Important Legal Bulletin for Community Associations and their Board Members: Complying with the new federal Corporate Transparency Act
By Eric F. Frizzell, Esq.
On January 1, 2024, the federal Corporate Transparency Act, became effective. Congress passed the Act due to concerns that “malign actors” seek to conceal their ownership of corporations, limited liability companies, and similar entities that facilitate the financing of terrorism, human and drug trafficking, and other crimes. The law is intended to protect the United States’ national security interests against such crimes by requiring “reporting companies” – corporations, limited liability companies, and similar entities that are created by the filing of a document with a Secretary of State under the law of a State – to file annual reports that disclose information about themselves and their “beneficial owners” with the United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
Must community associations comply with the Act? Based on the Act’s broad definition of a “reporting company,” New Jersey community associations, which almost invariably are formed by filing documents with the Secretary of State, must comply with it. They must submit to FinCEN by January 1, 2025 a report that identifies each “beneficial owner” of the association, meaning any individual who “directly or indirectly”, through any arrangement, relationship, or otherwise “exercises substantial control over the entity” or “owns or controls not less than 25 percent of the ownership interests of the entity…. .” Under the Act and the Treasury Department’s accompanying regulations, Board members clearly appear to be “beneficial owners”. In specific, the regulations state that an individual exercises substantial control over a reporting company if the individual, among other things:
– serves as a “senior officer” of the company
– has authority over the appointment or removal of any senior officer, or
– directs, determines or has substantial influence over important decisions made by the reporting company, including decisions regarding the sale or other transfer of any principal assets of the company; major expenditures or investments, incurrence of significant debt, or approval of the operating budget; entry into, termination or fulfillment of significant contracts; or amendment of the articles of incorporation, formation documents (e.g., master deed, proprietary lease), bylaws and significant policies or procedures.
The regulations further provide that an individual may “directly or indirectly … exercise substantial control over a reporting company” though “Board representation”.
What information must be reported? A reporting company must provide its legal name, any alternate name (e.g., trade name, doing business as), complete address, tax identification number, and state of formation. The information that must be reported for “beneficial owners” includes each Board member’s full legal name, date of birth, complete current residential street address, and a “unique identifying number” from any of the following documents: a non-expired passport issued by the United States; a non-expired identification document issued by a State, local government, or Indian Tribe to the individual for the purpose of identification of that individual; a non-expired driver’s license issued by a State; or, if, the individual does not have any of these documents, then a non-expired passport issued by a foreign government.
What happens if there is a change in the information that was reported? If there is any change regarding the information submitted about the reporting company or its beneficial owners, including any change regarding who is a beneficial owner or the information that must be reported about them, the reporting company must file an updated report within 30 calendar days after the date on which the change occurs. This means, e.g., that when a new member joins an association’s Board, or when an existing Board member’s address changes, an updated report must be filed within 30 calendar days. This same requirement applies to any change in the documentation – such as the beneficial owner’s driver’s license – that contains the necessary “unique identifying number.”
How is reporting done? Reporting is done electronically by using a form found at boiefiling.fincen.gov.
An individual may obtain a “FinCEN identifier” by submitting to FinCEN an application that contains the required information about the individual, as described above. If an individual obtains a FinCEN identifier and provides it to a reporting company, the reporting company may include the FinCEN identifier in its report in lieu of such information. However, if the information contained in the application on which the FinCEN identifier was issued changes, the covered individual must submit an updated application reflecting such change within 30 calendar days after the date on which the change occurred.
How is the information protected against wrongful disclosure? The reported information is considered confidential, must be maintained by FinCEN in a secure, nonpublic database to be used only by national security, intelligence and law enforcement agencies and federal regulators, and there are strict limits on its disclosure.
What are the penalties for not complying with the Act? It is a violation of the Act to willfully provide or attempt to provide false or fraudulent beneficial ownership information or to willfully fail to report complete or updated beneficial ownership information. Penalties for violations include a civil penalty of up to $500 for each day that a violation continues or has not been remedied, a fine of up to $10,000, and imprisonment for up to 2 years. However, a person is not subject to these penalties if the person has reason to believe that any report they submitted contains inaccurate information and, in accordance with the Treasury Department’s regulations, voluntarily submits a report containing corrected information within 90 days of the date on which the report was submitted.
Can an association obtain an exemption from complying with the Act? It is not likely. The Act authorizes the Secretary of the Treasury, with the concurrence of the Attorney General and Secretary of Homeland Security, to exempt any entities if requiring them to supply the required information would not serve the public interest or be highly useful in national security, intelligence and law enforcement agency efforts to detect, prevent or prosecute money laundering, the financing of terrorism, and proliferation of serious tax fraud and other crimes. However, community associations have not yet been made exempt. But there is an exemption for any “large operating company” that employs more than 20 employees on a full-time basis in the United States and filed in the previous year federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate.
As always, please feel free to contact us if you have any questions or if we can assist you with complying with the Act. This Bulletin is for information purposes only and does not constitute legal advice.