U.S. Transparency Updates

The United States has started with a bang for 2024 with respect to transparency initiatives. The initiatives affect real estate, financial and business sectors. This alert provides a brief overview of the developments in these areas. We will continue to monitor these developments and their implementation to ensure that we are ready to advise you.

Corporate Transparency Act – Dead or Alive?

Ready, set, go. The Corporate Transparency Act (“CTA”) went into effect January 1, 2024. Reporting companies can now go to the Financial Crimes Enforcement Network (“FinCEN”) website (https://boiefiling.fincen.gov/) to file their beneficial ownership information reports.¹  FinCEN’s director announced that in the first week of January 2024, more than 100,000 companies successfully filed their beneficial ownership information (“BOI”) reports, and that as of February 14, 2024 FinCEN received more than 430,000 BOI reports. FinCEN anticipates that tens of millions of companies will need to file such a report by January 1, 2025.

But, put on the brakes! All while FinCEN was working on the implementation of the CTA, there was a case pending in the Northern District federal court of Alabama. On March 1, 2024, the federal court in  National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) entered a final declaratory judgment concluding that the CTA exceeds the Constitution’s limits on Congress’ power, and prohibits FinCEN from enforcing the CTA against the plaintiffs.

Don’t pump the brakes too hard though! The final judgment only applies to the plaintiffs in the case and, by implication, does not apply to anyone else outside of the plaintiffs (i.e., everybody else!). On March 4, 2024, FinCEN issued a notice stating it will comply with the court’s order for as long as it remains in effect. As a result, FinCEN is not currently enforcing the CTA against the plaintiffs in that action. It is anticipated that the government will appeal this outcome and that perhaps the issue is destined for the U.S. Supreme Court. Therefore, until then, we believe the CTA remains in effect for everyone else.

FinCEN Proposes New Rule for Residential Real Estate Transfers:  CTA For Real Estate?

Since 2016, FinCEN has been running the Residential Real Estate Geographic Targeting Order (GTO) program, which requires title insurance companies to file reports identifying the beneficial owners of legal entities that make certain non-financed purchases of residential real estate in select jurisdictions in the United States. Bad actors often favor non-financed transfers, or “all-cash” sales of residential real estate that avoid scrutiny from financial institutions that have anti-money laundering (AML) program and Suspicious Activity Report (SAR) filing requirements under the Bank Secrecy Act. On December 8, 2021, FinCEN published an announcement requesting comment on potential AML regulations by real estate professionals. FinCEN sought public comment on whether a transactional reporting requirement, triggered when a real estate purchase meets certain conditions, should be imposed on real estate professionals under the Bank Secrecy Act. FinCEN received 151 comments from the public in response to its December 8, 2021 announcement above. On February 7, 2024, FinCEN issued a Notice of Proposed Rulemaking proposing new rules that would require certain professionals involved in real estate closings and settlements to report information to FinCEN about non-financed transfers of residential real estate to legal entities or trusts.² Comments are due from the public within 60 days of the Notice of Proposed Rulemaking (i.e., April 16, 2024).

Why do we need new rules if the GTO program is working? FinCEN believes that such bad actors continue to obscure their identities and often hold residential real estate in the name of a legal entity or trust. The proposed nationwide reporting framework for certain residential real estate transfers, if finalized, would replace the current Residential Real Estate GTOs.

What needs to be reported?  The proposed rule would require businesses, including attorneys, performing specified closing or settlement functions for the non-financed sale or transfer of residential real property³ located in the United States (including territories and possessions of the United States) to an entity or trust, to collect and report information to FinCEN which includes: (i) beneficial ownership information for the legal entity (transferee entity) or trust (transferee trust) receiving the property; (ii) information about individuals representing the transferee entity or transferee trust; (iii) information about the business filing the report (the reporting person); (iv) information about the residential real property being sold or transferred; (v) information about the transferor (e.g., the seller); and (vi) information about any payments made.

What is a “reportable transfer”?  A reportable transfer includes both purchases and non-consideration transfers. For purchases, there is no dollar threshold and the transfer must not be subject to any institutional financing (as compared to a private financing arrangement). Importantly, a non-consideration transfer such as a gift would need to be reported under this new rule.  Certain transfers are excepted from being reported: (i) transfers involving an easement (ii) transfers that occur as the result of the death of the property’s owner; (iii) transfers as a result of a divorce; (iv) transfers that are made to a bankruptcy estate; and (v) transfers between individuals. Notably, a gift to a revocable trust during lifetime is not exempt. However, FinCEN notes that it welcomes comments on the potential burdens related to the reporting of non-sale transfers.

What is a “reporting transferee”?  A reporting transferee is either a “transferee entity” or a “transferee trust” and, if as part of the transfer, at least one of the new owners of residential real property includes a “transferee entity” or a “transferee trust.”  A “transferee entity” is either a limited liability company, corporation, association or partnership (general or limited), or estate. Certain exemptions (similar to those in the CTA) apply to highly regulated entities. Notably, unlike the CTA, a transferee entity can include non-profit organizations, certain pooled investment funds, and large operating companies. A “transferee trust” is any legal arrangement created when a person (generally known as a settlor or grantor) places assets under the control of a trustee for the benefit of one or more persons (each generally known as a beneficiary) or for a specified purpose, as well as any legal arrangement similar in structure or function to the above, whether formed under the laws of the United States or a foreign jurisdiction. A statutory trust would not be a transferee trust but could be a transferee entity. However, a land trust would seemingly be considered a transferee trust. Limited exemptions apply for certain regulated trusts. Both domestic and foreign entities and trusts would be covered by the reporting requirement.

Who are the beneficial owners that need to be reported? The beneficial owners of the transferee entities or transferee trusts are identical to the rules in the CTA. For transferee entities, to be a beneficial owner an individual must, either directly or indirectly, exercise “substantial control” over the transferee entity, or own or control at least 25 percent of the transferee entity’s ownership interests. With respect to transferee trusts, the beneficial owners would be any individual who is a trustee or otherwise (e.g., trust protector) has authority to dispose of transferee trust assets; is a beneficiary who is the sole permissible recipient of income and principal from the transferee trust or who has the right to demand a distribution of, or to withdraw, substantially all of the assets of the transferee trust; is a grantor or settlor of a revocable trust; or is the beneficial owner of a legal entity or trust that holds one of these aforementioned positions.

Who is responsible for doing the filing? FinCEN expects that the obligation to file electronic Real Estate Reports to FinCEN would generally apply in the following cascading order: settlement agents, title insurance agents, escrow agents, and attorneys. Only one of the potential different professionals in the cascade that is involved in the real estate transaction would be required to file a report for any given reportable transfer, it being the professional who sits in the higher tier of the cascade of the transaction having the obligation to report. If an employee, agent, or partner acting within the scope of such individual's employment, agency, or partnership would be the reporting person in a reportable property transfer, then the individual's employer, principal, or partnership is deemed to be the reporting person. In that case, it is the responsibility of the reporting person ( i.e., the employer, principal, or partnership) to ensure that a report is filed.

When does the Real Estate Report need to be filed? A Real Estate Report would need to be filed with FinCEN within 30 days after the date of the property’s transfer. The reporting person would be required to keep a copy of the Real Estate Report for a period of five years, along with a form, signed by the transferee or a transferee’s representative, certifying that the transferee’s beneficial ownership information is correct. The reporting person would also be required to keep a copy of any designation agreement. The good news, unlike the CTA, there is not an obligation to file an updated report if there is a change of beneficial ownership of the transferee entity or transferee trust.

What is the effective date for this proposed new rule? FinCEN is proposing an effective date of one year from the date the final rule is issued (i.e., to allow real estate professionals with sufficient time to review and prepare for implementation of the rule).

Who will have access to the reporting information? FinCEN will maintain the Real Estate Reports on one of its Bank Secrecy Act secure databases. The information will be accessible by authorized users, such as law enforcement, intelligence and national security but not by the public.

What are the penalties for not filing? Interestingly, the proposed rule does not discuss penalties. It is likely that the final rule would include penalties and would be similar to the existing GTO Programs which includes both civil and criminal penalties for non-compliance.

You might be asking yourself by now, isn’t this what the CTA is already doing? FinCEN notes that the beneficial ownership information of certain legal entities is also collected under the CTA. However, FinCEN believes that the beneficial ownership information reporting rule and this proposed rule, if adopted, would serve different purposes. For example, trusts generally are not reporting companies under the CTA. Information proposed to be collected pursuant to this proposed rule would enable law enforcement to directly tie individuals, entities, and trusts of interest to specific non-financed sales and transfers of U.S. residential real estate.

FinCEN Proposes New AML/CFT Requirements for Investment Advisers: Expansion to other Gatekeepers

On February 13, 2024, FinCEN issued yet another Notice of Proposed Rulemaking in an attempt to keep criminals and foreign adversaries from exploiting the U.S. financial system and assets through investment advisers.⁴ Investment advisers are entities that provide advice to investors about securities for compensation as part of a regular business. The proposed rule is intended to complement the U.S. Treasury’s other initiatives, such as the CTA and the proposed new reporting rule discussed above regarding all-cash real estate transactions. The proposed rule would require certain investment advisers to apply Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) requirements pursuant to the Bank Secrecy Act, including implementing risk-based AML/CFT programs, reporting suspicious activity to FinCEN, and fulfilling recordkeeping requirements.  Specifically, investment advisers registered with the Securities and Exchange Commission (SEC), also known as registered investment advisers (RIAs), and investment advisers that report to the SEC as exempt reporting advisers (ERAs). Under the proposed rule, covered investment advisers would be required to comply with the rule on or before 12 months from the final rule’s effective date. The comment period for the public is open until April 15, 2024.