Federal Court Says ‘Sensible’ Corporate Transparency Act is Unconstitutional

An Alabama federal court ruled that the Corporate Transparency Act (CTA) is unconstitutional, leaving the policy’s future unclear.

In 2021, Congress enacted legislation mandating companies to share their identities and information about beneficial owners. The law, which went into effect in January, was designed to combat illicit activity, including monetary laundering, tax fraud, and terrorist financing.

Violations would lead to a fine of up to $10,000 and two years in prison.

U.S. administration officials championed the bill as a vital tool for law enforcement and national security agencies to crack down on criminals, corrupt individuals, and other players who may exploit the U.S. financial system for illegal pursuits.

“Critically, this rule will also greatly further our Administration’s work to fight corruption and its corrosive effects on our democracy and the rule of law – both at home and around the world.”

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According to a summary judgment in the case of National Small Business United v. Yellen, the U.S. District Court for the Northern District of Alberta determined that the CTA was unconstitutional.

The U.S. government presented three main arguments in court.

The first contention was that Congress could enact the CTA because of its foreign affairs power. The second is that the CTA is a necessary feature and function of its taxing power. The final reason is that the CTA is a proper tool under the Commerce Clause.

In his summary, the federal judge opined that the CTA “exceeds the Constitution’s limits on the legislative branch,” adding that it does not meet the criteria of congressional powers in the Commerce Clause.

“The plain text of the CTA does not regulate the channels and instrumentalities of commerce, let alone commercial or economic activity,” Judge Burke opined. “Because the CTA does not regulate commerce on its face, contain a jurisdictional hook, or serve an essential part of a comprehensive regulatory scheme, it falls outside Congress’ power to regulate non-commercial, intrastate activity.”

That said, the court contended that Congress could have penned legislation that would have won a constitutional challenge, citing two cases in 1946 and 1974. These instances highlight “how easily Congress could have written the CTA to pass constitutional muster.”

According to the court, neither case “would bar Congress from imposing the CTA’s disclosure requirements on State entities as soon as they are engaged in commerce, or from prohibiting the use of interstate commerce to launder money, ‘evade taxes, hide … illicit wealth, and defraud employees and customers.’”

The Legal Fallout

As a result of this case’s findings, the court prevented the Treasury Department, the Financial Crimes Enforcement Network (FINCEN), and any other federal agency from enforcing the CTA provisions against the plaintiffs.

However, experts warn that this will generate a great deal of uncertainty as to whether other parties must follow the CTA rules and regulations or risk facing penalties from federal authorities. For now, legal analysts have recommended that the roughly 32 million small businesses and reporting entities should not suspend their compliance plans as the CTA has not been halted outright.

While the implications of the court’s decision could lead to revisions or additions to the CTA, legal observers say the Treasury Department will likely appeal the decision to the U.S. Court of Appeals for the Eleventh Circuit.

The small business community will monitor the litigation developments in the appeals process.