Supreme Court Clears Path for CTA Amid Ongoing Legal Battles

The U.S. Supreme Court this week lifted a nationwide injunction on the Corporate Transparency Act (CTA), allowing the federal government to enforce the law's provisions at the behest of small businesses across the country.

The CTA mandates that corporate entities disclose their beneficial ownership information (BOI) to the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) to combat financial crimes such as money laundering, tax fraud, and terrorism financing.

Texas two-step

The injunction was initially imposed by a federal judge in Texas, who ruled that the CTA exceeded Congress's constitutional authority under the Commerce Clause.

This decision spurred challenges from small business groups, including the National Federation of Independent Business (NFIB) and the conservative Center for Individual Rights, who argued that the reporting requirements imposed undue burdens on small businesses.

Despite the Supreme Court's decision to lift the injunction, enforcement of the CTA remains on hold due to a separate nationwide injunction issued by another federal judge.

This means that, for the time being, companies are not required to file beneficial ownership information with FinCEN and will not face penalties for non-compliance while the injunction is in effect. Regardless, FinCEN is accepting voluntary submissions from companies that choose to comply ahead of any future enforcement.

Shelling the shells

The CTA, enacted in 2021, aims to increase corporate transparency by requiring corporations and limited liability companies (LLCs) to report information about their beneficial owners to FinCEN. A beneficial owner is defined as an individual who directly or indirectly owns or controls a company.

The law's supporters argue that it addresses the growing use of anonymous shell companies in the U.S. for illicit activities.

The Biden administration emphasized the importance of the CTA in preventing, detecting and prosecuting financial crimes. In its brief to the Supreme Court, the administration argued that the law falls within Congress's authority under the Commerce Clause to regulate economic activities affecting interstate commerce.

The push back

Opponents of the CTA, particularly small business advocacy groups, contend that the reporting requirements impose significant burdens on small businesses. They argue that the law's mandates are overly intrusive and could lead to privacy concerns for business owners.

The legal challenges surrounding the CTA have created uncertainty for businesses regarding compliance obligations. While the Supreme Court's decision lifts one injunction, the existence of a separate nationwide injunction means that the law's enforcement is still paused.

Businesses are advised to stay informed about ongoing legal developments and be prepared to comply with reporting requirements if and when the injunctions are lifted.

The Fifth Circuit Court of Appeals is scheduled to hear arguments on the merits of the case in the coming months. The outcome of these proceedings will have significant implications for the future enforcement of the CTA and the regulatory landscape for corporate transparency in the United States.

In the meantime, FinCEN continues to accept voluntary submissions of beneficial ownership information. Companies that choose to submit this information proactively may do so, but there is currently no legal obligation to file until the injunctions are resolved.

Still fluid

As the situation evolves, businesses should consult with legal counsel to understand their obligations under the CTA and to prepare for potential compliance requirements in the future. Staying informed about the legal proceedings and any changes to the law will be crucial for businesses to navigate this complex regulatory environment.

The ongoing legal battles highlight the tension between efforts to increase corporate transparency and concerns about regulatory burdens on businesses. The resolution of these cases will play a pivotal role in shaping the balance between these competing interests in the U.S.