Reporting companies should remain flexible given uncertain future of the Corporate Transparency Act after Texas court grants nationwide injunction
Congress passed the Corporate Transparency Act (CTA) as an anti-money laundering initiative in 2021 designed to combat the use of anonymous “shell companies” to facilitate money laundering, terrorist financing, and threaten the national security of the US and its financial system by requiring an estimated 32.6 million entities to provide detailed identifying information about the natural persons (beneficial owners) behind the company to law enforcement. The CTA requires non-exempt[1] reporting companies (LLCs and other corporate entities registered to do business in the US) to report their beneficial owners to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
Since its enactment, the CTA has been the target of litigation in multiple courts. The latest example, and the biggest blow to the CTA to date, is Texas Top Cop Shop, Inc. v. Garland, 4:24-cv-478 (E.D. Tex.), where six plaintiffs (one private individual and five entities) sued the federal government seeking a preliminary injunction against the enforcement of the CTA. On December 3, 2024, the US District Court for the Eastern District of Texas ruled in favor of the plaintiffs, finding the CTA and its implementing regulations are “likely unconstitutional.”[2] Slip Op. at 2. In a 79-page opinion, the District Court explained its rationale, concluding that the government was unable to provide the court with a “tenable theory” that the CTA falls within Congress’ enumerated powers or under the Necessary and Proper Clause. The District Court stressed that remaining an anonymous corporate entity is a state of being, not an activity that affects interstate commerce and thus may be regulated by Congress. In the District Court’s view, the CTA is an exercise of impermissible “police power” by Congress. As a result, the District Court held that the CTA likely violates the US Constitution and ordered a nationwide preliminary injunction preventing the government from enforcing the CTA. Under the district court’s injunction, reporting companies need not comply with reporting deadlines under the CTA – including the upcoming January 1, 2025 deadline.
The Texas Top Cop Shop, Inc. decision follows a similar ruling earlier this year from the US District Court for the Northern District of Alabama, which is summarized in more detail here. That court held the CTA unconstitutional, but the decision did not have immediate nationwide implications because the court enjoined FinCEN only from enforcing the reporting requirements against the plaintiff, National Small Business United, and its members. FinCEN’s appeal is pending before the Eleventh Circuit.
What is the future of the CTA?
A nationwide injunction against enforcement of the CTA is in effect at this time, but uncertainty remains about the future of the CTA because the litigation is ongoing.
FinCEN has appealed the District Court’s ruling to the US Court of Appeals for the Fifth Circuit, but it has issued a statement that it will comply with the District Court’s order for as long as it remains in effect and acknowledging that “reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect,” while noting that “reporting companies may continue to voluntarily submit beneficial ownership information reports.”
Because the government has not requested expedited review or sought to have the injunction stayed pending the appeal, we expect that the injunction will remain in place through January 2025 and potentially well beyond.
Furthermore, the start of the new Congress and the new presidential administration in January 2025 may have implications for the litigation and enforcement of the CTA. In 2021, then-President Trump vetoed the CTA, but Congress overrode the veto by passing the CTA with a supermajority vote. If President-Elect Trump maintains the same view on the CTA, then the incoming administration may seek to dismiss the government’s appeal of the preliminary injunction or decline to defend the constitutionality of CTA (with notice to Congress).
What should reporting companies do?
Reporting companies should remain flexible and prepared to act in a range of scenarios. At this time, no BOI reports need to be filed with FinCEN. Nonetheless, reporting companies that have yet to file BOI reports should continue to maintain and/or compile the information needed to file BOI reports and be prepared to file BOI reports if necessary.
It is also important to note that the injunction has no impact on states’ legislation that may require entities to report their beneficial owners, such as the New York Limited Liability Company Transparency Act (NYTA), which goes into effect on January 1, 2025. The NYTA imposes requirements on limited liability companies (LLCs) registered in New York that are similar to the requirements of the CTA. More information about NYTA and its requirements may be found here.
For more information
For additional guidance regarding the ongoing litigation and the status of the CTA or related state requirements, please contact your DLA Piper relationship partner or any of the authors.
[1] Exemptions generally apply to highly regulated businesses, large operating companies, pooled investment vehicles, wholly owned subsidiaries of certain exempt entities, and inactive entities.
[2] The District Court noted the issue of whether the CTA and implementing regulations are “absolutely unconstitutional is a question for another day,” but found that plaintiffs had “demonstrated a substantial likelihood of success on the merits” and satisfied the other elements necessary for a preliminary injunction. Slip Op. at 14.
