District Court Halts Enforcement of the Corporate Transparency Act
Commentary by Andrew Lom
The US District Court for the Eastern District of Texas granted a preliminary injunction against the enforcement of the Corporate Transparency Act ("CTA") and stayed the January 1, 2025 compliance deadline for entities formed prior to January 1, 2024. The CTA, which took effect on January 1, 2024, requires certain companies (incorporated in the US, such as LLCs as well as non-US companies that obtain licenses to do business in the US) to submit beneficial ownership information reports to FinCEN. (See generally The Corporate Transparency Act is here-are you ready?)
In a Memorandum Opinion and Order, the District Court described the CTA as an attempt by Congress "to combat bad actors' ability to cloak their criminal activities in a veil of corporate anonymity." However, the Court stated that the "unprecedented law ... represents a Federal attempt to monitor companies created under state law—a matter our federalist system has left almost exclusively to the several States." Further, the Court said that "the CTA ends a feature of corporate formation as designed by various States—anonymity."
The Court said that the CTA improperly compels action from companies merely because "[they] exist in their natural state" of anonymous corporate registration, which the Court found insufficient to establish a substantial connection to interstate commerce. As a result, the Court concluded that the CTA is unlikely to be upheld under the Commerce Clause or the Necessary and Proper Clause. Further, the Court said that regulation of corporate formation matters is a power granted to the States pursuant to the Tenth Amendment, and the disclosures required under the CTA likely violate rights under the First and Fourth Amendments as well.
Consequently, the Court found that the plaintiffs demonstrated a substantial likelihood of success on the merits of their claims that the CTA is unconstitutional.
Commentary
It is important to understand that the Eastern District of Texas Court's Order is not a final determination of anything. CTA filings may yet be due by January 1, 2025, for relevant entities. This is not the only challenge to the CTA that is making its way through the Courts.
The US is one of the few OECD countries that, prior to the CTA, did not have a mechanism for tracking beneficial ownership of legal entities. Banks and broker-dealers are required to collect BO information as a condition of providing account services to customers. Much of the same information would be required in a beneficial ownership report filed pursuant to the CTA.
The difference highlighted in this case is whether a company's mere existence entitles the federal government to collect such information (the answer to which might be yes and, in the view of Congress, was yes), or if the obligation to share such information should be triggered (albeit pursuant to other federal laws) by the company's choice to open a bank account or some other economic activity.
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The US District Court for the Northern District of Alabama held the Corporate Transparency Act unconstitutional.
