The following critical information was produced by Alabama REALTORS® and is reposted from the state association's website.
Enacted in January 2021 to help fight crimes including money laundering and fraud, the Corporate Transparency Act (“CTA”) will increase reporting requirements for many companies located or doing business in the U.S. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) will be responsible for administering the law. Beginning January 1, 2024, your real estate company will likely be subject to the new reporting requirements under the CTA. Read on to learn more.
What is the CTA?
The Corporate Transparency Act (“CTA”) is a new federal law that aims to increase transparency around ownership of U.S. businesses to prevent the businesses from being used to hide criminal activity. Under current federal law, businesses can sometimes be controlled by anonymous owners, which gives bad actors the opportunity to use their businesses for money laundering, fraud, and/or other crimes, including crimes involving real estate. The goal of the CTA is to prevent some of these crimes by requiring businesses to disclose their ownership.
What Businesses Does the CTA Apply To?
The CTA applies to all business entities that it defines as “reporting companies.” The definition of a reporting company under the CTA is very broad and includes corporations, LLCs, and “other similar entities.” There are some types of businesses which are exempt from the CTA, including banks, certain insurance companies, churches, charities, and many trusts.It is important to note that the CTA will likely apply to the majority of privately-owned real estate companies, except those that fall under an exemption.
What does the CTA Require?
When the CTA takes effect on January 1, 2024, it will require that reporting companies provide information about both the company itself and its ownership to FinCEN. The following company information must be reported: full business name, all trade and “doing business as” names, and the address of the company’s principal place of business, the jurisdiction where the business was formed or registered, and the business’ Taxpayer Identification Number.
The CTA also requires reporting companies to provide information about the people who “beneficially own” and/ or “substantially control” the business. The law defines beneficial owners as those who own or control at least 25% of the ownership interests in the company and/or “substantially control” its business operations. Senior officers, such as general counsel, CFOs, COOs, CEOs, and Presidents, are automatically assumed to have “substantial control” over the companies they work for. Additionally, any person who has “any other form of substantial control” such as the authority to appoint or remove officers ot decision-makers power over significant matters, must be reported to the FinCEN. Finally, reporting companies created on or after January 1, 2024 must also report information about the “company applicant,” which is the person(s) who handle the registration and filing of the company.
FinCEN requires the following beneficial owner information be reported: full legal name, date of birth, and residential address (P.O. boxes are not permitted). Additionally, a copy of the beneficial owner’s nonexpired, official government identification (e.g., driver’s license, tribal identification documents, or domestic or foreign passport) must be submitted. Additionally, the beneficial owner will be required to submit “an identifying number from an acceptable identification document such as a passport or U.S. driver’s license, and the name of the issuing state or jurisdiction.”[1] For beneficial owners who are concerned about privacy, there will be a way to provide the information to FinCEN directly, rather than to the reporting company.[2]
Existing companies that were formed before 2024 have a year to prepare and must submit the required information to FinCEN by January 1, 2025. Companies that are formed during 2024 will have 30 days to submit their information to FinCEN.[3]Additionally, if any information about the company or its owners changes, updated information must be submitted to FinCEN within 30 days of the change. Reporting companies must also correct any mistakes in previous filings within 30 days of discovering the error. Failure to report as required (including amendments as necessary) will carry both civil penalties, including $500 per day in fines, and the possibility of criminal prosecution.
What does the CTA Require?
It can be daunting to begin planning how to get your real estate company in compliance with the new law. If you have questions about whether or how the CTA applies to your business in particular, you should seek legal advice from an experienced attorney. Assuming your company is subject to the CTA’s reporting requirements, the following plan is a general guide to reporting under the CTA.
Step 1: Brainstorm a list of all the people and entities that own an interest in or substantially control your real estate company. For some, this process will be simple. For others, especially large companies, this process could take a while. If you have any uncertainty during this step, you should consult a professional – this will be the foundation for the rest of the process. If you have multiple businesses and you think one or more might be exempt from the CTA, this would also be the time to speak with an attorney about that.
Step 2: Contact the people and entities you identified to let them know that you will be reporting their information to comply with CTA and to confirm that the information you have for them is accurate. If any beneficial owners wish to report their own information directly to FinCEN, assist them with the process to ensure they will be able to provide the required information and provide you with the FinCEN identification number you will need for your records.
Step 3: Store the information that you have gathered in a database that can be viewed and edited in the future. Give special consideration to how you are going to keep this information safe – it is a best practice to have a professional assist with this if you are storing protected personal information.
Step 4: Create a system for reverifying the information and updating the database. Be sure that beneficial owners understand that they are under a continued requirement to update their information.
In the future: If you plan to create or acquire new real estate companies on or after January 1, 2024, ensure they comply with the CTA by having a plan for compliance prior to formation/ purchase of the company and speak to an attorney to ensure that the company’s key documents reflect compliance with the CTA.
Recommended Research: View the resources and reference materials FinCEN has created regarding the CTA here. FinCEN also has resources specifically geared towards small businesses, available here.