On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (“CTA”) and its implementing regulations. This decision halts for now the requirement for businesses to report beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”).
Background on the Corporate Transparency Act
Enacted in 2021 as part of the National Defense Authorization Act, the CTA mandates that certain entities disclose their beneficial owners to FinCEN. The primary aim is to combat illicit activities such as money laundering and terrorist financing by increasing corporate transparency. The reporting requirements predominantly target smaller businesses, as larger entities and publicly traded companies are generally exempt.
Court’s Rationale Behind Corporate Transparency Act Injunction
In the case of Texas Top Cop Shop, Inc. et al. v. Garland, the plaintiffs contended that the CTA exceeded Congress’s constitutional authority and infringed upon state sovereignty. U.S. District Judge Amos Mazzant concurred, stating that the CTA represents an “unprecedented” federal overreach into areas traditionally governed by state law. The judge further described the statute as “quasi-Orwellian,” expressing concerns about its implications for federalism.
Implications of the Injunction for Businesses
The injunction provides immediate relief to the estimated 32.6 million entities that would have been subject to the CTA’s reporting requirements. These businesses are no longer obligated to meet the January 1, 2025 deadline for submitting beneficial ownership information. However, this is a preliminary injunction, not a final ruling on the CTA’s constitutionality. The U.S. Treasury Department has already filed an appeal against this decision, asserting the importance of the CTA in safeguarding the financial system.
Next Steps for Businesses
Given the ongoing legal proceedings, businesses should remain vigilant. While the reporting requirements are currently suspended, a reversal of the injunction could reinstate them swiftly. Therefore, it is prudent for businesses to continue preparing the necessary information to ensure compliance if the injunction is lifted. As such, businesses should stay informed and be prepared to adapt should Treasury Department win its appeal.
Contact ByrdAdatto for the Latest on the Corporate Transparency Act
Stay informed about the latest developments surrounding the Corporate Transparency Act and its impact on your business. Contact ByrdAdatto for guidance on navigating these changes.
