In 2021 Congress passed and the president signed the Corporate Transparency Act or CTA as part of the larger Anti-Money Laundering Act. Under these laws the federal government targets tax fraud, terrorism, and money laundering by requiring US-formed corporations, limited liability companies, and any entity that registers its formation with the state to report certain information about their beneficial owners to the Financial Criminal Enforcement Network (FinCEN).
The CTA is intended to disclose to FinCEN the persons who control the activities of smaller businesses. Because nonprofit or not-for-profit corporations – depending on your state – in addition to virtually all other entities, have been involved in the criminal activities noted above community associations are included in those organizations required to report. Community associations that are tax exempt – not simply nonprofit or not-for-profit – are not required to report, although they represent a very small minority of all community associations. Further those associations that have more than 20 employees or annual gross revenues of over five million dollars are also exempt from filing.
Associations will be required to report in an online filing after January 1, 2024. FinCEN has issued regulations concerning the information required to be provided, as follows:
- An entity required to report includes any entity that is a corporation, limited liability company (LLC), or any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.
- Under the rule, a beneficial owner includes any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. The rule defines the terms “substantial control” and “ownership interest.” This clearly includes all members of a community association board and may also include the manager or managing entity. See the comment below concerning whether managers or their companies might fall under the rule and whether the association would be required to report their identity.
- In defining who has substantial control, the rule sets forth a range of activities that would meet that standard. An individual can exercise substantial control over a reporting company if they have “substantial influence over important decisions” of the reporting company. This will require a legal judgment concerning whether a manager or management company exercises “substantial influence” over an association’s activities.
- Associations created or registered before January 1, 2024, will have one year – until December 31, 2024 – to file their initial reports, while associations created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.
- Associations will have 30 days to report changes to the information in their previously filed reports and must correct inaccurate information in previously filed reports within 30 days of when the association becomes aware or has reason to know of the inaccuracy of information in earlier reports. This means that within 30 days of each election or appointment of a new trustee or director a report must be filed with FinCEN.
- The reporting information required by the final FinCEN rule requires the following:For every individual who is a beneficial owner of the association:
- The full legal name of the individual;
- The date of birth of the individual;
- A complete current address consisting of:
- In the case of a company applicant who forms or registers an entity in the course of such company applicant’s business, the street address of such business; or
- In any other case, the individual’s residential street address;
- A unique identifying number and the issuing jurisdiction from one of the following documents:
- A non-expired passport issued to the individual by the United States government;
- A non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual;
- A non-expired driver’s license issued to the individual by a State; or
- A non-expired passport issued by a foreign government to the individual, if the individual does not possess any of the documents described above; and
- An image of the document from which the unique identifying number of the required document was obtained.
- Failure to comply with the CTA’s reporting requirements may lead to civil and criminal penalties, including a maximum civil penalty of $500 per day (up to $10,000) and imprisonment for up to two years. The reporting requirement is not to be taken lightly.
While on first read this may appear daunting, for most board members it requires only their legal name and address and the number appearing on their driver’s license or passport, as well as a copy of that document.
As noted above, the persons deemed to be “beneficial owners” include anyone who has substantial influence over certain association activities. The term “substantial control” in the association context includes anyone who:
Directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:
- The nature, scope, and attributes of the business of the association, including the sale, lease, mortgage, or other transfer of any principal assets of the association;
- Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the association;
- Compensation schemes and incentive programs for senior officers; or
- The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts.
While there are other elements of a business that might contribute to a finding of substantial influence over a company, the foregoing are those that may most often impact associations.
The term “substantial influence” is one that requires analysis of the relationship between the association and the managing entity to determine whether the contractual obligations of the management company place it in the class of a beneficial owner. Several of these items, including substantial influence over approval of the operating budget, borrowing relationships, or entering into or terminating significant contracts, will require special attention.
Becker is prepared to assist our clients in making these determinations and assisting in completing the online reporting form as of January 1, 2024. Please contact your Becker attorney for more information concerning this.