December 3, 2024 – The U.S. District Court for the Eastern District of Texas has issued a nationwide preliminary injunction, halting enforcement of the Corporate Transparency Act (CTA) and its reporting requirements, citing constitutional concerns in Texas Top Cop Shop v. Garland et al. (Case No. 4:24-cv-00478).
Background on the CTA
The CTA, enacted as part of anti-money laundering efforts, requires “reporting companies” (which includes most business entities) to file a beneficial ownership report, and provide information to a federal database maintained by the Financial Crimes Enforcement Network (FinCEN). Entities formed prior to January 1, 2024 were required to file an initial report by January 1, 2025, while entities formed in 2024 were required (with some exceptions) to file within 90 days of formation. Noncompliance could result in fines and criminal penalties.
The Court’s Ruling
Judge Amos L. Mazzant III ruled that a nationwide injunction was appropriate, finding that the plaintiffs had demonstrated a “substantial likelihood of success” on the merits.
- He ruled that the law improperly encroaches on state authority over corporate regulation, focusing on the “existence” of anonymous entities rather than their operations or commercial activities.
- The court rejected the government’s claim that the CTA is a valid use of Congress’s Commerce Clause power, stating that regulating anonymity is not a valid exercise of federal authority. Judge Mazzant emphasized that the CTA was adopted as a law enforcement tool and was not intended to regulate interstate commerce. Mazzant found that upholding the CTA on such grounds would dangerously expand federal power.
- The plaintiffs also alleged violations of First and Fourth Amendment rights, including concerns about interests in privacy and anonymous association, but these claims were not addressed as the Tenth Amendment argument was sufficient to grant the injunction.
- The court also highlighted the CTA’s projected $22 billion compliance burden in its first year, especially for small businesses as another significant concern.
The injunction remains in effect until the legal case concludes or an appellate court overturns the decision. The government is expected to appeal this ruling, adding uncertainty to the CTA’s future enforceability.
Current Compliance Requirements
For now, no businesses are required to comply with the CTA’s reporting rules. Unless and until the injunction is lifted or modified by an appellate court:
- Businesses that have filed with FinCEN: No further compliance actions are required.
- Businesses that have not filed with FinCEN: Filing is not necessary at this time, though you should be prepared for potential reinstatement of the law.
Looking Ahead
The CTA’s future remains uncertain. Legal appeals and potential administrative changes – especially under the incoming Trump administration – may reshape its implementation. If the CTA is ultimately found to be constitutional, the new administration could take steps such as:
- Revisiting Regulations: Directing the Treasury Department and FinCEN to review or revise the CTA’s implementing rules.
- Delaying Enforcement: Postponing compliance deadlines through regulatory changes.
- Issuing Policy Guidance: Narrowing how and when beneficial ownership reports must be filed.
We encourage our clients who would qualify as reporting companies under the CTA to:
- Monitor Developments: Stay informed on litigation outcomes and regulatory changes.
- Prepare for Compliance: Evaluate processes and resources to ensure readiness if reporting requirements are reinstated.