As the U.S. government continues to combat issues of money laundering, terrorism financing, and other financial crimes, there are increasingly stringent requirements for companies formed or registered in the United States to report financial information about their “beneficial owners.” The main example of this is the Corporate Transparency Act (“CTA”), passed in 2021, which requires applicable corporations, limited liability companies (“LLCs”), and partnerships to report beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”).
The Department of the Treasury announced in March that it will not enforce any penalties or fines associated with the CTA’s reporting rule and that it will propose a rule change narrowing the scope of the CTA to apply only to foreign reporting companies. While the CTA is currently subject to scrutiny, FinCEN is still looking to reduce illicit activity in the U.S. real estate market. In recent years, the market has fallen victim to exploitation by illicit actors purchasing residential real estate to launder money through non-financed (all cash) transactions. These illicit actors often purchase property through legal entities or trusts to conceal their identities and intentions from financial institutions and government agencies.
To combat money laundering and other illicit activity in the real estate market, FinCEN announced a final rule, 89 Fed. Reg. 70258, commonly called the “Residential Real Estate Rule,” in August 2024. The rule is set to take effect on December 1, 2025. Nationwide, the rule requires certain parties involved in real estate closings and settlements to report information to FinCEN about specific types of transfers of residential real estate that are considered high risks for illicit finance. With a widespread reach, it is important for individuals and professionals involved in the real estate market to familiarize themselves with the key aspects of the rule.
What Types of Transactions Need to be Reported to FinCEN?
The goal of the Residential Real Estate Rule is to collect ownership information in non-financed transactions of residential property transferred to legal entities and trusts. However, not all transfers are considered reportable. Individuals and professionals need only report transfers that satisfy the following “reportable transfer” criteria:
- The property is residential real property;
- The transfer is non-financed;
- The property is transferred to a legal entity or trust; and
- An exemption does not apply.
Prior to filing, the applicable party should familiarize themselves with the exempted transfers and entities to ensure that they are not unnecessarily reporting information. At a glance, exempted transfers include transfers relating to death, divorce, bankruptcy, for no consideration, where there is no reporting person, and more.
What Information is Required to be Reported to FinCEN?
Once a party has determined that they are involved in a covered transfer, the next step is to ensure that all relevant information is being reported. The rule requires that the following information is provided regarding the transfer of residential real estate: (i) identifies the reporting person; (ii) identifies the legal entity or trust receiving ownership of the property; (iii) “beneficial owners” of the transferee entity or transferee trust; (iv) individuals signing on behalf of the entity or trust during the transfer; (v) transferor; (vi) residential property that is being transferred; and (vii) total consideration of the transfer. Verifying that all this information is reported accurately is vital to ensure compliance.
Relevantly, beneficial owners of transferee entities are those that exercise “substantial control” over the transferee entity, or own/control at least 25% of the entity’s ownership interests. Moreover, the rule defines beneficial owners of transferee trusts as individuals who are trustees or otherwise have the authority to dispose of transferee trust assets.
Who is Required to Report the Information to FinCEN?
Under the rule, those responsible for closing or settlement functions in applicable transfers are typically required to report the relevant information. However, the rule specifically lays out ways to determine who is responsible for reporting. The first of these is the “reporting cascade.” The reporting cascade lists seven (7) different functions that are performed in transactions involving the transfer of residential real estate, ordered by function performed in the transaction. The person who does the function that is highest on the reporting cascade (for example, a settlement agent) is the one who has the obligation to report for that transfer.
The other manner that the reporting person may be determined is through the real estate professionals who perform the functions in the “reporting cascade” entering a written agreement designating an individual to take on the reporting obligations. This approach is more efficient because it is more straightforward and clearly defines who has the reporting obligation.
What Happens When There is Noncompliance with the Residential Real Estate Rule?
If a reporting person fails to file a report or files an inaccurate report, the final rule delegates to the Bank Secrecy Act. Within the rule, negligently failing to comply with reporting requirements under the rule can lead to civil penalties. However, knowingly noncomplying with the rule may lead to more serious criminal penalties.
Next Steps
Prior to the rule’s effective date on December 1, 2025, parties interested in transferring or purchasing residential property should consider whether they are involved in non-financed transactions that are covered under the final rule. It may be necessary to take steps to compile the required reporting information and begin to think through processes to designate individuals to report the relevant information. Unless one of the legal challenges amounts to the rule being stayed or struck down, the best course of action is to prepare as if the rule is going into effect on December 1.
The attorneys in McCarthy Lebit’s Real Estate practice group are continuing to stay apprised of developments relating to the Residential Real Estate Rule and other FinCen regulations. We are available to assist with any needed compliance for such regulations or to discuss any questions or needs that you may have.
For more information or to seek counsel from our Real Estate & Construction group, please reach out to request a consultation or call us at 216-696-1422.
___
McCarthy Lebit would like to thank law clerk Douglas J. Carter for his effort in assisting with the preparation of this legal blog post for The More Report.
