Corporate Transparency Act: Further Clarification

As with any new sweeping federal regulatory scheme, there are kinks to work out and questions which need clarification. This has certainly been true for the Corporate Transparency Act (“CTA”). The Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury has continued to issue new FAQ’s in response to multiple inquiries.

We have issued previous alerts about the CTA and have offered risk management guidance to our insureds. We continue to receive questions asking for clarification, particularly with respect to the issue of serving as a “Company Applicant” and filing “Beneficial Owner” reports and updates.

Who is a Company Applicant and What are the Risks of Serving as Company Applicant?

One of the most common questions we receive from lawyers who have concerns about the Corporate Transparency Act (“CTA”) is whether a lawyer should serve as a Company Applicant. Similarly, lawyers often ask what acts will result in the lawyer being deemed a Company Applicant.

Entities formed after January 1, 2024, and subject to the CTA must provide to FinCEN identifying information about the entities’ “Company Applicant(s).”

• The CTA defines a Company Applicant to be no more than two persons:

• the individual who directly files the document that creates the entity; and

• the individual who is primarily responsible for directing or controlling the filing of the relevant document by another.

For each Company Applicant, the company will need to provide the individual’s: (1) legal name; (2) birthdate; (3) address (in most cases, a home address); and (4) an identifying number from a driver’s license, passport, or other approved document for each individual, as well as an image of the document that the number is from. Alternatively, if the company applicant has a FinCEN ID number already assigned, this identification number can be provided in place of this information.

Note that a law firm may be deemed to be a Company Applicant even if the law firm doesn’t file the formation documents with the Secretary of State. The newly released FinCEN FAQ’s (E.5.) explain that, if a law firm prepares entity formation documents and sends those documents to a corporate service provider with instructions to file at the Secretary of State, the law firm would be considered a Company Applicant because it directed the filing.

Preparation and Filing of Beneficial Ownership Information Reports

Another concern that insureds have raised is whether a Company Applicant has any responsibility for filing beneficial ownership information reports (“BOI reports”) and/or updates. The CTA and the FAQ’s seem to make clear that the responsibility for filing BOI reports and updates is on Reporting Companies and not Company Applicants. The only responsibility of a Company Applicant is to provide true and accurate identification information or a FinCEN ID number to be filed by the Reporting Company. Accordingly, it does not appear that a law firm increases its exposure by serving as a Company Applicant and should not be subject to penalties under the CTA in cases where a Reporting Company fails to file required BOI reports or provides false or incomplete information. Unfortunately, FinCEN has not issued a specific FAQ on this question. We submitted an inquiry to FinCEN asking whether a Company Applicant has exposure for penalties related to BOI reports. We received the following response from FinCEN:

A person may be subject to civil and/or criminal penalties for willfully causing a company not to file a required BOI report or to report incomplete or false beneficial ownership information to FinCEN.

* For example, an individual who qualifies as a beneficial owner or a company applicant might refuse to provide information, knowing that a company would not be able to provide complete beneficial ownership information to FinCEN without it. Also, an individual might provide false information to a company, knowing that information is meant to be reported to FinCEN. In either of these situations, the individual may be held responsible for willful violations of the reporting rule.

Based on this response, it appears that the only way a Company Applicant would have exposure for penalties would be to refuse to provide identification information to the Reporting Company or to provide false identification information to the Reporting Company.

In addition to questions concerning service as a Company Applicant, several insureds have raised questions about the risks of assuming responsibility for filing BOI reports and updates and whether there is coverage for such work.

Because of the logistical difficulties associated with collecting accurate and timely information from corporate entities, as well as the substantial penalties that can result from violations of the CTA, we have suggested that law firms may wish to decline responsibility for preparing and filing BOI reports and updates. Numerous third-party corporate service providers are available to provide this service. Most firms have decided to limit the scope of their representation to decline responsibility for filing BOI reports and have chosen to shift this responsibility to these corporate service providers.

However, many of our insureds have indicated that their clients expect them to be responsible for filing BOI reports. These clients do not want to do it themselves and do not want to farm it out to a corporate service provider. For marketing reasons, some firms have decided to accept the responsibility of filing BOI reports and updates.

If a firm chooses to offer these services to clients, the firm should set up processes and procedures to make sure that the firm collects accurate information from the clients on the front end. If the firm is also going to be responsible for BOI updates, the firm will need to have procedures in place to be able to timely update FinCEN with any changes to beneficial owner information (including a simple change of address). The firm should make clear in writing that the client is responsible for providing accurate information and notifying the firm immediately if there are any changes. If there is some deficiency in reporting down the road, this will give the firm a contributory negligence defense to any malpractice claim. You may not prospectively limit your liability to the client by including a provision in the engagement agreement that says that the client may not bring a claim for malpractice against the firm for failure to comply with the CTA filing requirements. This would be a violation of Rule 1.8(h) of the North Carolina Rules of Professional Conduct.

Coverage for Filing Beneficial Owner Information Reports and Updates

Several insureds have asked whether Lawyers Mutual provides coverage for claims related to defective BOI report filing. Generally, an insured law firm will be covered if one of its clients brings a malpractice claim against the firm because the client incurred damages as a result of the firm’s negligence in filing CTA reports or advising the client about filing requirements. If, however, the firm’s conduct violates the CTA and this results in court-ordered or FinCEN imposed sanctions or penalties directly against the firm itself, such sanctions or penalties are not covered damages under the Lawyers Mutual policy (or any other malpractice policy we know of).

The result would be different if the client, and not the law firm, is sanctioned for willful failure to comply with the CTA. If the client is sanctioned and then makes a malpractice claim against the law firm because of the law firm’s failure to properly advise the client, this would likely be covered since it is actual monetary loss suffered by the client. As in any case where there is a hypothetical question about coverage, we cannot state definitively whether coverage does or does not exist until we are presented with an actual claim. However, this will hopefully clear up some of the confusion about basic coverage for claims related to BOI reports.

We continue to monitor developments under the CTA and will provide updates as new information and guidance becomes available. If you would like to monitor developments, you can track the FAQ’s on FinCEN’s website.