Article Highlights:
- Alabama Federal Court Decision
- Corporate Transparency Act Purpose
- The court ruled the act overreached.
- Implications
- Financial Crimes Enforcement Network (FinCEN)
- FinCEN, March 5, 2024, Announcement
- Status of Reporting Pending Appeals by the Treasury Department
In a landmark decision on March 1, 2024, a federal district court in Alabama declared the Corporate Transparency Act (CTA), a piece of legislation aimed at combating money laundering, unconstitutional. The ruling, delivered in the case of National Small Business United et al. v. Yellen, No. 5:22-cv-1448-LCB, has sent shockwaves through the legal and business communities, challenging the federal government's efforts to increase transparency in business ownership.
The CTA, enacted as part of a broader anti-money-laundering initiative in 2021, mandates that corporations, limited liability companies (LLCs), and similar entities disclose beneficial ownership information (BOI) to the government. This includes the identities and personal information of the beneficial owners and, for entities formed after January 1, 2024, the identities of the individuals who file applications to create these entities. The legislation was designed to peel back the layers of anonymity often exploited by money launderers and financial criminals, requiring detailed disclosures such as full legal names, addresses, taxpayer identification numbers, and birth dates of the owners and applicants.
However, the federal court in Alabama, presided over by Judge Liles C. Burke, found the act to exceed the constitutional boundaries of legislative power. The court's opinion highlighted that while the goals of the CTA might be "sensible and praiseworthy," the means by which Congress sought to achieve these ends-by regulating millions of entities and their stakeholders based solely on their corporate status-lacked precedent and a sufficient nexus to any enumerated power. In essence, in the court's view, the act overreached, infringing on the rights and freedoms of businesses by imposing undue federal oversight and reporting requirements.
The government had defended the CTA by citing Congress's plenary power to conduct foreign affairs, its authority under the Commerce Clause, and its taxing power as bases for the legislation. However, the court found these arguments unconvincing, ruling that the CTA was not a necessary or proper means of achieving Congress's policy goals within the scope of these powers.
The implications of this ruling are significant. The CTA had imposed stringent penalties for non-compliance, including daily fines and the possibility of imprisonment, measures that the court in its ruling referred to as "severe" and highlighted that penalties could only apply to individuals and not the reporting entities. The Financial Crimes Enforcement Network (FinCEN), tasked with administering the act, estimated that the BOI reporting regulations would apply to over 32 million entities, with an additional 5 million entities added each year through 2034. The ruling, therefore, not only challenges the federal government's approach to combating money laundering but also relieves a substantial regulatory and financial burden from businesses across the United States.
Critics of the CTA have lauded the decision as a victory for small business rights and a check against federal overreach. The National Small Business Association (NSBA), one of the plaintiffs in the case and an organization representing over 65,000 members, has particularly welcomed the ruling. Advocates for the CTA, however, warn that the decision could undermine efforts to combat financial crimes and reduce transparency in the business sector.
This case does not prohibit the Treasury and any other federal government agencies from enforcing the CTA and only applies to those who challenged the CTA. In response to the court's ruling, the Financial Crimes Enforcement Network (FinCEN) announced on March 5, 2024, that it would pause collecting beneficial ownership information only from the plaintiffs in the case. These are members, as of March 1, 2024, of the National Small Business Association (NSBA) and Isaac Winkles, a small business owner and member of the NSBA. FinCEN said those individuals and entities do not need to report BOI at the present time. Thus, plaintiff Winkles and other members of the NSBA do not need to report BOI pending further developments.
Since the Court's ruling only applies to NSBA members and Winkle, others must still abide by the Corporation Transparency Act.
Thus, for the time being, others are still subject to the BOI reporting requirements. The reporting deadlines are:
- Businesses established before 2024 must complete the FinCEN reporting requirement before January 1, 2025.
- Businesses established in 2024 must complete the FinCEN reporting requirement within 90 days of establishing the business.
As the dust settles on this pivotal ruling, its broader implications for federal regulatory power and the fight against money laundering remain to be seen. The government is likely to appeal the decision, setting the stage for a legal battle that could ultimately reach the Supreme Court. Further guidance will have to wait for the results of an anticipated appeal by the Treasury Department.
