The Corporate Transparency Act (CTA), established under the Anti-Money Laundering Act of 2020, aims to curb illegal financial activities through enhanced transparency measures. Its intent is to peel back the layers of anonymity often exploited by money launderers and others engaged in illicit activities, disclosing the identities of the individuals who ultimately own or control legal entities. It mandates corporate entities to report details of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). Understanding the Corporate Transparency Act is especially relevant to real estate investors who frequently utilize intricate corporate structures in their transactions.
A recent landmark decision by a federal district court in Alabama has once again placed the CTA in the spotlight. The court ruled that the CTA’s mandates exceeded Congress’s constitutional powers and declared the act unconstitutional. This decision casts doubt on the future of compliance obligations across the broader corporate landscape.
For real estate investors, the ruling raises questions about whether they need to continue following established CTA ownership reporting rules. Currently, only the lawsuit parties are affected. However, many expect the issue to reach the Supreme Court. Future court cases and regulatory responses could change the landscape. Investors should monitor updates closely to understand potential impacts on reporting requirements.
Implications of the Alabama Court Ruling
The March 1st court ruling on the Corporate Transparency Act may initially seem advantageous for real estate investors desiring confidentiality. However, the swift response from the federal government to appeal underscores the potential disruption and uncertainty resulting from this decision.
If the court’s ruling stands, it may create a regulatory environment that is more favorable to investors seeking anonymity and confidentiality in corporate reporting. However, if the ruling is overturned or revised, companies found to be in violation of the CTA may face significant consequences, including penalties and reputational damage.
Here’s what real estate investors should consider as they navigate the landscape in 2024 and beyond.
Compliance
Following the Alabama court’s decision to deem the CTA unconstitutional, FinCEN has clarified that this specific injunction applies only to the plaintiffs in the case, not broadly to all entities. This implies that entities not directly involved in the case are still required to comply with the CTA’s mandates. FinCEN’s commitment to enforcing the CTA against other entities remains unchanged, signaling the importance of maintaining compliance. Furthermore, with the Department of Justice appealing the ruling to the 11th Circuit, the legal status of the CTA could change, further emphasizing the need for ongoing compliance.
Anticipate Future Developments
Plan for Reporting Obligations
The current CTA implementation schedule requires entities formed after January 1, 2024, to report beneficial ownership information to FinCEN within 90 days of formation. Entities formed or registered before this date have until January 1, 2025, to comply. As these deadlines approach, entities should ensure they have systems in place for collecting, verifying, and reporting beneficial ownership data accurately. Reviewing FinCEN’s frequently asked questions webpage will help ensure full compliance with the CTA.
It’s worth noting that there is a list of exceptions and exemptions to the reporting requirement, such as entities already subject to regular AML program requirements. Here are the exceptions that real estate professionals should keep in mind:
- Tax-exempt entity exemption: Applies to organizations under tax code sections 501(c), 527(e)(1), and 4947(a). Homeowner’s associations must report to FinCEN, as they aren’t covered under Section 528.
- Inactive entity exemption: This may apply to entities existing before January 1, 2020, not actively engaged in business, without foreign ownership, with no ownership changes in the past year or transactions over $1,000 in 12 months, and holding no assets. This exemption may be relevant for certain real estate investments and syndications.
- Large operating companies exemption: Requires having 21+ employees in the U.S., over $5 million in U.S. gross receipts or sales, and a physical U.S. office. Entities meeting these criteria are exempt from reporting beneficial ownership information (BOI) to FinCEN, though aspirational financial goals alone do not qualify for exemption.
Seek Professional Guidance
Navigating the CTA’s complexities, especially after the Alabama ruling, highlights the importance of professional guidance. Legal and financial advisors offer tailored advice to help real estate professionals remain compliant. Advisors also help professionals strategically manage changes in the regulatory landscape. As new developments emerge from appeals or legislative amendments, expert guidance is essential. This support enables real estate professionals to adapt compliance strategies effectively. Staying informed and well-advised ensures readiness for any shifts in requirements.
Conclusion
The recent ruling by the Alabama court regarding the CTA indicates a significant, though somewhat ambiguous, change for real estate investors. This dynamic scenario demands vigilant monitoring of legal developments and a flexible approach to strategy adjustments. As events continue to evolve, it is imperative for investors to stay well-informed and seek expert advice to adeptly manage the impact of these changes.
