Corporate Transparency Act Risks for Solo & Small Firm Attorneys - A Risk Manager’s Perspective

I’m sure this will come as no surprise; but as a risk manager with a law degree who works for a malpractice insurance company, I’m not one who embraces significant risk. I also believe it isn’t my place to tell any attorney what to do when it comes to making decisions about educating and assisting clients with their obligations under the Corporate Transparency Act (CTA). Of course, I recognize that there is a difference between advising clients on their obligations under the act and preparing the documents that need to be filed. It’s the filing part that concerns me. All I can say is I see the potential for significant risk there, so the best I can do is share my thoughts and leave the decision-making process to you.

Will our malpractice policy cover us if our firm helps clients with their reporting obligations under the act?

This is the most common question I’ve been asked about the CTA, so this seems like a good place to start. Of course, policy language will differ between insurers. Always review your policy and/or check with your insurer to be sure. That said, I can provide something of a general answer.

The CTA deals with the federal government’s efforts to identify and expose money laundering and criminal activity. The federal government has also been pushing the legal profession hard to “know your client” and effectively assist them in accomplishing their goals, which is why I need to start by reminding you of your ethical obligations. If you will assist clients in complying with the act, ensure you take your responsibilities seriously. If you haven’t already reviewed ABA Formal Opinion 491, I strongly encourage you to do so. Also remember your obligations under MRPC 1.2(d) which states “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent[.]” This is critically important because when you take on the responsibility of filing the initial beneficial ownership information report on behalf of a client, you will be required to certify that the report is true, accurate, and complete.

The reason why I needed to remind you of your ethical obligations is due to a coverage concern. Coverage will usually be in play when a lawyer assists clients with their reporting obligations under the CTA because regulatory compliance advice and assistance is something business and corporate lawyers normally do. However, lawyers can get into coverage problems when they ignore any warning flags that something about what a client is doing or saying isn’t right. Stated another way, willful blindness is never going to be a defense. This means that if a client ends up perpetrating a fraud or crime and the lawyer is eventually found to have (even unwittingly) assisted in that because he or she failed to conduct due diligence, the lawyer may very well find himself without coverage for any claim that might arise as a result. As an aside, and I will admit that it’s quite rare, be aware that over the years a few lawyers have lost their license to practice and several even served jail time for this very misstep. Just saying.

If we always take our ethical obligations seriously, are we good to go in terms of coverage?

Not necessarily, Consider the logistical problems that can arise with trying to collect accurate beneficial owner information, staying current on ownership changes and any changes of address for beneficial owners, and verifying the accuracy of the information being provided. If you are the one who will be certifying the accuracy of the information reported, you face substantial penalties for noncompliance should it turn out the information reported was inaccurate. In light of this risk, I personally feel that a decision to undertake the initial filing of beneficial owner information or the filing of any updates to the beneficial owner information should not be made lightly. This is particularly true given the availability of companies like Wolters Kluwer that specialize in helping businesses of all shape and sizes with regulatory filings. The reason I say this is because in most states malpractice policies provide no coverage for fines, penalties, and the like.

Is there anything else we should be thinking about? 

Here are two additional things to keep in mind. First, if your firm decides to assist clients with their reporting obligations, go all in. Don’t dabble in other words. You must have a thorough understanding of the CTA, to include all reporting deadlines and the consequences of noncompliance. You will need secure internal processes and systems that can streamline the accurate collection and reporting of all necessary data. Finally, make sure everyone involved with assisting clients with CTA compliance remains wary of scams, for example fake filing websites set up in an attempt to steal sensitive information.

Second, if your firm decides to refrain from assisting clients with their reporting obligations, I encourage you to at least do the following in light of your ethical obligations under MPRC 1.4 Communication. Notify all current clients about the new requirements of the CTA, to include the legal ramifications of failing to comply, and include written clarification that your firm will not be assuming responsibility for the initial filing requirements or any updates on behalf of clients. The reason is you want to prevent clients from alleging it’s your fault if they are ever penalized for noncompliance with the CTA. Also consider limiting your scope of representation in your engagement agreements with all new business clients stating that your firm will not assist with any of the filing requirements for the same reason.