Corporate Transparency Act rule halted by nationwide injunction

Joseph G. Veentra

Guest Columnist

December 23, 2024

The Corporate Transparency Act (CTA) Beneficial Owner Information disclosure rule, a federal law designed to fight financial crime, such as money laundering and fraud, has hit a significant roadblock.

A federal judge in Texas issued a nationwide injunction Dec. 4, halting its enforcement just weeks before compliance deadlines arrived. 

Though this injunction pauses the disclosure rule’s rollout, the implications are far-reaching for businesses, law enforcement and transparency advocates.

The last-minute ruling reflects the tension between the goal of combating financial crimes, respect for business privacy and autonomy and principles of federalism.

From the beginning, the CTA was viewed as a critical tool for transparency, while others criticized it as an overreach.

First, what is the CTA?

Enacted in 2020 as part of the Anti-Money Laundering Act, the CTA aimed to curb illicit financial activities by requiring businesses to disclose the identities of their “beneficial owners,” defined as individuals who either own at least 25% of a business or exercise significant control over it.

The information – which included each person’s full legal name, date of birth, residential or business address and a unique identifying number (e.g., a driver’s license or passport number) – was to be submitted to a centralized database managed by the Financial Crimes Enforcement Network (FinCEN).

Law enforcement agencies would then use this data to try to uncover and dismantle criminal networks that rely on anonymous business ownership to hide their illicit activities.

The CTA applied broadly to U.S. entities, including small businesses organized as corporations, limited liability companies (LLCs) and similar structures.

It also applied to foreign businesses registered to operate in the U.S.

Certain groups, such as publicly traded companies and heavily regulated industries like banks and investment firms, were exempt.

New entities were required to submit their beneficial owner information within 30 days of formation, but existing entities had until Jan. 1, 2025, to report.

Failure to comply came with severe penalties, including civil fines of up to $500 per day and potential criminal charges that could lead to up to two years in prison for deliberate violations.

Why the CTA was challenged

From its inception, the CTA faced criticism from small business owners, privacy advocates and legal experts.

Similar laws exist in other countries, notably within the European Union, which has robust transparency rules to combat financial crimes.

But the U.S. version has faced more backlash, largely because it applies to smaller businesses that are typically exempt under other frameworks.

The CTA’s broader scope and severe penalties contributed to its controversial reception.

Small businesses, many of which operate with limited resources, were among the most vocal critics.

They argued that the law imposed significant administrative and financial burdens, especially for entities without dedicated compliance teams.

For example, understanding the legal definitions of beneficial owners and accurately gathering the required data was expected to be a daunting task.

In addition, privacy advocates raised red flags about the centralized database.

There was concern about the potential misuse of sensitive information, such as unauthorized access by hackers or misuse by government officials.

Though FinCEN promised strict controls, critics remained skeptical of the database’s security.

The lawsuit leading to the injunction, filed in Texas, centered on constitutional concerns.

The plaintiffs argued that the CTA:

• Violated the First and Fourth Amendments by mandating disclosure and infringing on privacy rights without sufficient safeguards
• Exceeded federal authority under the 10th Amendment by imposing broad requirements on businesses without clear justification and beyond the commerce clause’s constitutional authority
• Carried disproportionately harsh penalties for non-compliance, making it punitive rather than regulatory

The court found these arguments persuasive enough to issue a nationwide injunction.

Though the ruling is not final, it effectively pauses this aspect of the CTA’s implementation.

What this means for businesses

For now, businesses that were preparing to comply can set those efforts aside.

The injunction prevents FinCEN from enforcing the CTA’s requirements or imposing penalties. But the pause may be temporary.

FinCEN has announced plans to appeal the decision.

Several legal experts, however, predict the process could take months or even years, and some believe this rule within the CTA may be revised or revoked before the appeal concludes.

Congress could step in to amend the law, addressing the court’s concerns by narrowing its scope or easing compliance burdens.

A revised version of the CTA could emerge with fewer requirements for small businesses.

If the courts ultimately strike down the CTA, Congress may explore alternative measures to achieve transparency goals without overburdening businesses.

The decision highlights the ongoing tension between transparency and privacy. 

Though the CTA’s critics celebrate the injunction, businesses should remain prepared for similar laws in the future.

As international efforts toward financial transparency grow, the U.S. may be pressured to adopt stricter rules.

In the meantime, business owners should stay informed and make sure their corporate books are up to date.

If the law is reinstated or revised, deadlines and requirements could change quickly.

Also, understanding the broader push for transparency can help businesses prepare for potential future regulations.