s the bottom line here? Well, the rules are numerous, they’re complex, they’re fact intensive. We don’t have bright line factors yet, but generally, even the factors we have now, you can get into nuances there, which is really what this case in a lot of ways was about. And you can see how a court will latch on to one fact, just one. And in this case, the fact was you’re not doing business yet. Why should you have to report? And conversely, why should you have to, or more importantly, why would you be penalized and potentially have to go to jail if you’re not conducting any kind of business and therefore can’t be money laundering?
Okay. Reporting companies and entities such as law firms that file on behalf of reporting companies should develop and implement procedures for both initial and ongoing compliance. To put that in perspective, we started implementing a process and a procedure in October of last year, four months before we knew it was coming online. And because of who reports, and the fact that the reporter, and I know I’m not using the technical term, but the reporter may also have to input their personal information into the FinCEN database. We have actually set up a dedicated email and a dedicated phone number for our clients to call in so that the information is localized, centralized, and we only have one person generally looking at that information and literally hitting the keystroke on the computer that sends that information up through to FinCEN. We also have become a go-to for other law firms, other accounting firms, and other businesses that we haven’t even represented before, who simply do not have the infrastructure or the desire, more often than the desire, and I tend to agree in a lot of respects, with setting up the necessary infrastructure to handle this and we do. So if you want assistance, I’m sure at the end of this presentation, there’ll be the phone number and or the URL and you can email us or call us anytime and we’ll assist and you can find out what’s involved in that process and procedure. Give me one second here. Well, somebody asked about the Illinois SOS website.

They’re wrong. It’s not less than 20. It’s 20 or less. So anyway, that’s the answer. And the Illinois Secretary of State is only putting that out as a courtesy. Because as we all know, the Secretaries of State are not the repository or the reporting entity for this information. But to be overly cautious, although I’ve been putting these presentations on for a while, I’ll double check and if for some reason that particular factoid is incorrect, we’ll let you know. Opponents of the CTA have repeatedly pointed out, like Tony Soprano, and this is the same argument against gun control that only criminals will illegally use guns, which of course is not true. Legal gun owners also use guns illegally. But that argument has been forwarded or put forward here contextually anyway, saying, well, why are you penalizing good people for the few bad?
Because unfortunately, this is even bigger by way of analogy or comparison than gun control. Even though you can have that can go to a concert and hurt many, many people, money laundering can really affect the whole country. And terrorism can have a much, much, much bigger impact. And as I said, the lack of this kind of enforcement mechanism has actually created a haven for terrorism and the harboring of illicit money used for terrorism in the United States. What else? Let’s see. If the company has until 12-31-24 to file, should it be filed sooner or closer to year end? Well, haste makes waste. That’s the first answer. Secondly, you have to understand that although the website went live and did not crash, as everyone expected, it didn’t crash.

because less than 15 percent of the businesses so far have only reported. So, and to put this in perspective, if you come to us more than 30 days before the deadline, we’re going to reject you. We’re not even going to process because we’re not going to take responsibility for the fact that either the system was too jammed and it crashed and we’re trying to not only get current clients and existing clients up into the database, but we’re trying to get new clients as well. In other words, we’re not gonna be responsible for that. And secondly, very likely that in the scramble, a lot of folks are gonna be giving us information that is incomplete. And I will tell you that we have already had, I think at last count, at least a dozen clients who said, no problem, we will do it ourself and every single one of them did it incorrectly. We really encourage you to have a qualified advisor, whether it’s us or someone else, preferably us, do it and that you get on it now. Worst case, you report and FinCEN changes the rules and you didn’t have to. Best case, as I said, it takes three or four years for anything concrete to happen and you’re in compliance and you’re not looking at fines and things like that. somebody said that the SOS does appear to be wrong. Thank you for that comment. Is this an annual reporting? That is a great question. The answer is no, it is not. With one caveat or one qualifier system the reporting function is not intuitive. It is merely a fill-in-the-blank form.
So, every time there is a change in information, you have 30 days to report. And when you report, you report everything over again. So by way of example, if you move your business, or you move your residence, or you get married and change your name, or you decide you want to change your birth date because now you’re a movie star, you need to report that within 30 days. From our perspective, we’re not going to charge the full fee for the original application or uploading if you will for these changes because we’ll have all the information. Already okay, but you also have to understand that if you have multiple entities and many, many people do, especially if you own a lot of real estate holdings, we are also not going to verify that information for you.

And there is no verify like there is, for example, in immigration where. they already have a database of social security numbers that they cross-reference. There’s too much data here. It would take FinCEN 100 years to verify 36 million businesses. So it’s incumbent on the client. And for us, you, the client, you will be certifying to us that the information you gave us is true and accurate. Because as the reporter, we’re also responsible for the information that goes up to FinCEN. last person in your office to hit that keystroke and send that information to us, their information, their personal information will also be reported. Okay? More than likely. Great question. Thank you for asking that great thank you jonathan uh looks like we’ve answered everybody’s questions and we’re right at the end of our presentation, so
thanks for the update on the corporate transparency Act. That was very informative and thank you attendees for joining us today and we hope you have a great rest of your day. Thank you everyone.


Disclaimer: This presentation has been prepared for the general information of clients and friends of the firm. It is not intended to provide legal advice with respect to any specific matter, nor is it intended to create an attorney-client relationship. Under rules applicable to the professional conduct of attorneys in various jurisdictions, this may be considered attorney advertising material.

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