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Jan
20 • 2021
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Delaware LLC Remains Best Way for Celebrities to Preserve Anonymity Even After the Corporate Transparency Act

We have written several prior articles on how to use (or in one case, how not to use) a Delaware limited liability company to safeguard your identity.[1] There are legitimate reasons for an individual to protect anonymity by engaging in a particular transaction through a Delaware LLC without divulging the identity of the individual who ultimately is the beneficial owner of the company. The prototypical example we have used is a celebrity buying a residential property and wanting to keep the location secret from prying eyes. We have seen a lot of chatter about how this practice will be immediately impacted by the Corporate Transparency Act (“CTA”) Congress just passed at the beginning of this year. But that is not true for two reasons. First, new companies will not have to comply with the CTA’s reporting requirements until the U.S. Department of the Treasury issues final regulations implementing the CTA, which it is not required to do until January 1, 2022, while existing companies will not have to file reports for up to two years after that. Second, and more importantly, the circumstances under which the government may disclose the information you will eventually have to provide under the CTA are extremely limited, especially if you are safeguarding your identity for a legitimate reason (i.e., not money laundering).

By way of background, in order to combat money laundering, the Financial Crimes Enforcement Network (“FinCEN”) of the Treasury Department in 2016 started requiring the actual identities of the owners of LLCs and other business entities that purchase high-end real estate in certain metropolitan areas to be disclosed in Geographic Targeting Orders (“GTOs”). At that time, FinCEN required a GTO to be submitted whenever a corporation, LLC, or other business entity bought residential real property for a total purchase price of: $500,000 or more in Bexar County, Texas (where San Antonio is located); $1 million or more in the Florida counties of Miami-Dade, Broward, or Palm Beach; $1.5 million or more in any of the five boroughs of New York City other than Manhattan; $2 million or more in the California counties of Los Angeles, San Diego, San Francisco, San Mateo, or Santa Clara; or $3 million or more in Manhattan. FinCEN has since expanded the scope so that GTOs are now required in connection with the purchase of residential real property by a legal entity for a price of only $300,000 or more in: the Texas counties of Bexar, Tarrant, or Dallas; the Florida counties of Miami-Dade, Broward, or Palm Beach; any of the five boroughs of New York City; the California counties of San Diego, Los Angeles, San Francisco, San Mateo, or Santa Clara; the City and County of Honolulu, Hawaii; Clark County, Nevada; King County, Washington; Cook County, Illinois; or the Massachusetts counties of Suffolk or Middlesex.

Despite the significantly expanded scope of the GTOs, some members of Congress, led by Rep. Carolyn Maloney (D-NY), continued to push for federal legislation addressing this issue. Their efforts resulted in the recent passage of the CTA as part of the annual National Defense Authorization Act.[2] In passing the CTA, Congress stated its “sense” that a “clear, federal standard for incorporation practices” is required to prevent “malign actors” from concealing their ownership of business entities to engage in money laundering, because “most or all States do not require information about the beneficial owners of the” business entities formed under state law.[3]

To that end, the operative provisions of the CTA require that private corporations, LLCs, or other business entities formed under state or tribal law must report to FinCEN the identity of each beneficial owner of the entity, as well as each person who actually files an application to form a new company.[4] The term “beneficial owner” is defined to include any individual who “exercises substantial control over the entity” or who “owns or controls not less than 25 percent of the ownership interests of the entity.”[5] The report (the contents of which are still to be finally determined by the Secretary of the Treasury) must identify each beneficial owner and applicant by: full legal name; date of birth; current residential or business street address; and an identifier obtained from FinCEN or a unique identifying number from an “acceptable identification document,” such as a valid U.S. passport or state driver’s license.[6] The report will have to be filed at the time when any reporting company is formed under state or tribal law, and the information provided will have to be updated upon any changes in beneficial ownership.[7] However, this requirement does not take effect until the Secretary of the Treasury issues final regulations implementing the CTA, which Congress has dictated must occur not later than January 1, 2022.[8] In addition, existing companies will have to provide the required information in a “timely manner, and not later than two years after the effective date” of the implementing regulations to be prescribed by the Secretary of the Treasury, so potentially not until January 2024.[9] We are closely monitoring for the issuance of proposed and final regulations and will provide further information when it becomes available.[10]

Will the CTA’s reporting requirements spell the end of the practice of using a Delaware LLC to safeguard one’s identity for legitimate reasons? They shouldn’t. The CTA further provides that beneficial ownership information collected under the statute can be made available by FinCEN only upon receipt of a request—through “appropriate protocols” intended to protect the security and confidentiality of the information—primarily from various authorized government authorities, including a federal agency engaged in national security, intelligence, or law enforcement activity, or, if a court of competent jurisdiction has authorized the request, a state, local, or tribal law enforcement agency.[11] Any person who violates the protocols, including through unauthorized disclosure or use of the information, is subject to substantial criminal penalties, including a fine of not more than $250,000, imprisonment for not more than five years, or both.[12] Therefore, while individuals will have to disclose their identities to FinCEN even if they have formed a Delaware LLC, that information should not become public, especially if the individuals are seeking to maintain their anonymity for legitimate reasons.

[1] See “How To Use a Delaware LLC to Safeguard Identity” (July 20, 2016); “Using a Delaware LLC to Safeguard Identity for Legitimate Reasons: The Impact of FinCEN’s Reporting Requirements” (July 29, 2016); “Trump’s Payment to Porn Star — How to Properly Use an LLC for Anonymity” (Jan. 29, 2018).

[2] National Defense Authorization Act, Pub. L. No. 116-283, §§ 6401 to 6403, 134 Stat. 3388 (2021).

[3] Id. § 6402(2)-(5). As it turns out, Congress’s sense is partially incorrect, as only a few states, including Delaware, do not require information about the beneficial owners of business entities formed under state law.

[4] Id. § 6403(a). Section 6403 of the CTA will eventually be codified at 31 U.S.C. § 5336. References for the remainder of this article are to where the relevant provisions of section 6403 will be codified in the United States Code. Companies required to report their beneficial owners do not include public companies, which must make that information available through public filings. 31 U.S.C. § 5336(a)(11)(B).

[5] 31 U.S.C. § 5336(a)(3)(A)(i), (ii).

[6] Id. § 5336(a)(1), (b)(2)(A).

[7] Id. § 5336(a)(1), (b)(1)(C), (D).

[8] Id. § 5336(b)(5).

[9] Id. § 5336(b)(1)(B).

[10] If you would like to keep apprised of the situation yourself, you can sign up to receive Treasury Department press releases, which cover the issuance of new regulations, by email here: https://public.govdelivery.com/accounts/USTREAS/subscriber/new?topic_id=USTREAS_49. Another option is to create a Google alert using a term something like “FinCEN Corporate Transparency Act regulations” or “FinCEN beneficial ownership regulations.” In addition, the CTA requires that state secretaries of state (or similar offices) periodically, including at the time of any initial formation or registration of an entity, assessment of an annual fee, or renewal of any license to do business, notify filers of their reporting requirements under the CTA and provide them with a copy of the reporting form to be created by the Secretary of the Treasury, or an internet link to that form. 31 U.S.C. § 5336(e)(2)(A).

[11] See 31 U.S.C. § 5336(c)(2)(A), (B), (3). FinCEN may also disclose information upon receiving “a request made by a financial institution subject to customer due diligence requirements, with the consent of the reporting company, to facilitate the compliance of the financial institution with customer due diligence requirements under applicable law.” Id. § 5336(c)(2)(B)(iii) (emphasis added).

[12] See id. § 5336(c)(4), (h)(3)(B). Note that these penalties are greater than the penalties for a person who willfully violates the CTA’s reporting requirements. See id. § 5336(h)(1), (3)(A) (penalties for reporting violations include a fine of not more than $10,000, imprisonment for not more than two years, or both).