For the past year, community association attorneys have been discussing the impact of the CTA (Corporate Transparency Act). Much of the discussion has been on whether the Act does or does not apply to homeowner and condominium associations. As the effective date of the law is January 1, 2024 (with first reports being due no later than January 1, 2025), the need for clear answers has become more pressing.
What Is the CTA?
The Corporate Transparency Act was enacted in 2021 as part of the Anti-Money Laundering Act of 2020. In short, the Act is intended to stop foreign actors from moving dirty money in the United States. A Federal Register document defines the purpose of the Act to “prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.” So what’s that got to do with a small HOA or condominium in the Carolinas? Not much. Unfortunately, the Act does not make great distinctions between fake companies set up to launder money and legitimate for-profit and nonprofit corporations, including HOAs, condos and cooperatives.
Unless an exemption applies, any entity created by the filing of a document with a state secretary of state, state corporate commission, or similar state office is deemed a “reporting company.” Once deemed a “reporting company,” details on the corporation and “beneficial owners” must be reported to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). “Beneficial owner” is anyone who:
- exercises “substantial control” over a “reporting company” or
- owns or controls at least 25% of the ownership interests.
The required information includes the corporation’s name, address, state of formation, and taxpayer identification number as well as contact details and specific items of personally identifiable information (“PII”) on each beneficial owner. Such PII information includes each beneficial owner’s name, date of birth, address, unique identifying number from a government issued identification, and an image of that identification.
NOTE: The information collected on associations and beneficial owners is for a private database available to law enforcement and is NOT public information.
The wording of the law means there is no “cookie cutter” answer for who is a beneficial owner. One article by the law firm of Taylor English Duma, LLC notes that the question of “substantial control” is complex and may vary by association.
The Final Rule also clarifies that an individual may exercise “substantial control” over a reporting company, directly or indirectly, including as a trustee of a trust or similar arrangement, through:Corporate Transparency Act Poses Challenges for Homeowner Associations: Most HOAs Will Need to File in the Coming Year
(A) Board representation;
(B) Ownership or control of a majority of the voting power or voting rights of the reporting company;
(C) Rights associated with any financing arrangement or interest in a company;
(D) Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
(E) Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
(F) any other contract, arrangement, understanding, relationship, or otherwise.
Even a community management company might meet the definition of “substantial control” in some circumstances. That might not be the case if the community management contract or circumstances make clear that actions of the management company are at the direction of and subject to the board of directors.
To make matters even more confusing, there are 23 types of exempt entities that do not fall under the reporting requirements. The whole list of exempt entities (but be prepared to go to sleep) can be found here under §5336 (Beneficial ownership information reporting requirements) (11).
What Are the Consequences for Failing to File?
Corporations and associations that fail to report could face a civil daily fine of $500 per day (up to $10,000 total) or even criminal fines or prison for willful failure to file in the most egregious circumstances.
Do All HOAs and Condos Meet the Reporting Requirements?
No, but that’s where the law gets even more complicated. There are twenty-three types of entities exempt from CTA reporting, including any “organization that is described in section 501(c) of the Internal Revenue Code of 1986 (determined without regard to section 508(a) of such Code) and exempt from tax under section 501(a) of such Code, except that in the case of any such organization that loses an exemption from tax, such organization shall be considered to be continued to be described in this subclause for the 180-day period beginning on the date of the loss of such tax-exempt status.”
Some community associations would be exempt from reporting due to being Internal Revenue Code § 501(c)(4) Homeowners’ Associations. Others might be exempt as 501(c)(7) organizations. Or another exemption may apply. However, if the association files under Internal Revenue Code 528, it will likely be subject to the CTA reporting requirements (unless some other exemption applies).
Without question, the most important takeaway is that the Corporate Transparency Act and its application to community associations is quite complex. NO ONE SIZE FITS ALL! Each association, in consultation with its attorney and tax professional, will need to make a call as to CTA reporting for its specific situation.
There is talk that the law may be delayed or change as to community associations. After all, a nonprofit homeowner or condominium association in no way fits the type of entity the law is attempting to regulate. At present, however, CTA’s reporting requirements begin January 1, 2024. Reporting companies in existence before that date will have until January 1, 2025 to file an initial report. Reporting companies created on or after January 1, 2024 will have 30 calendar days after the date of formation or registration to file an initial report. Once filed, if previously reported information changes, the association must file an amendment to its beneficial ownership report within 30 calendar days.
Over the next several months, community association professionals will be providing greater guidance to their association clients on how and where to file the required information. Associations will need in place policies for determining who its beneficial owners are and collecting the five pieces of PII from each individual to file its first report.
Expect to hear more about the Corporate Transparency Act in the coming months!