Listen to this post

When the Corporate Transparency Act took effect earlier this month, most commentary rightly focused on the obligations it imposed and the measures necessary to comply with its terms. As part of that analysis, commentators routinely noted the act contains criminal provisions providing for fines and imprisonment. From a defense perspective, the creation of new crimes is generally considered negative. But these new provisions could—counterintuitively—offer some benefits in certain cases. Where defense counsel faces complex plea negotiations that otherwise lack a viable path forward, the act may serve a valuable purpose.

Overview

The act’s general terms and expected impact are reviewed at length elsewhere, including our colleagues’ recent post. In substance, the act requires companies to report “beneficial ownership information” to the Financial Crimes Enforcement Network (FinCEN). The act’s underlying purpose is “to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

Two Potential Categories of Criminal Violations

The act’s criminal provisions create two forms of potential violation:

  1. “Reporting” violations that involve willful efforts to either provide or attempt to provide false or fraudulent beneficial ownership information, the provision of a false or fraudulent identifying document or photograph to FinCEN when reporting such information, or the willful failure to report complete or updated beneficial ownership information (31 U.S.C. § 5336(h)(1)); and
  2. “Unauthorized disclosure or use” violations that involve disclosure or use of beneficial ownership information obtained by FinCEN, except as specifically authorized (31 U.S.C. § 5336(h)(2)).

Reporting violations are punishable by up to two years’ imprisonment and a fine of not more than $10,000. Unauthorized disclosure and use violations are deemed more serious, and punishable by up to five years’ imprisonment and a fine of not more than $250,000 (increased to a maximum of 10 years’ imprisonment and a $500,000 when committed as a pattern of illegal activity involving more than $100,000 over a 12-month period).

Likely Narrow Application

The “unauthorized disclosure or use” theory has relatively narrow application, as it is essentially limited to those who work with FinCEN or otherwise have access to reported information (similar to 31 U.S.C. § 5336(h)(1), which prohibits the disclosure of tax return information).

Reporting violations theoretically allow for a broader application, reaching those who supply – or fail to supply – such information to FinCEN. That category contains a heightened mens rea element, requiring “willful” violation. In this context, willful means the “intentional violation of a known legal duty.”

As a practical matter, the enhanced intent requirement likely means the reporting violations will be charged infrequently in contested matters. The chances that those violations may be charged as stand-alone offenses are even lower, as their apparently technical nature has limited jury appeal absent broader context. When this theory is pursued, it is far likely to serve as support a broader allegation of fraudulent intent. By charging purposeful efforts to evade known reporting obligations, the government enhances its ability to offer what is effectively consciousness of guilt evidence that can apply to the larger scheme.

A Good Thing?

Likely infrequent application, of course, does not make a statute “a good thing.” Rather, the statute’s benefit may be that it enables a resolution in certain cases where it would be otherwise difficult to reach. In many white-collar cases, the parties struggle to reach a resolution due to uncertainty about the scope of exposure, both from a sentencing perspective and in terms of professional licensure sanctions. The U.S. Sentencing Guidelines, even though advisory, often add further ambiguity. Binding pleas offer some measure of comfort, but many prosecutors are disinclined to consider them, and some courts refuse to accept them.

When these types of challenges exist, a plea to a reporting violation can be a viable path forward. From a sentencing perspective, the two-year statutory maximum offers some comfort, particularly when the recently enacted zero-point offender guideline is applied. This approach also mitigates the risk of collateral consequences, both in terms of the stigma the defendant faces and potential licensure issues given that the offense is unlikely to be deemed to have occurred “within the scope of practice” (as would typically trigger many licensure actions), nor would it be considered a crime of moral turpitude (as would trigger others).

The full effect of the act’s reporting provisions remains to be determined. In theory, however, their content and potential application provide reason for optimism, not gloom.