Federal Court Says ‘Sensible’ Corporate Transparency Act Is Unconstitutional

Treasury Secretary Janet Yellen speaks at an event on the Biden administration’s economic strategy toward the Indo-Pacific in Washington on Nov. 2, 2023. Madalina Vasiliu/The Epoch Times

An Alabama federal court ruled that the Corporate Transparency Act (CTA) is unconstitutional, leaving the policy’s future unclear.

In 2021, Congress enacted legislation mandating that companies share their identities and information about beneficial owners. The law, which went into effect in January, was designed to combat illicit activity, including money laundering, tax fraud, and terrorist financing.

Violations would lead to a fine of up to $10,000 and two years in prison.

U.S. administration officials championed the bill as a vital tool for law enforcement and national security agencies to crack down on criminals, corrupt individuals, and other players who may exploit the U.S. financial system for illegal pursuits.

“In doing so, this rule will make it harder for criminals, organized crime rings, and other illicit actors to hide their identities and launder their money through the financial system,” Treasury Secretary Janet Yellen said in a September 2022 statement.

“Critically, this rule will also greatly further our Administration’s work to fight corruption and its corrosive effects on our democracy and the rule of law—both at home and around the world.”

According to a summary judgment in the case of National Small Business United v. Yellen, the U.S. District Court for the Northern District of Alabama determined that the CTA is unconstitutional.

Writing in a 53-page opinion on March 1, Judge Liles Burke asserted that while the intentions behind the law are “sensible and praiseworthy,” the federal government’s reasonings for the CTA “are not supported by precedent.”

The U.S. government presented three main arguments in court.

The first contention was that Congress could enact the CTA because of its foreign affairs power. The second was that the CTA is a necessary feature and function of its taxing power. The final reason was that the CTA is a proper tool under the Commerce Clause.

In his summary, the federal judge wrote that the CTA “exceeds the Constitution’s limits on the legislative branch,” noting that it does not meet the criteria of congressional powers in the Commerce Clause.

“The plain text of the CTA does not regulate the channels and instrumentalities of commerce, let alone commercial or economic activity,” Judge Burke wrote. “Because the CTA does not regulate commerce on its face, contain a jurisdictional hook, or serve an essential part of a comprehensive regulatory scheme, it falls outside Congress’s power to regulate non-commercial, intrastate activity.”

That said, the court contended that Congress could have penned legislation that would have won a constitutional challenge, citing two cases in 1946 and 1974. These instances highlight “how easily Congress could have written the CTA to pass constitutional muster.”

According to the court, neither case “would bar Congress from imposing the CTA’s disclosure requirements on State entities as soon as they are engaged in commerce, or from prohibiting the use of interstate commerce to launder money, ‘evade taxes, hide ... illicit wealth, and defraud employees and customers.’”

The Legal Fallout

As a result of this case’s findings, the court prevented the Treasury Department, the Financial Crimes Enforcement Network, and any other federal agency from enforcing the CTA provisions against the plaintiffs.

However, experts warn that this will generate a great deal of uncertainty as to whether other parties must follow the CTA rules and regulations or risk facing penalties from federal authorities. For now, legal analysts have recommended that the roughly 32 million small businesses and reporting entities should not suspend their compliance plans as the CTA has not been halted outright.

While the implications of the court’s decision could lead to revisions or additions to the CTA, legal observers say the Treasury Department will likely appeal the decision to the U.S. Court of Appeals for the Eleventh Circuit.

“We expect the Department of Treasury will appeal this decision to the U.S. Court of Appeals for the Eleventh Circuit and request a stay of the enforcement of the injunction. If such stay is granted, the CTA would still be in force as to the plaintiffs,” legal experts at Proskauer Regulatory & Compliance for The National Law Review wrote. “It is not known how the Eleventh Circuit or other federal courts will rule on the constitutionality of the CTA or when such cases might be finally resolved.”

The small business community will monitor the litigation developments in the appeals process.