WARNING: Homeowners Associations Could Be Fined Up to $10,000 by the Federal Government If They Fail to Do This...

The Corporate Transparency Act (CTA) is a new federal law that came into effect on January 1, 2024. It requires most corporations, including Homeowners Associations (HOAs), to report to the Financial Crimes Enforcement Network (FinCEN) who their "beneficial owners" are. This must be done on or before January 1, 2025, or they could face fines of up to $10,000 or up to 2 years in prison for non-compliance.

This law was passed to combat money laundering and other financial crimes, but its requirements have perhaps unintentionally involved many non-profit entities, such as HOAs. These entities operate differently from traditional companies in several ways, starting with the fact that they do not have owners who have a commercial stake or directly benefit from the entity's income.

Application of the CTA to HOAs in Puerto Rico:

In Puerto Rico, all HOAs are non-profit corporations organized before the Department of State of Puerto Rico, and their owners/members are the homeowners or lot owners in the developments. The simple fact of being corporations makes them, in the eyes of FinCEN, "reporting companies," and therefore, they must comply with the disclosure requirements of the CTA.

In Puerto Rico, this law does NOT apply to condominiums since condominiums are not corporations. This has no exceptions.

The CTA requires that "reporting companies" identify and report at least one "beneficial owner" or persons with "substantial control." Therefore, in relation to HOAs, this should include: all members of the Board of Directors, whom the CTA considers to exercise substantial control over the organization (such as the president, vice president, treasurer, and other key officers); and those property owners with a significant interest of at least 25% of the units or lots within the community, which could include builders or developers as long as they remain as owners.

What Defines Substantial Control, According to the CTA?

A person has substantial control if they act as a senior officer of a company or any entity (for example, a board member of a homeowners association); have authority over the appointment or removal of senior officers; have authority over the appointment or removal of the majority of the company's board of directors; direct, determine, or have significant influence over major decisions of the company; or possess any other form of substantial control.

What Information Must Be Submitted to FinCEN?

1. Full legal name of each director
2. Date of birth
3. Residential address
4. Unique identification number (e.g., driver's license number or passport number), and the jurisdiction of issuance

List of Acceptable Identification Documents to Submit Along with the Information:

1. Valid driver's license (including any driver's license issued by a state, territory, or possession of the United States)
2. Valid identification document issued by a U.S. state or local government
3. Valid U.S. passport
4. Valid foreign passport

An image of the identification document must be submitted to FinCEN as part of the filing process.

IMPORTANT: A valid foreign passport is only allowed when a person does not have any of the other three forms of identification.

Where to File the Information?

It must be done online at: https://boiefiling.fincen.gov. You can submit the information directly through FinCEN's online system or via a PDF document. For instructions on how to submit the information, you can visit: https://boiefiling.fincen.gov/help.

Challenges and Consequences for HOAs:

The application of the CTA imposes a significant administrative burden for some HOAs, which will have to collect and update information from their members, which can be tedious. This could also have the adverse effect of discouraging volunteers from participating on Boards of Directors, as they may not want to share certain personal information. As mentioned, failure to comply could result in administrative fines of $500 per day, up to criminal fines of $10,000 and up to two years in prison.

Current Situation and Exemption Efforts for HOAs:

Several organizations, including the Community Associations Institute (CAI), the largest international organization representing community associations, maintain that HOAs should be excluded from the requirements of this law. To that end, CAI is leading a very aggressive campaign in the United States Congress to exempt HOAs from these requirements. The argument of CAI is that homeowners associations should not be subject to the same regulations as regular corporations. However, to date, these efforts have not borne fruit, so HOAs are still required to comply with the CTA's reporting requirements.

Conclusion:

HOAs in Puerto Rico should act proactively and not postpone this process, keeping in mind that until anything to the contrary is approved, they are currently classified as "reporting companies" under the CTA. Boards and administrators must ensure compliance with the disclosure requirements to avoid fines and sanctions. Since this law is complex and can have significant legal implications, it is recommended that associations consult with trained professionals to support them in the proper compliance of this federal requirement, including Certified Public Accountants, lawyers, and licensed administrators.

Important Links:

1. FinCEN FAQ - https://www.fincen.gov/boi-faqs#Top_section
2. Beneficial Owner Information Filing Instructions - https://boiefiling.fincen.gov/
3. CAI Corporate Transparency Act Efforts - https://www.caionline.org/Advocacy/Priorities/CTA/Pages/landing.aspx

SOURCES: CAI; FinCEN

By Marco Rosado - President of Icon Management and Alianza de Profesionales de Condominios y Controles de Acceso

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