Columns Management

Co-op Board Dilemma: To File or Not to File

Have co-ops and their boards been caught in the wake of new federal regulations requiring most U.S. corporations to file personal information about those in decision-making positions?

At issue is a 2021 law that went into effect on January 1 of this year requiring the information to be filed with the Department of Treasury Financial Crimes Enforcement Network (FinCEN). The provision is part of the Corporate Transparency Act (CTA) created to curb illicit financing such as money laundering, tax fraud and financing of terrorism. Entities subject to the CTA must file a Beneficial Ownership Information Report (BOI) with information about the individuals who ultimately own or control them.

As I write this, the consensus is that the requirement to file applies to co-ops and their boards, according to Joshua Sycoff of law firm Belkin Burden Goldman LLP. Sycoff said that while co-ops and their boards are currently required to file, the jury is still out on whether co-ops will definitely be required to comply by the end of the year. For companies created prior to January 1, 2024, the filing deadline is December 31, 2024.

“We recommend holding off to see if more guidance is coming from FinCEN and whether co-ops will fall under an exemption,” Sycoff said. “The question should be revisited in the next several months with ample time to prepare the materials for filing.”

Twenty-three categories of entities are specifically exempted from the reporting requirements, including “large operating companies” with a U.S. presence, companies registered with the Securities and Exchange Commission and companies whose ownership interests are controlled by entities that qualify for an exemption.

Beneficial ownership information reporting is not an annual requirement and only needs to be submitted once unless updating is required such as election of a new board member. Information to be provided includes the individual’s name, birthdate, address and verifying information from a current document such as a driver’s license or passport.

Complicating the issue is New York State legislation that Governor Kathy Hochul signed into law in December which will impose its own set of disclosure requirements when it takes effect on December 21, 2024. This law mirrors the CTA and incorporates many of its provisions by reference but applies only to limited liability companies formed or authorized to do business in New York.

Initially, the New York legislation included provisions making the information available to the public. That, however, was scrapped. The federal law has no provisions to make the information public — it can only be disclosed to certain federal agencies and regulators, state and local law enforcement, financial institutions and foreign law enforcement agencies.

Throwing a possible curveball into enforcement of the CTA is a decision in early March by a federal district court judge in Alabama declaring the law unconstitutional; it stated that the Treasury Department cannot require small business owners to report details of their owners and others who benefit from the business. The judge said Congress exceeded its powers when it passed the law.

The suit was brought by the National Small Business Association. The small business lobbying group argued that the reporting rule violates the Constitution, saying that it is unduly burdensome on small firms, violates privacy and free-speech protections and infringes on states’ powers to govern businesses.

It is anticipated that the Treasury Department will appeal the ruling to the Eleventh Circuit Court of Appeals, but there could be additional challenges in other states.

Failure to comply with CTA can lead to steep penalties. Willfully providing false information or failing to report complete information can result in fines of $500 a day up to $10,000 and imprisonment for two years maximum for those who criminally violate the law. The CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.

What about condominiums on so-called “Billionaires Row,” where buyers use LLCs to hide their identity? Most of these are cash transactions, which already require the purchaser to disclose their identity to the Treasury Department, but the filings are not made public.

Information that walks small businesses through the requirements in plain language as well as informational videos and webinars to learn more about how to report are available at fincen.gov/boi. But it is best for co-ops to consult with their attorneys or accountants.

Ira Meister
President and CEO
Matthew Adam Properties Inc.
375 Pearl St. – 14th Floor
New York, NY 10038
(212)699-8900
imeister@matthewadam.com