Eleventh Circuit Upholds Constitutionality Of Corporate Transparency Act

Highlights

• The U.S. Court of Appeals for the Eleventh Circuit in National Small Business United vs. U.S. Department of the Treasury rejected two attacks on the constitutionality of the Corporate Transparency Act (CTA), reversing the U.S. District Court for the Northern District of Alabama.
• The Eleventh Circuit found that the CTA was a proper exercise of Congress' authority under the Commerce Clause.
• The Eleventh Circuit also found that the CTA did not violate the Fourth Amendment, which prohibits the government from conducting unreasonable searches and seizures.
• The National Small Business United opinion has potentially significant implications for the future of both the CTA and anti-money laundering regulations in general.

In National Small Business United v. U.S. Department of the Treasury, a panel of the U.S. Court of Appeals for the Eleventh Circuit reversed the ruling of the U.S. District Court for the Northern District of Alabama, which had concluded that the Corporate Transparency Act (CTA) did not regulate economic activity and, therefore, was not a constitutional exercise of power by the U.S. Congress under the Commerce Clause. The Eleventh Circuit held that "by effectively prohibiting anonymous business dealings, the CTA facially regulates economic activities having a substantial aggregate impact on interstate commerce." Turning to an additional challenge that the district court had not addressed, the Eleventh Circuit also held that "as a uniform and limited reporting requirement, the CTA does not facially violate the Fourth Amendment."

When assessing the constitutionality of the CTA, the Eleventh Circuit considered the entire statute and its many requirements. Accordingly, the National Small Business United holding describes and applies to a version of the CTA that is much more comprehensive than the current regulations promulgated for the CTA, which have been curtailed significantly. Specifically, on March 21, 2025, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued an interim final rule that substantially scaled back the scope of the CTA. Among other changes, it removed the requirement for U.S. companies and U.S. persons to report beneficial ownership information (BOI) to FinCEN and revised the definition of "reporting company" to mean only those entities that are formed under foreign law and have registered to do business in any U.S. state or Tribal jurisdiction. The interim final rule also excluded BOI reporting of U.S. persons (as defined in the Internal Revenue Code) who are beneficial owners of foreign reporting companies and imposed new BOI reporting deadlines for foreign reporting companies. The practical effect of the interim final rule was to reduce the application of the CTA from tens of millions of domestic and foreign businesses to only a few thousand foreign businesses. Although FinCEN had planned to issue a final rule by the end of 2025, the agency in a court filing announced that its progress has been delayed by various factors, including a lapse in appropriations. The interim final rule remains in effect.

When upholding the CTA, the Eleventh Circuit emphasized the findings of Congress that the collection of BOI is crucial to combating financial fraud, money laundering and the threats posed by transnational criminal organizations, terrorist operations and other illicit activity. Whether the Eleventh Circuit's opinion will spur FinCEN to materially revise the interim final rule and thereby expand the coverage of the CTA remains to be seen. Regardless, the National Small Business United holdings, and the particular language and analysis supporting its holdings, will be significant to any future lawsuits involving anti-money laundering (AML) regulations set forth by FinCEN under the Bank Secrecy Act (BSA) and to financial crime regulations in general.

A Proper Exercise of Congress' Power to Regulate Economic Activity

The Eleventh Circuit found that the CTA facially regulates economic activities with a substantial aggregate impact on interstate commerce because the CTA regulates how covered businesses operate and the level of secrecy with which they do business. Having upheld the CTA as a proper exercise of congressional power under the Commerce Clause, the court did not address the plaintiffs' additional challenges that Congress lacked the authority to enact the CTA under the Taxing or Necessary and Proper clauses or its foreign affairs and national security powers.

"[O]n its face, the CTA regulates activity that is economic in nature. It effectively prohibits anonymous corporate dealings, regulates commercial entities that are active in the stream of commerce, and requires them to report information related to their ownership." The entities regulated by the CTA – foreign and domestic corporations, limited liability companies (LLCs) and similar entities either created under the laws of a state or registered to do business in the U.S. – "are commercial by their very nature." According to the Eleventh Circuit, the plaintiffs had failed to identify any reporting companies that do not engage in commercial activity, and the CTA specifically exempts inactive businesses, as defined.

The Eleventh Circuit rejected the district court's finding that the CTA regulates the non-economic "isolated, discrete act" of incorporation. The Eleventh Circuit reasoned that even assuming that incorporation, standing alone, is not commercial activity, the CTA explicitly does not regulate incorporation. Rather, it regulates the reporting of BOI required of covered entities after they are registered to do business. The Eleventh Circuit also rejected the district court's finding that the CTA lacks a required jurisdictional element because "neither we nor the Supreme Court has ever suggested that a jurisdictional element is necessary for an economic regulation." As for the plaintiffs' argument that the CTA impermissibly regulates inactivity, the Eleventh Circuit found that the CTA's "tailored scope" regulates the anticipated effects on commerce of active businesses not reporting BOI.

Finally, the Eleventh Circuit rejected "hypothetical entities" suggested by the plaintiffs that engage in purely intrastate activity but still might be regulated by the CTA. The court reasoned that "the existence of some edge cases" will not support a facial challenge to a statute, as opposed to an as-applied challenge. For a facial challenge, the only question is whether Congress reasonably determined that the cumulative activity at issue would substantially affect commerce.

Anonymity and Corporate Forms

The Eleventh Circuit then turned to the second step of the Commerce Clause analysis and determined that Congress rationally concluded that the regulated conduct – curtailing perceived abuses of the corporate form that may facilitate financial crime – has a substantial aggregate effect on interstate commerce. This holding and its particular explanation will be important to any future challenges to the BSA in particular and to financial crime regulations in general.

First, the Eleventh Circuit rejected the suggestion that the CTA was an extraordinary overreach by observing that "the CTA is a routine federal law. Federal reporting requirements are very common." As one such example, the court pointed to the Currency Transaction Report (CTR), a BSA form that covered financial institutions must file for transactions more than $10,000 in currency.

The court then stressed the findings of Congress in support of enacting the CTA. Specifically, Congress had found that anonymous ownership and the corporate form were contributing to the commission of financial fraud and that anonymous shell companies "afford a high level of secrecy" to money launderers. Further, Congress found "that the United States was not meeting international standards [set by the Financial Action Task Force] regarding disclosure requirements, making it a target for money laundering." Congress also found that more than 2 million corporations and LLCs are formed annually in the U.S., "mostly in states that do not require beneficial ownership information. ... Because most states do not require businesses to report information about their owners, law enforcement has long suffered from an information gap when fighting financial crime." When making these findings, Congress relied on information provided by law enforcement, national security experts and financial industry representatives indicating that the collection of BOI would help combat financial crime and the threats posed by transnational criminal organizations, terrorist operations and other illicit activity.

Thus, the Eleventh Circuit held that "Congress could rationally conclude that the freedom of beneficial owners to operate anonymously through shell companies had a substantial aggregate impact on interstate commerce[,]" and that "failing to require businesses to report [BOI] would undercut its goal of regulating interstate financial crime."

The Fourth Amendment

Having determined that Congress had the power to enact the CTA, the Eleventh Circuit found that the plaintiffs also had failed to demonstrate that the CTA facially violates the Fourth Amendment. Again, this holding and its explanation will be important to any future challenges to government reporting forms required under the BSA or other regulatory regimes.

The panel relied on Cal. Bankers Ass'n v. Shultz, 416 U.S. 21 (1974), in which the U.S. Supreme Court rejected a Fourth Amendment challenge to the CTR filing requirement. CTRs contain the "name, address, business or profession and social security number of the person conducting the transaction," as well as a description of the transaction itself. Quoting Shultz, the Eleventh Circuit noted that "[e]ven though the law required banks to obtain information 'simply because the Government want[ed] it,'" the information was limited in nature and "sufficiently related to a tenable congressional determination as to improper use of transactions of that type in interstate commerce." Likewise, the Eleventh Circuit determined that the CTA "is a uniform reporting requirement applied to all businesses that meet the CTA's definition of 'reporting company.' There is nothing arbitrary or discretionary about its application." Further, the CTA contains several privacy provisions, such as prohibiting disclosure of BOI except to specific agencies in response to specific requests for specific reasons, thereby ameliorating Fourth Amendment concerns.

A Contrast: National Small Business United and the Current Scope of the CTA

As noted, FinCEN's interim final rule regarding the CTA is significantly more limited than both the initial regulations promulgated by FinCEN for the CTA and the statute itself. When issuing the interim final rule, FinCEN stated that the benefits of BOI reporting had been overstated:

The Secretary ... has determined for purposes of this interim final rule that the reporting of BOI by domestic reporting companies and their beneficial owners ''would not serve the public interest'' and ''would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.'' The Secretary is aware that most domestic reporting companies that are not already covered by a statutory exemption are small businesses and that any regulations affecting them must recognize this fact.

Further, FinCEN suggested in the interim final rule that its prior claims as to the benefits of BOI reporting under the CTA lacked sufficient support:

[I]t is unclear that the marginal benefits of the BOI that will no longer be reported would be comparable to the value of similar [foreign] entities to which the reporting requirements still apply. As FinCEN has not yet been able to conduct the kinds of robust quantitative analysis necessary to estimate the incremental value of such intelligence, it recognizes that its estimated values to date have been partially speculative, albeit informed by feedback from both domestic and international partners in law enforcement and national security.

When describing the prior findings of Congress and utility of BOI reporting to combat illicit activity, portions of the Eleventh Circuit's opinion stand in stark contrast to FinCEN's language in the interim final rule. It remains to be seen whether FinCEN latches onto the Eleventh Circuit's language – which merely repeated the stated findings of Congress – in order to expand regulations under the CTA in the near future. Alternatively, FinCEN may regard the government's victory before the Eleventh Circuit as a reason to conduct, over time, "the kinds of robust quantitative analysis necessary to estimate the incremental value" of BOI in order to justify and reissue, several years hence, CTA regulations much more robust than the requirements of the interim final rule.

Implications for Other CTA Cases

National Small Business United was the first of a plethora of more than a dozen filed litigations challenging the constitutionality of the CTA. These other challenges have produced mixed outcomes. It remains to be seen how the Treasury Department's finalization of the interim final rule affects pending cases challenging the CTA.

The New York State Limited Company Transparency Act

The CTA has had an impact at the state level. The New York State Limited Company Transparency Act (NY LLCTA) originally was modeled on the CTA and incorporated numerous definitions and elements of the CTA. The original version, signed into law by Gov. Kathy Hochul on Dec. 22, 2023, was controversial because it would have permitted public disclosure of BOI through a publicly available database. It was amended on March 1, 2024, to remove this public access element. As amended in 2024, the NY LLCTA was targeted at LLCs and required LLCs formed in, or qualified to do business in, New York state to report BOI of individuals that exercise substantial control over a reporting company or own or control at last 25 percent of the ownership interests of a reporting company to the New York Department of State.

FinCEN's March 2025 CTA interim final rule had an unanticipated impact on the NY LLCTA because the NY LLCTA had defined the term "reporting company" and other terms to have the same meaning as in the CTA and any regulations promulgated thereunder. To deal with this anomaly, the New York Legislature sought to decouple the NY LLCTA from the interim final rule by a bill that made certain key terms incorporated from the CTA independent of the interim final rule's definitions. However, on Dec. 19, 2025, Gov. Hochul vetoed the decoupling amendments because the bill "would create a mandate for businesses in New York that is not required under federal law" because it would require LLCs formed in, or qualified to do business in, New York state to register under the NY LLCTA even though the reporting company would not have to comply similarly with the CTA. That would impose a burden on New York businesses more onerous than the rules of any other state.

The NY LLCTA will take effect on Jan. 1, 2026. Unless the NY LLCTA is further amended, it is limited in its application to non-U.S.-formed LLCs that have registered, or will register to do business, in New York state.¹ Time will tell whether New York state will follow FinCEN's ultimate approach to the final interim rule: informed by the National Small Business United opinion.

Please look for future alerts and webinars that Holland & Knight will be presenting on transparency initiatives, including CTA developments, the FinCEN Residential Real Estate Transfer Rule and NY LLCTA.

Footnote

1. A foreign entity that registered to do business in New York prior to Jan. 1, 2026, must file a disclosure form or an exemption attestation form not later than Jan. 1, 2027, while a foreign corporation that registers to do business in New York on or after Jan. 1, 2026, has 30 days from registration to file a disclosure form or an exemption attestation.

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