The Corporate Transparency Act (CTA), enacted in 2021, mandates that most businesses disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. The aim of the CTA is to combat money laundering, terrorist financing, and other illicit activities by increasing transparency in corporate ownership. The implementation of the CTA has, however, been fraught with legal challenges, leading to uncertainty and confusion for businesses obligated to comply.
The legal battle over the CTA began in earnest in 2024 with several lawsuits challenging its constitutionality. One prominent case, Texas Top Cop Shop, Inc., et al. v. Garland, et al., resulted in a nationwide preliminary injunction issued by Judge Amos Mazzant in the Eastern District of Texas, temporarily blocking FinCEN from enforcing the CTA’s reporting requirements. Judge Mazzant sided with the National Federation of Independent Business (NFIB), arguing that the CTA likely exceeded Congress’s constitutional authority. This decision provided temporary relief to businesses facing the rapidly approaching January 1, 2025, reporting deadline.
The government swiftly appealed Judge Mazzant’s ruling to the Fifth Circuit Court of Appeals, seeking a stay of the injunction pending the appeal. The government argued that the injunction disrupted its efforts to combat financial crimes and that the plaintiffs had ample time to prepare for compliance since the CTA’s enactment. The Fifth Circuit agreed with the government, granting the stay and effectively reinstating the reporting requirements while the appeal process continued. This reversal created a renewed sense of urgency for businesses as the January 1 deadline loomed.
The Fifth Circuit’s decision contradicted an earlier ruling in National Small Business United v. Treasury, where a federal court in Alabama deemed the CTA unconstitutional. This conflicting legal landscape further complicated the situation for businesses, with some shielded from reporting requirements due to the Alabama ruling while others remained obligated under the Fifth Circuit’s decision. The government also appealed the Alabama ruling, leading to additional legal proceedings in the Eleventh Circuit Court of Appeals.
The back-and-forth court rulings created considerable uncertainty for businesses struggling to navigate the evolving legal landscape. Trade associations like the NFIB and the National Small Business United (NSBA) continued to challenge the CTA’s constitutionality, advocating for their members’ interests and pushing for legislative action to repeal or amend the law. While Congress considered including a provision to delay the CTA’s reporting deadline in a funding bill, this ultimately did not materialize, leaving businesses facing the imminent January 1, 2025, deadline.
The ongoing legal challenges and the rapidly approaching deadline created a frantic scramble for businesses to comply. While some sought legal counsel and guidance, others opted to voluntarily submit their beneficial ownership information to FinCEN despite the ongoing litigation. The contradictory court rulings, combined with the looming deadline, generated considerable stress and confusion for businesses unsure of their obligations.
Despite the temporary reprieve offered by the initial injunction, the Fifth Circuit’s decision to stay the injunction reinstated the reporting requirements, leaving businesses with limited time to comply with the CTA’s mandates. This legal rollercoaster highlighted the complexities of implementing new financial regulations, especially when facing constitutional challenges and conflicting court rulings. The future of the CTA remains uncertain, with ongoing litigation and the possibility of congressional action further shaping its implementation and enforcement. Businesses are left to navigate this complex legal landscape, balancing the need for compliance with the desire for clarity and stability in the regulatory environment. The ongoing legal challenges to the CTA underscore the tension between government efforts to combat financial crime and concerns about the potential burden on businesses, particularly small businesses.
