The Corporate Transparency Act and its Applicability to Community Associations

The United States Treasury Department adopted a Final Rule on September 29, 2022, implementing the requirements of a Federal Law adopted by the United States Congress known as the Corporate Transparency Act adopted to combat money laundering and the proliferation of anonymous business entities such as the famous/infamous “Delaware LLC”.?

?????????? All 32 million (an estimate) United States corporations, limited liability companies and other business entities formed pursuant to any state’s laws will be required to provide ownership information to the United States government in an attempt to end the inability of United States law enforcement’s ability to hold owners of shell companies accountable for criminal activity.?

?????????? Why are we talking about this in the context of condominiums and homeowners associations?? The challenge lies in the definitions in the Final Regulatory Rule adopted by the United States Treasury Department (FINAL TREASURY RULE “Final Treasury Rule”). All business entities that fit the definition of a “Reporting Company” must provide information regarding the people who are the “beneficial owners” of a Reporting Company. Some condominiums and homeowners will meet the definitional structure of these terms in the Final Treasure Rule after January 1, 2024 (the implementation date of the Final Treasury Rule.

?????????? For clarity, a “Reporting Company” – the universe of private business entities that must report after January 1 is defined as (for our discussion here we are excluding international entities that are also targeted):

? Pursuant to the Final Treasury Rule, a domestic reporting company is defined as:

1.?????????????? A corporation (no distinction is made between for-profit and nonprofit),

2.?????????????? A limited liability company, or

3.?????????????? Any other 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.

Who is a “beneficial owner” and when would it occur for a homeowners association or condominium?

The Final Treasury Rule states that a beneficial owner is any individual (1) who directly or indirectly exercises “substantial control” over the reporting company, or (2) who directly or indirectly owns or controls 25 percent or more of the “ownership interests” of the reporting company. Whether an individual has “substantial control” over a reporting company depends on the power they may exercise over a reporting company.

? The Final Treasury Rule states that an individual will have substantial control of a reporting company if they direct, determine, or exercise substantial influence over, important decisions the reporting company makes. The Final Treasury Rule states that any senior officer is deemed to have substantial control over a reporting company.?

? There are several scenarios where the Final Treasury Rule could become relevant:

?1.???? The President will ALWAYS Register as a “Beneficial Owner.” The “Senior Officer” is ALWAYS a Beneficial Owner.? The Final Treasury Rule states as follows:? “Senior Officer. The term ‘‘senior officer’’ means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.?

?2.???? The “Powerful Vice-President [or other officers]” Scenario:? In a scenario where the Vice-President or other office wields actual “substantial control” over the day-to-day governance of the association (whether a condominium or homeowners association – a “reporting company”) then the Vice-President or other officer’s control is in effect “substantial control under the Final Treasury Rule, the association has an obligation to report the Vice-President or other officer as the “Beneficial Owner”.?

3.???? The “Substantial Control Manager” Scenario:? If a community association hires a direct employee manager and vests that manager with the type of control over the day-to-day governance of the association (whether a condominium or homeowners association) for purposes of this paper (we’ll call it a “reporting company”) then the direct employee manager’s control is in effect “substantial control under the Final Treasury Rule, the association has an obligation to report the direct employee manager as the “Beneficial Owner”.?

?4.???? The “Substantial Control Developer in Control” Scenario:? The Association under developer control is a separate entity from the inception of the Association. The developer in control exercises “Substantial Control” under the Final Treasury Rule’s definition and must register as the “Beneficial Owner”.

5.???? The “Absentee Board unintentionally delegates to management” Scenario:? If a Board of Directors hires a professional management company and is uninvolved and disinterested to the point that professional management, by default, ends up with “substantial control”, the management company becomes the “beneficial owner.”

?The President, other officer, or developer who must report must provide the required information beginning January 1 on the website at www.fincen.gov.? As of the date of this letter, the website is not ready to accept data. Given past attempts by the federal government to debut websites on a specific date to deal with vast amounts of data, there is pessimism that the website will be ready, willing, and able to accept millions of uploads of information at midnight on January 1, 2024.? The information required will be:

?1.???? The Beneficial Owner’s:

a.???? name,

b.???? date of birth, and

c.???? address;

d.???? A unique identifying number from an acceptable identification document;

e.???? The name of the state or jurisdiction that issued the identification document.

f.????? For a beneficial owner, the reporting company must report the residential street address.

?What are the consequences of failure to register?? Failure to comply with the Corporate Transparency Act’s reporting requirements can 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.