On January 3, 2021, Congress passed the National Defense Authorization Act (NDAA) over a veto by the President. Contained therein was the authorization of the Corporate Transparency Act (CTA) which creates reporting requirements to the Federal Government for many entities.
At the Federal level, and under the purview of the Department of the Treasury, the Financial Crimes Enforcement Network (FinCEN) is the governmental agency tasked with investigating and prosecuting cases against bad actors in the financial sector. Specifically, the mission of the FinCEN is to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence.
FinCEN has recognized for years that criminals can use the vehicle of a business entity like a corporation or limited liability company to move funds secretly through real estate to avoid detection and ultimately lauder ill-gotten gains. As a result, FinCEN has been relying on the real estate settlement industry to report underlying beneficial ownership in such entitles to the government through Geographic Targeting Orders (GTOs). Here is California, five Counties are under such order, such that title companies insuring real estate transaction covered by the GTOs have to report information about the underlying owners to the government. Title companies have reluctantly complied, objecting to the imposition of additional duties without compensation and questioning the viability of the data having no source to verify it.
FinCEN has reported success in finding illicit funds through the program, and has argued for expansion of authority accordingly. That expansion is now here in the form of the CTA. As part of the new law, FinCEN will be creating a national database wherein corporations and limited liability companies will be required to report the beneficial owners of their entities.
Entities required to report to the database under the CTA include corporations, limited liability companies, or other similar entities that are created by the filing of a document with a secretary of state or a similar office of the law of a State or Indian Tribe, or is formed under the law of a foreign country and registered to do business in the United States through the filing of a document with a State or Indian Tribe. Reporting is required at formation and annually thereafter. Entities existing before the database is up must report by January 2023. The CTA does include more than 20 exemptions of entities that are not required to report covering larger entities and those that are already highly regulated like financial institutions.
Financial institutions with customer due diligence obligation can access the FinCEN data found in the new database once it is up and running. However, the financial institutions must get permission from their customers to access this data. For those of us in the real estate settlement industry, long term, the hope is that, the creation of the new database will lead to the elimination of the GTOs and data collection requirements accordingly.
For those of us who own entities, we should be aware of this new reporting requirement and be ready to report once the database is available.