As family offices continue to form, grow and diversify their businesses and portfolios, regulatory changes such as the Corporate Transparency Act (CTA) and the proposed ENABLERS Act are changing the way these entities operate. This affects both the operational structures that family offices use to run their day-to-day business as well as the structures created to engage in specific investments.
The introduction of these laws and proposed changes have led to increased scrutiny and compliance requirements, prompting some family offices to reassess their operating models and adopt more transparent practices. This is part of a larger global shift driven by a demand for increased transparency.
Understand the actions
The Corporate Transparency Act, passed as part of the National Defense Authorization Act of 2021, requires corporations and limited liability companies to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) upon formation or registration. Basically, the purpose of the CTA is to combat money laundering, tax evasion and other illegal activities.
The ENABLERS Act, on the other hand, centers on anti-money laundering rules and focuses on tax advisors and professionals who enable the use of offshore tax avoidance schemes. The Act proposes to expand the definition of “financial institution” under the Bank Secrecy Act (BSA) and related obligations to “gatekeepers”, which could include professional service providers such as law firms, investment advisers, payment processors, accounting firms and others who may be used to facilitate money laundering of money.
Impact on family offices in the US and beyond
Both the CTA and the ENABLER Act have direct implications for family offices, necessitating increased due diligence and increased transparency. As any adviser will know, due diligence and compliance are at the forefront of operations. Family offices must now ensure that they maintain accurate records of beneficial ownership and avoid engaging in aggressive tax planning schemes. Failure to comply with these rules can result in significant penalties and reputational damage.
The CTA applies not only to corporations incorporated or formed in the United States, but also to foreign corporations registered to do business in the United States. This means that while the law’s primary focus is on US companies, its scope also includes foreign entities that have a presence in the US. Under the CTA, these companies are also required to report their beneficial ownership information.
In addition, the ENABLERS Act would grant US extraterritorial jurisdiction, meaning that if the bill becomes law, the BSA/AML requirements could be enforced against international actors that provide covered services to US customers, vice versa, or both, depending on how the Treasury Secretary defines the provision applicability in its implementing provisions.
Five tips for family offices to stay compliant
Whether a family office is managed by a principal member or an advisor, it’s worth paying attention to these updated rules and making sure you know what questions to ask to stay compliant.
- Establish and maintain accurate beneficial ownership records: Ensure that all beneficial ownership information is up to date and readily available in the event of legal enquiries.
- Perform thorough due diligence on tax advisors and other professionals: Before contacting tax advisors or other professionals, check their credentials and track record to ensure they adhere to ethical standards and do not promote aggressive tax planning schemes.
- Implement robust internal compliance policies: Develop and maintain a strong compliance program that includes regular staff training, clear procedures for reporting potential violations, and a well-defined escalation process.
- Adopt a risk-based approach to compliance: Assess the specific risks your family office may face and tailor your compliance efforts accordingly. This may involve increased due diligence for higher risk relationships or investment structures.
- Monitor developments in legislation and interact with industry colleagues: Stay informed about regulatory changes and best practices by joining industry associations, attending conferences and collaborating with other family offices.
Keeping up with regulatory change is no small feat, but family offices may find the following resources useful in gaining a comprehensive understanding of the Corporate Transparency Act and ENABLERS Act and their implications, ensuring they are well equipped to navigate the changing regulatory environment .
- The American Bar Association (ABA) – Corporate Transparency Act Resource Center: The ABA offers a comprehensive resource center dedicated to the Corporate Transparency Act, providing legal analysis, updates and compliance guidance to various entities, including family offices.
- Family Office Association – Regulatory Compliance: The Family Office Association offers resources and insight into legal compliance for family offices. While not specifically focused on the CTA and ENABLERS Act, the association provides guidance on maintaining compliance in general, which can help family offices navigate the changing regulatory landscape.
- Deloitte – Corporate Transparency Act: Deloitte’s insight into the Corporate Transparency Act can help family offices understand the wider implications of the legislation and how it may affect their operations. Deloitte provides practical guidance on preparing for and complying with the CTA.
Laws and regulations will always be a headache, but one way of looking at the Corporate Transparency Act and the ENABLERS Act is that they will make family offices re-evaluate their practices and prioritize transparency – which is not the worst thing in the world. The best defense is a strong offense, and by adopting robust compliance measures and adhering to ethical standards, family offices can not only navigate the evolving regulatory landscape, but continue to capitalize on a wide range of investment opportunities.
Follow me further Twitter or LinkedIn. Check out my website or any of my other work here.