Modern Symplegades: FinCEN and Treasury to Enforce Corporate Transparency Act Disclosure Requirements Notwithstanding Constitutionality Challenge
Passed in 2021, Corporate Transparency Act (“CTA”) aims to prevent money laundering, fraud and nefarious shell corporations by requiring that all incorporated entities[1] disclose the identities and other information relating to each of its “beneficial owners,” defined as any individual who (i) “exercises substantial control over the entity” or who (ii) “owns and controls not less than 25 percent of the ownership interests of the entity. 31 U.S.C. § 5336(a)(3). Any person who knowingly or willfully fails to report “complete or updated” beneficial ownership information faces a civil penalty of $500/day, up to $10,000 in fines and/or two years in prison. 31 U.S.C. § 5336(h)(1), (3)(A). Additional penalties are also available against individuals who misuse information gathered from CTA disclosures or if a violation occurs within a larger pattern of illegal activity. 31 U.S.C. § 5336(h)(2), (3)(B); 31 U.S.C. §5336(h)(3)(B)(ii)(II).
According to its own statistics, the Department of Treasury estimates that the CTA’s reporting requirement applies to “32.6 million currently existing entities” and will apply to “5 million new entities formed each year from 2025 to 2034.” Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. at 59, 549. Given the breathtakingly broad scope of this disclosure requirement, critics of the CTA claim that the CTA is an unconstitutional federal overreach.
Earlier this month, the Federal District Court for the Northern District of Alabama declared the CTA’s reporting requirements to be unconstitutional as applied to the plaintiffs in that case, a small business owner and the National Small Business Association. National Small Business United et al. v Janet Yellen, et al., No. 5:22-cv-1448-LCB (N.D.Ala., March 1, 2024)(the “NSBU Opinion”). Ultimately, the Court determined that the disclosure requirement in the CTA was far too broad to fall within the Constitution’s grant of authority to Congress in the commerce clause, taxing power, or necessary and proper clause, as was argued by the government[2]. Although the substance of the opinion will make for an interesting appeal, the more immediate concern is that in the interim, the decision leaves Reporting Entities with a compliance dilemma. The Treasury Department has instructed its enforcement agencies, including the Financial Crimes Enforcement Network (“FinCEN”) to interpret the NSBU Opinion as limited to the to the individual Plaintiffs to that suit.[3] While technically correct as to the scope of the existing order, this application is seemingly at odds with the Opinion’s analysis of the harm imposed under the First, Fourth and Fifth Amendments:
The Government’s standing arguments miss the mark for an additional reason: the injury to ]Plaintiff] is not disclosure itself, but disclosure to FinCEN, the Treasury Department’s criminal enforcement division. [NSBU Opinion at p. 11].
What’s more, because the disclosure and associated invasion of privacy is a Constitutional injury, courts have little ability to remedy the situation since it cannot compel the government to un-learn the information gathered. NSBU Opinion at pp. 11-12. As a result, businesses wishing to vindicate their constitutional privacy interests are seemingly left in a double-bind: as they must either comply with the CTA and allow irreparable injury or refuse to comply and face criminal prosecution.
A path does remain open for affected parties to enjoy the certainty afforded by compliance without forfeiting the right to privacy recognized by the Opinion. Because the Court’s rationale is applicable to all affected parties, business associations and their beneficiary owners wishing to preserve their rights while this matter is resolved on appeal may file their own suits and requesting immediate injunctive relief. Entities or individuals with CTA compliance concerns in the wake of this Opinion should carefully consult with an attorney to determine the applicable disclosure requirements and whether this option is viable in their unique circumstances.
[1] 31 U.S.C. §5336(a)(11)(B) sets forth a list of entities/individuals exempt from the disclosure requirement, including (among others) banks, insurance companies, and entities with more than twenty employees and more than $5,000,00 in gross revenue who have a physical office in the United States.
[2]Id. at 17-25 (Foreign Affairs & National Security), 25-49 (Commerce Clause) and 49-52 (Taxing Authority/Necessary & Proper Clause).
[3] https://fincen.gov/news/news-releases/updated-notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448