Caught in the Crosshairs

The Corporate Transparency Act (CTA), passed in 2021, went into effect at the beginning of 2024 in an effort to root out and prevent money laundering, fraud and possible terrorist activities by capturing ownership information for specific U.S. businesses. None of those crimes is usually associated with co-op boards. But because they control their corporations, board directors are in the line of fire.

Who Is Covered

The federal legislation covers all corporations, limited liability companies and limited partnerships (unless exempt) that filed a document with the secretary of state (or similar state office) when they were created. The majority of New York’s co-ops were created as corporate entities by filing with the secretary of state, the same as most business corporations. The CTA is meant to capture information about individuals who directly, or indirectly, have a major influence on the reporting company’s decision or operations, or own at least 25% of the corporation. These individuals are termed “beneficial owners.” As it stands now, cooperative board directors and anyone who owns 25% or more of a co-op’s shares (such as a sponsor) are considered to be beneficial owners.

Condominiums, on the other hand, are created under the Real Property Law and therefore are not covered under the legislation.

The CTA lists 23 types of exemptions, but as of late January, the only one that might pertain to some co-ops is the “large operating company” exemption, which covers a corporation that employs more than 20 full-time employees and has revenue in excess of $5 million. It remains to be seen whether co-ops that have budgetary oversight by state or city agencies will be required to file.

Filing Details

Affected businesses must file information about the individuals who own or control them with the Financial Crimes Enforcement Network (FinCEN). Entities registered to do business before Jan. 1, 2024, will have until Jan. 1, 2025, to file their initial beneficial ownership information report. 

Proactive co-ops can get ahead start by seeing what has to be prepared for filing. The information can be filed through the beneficial ownership information report online portal (https://www.fincen.gov/boi) or by downloading the PDF form (available at https://bit.ly/BOIe-file), filling it out and uploading it.

The PDF form is broken up into four sections: the filing information, the recording company information, the company applicant information and the beneficial owner information. The filing information and recording company information will be the same on every form in a co-op. The company applicant section only applies to reporting companies created or registered on or after Jan. 1, 2024, so any co-ops formed before then can skip it.

The fourth section is the one that will have to be filled out by individual board members. Since the first two sections will be the same on every submission, an efficient board or management company can develop a copy of the PDF to distribute to board members, allowing them to fill in their own personal information and return it to the filing partner for submission. It’s in this section where every beneficial owner has to supply an identification document, which can be a copy of his or her driver’s license, a passport or an identification document issued by a state, local or U.S. government agency.

Be aware that while multiple beneficial owners can be added to the company information in the online portal, the PDF has space for only one, meaning that a separate PDF will have to be filled out and submitted for each board member. 

Complications

Records need to be updated every time the makeup of the board changes or a beneficial owner either changes their name due to marriage or divorce or gets a new or renewed identifying document. 

Boards should be aware that there are third-party companies, such as SingleFile, CT Corporation and Corporation Service Company, that will collect and file the information on the board’s behalf. A news bulletin published by the law firm Cozen O’Connor on Jan. 18 also encourages boards to develop a plan with their counsel and managing agents. 

“If I were a managing agent, I’d want to charge a fee for this,” says Ken Jacobs, a partner in the law firm Smith Buss & Jacobs. “Or you might want to make the accountant responsible, saying: ‘You file my tax returns. You deal with the treasury all the time.’ But if I’m the accountant, I’d want a fee. So the burden is either going to fall on the managing agent or the one who’s most likely to know when the filing needs to be made due to a change in the board composition, as a practical matter. I think the backup would need to be the attorney, to remind boards that they have to make the appropriate filings.”

It’s possible that the filing will eventually be folded into a management company’s compliance department.

Although the filing is required only once, annual elections in co-ops mean that boards may be required to file every year. 

“If we take the presumption that all of the board members of a co-op are beneficial owners, it has to be reported any time somebody resigns or is replaced,” explains Ben Kirschenbaum, a vice president and the general counsel at FirstService Residential. “That’s most likely going to happen after the annual meeting. And if in the middle of the year a board member sells his or her apartment and moves out, and the board elects a replacement, you’re going to have to update the information with that new board member as well.”

Monitoring who on the board has submitted their forms, ID number and picture proof of their ID — while maintaining the security of that information — will only add tasks to already full plates. 

In addition, there does not yet seem to be a way to remove board members from the database, which means that a board with significant turnover at each annual meeting could end up with more than a dozen beneficial owners incorrectly recorded. As of early February, FinCEN had not replied to questions about removing beneficial owners.

File Now, or Wait

The lack of clear guidance means that most professionals are, for now, advising boards to wait to file, at least until after their 2024 meetings and elections. The CTA deadlines aren’t until the end of the year, and many believe that FinCEN and the treasury will issue guidelines in the upcoming months to clarify and refine the rules around filing. 

“I’m trying to figure it out myself,” says Ira Meister, the president of the property management firm Matthew Adam Properties. “We have CPAs that work for us and they’re all waiting — everybody’s just taking a wait-and-see approach. It’s a little all over the place.”

Just don’t wait for a retraction. “I don’t think it’s going to be struck down,” says Jacobs, the attorney. “There should be a technical amendment exempting homeowners associations [defined in the Internal Revenue Code as co-ops, condos, HOAs and other residential associations], but it’s more likely that condos will just be folded in. The Community Associations Institute, an international housing association advocacy organization, along with others, is actively involved in a lobbying campaign to get co-ops and condos removed right now, and hopefully it’ll get changed in the technical corrections bill.”