The Corporate Transparency Act: Is your community Association Funding Terrorism?

A perennial problem for all national governments is preventing criminals from accessing money and the financial systems which grant them access to sources of funding. And while the United States already has numerous regulations designed to stop crooks from using the international banking system, malign actors continue to find ways around these regulations. That is why, as a part of the Anti-Money Laundering Act of 2020, Congress enacted the Corporate Transparency Act. 

The Corporate Transparency Act (“CTA”) creates a new reporting regime for nearly all corporations, limited liability companies, and similar entities which do business in the United States. In broad strokes the CTA requires that all “Reporting Companies” submit information identifying all “Beneficial Owners” to the U.S. Treasury Department, thereby ensuring that no bad actors are benefiting from companies operating in the U.S. economy. 

The CTA involves two key terms, which are defined as follows:

• “Beneficial Owner” – An individual who (1) directly or indirectly exercises substantial control over the entity or (2) owns or controls 25% or more of the entity.
• “Reporting Company” – A corporation, limited liability company, or other similar entity (1) that was created by filing a document with a secretary of state or (2) that was formed under the laws of a foreign country and is registered to do business in the United States. The CTA also contains a list of twenty-four exceptions to the definition of “Reporting Company”.

REPORTING COMPANIES

All homeowners’ associations, condominium associations, and cooperatives in the State of Florida are required to be organized as corporations, and while the definition of “Reporting Company” includes numerous exceptions, community associations cannot reasonably be interpreted to fall under any of these exceptions. Therefore, the broad consensus in the legal community is that all community associations are required to comply with the reporting requirements of the CTA.

BENEFICIAL OWNERS

We have established that community associations are Reporting Companies under the CTA, but who are the Beneficial Owners? 

There is little disagreement that the directors and officers of a board are considered Beneficial Owners under the CTA. In every community these individuals are the people making important decisions about the administration of the association – in other words, they are “exercising substantial control over the entity”. Similarly, members of committees that make important decisions about how the association is run would be considered Beneficial Owners for purposes of the CTA. 

Any owners of more than twenty-five percent (25%) of the total units or lots in your association are also considered Beneficial Owners under the CTA. Many communities, particularly subdivisions under development and condominium associations more generally, have bulk owners who can exert significant influence over the administration of the association. Consequently, associations are required to comply with all CTA reporting requirements for these Beneficial Owners as well.

But what about a community’s property manager? Are they also a Beneficial Owner because they exert control over the association? The CTA’s definition of “Beneficial Owner” specifically excludes “an individual acting solely as an employee [] and whose control over or economic benefits [are] derived solely from the employment status of the person”. Because the nature of the property manager-association relationship is one of employment, property managers are not Beneficial Owners under the CTA.

BENEFICIAL OWNERSHIP INFORMATION REPORTING

Associations must submit certain specified information for each individual it has determined falls under the “Beneficial Owner” umbrella. Reporting Companies that currently exist are required to submit their first report no later than January 1, 2025. Beneficial Ownership reporting includes each Beneficial Owner’s:

• Full legal name;
• Date of birth
• Current residential or business address; and
• A copy of identifying documentation (passport or state-issued driver’s license).

The actual information being reported is not particularly contentious, however, it is easy to imagine some directors will push back on providing their association with government-issued identifying documentation. Unfortunately this is a requirement and directors will have no choice but to provide all information requested under the CTA or face enforcement by the federal government.

Of course, who constitutes a Beneficial Owner of your association is likely to change frequently. By way of example, changes to Beneficial Ownership may come about from (1) board elections, (2) board resignations, (3) changes to committee membership, (4) the death of a Beneficial Owner, or (5) a purchase/sale which changes who owns 25% or more of the voting interest in the community. Any Reporting Company that experiences changes to its Beneficial Owners must file an updated report within thirty (30) days of that change.

ENFORCEMENT

The federal government is serious about cutting down on money laundering and the funding of terrorist organizations and the penalties for violating the CTA are no joke. 

Providing inaccurate information when reporting Beneficial Owner information or failing to provide Beneficial Owner information are both violations under the CTA. Additionally, failure to provide a timely update to changes in Beneficial Ownership is a violation of the CTA. Penalties for violating the CTA include fines up to $10,000.00 and up to two (2) years imprisonment. 

CONCLUSION

The CTA is a new law and how exactly the U.S. Treasury Department will go about its enforcement remains to be seen. Failure to report all Beneficial Owner information in compliance with the law, however, may result in penalties up to a $10,000.00 fine and imprisonment.

Based on the stated purposes of the CTA to counter money laundering and the financing of terrorism, it may seem ridiculous that community associations would fall under the definition of “Reporting Company”. And, broadly speaking, practitioners in this area would agree with you – not including community associations in the long list of exceptions to the definition of “Reporting Company” was likely an oversight by Congress. The CTA, when applied to community associations, is particularly burdensome and its reporting requirements have a very low likelihood of achieving the goals of preventing money laundering and financing of terrorism. It is likely that the CTA will be amended in the future to reduce the regulatory burden on certain groups, including community associations. However, because there is no timeline for such an amendment, all community associations should take steps to comply with the CTA as it is currently enacted.

CTA Beneficial Ownership reporting is intended to be fairly straightforward and the Department of the Treasury has designed a streamlined website to assist Reporting Companies. Every association is different, though, and if you have any questions regarding your specific community’s compliance with the CTA it would be wise to contact competent legal counsel for advice.