Could a new, little-noticed, federal law – conceived to block money laundering through LLCs and other legal entities – impact your company’s operations?

Bryan Saxton, Real Estate and Corporate Partner at Rosenberg Martin Greenberg, LLP, is recommending commercial real estate business leaders research the Corporate Transparency Act (CTA) to ensure they are in compliance and “at a minimum, have a conversation with legal counsel who can provide proper guidance.”

The CTA, which became effective January 1, 2024, requires companies and legal entities to adhere to financial reporting requirements or face substantial monetary penalties and even imprisonment. Companies formed prior to the start of this year must file all information to the Financial Crimes Enforcement Network by year-end. Those formed in 2024 have to report within 90 days of the entity’s formation.

Companies with more than 20 full-time employees working in the United States, operating a physical office in the country, and having more than $5 million in gross receipts on their most recent tax return are exempt from CTA. There are also 23 entity types that are exempt from the law including banks, insurance companies, public accounting firms, pooled investment vehicles, tax-exempt entities, and subsidiaries of certain exempt entities.

CTA’s requirements remain relatively unknown to many companies and individuals that may be impacted by this legislation, Saxton said.

The genesis of the law can be traced back to Florida Senator Marco Rubio, who became aware of Venezuelan officials investing more than $1 billion in the Miami real estate market. The group regularly used anonymous shell companies to funnel questionable funds into the companies, with many of the projects resulting in federal indictments and convictions.

The CTA was written and subsequently supported by both sides of Congress to identify and attempt to slow the amount of terrorist financing and money laundering and combat the use of shell companies to facilitate illicit activities. The legislation specifically targets limited liability corporations (LLCs) whose use is commonplace by development companies, property owners and managers, sellers, and brokers in the real estate sector. To establish the true identities of individuals and businesses involved in an LLC, filings require the complete business name, current address, state of formation and tax identification number for the entity, the ultimate “beneficial owners” and those exercising “substantial control”.

“CTA is flying a bit under the radar for most business owners and, although filing the appropriate information is fairly straight-forward, we are advising our clients to not delay and invest time now to determine any potential impact on their entities, including special purpose entities owning real estate,” explained Saxton. “The legislation, while not solely real estate-focused, has the effect of requiring identification of all ownership interests in a particular entity even if there is no real possibility of money laundering or the illicit use of funds. We see the particular impact on certain family businesses in which relationships have become strained, lines of communication have been shut off completely, and exact ownership percentages are unclear. However, these circumstances do not eliminate the need to comply with the new directives.”

“An unintentional consequence of CTA will be its negative impact on the use of LLCs and the fact that some owners will lose their anonymity in real estate deals, at least for purposes of CTA reporting,” added Saxton. “Owners of real estate brokerage companies also need to carefully familiarize themselves with the act. There is no reason to become overly alarmed by CTA but, like most new laws, it makes sense to become properly educated and prepare to avoid mistakes.”

The reporting process can be simplified in some measure by applying for a FinCEN identifier directly with FinCEN.