UNDERSTANDING THE CORPORATE TRANSPARENCY ACT:

What Boards Need to Know for Compliance and Insurance Protection

BY: JAMIE HACKWITH, CMCA, AMS, PCAM OF PRENDIVILLE INSURANCE AGENCY

The Corporate Transparency Act (CTA) is a federal law that was designed to combat certain illicit activities like money laundering by increasing transparency from company ownership. The CTA requires certain entities, including some homeowner associations (HOAs), to file reports with the Financial Crimes Enforcement Network (FinCEN), detailing information about their beneficial owners. For HOAs, this could mean disclosing personal details about board members or others who exert significant control over the association.

Timeline for Compliance

For HOAs established before 2024, the deadline to submit the initial report to FinCEN has been extended to December 31, 2024. HOAs formed after January 1, 2024, must submit their initial report within 30 days of formation. Adherence to these deadlines is critical to avoid penalties and ensure compliance.

Although the CTA is currently in effect with the above compliance deadlines, on July 15, 2024, Representative Richard McCormick (R-GA-6) introduced H.R. 9045 to exempt community associations from the CTA’s reporting requirements. If passed, this bill would protect your association by removing the need to comply with these regulations. Given the ongoing legislative activity, boards should expect to submit the required reports by the compliance deadline but also continue to regularly monitor updates to ensure that they are aware of any new requirements or changes.

CAI’s Lawsuit Against the Federal Government

The Community Associations Institute (CAI) has also challenged the CTA, arguing that its requirements impose an undue burden on HOAs by mandating the reporting of beneficial ownership information to FinCEN. CAI’s lawsuit seeks to exempt HOAs from these requirements, emphasizing that nonprofit community associations operate differently from other traditional for-profit business or corporate entities. The lawsuit is ongoing, and the outcome remains uncertain, so HOAs should prepare for the possibility that the CTA will continue to apply to them through the end of year compliance deadline.

Implications for HOAs and Individual Board Members

If the above legislation or CAI’s lawsuit fail and the CTA continues to include HOAs, board members could face severe consequences for non-compliance, including civil penalties of up to $500 per day and criminal penalties for willful non-compliance. The administrative burden of complying with the CTA could increase operational costs, potentially leading to higher assessments for homeowners. Additionally, board members could be held personally liable if their non-compliance is deemed willful misconduct or gross negligence, leading to legal action and reputational damage that could negatively affect property values and the overall community.

The Risks of Management Companies Taking on CTA Compliance

While it might seem straightforward for management companies to be tasked with ensuring compliance with the CTA, significant risks are involved. Management executives must carefully assess the potential liabilities their companies could face, as non-compliance may result in substantial fines and penalties, potentially sparking disputes over who should cover the costs. Given the complexities and legal implications of the CTA, this responsibility might be better suited to professionals with specific expertise in compliance and legal matters. Management companies are often hesitant to take on CTA compliance due to concerns about securing and storing Personally Identifiable Information (PII) and the liability associated with submitting this sensitive data to FinCEN and ensuring that the information is updated when required.

Insurance Considerations

A key concern for boards is whether the association’s insurance policy will cover penalties for non-compliance with the CTA, especially since the Act imposes penalties for ‘willful non-compliance.’ This raises serious questions about the applicability of Errors & Omissions (E&O) insurance, underscoring the need for boards to thoroughly review their policies and consult with their insurance providers. Given the potential ramifications of the CTA, HOAs and their board members must engage in detailed discussions with their insurance agents to ensure adequate coverage under their Directors & Officers (D&O) insurance policies. Key considerations include:

1 D&O Coverage: D&O insurance generally covers wrongful acts, errors, and omissions by board members in their official capacity. If a board member unintentionally fails to comply with the CTA, the D&O policy might cover legal defense costs and any resulting settlements or judgments. However, most D&O policies exclude coverage for criminal acts or willful misconduct . As a result, if non-compliance is found to be intentional or willful, the D&O carrier may deny coverage for any related claims. Boards should specifically ask the HOA’s insurance agent about these exclusions to fully understand what their policies do and do not cover.

2 Exclusions for Fines and Penalties: Both general liability and most D&O policies typically exclude coverage for fines and penalties imposed by the government. This means that if an HOA is fined for noncompliance with the CTA, it would likely need to pay those fines directly from its own funds. Because the Act contemplates daily fines in some circumstances, the financial impact of such fines could strain the HOA’s budget, potentially leading to increased assessments or cuts in services. To mitigate these risks, boards should explore potential riders or additional coverage options that could address these gaps in protection.

3 Potential Claims from HOA Members: There is a chance a homeowner may file a D&O claim if they believe the board’s failure to comply with the CTA constitutes a breach of fiduciary duty or another wrongful act. While the D&O carrier would likely defend such a claim, coverage might be denied if the claim stems from intentional or criminal behavior. This further highlights the importance for boards to review the association’s policy carefully and consider additional protections where necessary.

Third-Party Compliance Services: A Potential Option

Third-party companies are preparing to offer services that manage the paperwork for CTA compliance. These services can reduce the administrative workload but come with a fee that should be included in the association’s annual budget. Before engaging a third-party service, boards should carefully assess potential risks, including the consequences of reporting errors that could result in fines, and verify that the service has appropriate insurance to protect the HOA from liabilities. Consulting with legal counsel is essential to thoroughly review any agreement to ensure the HOA’s interests are protected.

Recommendations for Preparation

1 Legal Counsel Involvement: It is very important to work closely with the association’s legal counsel to navigate the complexities of the CTA. They can help guide the association through the compliance process, ensuring that all necessary steps are taken to avoid penalties.

2 Insurance Review: The board should review the association’s insurance policies with the HOA’s insurance agent, particularly the D&O coverage, to ensure appropriate protections are in place. This might include discussing potential policy enhancements or riders that could cover any gaps in coverage related to the CTA.

The High Cost of Non-Compliance: A Hypothetical Scenario

Imagine the Happy Homeowners Association, established in 2015, ignores the new CTA requirements, assuming they don’t apply. The board fails to file the necessary beneficial ownership information by the December 31, 2024, deadline. FinCEN imposes a fine of $500 per day. After a month, the fines accumulate to $15,000, only discovered when vigilant homeowners bring it to the board’s attention. In a scramble to resolve the issue, the board files a claim with their D&O insurance, only to have it denied because the non-compliance was deemed intentional. The board is forced to levy a special assessment on the community members to pay the fines, causing financial strain and dissatisfaction among homeowners.

Conclusion

Non-compliance with the CTA can have serious implications for both individual board members and the HOA as a whole. The potential for personal liability, fines, and reputational damage is significant. While D&O insurance might provide some protection, it is not a blanket safeguard, especially in cases of willful non-compliance or criminal behavior. HOA boards must understand their obligations under the CTA and take steps to ensure full compliance to avoid these risks.

For further guidance on the Corporate Transparency Act, several resources are available. The full text of the CTA regulations can be reviewed on the Code of Federal Regulations website. FinCEN also offers detailed FAQs and updates on their official website. Additionally, CAI provides valuable insights and updates regarding the CTA’s implications for HOAs.

Jamie Hackwith, CMCA, AMS, PCAM is an Agent-Broker and Commercial Account Manager with Prendiville Insurance Agency, and can be reached at jamie@PrendivilleAgency.com.

BUSINESS PARTNERS

7X, Inc.

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Modern Landscape and Tree Care, Inc.

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Platinum Security, Inc.

Roof Pro Inc.

Safeway Electric

Servpro of Woodcrest

The HOA Election Guys, Inc.

Vortex Plumbing Inc

Wallrug

COMMUNITY MANAGERS

Alexandra Guerrero

Annette Chavez

Darlene Harris

Emily Alexakis

Kara Peters

Jennifer Sanders, CMCA, AMS

Michael Spielmann, CMCA

Michelle Medina, CMCA

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MANAGEMENT COMPANIES

First Choice Community Management, LLC

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Ann Kurth

Christopher Joel Soto, CMCA

Elizabeth Dawn Mefford

Mckenna Burdette, CMCA

Danielle Nicole Lampreda, CMCA, AMS

Iris A Afable

Dennis G. Mangerino

George Gallanes, CMCA, AMS

James Niccoli, CMCA

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Michael Bodman, CMCA

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