What is Happening with the Corporate Transparency Act?
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The Corporate Transparency Act (“CTA”), first enacted on January 1, 2021, requires certain business entities, also referred to as “reporting companies,” to file information reports with the details of their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury. This law is the culmination of years of congressional effort to mandate beneficial ownership reporting for businesses to detect and prevent “shell companies” which are frequently utilized for illegal activities, such as money laundering and other financial misconduct. Previously, banks and financial institutions collected some of this information, but the CTA places this responsibility on the reporting companies and imposes stringent penalties and fees for non-compliance. For more information on the filing requirements and associated penalties for non-compliance read our recent article here.
Significantly, six weeks after the final rule regarding the CTA was issued by FinCEN, the National Small Business Association (“NSBA”) and one individual sued the Treasury Department, challenging the constitutionality of the CTA in the Northern District of Alabama. This is the first significant court case against the CTA, claiming “the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.”1 On March 1, 2024, U.S. District Court Judge Liles C. Burke declared the CTA unconstitutional because “it cannot be justified as an exercise of Congress's enumerated powers.”2
A few days later, on March 4, 2024, FinCEN released a notice regarding the Alabama court’s decision and stated that “as a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs.”3 Therefore, the CTA filing requirements are still in effect for all reporting entities besides the plaintiffs, which include the NSBA and its members (as of March 1, 2024), the individual, Issac Winkles, and the reporting companies that Issac Winkles is a beneficial owner of.
FinCEN filed a Notice of Appeal on March 11, 2024, which will be tried at the U.S. Circuit Court of Appeals for the Eleventh Circuit. FinCEN continues to enforce the CTA while the litigation is ongoing and reporting companies are still required to comply with the law and file their beneficial owner information reports. The NSBA released a response to the appeal which stated they believe that the CTA falls short of its goal of preventing money laundering but also places a burden on small businesses to comply and poses a significant risk to data security.4 Many criticisms of the CTA have been that the legislation requires significant costs for reporting companies to meet the filing requirements, which is especially hurtful for small businesses.
Despite the pending appeal, which might limit the ruling’s scope or overturn it entirely, it is crucial for reporting entities to prepare their beneficial owner reports proactively. The outcome of the appeal remains uncertain, and adherence to the CTA’s stipulations is essential to avoid severe penalties.
1 National Small Business United v. Yellen, No. 5:22-cv-01448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024). P.3
2 National Small Business United v. Yellen, No. 5:22-cv-01448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024). P.52
4 https://www.nsba.biz/post/press-nsba-response-to-doj-appeal-of-cta-ruling
