As our colleagues1 have previously reported,2 the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the United States Department of the Treasury, issued the “Final Rule” regarding implementation of the reporting of beneficial ownership information to FinCEN under the Corporate Transparency Act of 2019 (the “CTA”), which is part of the Anti-Money Laundering Act of 2020 (the “AMLA”). These Regulations,3 which are currently scheduled to go into effect on January 1, 2024, will affect clients in the real estate investment space who may need to make a report of beneficial ownership information (“BOI”) for their new as well as their existing investment vehicles.4 In conjunction, FinCEN has released a helpful FAQ guide, which provides further information regarding the requirements.5
While real estate companies are generally accustomed to providing beneficial ownership and other sensitive information to financial partners, banks and other lenders to satisfy “know your customer” a.k.a “KYC” requirements, as well as title companies6 for the purpose of “Covered Transactions,”7 the CTA regulations may capture a broader number of reporting persons.
What Real Estate Vehicles Will Be Subject to the Rules?
Starting January 1, 2024, all business entities8 are required to report BOI information to FinCEN, including entities formed under the law of a foreign jurisdiction that is registered to do business within the United States, unless one of the 23 entity type exemptions9 applies.
Therefore, numerous real estate companies, including those who form individual special purpose entities (“SPE’s”) to acquire, develop, lease and finance real property, may be affected. Unless a specific exemption applies, each such entity will be required to provide BOI to FinCEN.
Many private real estate companies may fall into the “large operating company” exemption which provides that entities with a physical US office, more than 20 “full-time” employees and which reported more than $5 million in gross receipt or sales on its last US federal tax return are exempt. Importantly for real estate companies, the Final Rule notes that companies are not allowed to consolidate employee headcount across affiliated entities, although the revenue test may be calculated on a consolidated basis.
So Who Is a “Beneficial Owner” Under the CTA?
A “beneficial owner” is defined as someone who directly or indirectly “exercises substantial control over an entity” or owns or controls at least 25% of the reporting entity’s ownership interests. As discussed previously, the Final Rule provides three indicators of substantial control: (i) service as a senior officer; (ii) authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body); and (iii) direction, determination, decision-making functions, or substantial influence over important matters of a reporting company10. FinCEN has provided a list of examples of “important decisions,” including, without limitation: compensation, approval of equity issuances or operating budgets and changes to governing documents; the later often being matters reserved to capital joint venture partners and preferred equity providers in real estate private equity transactions. Of note, control can also be found not only through broad representation and ownership, but also through “rights associated with any financing arrangement or interest.”
Further, the Final Rule specifically includes an expansive definition of “ownership interests,” including, without limitation: equity interests, capital and profit interests, convertible instruments, options, warrants, arrangements related to voting, proprietorship interests, “future conversion of ownership interests” and a catch-all provision which includes “any other instrument, contract, arrangement, understanding, relationship or other mechanism to establish ownership.” Several of the ownership interest categories are relatively straightforward, however a few are rather broad and require further guidance from FinCEN so that reporting companies can make an accurate decision regarding which “beneficial owners” to disclose.
What Information Must Be Reported?
As previously detailed,11 a reporting company’s report to FinCEN must include details of each beneficial owner and each “company applicant” (if applicable) as well as details on the reporting company itself. Specifically, the required reports must include each beneficial owner and each company applicant’s full legal name, date of birth, current residential or business address and a unique identifier from either an acceptable identification document or a previously-assigned FinCEN identifier. The filing must also contain an image of the identification document. Newly formed reporting companies must also provide reports on “company applicants,” which are individuals who file documents that form entities or register them to do business in the United States and “any individual who directs or controls the filing of such document by another person.” Again, such matters are often reserved to capital partners in the joint venture context.
When Do Reports Need to Be Filed?
Reporting Companies already in existence prior to January 1, 2024, have one year to file the BOI with FinCEN (i.e., by January 1, 2025). However, all reporting companies newly formed or registered after January 1, 2024, must submit an initial report to FinCEN within 30 calendar days after the date of formation or registration but such report is not only with respect to itself, but also its “company applicants.” It should also be noted that if a previously exempt entity no longer satisfies the exemption criteria, such entity is required to file its report within 30 calendar days after the date on which it no longer meets such criteria (or within the remaining days left in the one-year filing period if it ceases to be exempt during the first year after the effective date, whichever period is longer).
The Final Rule also provides that companies have 30 days “after the date on which there is any change with respect to any information previously submitted to FinCEN”;12 this 30-day deadline appears to start on the day the change occurs regardless of whether the reporting company has actual or constructive knowledge of the change.
What Happens to the Information?
FinCEN13 is only authorized to disclose BOI collected for two purposes: (i) to facilitate important national security, intelligence and law enforcement activities and (ii) to confirm BOI provided to financial institutions to facilitate their compliance with anti-money laundering and customer due diligence requirements. There are a few instances when FinCEN may disclose BOI to financial institutions to assist with compliance with the existing Customer Due Diligence Rule14 for financial institutions, but such disclosure requires the reporting company’s consent. Otherwise, BOI is not available to the public and may not be disclosed by FinCEN.
Starting January 1, 2024, FinCEN reporting will need to be a checklist item for all new non-public entities or non-exempt entities with the practice of tracing and reporting beneficial ownership being a regular part of the due diligence process for all real estate transactions irrespective of funding sources. However, consideration should start to be given now to ensure reporting companies receive and are able to obtain the specific information required (including for any “company applicants”) to allow compliant reporting under any relevant governance documentation that is put in place on a go-forward basis, and consideration should be given to modifications to existing reporting requirements in real estate joint venture and other entities governance documents.