The U.S. Corporate Transparency Act (CTA) has been ruled unconstitutional just two months after it took effect.
The U.S. Federal District Court in Alabama declared on March 1, 20241 that Congress lacks the federal jurisdiction to regulate the new mandatory beneficial ownership reporting requirements that came into force on January 1, 2024. These requirements are estimated to impact more that 32 million small businesses across the U.S.
The CTA is part of a global effort to improve corporate transparency and combat financial crimes such as tax evasion, money laundering and terrorist financing.
In recent years, similar initiatives to unmask private corporate ownership have emerged in the U.K., Europe and Canada. These generally require private companies to maintain a register of individuals with significant control (ISCs), typically individuals with 25% or more beneficial ownership or control.
In some jurisdictions, there is a mandatory requirement to report ISC information to a government agency, such as the Financial Crimes Enforcement Network (FinCEN) in the U.S., where access to information reported is limited to certain government agencies and is not subject to Freedom of Information requests.
Certain Canadian jurisdictions go one step further by mandating such corporate ownership to be made publicly available online. This public disclosure requirement took effect in January 2024 for federally incorporated companies under the Canada Business Corporations Act (CBCA). Quebec had already implemented public filings last year and British Columbia is planning to do so in 2025. Penalties for non-compliance can be severe, including fines of up to $1 million and potential jail time for directors and officers of CBCA companies providing false or misleading information.
The March 1st ruling by the U.S. Federal District Court held that the CTA violates the Constitution's limits by interfering with state incorporation practices. As a result, FinCEN has stated that it will not enforce the CTA against the plaintiffs, the National Small Business Association, or its more than 65,000 businesses located in all 50 states across the U.S. However, other businesses remain subject to the CTA.
While the U.S. Justice Department filed an appeal of the decision on March 11, 2024, further legal challenges are anticipated in the U.S.
The outcome of these legal battles may prompt policymakers globally to reevaluate their approaches to corporate transparency and disclosure regulations.
It remains to be seen whether the winds of uncertainty in the U.S. will have any impact on the climate of the more stringent Canadian private company disclosure regime.
Footnote
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
