One vehicle used by the criminal elements has been what is often referred to as a “shell corporation.” For our purposes here, we’ll include other business entities such as limited liability companies (LLCs) with the term shell corporation, even though those other business entities are not corporations in the pure legal sense. For over a century, the perpetrators of illegal business schemes have often used a shell corporation to keep the identities of the individuals behind the illicit enterprise shielded from the light of law enforcement. On the other side of the law, these artificial entities have served a host of worthwhile purposes in the commercial and financial worlds. One of those purposes has been to own aircraft, as pilots and individual owners or prospective owners, worried about liability issues, have “flocked” to creating LLCs for the purpose of owning aircraft. Sometimes these people have erroneously thought that merely creating an LLC and having it be the registered owner of an airplane would give the pilot ironclad protection from personal liability in the case of an accident. Generally, that isn’t the case, but that is a subject for another time. When you form an LLC, you come under the requirements of the CTA to disclose the identity of the beneficial owner(s) of that LLC.
In an attempt to shine a brighter light of transparent disclosure of the identities of who is behind smaller entities, in January 2021, as a part of the National Defense Authorization Act, Congress inserted another bill called the Corporate Transparency Act (the CTA). The CTA creates some new nomenclature into the mix – as it requires all U.S. businesses to file what it calls “beneficial ownership” information with a Federal agency known as the Financial Crimes Enforcement Network (FinCEN). Of course, there are exceptions to the businesses and other entities that are required to report their beneficial owners.
A beneficial owner is anyone, who, either directly or indirectly, through any sort of contract, arrangement, understanding, relationship or otherwise exercises substantial control over an entity, or who owns or control at least 25% of the ownership interests in that entity. As you can see, there are terms here that are intentionally loosely worded, and we’ll have to wait for court cases that will undoubtedly come down the road to get more precise definitions of concepts like substantial control, for instance.
The report that the CTA requires must contain the name, date of birth, current address and a unique identification number, such as a passport or driver license number of each beneficial owner. This information must be updated annually in a report to FinCEN. Larger companies that employ more than 20 people, have revenues in excess of $5 million, are physically present in the U.S. and companies that are heavily regulated are exempt, since they already provide this sort of information to a government agency. Additional exemptions apply to churches, charities and similar non-profit organizations.
The information disclosed to FinCEN is highly confidential, and may be released only to law enforcement agencies conducting an active investigation, on request of a foreign law enforcement agency, and in due diligence inquiries under the Patriot Act or Banking Secrecy Act. The information is not available to the general public. It may be used only for law enforcement, national security, or intelligence purposes.
The penalties for violations can be very stiff. Civil penalties can run up to $500 per day for every day that a violation continues. The law even contains the potential for criminal prosecution, and fines of up to $10,000, and imprisonment for up to two years. Unauthorized disclosure of information collected carries even harsher penalties, as the maximum fine can reach $250,000 and the maximum prison sentence is five years.
The required information must be filed with FinCEN when a new entity is formed, and those already in existence get two years to file after the effective date of the regulations, which are not yet in force. It’s easy to see who the targets of this new enforcement tool are designed to be. Congress wants to stop the illegal use of artificial entities that are typically small concerns that historically have evaded the critical eye of law enforcement. Even though general aviation pilots haven’t been among the most frequent major money launderers and the other criminals who are the targets of the CTA, we all have to be careful now to make sure that we don’t run afoul of the law.
Schedule a visit, or at least a phone conference with your lawyer to advise him or her whether you have any beneficial ownership of any entity covered by the CTA that will trigger a need to file with FinCEN. If in doubt, ask. When Congress formulates the required regulations, and the clock starts ticking toward the end of the two-year deadline for existing entities to file the required information, it may seem like April 14th in the accounting world. It also would be a good time to see if you are really getting what you think you are out of having an LLC or a corporation be the registered owner of the airplane. There are advantages to using that structure, but often they are overblown. Have a detailed discussion with your lawyer about all the ramifications, not only about the filing requirements mandated by the CTA, but also about what you are gaining by having the LLC. The deadline for filing the CTA disclosure will be upon us all too soon, and as is the case in dealing with any other deadline, it’s far better to be ahead of the game and not be scrambling at the end of the game to comply.
The opinions expressed in this article are those of the author.
As an aviation attorney in Ohio, Jerry Eichenberger has significant experience with aviation litigation and aviation transactions and financing matters. In his work outside of the courtroom, Jerry routinely advises clients on FAA regulatory matters and business planning.
Jerry's aviation clients include scheduled airlines, aircraft and component-part manufacturers, fixed based operators, flight schools, airports, insurers, flying clubs, individual pilots, maintenance facilities and corporate flight departments.
In addition to his practice in the field of aviation law, Jerry has routinely and extensively worked in
many other areas of business law including representation of financial institutions.
Jerry is a licensed commercial pilot, rated for single and multi-engine airplanes, helicopters, and
gliders. He is also a certified flight instructor rated for single and multi-engine airplanes and instrument
He is a current member of the Experimental Aircraft Association, the Ohio Aviation Association, the
Aircraft Owners and Pilots Association (where he serves on the legal services panel), National
Business Aviation Association, Aviation Insurance Association and is a past president of the
Professional Pilots Association. He has published four books and hundreds of magazine articles on
various legal and aviation topics.
Jerry joined Calfee in 2017.