Dear Donna

Dear Donna,

My firm represents some corporate entities, and our work includes setting up companies. To combat anonymous shell companies used for illegal purposes, the Corporate Transparency Act (CTA) went into effect on January 1, 2024.¹  It requires new LLC's and corporations that don't meet limited exceptions to register with the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). The Act requires companies to disclose their beneficial owners when the company is formed and within 30 days of any changes. Our past, current and anticipated new clients are required to comply with the CTA. Do you have any risk management advice regarding the CTA? 

Sincerely,
Making Sure that my Firm Complies

Dear Making Sure that my Firm Complies,

I've recently reviewed several similar questions from firms on the CTA. Because of the initial and continuing reporting requirements under the CTA, law firms that engage in reporting may expose themselves to additional liability exposure. Although the act is new, we already see areas where firms may employ best practices to avoid claims.

Ensure that your engagement letters set forth a clear scope of work that explicitly states whether (or not) your firm will perform services related to the CTA. Further, if your firm does undertake the task of CTA compliance, your engagement letter should set forth who will file the formation certificate, who will gather and file the information required by the act and who will file any changes to the information. As a best practice, your engagement letter should disclaim responsibility for changes to the entity of which your firm is unaware, as well as for any inaccurate information that your client might provide, particularly, due penalty provisions involving changes not reported within 30 days and filing of inaccurate information. Remember to calendar all filing deadlines to ensure compliance.

Similarly, always issue disengagement letters that clearly state when your representation ceases and disclaims any continued responsibilities under the CTA.

Has there been a continuous representation with regards to any entities your firm previously created? If so, you may be obligated to advise your client on the CTA. Conversely, did you create an entity years ago without expectation that your firm will advise on changes to the law? In either scenario, you should review the terms of your engagement and disengagement letters to determine your responsibilities. Remember your ethical obligation to keep clients reasonably informed.

The CTA also brings up issues around safeguarding sensitive personal information. Specifically, the CTA requires filed information to include name, address, date of birth, social security number and passport or driver's license number, with a picture of the same, for all 25% or more beneficial owners and applicants – quite sensitive info! The CTA requires you list the person filing as an applicant and that they certify the truthfulness of the information. Therefore, your firm should carefully select who within your firm files and has access to a client's sensitive personal information. Your computer and email systems should have appropriate encryption and password protections to avoid information getting into the wrong hands.  

The CTA has its potential pitfalls for attorneys. Therefore, your firm should consider whether the extra revenue is worth the risk of not properly complying with the CTA. If you do decide to perform CTA services, you should adapt your firm's internal protocols accordingly. Finally, please consult with the FinCEN, ABA and your state bar for any further resources and suggestions regarding the CTA.

¹The Northern District of Alabama, Northeastern Division, recently held that the CTA exceeds the Constitution's limits on Congress’ power.  The court enjoined the Department of the Treasury and FinCEN from enforcing the CTA against only the subject Plaintiffs. The matter is currently on appeal.  (See National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), **The CTA remains in effect as to all other reporting companies.**