Less than one month before the January 1, 2025 deadline for millions of companies to submit their beneficial owners' personal information to the U.S. government for anti-money laundering purposes, a Texas federal court has preliminarily enjoined the Corporate Transparency Act (CTA) nationwide.
What you need to know
- "Reporting companies" covered by the CTA need not submit beneficial ownership reports pending a further court order to the contrary.
- The ruling enjoins enforcement of the CTA rules and lifts the burden on reporting companies that already have filed from submitting updates within 30 days of a change to the information contained in a filed report.
- An appeal by the U.S. government and further developments are expected, which also could be impacted when the new Trump administration assumes power in January.
The court's decision
Calling the CTA "quasi-Orwellian"1, Judge Amos Mazzant III concluded that the law likely is unconstitutional because, he found, it violates the Commerce Clause by regulating entities regardless of whether they engage in commercial activity. "The fact that a company is a company does not knight Congress with some supreme power to regulate them in all aspects—especially through the CTA". A decision from an Alabama federal court earlier this year also ruled the CTA unconstitutional2, but enjoined its enforcement only against the parties to that case. An appeal of that separate lawsuit is pending.
As we previously reported in our bulletin, "U.S. beneficial ownership reporting is almost here", the rules implementing the CTA require most U.S. corporations, limited liability companies and limited partnerships—and non-U.S. entities registered to do business in the U.S.—to identify the individuals who own 25% or more of such entity or those who exercise what the CTA deems to be "substantial control" of the entity. Each such individual must submit personal information, including birthdate, residential address, and driver's license or passport information, to the Treasury Department's Financial Crimes Enforcement Network (FinCEN).
The court's order stays the January 1, 2025 deadline for entities that existed as of December 31, 2023 to submit their beneficial ownership reports. It also enjoins enforcement of the CTA rules, which require entities formed or registered to do business in 2024 and that are not otherwise exempt, to submit a beneficial ownership report within 90 days of formation or registration (which timing was set to reduce to 30 days beginning January 1, 2025). And it lifts the burden on reporting companies that already have filed from submitting updates within 30 days of a change to the information contained in a filed report.
What comes next?
We anticipate that the U.S. government will seek an immediate appeal of the ruling and may request a stay of the injunction pending such appeal, which, if granted, could restore imminent deadlines. Subject to the outcome of an appeal, the lawsuit before the Texas court should eventually proceed to a final judgment, which could ultimately restore some or all of the CTA's requirements. As of this writing, we understand that FinCEN's portal is still accepting beneficial ownership reports for reporting companies that prefer to submit a beneficial ownership report, notwithstanding the court's decision, to ensure compliance in the event that filing obligations are reinstated. We expect that FinCEN will retain beneficial ownership information previously submitted if and until a court, Congress or the President directs it to expunge its database.
Footnotes
1 Texas Top Cop Shop, Inc. v. Garland, slip op., No. 4:24-CV-478 (E.D. Tex. Dec. 3, 2024).
2 National Small Business United v. Yellen, 721 F. Supp. 3d 1260 (N.D. Ala. 2024), appeal filed, No. 24-10736 (11th Cir. Mar. 11, 2024).
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