News Type: Blogs

Despite veto drama during the waning days of the Trump administration, the William (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA) was enacted into law, and deep within its 1480 pages is a title-coined the Corporate Transparency Act (CTA)-that establishes new and more stringent reporting requirements. This represents but a small set of robust changes to U.S. anti-money laundering legislation that is part of the NDAA.

At its core, the CTA aims to eliminate anonymity of certain beneficial owners of entities (read: corporations, limited liability companies, financial institutions, and funds) formed in any U.S. state or territory or otherwise registered to do business in this country. It does so by commanding that beneficial ownership information be reported, all in an effort to eliminate (or at least minimize) the use of U.S.-incorporated shell companies for purposes of money laundering or terrorist financing schemes. .

Given this rather precise objective, the list of entities exempt from the CTA is a long one, and not every domestic company will need to comply. More on that below.

Reporting Requirements Under the CTA

The CTA mandates so-called “reporting companies,” defined broadly to encompass corporations, limited liability companies, and other similar entities created or registered to do business in the U.S., to submit a report to the Financial Crimes Enforcement Network of the Department of the Treasury. These reports must include the full legal name, date of birth and address (residential or business) of each entity’s beneficial owner, as well as a unique identifying number or identifier to be provided by FinCEN.

In terms of timing, entities formed before the effective date of the CTA have two years to submit their reports to FinCEN, while new companies must make their submissions at the time of formation or registration. Then, going forward, entities are obliged to report any change in beneficial ownership within one year of occurrence.

Information reported pursuant to the CTA is considered nonpublic and must be kept confidential by FinCEN, unless release is necessary under certain circumstances as enumerated in the statute. For example, the Department of the Treasury will have access to beneficial ownership data “for inspection or disclosure to officers and employees … whose official duties require such inspection or disclosure subject to procedures and safeguards” and for tax administration purposes. Likewise, federal agencies along with state, local, or tribal law enforcement agencies may request such information in furtherance of national security, intelligence, or law enforcement activity and for use in criminal or civil investigations.

There is more. So long as they are compliant with certain limited use requirements, requests for beneficial ownership information can be made on behalf of foreign authorities to assist with ongoing investigations. Financial institutions can make similar requests, but only with consent of the reporting company and subject to customer due diligence requirements. And finally, federal regulatory agencies, including federal functional regulators, are entitled to seek beneficial ownership information stored by FinCEN, subject to scope and use limitations contained in the CTA.

Rest assured, within a year FinCEN is expected to promulgate regulations implementing the CTA that should shed more light on these reporting requirements, among other things.

Beneficial Owners

The reporting requirements of the CTA beg the question: who can be deemed an entity’s beneficial owner? The answer as set forth in the law is not entirely straightforward: “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.” Interestingly, not mentioned are people receiving substantial economic benefits from the assets of the entity, which language was found in an earlier draft of the CTA.

It is anticipated that FinCEN will include further clarifying information expanding on this somewhat vague definition when it implements its regulations. In the meantime, earlier codified FinCEN regulations (31 C.F.R. § 1010.230(d)) provide a bit of insight to the extent they characterize a beneficial owner as “[a] single individual with significant responsibility to control, manage, or direct a legal entity… including” an executive officer or senior manager or other individual performing similar functions. Of note, expressly carved out of this definition are (1) minor children; (2) individuals acting as nominees, custodians, or agents of another individual; (3) those acting solely as employees of the entity in question and whose control is derived solely from that employment status; (4) individuals whose only interest in the entity is through a right of inheritance; and (5) creditors of the entity, unless such creditor meets certain enumerated criteria.

Exempt Entities

On paper, every business formed or operating in the U.S. is subject to the CTA. However, there are two very important exceptions: (1) foreign establishments not registered to do business here, and (2) certain specified exempted entities-spoiler alert: there are a lot of them, 24 to be exact.

Those specifically exempt from the CTA include, but are not limited to:

• Entities that are already regulated (including public companies; financial services companies, such as public accounting firms; and public utilities)
• Entities exercising governmental authority on behalf of the U.S. or any Native American tribe, state, or political subdivision
• Certain banks, bank holding companies, and federal and state credit unions
• Investment advisers and their operational investment vehicles
• Insurance companies and producers authorized by a state
• Tax exempt political organizations
• Any entity with a physical office within the U.S. that employs more than 20 employees full-time and has filed federal income tax returns demonstrating more than $5 million in gross receipts or sales in the aggregate
• Any entity that has been in existence for over one year, is not engaged in active business, not owned directly or indirectly by a foreign person, that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds greater than $1,000, and does not otherwise hold any kind of asset, including ownership interests in any other corporation, limited liability company, or similar entity
• Brokers or dealers as defined in the Securities Exchange Act
• Financial market utilities designated by the Financial Stability Oversight Council
• Any pooled investment vehicles
• Any entity or class of entities that the Secretary of the Treasury has determined, by regulation, should be exempt from the reporting requirements of the CTA

Bottom line, a wide swath of companies created or registered to do business in the U.S will not be impacted by the CTA’s reporting mandates.

Violations and Penalties

For entities not exempt from the CTA, the consequences of failing to abide by its requirements are significant. Individuals who willfully provide or attempt to provide false or fraudulent beneficial ownership information or who fail to report information to FinCEN at all will be liable for civil penalties up to $500 per day that the violation continues (up to $10,000), and/or imprisonment for not more than two years. Persons who participate in an unauthorized disclosure or use of the beneficial ownership information are subject to even harsher penalties-$250,000 and not more than five years imprisonment.

Impact of the CTA

Prior to the enactment of the NDAA-and with it the CTA-the U.S. had become the anonymous shell company capital of the world. In response, Congress has sought to flip the switch on these shell companies and add an unprecedented level of corporate transparency by overwhelmingly passing the NDAA in a bipartisan manner. Indeed, so strong was the support of the legislation from both sides of the aisle that then-President Trump’s veto was quickly overridden by both the House of Representatives and Senate.

Now that the CTA is the law, the beneficial ownership reporting requirements imposed on non-exempt entities should go a long way toward cracking down on those who rely on shell companies to launder money and fund criminality, including terrorism, nationwide. That being said and given the broad exemptions, the number of companies actually impacted by the new statute may prove to be far and few between.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Early last year, California enacted Senate Bill 824 (codified as section 675.1(b)(1) of the California Insurance Code), which serves to prohibit insurers from canceling or non-renewing policies of residential property insurance placed on homes located in certain ZIP codes for a year after the declaration of a state of emergency related to a California wildfire. The statutory provision also requires the California Insurance Commissioner to issue a bulletin informing insurers of the ZIP codes subject to the moratorium.

This month, Commissioner Ricardo Lara did just that by releasing Bulletin 2020-11 (the “Bulletin”) and a corresponding press release that once again notifies insurers of the one-year moratorium and sets forth the ZIP codes that are off limits in terms of notices of cancellation or non-renewal due to wildfire risk. In this alert, Michelman & Robinson explains how the Bulletin (not to be confused with a similar bulletin the Commissioner sent out last year) affects insurance companies and insureds, alike, and when the moratorium effectively began.

Q. What does the Bulletin provide?

A. Simply put, the Bulletin acts as a notice to insurers explaining that they are precluded from cancelling or non-renewing policies of residential property insurance held by insureds in certain ZIP codes within California for one year. Of note, it is the statutory provision (section 675.1(b)(1) of the California Insurance Code), not the Bulletin, that triggers this prohibition upon the Governor declaring a state of emergency due to wildfire(s).

Q. When does the moratorium begin?

A. It is important to stress that for many insurers, the Bulletin is their first notice of the requirements of the moratorium. Nonetheless, the effective date of the one-year prohibition is the date the Governor declares a wildfire-related state of emergency, not the date of the Bulletin itself. As such, insurers may find themselves in the position of having already issued cancellation or non-renewal notices and now having to retract them.

Q. Who does the Bulletin affect?

A. According to Commissioner Lara, the Bulletin impacts more than 2 million policyholders affected by wildfires. The specific ZIP codes covered by the moratorium, along with the corresponding effective dates (based on the declaration of each state of emergency to date), are listed in the Bulletin.

Q. Under what authority is Commissioner Lara acting?

A. The Bulletin issued by Commissioner Lara comes in the wake of Governor Newsom’s four separate state of emergency declarations made in August and September of 2020, all of which relate to several wildfires that ravaged California. The Commissioner’s action is pursuant to the law (section 675.1 of the California Insurance Code), which requires him to notify insurers of the moratoria that began on the date of each respective state of emergency and end one year later (e.g., in August and September of 2021, depending on the particular wildfire, state of emergency, and ZIP code).

Q. Who should insurers contact for information regarding the Bulletin?

A. The Bulletin directs all insurers with questions to contact Risa Salat-Kolm, an attorney within the enforcement bureau of the California Department of Insurance. She can be reached by email at risa.salat-kolm@insurance.ca.gov. Of course, carriers can also reach out to the insurance professionals at M&R for advice and counsel.

In the meantime, we will continue monitoring Commissioner Lara’s office for news on this and any future bulletins he may issue down the road.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

This week, the U.S. Supreme Court agreed to hear a case of great consequence when it comes to judicial review of IRS guidance that arguably concerns tax collection or assessment. At issue in CIC Services LLC v. Internal Revenue Service is the scope of the Anti-Injunction Act and, more specifically, what constitutes the collection or assessment of taxes for purposes of the statute.

CIC Services LLC is a risk management consulting firm and material advisor to captive insurance companies. Its lawsuit relates to Notice 2016-16 issued by the Treasury Department and IRS, by which the federal government:

• Identified certain transactions entered into between taxpayers and related captive insurance companies as having the potential for tax avoidance or evasion (micro-captive transactions);
• Labeled micro-captive transactions as “transactions of interest;” and
• Subjected micro-transactions to reporting requirements and potential penalties associated with “reportable transactions.”

In a nutshell, Notice 2016-16 served to label micro-captive transactions as potentially abusive tax shelters, much to the chagrin of CIC Services. In response, the company filed its complaint against the IRS in the United States District Court for the Eastern District of Tennessee, seeking to render Notice 2016-16 and its mandates invalid. CIC Services alleged that in issuing the notice, the IRS failed to follow the requisite notice-and-comment rulemaking and congressional review procedure for legislative rules as set forth in the Administrative Procedure Act.

The trial court dismissed CIC Services’ complaint for lack of subject matter jurisdiction, holding that the Anti-Injunction Act divested it of jurisdiction because the lawsuit was “for the purpose of restraining the assessment or collection of any tax.” CIC Services appealed this ruling to the Sixth Circuit, arguing that the Anti-Injunction Act did not prohibit pre-enforcement review of Notice 2016-16 because it is not geared toward tax collection or assessment; rather, the Administrative Procedure Act compels such a review.

For its part, the IRS contended that compelling taxpayers to report on the use of potentially questionable tax shelters (read: micro-captive transactions) is (and was) related to tax collection and therefore protected by the Anti-Injunction Act. The Sixth Circuit agreed, finding that the Anti-Injunction Act barred CIC Services’ litigation.

By way of certiorari, the U.S. Supreme Court has stepped in and is set to hear CIC Services LLC v. Internal Revenue Service during its October 2020 term. Michelman & Robinson will be sure to follow this interesting case and convey the High Court’s decision.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

In a dramatic departure from the rather flexible standard for joint employer liability embraced under the Obama administration, the Department of Labor has announced a final rule regarding joint employer status under the Fair Labor Standards Act (FLSA) that will surely please employers. It becomes effective in mid-March. The new rule is, in part, a response to the business community’s outcry against prior decisions finding franchisors to be joint employers of their franchisees’ employees, even when those franchisors lacked control over the terms and conditions of workers’ employment.

Four-Factor Balancing Test

In a nutshell, the DOL has adopted a four-factor balancing test to establish whether two or more affiliated businesses jointly employ workers that perform tasks for one company while simultaneously benefiting the other. As finalized, this test weighs whether a potential joint employer:

1. Hires or fires an aggrieved employee;
2. Supervises and controls the employee’s work schedules or conditions of employment to a substantial degree;
3. Determines the employee’s rate and method of payment; and
4. Maintains the workers’ employment records.

Of note, not every one of these factors must be satisfied for a business to be considered a joint employer.

Clearly, the DOL’s new rule is a far cry from the Obama standard, which made it easier for workers to sue their employees by considering a business to be a joint employer not only if it exercised direct control of an employee’s activities, but also if it had “indirect” or even “potential” control. The net effect of the rule as reworked will be to reduce joint employer liability, which is good news for businesses.

The Takeaway

All companies, including yours, should be mindful of joint employer liability because when two businesses are deemed joint employers under the FLSA, they share responsibility for their employees’ wages and can both be deemed legally liable for wage violations. That being said, the DOL’s final rule gives employers more leeway than previous incarnations, is limited to the FLSA, and has no effect on the issue of joint employer liability as it relates to other federal or state employment statutes.

Of course, the labor and employment attorneys at Michelman & Robinson, LLP are here to answer any questions you may have about joint employer liability or, for that matter, any other employment-related issue.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

If you’re in management, there’s some good news to report out of the National Labor Relations Board-at least theoretically.

The NLRB has just ruled that it’s not a violation of federal law-namely, the National Labor Relations Act-when employers misclassify their workers as independent contractors, as opposed to employees.

Classification issues have made headlines of late, especially in the wake of the California Supreme Court’s decision in Dynamex Operations West Inc. v. Superior Court, which significantly relaxed the standard applied in California to determine whether any given individual may be acting as an employee or independent contractor. But let’s put a pin in that for just a moment.

In the matter before the NLRB, Velox Express (a medical logistics company) was found to have misclassified certain workers as independent contractors. Despite this conclusion, the Board held that the misclassification didn’t violate the NLRA, which makes it illegal for employers to punish workers for forming unions or otherwise engaging in “concerted activities.” The NLRB determined that misclassification on the part of Velox didn’t serve to suppress workers’ organizing rights-this because the workers in question weren’t “inherently threatened” with firing or other discipline for acting together (and misclassification, by itself, wasn’t tantamount to such a threat).

The takeaway from the case is straightforward-employers that misclassify workers aren’t subject to NLRB litigation in the absence of some other labor law violation-though perhaps it’s something of a non-issue given the impact of certain state laws.

In California, for example, misclassification violates state law and related claims can still be brought by aggrieved workers (either individually or in a representative capacity) and the Division of Labor Standards Enforcement – the administrative agency charged with enforcement of the Labor Code. That being said, and given the ruling in Dynamex-by which an individual may be denied the status of employee only if the worker is the type of traditional independent contractor (such as an independent plumber or electrician) who would not reasonably have been viewed as working in the hiring business-there may well be an uptick rather than downturn of misclassification cases notwithstanding the NLRB’s take on the topic.

Long story short: (1) misclassification should remain front and center on company radar screens, and (2) the upside of the NLRB’s Velox Express ruling is likely reserved for entities with locations in states that largely track federal law.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for guidance in specific situations.

It’s a given that employers are prohibited from discriminating against employees on the basis of sex, race, color, national origin and religion – this according to Title VII of the Civil Rights Act of 1964, which generally applies to employers with 15 or more employees, including federal, state and local governments. It’s also been a given that a court lacked jurisdiction over a court action for discrimination under Title VII until and unless an employee first filed a charge of discrimination on the underlying claim with the U.S. Equal Employment Opportunity Commission (EEOC). Not anymore. By way of its recent ruling in Fort Bend County v. Davis, the U.S. Supreme Court has determined that this now-familiar administrative filing precondition is a “procedural obligation” and not a jurisdictional prerequisite to a lawsuit.

The “jurisdictional” vs. “procedural” distinction is important because if the failure to satisfy the charge-filing requirement itself does not divest a federal court of its jurisdiction over a Title VII lawsuit, an employer-defendant to a lawsuit must now affirmatively raise the plaintiff-employee’s failure to file a charge before a court is required to enforce the requirement. And critically, although the Court noted the plaintiff-employee’s charge-filing requirement is mandatory if properly raised, the defendant-employer may forfeit such requirement it “waits too long to raise the point.”

Translation: federal courts do not lack jurisdiction over discrimination claims simply because plaintiffs bypass the EEOC. Therefore, employers and their counsel must carefully review Title VII lawsuits to ensure they do not contain allegations and claims not previously specifically identified in an EEOC charge. Failure to timely object (e.g., in a responsive pleading) to such allegations and claims not raised to the EEOC may result in a waiver of the defense that a plaintiff has failed to exhaust administrative filing requirements.

Have questions about the EEOC, Title VII or anything in between? The labor and employment attorneys at Michelman & Robinson, LLP are here with answers.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for guidance in specific situations.