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The Corporate Transparency Act was deemed Unconstitutional by a District Court: How Does this Recent Decision Affect Filing Obligations?

By Robin Gerofsky Kaptzan & Chris Sciandra

On March 1, 2024, in the case National Small Business United v. Janet Yellen, the U.S. District Court for the 11th Circuit (Alabama) delivered a noteworthy decision stating that the Corporate Transparency Act (CTA) exceeded its congressional authority defined in the Constitution. This ruling is significant as Judge Lilies Burke concluded that the CTA is not authorized by the Constitution and commented that the ruling may fundamentally challenge and alter the CTA. The outcome is also expected to have far-reaching implications, potentially influencing future regulatory frameworks and discussions surrounding individual privacy and government oversight. For now, it is essential to understand how this decision may affect U.S. businesses, trusts, financial businesses or other entities immediate filing obligations, as we wait for a potential appeal of this decision to a higher court, or other cases filed.

The CTA requires defined individuals of any nationality involved in certain U.S. businesses, trusts, financial operations and other entities to disclose personal information to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), a federal authority, unless they fit within a defined exemption. (For an in-depth explanation of the CTA See Important Update re: Corporate Transparency Act – January 1, 2024: New Legal Business Owners’ Reporting Obligations to the Federal Government). In the recent case, the court held that Congress was legislating activities related to entity formation, which are constitutionally reserved for the states. Additionally, the court found that Congress was compelling innocent Americans to provide personal and sensitive information for inclusion in a criminal investigations database, even without any suspicion of wrongdoing.

This decision resulted from a constitutional challenge brought by the National Small Business Association (NSBA) and a small business owner, which was the sole legal challenge against the CTA despite widespread criticism. While the declaration that the CTA is unconstitutional is weighty regarding the law’s future application, it has certain limitations. It’s important to highlight that federal court decisions issued in the U. S. often operate on a regional basis. Each federal circuit court has jurisdiction over specific geographical areas, and decisions within one circuit may not automatically apply to others. Therefore, while the ruling by Judge Burke in the 11th Circuit District Court is a significant development, it doesn’t apply nationwide. On March 11, 2024, FinCEN clarified the application of the recent decision. In summary, FinCEN commented that:

  • FinCEN will continue to implement the CTA, as required by Congress, which means that all required reporting companies, as defined under the CTA, are still required to comply with the law and file the required reports, unless it falls into an exception.
  • FinCEN acknowledged that the exception is that it will not currently enforce the CTA against only the plaintiffs in NSBA v. Yellen (as of March 1, 2024).
    UPDATED: Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) | FinCEN.gov

This FinCEN notice means that, aside from the plaintiffs in NSBA v. Yellen, every business and corporation under the CTA’s guidelines still must fulfill the CTA requirements, unless other legal decisions alter its implications. Although some cases are quickly recognized as binding precedent, this case is not. If the 11th Circuit District Court decision is appealed or if other legal challenges emerge, the process could be prolonged. It is likely that any further decisions which could possibly prevent the necessity to comply with the CTA requirements would not come into effect prior to the current CTA filing deadlines.

In the interim, businesses are advised to exercise caution and ensure they have a system to identify the need for compliance, maintain current information, and file requisite reports timely. Compliance with federal regulations is necessary to avoid, with regards to willful behavior, 1) civil penalties up to $500 for each day a violation continues or has not been remedied, and 2) criminal violations involving fines up to $10,000, imprisonment for up to two years, or both. Until there’s a more comprehensive and nationally applicable ruling, erring on the side of caution and evaluating your filing obligations is highly recommended.

ZLG’s team is monitoring developments and providing support on CTA matters. If you have any questions about the CTA and its reporting and application requirements generally or for your specific situation, please reach out to us at your convenience for assistance navigating these new obligations.

In this article, ZLG is only offering a summary of the recent case involving the CTA and CTA requirements generally, and it is not intended to, and does not, provide legal advice and compliance recommendations to any entity or individual.

PROPOSED ANTI-MONEY LAUNDERING LEGITATION FOR THE REAL ESTATE INDUSTRY
In a continuing trend of increased anti-money laundering regulations, on February 16, 2024, FINCEN proposed new legislation focusing on specific residential real estate transfers. The proposed rules target non-financed transfers of residential properties, including those involving transfers by gift or note, into revocable and irrevocable trusts and into other entities, such as limited liability companies. Similar to the reporting requirements under the Corporate Transparency Act, information about the beneficial owners of a transferee trust or transferee entity would need to be reported to FINCEN within 30 days of the transfer of real estate. Comments on the proposed regulations are due by April 16, 2024.

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Attorney Advertising. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice. You should not act upon any such information without first seeking qualified professional counsel on your specific matter.