A controversial new law that requires reporting companies to report information to the U.S. government about who ultimately owns and controls them is dead—at least for now. A ruling out of the U.S. District Court for the Eastern District of Texas granted the plaintiffs a preliminary injunction, blocking the U.S. Department of Treasury from enforcing the beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA) across the country.
The 2021 law has been under fire from consumer groups since at least 2022, though chatter about it has picked up significantly in the past few months. That’s because a deadline has been looming: a reporting company created or registered to do business before January 1, 2024, only had until January 1, 2025, to file its initial report. This is true even if the company was created years before 2024.
(A reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days to file its initial report, while reporting companies created or registered on or after January 1, 2025, will have 30 calendar days to report).
Reporting Requirements
The law cast a wide net. Companies required to report are called reporting companies. A company may be a reporting company if it is a corporation, a limited liability company (LLC), or other entity created by the filing of a document with the state, local, or federal government (or a foreign company registered to do business in the U.S.)—some exceptions apply. Those reports are filed online with the Financial Crimes Enforcement Network (FinCEN). FinCEN expected to receive over 32 million reports in the first year that the law was effective—this year, 2024.
The law, intended to make it harder for bad actors to hide their identities and ill-gotten gains through shell companies or opaque corporate structures, pulls in companies and owners. The information that must be reported includes details about the owners, including the name, date of birth, address, and a scanned image of an identifying document like a driver’s license or passport—from each so-called “beneficial owner.” The same information, generally, has to be reported for a company applicant—typically the person who helped organize the company (most commonly, a corporate formation company or a lawyer).
That’s a lot of information. And companies were slow to react. Despite FinCEN opening its virtual doors for reporting earlier this year, only about 20% of companies—or six million—have filed a report.
The penalties for failing to comply are harsh. A person who willfully violates the reporting requirements may be subject to civil penalties of up to $500 for each day the violation continues, as well as criminal penalties of up to two years imprisonment and a fine of up to $10,000.
Court Rulings
Months after the CTA went into effect, a federal court found it unconstitutional. The ruling resulted from a lawsuit filed by the National Small Business United (also known as the National Small Business Association, or NSBA) and Isaac Winkles on November 15, 2022. On March 1, 2024, U.S. District Judge Liles C. Burke of the Northern District of Alabama, Northeastern Division, found the CTA unconstitutional. In his opinion, Burke, a Trump appointee, wrote, “Congress sometimes enacts smart laws that violate the Constitution.” This case, he continued, “illustrates that principle.”
(You can read the ruling here.)
However, while the ruling in National Small Business United bars the U.S. Treasury from enforcing the CTA against the Plaintiffs, it does not enjoin enforcement against others—this is a significant difference from the most recent ruling. The Government immediately appealed the ruling to the Eleventh Circuit, and the oral arguments were heard in October of this year (you can listen to those here).
Texas CTA Case
The decision in Texas Top Cop Shop, Inc., et al. v. Garland, et al.—the most recent ruling—at the U.S. District Court for the Eastern District of Texas is different. In that case, Judge Mazzant, an Obama appointee, granted the request of the National Federation of Independent Business (NFIB) for a preliminary injunction, blocking the U.S. Department of Treasury from enforcing the CTA’s reporting requirements. Because NFIB and its nearly 300,000 members were a party to this case, the judge blocked enforcement of the BOI reporting requirements nationwide.
Ironically, in this instance, the plaintiffs appeared to seek relief for the plaintiffs and the NFIB’s members. However, the Government characterized the request as one for a “nationwide injunction,” arguing that if the Court were to enjoin the CTA for the NFIB’s members, then the injunction would, in practical effect, be nationwide. The Court agreed and found that a nationwide injunction was appropriate.
“This ruling is a huge victory for small businesses nationwide, and just in time,” said Beth Milito, Executive Director of NFIB’s Small Business Legal Center. “For many Main Street small businesses, they were a mere four weeks away from the deadline to file their information in accordance with the CTA. The BOI reporting requirements are a harmful invasion of small business owners’ privacy and a misuse of their valuable time. Thankfully, the Court agreed and granted a preliminary injunction, giving small business owners a reprieve from this burdensome rule.”
In its lawsuit, NFIB (which filed suit with the Center for Individual Rights (CIR), Texas Top Cop Shop, Data Comm for Business, Mustardseed Livestock, Russell Straayer, and Libertarian Party of Mississippi) argued that the CTA is unconstitutional because it exceeds Congress’s authority over the states, improperly compels speech and contradicts the right of anonymous association guaranteed by the First Amendment, and violates the Fourth Amendment by forcing the disclosure of private information.
In his 74-page ruling, the Court agreed, noting, “For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government.” Judge Mazzan, writing for the U.S. District Court for the Eastern District of Texas, declared, “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.”
Here’s why the word “likely” matters. The ruling was not a final decision on the case. It was in response to the plaintiffs’ motion for a preliminary injunction. A preliminary injunction is an order issued by a judge early in a lawsuit to stop the defendant from continuing allegedly harmful actions before final judgment. That means that the matter is ongoing.
However, to issue a preliminary injunction, the Court must find that the plaintiffs met certain burdens of proof, including “a substantial likelihood of success on the merits of any of their challenges.” While the ruling is not final in the case, the judge signaled that he believes the plaintiffs will ultimately be successful in the litigation. Having found that to be the case, the judge ruled, “Therefore, the CTA, 31 U.S.C. § 5336 is hereby enjoined. Enforcement of the Reporting Rule, 31 C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed under § 705 of the APA. Neither may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”
Next Steps and Worries
The ruling should mean that no businesses are obligated to comply with the reporting requirements.
But here’s the concern. The Texas case is ongoing, and the FinCEN deadline is January 1, 2025. After the Alabama ruling, NSBA President and CEO Todd McCracken emphasized, “FinCEN should immediately reverse course and suspend enforcement of the CTA for all until these issues are finally resolved.”
The agency did not do so—and it’s not expected to do so now.
A FinCEN spokesperson noted that the agency continues to believe “consistent with the conclusions of other federal courts—that the CTA is constitutional.” Yesterday’s ruling, the spokesperson noted, “is one of several cases pending before courts around the country, including ones in which district courts have denied requests to enjoin the CTA and that are now before courts of appeals.”
As for next steps? The agency didn’t offer any specifics, as they are reviewing the ruling. When asked about any planned appeal, the Department of Justice declined comment (though it’s widely believed that an appeal is certain).
In the meantime, despite some cheering on social media, not everyone thinks it was the right decision. Ian Gary, Executive Director of the FACT Coalition, a non-partisan alliance with a mission to promote policies to combat the harmful impacts of illicit finance on communities, global security, and the environment, said about the ruling, “This wrong-headed injunction is a Christmas gift to criminals who use anonymous shell companies to traffic fentanyl, exploit people, and hide dirty money.”
Gary continued, “The law is clearly constitutional and Congress was well within its powers to pass the law to defend America and protect our financial borders. Two other federal courts have reached the opposite conclusion and denied injunctions in similar cases, so we expect the government to move to stay this outlier order promptly.”
Confusion and Congress
So what happens if the ruling is overturned or another court reaches a different result before the deadline? That would necessarily cause confusion and could result in companies who were waiting for further instruction to miss deadlines. As a result, some advisors are taking the position that it’s better to file than to wait—again, those penalties are draconian.
It’s important to note that this is not something the Treasury has dreamed up. Congress passed the law in 2021, with a version initially introduced in 2019. The House passed the initial version of the CTA in 2019 with a 249-173 vote, but it didn’t make its way to a full Congressional vote until the following year when it was added to the fiscal year 2021 National Defense Authorization Act (NDAA). The final version of the bill was agreed on by the House and Senate in December 2020, where it was promptly vetoed by then-President Trump for, among other things, not repealing section 230 of the 1996 Communications Decency Act (two other sticking points included increases to stimulus checks and starting an investigation into alleged voter fraud).
When the bill returned to Congress, Senate Majority Leader Mitch McConnell (R-KY) urged his colleagues to overturn the veto, saying, “For the brave men and women of the United States armed forces, failure is not an option. So when it is our turn in Congress to have their backs, failure is not an option here either. I urge my colleagues to support this legislation one more time.” The veto was quickly overridden with a House vote of 322-87 and a Senate vote of 81-13 on January 1, 2021.
Congress has not, for several years since, taken any serious steps to delay or repeal the provisions. Last month, 44 members of the House sent a letter to FinCEN requesting a one-year delay of the reporting deadline (that’s only about 10% of the House membership). It doesn’t feel like there is much political will to change it.
After the Alabama ruling, the NSBA noted, “If Congress does not repeal the CTA, eventually the Supreme Court will need to address this issue as well and strike down the statute for the entire United States.”
That appears to be where things are headed.
(Author’s note: The article was updated to reflect a ruling from the FACT Coalition.)
Read the full article here
