The recently instituted Corporate Transparency Act (CTA) aims to combat money laundering, terrorism financing, and other illicit business activities. Under the CTA, certain businesses must report their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN).
This article explores a recent U.S. District Court of Northern Alabama ruling that deemed the Corporate Transparency Act unconstitutional. We shed light on its implications for businesses and aim to clarify misconceptions surrounding the ruling's implementation.
The Corporate Transparency Act ruled unconstitutional
On March 1, 2024, the U.S. District Court issued a summary judgment in favor of the National Small Business Association (NSBA) declaring the CTA unconstitutional. The case originates from a lawsuit filed by an individual NSBA member alleging the CTA violates five U.S. constitutional amendments (first, fourth, fifth, ninth, and tenth).
The federal district judge ruled that the Corporate Transparency Act “exceeds the Constitution’s limits on Congress’ power” thus preventing the federal government from enforcing the CTA. The injunction only applies to the plaintiffs in the action, namely Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the NSBA, and members of the NSBA as of March 1, 2024.
The U.S. Treasury Department, of which FinCEN is a division, has appealed the decision. However, the Department has stated it will not enforce the CTA against the plaintiffs while litigation is ongoing.
Misconception about whom the Alabama ruling applies to
The Alabama ruling only applies to the plaintiffs in this case, namely the NSBA and its existing members as of the March 1, 2024, ruling date. The CTA will remain in effect for all other non-exempt businesses.
For the NSBA and its 65,000 members, for now, the CTA cannot be enforced. Notably, 40% of these members are already exempt from the legislation due to falling under one of the Act's 23 specified exemptions including the large operating corporation exemption.
All other businesses, such as non-NSBA members and those who were not plaintiffs in the action, must continue to comply with the Corporate Transparency Act's Beneficial Ownership Information reporting requirement. According to FinCEN, this amounts to approximately 32 million companies.
In addition, businesses that join the NSBA after the March 1 ruling date, are not within the scope of the ruling and must still comply with the CTA, unless they meet one of its 23 exemptions.
Until further guidance is issued by the court or FinCEN, non-exempt companies must comply with the CTA’s BOI reporting requirements.
CT Corporation will continue to monitor the ruling and any further actions.
Misconception on what is required
Since the CTA went into effect on January 1, 2024, many businesses are concerned about the potentially burdensome BOI reporting requirements, particularly for small businesses that lack compliance teams of staff attorneys.
FinCEN has developed resources designed to assist businesses in navigating the necessary steps to ascertain whether a filing is necessary, and if it is, what specific information must be included in the filing. Should any inquiries arise, they can also be submitted for clarification. While the Justice Department, on behalf of the Department of Treasury, is appealing the Alabama ruling, companies who are not plaintiffs in the action or who joined the NSBA on or after March 1, 2024, should view the CTA as in full force and prepare to make required BOI filings by the applicable deadlines.
Civil and Criminal Penalties
The director of FinCEN, Andrea M. Gacki, recently testified before Congress, stating that FinCEN has no interest in hitting small businesses with excessive fines or penalties. The CTA penalizes willful violations of the law and is not seeking to take “gotcha” enforcement actions.
However, small businesses should be aware of the risk of non-compliance. Penalties for willfully not complying with BOI reporting requirement can result in criminal and civil penalties. The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil or criminal penalties, including civil penalties of up to $590 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.
Learn more
It can be easy to get caught up in headlines, so it is especially important to get all the facts and information to avoid missing critical regulatory details that may affect you or your business directly. Additionally, collaboration between federal and state authorities can help ensure consistency and clarity in messaging regarding ongoing requirements of implementing corporate transparency measures nationwide.
Since the ruling by the Alabama U.S. District Court, two subsequent lawsuits have been filed. Both lawsuits, one filed in U.S. District Court of Maine and the other in the U.S. District Court in the Western District of Michigan, Southern Division, also dispute the CTA's constitutionality.
CT Corporation is monitoring the legal developments of the Alabama ruling including the Department of Treasury’s appeal and will provide additional information and guidance as the two additional cases proceed.
Need to find out if the Corporate Transparency Act applies to you? Take our quiz to help determine your eligibility.
To learn more about how CT Corporation can help, contact a CT Corporation service representative or visit our Corporate Transparency Act resource page where you can sign up for updates.
