1 March 2024, the US District Court for the Northern District of Alabama held that the Corporate Transparency Act (CTA) was an unconstitutional exercise of congress’s enumerated powers because it represented an inappropriate federal intrusion to the regulation of state-created and regulated enterprises.
The CTA, which came into force on 1 January, was enacted to “help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimising the burden on entities doing business in the United States”.
It requires certain entities conducting business in the US to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), the law enforcement arm of the US Treasury. Compliance with the CTA is estimated to affect 32.6 million existing entities and five million new entities formed each year.
The reporting rules under the CTA require covered companies and applicants to file specified beneficial ownership information that will be maintained in a secure, non-public database for at least five years, which can be accessed by law enforcement and certain financial institutions for customer due diligence.
In National Small Business Association, et al. v. Yellen et al, Case No. 5:22-cv-1448-LCB, the National Small Business Association (NSBA) and Isaac Winkles, an NSBA member, challenged the constitutionality of the CTA by suing the Treasury Department, alleging that the mandatory disclosure requirements of the law exceed Congress’ authority under the Constitution.
The US government contended that the CTA was a permissible exercise of Congress’ authority under Congress’s foreign affairs power, its ability to regulate interstate and foreign commerce, and its taxing power.
The district court recognised the “sensible and praiseworthy” objectives of the CTA in combatting money laundering and the financing of terrorism, but rejected each argument in turn, emphasising that that regulation targeted ‘local’ activity and that “no principle of corporation law and practice is more firmly established than a State’s authority to regulate domestic corporations”.
The court finally held that the regulation was an unconstitutional exercise of congressional power, declining to address plaintiffs’ further arguments that the CTA violated the First, Fourth and Fifth Amendments of the US Constitution.
It granted summary judgment in the plaintiffs’ favour and issued an injunction permanently enjoining the government from enforcing the CTA against the plaintiffs in this case. FinCEN issued a statement that it was not currently enforcing the CTA against the plaintiffs including members of the NSBA as of 1 2024.
On 11 March, the US Justice Department, on behalf of FinCEN and the Department of the Treasury, filed a notice of appeal with respect to the federal district court’s decision and FinCEN issued a statement that it would continue to implement the CTA while complying with the court’s order. Accordingly, other than the plaintiffs in the case subject to the court’s injunction, reporting companies under the CTA must comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.
The full judgment of the US District Court for the Northern District of Alabama can be viewed at https://www.govinfo.gov/content/pkg/USCOURTS-alnd-5_22-cv-01448/pdf/USCOURTS-alnd-5_22-cv-01448-0.pdf
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