Federal Court of Appeals Stays Corporate Transparency Act Mandating Disclosure of Company “Beneficial Owners”

Federal Court of Appeals Stays Corporate Transparency Act Mandating Disclosure of Company “Beneficial Owners”

Under a federal statute passed in 2021 called the Corporate Transparency Act (CTA), millions of entities incorporated under various state laws would have been required by January 1, 2025 to provide detailed information about “beneficial owners,” meaning those who own 25% or more of the company or who direct substantial company-wide operations, to the U.S. Department of the Treasury.

This law was designed to combat money laundering and the use of shell corporations by shady corporate entities engaged in corporate criminal activity, but on December 3, 2024, a Texas federal court enjoined the CTA’s reporting requirements, calling the federal statute “quasi-Orwellian” and holding that the statute likely violates the United States Constitution.

Then, in a double switcheroo, the federal Fifth Circuit court of appeals lifted the injunction on December 23, and then three days later reinstated it. So as it stands now, the law is on hold and corporations do not have to report beneficial owners to the Department of the Treasury.

From Reuters: US appeals court halts enforcement of anti-money laundering law:

A U.S. appeals court has halted enforcement of an anti-money laundering law that requires corporate entities to disclose the identities of their real beneficial owners to the U.S. Treasury Department ahead of a deadline for most companies to do so.

The New Orleans-based 5th U.S. Circuit Court of Appeals reinstated late Thursday a nationwide injunction that had been issued this month by a federal judge in Texas who had concluded the Corporate Transparency Act was unconstitutional…

[I]n Thursday’s order, the court said it decided to keep enforcement of the law paused “to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments.”

* * *

The injunction had been obtained by the National Federation of Independent Business, which along with several small businesses challenged the law through lawyers at the conservative Center for Individual Rights.

“Given that we have established that the CTA is likely unconstitutional, this intrusive form of government surveillance should be halted until the law’s fate is finally resolved,” Todd Gaziano, the Center for Individual Rights’ president, said in a statement.

Under the law, which was enacted in 2021, corporations and LLCs were required to report information concerning their beneficial owners to FinCEN [the Treasury’s “Financial Crimes Enforcement Network”], which collects and analyzes information about financial transactions to combat money laundering and other crimes.

The measure’s supporters said it was designed to address the country’s growing popularity as a venue for criminals to launder illicit funds by setting up entities like limited liability companies under state laws without disclosing their involvement.

U.S. District Judge Amos Mazzant in Sherman, Texas, on Dec. 3 ruled Congress had no authority under its powers to regulate commerce, taxes and foreign affairs to adopt the “quasi-Orwellian statute” and that it likely violated states’ rights under the U.S. Constitution’s Tenth Amendment.

At first glance, it seems like maybe this law is a good thing, especially since money laundering and other corporate crimes likely finance many illicit schemes including illegal drug distribution and maybe even human trafficking.

But looking at Judge Mazzant’s order, which stayed implementation of the statute in question provides some insight into what he found objectionable:

Legislative ingenuity, dispatched to meet today’s problems, is not measured by any other standard than our written Constitution. Modern problems may well warrant modern solutions, but modernity does not grant Congress a roving license to legislate outside the boundaries of our timeless, written Constitution. See, e.g., Louisiana v. Biden, 55 F.4th 1017, 1032 (5th Cir. 2022) (“The Constitution is not abrogated[, even] in a pandemic.”). The Constitution must stand firm.

In the matter before the Court, Plaintiffs challenge an unprecedented law known as the Corporate Transparency Act (“CTA”). It represents Congress’s attempt to combat bad actors’ ability to cloak their criminal activities in a veil of corporate anonymity. At its most rudimentary level, the CTA regulates companies that are registered to do business under a State’s laws and requires those companies to report their ownership, including detailed, personal information about their owners, to the Federal Government on pain of severe penalties. Though seemingly benign, this federal mandate marks a drastic two-fold departure from history. First, it represents a Federal attempt to monitor companies created under state law—a matter our federalist system has left almost exclusively to the several States. Second, the CTA ends a feature of corporate formation as designed by various States—anonymity. For good reason, Plaintiffs fear this flanking, quasi Orwellian statute and its implications on our dual system of government. As a result, Plaintiffs contend that the CTA violates the promises our constitution makes to the People and the States. Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power. And even in the face of the deference the Court must give Congress, the CTA appears likely unconstitutional. Accordingly, the CTA and its Implementing Regulations must be enjoined.

Nice to see a federal district court actually taking the U.S. Constitution seriously.

The court went on to hold that the costs imposed on the millions of corporations under the CTA could never be recovered, because “the federal government generally enjoy[s] sovereign immunity for any monetary damages,” making such damages “irreparable.” And these costs are not small or de minimis:

[a]ssuming that all reporting companies are small businesses, the burden hours for filing BOI [(beneficial ownership information)] reports would be 126.3 million in the first year of the reporting requirement (as existing small businesses come into compliance with the rule) and 35 million in the years after. FinCEN estimates that the total cost of filing BOI reports is approximately $22.7 billion in the first year and $5.6 billion in the years after.

And the court held that the statute likely violates the First and Fourth Amendments to the U.S. Constitution:

the record before the Court contains sufficient facts to indicate the CTA and the Reporting Rule may violate the Constitution…Absent injunctive relief, come January 2, 2025, Plaintiffs would have disclosed the information they seek to keep private under the First and Fourth Amendments and surrendered to a law that they contend exceeds Congress’s powers. That damage “cannot be undone by monetary relief.” That harm is irreparable.

The court also held that the CTA was not valid under the commerce clause because “[t]he CTA does not regulate channels of, or instrumentalities in, commerce,” only formation of corporations and reporting about them. And, “[t]he CTA does not regulate an activity—it creates one.”

The court then issued a nationwide injunction staying reporting under the CTA.

So of course the government appealed. And on December 23, a three-judge panel of the Fifth Circuit lifted Judge Mazzant’s injunction, making the CTA’s reporting requirement mandatory again, because “the government has made a strong showing that it is likely to succeed on the merits in defending CTA’s constitutionality.”

But then, in a surprise “text order” with no accompanying pdf document explaining its reasoning in detail, the Fifth Circuit held that “[i]n order to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments, that part of the motions-panel order granting the Government’s motion to stay the district court’s preliminary injunction enjoining enforcement of the CTA and the Reporting Rule is VACATED.”

So as it stands now, briefing is scheduled to be submitted in February 2025, with oral argument scheduled in March of 2025. If it takes the Fifth Circuit several months to issue a ruling that means it should come out some time in mid-2025.

Then, of course, however it comes out, the loser will ask the Supreme Court to take the case.

Of course this could all be thrown off kilter by the incoming Trump administration.

We’ll see.

🚨🚨Another insane BOI Update🚨🚨

5th Circuit today has vacated its own motions panel’s decision to stay the District Court’s injunction against enforcement of the CTA.

The takeaway of that word salad?

The injunction is back!! 🎉

Enforcement of the Corprate Transparency Act… pic.twitter.com/459Go7iFGe

— Kevin Henderson (@KHendersonCo) December 27, 2024

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