Not All Owners Off the Hook on Transparency

PUBLISHED MARCH 2024

On March 1, a federal judge issued a final judgment ruling in favor of the National Small Business United’s motion for summary judgment, and against the U.S. Treasury Dept. over the Corporate Transparency Act.

U.S. District Judge Liles Burke of the northeastern division in the northern district of Alabama, Northeastern Division, held that the act is unconstitutional because it exceeds the limits on Congress’s power. Further, the department’s Financial Crimes Enforcement Unit was permanently enjoined from enforcing the act against the plaintiffs in that case.  

The implications of this ruling for the business community at large remain unclear. This ruling may be persuasive in similar cases brought against Treasury outside of the Northern District of Alabama but is not precedential, meaning that other judicial forums may rule differently on the issues presented in this case. Further, the Justice Department has already filed an appeal of the ruling on behalf of U.S. Treasury with the 11th Circuit Court of Appeals.  

Because this case only included questions of law, and was decided on summary judgment based solely on dispositive motions by the parties, the appeals court will have de novo review of this case (including the plaintiff’s unaddressed claims based on the First, Fourth, and Fifth Amendments to the Constitution). That is, the appeals court will decide all issues in the case, as if the case was being heard for the first time.  

In response to the ruling, FinCEN issued a March 4 statement—updated a week later—“to reflect that a Notice of Appeal has been filed regarding this case.” “FinCEN will continue to implement the Corporate Transparency Act as required by Congress while complying with the court’s order. FinCEN will comply with the court’s order “for as long as it remains in effect.”

FinCEN is currently and will continue enforcing the CTA against all persons “other than the particular individuals and entities subject to the court’s injunction” (i.e., the plaintiffs in that case). “[R]eporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.” “[A]t this time,” FinCEN is not requiring beneficial ownership information reporting from those members of NSBA who were members as of March 1, 2024 (that is, future and past members of NSBA are not included in this reporting deferral).”

It bears noting that the position stated by FinCEN does not extend to the beneficial owners of members of NSBA, only to the NSBA members themselves. If a beneficial owner of a company member of NSBA is also a beneficial owner of an entity, not a member, that beneficial owner will not be excluded from the CTA’s reporting obligations through the non-member entity. 

Also, if an individual is a member of NSBA, that individual would be excluded from reporting into the FinCEN database, but the reporting companies to which that individual is a beneficial owner would not be excluded. This means that those reporting companies (if not an NSBA member) would remain required to report their other beneficial owners. This may be disappointing news to those who have multiple business entities in their portfolio, but where not all of those entities are members of NSBA.

The CTA is a seismic shift in the beneficial owner reporting regimes in the United States, disturbing long-established norms. Beginning Jan. 1, 2024, tens of millions of unwitting U.S. business entities, and their beneficial owners, became subject to FinCEN’s dragnet designed to catch nefarious actors hiding behind the “corporate veil.”  

The present district court ruling muddies the waters as to the act’s applicability to and enforcement against the U.S. business community. Having found the CTA unconstitutional, the district court enjoined any requirements for registration as well any potential penalties for noncompliance—but only for the plaintiffs in that case. However, FinCEN’s stated position on the CTA is clear: business as usual for everyone other than the plaintiffs in the district court case.

Business owners and management should continue to monitor further developments in the ever-evolving CTA space and should continue to meet any impending filing deadlines under the CTA. In particular, business entities formed in 2024 should continue to adhere to their 90-day post-formation CTA filing obligations, while business entities in existence prior to 2024 may wish to defer their filing until later in the year to be informed by subsequent developments in the appeals process.

With this and other Corporate Transparency Act new developments occurring almost daily, now is the time to discuss the Corporate Transparency Act with your legal team for guidance.