Proposed regulations: Beneficial ownership information reporting; possible real estate transaction reporting

Proposed regulations from Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department

Possible real estate transaction reporting

The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department today released for publication in the Federal Register proposed regulations to require corporations, limited liability companies, and other similar entities formed or registered to do business in the United States to report their beneficial owners.

A second release from FinCEN—an advance notice of proposed rulemaking—also released today for publication in the Federal Register solicits comments regarding possible rules requiring certain entities or persons involved in U.S. real estate transactions to collect, report, and retain information about such transactions.

Beneficial ownership information reporting

A notice of proposed rulemaking [PDF 591 KB] (55 pages as published in the Federal Register on December 8, 2021) includes rules to require certain entities to file reports that identify two categories of individuals:

  • The beneficial owners of the entity
  • Individuals who have filed an application with specified governmental authorities to form the entity or to register it to do business

These proposed regulations are intended to implement provisions of the “Corporate Transparency Act” (a division of the “National Defense Authorization Act for Fiscal Year 2021” as enacted following Congress’ veto-override in early January 2021). Read TaxNewsFlash

An advance notice of proposed rulemaking was issued in April 2021. Read TaxNewsFlash

Today’s proposed regulations describe:

  • Who must file a report
  • What information must be provided
  • When a report is due

The rules requiring entities to submit beneficial ownership and company applicant information to FinCEN are intended to address money laundering, terrorist financing, tax fraud, and other illicit activity. Once finalized, these regulations will affect entities doing business in the United States.

Comments regarding the proposed regulations (as well as comments in response to specific questions) are due on or before February 7, 2022.

Key elements of the proposed beneficial ownership information reporting regulation

According to a FinCEN fact sheet, the proposed regulations provide the following guidance and measures.

Reporting companies

  • The proposed regulations identify two types of reporting companies: domestic and foreign.
    • A domestic reporting company would include a corporation, limited liability company, or any other entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe.
    • A foreign reporting company would include a corporation, limited liability company (LLC), or other entity formed under the law of a foreign country and that is registered to do business in any state or tribal jurisdiction. Under the proposed rule, 23 types of entities would be exempt from the definition of “reporting company.”
  • FinCEN expects that these definitions would include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and LLCs, because such entities appear typically to be created by a filing with a secretary of state or similar office.
  • Other types of legal entities, including certain trusts, would appear to be excluded from the definitions to the extent that they are not created by the filing of a document with a secretary of state or similar office. FinCEN recognizes that the creation of many trusts does not involve the filing of such a formation document. The proposed regulations seek comments on state and Indian tribe law practices regarding trust formation to better understand and define the scope of the rule.

Beneficial owners

  • Under the proposed regulations, a beneficial owner would include any individual who (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25% of the ownership interests of a reporting company. The proposed regulations define the terms “substantial control” and “ownership interest” and set forth standards for determining whether an individual owns or controls 25% of the ownership interests of a reporting company. The proposed regulation exempt five types of individuals from the definition of “beneficial owner.”
  • In defining the contours of who has “substantial control,” the proposed regulations set forth a range of activities that could constitute “substantial control” of a company. This list would capture anyone who is able to make significant decisions on behalf of the entity. According to the FinCEN fact sheet release, this approach is designed to close loopholes that would allow corporate structuring that obscures owners or decision-makers—a crucial step to unmasking shell companies.

Company applicants

  • In the case of a domestic reporting company, the proposed regulation define a company applicant to be the individual who files the document that forms the entity. In the case of a foreign reporting company, a company applicant would be the individual who files the document that first registers the entity to do business in the United States.
  • In both cases, the proposed regulations specify that anyone who directs or controls the filing of the relevant document by another would also be a company applicant.

Beneficial ownership information reports

  • When filing the reports of beneficial ownership with FinCEN, the proposed regulations would require a reporting company to identify itself and report four pieces of information about each of its beneficial owners and company applicants—name, birthdate, address, and a unique identifying number from an acceptable identification document (and the image of such document).
  • If an individual provides his or her report to FinCEN, the individual can obtain a “FinCEN identifier,” which can then be provided to FinCEN in lieu of other required information about the individual.
  • The proposed regulations also include a voluntary mechanism to allow reporting of the taxpayer identification number (TIN) for a beneficial owner or company applicant.

Timing

  • Under the proposed regulations, the timing of submitting the report would depend on (1) when a reporting company was created or registered, and (2) whether the report at issue is an initial report, an updated report providing new information, or a report correcting erroneous information in a previous report.
  • Domestic reporting companies created before the effective date of the final regulations would have a year to file their initial reports. Reporting companies created or registered after the effective date would have 14 days after their formation to file. The same deadlines would apply to existing and newly registered foreign reporting companies.
  • Reporting companies would have 30 days to file updates to their previously filed reports, and 14 days to correct inaccurate reports after they discover or should have discovered the reported information is inaccurate.

Anti-money laundering regulations for real estate transactions

FinCEN’s advance notice of proposed rulemaking [PDF 264 KB] (14 pages as published in the Federal Register on December 8, 2021) solicits comment on potential requirements under the Bank Secrecy Act for certain persons involved in real estate transactions to collect, report, and retain information.

As explained in this release:

…systemic money laundering vulnerabilities presented by the U.S. real estate sector, and consequently, the ability of illicit actors to launder criminal proceeds through the purchase of real estate, threatens U.S. national security and the integrity of the U.S. financial system.

Accordingly, FinCEN intends to begin the rulemaking process to address such vulnerabilities.

Today’s release is the first step in this rulemaking process, with FinCEN intending to use comments received in response to today’s release in preparing a proposed rule. Comments are requested on or before February 7, 2022.

 

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