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A district judge in Alabama Friday ruled that the U.S. Corporate Transparency Act is unconstitutional, potentially throwing a wrench into the government’s collection of corporations’ and other legal entities’ beneficial ownership data as mandated by the 2021 law.

Judge Liles Burke in Huntsville, Ala. ruled in a 53-page opinion in favor of the National Small Business Association (NSBA) and member Isaac Winkles against the U.S. Treasury.

Specifically, he rejected Treasury’s argument that the CTA rests on Congress’ recognized authority to regulate interstate commerce, foreign affairs involving national security, and the administration of taxes.

“The Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers,” the judge concluded in the 53-page ruling.

Treasury’s Financial Crimes Enforcement Network began on Jan. 1 collecting ownership information from corporations and other legal entities as required under the law, and has received more than 100,000 ownership reports.

Treasury will likely appeal the ruling at both the district level in Northern Alabama and the 11th Circuit Court of Appeals, Thomas Lee, special counsel at Hughes Hubbard & Reed in New York who represented NSBA, told ACAMS moneylaundering.com.

“In all likelihood, this decision will be overturned but, in any event, it is a lower court decision that is only applicable in the Northern District of Alabama,” Daniel Stipano, a partner at Davis Polk & Wardwell and former chief deputy counsel in the Office of the Comptroller of the Currency, told moneylaundering.com.

If the decision is not stayed pending appeal it could disrupt the implementation of FinCEN’s beneficial ownership database, Lee said. Although the ruling only applies to the 65,000 members of the NSBA, segregating those company owners and continuing to collect ownership information from others would face substantial practical difficulties.

“It’s going to be an enforcement decision for them,” Lee said.

Experts had predicted a slim chance of success for NSBA’s lawsuit because established precedent gives Congress broad authority to regulate business under the Constitution’s commerce clause. But Burke ruled that merely filing incorporation papers to form a legal entity, a process administered at the state level, does not qualify as commerce.

“[T]he CTA does not regulate commerce on its face,” he wrote.

His decision made it unnecessary to evaluate whether the CTA violated constitutional privacy protections as NSBA had argued, Burke concluded.