The Corporate Transparency Act (‘CTA’), effective January 1, 2024, aims to combat illicit activities such as money laundering, terrorism financing, and other financial crimes by increasing transparency in corporate ownership. The CTA requires corporations, limited liability companies and other entities registered with a U.S. secretary of state, and foreign entities registered to do business in the U.S. (‘Reporting Companies’) to disclose their beneficial owners to the Financial Crimes Enforcement Network (‘FinCEN’).
For more details about the CTA, please see our previous article: Navigating The Corporate Transparency Act: What You Need To Consider.
Many Reporting Companies have their membership interests or shares held by an offshore corporate trustee. This raises the question of whether the offshore trustee, despite not itself being registered in the U.S., should be identified as a beneficial owner of the Reporting Company and therefore required to report to FinCEN under the CTA. Further questions arise regarding the extent of such disclosure, particularly whether the beneficial owners (including shareholders, directors and authorised signatories) of the offshore trustee should also be identified and reported under the CTA.
We have closely reviewed the CTA in order to ascertain what reporting obligations Southpac’s offshore trustee companies in the Cook Islands, Nevis and New Zealand (together, the ‘Southpac Trustees’) and their beneficial owners have under the CTA. We have also consulted with U.S. attorneys as part of this process. As a leading provider of trust and corporate services, we understand the importance of compliance while ensuring regulations are interpreted and applied correctly.
Scope of the CTA
The CTA primarily seeks to identify individuals who exercise substantial control over Reporting Companies. These individuals are considered ‘beneficial owners’. According to FinCEN, a beneficial owner is an individual who either directly or indirectly:
- Exercises substantial control over a Reporting Company, or
- Owns or controls at least 25 percent of a Reporting Company’s ownership interests.
Substantial control can be exercised in four ways:
- The individual is a senior officer of the Reporting Company.
- The individual has authority to appoint or remove certain officers or a majority of directors of the Reporting Company.
- The individual is an important decision-maker for the Reporting Company.
- The individual has any other form of substantial control over the Reporting Company.
However, it is essential to differentiate between entities directly engaged in U.S. business activities and those, like Southpac Trustees, that act in fiduciary capacities without exercising substantial control over Reporting Companies.
FinCEN Guidelines
FinCEN has provided detailed guidelines (‘Guidelines’), which were updated in April 2024 and now clarify, among other things, the reporting requirements for offshore corporate trustees under the CTA. Although the Guidelines do not directly answer all questions raised under the CTA, they do provide guidance on the reporting requirements regarding offshore corporate trustees.
Reporting Companies and the Extent of Disclosure
The Guidelines provide that a Reporting Company may report the name of the offshore corporate trustee instead of information about its individual beneficial owners if all of the following three conditions are met:
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The corporate trustee is an entity exempt from the reporting requirements.
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The individual beneficial owner owns or controls at least 25 percent of ownership interests in the Reporting Company only by virtue of ownership interests in the corporate trustee.
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The individual beneficial owner does not exercise substantial control over the Reporting Company.
In addition FinCEN provides that when considering whether the beneficial owners of an offshore corporate trustee own or control the ownership interests of a Reporting Company whose ownership interests are held in trust, it may be necessary to consider whether any owners of, or individuals employed or engaged by, the corporate trustee exercise substantial control over the Reporting Company.
Analysis
We have analysed each of the three conditions above to understand if information about the Southpac Trustees’ beneficial owners is required to be reported under the CTA. Reporting is required if the Southpac Trustees fail to meet any of the three conditions.
Condition 1: The Guidelines define two types of Reporting Companies:
- Domestic Reporting Companies: Corporations, limited liability companies, and any other entities created by filing a document with a secretary of state or any similar office in the United States.
- Foreign Reporting Companies: Entities formed under the law of a foreign country that have registered to do business in the United States by filing a document with a secretary of state or any similar office.
Southpac Trustees satisfy condition 1 because they are not considered Domestic Reporting Companies or Foreign Reporting Companies as they have not filed any document with a secretary of state or any similar office in the United States. They are only registered in the offshore jurisdictions in which they operate. As they do not meet the definition of Reporting Companies they can be regarded as exempt from the reporting requirements.
Condition 2: Southpac Trustees only own or control interests in Reporting Companies in their corporate capacity. Their beneficial owners do not own or control ownership interests in any Reporting Company in their individual capacities. If they can be regarded as having any ownership or control of a Reporting Company for the purposes of the CTA, it is only by virtue of their ownership interests in the Southpac Trustee.
Condition 3: Southpac Trustees’ beneficial owners – including employees, directors, shareholders and signatories – do not exercise substantial control in any individual capacity over any Reporting Company. This may not be the case for all offshore trustee companies, depending on how they are structured and how they operate, but is the position for all Reporting Companies owned directly or indirectly by Southpac Trustees.
Considering Southpac Trustees meet all three requirements under the Guidelines, a Reporting Company may report the name of the Southpac Trustee as part of its CTA return, but does not have to report or submit information about the Southpac Trustee’s individual beneficial owners.
Conclusion
The recent updates to the Guidelines are welcome as they have clarified the scope of reporting obligations for the Southpac Trustees, and confirmed that the beneficial owners and officers of many offshore corporate trustees are not required to register as beneficial owners with FinCEN. We appreciate that clients who are themselves the managers or beneficial owners of Reporting Companies owned by a Southpac Trustee have been concerned about any obligations Southpac Trustees may have had in this area and are pleased that this issue has now been resolved.
For further information or specific inquiries regarding this position, please contact our Legal and Client Services Team.
