Congress passed the Corporate Transparency Act (CTA) as an anti-money-laundering initiative in 2021. Absent an applicable exemption,[1] the CTA requires all entities formed or registered to do business in the US (reporting companies) to report their beneficial ownership[2] to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
In National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), the National Small Business Association (NSBA) and one of its members brought a suit in the US District Court of the Northern District of Alabama challenging the CTA and FinCEN’s implementing rules. On March 1, 2024, the District Court ruled for the plaintiffs, holding that the CTA is unconstitutional because it “exceeds the Constitution’s limits on the legislative branch.” Slip Op. 3.
The District Court rejected the US government’s arguments that Congress had the power to enact the CTA under its (1) plenary power to conduct foreign affairs, (2) its Commerce Clause authority, and (3) its taxing power, or under its authority to pass laws “necessary and proper” to carrying out those enumerated powers. The District Court identified the “central question” as whether the Commerce Clause authorizes Congress “to regulate non-commercial, intrastate activity when certain entities, which have availed themselves of states’ incorporation laws, use the channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce.” Slip Op. 35 (internal quotation marks omitted). The answer, it found, is “[n]o.” Id.
While the District Court held that the CTA is unconstitutional, its injunction against enforcement applies to only the plaintiffs in this matter, including the NSBA.
What does this mean for CTA compliance? Read more.