Insight Article

Corporate Transparency Act under scrutiny: key developments and implications

December 23, 2024 | by Kushner LaGraize, LLC

If you've been keeping an eye on the Corporate Transparency Act (CTA), you might have heard some surprising news. A federal district court in Texas recently issued a nationwide injunction that temporarily halts the enforcement of key parts of the CTA. For many businesses, this development brings a mix of relief and uncertainty. 

Let’s break down what’s happening and what it could mean for your company.

Background

Back in 2021, the CTA was introduced to enhance transparency in corporate ownership and curb the misuse of shell companies for activities such as money laundering, terrorist financing, and tax evasion. Under the CTA, certain businesses were required to disclose detailed information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).

The initial deadline for most companies to comply was set for January 1, 2025. This meant gathering and submitting information about owners, officers, and anyone with significant control over the company.

Legal challenges to the CTA

Since its passage, the CTA has been the subject of legal scrutiny, with various lawsuits challenging its constitutionality and the scope of Congress's legislative powers. Key arguments have centered around potential violations of constitutional rights and federal overreach.

Some opponents have argued that the CTA’s reporting requirements violate the First Amendment by forcing companies to disclose sensitive information and the Fourth Amendment by violating privacy expectations.

Other critics have asserted that the CTA is an overreach - extending beyond the powers granted to Congress under the Constitution and Commerce Clause jurisprudence. 

Latest court ruling

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a preliminary injunction against the CTA’s reporting requirements. In simpler terms, this court order puts a temporary stop to the enforcement of these reporting obligations nationwide. 

The case at the heart of this decision is Texas Top Cop Shop, Inc., et al. v. Garland, et al. The plaintiffs argued that the CTA oversteps Constitutional boundaries, particularly questioning whether Congress had the authority to impose such detailed reporting requirements. 

Judge Amos Mazzant, overseeing the case, sided with the plaintiffs, citing concerns that the CTA might infringe upon Constitutional rights and exceed Congressional powers. As a result, businesses are not currently required to submit their beneficial ownership information to FinCEN, and the January 2025 deadline has been put on hold. 

On December 5, 2024, the U.S. Department of Justice filed an appeal against the preliminary injunction, indicating the government's intent to challenge the court's decision.

What does this mean for your business?

For most businesses, this injunction provides temporary breathing room. As long as the injunction stands, you’re not obligated to file your beneficial ownership reports with FinCEN. 

Even though reporting is paused, it’s wise to continue gathering the necessary information. Being prepared ensures that if enforcement resumes, you won’t be scrambling to comply on short notice. The Department of Justice has already filed an appeal, indicating that the legal battle isn’t over. Higher courts could overturn the injunction, leading to the resumption of reporting requirements.

Looking ahead

If you have any questions about how these developments might impact your business or need assistance with compliance strategies, please contact our office.