Client Alert: Federal Court Grants Nationwide Preliminary Injunction Against Corporate Transparency Act
Federal Court Grants Injunction Halting CTA Enforcement
Date: December 4, 2024
Overview of the CTA
The CTA, enacted as part of the National Defense Authorization Act for Fiscal Year 2021, aims to combat financial crimes by increasing transparency in corporate structures. Under the CTA, reporting companies — defined as corporations, limited liability companies, or other similar entities created in the United States, as well as foreign entities registered to do business in the United States through filings with a secretary of state or similar office — are required to submit their beneficial ownership information (“BOI”) reports to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, that serves as the financial intelligence unit of the U.S. responsible for receiving, analyzing, and disseminating disclosures of financial information in order to combat money laundering and terrorism financing. Reporting companies formed before January 1, 2024, are required to submit their initial BOI reports by January 1, 2025, while companies formed in 2024 must file within 90 days of their formation, and those formed on or after January 1, 2025, must file within 30 days of their formation. See our prior reporting on the CTA here.
Court’s Findings and Rationale
The plaintiffs in Texas Top Cop Shop, Inc., challenged the constitutionality of the CTA, arguing that it violates their rights under the First, Fourth, Ninth, and Tenth Amendments. They sought a preliminary injunction to prevent the enforcement of the CTA, which has a reporting deadline of January 1, 2025, for reporting companies formed prior to January 1, 2024.
The court granted the plaintiffs' motion, finding, among other things, that they were likely to succeed on the merits of their Tenth Amendment challenge, that they would suffer irreparable harm without an injunction, and that the balance of equities and the public interest favors the plaintiffs. The court concluded that the CTA likely exceeds Congress's powers under the Commerce Clause and the Necessary and Proper Clause of the U.S. Constitution, as it regulates the anonymous existence of corporations, which is not an activity that substantially affects interstate commerce. The court did not reach a conclusion on the plaintiffs' other constitutional challenges, as the Tenth Amendment challenge was sufficient to grant the preliminary injunction.
Moving Forward
The government may appeal the court's order to the U.S. Court of Appeals for the Fifth Circuit, or seek a stay of the injunction pending appeal. For the time being, reporting companies are not required to submit BOI reports while the injunction remains in effect. However, there is a possibility that the injunction could be lifted, or the CTA upheld, which could lead to retroactive compliance obligations. While filing now is not required, BOI reports may still be filed voluntarily. Doing so ensures readiness in the event the CTA’s enforcement resumes and mitigates the risk of facing tight (or missed) filing deadlines later and exposure to civil and criminal penalties. Possible civil and criminal penalties for non-compliance with the CTA are daily fines of $500 per day of continued violation, not to exceed $10,000, and possible imprisonment of not more than two (2) years, or both. Out of an abundance of caution, we suggest that clients adhere to the original filing deadlines unless and until there is a definitive resolution or further guidance from FinCEN.
We will continue to monitor the progress of this case and similar challenges throughout the federal courts and assess the potential impact of the court's decision on corporate compliance and reporting requirements. We advise our clients to consult with us before taking any action in response to the CTA or its implementing regulations, as the legal landscape continues to evolve.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.