Yesterday, a federal judge in the Eastern District of Texas granted a motion for preliminary injunction that asked the court to enjoin the government from enforcing the Corporate Transparency Act (CTA) and the Act's related federal regulations. 

The CTA was enacted in 2021 as part of the Anti-Money Laundering Act of 2020 and is administered by the Financial Crimes Enforcement Network (FinCEN), which is a unit of the Treasury Department.  The general policy purpose of the CTA is to make it more difficult for individuals or entities to use corporate entities to mask a beneficial ownership interest in a company.  The Congressional intent behind the CTA is to ferret out shell companies often used in connection with financial crimes like money laundering and terrorism financing.   But the CTA's effect is, in practice, far more reaching, and thousands of legitimate businesses, from small mom-and-pop operations to large corporations with hundreds of employees, are required to file Beneficial Ownership Information (BOI) reports.  Such companies doing business in the United States are “reporting companies” within the meaning of the law and are required to comply with the CTA.  A reporting company is required to submit a Beneficial Ownership Information (BOI) report with FinCEN that discloses information about the company's true beneficial owners.

A copy of the court's opinion can be accessed at Bloomberg Law, here.  The lead plaintiff in the case is a Texas gun store, which argued that the CTA violates the Constitutional limitations on Congress's power to regulate interstate and foreign commerce, i.e., a class Commerce Clause position.  The court agreed, finding that the Commerce Clause may not be used to require disclosure of corporate entity information that may then be used by law enforcement against the corporation or its beneficial owners.  As noted above, the main policy purpose underpinning the CTA is just that: to ferret out and crack down on shell companies often used to launder money or finance terrorism.  The opinion, which describes the CTA as “an unprecedented law” cites ancient black letter Supreme Court precedent, including the seminal law school classic, Marbury v. Madison: “The powers of the legislature are defined, and limited: and . . . those limits may not be mistaken, or forgotten, the Constitution is written.” 

The order entered in the Texas case applies nationwide, not just to businesses operating within the Eastern District of Texas.  This is likely to cause confusion for the millions of companies doing business in the U.S. that qualify as “reporting companies” within the purview of the CTA.  The impact will be felt immediately, as the deadline for CTA compliance is rapidly approaching for non-exempt companies that existed prior to January 1, 2024 (which must file a BOI report with the Treasury Department by January 1, 2025).  According to press reports, the Department of Justice has not formally commented on the injunction, but it is likely the government will quickly file an appeal of the court's decision with the Fifth Circuit and seek an expedited ruling. 

Please refer to our CTA practice area section for additional information about the CTA.