Buried in the 1,500 pages of the 2021 National Defense Authorization Act was a provision called the Corporate Transparency Act (“CTA”), which requires most entities organized under state law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement division, the Financial Crimes Enforcement Network (“FinCEN”). The intent of Congress in requiring these disclosures was to prevent financial crimes like money laundering and tax fraud, which are frequently committed through shell corporations. The CTA requirement became effective on January 1, 2024, with businesses required to complete the forms by December 31, 2024. It was immediately the subject of a constitutional challenge.

The National Small Business Association (“NSBA”) and others sued the Treasury Department, along with Treasury Secretary Janet Yellen, in the United States District Court for the Northern District of Alabama Northeastern Division. National Small Business United v. Yellen, No. 5:22-cv-1448-LCB (N.D. Ala.). The NSBA alleged that the CTA’s mandatory disclosure requirements exceed the authority of Congress under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments. The U.S. government argued that the CTA was within the broad powers of Congress to regulate commerce, oversee foreign affairs and national security and impose taxes and related regulations. On March 1, 2024, the court granted the plaintiffs’ motion for summary judgment, finding the CTA unconstitutional, as corporate formation requirements are a process usually left to state governments. In addition, the corporate entities subject to the statute include those that conduct business only within a single state or do no business at all. On March 11, 2024, the Treasury Department appealed the court’s final judgment to the United States Court of Appeals for the Eleventh Circuit. FinCEN announced that it will not enforce the CTA against the plaintiffs in this specific action, but has been silent as to whether the obligations continue to apply to other businesses during the appeal process. On March 15, 2024, a Maine resident also sued the Treasury Department, claiming that the CTA exceeds Congressional authority and encroaches on state sovereignty. Other challenges to the CTA are likely.

FinCEN estimates that the CTA would apply to 32.6 million existing entities and five million entities formed each year from 2025 to 2034, many of which are small businesses. The CTA requires “beneficial owners” of these entities, i.e., individuals who exercised substantial control over the entity or owned or controlled at least 25 percent of the ownership interests of the entity, to disclose the full legal name of the beneficial owner or applicant, date of birth, current address and identification numbers and provide an image of a driver’s license, ID card or passport. 31 U.S.C. § 5336 (b) (2). To avoid public disclosure of this personal information, individuals can apply for a FinCEN identifier, which can then be used in the reporting process. Knowing or willful violations of the CTA carry severe civil and criminal penalties, ranging from a $500 per day civil penalty and up to $10,000 in fines and two years in federal prison, to a $500,000 fine and ten years in federal prison.

Lutzker & Lutzker will continue to monitor and report on developments relative to the CTA.