The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) said it is appealing a ruling by a Texas judge blocking the implementation of a law intended to tamp down on the use of anonymous shell companies by criminals and other nefarious actors.

The ruling by District Judge Amos Mazzant on the financial reporting law comes just weeks before the January 1, 2025, deadline by which small businesses and certain corporate entities were due to report information about their owners as part of the Corporate Transparency Act, a bipartisan law implemented on January 1, 2024.

FinCEN spent this summer and fall pushing to get corporate entities to submit the required information.

But as that deadline for reporting companies formed prior to 2024 approaches, reporting companies should think twice before forgoing their CTA compliance efforts.

The ruling

The recent ruling stays all deadlines to comply with the CTA’s reporting requirements. The Department of Justice, on behalf of the Department of the Treasury, filed a Notice of Appeal on December 5, 2024.

The Texas case is only one of several that are pending before courts around the country in which plaintiffs have challenged the CTA. Several district courts have denied requests to enjoin the CTA, ruling in favor of the Department of the Treasury.

The government issued a statement saying it continues to believe – consistent with the conclusions of the US District Courts for the Eastern District of Virginia and the District of Oregon – that the CTA is constitutional.

FinCEN instructed businesses this way on its website: “While this litigation is ongoing, FinCEN will comply with the order issued by the US District Court for the Eastern District of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

FinCEN has estimated that there were more than 32 million entities that would need to register under the new program. And there is still significant support from an array of business advocacy groups and lawmakers across the political spectrum that it is needed to plug a gap for those businesses that do not have to report ownership details to the government.

Characterizing the CTA as a “flanking, quasi-Orwellian statute,” Judge Mazzant concluded that matters involving corporate formation have traditionally fallen to the states and that Congress exceeded its powers in regulating this activity.

The CTA

The CTA requires reporting companies to report information about themselves, personal identifying information (PII) about the individuals – called beneficial owners – who own 25% or more of the ownership interests in the entity or exercise substantial control over the entity.

The reporting company sends this information to FinCEN, which has said it maintains such information on a secure, nonpublic database for use by governmental authorities, certain financial institutions and financial regulators.

Limited liability companies and statutory trusts are examples of those reporting companies that will now need to submit such information.

The impetus behind its creation was to upgrade our country’s anti-money laundering laws. For years, experts have said anonymous shell companies— those entities in which the true, ‘beneficial’ owners are unknown — are the biggest weakness in the country’s anti-money laundering safeguards.

Senator Mark Rubio (R-FL) first introduced the bipartisan Corporate Transparency Act with Senator Ron Wyden (D-OR) in August 2017.

In August 2018, Senators Rubio, Wyden, and Sheldon Whitehouse (D-RI) secured bipartisan legislation to lay the groundwork to expand a Treasury initiative to curb foreign nationals laundering money through high-end real estate. And in May 2021, Rubio and colleagues sent a bipartisan comment to FinCEN urging the efficient, effective implementation of a beneficial ownership reporting system, as required by the CTA.

Don’t dream it’s over

The CTA might not be fatally wounded. The bipartisan push to create it is not suddenly gone, and as the law’s authors noted in advocating for it, Vladimir Putin’s invasion of Ukraine amplified the importance of the CTA. “The federal government cannot properly implement sanctions against Putin and his oligarchs if it does not know the full extent of their holdings,” Rubio said at the time.

And the threat of illicit finance by way of anonymous shell companies is a national security threat – a well-accepted principal – with the idea of kleptocrats, sanctioned individuals, and other corrupt actors secretly benefiting from the US economy not being one either political party wants to take too lightly.

But there has been some disagreement in the lawsuits involving it over whether the power to collect the information is one that was granted to Congress by the US Constitution and whether it would pose too much of a burden on smaller reporting companies.

To that end, FinCEN has already published a Small Entity Compliance Guide to assist the small business community in complying with the reporting rule

“This ruling is a huge victory for small businesses nationwide, and just in time,” Beth Milito, an executive director for the National Federation of Independent Business’s Small Business Legal Center, said in a statement. “The [beneficial ownership information] reporting requirements are a harmful invasion of small-business owners’ privacy and a misuse of valuable time.”

Given the division in the courts in terms of the powers granted to Congress and the burdens imposed (the latter being something that could possibly be adjusted to save the law), it’s not a great idea to assume it’s a dead law.

“Everyone is asking, ‘What do we do?’” said Alan Winston Granwell, a lawyer at law firm Holland & Knight. 

Granwell said his firm was advising clients to continue preparing for the law. “If they haven’t done the work now and decide to wait, and say for some reason the order is reversed, they are going to have a very difficult time getting their act together and filing by the first of January.”