News

A U.S. district judge’s ruling against the Corporate Transparency Act promises to disrupt the Treasury Department’s collection and provision of beneficial ownership information while the anticipated appeals process play out, legal analysts told ACAMS moneylaundering.com.

Judge Liles Burke of the U.S. District Court of Northern Alabama ruled the Corporate Transparency Act, or CTA, unconstitutional on March 1, enjoining Treasury’s Financial Crimes Enforcement Network, or FinCEN, from enforcing the 2021 law against the winning plaintiff, the National Small Business Association and the group’s 65,000 members.

FinCEN, which appealed against the ruling Monday, continues to collect information from the estimated 32 million limited liability companies and other legal entities that must identify their true owners by Jan. 1, 2025, pursuant to the law, but noted that in light of the injunction, it will no longer enforce disclosure against those that held membership in NSBA as of March 1.

“That FinCEN acknowledges the injunction applies to the NSBA’s existing membership … raises serious doubts about the government’s ability to enforce the CTA’s reporting requirements,” said Seth Ashby, partner at the Varnum law firm in Grand Rapids, Michigan.

FinCEN’s regulation to implement the CTA’s reporting requirement gives legal entities formed before Jan. 1, 2024, until Jan. 1, 2025, to supply the names, birthdates, addresses, social security numbers or other “unique identifying numbers” of any individual who owns 25 percent or more of their shares or controls their operations.

Entities formed from Jan. 1 to Dec. 31, 2024, will have 90 days from their inception to supply such information.

But imposing fines up to $10,000 and potentially making criminal referrals against non-compliant companies outside of the NSBA while giving members of the organization a pass for similar misconduct would place FinCEN in an untenable position.

Rather than observe a dual-track enforcement regime, FinCEN could opt to refrain from requiring any party to observe the regulation until the bureau’s challenge eliminates all legal ambiguities arising from Burke’s ruling, said Emmanuelle Litvinov, an attorney at the DarrowEverett law firm in Miami.

Review of FinCEN’s challenge against Burke’s ruling falls to the 11th U.S. Circuit Court of Appeals in Atlanta, which has a track record of tightly limiting federal authority.

In November, a three-judge panel for the Circuit—whose rotation of 12 judges includes five appointees of former President Donald Trump—rejected a petition to invalidate Georgia’s system for electing public commissioners as a violation of the Voting Rights Act after finding that the federal government and plaintiff failed to propose a better alternative.

“Federal preemption is a bitter pill,” one of the 12 judges, Gerald Tjoflat, wrote in a separate opinion in July 2022. “We should administer it carefully.”

Mixed message

Either side could petition the Supreme Court to review the 11th U.S. Circuit’s eventual, anticipated ruling in the case. Such a decision would either delay FinCEN from fully enforcing the disclosure requirements of the CTA until at least next year, possibly indefinitely.

A U.S. official who spoke to moneylaundering.com on background said only that “we are complying with the court’s injunction.”

FinCEN previously disclosed plans to educate the financial services industry on complying with their beneficial-ownership reporting requirements throughout 2024 via a series of webinars, meetings and other forms of public outreach this year.

Those efforts must now compete for attention with headlines describing the requirements as unconstitutional.

“On a practical level, the court’s ruling and the news that follows it has made what was already a challenging communications effort even more challenging,” Jonathan Wilson, partner at Taylor English in Atlanta and founder of the FinCEN Report Company, told moneylaundering.com.

In light of the ruling, corporations and the third-party professionals that support them are now less inclined to identify their beneficial owners, said Wilson, whose company submits ownership disclosures to FinCEN for accountants, lawyers and other industries and professions.

The federal database of beneficial ownership information in operation since Jan. 1 constitutes the key pillar of congressional efforts to prevent criminals from using legal entities formed or registered in the U.S. to launder money, evade sanctions or finance terrorism.

FinCEN’s continued ability to implement the Bank Secrecy Act also faces a potential threat from a case already before the Supreme Court that aims to overturn Chevron v. Natural Resources Defense Council, a 1984 ruling confirming that the task of interpreting ambiguously worded federal statutes falls to regulators.

In the meantime, NSBA’s heretofore successful challenge against FinCEN could prompt “copycat lawsuits” from businesses and individuals in U.S. states outside the 11th Circuit, said Litvinov, the attorney in Miami.

“Right now, most small business owners will probably play the waiting game.”

Contact Fred Williams at fwilliams@acams.org