The Corporate Transparency Act (CTA) is a law passed by Congress in 2021 as part of the National Defense Authorization Act. The CTA aims to combat money laundering, tax evasion, and other financial crimes by requiring certain businesses and their beneficial owners to register and report to the Financial Crimes Enforcement Network (FinCEN). However, on March 1, 2024, a federal district court in the Northern District of Alabama, Northeastern Division, declared the CTA unconstitutional in a case brought by the National Small Business Association and other plaintiffs. 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, we believe it important to touch on the main arguments and implications of this decision.
The Arguments Against the CTA
The plaintiffs challenged the constitutionality of the CTA on several grounds, claiming that it violated the First Amendment, the Fourth Amendment, the Fifth Amendment, the Ninth Amendment, and the Ten Amendment. The government contended the CTA is authorized by: the government’s foreign affairs and national security powers; the Necessary and Proper Clause, Interstate Commerce Clause; Foreign Commerce Clause; and the government’s taxing authority. Rather than directly addressing the plaintiffs’ concerns, the court looked at the powers granted to Congress to pass the CTA and ultimately ruled that the CTA exceeded Congress’ authority under the Constitution.
The court determined that the CTA cannot be justified under Congress’ foreign affairs powers. While the government argued that collecting beneficial ownership information was crucial for national security interests, the court emphasized that corporate incorporation is primarily an internal affair governed by state law, and thus, Congress’ foreign affairs powers do not extend to such matters. It is notable that the court mentioned that an act such as the CTA may, in fact, be good foreign affairs policy, but that being good policy does not make the CTA “necessary” or “proper” (or constitutional).
The court also ruled that the CTA does not fall under the authority of the Commerce Clause. Despite arguments that entity formation often results in interstate commerce, the court reasoned that the CTA doesn’t directly regulate commercial activity and isn’t part of a comprehensive regulatory scheme, thereby falling outside Congress’ powers to regulate interstate commerce. In fact, as the court pointed out, the word “commerce,” or references to any channel or instrumentality of commerce, are nowhere to be found in the CTA.
Finally, the court rejected the government’s argument that the CTA could be authorized under its taxing authority. While acknowledging the connection between beneficial ownership disclosure and tax enforcement, the court found that allowing the government to collect various types of private data simply because they say it is for tax purposes would constitute a significant expansion of federal authority.
The Implications of the Decision
The court’s decision has significant implications for the future of the CTA and its enforcement. The court granted the plaintiffs’ motion for summary judgment and issued a permanent injunction, prohibiting the defendants (the Secretary of the Treasury, the Director of FinCEN, and the Attorney General) from enforcing the CTA against the plaintiffs and their members. However, the court did not issue a nationwide injunction, meaning that the CTA remains in effect for other businesses that are not part of the lawsuit. The court also did not rule on the plaintiffs’ request for a declaratory judgment, meaning that the court did not declare the CTA invalid or void for all purposes.
As mentioned above, the Justice Department has appealed the Alabama court’s decision. It is possible that other courts may reach different conclusions on the constitutionality of the CTA, creating a split among the circuits and increasing the likelihood of Supreme Court review. Alternatively, Congress may amend or repeal the CTA to address the constitutional concerns raised by the Alabama court, or to clarify or modify the scope and applicability of the reporting requirements.
In the meantime, businesses that are subject to the CTA should continue to monitor the developments and guidance from FinCEN and other authorities, and consult with their legal advisors on how to comply with the law or seek relief from it. The CTA is a complex and controversial law that has sparked a fierce debate over the balance between corporate transparency and privacy rights. The court’s decision is a major setback for the CTA, but it may not be the final word on this issue.
More Information
Austin Legal Group, APC (ALG) represents the legal interests of businesses and individuals across the country. The firm was founded on a desire to deliver excellent legal services in a personalized and economical manner. We represent public and private companies in a variety of corporate transactions including strategic planning, public offerings, private equity, debt offerings, mergers and acquisitions, and other general corporate services. Our clients include companies from various sectors, including: technology, health and wellness, agriculture, real estate development, manufacturing, cannabis, renewable energy and digital assets/crypto currencies. For more information or to schedule a consultation, please call our office at (619) 924-9600 and ask to speak with one of our attorneys.
Disclaimer
ALG does not make any representations or warranties, expressed or implied, as to the accuracy, completeness or fitness for a particular purpose of this or any article. This article is meant for general informational purposes only and should not be construed as, and does not constitute, legal advice. No one should take any action regarding the information in this article without first seeking the advice of an attorney. This article does not create an attorney-client relationship. No attorney-client relationship will exist with ALG or any attorney affiliated with it unless a written contract is signed by all parties and any conditions in such contract are satisfied.
