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:
- Similar Entities. The Act does not define the entities that are “similar” to corporations and LLCs. Given the variety of entities encountered in real estate transactions—from the common (e.g., limited partnerships) to the less common (e.g., general partnerships, Delaware statutory trusts, and Maryland real estate investment trusts)—how will this definition be applied?
- The Substantial Control Test. How will the Act’s “substantial control” test be applied to customary “major decision” provisions in joint venture operating agreements or—since control can also be created by contract—to loan covenants if the lender does not fall within one of the reporting exclusions?
- The Meaning of Ownership. Similarly, what does “ownership” mean in the context of common waterfall and promote structures? Will the allocation of membership interests set forth in an LLC’s operating agreement be respected, or will developers and investors need to consider in advance how distributions might be made upon an eventual real estate disposition?
- Standard Operating Agreements. What changes will need to be made to the standard operating agreements in connection with the reporting requirements for newly created entities and, since the disclosure requirements will eventually be applied to existing entities, to their existing agreements? How should covered companies and their management protect themselves against noncompliance by others?
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.
