As of Jan. 1, nearly 33 million companies are required to disclose their beneficial owners to the U.S. Department of the Treasury through the Financial Crimes Enforcement Network under the recently passed Corporate Transparency Act.[1]
Many of these companies – and their owners – likely own digital assets such as cryptocurrencies or non-fungible tokens.
These assets, if identified, can fall within the purview of a plaintiff’s claimed damages in the event of a favorable ruling.
This tenet holds true regardless of whether a plaintiff is suing a venture-backed Web 3.0 startup or a mom-and-pop shop with diversified holdings.
Naturally, litigants need to understand where they locate these digital assets, and, when considering the anonymized nature of crypto wallets, identify the keepers of the private wallet keys that grant access to those accounts. However, the identities of these owners are often shrouded beneath layers of shell companies and anonymous business entities.
While some states require these organizations to publicize their owners’ names and contact information, many – including Delaware and Wyoming, the go-to states for incorporation and limited liability company organization, respectively – do not.
While litigators need to uncover the individuals behind these often-convoluted corporate entities, traditional discovery methods are often unhelpful in piercing the corporate veil or LLC ownership web.
However, the act’s identity disclosure requirements could offer a less burdensome shortcut toward determining the actual owners of these companies and, by extension, any digital assets they own that could be subject to a potential judgment.
This article discusses what information could be made available to litigants from the U.S. government and how parties can leverage this information in litigation to locate digital assets.
How the Corporate Transparency Act Could Facilitate Digital Asset Discovery
The new act requires most corporations, LLCs and similarly structured businesses to register their beneficial business owners and decision-makers with the U.S. government.
The new filing requirements serve as a federal anti-money laundering measure aimed at reducing the likelihood of financial crimes involving shielded business entities on U.S. soil.
Subject to some exceptions, virtually any corporation, LLC, or similarly organized entity that has been organized in or authorized to do business in the U.S. or Native American tribal lands must comply with the act’s disclosure requirements. This includes foreign companies.[2]
Under these requirements, individuals who have substantial control over a company -including senior officers or individuals with majority voting power, or who have at least a 25% ownership interest – must submit their full legal name, date of birth, current address, unique identifying number, and nonexpired passport or driver’s license image to the federal government.
All of this information can help parties get straight to the point when demanding the disclosure of stakeholder digital assets in ways even custom interrogatories or production demands cannot.
With a beneficial owner’s identifying information in tow, litigants would have the information needed to efficiently subpoena exchanges such as Coinbase for user data, track crypto and cold storage account downloads and information, find wallet addresses for tracking on-chain transaction histories, and, in turn, uncover additional sources of crypto-assets and interested parties.
However, it is still up for debate whether all of this key information is truly fair game for discovery.
Since the act has just gone into effect, courts have not had an opportunity to determine the discoverability of a company’s beneficial ownership information.
Therefore, it is presently unclear whether a party can obtain that information in connection with litigation – though it is highly likely the courts will address this question quickly.
Anticipated Arguments for Disclosure
In the meantime, the legal community can speculate about how the arguments for and against the disclosure of beneficial ownership information supplied under the act could play out.
Clues around how these arguments could proceed are rooted in the law itself, along with what the act fails to address expressly.
Many potential arguments under the CTA would remain consistent regardless of whether a lawsuit involves discovering cryptocurrency assets, as the information at issue involves the beneficial ownership information a company submits to the U.S. government.
Under the act, any beneficial ownership information reported to FinCEN is confidential and may not be disclosed by the U.S. government unless one of four exceptions applies.[3]
Specifically, FinCEN may disclose beneficial owner information only under the following circumstances:
- A federal agency engaged in national security, intelligence or law enforcement activity and for use in such activity;
- A state law enforcement agency, if a court of competent jurisdiction, or officer of such court has authorized the law enforcement agency to seek information in a criminal or civil investigation;
- A federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country under an international treaty or agreement, convention or official request made by law enforcement, judicial or prosecutorial authorities in trusted foreign countries when no treaty, agreement or convention is available; or
- A financial institution, with the consent of the reporting company, to facilitate compliance of the financial institution with customer due diligence requirements under applicable law.[4]
At first glance, prosecutors and federal regulators appear to have more leeway in requesting beneficial ownership data.
However, the act is silent on whether a reporting company can disclose beneficial ownership information reported to FinCEN in response to a discovery request or subpoena.
These ambiguities can open the door for civil litigants to argue that they are also entitled to this information.
The Requester’s Case Given the value of the information the Department of the Treasury would hold, litigators could leverage the act’s lack of clarity on this issue to request beneficial ownership information from opposing or nonparties involved in a lawsuit.
After all, FinCEN has already made clear that third-party service providers can collect and upload beneficial owner information on a company’s behalf.[5]
Traditional methods of discovery to obtain this information – such as subpoenas duces tecum, interrogatories, depositions and requests for the production of documents – often yield objections that delay disclosure and increase litigation costs.
This reality is especially possible if the responding party’s answers drag the requester down the shell company rabbit hole or otherwise obfuscate attempts by parties to identify relevant digital asset wallets and exchange accounts.
So, why not go to the source and request the basics?
The requesting party will likely claim that the disclosure of beneficial owner information supplied under the act is no different than a company’s obligation to produce its tax returns.
So long as the information within the request’s purview reasonably relates to the issues the lawsuit covers, that party is entitled to discover the responding organization’s beneficial information.
In addition, similar to how a company may subpoena a tax processing provider for records, litigants may argue that any business that prepares or facilitates the collection and uploading of beneficial owner data is not entitled to the same immunity from discovery as the government under the act.
The Respondent’s Arguments
Still, despite the ambiguities around third-party discovery, there is also support within the act’s express language that could allow responding companies to keep their beneficial ownership information from disclosure.
A respondent’s strongest arguments could be rooted in several portions of the act addressing confidentiality and eligible recipients.
Throughout the act, beneficial ownership information is considered confidential. Specifically, the law states that in general, beneficial ownership information reported under this section shall be confidential and may not be disclosed by:
- An officer or employee of the U.S.;
- An officer or employee of any state, local or tribal agency; or
- An officer or employee of any financial institution or regulatory agency receiving information under this subsection.[6]
Considering Congress’ intent to treat beneficial owner information as confidential and prevent its legally intended recipients under the act from disclosing this data, responding companies will likely argue that allowing third parties that collect and handle this information to disclose it would undermine the act’s enforceability.
Furthermore, the responding company may argue that disclosure will be futile, even if not prohibited. That’s because the act makes it unlawful for any person to knowingly use beneficial ownership information a person obtained through a report submitted to FinCEN.[7]
Therefore, even if a digital asset holder supplied beneficial information in response to a discovery request or subpoena, the requesting party would arguably be unable to use it.
Conclusion
It remains to be seen how litigants and courts will interpret and enforce the Corporate Transparency Act when addressing discovery requests for the owners of corporate-held and stakeholder-held digital assets.
Given the roadblocks associated with traditional discovery approaches and the complexities underpinning digital asset discovery, the act could provide a streamlined path toward unmasking the corporate owners of cryptocurrency holdings, NFTs and other digital assets under dispute. However, litigators must wait to see how courts interpret and apply the act.
[1] Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 (Sept. 30, 2022).
[2] 31 U.S.C. § 5336(a)(11)(A); 31 C.F.R. § 1010.380(c)(1).
[3] 31 U.S.C. § 5336(c)(2).
[4] 31 U.S.C. § 5336(c)(2)(B).
[5] https://www.fincen.gov/boi-faqs#A_3 (accessed December 14, 2023).
[6] 31 U.S.C. § 5336 (c)(2)(A)(i-iii).
[7] 31 U.S.C. § 5336(h)(2).
