Lenders Requiring CTA Compliance in Loan Agreements

Some of my law partners have noticed lenders adding CTA compliance covenants to loan agreements and even term sheets for new loans. FinCEN's Final Rule on beneficial ownership reporting does not take effect until January 1, 2024, but it seems that some banks and other commercial lenders are requiring CTA compliance in their loan documents and in term sheets for new deals.

Generic "comply with all laws" covenants are standard in loan agreements, but a specific covenant pertaining to the Corporate Transparency Act is a new development.

In one of the samples I've seen, the term sheet covenant reads as follows:

"Borrower and Recourse Guarantor hereby consent and on their respective direct or indirect managers, members, partners, shareholders, affiliates or controlling persons that are entities and are considered "Reporting Companies" as such term is defined in the Corporate Transparency Act (as defined below) (collectively, the "Reporting Companies") to permit the U.S. Department of Treasury Financial Crimes Enforcement Network ("FinCEN") to disclose to Admin Agent and Lender the beneficial ownership information of each Reporting Company and any other information disclosed to FinCEN pursuant to the Corporate Transparency Act (expected to be codified at 31 U.S.C. § 5336) and the regulations promulgated thereunder or any substitute or similar legislative or statutory requirement (each as amended from time to time, the "Corporate Transparency Act"). Borrower and Recourse Guarantor hereby (x) represent and warrant to Lender that (i) Borrower, Recourse Guarantor, and Sponsor are in compliance with the Corporate Transparency Act and (ii) each Reporting Company has, on behalf of such Reporting Company, provided such a consent in writing, and (y) covenants and agrees that Borrower, Recourse Guarantor, and Sponsor shall obtain and deliver to Admin Agent and Lender any additional consents and/or documentation from any such Reporting Company necessary to effectuate any consent required by FinCEN, from time to time, for FinCEN to release to Lender all such beneficial ownership information and other information disclosed to FinCEN pursuant to the Corporate Transparency Act."

This particular sample was in a term sheet dated in December 2022. Consequently, it is not clear how the corporate borrower could represent that it is "in compliance with" the CTA more than a year before the CTA's reporting obligations take effect.

Setting that objection aside, the lender's intention is to draw the borrower's attention to the CTA and to obtain the borrower's prior written consent for the lender to obtain the borrower's beneficial ownership filings directly from FinCEN.

In FinCEN's recently issued NPRM for the Access Rule, FinCEN's proposed regulations would allow "a financial institution subject to customer due diligence requirements under applicable law" to obtain beneficial ownership information from FinCEN from reporting companies who have consented to disclose their data to the financial institution.

Having financial institutions track CTA beneficial ownership reports will give reporting companies additional incentives (if any were needed) to adopt internal procedures to ensure ongoing compliance.

About The Author

Jonathan Wilson is the co-founder of FinCEN Report Company with 31 years of experience in corporate, M&A and securities matters. He is the author of The Corporate Transparency Act Compliance Guide (to be published by Lexis Nexis in the summer of 2023) and the Lexis Practical Guidance Practice Note on the Corporate Transparency Act.

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