By Ramona Morgan, Senior Associate
In a recent judgment that has caught the attention of the legal and business communities, a Federal District Court in the Northern District of Alabama has held that the Corporate Transparency Act (CTA) is unconstitutional. It was a noteworthy development for legislation that has been many years in coming and would finally require compliance by existing companies by January 1, 2025.
The CTA, which came into effect in January 2024, was enacted to deter illicit activities by enhancing transparency in business ownership, mandating that certain companies disclose their beneficial owners (see our previous article regarding the CTA here). Beneficial owners are defined as individuals with direct or indirect “substantial control” over the company or who own at least 25% of the company’s ownership interests. The Act aims to prevent the misuse of shell companies and aid law enforcement in combatting money laundering, tax fraud, terrorism financing, drug trafficking, corruption, and other illicit activity conducted through anonymous shell companies.
At the heart of the controversy is the CTA’s attempt to peel back the layers of anonymity often associated with shell companies. The Act mandates that non-exempt domestic and foreign entities disclose the personal identifying information of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), which houses this data in a secure, private database accessible under strict conditions.
However, this ambition has been met with resistance. The National Small Business Association (NSBA) asserted that the law was an overstep of the boundaries set by the Constitution. The Court agreed with them. However, it is important to note that this ruling applies specifically to the plaintiffs involved in the lawsuit, leaving the broader applicability of the CTA intact for other entities, as clarified by FinCEN, the agency tasked with the Act’s implementation (see FinCEN’s guidance on this issue here).
This dynamic reflects the precarious balance between the demand for regulatory transparency and the need for constitutional safeguards. While there is a trend toward greater transparency for enforcement and regulatory purposes, businesses are also pushing back with their privacy concerns.
So, what does this mean for businesses and their compliance obligations? Despite the ongoing legal challenges, the primary directive remains straightforward: continue to adhere to the CTA. The government’s decision to appeal highlights that this legal dispute is yet to reach a conclusion. Until a definitive ruling with broader implications is issued, businesses that are not explicitly covered by the ruling are advised to proceed with compliance. Seeking advice from legal professionals to understand these obligations can assist businesses in staying ready for any regulatory changes.
If you have any further questions regarding compliance with the CTA, please contact Ramona Morgan.
