Category: Corporate law

The Corporate Transparency Act December 2023 Update

The Corporate Transparency Act (“CTA” or the “Act”) comes into effect on January 1, 2024. Enacted by Congress as part of the Anti-Money Laundering Act of 2020, the CTA requires certain entities, domestic and foreign, to report beneficial ownership to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

The CTA’s reporting obligations will apply to “Reporting Companies” (discussed below) currently in existence, and to those formed after January 1, 2024. However, while FinCEN estimates that the CTA will affect over 32 million entities, it will largely impact only smaller and unregulated companies. For example, companies that meet the CTA’s definition of a “large operating company,” are publicly traded or regulated, or are a subsidiary of certain exempt entities are not required to submit beneficial ownership information to FinCEN. Accordingly, while all companies should take note of the CTA and the significant change in the law for corporate reporting obligations, an equally vast number of entities will likely find themselves exempt from these requirements.

With the CTA’s effective date fast approaching, companies should consider its potential impact to their compliance obligations and, if appropriate, implement appropriate policies and procedures for handling reporting.

WHAT DOES THE CTA REQUIRE?

The CTA will require Reporting Companies to file reports electronically with FinCEN identifying their beneficial owners, in addition to certain other information. For Reporting Companies formed prior to 2024, these reports require information about the Reporting Company and its beneficial owners. Reporting Companies formed prior to 2024 will have until January 1, 2025, to file an initial report.

For Reporting Companies formed on or after January 1, 2024, reports will require information about the Reporting Company and its beneficial owners, as well as its company applicants (i.e., individuals involved in the company’s formation filing). Reporting Companies formed after January 1, 2024, will have 30 days from formation to file their initial reports, although FinCEN recently issued a final rule extending this reporting period to 90 days for companies created or registered in 2024.

WHO MUST REPORT?

Reporting Companies are defined as legal entities that are formed through a filing in a state secretary of state’s office or similar office under the law of a state or Indian tribe. Reporting Companies can be domestic or foreign and include, but are not limited to, corporations, limited liability companies, certain partnerships and certain trusts. A foreign Reporting Company is an entity formed under foreign law that registers to do business in any state or Indian tribe. Certain entities outside of the CTA’s scope include sole proprietorships, most general partnerships, common law trusts, unincorporated
associations, and foreign entities not registered to do business in a state or tribal jurisdiction. These entities are likely to have no reporting obligations under the CTA.

EXEMPT ENTITIES

The CTA provides 23 exemptions for Reporting Companies that would otherwise be required to report beneficial ownership information under the Act. These exemptions are predominantly for large or heavily regulated companies, including:

  • securities reporting issuers, banks, credit unions, depository institution holding companies, money services businesses, brokers-dealers, securities exchange or clearing agencies, pooled investment vehicles, regulated investment companies and investment advisors, insurance companies and state-licensed insurance providers, and accounting firms;
  • “large operating companies” who have more than 20 full-time employees in the U.S., an operating presence at a physical office within the United States, and more than $5 million in gross receipts or sales on their previous years’ U.S. tax returns;
  • U.S. publicly traded companies;
  • governmental authorities and tax-exempt entities; and
  • inactive entities who have been in existence prior to January 1, 2020, are not engaged in active business, are not owned in any manner by a foreign person, have not had a change in ownership within the last 12 months, have not sent or received any amount greater than $1,000 within the last 12 months, and have no assets or ownership interests in any entity in the United States or abroad.

The CTA also exempts subsidiaries of certain exempt entities if those exempt entities own or control the subsidiary.

WHAT MUST BE REPORTED?

Reporting Companies are required to report to FinCEN:

  • basic company information, including full legal name, trade names, business address, state of incorporation or business registration, and employer identification number;
  • information of Beneficial Owners, including full legal name, date of birth, residential street address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document (e.g., driver’s
    license, passport, state-issued ID, etc.), and image of ID document from which unique ID number was obtained;
  • information of Company Applicants, including full legal name, date of birth, business address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document, and image of ID document from which unique ID number was obtained. A “Company Applicant” is defined as the individual who directly files a document with the state secretary of state’s office to create the entity or register it to do business in the state, and the individual who is primarily responsible for directing or controlling the filing.

There is no cap on the number of beneficial owners a Reporting Company is required to report. In contrast, a Reporting Company cannot have more than two reportable company applicants. Additionally, the CTA only requires Reporting Companies formed on or after January 1, 2024, to report company applicants in their initial reports. There is no requirement to report company applicants for entities formed prior to January 1, 2024.

WHO IS A BENEFICIAL OWNER?

A beneficial owner is defined as any individual who, directly or indirectly, either exercises substantial control over a Reporting Company or owns or controls at least 25% of the ownership interests of such Reporting Company.

An individual may exert substantial control by (i) serving as a senior officer (e.g., company’s president, CEO, COO, CFO or general counsel, or any officer who performs a similar function), (ii) having authority to appoint or remove certain officers or a majority of directors (or similar governing body) of the Reporting Company or (iii) having “substantial influence” over important matters at the company, regardless of their title or role.

Ownership interests in a company generally refer to any arrangement that establishes ownership rights in the Reporting Company, such as stock, capital or profit interests, convertible interests, options to buy or sell any of the above-named interests, or contracts, relationships or other understandings. Option interests must be treated as exercised for purposes of the analysis. Additionally, a beneficial owner may own or control such interest directly or indirectly, jointly with another person or through an agent, custodian, trust or intermediary entity.

The CTA identifies five instances where an individual who would otherwise be a beneficial owner under the Act qualifies for an exception. In these cases, the Reporting Company does not have to report the individual’s information to FinCEN. These exceptions are as follows:

  • a minor child;
  • a nominee, intermediary, custodian or agent;
  • an employee (excluding senior officers);
  • an inheritor, whose only interest in the company is a future interest through a right of inheritance; and
  • a creditor.

HOW TO REPORT

No filings are due prior to the Act’s effective date. While FinCEN has published draft forms for filing by a Reporting Company for comment, they are not yet finalized. FinCEN is also in the process of setting up the beneficial owner reporting infrastructure, the Beneficial Ownership Secure System (“BOSS”), which has not yet been finalized.

If beneficial owners or company applicants do not want to provide their personal data to a Reporting Company, individuals have the option of applying directly to FinCEN for a “FinCEN identifier” (a “FinCEN ID”). The individual will need to provide directly to FinCEN all of the same data that he or she would need to submit to the Reporting Company, but then would only need to provide his or her FinCEN ID to the Reporting Company for inclusion on its reporting.

Individuals who receive FinCEN IDs have the burden of keeping their data updated with FinCEN, whereas a Reporting Company has the burden of keeping the individual’s data current if the individual reports such data directly to the Reporting Company.

WHEN TO REPORT

For non-exempt Reporting Companies in existence as of January 1, 2024, they will have until January 1, 2025, to make their initial beneficial ownership report.

For non-exempt Reporting Companies formed on or after January 1, 2024, they will need to file their first beneficial ownership report within 30 calendar days after the date of formation. On November 29, 2023, FinCEN issued a final rule extending this deadline to 90 days for companies formed or registered in 2024. The time of formation is the earlier of (i) a company receiving actual notice of its registration from the state secretary of state or (ii) a company receiving notice of its registration becoming publicly available.

In addition to filing initial reports, Reporting Companies are also obligated to make reports within 30 days of a change to any data that FinCEN requires to be reported for the company and its beneficial owners.

PENALTIES FOR NONCOMPLIANCE

Congress included steep penalties for non-compliance with the CTA’s reporting requirements. Specifically, the CTA provides that willfully reporting or attempting to report false or fraudulent beneficial ownership, or willfully failing to make updates, shall be punishable with a civil penalty up to $500 per day while such violation continues, with a possible criminal fine up to $10,000 and up to two years in prison. If a reporting violation is found to be “willful,” the CTA provides that responsible parties can include individuals that cause the failure, or are senior officers of the Reporting Company at the
time of the failure. The CTA also enhances criminal penalties when a Reporting Company’s failure to file is combined with other illegal activity.

Additionally, it is also unlawful to knowingly disclose or knowingly use beneficial ownership information obtained by the person for an unauthorized purposes. Violations are punishable with a mandatory civil penalty of $500 per day while the violation continues, plus a possible criminal fine of up to $250,000, five years in prison, or both.

HOW YOU CAN PREPARE

The CTA will alter the ways entities organize and govern themselves and it will impose substantial and continuing reporting obligations. In the weeks leading up to the CTA’s implementation, entities should be developing internal policies and procedures to assess their reporting obligations, identify beneficial owners, and identify company applicants on a go-forward basis.

Reporting Companies may wish to consider adopting a CTA compliance policy. Such a policy can educate managers and senior officers on obligations under the CTA, address procedures for reporting to FinCEN and monitoring changes to a company’s reporting status and beneficial ownership, and address the application of the CTA to potential future affiliates of the Reporting Company.

Reporting Companies may also wish to consider how the CTA may implicate its constituent documents and evaluate amending existing operating agreements to incorporate provisions addressing compliance with the CTA. Similarly, some entities may wish to consider their organizational structures and corporate governance in light of the obligation to collect and report personally identifiable information. Additionally, Reporting Companies should consider how the CTA will impact future material transactions, such as mergers and acquisitions.

© 2023 Vedder Price
by: Joel R. Thielen of Vedder Price
For more news on Corporate Transparency Act Updates, visit the NLR Financial Institutions & Banking section.

Beneficial for Whom? Requirement to Provide Beneficial Ownership Information for Business Entities Begins January 1, 2024

On January 1, 2024, the Corporate Transparency Act, a US federal law, will begin requiring certain corporations and limited liability companies to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury. The corporate ownership structures of many gaming companies, particularly those that utilize a private equity or Voteco model, may be subject to the reporting obligations.

Unless an exemption applies, entities subject to these obligations must report information about their beneficial owners, including their full legal names, dates of birth, addresses, unique identification numbers, and an image of one of the following non-expired documents: (i) state driver’s license; (ii) US passport; or (iii) identification document issued by a state, local government, or tribe. Gaming companies should consult with their legal counsel on their specific structures and the applicability of the reporting obligations to their corporate ownership models.

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information, may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required beneficial ownership information report may be held accountable for that failure.

The obligation to report this information is generally required for entities with at least one beneficial owner who owns 25% or more of the entity or exercises substantial control over it. An individual exercises substantial control over a reporting company if that individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision maker; or (4) the individual has any other form of substantial control over the reporting company.

Reporting companies created or registered to do business before January 1, 2024, will have until January 1, 2025, to file their initial reports. Under FinCEN’s regulations, reporting companies created or registered on or after January 1, 2024, will have 90 days after their company’s creation or registration to file their initial reports, and those created or registered on or after January 1, 2025, will have 30 days after their company’s creation or registration to file their initial reports.

© 2023 Jones Walker LLP
For more news on the Corporate Transparency Act and Beneficial Ownership Information, visit the NLR Criminal Law / Business Crimes section.

Corporate Transparency Act: Implications for Business Startups

Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers, and certain individuals involved in their formation to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. The beneficial ownership information (BOI) reporting requirements of the CTA are set to take effect on January 1, 2024. Those who disregard the CTA may be subject to civil and criminal penalties.

A recent advisory explaining the CTA reporting requirements in further detail may be found here.

While the CTA includes 23 enumerated exemptions for reporting companies, newly formed businesses (Startups) may not qualify for an exemption before the date on which an initial BOI report is due to FinCEN. As a result, Startups (particularly those created on or after January 1, 2024) and their founders and investors, must be prepared to comply promptly with the CTA’s reporting requirements.

As an example, businesses may want to pursue the large operating company exemption under the CTA. However, among other conditions, a company must have filed a federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales. By definition, a newly formed business will not have filed a federal income tax or information return for the previous year. If no other exemption is readily available, such a Startup will need to file an initial BOI report, subject to ongoing monitoring as to whether it subsequently qualifies for an exemption or any reported BOI changes or needs to be corrected, in either case triggering an obligation to file an updated BOI report within 30 days of the applicable event.

Startups also should be mindful that the large operating company exemption requires the entity to (i) directly employ more than 20 full time employees in the U.S. and (ii) have an operating presence at a physical office within the U.S. that is distinct from the place of business of any other unaffiliated entity. Importantly, this means that a mere “holding company” (an entity that issues ownership interests and holds one or more operating subsidiaries but does not itself satisfy the other conditions of this exemption) will not qualify. Startups may want to consider these aspects of the large operating company exemption during the pre-formation phase of their business.

Fundraising often requires Startups to satisfy competing demands among groups of investors, which can lead to relatively complex capitalization tables and unique arrangements regarding management and control. These features may cause BOI reporting for Startups to be more complicated than reporting for other small and closely held businesses. Founders, investors, and potential investors should familiarize themselves with the CTA’s reporting requirements and formulate a plan to facilitate compliance, including with respect to the collection, storage and updating of BOI.

By ensuring all stakeholders understand the BOI reporting requirements and are prepared to comply, your Startup can avoid conflicts with current and potential investors and ensure that it collects the information that it needs to provide a complete and timely BOI report.

Yezi (Amy) Yan and Jordan R. Holzgen contributed to this article.

© 2023 Varnum LLP
For more news on the Corporate Transparency Act, visit the NLR Corporate & Business Organizations section.

Large Corporate Bankruptcy Filings Surged in First Half of 2023

Increase in large corporate bankruptcy filings driven by companies in retail trade, services, and manufacturing.

The increase in large corporate bankruptcies in the first half of 2023 marked a reversal from a gradual decline in filings since the start of 2021, according to a report released today by Cornerstone Research.

The report, Trends in Large Corporate Bankruptcy and Financial Distress—Midyear 2023 Update, found that the number of bankruptcies filed by public and private companies with over $100 million in assets increased during the first half of 2023 to 72 filings, already surpassing the 53 bankruptcy filings in 2022. While the number of bankruptcies increased, the average assets at the time of filing, $780 million, were well below the 2005–2022 average of $2.05 billion and the 2022 average of $1.62 billion.

The surge in large corporate bankruptcy filings in the first half of 2023 is consistent with economic conditions posing heightened bankruptcy risk for highly leveraged companies.

Retail Trade, Services, and Manufacturing saw the most notable increases in bankruptcy filings in the first half of the year, while Mining, Oil, and Gas continued to decline. Manufacturing has already seen nearly twice as many bankruptcies as in the previous year (24 filings in 1H 2023 compared to 13 in 2022) and accounted for 33% of all bankruptcies filed in the first half of 2023.

“The surge in large corporate bankruptcy filings in the first half of 2023 is consistent with economic conditions posing heightened bankruptcy risk for highly leveraged companies,” said Matt Osborn, a principal at Cornerstone Research and coauthor of the report. “Along with a general rise in interest rates, credit spreads for highly leveraged corporate issuers compared to investment grade issuers began widening in mid-2022, a shift that generally persisted into the first half of 2023.”

The number of mega bankruptcies, those filed by companies with over $1 billion in reported assets, also increased. In the first half of 2023, the number of mega bankruptcies already matched the full-year total for 2022 of 16 and surpassed the 2005–2022 half-year average of 11. The largest bankruptcy was filed by SVB Financial Group, with $19.68 billion in assets at the time of filing. The largest non-financial-firm bankruptcy filing was by Bed Bath & Beyond Inc., with $4.40 billion in assets at the time of filing. Six mega bankruptcies were filed by companies in the Services industry.

Additional Statistics and Trends

  • The first half of 2023 saw an average of 12 bankruptcies per month, nearly twice the monthly average between 2005 and 2022 of 6.4.
  • The average assets at the time of filing among the largest 20 bankruptcies in the first half of 2023 ($32 billion) were 41% lower than that of the 20 largest in 2022 ($3.95 billion).
  • The most common venues for bankruptcy filings were Delaware and the Southern District of Texas, which accounted for 39% and 32% of all bankruptcy filings in 1H 2023, respectively.
  • The second half of 2022 saw a large number of corporate bankruptcies involving crypto lending companies, exchanges, and related businesses, with such bankruptcy filings continuing in the first half of 2023.

Click here to read the full report.

Copyright ©2023 Cornerstone Research
For more news on 2023 Bankruptcy Filings, visit the NLR Bankruptcy & Restructuring section.

What Can We Learn From OFAC Enforcement Actions?

The Office of Foreign Assets Control (OFAC) has closed eight enforcement actions so far in 2023. These enforcement actions targeted companies, financial institutions, and individuals in the United States and abroad, and they resulted in more than $550 million in settlements.

What can other companies, financial institutions, and individuals learn from these enforcement actions? OFAC publishes Enforcement Releases on its website, and these releases provide some notable insights into OFAC’s sanctions enforcement tactics and priorities. By understanding these tactics and priorities, potential targets of OFAC enforcement actions can take strategic steps to bolster their sanctions compliance programs and efforts and reduce their risk of facing OFAC scrutiny.
Notably, all eight of OFAC’s enforcement actions so far in 2023 resulted in settlements with the target. As discussed further below, the majority of these enforcement actions also resulted from voluntary self-disclosures—so it makes sense that the companies and financial institutions involved were interested in settling. There are several other notable consistencies among OFAC’s 2023 enforcement actions as well.

OFAC Enforcement Actions in 2023

Here is a brief summary of each of OFAC’s enforcement actions so far in 2023:

1. Godfrey Phillips India Limited

Statutory Maximum Civil Monetary Penalty (CMP): $1.78 million

Base Penalty Amount: $475,000 (non-egregious violation, no voluntary self-
disclosure)
Settlement Amount: $332,500

Godfrey Phillips India Limited (GPI) faced an enforcement action related to its use of U.S. financial institutions to process transactions for exporting tobacco to North Korea. According to OFAC, GPI “relied on several third-country intermediary parties to receive payment, which obscured the nexus to the DPRK and caused U.S. financial institutions to process these transactions.”

In agreeing to a $332,500 settlement with GPI, OFAC considered the following
aggravating factors under its Economic Sanctions Enforcement Guidelines:

  •  GPI acted “recklessly” and exercised a “minimal degree of caution or care for U.S. sanctions laws and regulations.”
  • Several company managers had actual knowledge that the conduct at issue “concerned the exportation of tobacco to [North Korea].”
  •  The company’s actions harmed U.S. foreign policy objectives “by providing a sought-after, revenue-generating good to the North Korean regime.”

    Mitigating factors in this case included:

  • GPI had not received a Penalty Notice or Finding of Violation from OFAC in the previous five years.
  •  GPI took remedial measures upon learning of the apparent violations, including implementing new know-your customer measures and recordkeeping requirements.
  •   GPI cooperated with OFAC during its investigation.

2. Wells Fargo Bank, N.A.

Statutory Maximum CMP: $1.066 billion

Base Penalty Amount: $533,369,211 (egregious violation, voluntary self-disclosure)

Settlement Amount: $30 million

Wells Fargo Bank, N.A. faced an enforcement action related to its predecessor Wachovia Bank’s decision to provide software to a foreign bank that used the software to process trade-finance transactions with sanctioned nations and entities. While noting multiple failures by the bank (including its failure to identify the issue for seven years “despite concerns raised internally within Wells Fargo on multiple occasions”), OFAC agreed to settle Wells Fargo’s potential half-billion-dollar liability for $30 million. Aggravating factors in this case included:

  •  Reckless disregard for U.S. sanctions requirements and failure to exercise a minimal degree of caution or care.
  • The fact that senior management “should reasonably have known” that the software was being used for transactions with sanctioned jurisdictions and entities.
  • Wells Fargo undermined the policy of OFAC’s sanctions programs for Iran, Sudan, and Syria by providing the software platform.

Mitigating factors in this case included:

  • Wells Fargo had a strong sanctions compliance program at the time of the apparent violations.
  • The “true magnitude of the sanctions harm underlying the conduct” is less than the total value of the transactions conducted using the software platform.
  • Wells Fargo had not received a Penalty Notice or Finding of Violation from OFAC in the previous five years and remediated the compliance issue immediately.

3. Uphold HQ Inc.

Statutory Maximum CMP: $44,468,494

Base Penalty Amount: $90,288 (non-egregious violation, voluntary self-disclosure)

Settlement Amount: $72,230

Uphold HQ Inc., a California-based money services business, faced an enforcement action related to its processing of transactions for customers who self-identified as being located in Iran or Cuba or as employees of the Government of Venezuela. The 152 transactions at issue involved a total value of $180,575. Aggravating factors in this case included:

  •  Failure to exercise due caution or care when conducting due diligence on customers who provided information indicating sanctions risks.
  • Uphold had reason to know that it was processing payments for customers in Iran and Cuba and who were employees of the Venezuelan government.

Mitigating factors in this case included:

  •  Uphold had not received a Penalty Notice or Finding of Violation from OFAC in the previous five years.
  • Uphold cooperated with OFAC’s investigation.
  •  Uphold undertook “numerous” remedial measures in response to OFAC’s investigation.

4. Microsoft Corporation

 
Statutory Maximum CMP: $404.6 million

Base Penalty Amount: $5.96 million (non-egregious violation, voluntary self-disclosure)

Settlement Amount: $2.98 million

Microsoft Corporation faced an enforcement action related to its exportation of “services or software” to Specially Designated Nationals (SDNs) and blocked persons in violation of OFAC’s Cuba, Iran, Syria, and Ukraine/Russia-related sanctions programs. According to OFAC’s Enforcement Release, “[t]he majority of the apparent violations . . . occurred as a result of [Microsoft’s] failure to identify and prevent the use of its products by prohibited parties.” Aggravating factors in this case included:

  • Microsoft demonstrated a reckless disregard for U.S. sanctions over a seven-year period.
  •  The apparent violations harmed U.S. foreign policy objectives by providing software and services to more than 100 SDNs or blocked persons, “including major Russian enterprises.”
  •  Microsoft is a “world-leading technology company operating globally with substantial experience and expertise in software and related services sales and transactions.”

Mitigating factors in this case included:

  • There was no evidence that anyone in Microsoft’s U.S. management was aware of the apparent violations at any time.
  • Microsoft cooperated with OFAC’s investigation.
  • Microsoft undertook “significant remedial measures and enhanced its sanctions compliance program through substantial investment” after learning of the apparent violations.

5. British American Tobacco P.L.C.

Statutory Maximum CMP: $508.61 billion

Base Penalty Amount: $508.61 billion (egregious violation, no voluntary self-
disclosure)
Settlement Amount: $508.61 billion

British American Tobacco P.L.C. entered into a settlement for the full statutory maximum CMP resulting from apparent violations of OFAC’s sanctions against North Korea. According to OFAC, the company engaged in a conspiracy “to export tobacco and related products to North Korea and receive payment for those exports through the U.S. financial system” by obscuring the source of the funds involved. Aggravating factors in this case included:

  •  The company “willfully conspired” to unlawfully transfer hundreds of millions of dollars from North Korea through U.S. banks.
  •  The company concealed its business in North Korea through “a complex remittance structure that relied on an opaque series of front companies and intermediaries.”
  • The company’s management had actual knowledge of the apparent conspiracy “from its inception through its termination.”
  •  The transactions at issue “helped North Korea establish and operate a cigarette manufacturing business . . . that has reportedly netted over $1 billion per year.”
  •  British American Tobacco is “a large and sophisticated international company operating in approximately 180 markets around the world.”

Mitigating factors in this case included:

  • British American Tobacco has not received a Penalty Notice or Finding of Violation in the past five years.
  •  British American Tobacco cooperated with OFAC’s investigation.

6. Poloniex, LLC

Statutory Maximum CMP: 19.69 billion

Base Penalty Amount: $99.23 million (non-egregious violation, voluntary self-disclosure)

Settlement Amount: $7.59 million

Poloniex, LLC, which operates an online trading platform in the United States, agreed to settle after it was discovered that the company committed 65,942 apparent violations of various sanctions programs by processing transactions with a combined value of over $15 million. In settling for a small fraction of the base penalty amount, OFAC noted that Poloniex was a “small start-up” when most of the apparent violations were committed and that its acquiring company had already adopted a more-robust OFAC compliance program.

7. Murad, LLC

Statutory Maximum CMP: $22.22 million

Base Penalty Amount: $11.11 million (egregious violation, voluntary self-disclosure)

Settlement Amount: $3.33 million

Murad, LLC, a California-based cosmetics company, faced an OFAC enforcement action after it self-disclosed that it had exported products worth $11 million to Iran. While OFAC found that the company acted willingly in violating its sanctions on Iran, as mitigating factors OFAC noted the company’s remedial response and the “benign
consumer nature” of the products involved.

8. Swedbank Latvia AS

Statutory Maximum CMP: $112.32 million

Base Penalty Amount: $6.24 million (non-egregious violation, no voluntary self-disclosure)

Settlement Amount: $3.43 million

Swedbank Latvia AS faced an enforcement action related to the use of its e-banking platform by a customer with a Crimean IP address to send payments to persons in Crimea through U.S. correspondent banks. While OFAC noted that Swedbank Latvia is “a sophisticated financial institution with over one million customers” and failed to exercise due caution or care, it also noted that the bank took “significant remedial action” in response to the apparent violations and “substantially cooperated” with its investigation.

Insights from OFAC’s 2023 Enforcement Actions To Date

As these recent enforcement actions show, OFAC appears to be willing to give substantial weight to companies’ and financial institutions’ good-faith compliance efforts as well as their remedial efforts after discovering apparent sanctions violations. Cooperation was a key factor in several of OFAC’s 2023 enforcement actions as well. When facing OFAC scrutiny or the need to make a voluntary self-disclosure, companies and financial institutions must work with their counsel to make informed decisions, and they must move forward with a strategic plan in place focused on achieving a favorable outcome in light of the facts at hand.

Oberheiden P.C. © 2023
By Dr. Nick Oberheiden of Oberheiden P.C.
For more news on OFAC Enforcement Actions, visit the NLR Corporate & Business Organizations section.

Corporate Transparency Act – What You Need to Know

Beginning on January 1, 2024, the U.S. Treasury Department will be implementing heightened transparency disclosure requirements on US corporate entities. These new requirements include disclosing all beneficial owners of US corporate entities for the purpose of preventing white collar crime including money laundering, terrorism financing, and drug trafficking. The Corporate Transparency Act (“CTA”) was passed in early 2021 as part of the National Defense Authorization Act by the Financial Crimes Enforcement Network (“FinCEN”) which is a division of the U.S. Treasury Department.

REPORTING REQUIREMENTS

The CTA will require US corporate entities, such as corporations and LLCs, as well as other entities that fall under the CTA reporting requirements to disclose their ultimate Beneficial Owner Information (“BOI”). A beneficial owner is defined as an individual who, directly or indirectly, either (i) exercises “substantial control” over a reporting company or (ii) owns or controls at least 25 percent of the ownership interests of a reporting company. Certain foreign entities registered to do business in the United States may also be required to file disclosures under the CTA. Although the CTA’s requirements cover a large range of companies, many entities will benefit from an exemption from the reporting requirement including financial institutions, companies with SEC reporting obligations, insurance companies, accounting firms, certain large operating companies, etc. BOI information that will be required includes the name(s) of the individuals that ultimately own the reporting company, their date of birth, address, and a government-issued identification. BOI requirements specify that it must be the individuals that ultimately own a reporting company that are disclosed, and not simply the identity of the shareholders or the members of an intermediary holding company.

TIMING OF DISCLOSURE FILINGS

Entities created before January 1, 2024, have until January 1, 2025, to file their initial BOI report while entities created after January 1, 2024, must file their initial BOI reports within 30 calendar days of their creation or registration. FinCEN recently issued a notice whereby this 30-day rule may be extended to 90 days for 2024 filings, and the 30-day period would apply for filings made during the 2025 year.

ELECTRONIC FILING

Filing BOI reports will be done electronically through an online interface. FinCEN is currently designing and building a new IT system called the Beneficial Ownership Secure System to collect and store CTA reports, but this system will not be available for filing purposes until January 1st, 2024. According to FinCEN, the filing system will be secure, and the information provided to FinCEN will not be accessible by the public but may be disclosed to other government agencies.

MISTAKES AND CHANGES TO FILING

If any inaccuracies are identified in a BOI report already made by a reporting company, FinCEN has stated a correction must be made within 30 days. This makes the reporting obligation a rolling requirement, and not merely an annual reporting mechanism.

PENALTIES FOR FAILURE TO FILE

Deliberate non-compliance or providing false information to FinCEN can result in penalties up to $500 for each day of the violation. Criminal penalties include imprisonment for up to two years and/or a fine up to $10,000. Penalties are also applied to companies who are aware of or have reason to know of any error or inaccuracy in the information contained in any previously filed report and fail to correct it within 30 days.

© 2023 SHERIN AND LODGEN LLP
For more news on the Corporate Transparency Act, visit the NLR Corporate & Business Organizations section.

May A Joint Venturer Withdraw From A Joint Venture In Order To Pursue A Joint Venture Opportunity?

California’s Uniform Partnership Act of 1994 provides that a partner has a duty to refrain from competing with the partnership in the conduct of the partnership business “before the dissolution of the partnership”.  Cal. Corp. Code § 16404(b)(3).   California’s statute is based on Section 409(b)(3) of the Uniform Partnership Act.  The comment to that act flatly declares: “This duty ends when the partnership dissolves.”  Does this mean that a partner may withdraw from a partnership in order to pursue an opportunity of the partnership?

In Leff v. Gunter, 33 Cal.3d 508 (1983), the California Supreme Court held that the jury instructions correctly stated California law, under which “a partner’s duty not to compete with his partnership with respect to a partnership opportunity which is actively being pursued by the partnership survives his withdrawal therefrom.”  This case is seemingly at odds with the later enactment of Section 16404(b)(3).

In Ecohub, LLC v. Recology, Inc., 2023 WL 6725632, the plaintiff alleged, among other things, that the defendant had breached its fiduciary duty by withdrawing from a joint venture formed to submit a bid on a project in order to submit its own bid.   In ruling on the defendant’s motion to dismiss, U.S. Magistrate Judge Thomas S. Hixon acknowledged the possible tension between the Supreme Court’s holding in Leff and the statute but did not feel the need to resolve it because  the plaintiff had alleged that the defendant withdrew from the joint venture in bad faith and misused information exchanged as part of the joint venture.

© 2010-2023 Allen Matkins Leck Gamble Mallory & Natsis LLP
For more articles on California corporate law, visit the NLR Corporate & Business Organizations section.

Businesses Beware: Penalties for Failure to Comply with Reporting Requirements of the Corporate Transparency Act

Businesses, especially small and privately-owned businesses, should be aware of federal reporting requirements becoming effective Jan. 1, 2024. Congress enacted the Corporate Transparency Act (“CTA”) in 2021 to combat money laundering, terrorism financing, securities fraud, and other illicit financial activities by requiring businesses to be transparent about their ownership. With significant exceptions, the CTA generally requires businesses to report certain information—known as Beneficial Ownership Information (“BOI”)—to the federal government. BOI must be reported to the Financial Crimes Enforcement Network (“FinCEN”)—a Bureau of the U.S. Department of Treasury—where the information will be stored in a secured database. Last year, FinCEN published final regulations implementing the CTA’s reporting requirements. These regulations become effective Jan. 1, 2024.

Businesses should begin preparing for compliance with the CTA, as initial reports for existing businesses must be submitted prior to Jan. 1, 2025, and the penalties for non-compliance are severe.

What is BOI?
The CTA generally requires most domestic and foreign business entities doing business in the United States to report BOI concerning:

persons who directly or indirectly hold a 25% or greater interest in the business;
persons who directly or indirectly “exercise substantial control over” the business; and
for businesses formed after Jan. 1, 2024, persons who assisted in the preparation of the business’s organic documents.
To Whom and When Must BOI be Reported?
For existing businesses, BOI must be reported prior to January 01, 2025.
Businesses formed after Jan. 1, 2024, will have 30 days from confirmation of their formation, incorporation, or registration to report BOI.
If a business’s beneficial ownership changes following the submission of a BOI report, the business must report updated BOI to FinCEN within 30 days after such change.
Penalties for Failure to Comply with the CTA
The penalties for willfully failing to comply with the CTA’s reporting requirements are quite severe. Any person who willfully fails to report BOI or reports it inaccurately may be subject to civil and criminal penalties, including fines up to a maximum of $10,000 and imprisonment up to 2 years. Businesses should be aware that, although they may have been required to supply information regarding the entity to the secretary of state or other similar office upon formation or registration, BOI reports concern the business’ owners or controllers and must be submitted to FinCEN in addition to any information supplied to a state during the entity’s formation or registration.

An Evolving Landscape: Interplay between State Law and the Impact of the CTA on Businesses
It is yet to be seen whether states will adopt similar or identical BOI reporting requirements. As of the date of this post, legislation is pending in New York that would require LLCs to submit BOI to the New York Department of State upon organization or registration with the state. This same legislation also requires existing LLCs to amend their organic documents to include BOI.

Pennsylvania amended its Business Corporation Law effective Jan. 1, 2023, and now requires businesses conducting business in the state to file annual reports containing information regarding the entity itself. Pennsylvania does not currently require reporting of BOI. However, it is likely that Pennsylvania and many other states will soon follow the lead of the federal government and New York in requiring businesses to report BOI on a state level.

Conclusion
The CTA’s adoption is a watershed moment in the regulation of business entities. For the first time, businesses will be required to internally track and monitor their BOI to ensure compliance with the CTA. Moreover, compliance with the CTA will require businesses to evaluate their control structures and contractual relationships. For example, while it may be simple to determine whether a person owns 25% or more of a business, the determination of whether someone “exercises substantial control over” the business may not be so straightforward.

It is strongly recommended that businesses consult an experienced and qualified attorney to determine whether they are subject to the CTA’s reporting requirements, as well as any similar requirements imposed by states in the future.

©2023 Norris McLaughlin P.A., All Rights Reserved

By Rocco L. Beltrami , John F. Lushis, Jr. of Norris McLaughlin P.A.

For more on the Corporate Transparency Act, visit the NLR Corporate & Business Organizations section.

FTC and DOJ Propose Significant Changes to US Merger Review Process

On 27 June 2023, the Federal Trade Commission (FTC) and the Department of Justice–Antitrust Division (DOJ) (collectively, the Agencies) announced sweeping proposed changes to the US-premerger notification filing process. The proposed changes mark the first significant overhaul of the federal premerger notification form since its original release in 1978 and would require parties to report

On 27 June 2023, the Federal Trade Commission (FTC) and the Department of Justice–Antitrust Division (DOJ) (collectively, the Agencies) announced sweeping proposed changes to the US-premerger notification filing process. The proposed changes mark the first significant overhaul of the federal premerger notification form since its original release in 1978 and would require parties to reportable transactions to collect and submit significantly more information and documentation as part of the premerger review process. If finalized, the proposed rule changes would likely delay deal timelines by months, requiring significantly more time and effort by the parties and their counsel in advance of submitting the required notification form.

In this alert, we:

  • Provide an overview of the current merger review process in the United States;
  • Describe the proposed new rules announced by the Agencies;
  • Explain the Agencies’ rationale for the new proposed rules;
  • Predict how the proposed new rules could impact parties’ premerger filing obligations, including deal timelines; and
  • Explain what companies should expect over the next several months.

BACKGROUND ON THE HSR MERGER REVIEW PROCESS

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act or “HSR”) requires certain persons making acquisitions of assets, voting securities, and non-corporate interests (i.e., interests in partnerships and limited liability companies) to:

(a)    File premerger notifications with the FTC and DOJ; and

(b)    Wait until the expiration or termination of a waiting period (usually 30 days) before consummating the acquisition.

Most mergers and acquisitions valued in excess of USD$111.4 million fall under the HSR Act subject to size-of-party thresholds in certain cases. Additionally, there are several exemptions that may apply to an otherwise reportable transaction.

The FTC or the DOJ reviews the parties’ HSR filings during the waiting period to determine whether the transaction may substantially lessen competition in violation of the antitrust laws. If, at the end of the waiting period any concerns have not been placated, the reviewing agency may issue a Request for Additional Documents and Information (commonly referred to as a Second Request), a very broad subpoena-like document seeking documents, data, and interrogatory responses from the filers. This tolls the waiting period until both parties substantially comply with the Second Request. The reviewing agency then has an additional 30-day period to decide whether to challenge the transaction in court.

WHAT ARE THE PROPOSED CHANGES?

On 27 June 2023, the FTC and DOJ announced a number of significant changes to the HSR notification form and filing process, the first such overhaul in almost 45 years. The Agencies released the proposed changes and rationale for the same in a 133-page Notice of Proposed Rulemaking (Notice) that will be published in the Federal Register later this week. While antitrust practitioners are still digesting the full extent of all of the proposed changes, it is clear that they would require parties to submit significantly more information and documentation to the Agencies as part of their HSR notification form. The most notable additional information and documentation includes:

  • Submission of additional deal documents, including draft agreements or term sheets (as opposed to just the preliminary agreement), where a definitive transaction agreement has not yet been executed; draft versions of all deal documents (as opposed to just the final versions); documents created by or for the deal team lead(s) (as opposed to just officers and directors); and verbatim translations of all foreign language documents.
  • Details about acquisitions during the previous 10 years.
  • Identification of and information about all officers, directors, and board observers of all entities within the acquiring person, including the identification of other entities these individuals currently serve, or within the two years prior to filing had served, as an officer, director, or board observer.
  • Identification of and information about all creditors and entities that hold non-voting securities, options, or warrants totaling 10% or more.
  • Disclosure of subsidies (e.g., grants and loans), by certain foreign governments, including North Korea, China, Russia, and Iran.
  • Narrative description of the strategic rationale for the transaction (including projected revenue streams), a diagram of the deal structure, and a timeline and narrative of the conditions for closing.
  • Identification and narrative describing horizontal overlaps, both current and planned.
  • Identification and narrative describing supply agreements/relationships.
  • Identification and narrative describing labor markets, as well as submission of certain data on the firms’ workforce, including workforce categories, geographic information on employees, and details on labor and workplace safety violations.
  • Identification of certain defense or intelligence contracts.
  • Identification of foreign jurisdictions reviewing the deal.

WHY ARE THESE CHANGES BEING PROPOSED?

In its press release announcing the proposed new rules, the FTC stated that “[t]he proposed changes to the HSR Form and instructions would enable the Agencies to more effectively and efficiently screen transactions for potential competition issues within the initial waiting period, which is typically 30 days.”1 The FTC further explained:

Over the past several decades, transactions (subject to HSR filing requirements) have become increasingly complex, with the rise of new investment vehicles and changes in corporate acquisition strategies, along with increasing concerns that antitrust review has not sufficiently addressed concerns about transactions between firms that compete in non-horizontal ways, the impact of corporate consolidation on American workers, and growth in the technology and digital platform economies. When the Agencies experienced a surge in HSR filings that more than doubled filings from 2020 to 2021, it became impossible to ignore the changes to the transaction landscape and how much more complicated it has become for agency staff to conduct an initial review of a transaction’s competitive impact. The volume of filings at that time also highlighted the significant limitations of the current HSR Form in understanding a transaction’s competitive impact.2

Finally, the FTC also cited certain Congressional concerns and the Merger Fee Filing Modernization Act of 2022, stating that the “proposed changes also address Congressional concerns that subsidies from foreign entities of concern can distort the competitive process or otherwise change the business strategies of a subsidized firm in ways that undermine competition following an acquisition. Under the Merger Filing Fee Modernization Act of 2022, the agencies are required to collect information on subsidies received from certain foreign governments or entities that are strategic or economic threats to the United States.”

HOW WILL THESE CHANGES POTENTIALLY IMPACT PARTIES’ HSR FILINGS?

The proposed changes, as currently drafted, would require significantly more time and effort by the parties and their counsel to prepare the parties’ respective HSR notification forms. For example, the proposed new rules require the identification, collection, and submission of more deal documents and strategic documents; significantly more information about the parties, their officers, directors and board observers, minority investments, and financial interests; and narrative analyses and descriptions of horizontal and non-horizontal relationships, markets, and competition. Gathering, analyzing, and synthesizing this information into narrative form will require significantly more time and resources from both the parties and their counsel to comply.

Under the current filing rules, it typically takes the merging parties about seven to ten days to collect the information needed for and to complete the HSR notification form. Under the proposed new rules, the time to gather such information and complete an HSR notification form could be expanded by multiple months.

WHAT IS NEXT?

The Notice will be published in the Federal Register later this week. The public will then have 60 days from the date of publication to submit comments. Following the comment period, the Agencies will review and consider the comments and then publish a final version of the new rules. The new rules will not go into effect until after the Agencies publish the final version of the new rules. This process will likely take several months to complete, and the new rules–or some variation of them–will not come into effect until that time.

While the final form of the proposed rules are not likely to take effect for several months, the Agencies’ sweeping proposed changes to the notification form and filing process are in line with the type of information that the Agencies have been increasingly requesting from parties during the merger review process. Accordingly, parties required to submit HSR filings over the next several months should be prepared to receive similar requests from the Agencies, either on a voluntary basis (e.g., during the initial 30-day waiting period) or through issuance of a Second Request, and they should build into their deal timeline (either pre- or post-signing) sufficient time to comply with these requests.

 

1 “FTC and DOJ Propose Changes to HSR Form for More Effective, Efficient Merger Review,” FTC Press Release, June 27, 2023, available at FTC and DOJ Propose Changes to HSR Form for More Effective, Efficient Merger Review | Federal Trade Commission.  

2 “Q and A on the Notice of Proposed Rulemaking for the HSR Filing Process,” FTC Proposed Text of Federal Register Publication, available at 16 CFR Parts 801 and 803: Premerger Notification; Reporting and Waiting Period Requirements | Federal Trade Commission (ftc.gov).

Copyright 2023 K & L Gates

Diving Into SECURE 2.0: Changes for Small Employer Retirement Plans

International arbitration provides a binding, neutral, and consensual process for resolving contractual disputes between parties, often resulting in resolutions that are quicker, cheaper, more private, and more controllable than litigation in a court of law. Accordingly, arbitration for the resolution of international disputes between contracting parties from different legal jurisdictions has emerged as a fundamental method for resolving complex disputes in an ever-increasingly interconnected world. Multinational companies should make sure they stay up to date on the fundamentals of international arbitration, and it all starts with ensuring any arbitration clause included in an international agreement is drafted in a way that is enforceable and provides contracting parties a clear path toward the resolution of their dispute.

Why Should You Care about What Your Arbitration Clause Says?

An arbitration clause is the starting point for determining the parties’ intent in resolving their dispute outside a court of law. It is an independent agreement within the broader contract, likely enforceable even if the remainder of the contract is procured by fraud, and sits at the apex of what a court or arbitrator will look for to determine the parties’ intent with respect to how a dispute between contracting parties should be resolved.

A clear arbitration clause results in a meaningful, enforceable outcome, minimizes the intervention of U.S. or foreign judiciaries in what should be a private dispute resolution process, grants the third-party administrator and/or the arbitrator the powers necessary to resolve the dispute, and is conducted in accordance with procedures that help guarantee a fair, efficient proceeding.

In contrast, if an arbitration clause is ambiguous, there may be a finding that there is no dispute resolution agreement to enforce. This can result in challenges to the arbitration clause’s enforceability and potential litigation in unfavorable and less-than-ideal judicial systems. Of course, such ambiguity and challenges will create higher costs, longer windows of time to resolve disputes, greater risks that your claims in the dispute will be vulnerable to collateral attacks, and other unintended and unexpected consequences.

What Are the Hallmarks of a Clear Arbitration Clause?

For purposes of clarity, you should ensure your contract’s arbitration clause identifies:

  • Applicable Law. Which country’s (or state’s) law applies?
  • Forum and Rules. There are any number of arbitral forums, each with its own nuances in terms of procedure. Knowing the business and potential disputes that could arise will assist in selecting a good fit in terms of applicable rules.
  • Seat of Arbitration. The seat of the arbitration is more than just the place where the final hearing will take place. It provides a significant backbone to the proceeding and is as important as the selection of the forum and applicable rules.
  • Number of Arbitrators. The more arbitrators, the larger the cost, but a three-member tribunal has its place in certain disputes.
  • Language. Selecting the language (or languages) of the arbitration can greatly affect the cost of the proceeding.

Why Does Selecting the Seat of Arbitration Matter?

More than just the physical place where the arbitration will take place, the seat of arbitration is a legal construct that determines the lex arbitri — the procedural law of the arbitration.

Where the contract between the parties or the rules selected by the parties do not provide for certain procedures, the procedural laws of the seat of arbitration will be applied. Among the important aspects of a proceeding that the seat of the arbitration determines is:

  • Which courts will have supervisory jurisdiction over the arbitration;
  • Definitions and form of an agreement to arbitrate;
  • The arbitrability of the dispute;
  • The constitution of the arbitral tribunal and any grounds for challenge;
  • The equality of treatment of the parties;
  • The freedom to agree on detailed rules of procedure;
  • Interim measures of protection and court assistance;
  • Default proceedings;
  • The validity of the arbitration award; and
  • The finality of the arbitration award, including which courts will hear challenges to the award.

If not clearly identified by the parties, the seat of arbitration — and the procedural laws of that seat — will be selected by the arbitral tribunal.

What Do the Rules You Picked Say About Interim Measures?

A major consideration in selecting the applicable arbitral rules is the availability of interim measures. These are measures of relief, which can include injunctive relief, obtained prior to the commencement of, or during, an arbitral proceeding.

One of the most interesting forms of interim measures is an award of security. An interim award of security in arbitration is a payment of an amount of monies (usually tied to damages) pre-hearing for the conservation of, and enforcement of, a judgment so as to not render a judgment in the future a Pyrrhic victory. These securities prevent the dissipation of assets before it is too late to reach those assets. As such, it is an extremely powerful tool, and determining whether the rules you select, and/or the seat of the arbitration, allows for such an interim award should be a key consideration in drafting your arbitration clause.

What Are the Abilities and Liabilities of Third Parties?

Depending on the circumstances, jurisdiction chosen, governing law, and seat of the arbitration, a third party (a non-signatory to the agreement) can compel arbitration and be compelled to arbitration, the latter being the rarer occurrence. Knowing if there is potential exposure to such parties, which can include directors, officers, employees, beneficiaries, and others, should be assessed prior to entering into an arbitration agreement.

On What Basis Are Arbitral Awards Enforceable?

Arbitral awards, because of the adherence by more than 160 countries to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (“New York Convention”), are the most enforceable award anywhere in the world. Under the New York Convention:

  • A written agreement to arbitrate, including as contained in a contractual arbitration clause, is generally enforceable.
  • Subject to very narrow exceptions, an arbitral award may be recognized and enforced as a final judgment in each contracting country.

In contrast, no treaty requires that the judgments of a country’s court system be recognized; these enforcement decisions are made on an ad hoc basis according to principles of comity and public policy. The Hague Judgments Convention on the Recognition and Enforcement of Foreign Judgments, a treaty similar to the New York Convention, may become the relevant applicable framework in the future but is still in its infancy.

How Can Legal Counsel Help My Multinational Company Address International Arbitration Issues?

The best way to ensure a reliable and enforceable arbitration agreement is a careful examination of the structure and purpose of the contract as well as the company’s unique business profile based on how and where it does business.

Adequate legal counsel should provide clients with practical guidance in drafting and enforcing international arbitration agreements. Services provided should include:

  • Counseling: Counseling companies to understand how international arbitration clauses apply to their multinational operations, how they may benefit from such clauses, and/or how such clauses may not be in their best interest.
  • Drafting: Working with clients to ensure enforceable and clearly understood arbitration clauses are prepared for the specific contractual relationship, considering the myriad factors that go into preparing such a clause.
  • Risk Assessments: Working with companies to conduct risk assessments in the event of contract disputes with arbitration clauses.
  • Arbitration: Arbitrating before tribunals to secure interim securities and/or enforceable arbitral awards in the event of a contract dispute anywhere in the world.

© 2023 Foley & Lardner LLP

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