On September 29, 2022, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued its highly anticipated final Beneficial Ownership Information (BOI) reporting provisions (Final Rule), thereby implementing part of the Corporate Transparency Act (CTA).
The prevalent use of legal entities in owning real estate assets makes the U.S. real estate market particularly vulnerable to noncompliance. Indeed, FinCEN has frequently noted concerns about the sector throughout its rulemaking process. Therefore, the industry should pay special attention to the Final Rule’s broad reporting requirements.
Effective January 1, 2024, FinCEN’s Final Rule will mark the most significant updates to the U.S. anti-money laundering and countering the financing of terrorism (AML/CFT) compliance framework in a generation. It aims to combat illicit financial activity and enhance national security interests by requiring that reporting companies provide detailed information regarding their beneficial ownership. The following summarizes the Final Rule’s key elements:
Both foreign and domestic reporting companies must file BOI reports with FinCEN under the CTA, unless specifically exempt. A domestic reporting company is any entity created by filing with the secretary of state or a similar office, including limited liability partnerships, business trusts, corporations and LLCs. Foreign reporting companies include any entity formed under the laws of a foreign country that is registered to do business in the U.S.
One key exemption to the reporting requirements is for entities that employ more than 20 full-time U.S. staff, report more than $5 million in annual revenue and operate out of a physical location in the U.S. However, this exemption will not apply to most real estate-owning entities because they generally do not hire their own employees, but instead outsource to property managers employed by other entities.
Other notable exemptions include SEC-registered issuers, tax-exempt entities, certain financial institutions and pooled investment vehicles such as REITs and JVs that are not considered foreign reporting companies (domestic pooled investment vehicles are exempt while their foreign counterparts are not) and are advised by other exempted entities. Similarly, most trusts will be exempt from reporting requirements to the extent they are not created by a filing with an applicable state office.
Reporting companies must disclose each of their beneficial owners’ or company applicants’ full legal name, date of birth, complete and current address, unique identifying number from an acceptable identification document, and an image of the identification document. An owner may streamline future reporting by requesting a FinCEN ID number that can be reported in lieu of the identifying information listed above.
Each reporting company must also disclose its full legal name, any trade name or “doing business as” name (whether registered or not), the address of its principal place of business in the U.S., its jurisdiction of formation and an IRS Tax Identification Number.
A beneficial owner is each individual who (1) exercises substantial control over a reporting company, or (2) owns and controls at least 25% of the ownership interests of a reporting company.
Substantial control is broadly defined and is exercised by a reporting company’s senior officers and others who make significant decisions on behalf of the entity. Substantial control may also be exercised in less conventional ways (i.e., through economic pressures, bribery or threats) and despite use of emerging governance structures such as series LLCs and decentralized autonomous organizations. However, how control in such entities is assessed—and who exactly must be included in the reports—remain largely unexplained. Thus, FinCEN will likely issue additional guidance and clarifications in the future as it gains experience with the variety of structures.
Ownership interest is also broadly defined to include equity in the reporting company, capital or profit interests (including partnership interests), convertible instruments, warrants or rights, and options and privileges to acquire equity, capital or other interests in a reporting company. In addition, a catch-all provision includes “[a]ny other instrument, contract, arrangement, understanding, relationship, or other mechanism used to establish ownership.” Reports must also disclose 25% or more ownership interests in reporting companies held in trust by trustees or other individuals with authority to control or dispose of trust assets.
A company applicant is the individual who directly filed the document that creates or registers the entity, or the individual who is primarily responsible for directing or controlling such filing by another. Existing or registered companies as of the effective date need not identify and report on their company applicants.
Reporting companies created or registered prior to the effective date (January 1, 2024) must file their initial BOI report within one year of the effective date, while those created or registered after the effective date must file their initial BOI report within 30 days of creation or registration. Once the initial report has been filed, reporting companies must file updates within 30 days of a change in their BOI.
The Final Rule imposes civil and criminal liability on any person that willfully fails to report true, correct and complete BOI, including any reporting company, individuals or other entities. A person is considered to have failed to report complete or updated BOI if the person causes the failure directly or indirectly (by providing information to another person for purposes of a report) or is a senior officer of the entity at the time of the failure. This means that potentially all senior officers of a reporting company may be held liable for willful failures to report. FinCEN will consider all facts relevant to a determination of willfulness when deciding whether to pursue enforcement actions. A safe harbor provision protects from liability if inaccurately reported information is corrected within 90 days after submission.
FinCEN must engage in further rulemaking to implement the Corporate Transparency Act. Specifically, who may access BOI, for what purposes and what safeguards will be required to ensure that the information is secured remain to be established. FinCEN’s Customer Due Diligence rule must also be revised to align with the Final Rule.
Real estate-holding reporting companies must stay apprised of the Final Rule’s requirements and put in place processes and procedures to ensure sufficient time to recognize whether reporting is necessary, identify beneficial owners and address any complexities associated with their organizational structures.
Shearman & Sterling will continue to monitor FinCEN’s rulemaking activity and developments relating to the CTA. For an overview of the CTA, see our earlier discussion.
Special thanks to attorney Yuval Rosenthal for his contribution to this publication.