Starting January 1, 2024, certain U.S. and foreign entities (Reporting Companies) must report detailed information about the individuals that beneficially own or substantially control them (Beneficial Owners) to the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) pursuant to the Corporate Transparency Act (CTA) and its implementing regulations (Regulations).
The CTA covers all entities that qualify as Reporting Companies.
Reporting Companies are broadly defined to include U.S. corporations, limited liabilities companies and “other similar entities” that are created by a filing with a secretary of state’s office or foreign entities that register to do business in the U.S.
The CTA includes a number of exceptions to the Reporting Companies definition, including publicly traded corporations, certain tax exempt organizations, banks and “large operating companies” (as defined in detail in the Regulations).
Take Note: Most privately held real estate companies will be considered Reporting Companies unless they satisfy one of the exceptions outlined in the Regulations.
Who is a Beneficial Owner?
Under the CTA, a “Beneficial Owner” is any individual that directly or indirectly (i) “substantially controls” the Reporting Company; or
(ii) owns or controls not less than 25% of the ownership interests in the Reporting Company. The CTA and Regulations describe five exceptions to the definition of Beneficial Owner, including minor children, certain employees and creditors.
What is Substantial Control?
An individual exercises “substantial control” over a Reporting Company if he/she is a senior officer (i.e., President, CFO, General Counsel, CEO and COO) or has authority or substantial influence over any significant Reporting Company matter or major decisions.
Additionally, an individual that has “any other form of substantial control” over the Reporting Company must be reported.
Take Note: From a practical standpoint, this catch-all provision requires Reporting Companies to disclose all individuals with any significant influence or authority over the Reporting Company’s activities or decisions.
The Regulations contain a broad and detailed definition of “ownership interests” including, among others, any equity, stock, joint venture interests, any capital or profit interests, instruments convertible into equity or other interests, and the catch-all “any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership”.
What Information is to be Reported?
Per the Regulations, Reporting Companies must disclose specific information and documentation to FinCEN about themselves, their Beneficial Owners and their Company Applicants (i.e., the persons who directly file the document that creates the Reporting Company and who are primarily responsible for directing or controlling such filing).
This includes full legal names, trade or “doing business as” names, business and/or residential addresses, jurisdictions of formation, and unique identification numbers (UINs) (such as IRS Taxpayer Identification Numbers, U.S. passport or driver’s license numbers), with an image of the documents that contain those UINs.
Take Note: If the Reporting Company was formed or registered (if foreign) before January 1, 2024, information about the Company Applicant is not required to be reported.
For U.S. Reporting Companies formed (i) before January 1, 2024, the report must be submitted by January 1, 2025; and (ii) after January 1, 2024, the report must be submitted within 30 days after the date of its formation.
Within 30 days after the Reporting Company becomes aware or has reason to know that submitted information was inaccurate or has changed, the Reporting Company must file an updated report.
Civil and Criminal Penalties for CTA Violations:
The CTA provides for meaningful civil and criminal penalties for reporting violations, including willfully providing false information or failing to file complete and accurate reports (or updated reports) and for the unauthorized disclosure of beneficial ownership information.
What’s the Purpose?
The CTA authorizes FinCEN to maintain this information in a national database and to disclose it to law enforcement, national security agencies, and others to combat crimes including money laundering, terrorism and human trafficking.
Start Preparing Now – The Checklist:
- Develop a list of all existing entities that directly hold title to your portfolio assets and all indirect persons and entities that own them. Also include entities through which your business is conducted.
- Confirm the accuracy of this information with organizational charts that were created for lenders and equity investors when the assets were acquired or recently refinanced. Also check it against entity tax returns and Schedule K-1s.
- Create a database (CTA Database) to organize, retain, supplement and update this information.
- Determine which of your entities are Reporting Companies (subject to the CTA reporting requirements) and which are exempt. Include the basis for this determination in the CTA Database.
- For all Reporting Companies, input into the CTA Database those individuals that qualify as Beneficial Owners, including links to supporting documents.
- Communicate with equity investors to obtain needed Beneficial Ownership information for their entities holding interests in the Reporting Companies, and to coordinate with them about who is handling the CTA reporting requirements.
- Notify the Beneficial Owners for each Reporting Company that you are preparing records to comply with the CTA, advise them that their compliance is required, ask them to confirm the personal information to be reported for them and to provide you with the required documentation to be submitted for them to FinCEN.
- Request that Beneficial Owners respond within a specified time period so that you have adequate time to pursue them if they are non-responsive.
- Develop a cyber security plan (if you do not already have one) to protect the personal information you will be collecting and maintaining from Beneficial Owners.
- Draft provisions to be included in the governing documents of newly formed entities requiring their Beneficial Owners to comply with the CTA and the Regulations and to provide all required information and documentation and updates for the same if it changes.
- Include default provisions, remedies and indemnities to protect Reporting Companies against a Beneficial Owner’s failure to comply or its provision of inaccurate information/documentation.
- Revise confidentiality provisions so that they exclude disclosures to comply with law, including the CTA.
- Include disclaimer and release provisions where the Beneficial Owners release the Reporting Companies from anyone wrongfully obtaining their personal, other than due to the gross negligence or intentional misconduct of the Reporting Companies.
- Regularly update the CTA Database to include relevant information/documentation to be reported concerning newly formed Reporting Companies and their Beneficial Owners and Company Applicants.
- Create a schedule to routinely check in with Beneficial Owners to identify changes that require CTA reporting updates.
- Develop a system for the formation of new entities after January 1, 2024 and how the required information/documentation for Reporting Companies will be input into the CTA Database.
A Big Burden:
The CTA imposes a massive burden on property owners and their investors since real estate companies typically own their assets in separate limited liability companies or other tax flow through entities, most of which constitute Reporting Companies. Identifying all of your entities and gathering all of the information and needed documentation for Reporting Companies will take a lot of time and resources.
Activate now to prepare for the CTA’s looming reporting deadlines. For more legal details click here.
Pam Rothenberg is a partner in the Washington, DC office of Womble Bond Dickinson (US) LLP and practices in the area of commercial real estate.