Long in coming, the Corporate Transparency Act (CTA) that aims to combat tax fraud, money laundering and other illicit activity is finally here, and while structured finance may be less impacted than other industries, noncompliance could result in civil or even criminal penalties.
The CTA was enacted in 2021 and requires businesses operating in or accessing the U.S. market that do not meet criteria for one of 23 exemptions to submit Beneficial Ownership Information Reports (BOIRs) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The BOIRs identify individuals associated with the reporting company, and the information itself, including names, addresses, birthdays and identification numbers, is straightforward.
More complicated is determining when businesses must file BOIRs. The CTA provides 23 exemptions, but most business entities will have to file BOIRs—FinCEN estimates more than 32 million—about the individuals who ultimately own or control them.
The issue of control can complicate matters for securitizations. The Structured Finance Association recently published a six-page FAQ to help clarify issues, such as whether an entity can claim an exemption as a subsidiary that is controlled but not wholly owned by an exempt parent. Another issue addresses whether individuals associated with transaction parties that do not own a securitization-issuing entity but have “substantial” control over it require BOIRs.
Reporting companies formed this year must determine whether they are exempt, and if not file BOIRs within 90 days. Companies formed before 2024 must comply by Jan. 2, 2025, after which all reporting entities must submit BOIRs within 30 days. Some sponsors formed issuing entities in 2023 to enable them to address the requirements this year and develop a comprehensive compliance program, said Charles Sweet, practice development leader of Morgan Lewis’s structured transactions group.
He added that the industry is currently working through several issues. A key one, for which the SFA’s FAQ concludes FinCEN should either provide exemptive relief or more clarification, centers around securitizations in which equity ownership interests are held through the DTCC and can be sold anonymously in the secondary market.
“Equity is clearly the type of ownership that falls under BOI reporting, but how does the issuer comply with the rule when it doesn’t know who the book entry owners are?” Sweet said.
To address that issue, international law firm Mayer Brown has been looking at introducing contractual language in the special-purpose-vehicle (SPV) or other deal-related agreements that legally requires equity owners who trigger BOIR obligations to tell the sponsor, who would then file the report, said Matthew Bisanz, a partner in the firm’s financial services, regulatory & enforcement practice.
Rarely do investors own a major part of a securitization, so BOIRs most likely won’t be necessary for them, Bisanz said. However, disclosures must be made for natural persons who have substantial control over the vehicle, such as the sponsor or a discretionary trustee.
“They’re professionals, so that shouldn’t be difficult,” Bisanz said.
Failure to submit BOIRs can result in a civil penalty of $500 per day for each violation that continues, and criminal penalties of up to $250,000 in fines and five years in prison.
