On December 3, 2024, the United States District Court for the Eastern District of Texas issued a nationwide preliminary injunction, which temporarily blocks the enforcement of the Corporate Transparency Act. Two days later, the Department of Justice, representing the Department of Treasury, filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit.
KingSpry Business Law Attorney, Taisha K. Tolliver-Duran, Esq., has kept abreast of the litigation impacting the Corporate Transparency Act, and details what businesses must know to remain compliant as the Act is challenged in Federal Court.
What is the Corporate Transparency Act?
The Corporate Transparency Act (the “Act”) is a federal law that imposes filing requirements on nearly every corporation, limited liability company, or similar business entities formed in or registered to do business in the United States.
Under the Act, beneficial ownership information (“BOI”) must be reported to the United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Additionally, the Act imposes severe penalties for failure to comply with reporting obligations.
The Act took effect earlier this year, on January 1, 2024, as part of the National Defense Authorization Act.
Purpose
The Act aims to identify individuals who engage in illegal activity by attempting to conceal their ownership of business entities in the United States. Such activity includes money laundering, financing terrorism, tax fraud, and other acts of foreign corruption that harm national security interests. The Act allows FinCEN to collect BOI from business entities to protect national security interests and enable efforts to identify malign actors and illicit activities.
Reporting Timelines
The Act requires the reporting of BOI, as follows:
- Entities registered prior to January 1, 2024 have until January 1, 2025 to file their BOI reports;
- Entities registered between January 1, 2024 and January 1, 2025 must file their BOI reports within ninety (90) calendar days of creation; and
- Entities registered after January 1, 2025, must file their BOI reports within thirty (30) calendar days of creation.
For more information regarding the Act, see Taisha K. Tolliver-Duran, Esq.’s previous article, which discusses reporting requirements, beneficial owners, exemptions, penalties, and more.
Legal Challenges
Earlier this year, six (6) Plaintiffs filed a lawsuit against several United States representatives and the governmental entities that they service. The Defendants include (1) United States Attorney General, Merrick Garland, (2) United States Secretary of the Treasury, Janet L. Yellen, (3) U.S. Department of the Treasury, (4) Director of FinCEN, Andrea Gacki, and (5) FinCEN (collectively referred to as the “Government”).
The Plaintiffs’ lawsuit challenged the Act on several grounds. The Plaintiffs argued that the Act is unconstitutional because it (1) intrudes upon states’ Ninth and Tenth Amendment rights, (2) compels speech and burdens the Plaintiffs’ First Amendment rights, and (3) compels disclosure of personal information in violation of the Fourth Amendment.
Upon review, the United States District Court for the Eastern District of Texas did not address whether the Act is unconstitutional; rather, it analyzed (1) whether the Plaintiffs demonstrated a substantial likelihood of success on their claims, and (2) whether they satisfied the elements necessary for a preliminary injunction.
The Court’s Decision
The Court determined that the Plaintiffs satisfied all requirements for a preliminary injunction. As such, the Court issued a nationwide preliminary injunction, which temporarily restricts the enforcement of the Act. The Court also noted that “the [Act] is likely unconstitutional as outside of Congress’s power.”
The Government filed a notice of appeal challenging this decision.
Update from FinCEN
Following the Court’s decision, FinCEN issued updated guidance to reporting companies, providing that they are not currently required to file BOI with FinCEN and are not subject to liability if they fail to do so while the preliminary injunction remains in effect. However, FinCEN noted that reporting companies may continue to voluntarily submit BOI reports.
Key Takeaways for Businesses
While enforcement of the Act is currently halted, businesses should be proactive in determining whether they are required to make BOI reports to FinCEN. Continued preparation and awareness of the Act’s requirements is pertinent, especially in the event that the Government’s appeal is successful.
KingSpry’s Business Law Team will continue to monitor developments in this case and is prepared to assist your business in navigating the impact of the Corporate Transparency Act. Should you or your business have questions or concerns, contact KingSpry’s Business Law Team. This article is meant to be informational and does not constitute legal advice.
