The Corporate Transparency Act (CTA) faces a pivotal moment as a recent court ruling deems it unconstitutional, challenging its fundamental principles. Within a mere 60 days of its enforcement, the CTA’s legal standing is under scrutiny, initiating in a critical examination of its implications on beneficial ownership disclosure in the United States
Corporate Transparency Act’s Unconstitutional Fallout.
In a bid to combat money laundering, terrorist financing, and other financial crimes, the Corporate Transparency Act (CTA) became federal law in the United States on January 21, 2021, and came into effect on January 1, 2024. However, just 60 days after its effective date, the U.S. District Court for the Northern District of Alabama, in the case of National Small Business United v. Yellen, ruled the CTA unconstitutional.
The Department of the Treasury and the Financial Crimes Enforcement Network (FinCEN) released the following statement on March 4, 2024:
On March 1, 2024, in the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), a federal district court in the Northern District of Alabama, Northeastern Division, entered a final declaratory judgment, concluding that the Corporate Transparency Act exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the Corporate Transparency Act against the plaintiffs. FinCEN is complying with the court’s order and will continue to 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.
In the lawsuit, the National Small Business United (NSBA) and its member, Isaac Winkles, challenged the mandatory disclosure requirements of beneficial ownership under the CTA, contending that it exceeded Congress’s authority and violated several constitutional amendments. The court’s decision analysed the government’s arguments based on foreign affairs powers, Commerce Clause authority, and taxing power, ultimately rejecting all three.
The court dismissed the foreign affairs powers argument, emphasizing that Congress cannot extend its authority to purely internal affairs traditionally left to the states. Regarding the Commerce Clause, the court ruled that the CTA, focusing on disclosure during entity formation rather than commerce engagement, lacked the necessary jurisdictional hook and comprehensive regulatory scheme. The taxing power argument also fell short, as the court deemed the incidental relationship between beneficial ownership disclosure and tax administration insufficient.
The court concluded that the CTA lacked constitutional justification within Congress’s enumerated powers, rendering it unconstitutional. Consequently, the plaintiffs were granted summary judgment, and the defendants, including FinCEN, were permanently enjoined from enforcing the CTA against them.
FinCEN swiftly responded to the ruling, acknowledging compliance with the court’s order, and assuring non-enforcement against the specific plaintiffs listed in the case. However, FinCEN’s statement left key questions unanswered, implying a potential appeal to the federal Court of Appeals for the Eleventh Circuit. This uncertainty prompted a recommendation for reporting companies to continue CTA compliance until further guidance is provided.
Looking ahead, the court’s opinion proposed specific amendments for Congress to address the CTA’s constitutional shortcomings. The 2025 National Defense Authorization Act (NDAA) may become a platform for such changes, though bipartisan efforts in an election year present challenges. The court decision could also revive interest in the Establishing New Authorities for Businesses Laundering and Enabling Risks to Security (ENABLERS) Act, originally part of the 2022 NDAA, but removed before passage.
Meanwhile, states may take matters into their own hands by enacting their versions of the CTA. New York has already approved a transparency statute, and Maryland is considering similar legislation. State-level initiatives may lead to dual reporting requirements, creating additional complexities for businesses.
The ruling in National Small Business United v. Yellen not only raises questions about the fate of the CTA but also sparks potential changes at both federal and state levels. As the legal landscape evolves, businesses and their beneficial owners must remain vigilant, closely monitoring developments that may impact their compliance obligations.
