On March 1, 2024, the United States District Court for the Northern District of Alabama (Northeastern Division) issued a decision declaring the Corporate Transparency Act (“CTA” or the “Act”) unconstitutional.[1]
As we have previously reported, the CTA is part of the Anti-Money Laundering Act of 2000 and was adopted with the intent of providing law enforcement with beneficial ownership information for the purpose of detecting, preventing, and punishing terrorism, money laundering, and other misconduct through business entities. It requires certain businesses to provide detailed information about their beneficial owners, with “beneficial owner” being defined broadly to include, among others, senior officers and individuals who exert control over the activities of the business.
The National Small Business Association (“NSBA”) and one of its members, Isaac Winkles, challenged the Act in a case against Janet Yellen, in her capacity as Secretary of the Treasury. The NSBA and Winkles alleged that the CTA’s mandatory disclosure requirements exceed Congress’ authority under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments. The government argued that it had three sources of constitutional authority for the CTA: its foreign affairs powers under the Necessary and Proper Clause, the implementation of the Commerce Clause due to the act of corporate formation, and the government’s taxing power under the Necessary and Proper Clause. The Court rejected each of the government’s arguments and concluded that “the CTA is not authorized by the Constitution,”[2] and granted summary judgment in favor of the Plaintiffs holding that “[t]he Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers.”[3]
What Does This Mean for Companies Subject to the CTA?
While it might seem like this decision bans the government from enforcing the provisions of the CTA, it is important to note that the order is specifically limited to the Plaintiffs in the case, including members of the NSBA. (According to the NSBA, their membership consists of “over 65,000 businesses and entrepreneurs located in all 50 states.”[4]) The Financial Crimes Enforcement Network (FinCEN) released a statement on March 4, 2024 indicating that it is complying with the court’s order “for as long as it remain in effect,” and it went on to say that “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).”[5]
What Happens Next?
While the Treasury has not issued a statement regarding its next steps in response to the Court’s decision, we can expect that the Treasury will appeal and request a stay of the judgment. The appeal would be to the Eleventh Circuit Court of Appeals and the Treasury would ask the Court to “stay” the enforcement of the order against the CTA while the appeals process is ongoing.
While it would appear that, at a minimum, members of the NSBA may have a temporary reprieve from the Act, we cannot predict whether a stay will be granted, or the Court’s ruling will eventually be overturned. Jackson Kelly advises that all entities that may be subject to the CTA consult with their legal advisors to determine their obligations under the Act.
[1] National Small Business United, d/b/a the National Small Business Association, et al. v. Janet Yellen, in her official capacity as Secretary of the Treasury, et al, No. 5:22-cv-1448-LCB, 2024 WL 899372 (N.D. Ala. March 1, 2024)
[2] National Small Business United, 2024 WL 899372, at *3.
[3] National Small Business United, 2024 WL 899372, at *16.
[4] National Small Business United, 2024 WL 899372, at *1.
[5] https://www.fincen.gov/news/news-releases/notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448-nd-ala