How to prevent employees from stealing — and detect theft if they are

You’ve just discovered someone is stealing from your company. Worse yet, what if a high-level person — a partner, an owner, a director or an officer — is involved?

“Particularly if the theft involves a substantial amount of money, an accomplice outside of your business, or if criminal investigatory agencies are involved, you should consult with an attorney about how best to interact with authorities, respond to possible subpoenas, conduct an internal investigation and craft a consistent message to employees and customers,” says Kevin Douglass, a shareholder at Babst Calland.

Of course, every employee with access to company financials poses a risk, and every company should take steps to protect itself.

Smart Business spoke with Douglass about how to keep your business from falling prey to a theft — and what to do if it happens anyway.

How can a company protect its assets?

Employees with the greatest access to the company’s finances are in the best position to take advantage. The easiest way to prevent stealing is to ensure that there are checks and balances built into your company’s financial system, regardless of the trust you have in employees or colleagues responsible for managing that system.

The easiest way to do that is to require that more than one person monitor the company’s cash flow, including approval or review of checks, credit and debit card usage, petty cash and invoicing. If that is not possible, consider an audit every couple of years by an independent accounting firm and provide them with full access to the company’s internal financial records.

An individual may only take small amounts in the beginning, increasing the amount and frequency as they gain confidence. And to cover their tracks, they likely will delete, alter or fabricate financial recordkeeping. If undetected, embezzlement can last years, or even decades, and add up to thousands or millions of dollars. Once someone starts down this path, they rarely stop until they are caught.

Company theft happens more often than you might think. No company wants to publicize the fact that an employee is stealing. Often, once detected, a business may choose to quietly terminate the employee and sweep the situation under the rug to avoid negative attention. But that does not mean that it did not happen.

Once theft is discovered, how should a company proceed in the immediate aftermath?

First, you must be certain the person has actually stolen from the business. As quickly as possible, perform an internal investigation and, depending on the complexity and scope, consider hiring an independent investigator or accountant to ensure your investigation is credible and comprehensive.

You also need to take steps to prevent further harm to your business, including likely termination of the employee, denying the offender access to the company’s accounts and finances, as well as other company records and property, including laptops and company phones. An employee under suspicion may intentionally delete computer files and/or alter records, so decisive and immediate action is necessary. If the individual has signature authority on a bank account, you need to remove that authority or consider closing the account.

After a theft is discovered, consider whether and how to communicate with other employees, customers and the public. Can you keep this quiet? Should you keep it quiet? What is the right messaging?

In addition, you must decide whether to report the theft and seek recovery of the stolen funds. Is a customer a victim via fabricated invoices or other means? If yes, consider your obligations with counsel given the company’s unwitting role in the theft.

How can an attorney help you navigate the crisis?

It is critical to receive sound advice as quickly as possible when confronted with a theft of company assets involving an owner or employee. Counsel can guide you through this stressful process, ensuring proper communication and messaging with governmental authorities, employees and customers, as well coordinating the internal investigation. In addition, counsel can help navigate the complex contractual issues that may arise in order to sever ties with an offending owner.

Insights Legal Affairs is brought to you by Babst Calland

Force majeure: Why these contract provisions are drawing new scrutiny

In the past, force majeure provisions were regularly overlooked in contracts, inserted as a boilerplate without much thought. That all changed with COVID-19, says Kate Cooper, shareholder at Babst Calland.

“With the pandemic, our clients suddenly cared a lot about whether their contracts included a force majeure provision, what it said, what it meant and how it could be interpreted,” says Cooper.

Smart Business spoke with Cooper about force majeure provisions and how approaches to them are changing.

What are force majeure provisions?

Force majeure provisions govern the conduct of both parties if unexpected or unforeseeable events result in a party being unable to deliver on the terms of the contract, with an emphasis on the unforeseeable. They’re designed to cover unexpected events and potentially allow you to delay delivering on a contract. But the provisions are not a get-out-of-jail free card, and in most circumstances, they do not let a party to a contract completely off the hook.

The disruption to the supply chain caused by the pandemic and government shutdowns has drawn renewed attention to these clauses. For example, when suppliers couldn’t deliver to their customers, those disruptions had a knock-on effect down the supply chain. Companies aiming to avoid breaching their contracts were hopeful that their force majeure provisions would provide them with relief. However, many were disappointed to find that what they wanted to do — whether that be delay performance obligations, or even terminate the contract entirely — wasn’t permitted by the language of the specific provisions set forth in their contracts.

How is the conversation regarding force majeure changing?

It will be difficult to argue that the pandemic is an unforeseeable event now that we are a year and a half into COVID-19, meaning that COVID-19 (and pandemics generally) will need to be specifically referenced in the provision in order for it to be enforceable in most jurisdictions. Contracts differ greatly in how they define force majeure, what types of events will trigger the provision and what remedies will be available to the parties, so businesses need to have a clear understanding of the specific language of their provision and its impact if triggered.

Businesses should ensure that they are tailoring their force majeure provisions to their particular circumstances, and they should consider whether it is more appropriate to include specific COVID-19 language outside of the force majeure clause.

When drafting new contracts, make sure you understand the events upon which you, or your counterparty, may wish to delay performance, and define these provisions in a clear way that connects the dots between that triggering event and the party’s inability to perform its contractual obligations.

Working with an expert legal adviser allows you to draft your contracts on a practical level in order to protect your business interests when these events arise and future disruptions occur. Relevant questions include, ‘How do your operations work? How do you fulfill contracts? What would be an impediment to doing so?’ It may be appropriate to explore options that would permit parties to renegotiate the contract or extend delivery times upon the occurrence of one of these unforeseeable events.

Pre-pandemic, most businesses did not anticipate the importance of force majeure provisions and defining the ‘unforeseeable.’ Now that so many companies have experienced how challenging these issues can be as a result of the COVID-19 pandemic, and how nuanced the interpretation of these force majeure provisions are, business leaders need to focus on crafting the appropriate coverage in their agreements for these risks post-pandemic. Paying close attention to these issues at the time your contract is being negotiated and collaborating with your counterparty on identifying potential issues and how to resolve them can prevent your business from having to absorb the costs of dealing with these issues when they occur, or entering into litigation to resolve them.

Insights Legal Affairs is brought to you by Babst Calland

Interest rates and their impact on estate planning strategies

Evidence of rising inflation has caused the Federal Reserve to accelerate the timeframe on when it will next raise interest rates. This will have an effect on borrowing costs, stocks, bonds, commodities, currencies, as well as estate planning strategies.

Smart Business spoke with William J. Stein, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC, about how interest rates impact estate planning and what to consider in both high and low interest rate environments.

How do interest rates affect estate planning?

Interest rates are fueled in part by increases in the federal funds rate, which is the interest rate that banks charge each other for short-term loans. Increases in the federal funds rate typically have a chain-reaction effect on long-term interest rates, including the two primary interest rates used in many estate planning strategies — the Section 7520 rate and the Applicable Federal Rate (AFR). Certain estate planning strategies depend on investments returning more than the 7520 Rate to be successful, so they tend to be most effective when the 7520 Rate is low. The AFR is the minimum interest rate that must be charged on loans to avoid triggering imputed income or gift taxes. Certain strategies that use the AFR to determine the present value of payments are more effective when interest rates are higher because a higher AFR will lead to a lower present value and, therefore, a lower tax cost for a particular strategy.

What Strategies Are Available In High- and Low-Rate Environments?

Efficient higher-rate environment strategies include the Qualified Personal Residence Trust (QPRT) and the Charitable Remainder Annuity Trust (CRAT).

In a QPRT, a homeowner places a residence in trust but retains the right to live in the residence rent-free for a designated period, then the residence passes to the trust beneficiaries. The initial transfer to the QPRT is a taxable gift of the remainder interest, calculated using the 7520 Rate. The higher the rate, the higher the value of the grantor’s right to use the residence during the designated period, and the lower the future remainder interest. So as the 7520 Rate increases, the taxable gift decreases, making the QPRT a more attractive strategy at higher interest rates. With a CRAT, the grantor places an asset in a charitable trust. The trust pays an annuity to the grantor for a term of years. At the end of the annuity term, the remainder is given to a designated charity. The value of the remainder, calculated using the 7520 Rate at the time the trust is created, gives the grantor an income tax charitable deduction. The higher the 7520 Rate, the higher the value of the charitable interest.

Planning when interest rates are low often involves leveraging lending strategies to transfer wealth with little or no gift tax. Efficient wealth transfer strategies in a low interest rate environment include intra-family loans, the Charitable Lead Annuity Trust (CLAT) and the Grantor Retained Annuity Trust (GRAT). The simplest method is to make a cash loan structured as an interest-only loan with a balloon payment on maturity. If the assets purchased with the loan proceeds appreciate more than the interest rate paid on the loan (the AFR), the excess passes to the borrower free of gift tax. With a GRAT, the grantor places assets into an irrevocable trust but receives payments over the term of the GRAT equal to the original value of the assets plus any appreciation up to the 7520 Rate. Any appreciation in excess of the 7520 Rate passes to the trust beneficiaries. A CLAT is similar to a GRAT, in that asset appreciation over the 7520 Rate passes to the trust beneficiaries gift tax free. However, the annuity payments during the lead term are paid to a charity instead of the grantor. Depending on how the CLAT is structured, the grantor may receive a charitable income tax deduction when the trust is funded.

What else should those who are estate planning this year consider?

For those considering implementing or updating estate plans this year, additional considerations include utilization of the temporarily increased transfer tax exemptions, the potential for increased transfer tax rates and higher income tax rates given the current political climate, and the possible repeal of the step-up in basis at death.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Guidance on steps to protect your business against cyberattacks

Recent high-profile cybersecurity breaches have highlighted how vulnerable even the largest businesses are to disruption. But even the smallest of businesses face risks, says Ashleigh Krick.

“Organizations may think they are not at risk and do not have valuable information, but they should think again,” says Krick, an associate at Babst Calland. “It does not matter what information you have when a hacker just wants money. It’s not just about data; it’s also about shutting down your business to force you to pay a ransom.”

Smart Business spoke with Krick about steps every business can take to protect itself.

How have recent cyberattacks drawn attention to the vulnerability of businesses?

Recent cyberattacks on Colonial Pipeline and JBS Foods have demonstrated the cyber vulnerabilities of even our nation’s most critical industries. In May, Colonial Pipeline fell prey to a ransomware attack, forcing it to halt transportation of gasoline and other fuels on the largest refined products pipeline on the East Coast. The effect was felt by everyone along the East Coast, as disruption to gasoline supply caused consumer panic and gasoline prices to skyrocket.

Not a month later, JBS Foods, the world’s largest processor of fresh beef and pork, was attacked by ransomware, causing its plants to shut down and rendering the business incapable of processing meat. We are still seeing effects from that, which could disrupt the U.S. market and international markets.

In the aftermath of these attacks, the federal government became immediately involved in how businesses were responding to ransomware attacks and questioning whether mandatory cybersecurity standards in the most critical industries are needed.

What should businesses be thinking about cybersecurity?

Every business should be thinking about about cybersecurity. First, conduct risk and security vulnerability assessments to understand your cybersecurity practices, threats and vulnerabilities. If you are unable to do an assessment internally, a consulting organization can help.

Cybersecurity risk and security vulnerability assessments identify information assets that could be affected by a cyberattack and evaluate a business’s information security risks. The assessment should evaluate where your vulnerabilities lie and identify safeguards to address those. It should identify your most critical facilities, activities and information, and the potential pathways to gain access to your networks.

Also, businesses must assess where they are in terms of cybersecurity policies and practices. How do you describe those activities, and how are those practices protecting your information and systems? Are those policies sufficient, or do they need revisions?

What are the next steps?

After evaluating your risks, vulnerabilities and current practices, think about an incident response plan that maps out the response if your business were subjected to a cyberattack. Who would lead that response, and how would you coordinate with internal and external stakeholders?

Review incident response plans often to keep up to date with lessons learned from internal or external cyberattacks and to address new vulnerabilities or potential pathways for malicious actors to gain access to your systems.

It is also important that businesses designate an individual internally to act as a cybersecurity coordinator. This person is charged with establishing and updating procedures, ensuring compliance, reviewing data or security breaches, leading incident response and coordinating with relevant government entities or industry data-sharing organizations. It’s nice to have a plan, but if it is not followed, it’s worthless.

Finally, with the significant uptick in cybersecurity incidents, businesses need to stay aware of the pathways hackers can use to gain access to their systems. The federal government and states are getting involved in privacy and cybersecurity issues, including calling for changes to laws and regulations. Businesses must stay current on changing laws and regulations and how new obligations affect their operations.

History is likely to repeat itself, and there is the potential for severe consequences to both big industry and small businesses. It’s not a question of if, it’s a question of when. Businesses must be asking these questions now to prepare and protect against cyberattacks.

INSIGHTS Legal Affairs is brought to you by Babst Calland.

No-hire provisions now unenforceable in Pennsylvania

This year, the Pennsylvania Supreme Court made a ruling that will likely upend no-hire provisions in the state. Companies that currently utilize a no-hire strategy will need to find other solutions to accomplish the same end, or risk running afoul of the law.

Smart Business spoke with Michael J. Torchia at Semanoff Ormsby Greenberg & Torchia, LLC, about no-hire clauses, the ruling, and alternate strategies to achieve similar ends.

What is a no-hire clause and what are some of its benefits?

It is common for a contract between two companies to contain a “no hire” clause. This is a provision where one or both of the companies agree not to solicit and/or hire the employees of the other. There are business situations where these clauses are found, for example, when a company:

  • Leases its employees to another company such as a temporary provider or PEO (Professional Employer Organization)
  • Permanently assigns its employees to another company, such as a company that handles marketing or promotions and its employees are hired specifically to work on a project for their client, the other company.
  • Professional services companies (such as attorneys, accountants, consultants) that provide embedded employees to their clients for a project or some length of time.
  • Temporarily assigns employees to work on a project, such as an IT or Human Resources company that serves as outside consultants for their clients.

The benefit of these “no hire” (sometimes referred to as “no poaching”) provisions is obvious — the referring company can assign employees to the other without fear of losing the employees they have trained, and they can hire them out again and again. Worse yet, without these clauses, the employee who leaves to join a customer does so without the referring company getting anything in return.

What did the Pennsylvania Supreme Court recently decide?

In April, 2021, the Pennsylvania Supreme Court in Pittsburgh Logistics Sys., Inc. v. Beemac Trucking, LLC affirmed a Superior Court ruling holding that these no-hire clauses are now unenforceable under Pennsylvania law.

In a case of first impression, the Pennsylvania Supreme Court held that a “no-hire” provision between a logistics provider and a shipping company that prohibited the shipping company from hiring the provider’s employees during the contract and for two-year period following termination of contract, was unenforceable. The Court stated:

“We believe these types of no-hire contracts should be void against public policy because they essentially force a non-compete agreement on employees of companies without their consent, or even knowledge, in some cases. We believe that if an employer wishes to limit its employees from future competition, this matter should be addressed directly between the employer and the employee, not between competing businesses.”

How might companies that utilize no-hire clauses achieve similar ends now that the laws have changed?

For a company seeking to protect its employees, the safest method would be to have a direct restrictive covenant agreement with the employee, providing the requisite consideration. Another way, although this has not been tested in the courts, is to have the agreement between the companies subject to the law of a state that will enforce the no-hire provision.

But the immediate task for employers is clear: review your current agreements and know whether or not your employees are protected from solicitation and hiring.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Protecting your innovations outside the United States

If you’re considering selling your innovative product or commercializing your novel processes in another country, protecting your innovations with a patent in that country may be key to your success. But trying to navigate the process alone can prove difficult.

“It’s surprising how complicated it can be, and there are a lot of places to get tripped up,” says Carl Ronald, shareholder at Babst Calland. “While you can try to do it on your own, hiring a patent attorney can make the process much smoother, ensuring you are including all relevant information and complying with all relevant deadlines to protect your invention in the most cost-effective way possible.”

Smart Business spoke with Ronald about when you might need international protection and how a patent attorney can help you navigate the complex process.

When should a company consider applying for a patent outside the U.S.?

A U.S. patent only provides a protectable interest here in the U.S.; you can’t stop someone from using what your patent teaches to compete with you in other countries unless you’ve timely filed in those countries, as well. If you have an international customer base that is purchasing products or services that, in the future, may be produced with, employ, or contain your patented process or device, you should seek protection, at a bare minimum, in those countries where your anticipated market is largest.

Keep in mind the importance of secrecy before filing your application. In the U.S., you have one year to file a patent application covering your invention after you disclose it publicly. Other nations are not so lenient and, in many countries, any disclosure of your invention to someone who does not have an obligation of confidentiality will destroy novelty and likely preclude you from ever obtaining a patent in that country.

What is the process for filing in a foreign country?

In general, the first step for most U.S.-based applicants is to file either a provisional or a nonprovisional patent application (your “priority filing”) in the USPTO. Once the application has been reviewed for national security issues that would prohibit you from filing outside the country, a foreign filing license grants permission to file in other countries.

If you want to practice your invention in just one or two other countries, your patent attorney can file directly with those countries, so long as the foreign filing license has been granted and it’s less than a year since your original U.S. filing.

However, if you’re seeking patents in more than one or two countries, it’s likely more cost-effective to file an international application through the Patent Cooperation Treaty (PCT). The PCT provides a unified procedure for filing a single patent application that will preserve your ability to ultimately seek protection for your invention with each of its participating members, which includes nearly all industrialized countries.

Deadlines are important; you must file a PCT application within one year of the filing date of your priority filing. After your PCT is filed, you have up to an additional 18 months in most countries before you are required to file your application directly in each country where you’d like to have protection.

How can a business determine if it should apply for a patent outside the U.S.?

Every business has competition in the marketplace and seeks an edge — something to differentiate it from its competitors. One of the ways to compete is to maximize the value of its products and processes and to ensure others are not unfairly competing with it.

If a particular innovation satisfies a need in the marketplace and obtaining a patent will provide a competitive advantage, patent protection should be strongly considered for any country where the innovation is sold.

Insights Legal Affairs is brought to you by Babst Calland

Leaving an inheritance to a child with a disability

Estate planning for a child with a disability requires thoughtful consideration. Parents must consider not only how much money to leave their child, but how the assets will be protected and who will manage and distribute the funds for their child.

“Parents with children who are unable to support themselves and depend on disability benefits should consider leaving assets to a Third-Party Funded Special Needs Trust,” says Alissa B. Gorman, J.D., LL.M., an attorney at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Gorman about the trusts, commonly referred to as Supplemental Needs Trusts (SNT), and how to ensure they provide the most help to a child with a disability.

What is a SNT and why is it useful?

A SNT is established in connection with a will to hold assets for the child with a disability. It is the only type of trust that will allow the child to receive disability-related benefits. The trust serves as a money management tool that lodges management and investment responsibilities in someone other than the child and allows the child to have a fund of money to use for their supplemental needs.

Inheritance monies left directly to a child on disability benefits may have disastrous results where the child depends on those benefits to provide medical care, therapies and residential care. That’s because a child who directly receives inheritance monies becomes ineligible for disability benefits until the funds are spent down on their medical care or other expenses.

Parents may create a SNT under their will or as a separate trust document. A SNT created under a will comes into existence when the parent dies, while a separate trust document is established and funded during the parents’ lifetimes.

Who will manage and distribute the SNT funds?

The will must pay the inheritance monies directly to the trustee, who is a person or financial institution that will hold, invest and distribute the funds for the benefit of the child. Trustee selection depends on the value of the trust and availability of a trusted family member or friend who has the time, background and commitment to manage the trust. Financial institutions are a good choice if the trust will be funded with a significant amount of assets because SNTs have certain distribution restrictions that must be followed to maintain the child’s eligibility for disability benefits. SNT trustees will have total and absolute discretion to pay income and principal of the trust for the child’s special needs, but must make all purchases directly and may not give cash to the child.

Trust funds may pay for any expenses related to the child’s disability, such as clothing, transportation, education, entertainment, non-essential household expenses (cell phone service, for example) and household items, but may not purchase food or shelter for the child without reducing or totally eliminating certain disability benefits. The SNT may even own a home for the child with special needs but should not pay for heat, electric, water and sewer. When the child dies, any remaining funds in the trust get paid to whomever the parents have named in the document to receive such funds.

How are beneficiary designations best handled?

Beneficiary designations for retirement accounts and life insurance intended to benefit the child should be made payable to the trustee of the SNT and not to the child directly. Tax-deferred assets payable to a SNT may qualify to stretch the required minimum distributions over the lifetime of the child.

The trust must accumulate the required minimum distributions within the trust to avoid benefits ineligibility that would occur if the trustee paid the cash directly to the child. Using trust income throughout the taxable year to directly purchase goods and services for the child will reduce the trust’s income tax liability by causing the income attributable to the required minimum distributions to be included on the child’s tax return and taxed at a lower rate.

Parents of a child with a disability should not delay creating their estate plan to ensure that a Special Needs Trust is properly created and inheritance monies will be appropriately managed for their child.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Aggressive goals aim to decrease emissions — but challenges await

To remain competitive, businesses should stay on top of evolving state and federal policies on renewable energy. These changes present both opportunities and challenges, according to James Curry, managing shareholder in Babst Calland’s Washington, D.C. office, and Ashleigh Krick, an associate at Babst Calland. Commercial and industrial power consumers may be able to obtain benefits from sourcing renewable power, both financially and to answer growing shareholder and lender scrutiny.

At the same time, the increasing level of renewables coming online presents challenges related to grid reliability, underscoring the continued relevance for other more stable sources of electricity.

Smart Business spoke with Curry and Krick about the increase in state-level carbon reduction targets, the challenges associated with increased use of renewable energy and the role of traditional generation sources to maintain reliability.

What is the current state of affairs for renewables?

In Pennsylvania, bipartisan legislation has been introduced to increase the state’s Alternative Energy Portfolio Standards (AEPS), enacted in 2004 with the goal of increasing the state’s share of power from renewables. The AEPS requires that electric distribution companies and electric generation suppliers supply 18 percent of their electricity from certain alternative energy sources, such as solar, hydropower, geothermal, waste coal and distributed generation. The proposed legislation would increase that requirement by 10 percent.

Although an early adopter of a renewable portfolio standard, neighboring states have jumped ahead of Pennsylvania in recent years. New Jersey and Maryland have set renewable energy targets of 50 percent by 2030, while New York has a goal of 70 percent. And, in April 2020, Virginia passed legislation requiring the state’s largest utility to provide 100 percent of its electricity from renewables by 2045.

Pennsylvania Gov. Tom Wolf recently committed state government to purchasing 50 percent of its electricity needs from solar energy, the largest commitment of its kind in the U.S. The project will involve seven new solar facilities totaling 191 megawatts around the state and is slated to begin operation in 2023.

What are the challenges with renewables?

Renewables such as solar and wind are intermittent resources and do not provide continuous output. As more renewables come online, it becomes more difficult for grid operators and utilities to ensure system reliability. As renewables grow, the additional renewables that must be added to maintain reliability dramatically increase, as does the cost.

In some areas, market participants have looked to utility-scale battery energy storage to fill part of this reliability need. While storage can be a complement to renewables and gas-fired generation, storage faces some of the same reliability issues. As states advance decarbonization targets, traditional, baseload electric generation sources will continue to play a vital role in reliability.

In addition, there is no one-size-fits-all approach for renewables projects. Timelines and success may depend on state, county and local permitting and other requirements. Land acquisition can be challenging and in many states, including Pennsylvania, local municipalities exert substantial control over project-related zoning and land use issues.

Despite the challenges, many utilities and businesses are pursuing renewables projects to meet state targets or mandates.

What does the future hold for renewables?

The cost of renewables is likely to continue to fall, and technologies will continue to improve. Battery electric storage and other storage technologies are expected to become more cost-competitive, with demand for electricity increasing significantly in the coming decades as trends toward the electrification of the transportation and industrial sectors continue.

These factors call for practical, common-sense solutions to our growing energy needs, environmental challenges and continued demand for a reliable grid. While state-level incentives and mandates have been a driving force behind renewables development, we anticipate new federal policies such as tax credits, carbon capture incentives and possibly a federal clean energy standard.

Insights Legal Affairs is brought to you by Babst Calland

What you need to know about the Corporate Transparency Act

On January 1, 2021, Congress passed the Corporate Transparency Act (CTA) with the purpose of combating “money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption.” The CTA requires companies — many of which have been historically unregulated — to file reports identifying its beneficial owners with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

The CTA’s effective date is slated around January 2022. The Secretary of the Treasury will issue procedures and standards to implement the provisions of the CTA. Until the Secretary’s regulations are issued, Reporting Companies (defined below) are not required to submit the required information.

Smart Business spoke with Charles W. Ormsby, Jr., managing member of Semanoff Ormsby Greenberg & Torchia, LLC, to get a summary of the CTA’s reporting requirements.

What is a “reporting company” and which organizations fit that definition?

Every corporation or limited liability company that’s registered to do business in the United States must file a report with FinCEN containing a list of their beneficial owners. Although the vast majority of businesses fit this definition of a reporting company, the CTA includes a long list of exempt entities. Most notably, the following entities are exempt:

  • Corporations or LLCs with twenty or more full time employees, sales over $5 million, and an operating presence at a physical United States office;
  • Public utility companies;
  • Banks and credit unions;
  • Government entities; and
  • Nonprofits.

If a company is considered an exempt entity, it need not provide information on its beneficial owners, but it will have to submit a written certification that states it qualifies as an exempt entity under the CTA.

What information are reporting companies required to provide?

A reporting company is required to identify all its beneficial owners. A beneficial owner is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity or owns or controls not less than 25 percent of the ownership interests of the entity. A beneficial owner does not include a minor child; an individual acting as a nominee, intermediary, custodian or agent of another individual; an employee whose economic benefits derive solely from being an employee of the company; an individual whose ownership was gained through right of inheritance; or the entity’s creditor.

A reporting company must provide the following information of each beneficial owner of the company:

  • Full name;
  • Date of birth;
  • Current residential or business street address; and
  • A form of identification such as passport, driver’s license, or personal identification card.

When is the deadline to submit required information?

Existing reporting companies will have two years from the effective date to submit reports to FinCEN. After the effective date, newly formed or registered reporting companies must submit their reports to FinCEN at the time they are formed or registered. Reporting companies will be required to update their beneficial owner information annually.

What are the penalties for violating the CTA?

A person who knowingly provides false or fraudulent information, willfully fails to provide complete or updated beneficial information, or knowingly discloses the existence of a subpoena or other request for beneficial ownership information is in violation of the CTA. Any person who violates the CTA is liable for a civil penalty not to exceed $10,000 and may be imprisoned for not more than three years.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia LLC

How alternative legal service providers can add efficiencies, create value

With companies consistently scoring law firms an average of just 2 to 3 (on a scale of 10) on the value they receive for legal services, businesses and firms alike are increasingly employing the value-added services of alternative legal service providers (ALSPs).

“Alternative legal service providers are a legitimate avenue to unlock enhanced value and services for clients, and the use of this model is increasing,” says Christian Farmakis, shareholder and chairman of the board at Babst Calland, and president of its affiliated ALSP, Solvaire. “The intersection of the rise in ALSPs, coupled with the use of technology, allows ALSPs to increase efficiencies and reduce legal costs.”

Smart Business spoke with Farmakis about how ALSPs can help businesses get more value from their legal providers.

Why is the use of ALSPs on the rise?

Businesses are continuing to face unprecedented financial and legal challenges. As a result, companies are placing constant demands and pressure on all vendors, including their legal firms, to deliver more value. Well-run ALSPs allow in-house counsel and law firms to work more efficiently and focus on higher-priority work.

The traditional law firm model is based on billable hours. And while businesses generally like the quality of service they receive, they don’t believe they are always getting value based on the type of legal work being performed. While it makes sense to assign complex and specialized legal work to seasoned associates or law firm partners, other services, such as discovery, diligence and technology-enabled tasks should be delegated to others with specific skills and defined pricing models. This is where ALSPs come in. Both clients and their law firms see the value proposition in ALSPs, which are increasingly gaining traction, moving beyond ‘just’ a cost-savings measure to becoming a true industry service partner.

How do ALSPs function?

ALSPs can be independent of a law firm, owned by it, or have an affiliation with a firm, such as Babst Calland and its ALSP, Solvaire. Services include those traditionally performed by law firm associates, such as due diligence, document management and discovery, but at a lower rate structure — not necessarily driven by the billable hour — and a service-oriented delivery service model. Usually there are licensed attorneys overseeing the work.

Clients don’t care how a project gets done. They are looking for fast, efficient, accurate service, with budget certainty. They are demanding this service, and law firms that associate with ALSPs will be the winners.

How is technology helping ALSPs increase the value they provide?

Legal technology used by ALSPs brings efficiencies, and artificial intelligence (natural language processing and machine learning) can help identify relevant information within documents more quickly than a full manual review. Compared to an attorney doing a full manual review of documents in a diligence context, using ‘legal tech’ can decrease the review time by as much as 40 to 60 percent. As such, ALSPs can often cover more information and provide a more complete diligence work product.

Anyone can license legal technology, but you need to know how to properly use it to maximize its benefits. Project management skills, critical to the success of any legal technology services project, are typically not germane to a lawyer’s core competence. Those that can harness the legal technology and provide sound project management skills will excel in this new marketplace.

How can business owners approach their legal provider about engaging with an ALSP?

Ask if the law firm offers alternative legal services, what kind of legal technology they use, and how. Get testimonials from others who have engaged with ALSPs who can speak to the value and quality.

If the firm uses an ALSP, ask if they met deadlines, and if they were happy with the quality, reporting and security. Finally, ask if the ALSP worked seamlessly with the lead law firm managing the overall legal project.

Clients are expecting a higher quality of service for the price they pay. ALSPs are not competitors of law firms; they are partners that can add value through the services they provide.

INSIGHTS Legal Affairs is brought to you by Babst Calland.