Haven No More: The Effects of Beneficial Owner Reporting Rules

Welcome to the February 2024 edition of our newsletter!  In this issue, we’ll examine the recently implemented Beneficial Owner Information requirements and its effects, intended and otherwise.

Increased Transparency, But At a Cost?  New Ownership Reporting Rules May Change Business and Investing

Beginning on January 1, 2024, the U.S.Treasury Department’s Financial Crimes Enforcement Network, or FINCEN, began requiring “many companies” to disclose the beneficial owners who derive profit from, and exercise control over, previously opaque limited liability companies and other entities created to maximize secrecy referred to very generally by FINCEN as “entities created by the filing of a document with a secretary of state or any similar office in the United States.”

The implications of increased ownership disclosure – with which existing companies must comply by January1, 2025 – are considerable.  Many real estate purchase are made on behalf of owners directly by such companies (rather than by an individual who then transfers it to an entity.)  Whether to maintain privacy – as in the case of celebrities – or to maintain an additional layer between the owner of a rented townhouse and its tenants when a liability event occurs – these companies have served many legitimate purposes over the years.  They have also been used to launder illicit gains into hard assets like real estate, aircraft, or watercraft – thus explaining one of U.S. law enforcement’s motivations in seeking this authority under the 2022 Corporate Transparency Act.  As enacted, that act only allows authorized “requestors,” such as law enforcement agencies, to seek filing information once the grace period is over at the end of 2024.  It remains somewhat unclear how much of this information will be available to the public via the Freedom of Information Act in 2025 and beyond.

These new requirements are likely to be seen as an earthquake in secrecy havens such as Delaware and Nevada – seemingly gone are the days where an owner could hide behind nominees such as “authorized signatories,” who could simply be a paralegal at their retained law firm.  While that veil may remain in the public realm, for now, the true ownership will be known to law enforcement, which is likely to make the lives of bad actors much more difficult, as the law intended.  The rest of the business community is advised to exercise additional diligence in this new environment as well, and thorough due diligence can help avoid guilt by association when dealing with parties who might have reason to keep their ownership of assets a secret/