The National Defense Authorization Act (NDAA), which serves as the annual authorization package for the Department of the Defense, passed this week in both the House and Senate by veto-proof margins—335 to 78 in the House and 84-13 in the Senate. The measure includes landmark legislation related to money laundering and beneficial ownership reporting, an issue that NMHC and NAA have been monitoring closely given its impact on real estate stakeholders. But despite the must-pass nature of the NDAA, President Trump has threatened to veto the measure over his concern that the bill allows for the renaming of military bases and because the bill does not include language to remove liability protections for social media and other internet-based companies. House and Senate Leaders have vowed to override the President’s veto, if necessary, to allow for the legislation to be enacted.
Tucked into the NDAA is a section requiring businesses who form limited liability companies to fully disclose who are the beneficial owners of that business entity. Law enforcement agencies globally have asked for, and received, mandates for businesses to disclose more information on beneficial ownership to curb money laundering, fight terrorism financing and identify illegal or criminal activities that have been sheltered by LLCs or shell companies. The United States remains an outlier to this international movement. And although this has been debated by Congress for a long time, lawmakers have failed to reach consensus until now.
The new framework was fiercely negotiated over the past two years and NMHC and NAA were actively engaged in the negotiations. The initial framework proposed would have been hugely onerous for the industry, and NMHC and NAA advocated for sensible changes to reduce the regulatory and compliance burden that multifamily firms would face under the new regulatory structure. Fortunately, many of our suggestions and edits were incorporated in the final language.
The beneficial ownership framework will require business entities who form limited liability corporations (LLCs) to disclose and report who their beneficial owners are to a newly established national database. Presently, there is no national protocol nor national database of this information and each state sets its own disclosure, approval, management and updating protocols. This legislation would move the U.S. towards a standard process that more closely conforms with international protocols.
The commercial real estate industry is a frequent user of LLCs as part of its normal business practices. Multifamily borrowers today are required to disclose beneficial ownership of their LLCs when accessing bank debt or if their loans were purchased by the Enterprises (Fannie Mae and Freddie Mac). The new framework takes these existing practices a step further by requiring every LLC to report beneficial ownership data into a national database maintained by an agency within Treasury called the Financial Crimes Enforcement Network (FinCEN).
The new reporting process will require that:
- every newly formed LLC to be entered into the FinCEN system by the business entity;
- that every LLC formed prior to enactment of this new protocol, will also have to enter its beneficial ownership information into the FinCEN database; and
- changes to the beneficial ownership of any LLC must be entered into the FinCEN database within one year of the change.
The framework set forth in the legislation goes into extensive detail regarding data security, data access, the entities excluded from reporting, the penalties for non-compliance and timelines for implementation. Once enacted into law, the Treasury will have one to two years to develop the rules of implementation and NMHC and NAA will have the opportunity to identify and raise concerns during this process.