Co-ops Face Critical Deadline for Compliance with Corporate Transparency Act

As of December 3, 2024, a Texas court granted an injunction against enforcement of the Corporate Transparency Act. More information is below this article.

The clock is ticking for board directors as they face a critical Jan. 1, 2025, deadline to comply with the Corporate Transparency Act (CTA). Enacted in 2021, the CTA requires specific U.S. businesses to file beneficial ownership information with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) as part of an effort to prevent potential terrorist activities.

While the law was broadly written to capture business ownership information, co-ops found themselves caught in its scope due to their corporate control structure (most condominiums are not corporations, so the CTA wouldn’t apply, but condo boards should verify with their attorneys). However, some question whether the CTA should apply to co-ops at all. The Community Associations Institute (CAI) has filed a lawsuit challenging the act’s applicability to community associations nationwide. Despite its efforts to secure a preliminary injunction to extend the filing deadline, the motion was denied, leaving the January deadline firmly in place.

The stakes for noncompliance are high. Boards that intentionally fail to file face civil penalties of up to $591 per day or criminal penalties including up to two years imprisonment and fines up to $10,000. Geoffrey Mazel, founding partner at the law firm Hankin & Mazel, notes that while board members may be hesitant to share private information with a new federal database, “you already file taxes. They know everything.” The consensus among industry professionals is clear: Compliance is essential to avoid significant penalties.

One particular challenge for co-ops is their annual rotation of board members. The CTA requires updates within 30 days whenever beneficial ownership information changes or new owners are added. A Treasury Department official has clarified that while previous board members’ information will remain in the database, FinCEN will maintain a clear reporting history for each company, organizing both current and previous owners’ information chronologically.

FILING RESPONSIBILITY 

Many boards are wondering who should do the filing. There are private companies that have cropped up to handle the task, and some management companies are outsourcing to them. Argo Real Estate, for instance, has assigned it to their in-house compliance team and engaged a third-party legal firm, charging buildings between $250 and $500 for their services.

FirstService Residential is working nationally with a private entity called FinCEN Report to collect and verify information from beneficial owners. “This is something that FirstService is doing nationally, because this is not just a New York issue,” says Ben Kirschenbaum, vice president and general counsel at FirstService. “It affects homeowners associations, co-ops and (some) condos across the country.” If a community opts in, FirstService will give FinCEN Report the names and contact information for all the beneficial owners required to report; the company will then reach out to the owners, collect and verify the necessary information, and file the report through the online portal. 

But whether everything will continue to move forward smoothly remains to be seen. “We’re still in the process,” says Kirschenbaum, who says that FirstService asked its clients to let them know by mid-October 2024 if they would be filing on their own or through the management company. “There are always some stragglers who are asking questions,” he says. “We gave them some recommendations as to what needs to be done, but some of them are talking to their attorneys. We’re just still at the very beginning, so I haven’t really got a lot of feedback as to whether it’s working well.”

Meanwhile, CAI continues its efforts on multiple fronts to exempt community associations from these requirements. “We are not only continuing those efforts with the lawsuit, but we also have efforts on the advocacy front,” says Dawn Bauman, chief strategy officer at CAI. “There is a bill in Congress that would exempt community associations from the Corporate Transparency Act. We’ve made an official request with the Department of the Treasury requesting an exemption of community associations that they are considering. And there’s a specific process in place for that exemption request that we’ve been pursuing since last December. Our endgame, our goal, is to have community associations recognized as exempt from this requirement.” 

As Kirschenbaum of FirstService Residential observes, the process is still in its early stages, with some boards consulting their attorneys and others still catching up with requirements. Whether the implementation will continue smoothly remains to be seen, but for now, the message is clear: Unless explicitly exempted, co-ops must prepare to file their beneficial ownership information by the January deadline.

Dec. 5, 2024: The Corporate Transparency Act: Put On Pause
By Paula Chin
Just as boards were scrambling to meet the looming deadline to file reports required by the Corporate Transparency Act (CTA), the federal government has hit a major roadblock. On Dec. 3, a Texas court issued a nationwide injunction against enforcement of the law, finding that the government was unable to provide “any tenable theory that the CTA falls within Congress’s power,” and is therefore likely to be found unconstitutional. Boards, attorneys and management companies can breathe a sigh of relief — at least for the moment.
The CTA required “beneficial owners” of over 32 million businesses, including co-op and (some) condo board directors, to submit ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department by Jan. 1, 2025. The injunction was issued in response to a suit filed by several businesses and the National Federation of Independent Businesses, which claims over 300,000 members. In addition, “there are a bunch of different lawsuits out there across the country,” says William McCracken, partner at the law firm Moritt Hock & Hamroff. “These were all landmines that could go off at any point.”
McCracken, who had been sending out monthly alerts to co-op and condo clients urging them to file their reports since the CTA went into effect in Jan. 2024, had just finished answering a series of related questions from a major management company when the decision came down. “I was telling them what they needed to do, and then literally half an hour later we got news of this injunction,” he says. “I had to call everyone back and tell them, ‘Well, forget all that I told you.”
 
For their part, management companies were dealing with the headaches of getting everyone to comply. The CTA required all beneficial owners of a business entity (which includes co-op board directors and some condo (depending on the corporate structure) board members to file, as well as a new report every time there is a change in board membership, and failure to comply can result in civil penalties of up to $591 (adjusted for inflation) per day, as well as criminal penalties of up to $10,000.
It’s uncertain what lies ahead. FinCEN "may appeal the injunction and argue that the current filing requirements should remain in place until there is a final resolution on the merits of the case, but an appeal could take months or even years unless the courts agree to address it on an emergency basis,” says Ken Jacobs, a partner at the law firm Smith Buss & Jacobs. “We have been filing BOI information on behalf of our co-op and condo board clients, charging a fee of $600, but I’m now advising those who haven’t filed to delay doing so until we get more clarity on what FinCEN plans to do.”
Some management companies are also taking a wait-and-see approach in putting  the process on hold.  “We are pausing our compliance efforts for the time being and watching closely,” says Dennis DiPaola, chief legal officer at Orsid New York. Adds McCracken: “It is a preliminary injunction in one district court and certainly not the final word. So there's more to come, but people who haven't already filed it are left in a state of limbo.”