“SILENT PEOPLE” EXPOSED: Corporate Transparency Act Brings Controllers Out of Shadows

In 2021, the US Congress passed CTA (The Corporate Transparency Act). The purpose, according to the American Bar Association, is “provide law enforcement with beneficial ownership information for the purpose of detecting, preventing and punishing terrorism, money laundering and other misconduct through business entities.” The law went into effect on January 1, 2024.

However, in an article by Taylor | English, and HOA Law Firm, “Corporate Transparency Act Poses Challenges for Homeowner Associations: Most HOAs Will Need to File in the Coming Year”.

As some eyes will roll, and cynical comments flow about how terrible Congress is, the reality, however, is that it has already begun to impact HOA Directors and operations. In fact, it had an effect earlier in 2023 when the POHOA Board attempted to open an account with Fidelity to put our reserves in an interest-bearing account. According to the 9/6/23 Meeting Minutes, Treasurer Clay Jones reported that he chose not to proceed with opening an account because they “required too much personal information”.

Instead, we chose a short term 3-month CD that will come to term in the coming weeks bearing 4.6% interest. While one homeowner pointed out at the 11/14/23 Board Meeting that they had recently obtained a better rate with their own personal funds, Treasurer Jones made comments about the market was now inverted and again complained about the new requirements.

Now, some will point out that there is avenue for exemption for having those who significantly control an HOA from turning over personal information to what is essentially federal law enforcement. However, that exemption comes with a heavy cost for the HOA – having to pay income taxes for which it is currently exempt as a non-profit.

Per Taylor|English:

“Importantly, this exemption does not apply to an HOA that is exempt from taxation under IRC Section 528.

Most HOAs elect to be exempt from taxation under IRC Section 528 because the requirements of Section 528 are easy to satisfy. It is possible, however, for an HOA to apply for exemption from federal income tax under either Section 501(c)(4) or 501(c)(7). To pursue either of these exemptions, however, would require the HOA to forgo the automatic exemption under Section 528 and would require the HOA to apply specially for 501(c) recognition with the IRS. If the HOA failed to qualify under 501(c), the HOA would be at risk of having to pay federal income tax for each tax year in which it was not qualified6. For most HOAs, the application process, and the risk of potentially being subject to federal income tax, would not be worth the effort.”

So, the subject then leads to who within the HOA is a “Beneficial Owner”. Such persons will be required to provide 5 pieces of Personally Identifying Information (PII) that apparently Treasurer Jones objected to in order to obtain a Fidelity account to earn us the highest interest rate.

“(ii) For every individual who is a beneficial owner of such reporting company, and every individual who is a company applicant with respect to such reporting company:
(A) The full legal name of the individual;
(B) The date of birth of the individual;
(C) A complete current address consisting of:
(1) In the case of a company applicant who forms or registers an entity in the course of such company applicant’s business, the street address of such business; or
(2) In any other case, the individual’s residential street address;
(D) A unique identifying number and the issuing jurisdiction from one of the following documents:
(1) A non-expired passport issued to the individual by the United States government;
(2) A non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual;
8 31 CFR § 1010.380(b)(1)(i). 9 31 CFR § 1010.380(b)(1)(ii).(3) A non-expired driver’s license issued to the individual by a State; or
(4) A non-expired passport issued by a foreign government to the individual, if the individual does not possess any of the documents described in paragraph (b)(1)(ii)(D)( 1), (b)(1)(ii)(D)( 2), or (b)(1)(ii)(D)( 3) of this section; and
(E) An image of the document from which the unique identifying number in paragraph (b)(1)(ii)(D) of this section was obtained.
As a result, HOAs that are non-exempt reporting companies will need to report to FinCEN these five pieces of personally identifiable information (“PII”) from each of their “beneficial owners.” Since HOAs do not have stockholders or investors, HOA directors will need to understand how the CTA defines “beneficial owner” as part of their reporting efforts.”

This, in turn, requires an examination of what the governing now defines as a Beneficial Owner. And, this is where the subject of The Silent People who reside in almost every HOA comes in. As I wrote about in 2019, Poudre Overlook HOA has many homeowners who wish to control the HOA governance, but wish to remain anonymous. They accomplish this control through the proxy system of voting, which then results in the Republic model which Director Flanary frequently opines about. The elected Director then protects the privacy of the so-called Silent People, but that person often meets with an acts upon their wishes – which means they have effective control.

The definition is somewhat vague, and that is where it can reach beyond just the Directors. If, for instance, we hire a contractor or Community Area Manager and those individuals exert “substantial control” over the affairs of the HOA, it may be necessary to disclose to FINCEN (Federal Law Enforcement) the PII information of such individuals.

“Also, the definition of “beneficial owner” includes any person who “exercises substantial control.” The Final Rule provides11 that, “An individual exercises substantial control over a reporting company if the individual:
(A) Serves as a senior officer of the reporting company;
(B) Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
(C) Directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:
(1) The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
(2) The reorganization, dissolution, or merger of the reporting company;
(3) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
10 31 CFR § 1010.380(d).
11 31 CFR § 1010.380(d)(1)(i).

(4) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;
(5) Compensation schemes and incentive programs for senior officers;
(6) The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;
(7) Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or
(D) Has any other form of substantial control over the reporting company.”

If the requirements of Fidelity caused Treasurer Jones to avoid getting us the best interest rate because they required “too much information”, how will he comply with the new requirements of the federal government on January 1, 2024?

Better yet, how does this relate to Proxy Voting?

Well, according to the definitions provided by Taylor|English, simply having a voting block controlling the affairs of the Corporation would constitute “substantial control”. That means that those holding two dozen proxies or coordinating such numbers of proxies would then, even if not a Director themselves, may have to turn in their personal information to the federal government.

“The Final Rule also clarifies that an individual may exercise “substantial control” over a reporting company, directly or indirectly, including as a trustee of a trust or similar arrangement, through:
(A) Board representation;
(B) Ownership or control of a majority of the voting power or voting rights of the reporting company;
(C) Rights associated with any financing arrangement or interest in a company;
(D) Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
(E) Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
(F) any other contract, arrangement, understanding, relationship, or otherwise.”

This may be something the POHOA Board wishes to willfully ignore. Having written to the Board in October about this impending deadline, there has been no response. And, attempts to discuss this at the 11/14/23 meeting were shut down – with substantial anger, I might add. This isn’t just a guideline with no consequences. Failure to comply comes with $500/day penalties!

“Compliance will be important because the CTA provides that the knowing failure to provide complete and/or updated information, or willfully providing false or fraudulent information, is punishable by civil penalties of up to $10,000 ($500/day) and criminal penalties of up to two years in prison.“

It appears that the days of having HOAs controlled by groups of Silent People may be coming to an end. But, I suspect that those who wish to operate in this manner won’t comply willingly. Treasurer Jones’ avoidance of similar requirements from Fidelity are predictive, it appears.