FinCEN: Companies Must Register Beneficial Owners with Federal Government

By Kimberly Rau, MassLandlords, Inc.

In an effort to combat money laundering and create transparency, the federal Financial Crimes Enforcement Network (FinCEN) is requiring all non-exempt reporting companies to register their beneficial owners with the government. This includes small landlords who have established LLCs or trusts.

It may surprise you to learn that real estate is a popular place for money laundering, and the federal government is cracking down. (License: Unsplash)

This rule went into effect Jan. 1, 2024. Companies that existed prior to that date have until Jan. 1, 2025, to file a Beneficial Ownership Information (BOI) report. Companies created after the effective date have 90 days to register their beneficial owners. After the initial BOI report is filed, any changes to that information must be reported within 30 days.

Some companies, including banks and credit unions, are exempt from filing if they meet certain qualifications. However, real estate businesses are not on the exemption list. Limited liability companies (LLCs) are considered reporting companies, so if you have incorporated your rental properties under one or more LLCs, you will need to file a BOI report for each of them. Additionally, trusts are considered reporting companies if they were created by filing a document with the secretary of state or similar office.

What is Money Laundering, and How Does it Impact the Real Estate Market?

Money laundering is the process of taking “dirty money” – money obtained through illegal means – and hiding its origins through a series of transactions or transfers. This makes the income seem legitimate, allowing criminals to use the money without revealing its true source. (If you watched Breaking Bad, this is what Walter White was attempting to do when he bought a car wash.)

Common money laundering schemes involve businesses where large amounts of cash are transferred regularly. If someone needs to launder millions of dollars, it’s easier to hide this kind of volume within an industry where large sums of money are frequently processed. (To continue with the reference, this is why the Whites’ single car wash was not able to plausibly launder all of his drug money.) Casinos and gambling are popular money-laundering targets, as are banks. This is why the government requires entities to report single cash transactions (or related transactions) over $10,000 to the Internal Revenue Service (IRS).

The real estate market is one of the most common places to launder money. Millions of dollars can be moved in a single transaction without arousing any suspicion. Additionally, criminals can front money and have family members, acquaintances or even strangers buy properties under an LLC, never disclosing that they are the true financial beneficiaries.

These secret owners can buy a rental property, and then over-declare their income. A criminal could buy a rooming house with 20 rooms, and claim they charge $1500 a month for each room. In reality, the rents are $600, if the landlord bothers collecting them at all. They report monthly rental income of $30,000, the majority of which doesn’t come from rent payments at all. If anyone gets suspicious, they would have to start by tracking down and speaking to every tenant to find the fraud.

The numbers can be staggering. In 2019, the BBC reported that gangs used the hot real estate market in Vancouver, Canada, to launder approximately $5 billion CAD ($4 billion USD at the time). In a 2023 article discussing the then-pending BOI reporting requirements, U.S. Treasury Secretary Janet Yellen stated that up to $2.3 billion was laundered through domestic real estate between 2015 and 2020.

This is a problem for everyone involved in the housing market, because money laundering through properties creates distorted real estate values and adds to market instability. This means more everyday people, including mom-and-pop landlords, are further priced out of the market. Money laundering also reduces the available housing supply. Business concerns aside, money laundering also contributes to the continuation of drug running, human trafficking and terrorism.

Money laundering can upset the real estate market, including distorting property values and reducing housing supply. (License: Osman Rana for Unsplash)

How Do I Know if My Real Estate Business Counts as a Reporting Company?

FinCEN has published a Small Entity Compliance Guide specifically about beneficial ownership. It explains how to determine if your business counts as a domestic or foreign reporting company (complete with flow chart on page 2).

The definition itself is vague: “A reporting company is any entity that meets the ‘reporting company’ definition and does not qualify for an exemption.” But there are guidelines. Companies created or formed under U.S. laws are domestic; companies formed under another country’s laws are foreign. Corporations, limited liability companies and companies created by filing documents with the secretary of state’s office (or similar state or tribal offices) are all considered potential domestic reporting companies, unless they fall under one of the exemptions allowed by FinCEN.

If a foreign company has registered to do business in a U.S. state or a tribal jurisdiction by filing with a state office such as the secretary of state, it, too, is likely a reporting company.

How Do I Know Who Is Considered a Beneficial Owner?

FinCEN defines a beneficial owner as any individual who directly or indirectly has “substantial control” over a reporting company, or who owns or controls at least 25% of the reporting company’s ownership interests. Individuals can meet one or both of these qualifications to be considered a beneficial owner.

It’s important to note that there is no maximum number of people who can be beneficial owners for an entity. For example, several people could each control 25% of the ownership interests in a company, and all of them would be considered beneficial owners. Two different individuals could own 0% but still be exercising substantial control over the operations of that same company as officers, and they, too, would be considered beneficial owners. All of them would need to be named on a BOI report. Trustees for a trust might have no financial benefit for themselves, but would still need to register, as they have total control over the trust’s operations.

In its Small Entity Compliance Guide, FinCEN provides step-by-step guidance to determine who has substantial control in your company, as well as what qualifies as an ownership interest. These can be found starting on page 16 of the guide.

Conclusion

Registering your rental properties as an LLC can make sense. Though these new rules seem to remove some of the anonymity that LLCs used to provide, registering your rentals as limited liability corporations can still protect your personal assets in the event of a lawsuit. And in Massachusetts, corporate officers’ names are part of the public record anyway, meaning you’re never truly anonymous.

More questions about BOI reporting? FinCEN has a page of frequently asked questions that may provide additional insight. If you, as an owner or control person, appear on more than one entity, we recommend you take the option to register for a FinCEN ID. You’ll enter some basic identifying information once and receive an ID that allows you to report for each of your LLCs. FinCEN has rules about who can see reported information; generally, reports are non-public.

If you have a story about how registering as a beneficial owner will impact you as a landlord, we’d love to hear more. Email us at hello@masslandlords.net.