How to Stay Rich (and out of jail)

But it’s the phrase “series of offshore companies” that might stick in your head more than any catchy lyric. That’s because a proliferation of regulations meant to curtail the illegal use of anonymous LLCs and trusts to launder money, may also now impact millions of legitimately affluent Americans.

Money laundering—the process of turning criminal profits into “clean” untraceable cash—is a major problem in the United States and in the rest of the world. Here’s an excerpt from the U.S. Treasury Department’s 2022 National Money Laundering Risk Assessment: “Fundamentally, money laundering is a necessary consequence of almost all profit-generating crimes. [It] remains a significant concern because it facilitates and conceals crime and can distort markets and the broader financial system. . .  Criminals and professional money launderers continue to use a wide variety of methods and techniques.”

In efforts that accelerated after the terrorist attacks of September 11, 2001, and the 2016 Panama Papers—when 11.5 million documents relating to offshore bank accounts were leaked—financial regulators have worked hard to crack down on money laundering by forcing the banking system to collect identifying information about anyone trying to use “shell companies” to anonymously buy valuable assets with dirty money. And with the Corporate Transparency Act (CTA), a law that takes effect in January 2024, they hope to close one of the last loopholes available to scofflaws, by applying beneficial ownership rules to “Mom and Pop” LLCs.

Why should you be paying attention?

Let’s take the imaginary case of Mr. and Mrs Harrington IV, of the Nebraska Harringtons, who had accumulated investments, business interests, and real estate well in excess of $150 million by the time Mr. Harrington died this year at the ripe old age of 92. Mrs. Harrington, 80, a brilliant and generous bon vivant, is devastated, as is the rest of the family, at the loss of their patriarch.

She is also, apart from being quite well off and blessed with a large loving family, in a bit of a pickle. You see, the intricate web of LLCs, trusts, and special purpose vehicles that house the family’s business interests is quite complex. With the 2026 sunsetting of the Tax Cuts and Jobs Act of 2017 (when the estate tax exemption, currently $12.92 million, will be cut in half, and adjusted for inflation) the Harringtons had been accelerating the transfer of wealth to their four children and 13 grandchildren, some of whom live outside the United States.

Enterprising offspring have been given seed money for various projects or taken partial control of special purpose vehicles housing new family ventures. Grandchildren have been named as beneficial owners via various trusts. Assets have sometimes transferred between entities for purposes of tax efficiency. And due to security and privacy concerns, many of these efforts—including several recent real estate purchases—have been cloaked in anonymous-sounding names “care of” attorneys or business managers.

Here’s where things get a bit dicey for Mrs. Harrington. Starting in January 2024, when the CTA takes effect, Mrs. Harrington will be responsible for keeping track of every newly formed LLC, corporation and limited partnership in her estate, and by January 2025 that responsibility will include entities formed before 2024 (at last count there are several dozen).

That means maintaining a full list of these entities, including all beneficial owners—even her college-age grandchildren who haven’t yet been told they are heirs—and their addresses and passport numbers. To the extent the ownership is greater than 25 percent, or such person is an officer or otherwise has “control” over the entity, the information must be reported to the Financial Crimes Enforcement Network (FinCEN) and if anything changes in any of the above—a grandchild moves or takes a gap year in Europe, one of the businesses gets transferred or acquired—she will be required to file an update. And if she doesn’t do it right? Mrs. Harrington could be looking at two years in the slammer.

Admittedly, the  chances of jail time or even significant penalties, while outlined in the new rules, are probably low for someone who’s not actually a criminal. But still, this presents a significant administrative challenge for Mrs. Harrington, and feels like an affront to both her integrity and her desire for discretion. She, of course, is nothing like Imelda Marcos—although she does quite love her walk-in shoe closet—and has nothing to hide from the government.

But it’s a lot to keep track of. Additionally, she feels very uncomfortable imagining that the details of her family’s wealth will become a matter of record. (Spoiler: the record is a government database, not a public bulletin board).

Unfortunately, the government has little sympathy for either of her concerns. Brendan Snowden and Elizabeth Falkoff, who lead a task force on the CTA for preeminent estate planning law firm Cummings and Lockwood, believe that while enforcement may not start on day one, wealthy families will have little alternative but to follow both the letter and spirit of the new law. And while they caution that the rules may add a layer of administrative burden, they say it shouldn’t change much in terms of privacy or security (since the FinCEN database is only accessible to law enforcement and to banks for certain regulatory purposes).

In fact, many of the steps Snowden and Falkoff recommend for people like the Harringtons are in line with general best practices of families seeking to preserve multi-generational wealth:

Prioritizing family communication, including holding regular meetings to ensure everyone understands their roles and responsibilities, and the importance of compliance with tax and regulatory protocols. This may mean it becomes more difficult to keep large trusts a secret from beneficiaries not yet entrusted with the responsibility, but that may be outweighed by the benefits of education and training.

Assembling a trusted team of financial, legal, and tax advisors that can help perform an audit of the portfolio and create a map of the ownership structures. A careful review might reveal opportunities to simplify the reporting burden by reducing the number of entities. There are also nuances to the definition of “beneficial ownership” that argue for expert advice.

Keeping good books and records from the beginning. The CTA will require a clear understanding of who owns and controls each entity at the moment of formation, rather than trying to figure it out at the moment tax returns are being prepared.

Leveraging technology. There are a wealth of software solutions the Harringtons may already be using to help them stay on top of their complex financial situation: risk management, performance reporting, digital document storage, tax records, cybersecurity safeguards and even tools like private Slack channels to keep the family in touch wherever they are in the world.

To this they could consider adding a compliance tool—well-known providers include Oracle and Thomson Reuters—to help them keep track of their various entities and auto-generate reports.

The bottom line: Nobody suspects you of being a money launderer or a shoe-hoarder—probably. But you also probably don’t want to ignore these new rules. If you want to skip the headaches, remember that the best way to avoid a tedious administrative burden is to optimize for simplicity. If, however, complexity is unavoidable, then the next best thing is to put a good system in place.