woman sitting at desk working on computer

Corporate Transparency Act Unconstitutional, Confusion Ensues

The Corporate Transparency Act, which Congress passed in 2021 to fight money laundering and fraud, took effect on January 1, 2024. Two months later, a federal judge in Alabama ruled the law unconstitutional.

The Act required businesses, including some 32 million small businesses, to file ownership information to FINCEN. But, according to a report in the Wall Street Journal, many companies were unaware of the requirements.

To further confound the situation, the suspension of reporting requirements under the Judge’s ruling applies narrowly—only to the plaintiffs in the case. The National Small Business Association (NSBA) plaintiffs opposed the law and filed suit against the U.S. Treasury Department to stop it. (The U.S. banking industry supported the legislation.)

You May Still Have to File

If your business was a member of the NSBA when the ruling was issued, good for you—you’re covered by the Judge’s decision. If not, you might still have to file the information by the January 1, 2025 deadline. The Treasury Department says it will continue to collect ownership information despite the ruling.

U.S. District Judge Liles C. Burke, ruling in favor of the NSBA, said the federal law infringes on states. The ownership disclosure requirements, according to Burke, give the federal government “unfettered legislative power.”

The Judge said the Act “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’s policy goals.” (A Wall Street Journal op-ed agrees, calling the act a “personal-data grab.”)

What Is the Point?

The law is similar to requirements in the U.K. and E.U. It would create a database of owners of U.S. businesses, both domestic and foreign. LLCs and corporations registered to do business in the U.S. through filing with a secretary of state must comply.

Businesses meeting the reporting criteria must provide details identifying the individuals who own 25 percent or more or have a major influence over company decisions. The reporting timeframe allows existing companies to report by January 1, 2025. Newly formed companies in 2024 are to report within 90 days, and those formed in 2025 within 30 days.

At present it is not clear whether the ruling extends beyond the plaintiffs. Meanwhile, the Treasury Department has said that it will appeal the ruling.

Reactions

The U.S. banking industry and anticorruption organizations caution about the negative impact of striking the law.

Mengqu Sun of the Wall Street Journal quotes Ian Gary, executive director of the FACT Coalition, on full tilt, saying, “This is a pro-crime, pro-drug cartel, pro-fentanyl ruling which undermines the rule of law and allows criminals to use anonymous shell companies to hide their dirty money from law enforcement.”

Meanwhile, Todd McCracken, president and chief executive of NSBA, says, “The judge’s decision is an opportunity for Congress to go back to the drawing board and find a solution that will truly protect Americans from bad actors.”

Businesses must stay tuned to find out how the issue develops. Do companies beyond the plaintiffs still have a reporting responsibility? What about the appeal? Or will Congress have to write a new law to achieve its goals? Meanwhile, to comply or not comply—that is, for now, the question, but you have some time to see what develops.

Lets Talk!

Vendor Inquiries

— Simplified

Please enable JavaScript in your browser to complete this form.