Note: The original alert has been updated to reflect an updated notice regarding this decision that was issued by FinCEN on March 11, 2024.
Key Takeaways
Introduction and Background
On March 1, 2024, a federal district judge in Alabama ruled that the CTA is unconstitutional, holding that it exceeds the powers granted to Congress by the U.S. Constitution. The ruling permanently enjoins FinCEN from enforcing the CTA against the named plaintiffs and casts uncertainty on the broader enforceability of the CTA going forward.
The CTA was originally enacted by Congress on Jan. 1, 2021, and became effective on Jan. 1, 2024. Designed to combat money laundering and illicit financing through anonymous shell companies, the CTA imposes new beneficial ownership information (BOI) reporting requirements on all companies formed or registered to do business in the U.S., unless an exemption applies. FinCEN estimated that the CTA would impact approximately 32.6 million existing entities at the time it went into effect and approximately 5 million new entities formed each year thereafter.
Case Summary
On Nov. 15, 2022, the NSBA filed suit in the Northern District of Alabama, alleging that the CTA’s mandatory disclosure requirements (i) exceeded the limits on Congress’ powers under the Constitution and (ii) infringed upon individual constitutional rights in violation of the First, Fourth and Fifth Amendments.
The government offered three sources of constitutional authority in support of Congress’ ability to enact the CTA: (i) foreign affairs power; (ii) Commerce Clause power; and (iii) taxing power.
The court rejected all three arguments:
The court held that Congress lacked the constitutional authority to enact the CTA. This conclusion made it unnecessary to determine whether the law violates the First, Fourth and Fifth Amendments.
Impact of the Decision
As of now, this ruling technically applies only to the 65,000 members of the NSBA at the time of the decision. In other words, no other company may rely on this decision to avoid complying with the CTA, absent subsequent guidance from FinCEN permitting them to do so.
When a law is ruled unenforceable by a district court, the federal agency overseeing that law will typically indicate whether it intends to appeal the decision and issue clarifying guidance regarding compliance with and enforcement of that law during that interim period.
On March 4, 2024, FinCEN published a notice acknowledging the district court’s decision and announcing that it will not enforce the CTA against the named plaintiffs, implying that all other reporting companies will be expected to comply with the CTA:
FinCEN will comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.
On March 11, 2024, FinCEN updated this notice by adding the following, which confirms that it has appealed the decision and expressly states that all reporting companies other than the named plaintiffs must still comply with the CTA:
The Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal on March 11, 2024. While this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction, … reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.
Our key takeaways from the initial statement and updated statement are as follows:
We will continue to provide updates regarding any further material developments as they arise.
