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Compliance & Risk

US federal judge rules Corporate Transparency Act unconstitutional, future of beneficial ownership regime in limbo

Brett Wolf  Regulatory Intelligence

· 5 minute read

Brett Wolf  Regulatory Intelligence

· 5 minute read

A ruling out of an Alabama court saying the CTA is unconstitutional throws the whole question of requiring beneficial ownership information from companies into doubt

A U.S. District Court judge in Alabama has ruled unconstitutional the Corporate Transparency Act (CTA), which was enacted as part of the Anti-Money Laundering Act of 2020 and underpins the nascent beneficial ownership reporting regime.

The ruling’s ultimate impact on the US beneficial ownership information reporting requirement cannot be known at present, as the government is expected to appeal, although a Treasury Department official said that the department was complying with the court’s injunction.

“The Government says that the CTA is within Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations,” Judge Liles C. Burke wrote in the ruling, issued March 1. “The Government’s arguments are not supported by precedent. Because the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress policy goals.”

In short, Burke’s ruling suggested that there was not a clear enough case that the CTA was supported on the grounds of national security. Judge Burke’s ruling was the product of a legal challenge brought by the National Small Business Association (NSBA) and one of its members against the Secretary of the U.S. Treasury Department.

Treasury’s CTA implementation

Treasury’s Financial Crimes Enforcement Network (FinCEN) has written rules implementing the CTA’s reporting requirements and dictating which parties will have access to the beneficial ownership information held in the database.

FinCEN’s rule defines “beneficial owner” as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” Tens of millions of entities, many of them small businesses, are affected by the reporting requirement, which aims to unmask the owners of complex legal entities and make it harder for criminals to abuse shell companies.

FinCEN began collecting ownership information on January 1, with plans to allow high-priority government authorities to access the data this year. It is not immediately clear, however, to what degree information collection and dissemination will be affected by Judge Burke’s decision.

The order “only applied to enjoin the CTA’s reporting requirements as to the plaintiffs, including NSBA member entities across the country,” said Thomas H. Lee, the lawyer who challenged the act on behalf of the NSBA. Lee is with Hughes Hubbard & Reed in New York. “The government may move for a stay pending appeal, but it has not yet filed.”

When asked, a Treasury official said that “Congress overwhelmingly voted to enact the bipartisan (CTA)… to crack down on illicit shell companies and combat financial crime. We are complying with the Court’s injunction and refer you to [the Department of Justice] for any further information about the case.” The Department of Justice did not immediately return a request for comment.

Last year, the nonpartisan FACT Coalition joined Transparency International U.S. and small business group, Main Street Alliance, to file an amicus brief in support of the CTA. That brief emphasized the law’s core national security function and the limited nature of the information being collected.

“Pro-crime, pro-drug cartel, pro-fentanyl ruling”

Ian Gary, executive director of the FACT Coalition, said Judge Burke’s order “is a pro-crime, pro-drug cartel, pro-fentanyl ruling which undermines the rule of law and allows criminals to use anonymous shell companies to hide their dirty money from law enforcement. Close to a million law-abiding companies have already complied with the law, and this ruling should be stayed and overturned on appeal,” Gary said in a statement.

Zorka Milin, policy director at the FACT Coalition, concurred, adding: “We urge the government to promptly appeal and to request to stay the district court’s injunction pending appeal.”

Peter Djinis, a former regulatory policy official with FinCEN, said he does “not find the court’s opinion persuasive,” adding “I will wait and see how this develops through the inevitable appellate process. This certainly throws a monkey wrench into the long-delayed implementation of the Corporate Transparency Act.”

For more on the beneficial ownership database, listen to this episode of the Thomson Reuters Institute Insights Podcast channel on Spotify

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