Federal Court Halts Enforcement of Corporate Transparency Act Amid Constitutional Challenges

SHERMAN, Texas, 3 December 2024 – A United States District Court in Texas ​issued a preliminary order to terminate the application of the Business Transparency Act (BTA), alleging possible constitutional violations. This decision, rendered by Justice Amos Mazzant, represents an important setback for federal efforts to increase the transparency of corporate ownership through financial crime reporting.

The decision is the result of a lawsuit brought by Texas Top Cop ​Shop, Inc., a small business based in Texas, ​as well as several other complainants, including a Wyoming dairy farm and a non-profit organization. The applicants submit that the CTA and its regulations, implemented by the Financial Crimes Enforcement Network (FinCEN), violate constitutional rights ​and ​impose excessive compliance burdens on small businesses. Justice Mazzant & apos;’s decision grants complainants temporary relief while pleading for broader ​constitutional issues.

Overview of the Business Transparency Act

Under the Anti-Money Laundering ​Act 2020, ​enacted under the National Defence Authorization ​Act, CTA aims to combat the abuse of anonymous commercial entities for money laundering, terrorist financing and other illegal activities. It requires millions of U.S. companies and limited liability companies to disclose personal information about their beneficial owners ​to FinCEN. This information ​is stored in a secure, non-public ​database ​accessible to law enforcement agencies. Underserved businesses ​are subject to significant civil ​and criminal sanctions.

FinCEN estimated that the new reporting requirements would affect approximately 32.6 million existing entities and 5 million new businesses each year. According to FinCEN, compliance costs could range from ​$85 ​to $2,600 per entity depending on the complexity of its ownership structure. Despite its objectives of ​increased transparency, the CTA ​has been criticized for its potential to violate privacy and ​impose burdens on small businesses.

Main constitutional challenges

The plaintiffs raised several constitutional concerns, arguing that the CTA violates the ninth and tenth amendments, infringing the right of States to regulate company formation. They also claimed that the law violated the protection of associations by the first amendment ​and the rights of the fourth amendment against unreasonable searches by sending the disclosure of sensitive ​personal information without adequate safeguards.

Justice Mazzant’s decision highlighted the excessive extension of the federal government in areas traditionally governed by state law. ​The opinion highlights the departure of CTA from historical standards, stating that the federal mandate interrupts the balance of powers in the U.S. federalist system and imposes a similar supervisory framework for small businesses.

Potential impact on small businesses

The decision noted the significant compliance costs for small businesses ​under the TTA. For example, FinCEN calculated the economic burden for the first ​year of compliance at $22.7 billion, and subsequent years cost $5.6 billion. The applicants, including the Texas Top Cop Shop and a ​Wyoming dairy farm, ​argued ​that these costs disproportionately affect small and family ​businesses with limited resources.

A complainant, ​the Liberian Mississippi ​Party, expressed concern about the impact on donor privacy and freedom of association, argued that CTA’s requirements could ​deter political participation and advocacy. Another ​complainant, a small IT ​service company, raised ​alarms about data security, given the possibility of sensitive information from the owner being misused or exposed.

Position of ​the Government ​and future implications

The U.S. government, represented by Attorney General Merrick Garland and Treasury Secretary Janet Yellen, defended CTA as an essential tool for national security and financial crime prevention. They ​argued that ​the requirements of the law ​are clearly ​adapted and essential ​to meet international anti-money ​laundering standards. The Government intends to appeal the preliminary order, highlights the ​potential risks posed by the delay in enforcement.

The decision is in addition to a growing set of legal issues against the CTA, and courts in other jurisdictions are also reviewing its provisions. Legal analysts suggest that the case could set ​a precedent for the limits of federal authority in corporate regulation and balance transparency with ​constitutional protections.

As the legal battle develops, companies subject to CTA’s requirements face uncertainties about compliance times and possible sanctions. The judgment underlines the need ​for ​a nuanced approach to the fight against financial ​crime, while preserving constitutional rights and minimizing the burden on small businesses.