Key Takeaways
- A federal district court in Alabama ruled that the Corporate Transparency Act (CTA) is unconstitutional on the basis that it regulates beyond Congress' Article I legislative powers.
- The case is now being reviewed on an expedited basis by the U.S. Court of Appeals for the Eleventh Circuit and may go on to the Supreme Court of the United States for further review as early as fall 2024.
- In the meantime, the CTA is still in effect for all parties (except the plaintiffs in the case, the National Small Business Association (NSBA), and its members as of March 1, 2024).
- If the plaintiffs' lawsuit is successful, it might be possible for Congress or the enforcing agency to apply a regulatory/legislative "fix" by limiting the CTA to entities that engage in commerce.
- It remains to be seen when and how courts will address the several other constitutional arguments raised against the statute that were not resolved by the district court, which could result in much more significant limitations to application of the CTA.
The CTA and Legal Challenges
The CTA is a sweeping new anti-money-laundering law that, as of January 1, 2024, requires most entities formed or registered to do business in the United States to disclose detailed information regarding their owners, officers, and control persons to the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). The CTA implements the most significant revisions in more than 20 years to the United States' compliance framework for anti-money-laundering and countering the financing of terrorism (AML/CFT). The law responds to domestic and international concerns that entities in the United States are often anonymously formed and leveraged to obscure the conduct of criminal enterprises, hide the proceeds of corruption, and evade U.S. economic sanctions.
The new regime imposes a significant burden on affected U.S. entities (and their owners) given the breadth of the reporting requirements and the many ambiguities in application to complex corporate structures. It also raises concerns regarding privacy rights and the security of the vast amounts of personal information already being collected in the CTA reporting database.
In that context, it is unsurprising that the CTA has been subject to legal challenges. And one such challenge recently found success: On March 1, 2024, the U.S. District Court for the Northern District of Alabama held that the CTA was unconstitutional because it exceeds Congress' enumerated powers. As a result, the Alabama district court enjoined enforcement of the CTA as to the plaintiffs in that matter, the National Small Business Association (NSBA), and one of its individual members. Treasury subsequently issued a statement confirming that, as a result of the injunction, "the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action," including all members of the NSBA, as of the March 1 order. The government subsequently appealed the Alabama district court's decision to the U.S. Court of Appeals for the Eleventh Circuit.
While the injunction is presently limited and the CTA remains enforceable as to all other reporting companies, this ruling creates uncertainty about the CTA's future. In this Update, we provide a practical overview of the Alabama district court's ruling along with guidance on its wider implications and what to expect next. As explained in more detail below, it seems unlikely that the current challenge, even if it succeeds, will ultimately overturn or even significantly narrow the application of the CTA. But the plaintiffs in the Alabama case raised additional constitutional challenges to the CTA that the district court did not reach. And it remains unclear when and how those challenges...
