Collecting Beneficial Ownership Information for U.S. Real Estate

One of the key advantages for wealthy individuals and high-net-worth persons worldwide in purchasing U.S. real estate has been the ability to structure acquisitions with a high degree of confidentiality. For instance, by utilizing a South Dakota trust structure to purchase U.S. property, even the U.S. government might not be able to identify the true beneficial owner. Of course, when bank financing is involved, the financial institution will need to know the beneficial owner's identity. After all, banks won't provide loans without knowing who stands behind the property. While banks' knowledge of beneficial ownership doesn't automatically translate to government awareness, and they won't voluntarily disclose such information to authorities, the government can typically access this information if needed through financial institutions.

However, this risk can be eliminated by purchasing properties with all cash, which explains why U.S. real estate has been particularly attractive to bad actors: it offers both asset concealment and value appreciation. But these favorable conditions may be coming to an end.

On February 7, 2024, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (the "Rule") aimed at combating and deterring money laundering in U.S. residential real estate through enhanced transparency.

The Rule will require certain professionals involved in real estate closings and settlements to report to FinCEN information about residential property transfers made through non-financed means (i.e., all-cash) to legal entities or trusts. FinCEN's proposal specifically targets residential transfers deemed high-risk for money laundering (excluding transfers to individuals), minimizing the potential reporting burden on the industry. These reports will collect beneficial ownership information behind relevant legal entities or trusts, which will be stored in a non-public database accessible only to specific government officials.

The Rule outlines when reports must be filed; who must file them; what information must be provided, including details about beneficial owners of legal entities and trusts; and the timing requirements for transaction reports. The collected data will assist the U.S. government and its partners in addressing vulnerabilities that allow illicit actors to abuse the U.S. residential real estate market.

The Rule aligns with the Bank Secrecy Act's long-standing directive to extend anti-money laundering measures to the real estate sector. However, persons involved in real estate transactions and settlements will continue to be exempt from the BSA's anti-money laundering compliance program requirements.

Notably, the current rule only covers residential properties and not commercial real estate. While FinCEN intends to expand the scope to commercial properties, no specific timeline has been set. We will analyze the Rule's key contents in this article.