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FinCen declares BOI reports voluntary amid nationwide injunction of the Corporate Transparency Act

12/9/24

By: William R. Covino and Nancy M. Reimer

On December 3, 2024, in Texas Top Cop Shop, Inc., et al. v. Merrick Garland, Attorney General of the United States, et al., Civil Action No. 4:24-CV-478 the Eastern District Court of Texas determined the Corporate Transparency Act (the “CTA”) and its corresponding reporting rule “are likely unconstitutional.” It issued the extraordinary remedy of a nationwide injunction over the enforcement of the CTA in advance of its upcoming mandatory filing deadline of January 1, 2025. The decision is anticipated to impact over 32.6 million corporations. 

By way of background, Congress enacted the CTA in January 2021 within the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. At its core, it seeks to regulate “reporting companies” who are registered to conduct business under state law by requiring them to file beneficial ownership reports with the Department of Treasury’s enforcement arm, known as the Financial Crimes Enforcement Network (“FinCEN”). These reports require companies to provide sensitive stakeholder information, including their beneficial owners’ full legal name, date of birth, current residential or business street address, and a unique identifying number. In short, it ends a key feature of corporation formation in various states—anonymity.   

The public policies underlying the CTA are laudable. Congress designed the statute to: (i) further transparency concerning corporate structures and insights into the flow of illicit funds through these structures, (ii) discourage the use of shell corporations as a tool to disguise and move illicit funds; (iii) assist in national security, intelligence, and law enforcement with the pursuit of crimes, and (iv) improve national security for the United States of America.

Failure to comply with the CTA is fraught with peril. The CTA makes it illegal to “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information;” and “willfully fail to report complete or updated beneficial ownership information.” Anyone who violates these provisions may be fined $500 a day for each day the violation continues (or has not been remedied) and may be incarcerated for up to two years. 

Now enters the Texas Top Cop Shop, Inc. (the “TTCS”). On May 28, 2024, the TTCS and five other plaintiffs filed a declaratory judgment action requesting the CTA and its reporting rule be deemed unconstitutional and an injunction be issued against its enforcement. In support, they contended the CTA, and its reporting requirement, violated the First, Fourth, Ninth, and Tenth Amendment of the United States Constitution. 

The primary issue before the Federal Court was whether the Plaintiffs had a substantial likelihood of success on their constitutional challenges. The Court found they did. Citing the Tenth Amendment of the United States Constitution, the Court concluded “the CTA and the Reporting Rule may violate the Constitution.” The Tenth Amendment of the United States Constitution provides, “any powers not given to the federal government are reserved for the states or the people.” Simply put, Congress cannot exceed the legislative powers granted to it by the United States Constitution. 

In its detailed seventy-nine-page opinion, the Federal Court debunked each of the Attorney General’s argument as to the source of Congress’ purported constitutional authority to enact the CTA and its reporting requirement. The United States claimed Congress had the power to enact the CTA under the following two, independent constitutional provisions: the Commerce Clause and the Necessary and Proper Clause. The Court disagreed.

In analyzing the Commerce Clause, the Court explained it allows Congress to regulate an activity, which in the aggregate, substantially impacts interstate commerce. The CTA does not regulate an activity. To the contrary, it created a new activity in the form of a new reporting requirement. Upon opining the Commerce Clause did not justify the CTA, the Court turned to assessing the Necessary and Proper Clause. It fared no better. Its function is to provide Congress ample means to execute the powers entrusted to it by the Federal Government. For example, this clause allows Congress to regulate commerce, regulate foreign affairs, and to collect taxes. Yet, neither the CTA nor its reporting requirement assist in the regulation of these activities or in the collection of taxes. Consequently, the Court concluded a nationwide injunction was appropriate.

The Court further expressed, “[i]f the Court were to sanction such an extension of legislative power today, then there is no telling how Congress would control companies tomorrow.” This position is not surprising. The Supreme Court of the United States has previously declared, “[n]o principle of corporation law and practice is more firmly established than a State’s authority to regulate domestic corporations,” and our Founding Fathers even acknowledged while “leaving business regulation primarily to individual states might cause friction within the overall American economy, they were more reluctant . . . to allow concentrations of economic power, which they visualized as a government-sponsored monopoly . . . .”

In response to this ruling, FinCEN issued an alert stating:

While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect.  Therefore,  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. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.

While it presently remains uncertain whether the Eastern District Court of Texas’s constitutional analysis of the CTA and its reporting requirement will be upheld, there are two certainties: 1) companies who have not already filed a beneficial ownership report have more time to compile the information they need to complete a future filing, if necessary and 2) this Court provided a roadmap for Congress—if it wishes—to pass a future statute seeking the exact same information sought from the CTA in a manner that will pass constitutional muster.

We will continue to follow and report developments concerning the CTA to you.

For more information on this topic, please contact Nancy Reimer at nancy.reimer@fmglaw.com; Will Covino at william.covino@fmglaw.com; or your local FMG relationship partner.