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8 • 2022

Who Can Access Information About Real Estate Transactions That Must Be Reported to FinCEN?

Since 2016, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury has sought to combat money laundering by requiring, through a series of Geographic Targeting Orders (“GTO”),[1] the actual identities of the owners of limited liability companies and other business entities that purchase high-end real estate in certain metropolitan areas to be disclosed in a Currency Transaction Report (“CTR”) submitted to FinCEN.[2] FinCEN currently requires a CTR to be filed in connection with the purchase of residential real property by a legal entity for a price of $300,000 or more, if the purchase is made without a bank loan or other similar form of external financing, in: the Texas counties of Bexar, Tarrant, or Dallas; the Florida counties of Miami-Dade, Broward, or Palm Beach; any of the five boroughs of New York City; the California counties of San Diego, Los Angeles, San Francisco, San Mateo, or Santa Clara; the City and County of Honolulu, Hawaii; Clark County, Nevada; King County, Washington; Cook County, Illinois; or the Massachusetts counties of Suffolk or Middlesex.[3] When required in connection with such a transaction, a CTR is filed digitally by the title insurance company through the BSA [Bank Secrecy Act] E-Filing System maintained by FinCEN.[4] The E-Filing System is (theoretically) more secure than paper filings, so that the identity of real property purchasers in legitimate all-cash transactions is protected from prying eyes outside of FinCEN.

Those privacy protections were codified with the passage by Congress of the Corporate Transparency Act (“CTA”) early in 2021.[5] The CTA actually goes beyond the GTOs in effectively setting a “federal standard for incorporation practices,” to deal with the issue that not every state (Delaware, most notably) requires incorporators to provide information about the beneficial owners of business entities formed under state law.[6] The CTA thus requires private corporations, LLCs, or other business entities formed under state or tribal law to report to FinCEN the identity—including full legal name, date of birth, current residential or business street address, and an identifier obtained from FinCEN or a unique identifying number from an acceptable identification document, such as a valid U.S. passport or state driver’s license—of each beneficial owner of the entity, as well as each person who actually files an application to form a new company.[7]

With regard to who can access that sensitive information reported to FinCEN, the CTA specifically provides that beneficial ownership information collected under the statute is confidential and generally may not be disclosed by an officer or employee of: the federal government; a state, local, or tribal government; or any financial institution or regulatory agency that receives the information.[8] Exceptions to the general rule of confidentiality are quite limited, so that FinCEN can make the information available only upon receipt of a request—through “appropriate protocols” intended to protect the security and confidentiality of the information—primarily from various authorized government authorities, including a federal agency engaged in national security, intelligence, or law enforcement activity, or, if a court of competent jurisdiction has authorized the request, a state, local, or tribal law enforcement agency.[9] FinCEN may also disclose information upon receiving “a request made by a financial institution subject to customer due diligence requirements,” but only “with the consent of the reporting company, to facilitate the compliance of the financial institution with customer due diligence requirements under applicable law.”[10] The penalties for violating the protocols through an unauthorized disclosure or use of beneficial ownership information reported to FinCEN in confidence are substantial, including a fine of not more than $250,000, imprisonment for not more than five years, or both.[11]

The heavy penalties should ensure that access to information about individuals who are now required to disclose their identities to FinCEN, either under the CTA or because they have engaged in an all-cash real estate transaction in a certain metropolitan area, should be limited only to FinCEN, so long as the transaction is legitimate.[12] As such, it should still be the case that Delaware limited liability companies remain a useful way to legitimately safeguard the identity of real estate purchasers in the entertainment industry from casual internet Google searchers.

Of course, while forming a Delaware limited liability is a great start to safeguarding identity for legitimate reasons, thought must still go into issues other than just structuring the entities, as there are other ways identity can get out. For example, in a financed transaction,[13] it is important to structure the deal so that the celebrity purchasing the property does not sign the mortgage, which is a public record that can easily be found by anyone looking for that information. Others involved in the transaction, such as real estate brokers and the title insurance company (which files the CTR with FinCEN in an all-cash transaction), likewise need to understand not to disclose anything and it is probably best to have them sign nondisclosure agreements as an added precaution.

[1] The most recent GTO was issued by FinCEN on April 29, 2021.

[2] See eMinutes Blog, “Using a Delaware LLC to Safeguard Identity for Legitimate Reasons: The Impact of FinCEN’s Reporting Requirements” (July 29, 2016).

[3] See Geographic Targeting Order (Apr. 29, 2021), at 1-2.

[4] See id. at 2 & n.2.

[5] See eMinutes Blog, “Delaware LLC Remains Best Way for Celebrities to Preserve Anonymity Even After the Corporate Transparency Act” (Jan. 20, 2021). For more information on the background of the CTA, see Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 17,557, 17,558-59 (Apr. 5, 2021) (“Proposed Rule”).

[6] National Defense Authorization Act, Pub. L. No. 116-283, § 6403(a), 134 Stat. 3388 (2021). The CTA is codified at 31 U.S.C. § 5336.

[7] 31 U.S.C. § 5336(b)(1). A “beneficial owner” includes any individual who, directly or indirectly, exercises substantial control over the entity or owns or controls not less than 25% of its ownership interests. Id. § 5336(a)(3)(A)(i), (ii). The reporting requirement does not take effect until the Secretary of the Treasury issues final regulations implementing the CTA, which must occur not later than January 1, 2022. Id. § 5336(b)(5). Existing companies will also have to provide the required information in a “timely manner, and not later than two years after the effective date” of the implementing regulations to be prescribed by the Secretary of the Treasury, so potentially not until January 2024. Id. § 5336(b)(1)(B).

[8] Id.  § 5336(c)(2)(A); see also Proposed Rule, 86 Fed. Reg. at 17,560 (“The CTA requires FinCEN to maintain the reported beneficial ownership information in a secure, non-public database for not fewer than five years after the date on which the reporting company terminates.” (emphasis added)).

[9] See  31 U.S.C. § 5336(c)(2)(B). What those “appropriate protocols” might be will be spelled out by FinCEN when it promulgates the final rule implementing the CTA at the beginning of 2022.

[10] Id. § 5336(c)(2)(B)(iii) (emphasis added).

[11] See id. § 5336(c)(4), (h)(3)(B). Note that these penalties are greater than the penalties for a person who willfully violates the CTA’s reporting requirements. See id. § 5336(h)(1), (3)(A) (penalties for reporting violations include a fine of not more than $10,000, imprisonment for not more than two years, or both).

[12] See Proposed Rule, 86 Fed. Reg. at 17,560 (the CTA includes “protections to ensure that the reported beneficial ownership information is maintained securely and accessed only by authorized persons for limited uses”).

[13] It is not required that a financed purchase of property be reported to FinCEN in a CTR because it is not an all-cash transaction; however, actual ownership of the company purchasing the property will still have to be reported to FinCEN under the CTA once FinCEN’s regulations are finalized and take effect.