Regular readers of the Tilchin & Hall Law Blog will already be familiar with the federal Corporate Transparency Act (CTA) from Corene Ford’s December 2023 post on the CTA and its impact on residential associations. To briefly recap, the CTA, with its stated goal of fighting money laundering, fraud, and other crimes, imposes an affirmative obligation on covered entities, which include most entities incorporated under state law and certainly include virtually all residential associations, to report personally identifiable information of their “beneficial owners” to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), which is the financial crimes enforcement arm of the Department of Treasury. The personally identifiable information includes a beneficial owner’s full legal name, date of birth, current address, and identification number from a driver’s license, ID card, or passport. 31 U.S.C. 5336(a)(1), (b)(2)(a). A “beneficial owner” is defined as an individual who, with some limited exceptions “(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity”. 31 U.S.C. 5336(a)(3). In addition to the beneficial ownership disclosure requirement, any entity formed from January 1, 2024 onward must also disclose the identity and information of “applicants”—essentially those who file any application to form an entity. 31 U.S.C. 5336(a)(2). The deadline for complying with the reporting requirements of the CTA for an entity formed before January 1, 2024 is January 1, 2025 and this is an ongoing obligation every time there is any change in beneficial ownership. 31 CFR 1010.380(a)(1).
Based on the above, directors of a residential association would need to be disclosed to FinCEN by the deadlines imposed and any time there is a change of the make-up of the board of directors, it must be reported to FinCen within 30 days. We have also previously pointed out that, if substantial control were exercised by other individuals over the association, aside from board members, those individuals would need to disclose the information required by the CTA, which underlines the fact that what constitutes “substantial control” is fairly vague, perhaps deliberately so. Given that the penalties for willfully failing to disclose the information are quite severe, for instance failure to report or “complete or updated beneficial ownership information to FinCEN” is punishable by a $500 per day civil penalty up to $10,000 in fines and 2 years in federal prison, 31 U.S.C. 5336(h)(1), (3)(A), individuals that could potentially be exercising substantial control over an association would want to err on the side of caution and provide disclosures to FinCEN.
While the requirements imposed by the CTA may be characterized by some as relatively minimal, the ongoing administrative burden of reporting, vagueness surrounding what constitutes “beneficial ownership”, the sheer breadth of the CTA’s reach, and the substantial penalties for non-compliance, have been cause for some concern for residential associations, residential managers, and related professionals.
Federal District Court in Alabama Finds the CTA Unconstitutional
In November 2022, a small business association and small business owner filed a lawsuit against the Secretary of the Treasury and Acting Director of FinCEN alleging that the CTA was unconstitutional, National Small Business United v. Yellen, Case No. 5:22-cv-01448 (N.D. Ala.). This case was recently resolved in a Memorandum Opinion, dated March 1, 2024, in which the Court found that the CTA was unconstitutional on that grounds that the CTA exceeds the broad powers granted to Congress under the Constitution. The Court noted that the government had argued that it had powers to enact and enforce the CTA under its foreign affairs powers because the CTA attempts to combat foreign money laundering and other “malign foreign influences.” Additionally the Court stated the government argued that the act of corporate formation itself affected commerce so as to allow Congress to enact the CTA under the Commerce Clause of the Constitution. The government also contended that the CTA was a necessary and proper exercise of its power to tax. In addition to their contention that the Constitution does not give Congress the authority to enact the CTA, the Plaintiffs in the case made arguments that the CTA violated the First, Fourth, and Fifth Amendments of the Constitution. However, the Court did not even reach those issues before finding for Plaintiffs on the constitutional authority arguments. The CTA, the Court found, “lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.” The Justice Department filed a Notice of Appeal of the Court’s ruling and has already filed its appeal brief in the Court of Appeals for the 11th Circuit, Case No. 24-10736.
It is important to note that the practical effect of the District Court’s decision that the CTA is unconstitutional is quite limited at this time. The Court did not issue a nationwide injunction against enforcement of the CTA. Rather, in its Final Judgment, the Court stated FinCEN is enjoined from enforcing the CTA against the specific plaintiffs in National Small Business United v Yellen. FinCen has specifically announced its intention to continue to implement the CTA and pointedly states that reporting companies under the CTA are still required to file beneficial ownership reports and otherwise comply with the CTA. While it appears the parties have agreed an expedited briefing schedule in the 11th Circuit, it will likely take some time for the CTA’s eventual fate to play out in the courts.
What Does This Mean for Residential Associations?
While we will be following developments in this matter as well as monitoring whether FinCEN provides additional guidance over the next few months, given the limited effect of the District Court’s Final Judgment, associations should still plan on filing beneficial ownership reports by January 1, 2025, assuming the association was formed prior to January 1, 2024. It makes sense to monitor any legal developments over the next three to four months and to allow some time for more information to be made available Perhaps, for instance, FinCEN will further clarify the definition of “beneficial ownership.” However, barring any dramatic legal developments, we would not recommend Associations wait until December 2024 before filing a beneficial ownership report.
As it now stands, compliance with the CTA will be a substantial and consequential ongoing duty of residential associations that will require the involvement of legal professionals. We are here to assist with that compliance and any questions you may have about the CTA. Please reach out to us at (248) 349-6203 or email us using the form below.Disclaimer: This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this Blog, you understand that there is no attorney client relationship between you and lawyer, law firm, and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
Disclaimer: This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this Blog, you understand that there is no attorney client relationship between you and lawyer, law firm, and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
