Shhhh…!

Can you keep a secret?

Great! Now, do you believe that the U.S. Government can also keep a secret?

That question isn’t purely academic—and your answer may be put to the test when new disclosure requirements under the Corporate Transparency Act (“CTA”) go into effect in the U.S. on January 1, 2024.

First, some background. One benefit of conducting business in the U.S.—and a beloved (or bemoaned) feature of our highly opaque art market—has always been the ability to use anonymous entities to keep the identity of those who own or control companies secret from both the government and the public.

The traditional U.S. approach to shielding the identity of corporate owners differs from that of many other Western countries, where ownership information can be found on government registers accessible by anyone. This is one reason why U.S. companies have been used in so many high value art transactions, and why, according to the Financial Secrecy Index prepared by the Tax Justice Network, America’s legal and financial system rank ahead of even Switzerland, Singapore and Hong Kong in being “complicit in helping individuals to hide their finances from the rule of law.”

The benefit to this secrecy in legitimate art transactions here is obvious—and we aren’t going near the issue of nefarious players. After all, what savvy art dealer or advisor wouldn’t want to hide the identity of her client behind an anonymous corporate entity when dealing with, say, a prospective buyer or auction house rep?

The CTA reflects the recent shift in the longstanding U.S. approach to corporate secrecy and requires companies to report information on their owners to the U.S. Treasury’s Financial Crimes Enforcement Network (known as “FinCEN”). According to the U.S. Treasury, this “sensitive information” will be stored by FinCEN in a “secure, confidential database.”

What that all means remains to be seen. But in the interim we thought we would answer a few questions posed by our clients and others about this new law. Bottom line: the CTA will have an impact on U.S. businesses in general, and on galleries, art advisors, private dealers, and other art world players, in particular.

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Q: What is the real purpose of the CTA—and why was this law just passed now?

A: The CTA is basically an anti-money laundering statute designed to prevent bad actors from moving illicit funds through anonymous shell companies, though the law has broader reach than that. This statute was actually passed in 2021, though the effective date was delayed until 2024. According to Thomson Reuters, the “law was largely ignored by accounting professionals at first,” but as the effective date approaches, “people are starting to panic.”

Q: “Panic” doesn’t sound good. What information do companies need to report to the Government under the CTA, and when does the filing have to be made?

A: The disclosure requirements are quite extensive and include the name of all beneficial owners (individuals owning 25% or more of the company, or who control the company), their dates of birth, addresses and copies of passports, driver’s licenses or other official documentation. The filing date depends on when a company was formed. For corporations created before January 1, 2024, the filing deadline is January 1, 2025.

Q: I am not a “bad actor” but don’t want the Government to know about my business. What happens if I don’t make the CTA filing?

A: The Government will gently encourage people like you to comply with the CTA by assessing penalties of up to $500 a day until the filing is made—with the added incentive of criminal penalties of up 2 years in prison and an additional $10,000 fine. So you might wish to reconsider here.

Q: My Madison Avenue gallery is owned and operated by a New York corporation. It sounds like I need to comply with the CTA, correct?

A: As with other corporations, this depends on the size of the gallery and its revenues. If it has more than 20 employees and over $5 million in annual sales, then you are off the hook and don’t need to file under the CTA. If not, you must file. And in addition to large corporations, other entities such as non-profits, banks, and insurance companies are also exempt from filing.

Q: How about an art advisory business operated as a limited liability company?

A: If it doesn’t meet one of the CTA’s 23 listed exemptions, it would have to file.

Q: I work with a very private European collector who buys works in the U.S. through her single purpose Delaware corporation. Will that company have to file here and will the collector’s personal information go in the FinCen database?

A: Almost certainly.

Q: I am concerned about my private information leaking out. Who will have access to the information filed under the CTA?

A: Great question. As it now stands, the list includes federal, state, and local officials in the U.S., and certain unnamed foreign officials—plus, in some cases, financial institutions and their regulators.

Q: How exactly will the Government protect my confidential information?

A: The FinCen website assures us that data will be stored “using rigorous information security methods and controls” to protect “non-classified yet sensitive information systems at the highest security level.” So the confidential information on you and your company filed under the CTA should not be made public.

Q: Do you really believe that?

A: Can you keep a secret…?

Thomas C. Danziger and Bradley J. Muro are partners in the New York firm Danziger, Danziger & Muro, LLP, specializing in art law. Go to danziger.com for more information. Some of the material above has been edited to preserve client confidentiality or has been made up out of whole cloth. Nothing in this article is intended to provide specific legal advice.