Despite the bipartisan effort to increase corporate transparency under US law, an Alabama federal district judge has ruled that the Treasury Department cannot require small business owners to report details of their owners and others who benefit from the business.

US District Judge Liles C Burke decided that the Corporate Transparency Act (CTA), the landmark US anti-money-laundering law enacted as part of the National Defense Authorization Act for fiscal year 2021, is unconstitutional on the grounds that Congress exceeded its powers in enacting the law. That makes the law itself unlawful.

The National Small Business Association (NSBA) filed the suit in November 2022, seeking to block the requirement that tens of millions of small businesses register with the government as part of an effort to prevent the criminal abuse of anonymous shell companies.

The ruling

The act became effective on January 1, and Congress had hoped it would help stop money-laundering by rooting out the use of anonymous shell companies, track the flow of illicit money, and protect US national security interests.

The beneficial ownership part of the law involves the creation of a database and reporting requirements for companies to file ownership information to the Treasury, similar to existing requirements in the UK and the EU. The law focuses primarily on small and private companies and applies to more than 32.5 million small businesses nationwide, with about five million new entities expected to join each year.

By mid-February, about a half million reports had been filed under the CTA, according to the department at the Treasury overseeing the program, the Financial Crimes Enforcement Network.

“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’s policy goals.”

Judge Burke

In National Small Business United d/b/a National Small Business Association v. Yellen, the judge held that the CTA exceeded Congress’s authority to regulate interstate commerce.

The court also observed that the CTA applies to corporate entities even if the entity conducts purely intrastate commercial activities or no commercial activities at all. Lastly, the court concluded that the CTA’s disclosure requirements could not be justified as a data-collection tool for tax officials as that would raise the specter of “unfettered legislative power.”

The court issued a declaratory judgment to state the CTA is unconstitutional and enjoined the federal government from enforcing the CTA’s reporting requirements against the plaintiffs in that litigation. The ruling was not a nationwide injunction; it specifically applies to the government enforcing it against these plaintiffs.

“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,” Judge Burke, a Trump appointee, wrote in the ruling.

The NSBA had argued that the reporting rule violates the Constitution, saying it is unduly burdensome on small firms, violates privacy and free-speech protections and infringes on states’ powers to govern businesses.

It is likely the government will appeal the decision, but the court’s injunction and declaration will remain in effect unless a stay is granted. An appeal would be heard by the Eleventh Circuit Court of Appeals, which has jurisdiction over Alabama, Georgia and Florida.

GRIP comment

The main impact of the court’s decision is to create uncertainty on entities’ ongoing obligations under the CTA.

Although the court purported to limit its injunction to the parties in the litigation, the lead plaintiff in the suit is a small business lobbying group with over 65,000 members. And it is certainly possible the ruling will inspire “copycat” suits in other districts.

It should be noted that a number of states, such as New York, have passed or are planning to pass into law their own versions of the CTA. The ruling on Monday does not affect the implementation of those laws, as it is based on interpretations of Congress’s authority under the US Constitution. 

The US government is likely to not only appeal the decision but also to seek an interim stay of the ruling from both the trial and appellate courts. Winning a “stay” involves filing a motion, which the courts will consider in light of: (1) how likely it is that the government will succeed on appeal; (2) whether the government will be irreparably harmed without a stay; (3) whether a stay will injure other parties interested in the litigation; and (4) whether a stay would benefit the public interest.

An important point here is that the current injunction only applies to enforcement of the CTA against the plaintiffs, so other reporting companies (those that are not plaintiffs in this case) are still bound by the CTA and should continue to comply unless exempt under other provisions.

Another one is this: Congress overwhelmingly voted to enact the bipartisan CTA to crack down on the opaque means that help to disguise the true use and ownership of significant money flows. It is unlikely the government will not seek out other avenues (judicial and legislative) to reach these goals.