A bubbling legal battle over a federal anti-fraud law has sparked worries from homeowners association advocates that they could be newly buried in bureaucratic red tape — and face increased costs.
Originally designed to deter fraud and abuse in businesses entities, the Corporate Transparency Act imposes new reporting requirements on many business entities, including condo associations and HOAs.
But many groups are now challenging the law’s key requirement to disclose ownership of corporate entities.
After a series of courts upheld the law, a group of business entities led by the National Small Business Association are asking the US Supreme Court to weigh in to overturn the law.
They argue it’s unconstitutional. And they’re joined by several HOA groups, which are concerned that costs will increase.
The suit comes at a time when millions of Americans are part of HOA communities, where dues are rising. A string of fraud and theft cases involving HOAs have followed. And several states have come forward with potential reforms.
What is the Corporate Transparency Act?
Developed in 2017 and enacted in 2021, the Corporate Transparency Act (CTA) is intended to cut down on financial fraud.
The law required 32 million American business and financial entities to file information about their beneficial owners and officers, including names and addresses, under threat of punishment from the Treasury Department’s Financial Crimes Enforcement Network.
A series of lawsuits followed nationwide and the CTA’s implementation was paused and resumed several times as different courts weighed in.
Eventually, the Trump administration relented and announced last year it would aim enforcement efforts at curtailing international fraud. But it kept the law on the books, arguing the government loses billions a year to financial crimes.
Lawsuits continued from businesses and entities that claimed the federal government was intruding into affairs that the Constitution delegates only to the states, violating the Commerce Clause.
That included several Texas homeowners who own their properties through LLCs and must file reports to the government disclosing the true ownership.
They and other plaintiffs argue the CTA also imposes high costs to maintain compliance.
They also say the law unfairly punishes them, because their entities aren’t being run for profit.
Now, the group challenging the law has appealed to the US Supreme Court to strike it down on constitutional grounds, after several lower courts upheld the legality of the CTA.
The Supreme Court agrees to hear very few cases, but if it opts to take up the CTA challenge, it could strike or force changes to the entire law.
HOA group says new requirement is onerous
Community Associations Institute, which represents about 373,000 condo associations and HOAs, worries about the impacts of the law as it stands.
HOAs say they face a special dilemma because their boards and ownership change regularly, and so the burden of disclosing ownership is more onerous.
CEO Dawn Bauman said she believes the act unintentionally swept in community associations.
The CTA has exceptions for 20 different kinds of groups, including several kinds of nonprofits with 501(c) designations.
Most HOAs are under 528 tax-exempt status, and the law treats them similarly to other nonprofits in many ways. But they aren’t protected from CTA enforcement in any specific carve-out.
“It’s not a typical filing requirement a corporation would have where they file their owners and that’s it,” she said. “Community associations have new board members every year at least, and often more often.”
Bauman said she hasn’t yet heard of the government threatening fines against any one association. But the fear is that HOAs will suffer as many would-be volunteer board members shy away from potential penalties, including fines and jail time. Many volunteers may also balk at having their information in another government database, she says.
And, while the Trump administration revised CTA enforcement to specifically target foreign owners, that was just executive rulemaking, not law. Bauman said HOAs fear that new rules and guidance under a future administration could change things again. So, the Community Associations Institute is arguing for either legislation or a harder rule from Treasury that explicitly exempts HOAs from the law.
A CAI survey of board members conducted before the government clarified the CTA found 58% were uncomfortable sharing information with the government. About half also said they’d step back from volunteering with their local HOA, or step down entirely if the law was enacted.
Supporters say law deters HOA fraud
To date, most major courts have upheld the Corporate Transparency Act as legally justified. The government has a vested interest in collecting tax revenue, after all, and the bill’s proponents have so far convinced the court that the law deters fraud and money laundering through opaque shell corporations.
Erica Hanichak is the deputy director of the FACT Coalition, a financial think tank that supports the law. The CTA isn’t an onerous requirement, and it’s not aimed at HOAs, she said. Most required business disclosures will be short, unless there are foreign owners in the HOA entity.
And she said the CTA is a possible avenue to help deter fraud against HOAs. While FinCEN isn’t specifically targeting HOAs for prosecution under the law, the disclosures provide a way for police investigating fraud to track illicit activities.
“A little bit of transparency goes a long way in protecting our communities,” Hanichak said. “While it might feel cumbersome to reach out to partners to try to do some of those disclosures, it’s a huge helping hand to law enforcement in trying to prevent financial crime.”
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