How the Corporate Transparency Act Will Affect Commercial Real Estate Companies
Partners at Stroock discuss anti-money laundering Corporate Transparency Act, and why companies need certain information on their beneficial owners.
By Stroock & Stroock & Lavan LLP May 8, 2023 8:00 amreprints
The Corporate Transparency Act (CTA), which takes effect Jan. 1, 2024, will create mandatory paperwork for virtually every company in commercial real estate. Partner Insights spoke with Bradley Kulman and Karen Scanna, partners at Stroock & Stroock & Lavan LLP, about what companies can expect once the CTA becomes law.
Commercial Observer: What exactly is the Corporate Transparency Act, and what is its main purpose?
Bradley Kulman: The Corporate Transparency Act is intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activities. With various exceptions, it will require corporate and similar types of entities in the U.S. to file reports with the Department of Treasury’s Financial Crimes Enforcement Network, known as FinCEN, identifying their beneficial owners and providing certain information about them.
What exactly are the requirements companies will need to adhere to?
Karen Scanna: This reporting process will apply to virtually every commercial real estate firm. Reporting companies that don’t qualify for an exemption are required to file a report that includes certain basic information about themselves (name, address, state of jurisdiction, and taxpayer ID number) and every beneficial owner and company applicant (name, date of birth, address and other identifying information such as a passport, driver’s license or identifying number assigned by FinCEN).
A beneficial owner is an individual who directly or indirectly exercises “substantial control” over the reporting company, or owns or controls at least 25 percent of the company’s ownership interests. There are three specific indicators of when an individual possesses substantial control: if they serve as a senior officer of the reporting company, if they have authority over the appointment or removal of a senior officer or a majority of the board of directors of the reporting company, or if they have substantial influence over important decisions made by the reporting company, such as sales of principal assets, major expenditures, issuance of equity, incurrence of debt, or approval of budgets.
A company applicant is the individual who files (or is responsible for filing) the document that creates the reporting company.
There are companies that are exempted from this rule. How can a company determine if they are exempted?
Kulman: Every complex organization will need to examine their entities one by one to determine whether they qualify for one of the 23 exemptions. Some that might be relevant in the real estate world include public companies that report under the 1934 Act; investment companies and advisers that are federally registered; and certain pooled investment vehicles (funds). Another important one is large operating companies, but they must have 20 full-time employees in the U.S., an operating presence in the U.S., and $5 million or more of U.S. gross proceeds or sales. Plus, wholly owned subsidiaries of all of these (other than pooled investment vehicles) are exempt.
How should affected companies prepare for this, particularly those that have complex organizational structures?
Scanna: Look at all of your organizational structure charts and determine entity by entity whether an entity is exempt. Once satisfied that it’s not, then go through the beneficial owner test. That will entail reviewing organizational documents, stockholders agreements, operating agreements — whatever is relevant to the determination. If the structure is complex, you probably need to analyze ownership and control separately.
What are some of the important deadlines?
Kulman: For companies formed prior to Jan. 1, 2024, the initial report is due Jan 1, 2025. For companies formed on or after Jan. 1, 2024, the initial report is due within 30 days following formation. To the extent information changes or a mistake is uncovered, there are 30 days to update the report.
How can newer companies that are just forming prepare to be able to handle all of these reporting requirements?
Scanna: Since a newly formed company — meaning from after Jan. 1, 2024 — has to file its initial report within 30 days after formation, people should not form an entity until they know the ultimate ownership structure. If that’s not possible (for example, due to lender requirements), we suggest that the company submit the initial filing making a good faith determination as to what that ownership structure will be. If it changes, update the information within 30 days after the final structure is determined.
In a client alert you released on the subject, you noted that, “Many reporting companies will not have appropriate contractual rights to obtain the necessary information about their beneficial owners.” Can you elaborate on that?
Kulman: Existing organizational documents typically do not have provisions allowing entities to obtain the required information, so the parties should contemplate amending the documents. For new entities, provisions should be baked into their documents obligating the appropriate parties to provide (and update) this information.
What if a beneficial owner says no, and has a legal agreement protecting their identity. Now you have a legal agreement vs. a legal requirement. What does a company do in that case?
Kulman: The proposed form of report has a box on it for beneficial owners that says “Unknown.” We don’t know whether that will survive in the final form. But presumably it’s included to address this kind of situation, where a good faith effort has been made.
Scanna: We are hoping that, between now and the filing deadline, clarification will be provided on this issue and others, and we will update our clients accordingly.
What are the penalties for those who don’t comply?
Scanna: There are significant penalties, both civil and criminal, for failure to comply, including a minimum civil penalty of $500 per day up to $10,000 in the aggregate, and imprisonment for up to two years. There is a safe harbor if a person who’s filing has reason to believe that the report actually contains inaccurate information, and then within 90 days submits a corrected report. But the safe harbor doesn’t apply if the person is doing this for the sole purpose of evading the reporting requirements, and has actual knowledge of the inaccurate information. It really has to be a good faith mistake that you correct in order to avoid the penalty.
Is there anything else about this topic that you think companies should keep in mind?
Kulman: This is an evolving process. As we move through this year, there are likely to be clarifications from FinCEN in the form of FAQs. Hopefully these will answer some of the tricky issues we have been discussing.