Alert 01.05.21
Alert
01.07.21
Congress recently enacted the Corporate Transparency Act (Act), which will require unprecedented disclosure to governmental agencies of direct and indirect ownership and control of entities commonly used in private transactions, including real estate development and investment. Many aspects of the new law are unclear, having been left to subsequent regulations. Disclosure requirements will apply to new and existing entities. While confidentiality is generally mandated, there are exceptions. Fines and penalties, civil and criminal, are prescribed for a failure to comply.
The Act is one component of the National Defense Authorization Act (NDAA) for Fiscal Year 2021, recently enacted over President Trump’s veto. The professed intent is to align the United States with anti-money laundering and anti-terrorism efforts of other countries. Under the Act, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) will create a federal beneficial ownership registry for corporations, LLCs and “other similar entities.” These “reporting companies” will be required to report individuals (and personal information of individuals) who, directly or indirectly, by ownership or contract, exercise “substantial control” over a reporting company or directly or indirectly own 25 percent or more of its beneficial interests. There are broad exclusions from the reporting requirements for public companies, some larger private companies, and certain other entities that either have existing disclosure obligations or otherwise are seen as being at lower risk of being used for money laundering purposes.
Once regulations are issued, the Act will require reporting companies to provide to FinCEN information that otherwise might be considered confidential, such as date of birth and passport or driver’s license numbers, or in the alternative FinCEN-issued identifiers, for the relevant individuals.
Covered companies formed after the regulations become effective will need to report upon their formation. Covered companies already in existence at the time the regulations become effective will need to report within two years after the regulations’ effective date. In both cases, covered companies will have an ongoing obligation to report changes in previously reported information.
Despite the general requirement for confidentiality, FinCEN has the right to share information with other governmental authorities, including foreign authorities, and—with consent of the reporting company—to financial institutions.
To facilitate identification of beneficial owners, the Act prohibits issuance by covered companies of ownership certificates in bearer form.
At this point, the Act raises questions for many real estate developers and investors, such as:
Pending regulations, there are no definitive answers to such questions. The Act, to be codified in section 5336 of title 31 of the U.S. Code, requires the Treasury Department to promulgate regulations within a year, with reporting requirements to be tied to the effective date of those regulations. For now, developers and investors will want to consider what changes to make to their standard operating agreements. We will continue to monitor the creation of those regulations for answers to these and other questions. In the meantime, developers and investors should remain alert to these potential future compliance obligations.
For a broader overview of the NDAA’s effects on anti-money laundering and combatting the financing of terrorism measures, see our colleagues’ recent publication.