Arguments Begin in Federal Suit Challenging Biden Admin’s New Small Businesses Reporting Rules

The U.S. Treasury Department building is shown at dusk in Washington on June 6, 2019. Patrick Semansky/AP Photo

Oral arguments began this week in Alabama in the case of the National Small Business Association (NSBA) vs. the U.S. Treasury Department over a proposed rule that is set to go into effect next year.

The suit represents one of several lawsuits and pushback to rules published by federal agencies regulating small businesses, nursing homes, and federal waterways to name a few.

The rule, billed as the Corporate Transparency Act (CTA), would require small businesses nationwide to comply with stringent reporting requirements to the Financial Crimes Enforcement Network (FinCEN), under the U.S. Department of the Treasury.

“The CTA has been mired in confusion and ambiguities from start to finish. Not only is it bad policy, it is unconstitutional,” said NSBA President and CEO Todd McCracken said in a statement on Monday, November 20. “Americans who are not suspected of doing anything wrong are being asked to provide deeply personal information to a government agency, which is putting the information in a database for criminal law enforcement purposes.”

Legal Origins

The roots of the confrontation trace back to the enactment of the CTA as part of the National Defense Authorization Act for Fiscal Year 2021, according to the lawsuit.

The CTA, aimed at enhancing anti-money laundering measures and preventing terrorist financing, imposes stringent reporting requirements on small businesses.

The lawsuit, filed on November 15, 2022, by the NSBA, contends that the Act’s demands for disclosing personal owner information infringe upon constitutional rights and overstep federal authority.

Treasury Secretary Janet Yellen speaks about goals for the 2024 tax filing season at the IRS headquarters in Washington on Nov. 7, 2023. Stefani Reynolds/AFP via Getty Images

“The CTA is a poorly thought out and heavy-handed federal mandate that will be a bureaucratic nightmare for small-business owners,” McCracken said after filing the suit last year. “If implemented, small businesses will be forced to spend millions of hours and billions of dollars on paperwork instead of creating jobs and helping grow our economy.”

CTA Explained

The CTA’s primary objective, according to the rule published in the Federal Register in September 2022, is to mitigate the exploitation of corporate structures for illicit activities by mandating transparency about the beneficial ownership of corporate entities, according to the agency.

FinCEN notes the importance of small businesses to the national economy, but states the historical “inability” to mandate the collection of the information has been a “vulnerability.”

Prior to the CTA, the United States faced challenges in its anti-money laundering and countering the financing of terrorism (AML/CFT) framework, mainly due to the absence of a uniform system for reporting beneficial ownership, according to the federal register.

The CTA addresses this gap by creating a national registry, compelling corporations and LLCs to report detailed information about their beneficial owners to FinCEN.

“Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system,” the agency explained in the text of the rule. “Not only do such acts undermine U.S. national security, but they also threaten U.S. economic prosperity: shell and front companies can shield beneficial owners’ identities and allow criminals to illegally access and transact in the U.S. economy, while creating an uneven playing field for small U.S. businesses engaged in legitimate activity.”

According to the plaintiffs, the new rule shifts the reporting work from banks to small businesses. They explain that existing rules, the Customer Due Diligence framework, require banks to collect, monitor, and report suspicious activity to FinCEN and law enforcement.

“The CTA is simply passing the buck from big banks—which have legions of staff to absorb this kind of reporting requirement—to small businesses like mine,” stated NSBA Chair Mike Stanek from Berea, Ohio. “A simple mistake has the potential to land a small-business owner in jail for as long as two years.”

Controversy Surrounding the CTA

Critics of the CTA, including the NSBA, argue that the Act disproportionately burdens small businesses with compliance costs and risks to personal privacy.

These entities are required to disclose sensitive information, including dates of birth, addresses, and identification details, which opponents claim is excessive and potentially harmful if mishandled.

Mr. McCracken expressed concerns about the average compliance cost of $8,000 in the first year and the potential for government mishandling of sensitive data.

The lawsuit has garnered support from various trade associations and small business groups, united in their concern over the CTA’s implications for privacy and financial burden.

The US Treasury Department building is seen in Washington, on January 19, 2023. Saul Loeb/AFP via Getty Images

These supporters emphasize the Act’s overreach and potential negative impact on the small business sector, a critical component of the American economy.

Conversely, proponents of the CTA argue that the Act is a necessary step in bolstering the nation’s defenses against financial crimes.

They contend that the transparency it provides is crucial for combating illicit activities hidden behind anonymous corporate entities.

Key Arguments in the Legal Challenge

The plaintiffs, represented by attorney John Neiman, have focused their arguments on the constitutional limits of Congress’s power.

“Congress, whether or not it has good intentions, is always constrained by the Constitution,” said John Neiman, attorney for the plaintiffs. “Our challenge is trying to get Congress to follow the law and not create an unconstitutional burden on Americans.”

They assert that the CTA violates the First, Fourth, and Fifth Amendments by compelling the disclosure of personal information without just cause.

Moreover, they argue that the Act intrudes upon states’ rights to regulate entity formations. This lawsuit is emblematic of a broader debate on the balance between national security and individual liberties.

The case’s outcome has the potential to significantly influence the regulatory landscape for small businesses and the approach of the U.S. government in addressing financial crimes.