The U.S. Corporate Transparency Act

On January 1, 2021, the U.S. Congress enacted the then little-known Corporate Transparency Act (the “CTA”) as a part of the “National Defense Authorisation Act for Fiscal Year 2021”. The CTA is aimed at increasing the transparency of private company ownership and to “help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity.”

It imposed an obligation to file a report that identifies information about each “beneficial owner”, and each “company applicant” of either virtually every domestic company or a foreign reporting company, unless they fall into one of twenty-three exceptions. The agency enforcing the CTA, and to which the beneficial ownership information (“BOI”) reports are filed, is the Department of Treasury’s Financial Crimes Network.

National debate

Against the above background, a national debate has begun over the CTA’s compliance with the U.S. Constitution.

The CTA was found unconstitutional for the first time in a federal case pending in a federal district court in the Northern District of Alabama, Northeastern Division. The court held that the CTA “exceeds the constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving congress’ policy goals…”.

In response to this decision, without addressing the merits of the plaintiffs’ allegations, FinCEN indicated in its statement that the Justice Department had already filed an appeal but that, while that litigation is ongoing, FinCEN would respect the Alabama Court’s ruling and not attempt to enforce the CTA, solely against the two named plaintiffs, or any of the other related individuals/entities as specified in the Alabama Court’s injunction.

In other words, the FinCEN made it clear that the Alabama decision would not affect FinCEN’s general enforcement of the CTA against any individual or entity not expressly included in the Alabama action and that all other “reporting companies are still required to comply with the [CTA] and file beneficial ownership reports as provided in FinCEN’s regulations.” However, the foregoing status quo subsequently changed in December 2024.

Judge Amos L. Mazzant III of the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction in the case of Texas Top Cop Shop, Inc. et al. v. Garland, halting the enforcement of the CTA and its reporting obligations.

The case revolves around the CTA constitutionality; in particular it is aimed at reviewing whether the CTA intrudes upon states’ rights under the Ninth and Tenth Amendments, compels speech and violates First Amendment rights of association and violates the Fourth Amendment – which protects people against unreasonable searches and seizures by government – by requiring disclosure of private information without individualised suspicion or judicial process.

While not ruling on any of the above arguments specifically, Judge Mazzant found that the plaintiffs satisfied all prerequisites for obtaining a preliminary injunction – including finding a substantial likelihood of success on the merits of their claims. As a result, the court granted the requested preliminary injunction, enjoining enforcement of the CTA and its reporting obligations and staying the January 1, 2025 CTA reporting deadline.

Moreover, the court clarified that the granted preliminary injunction is intended to apply nationwide. In response to the above case, FinCEN posted on its CTA reporting portal that the CTA’s enforcement was put on hold.

However, this situation changed on December 23, 2024, when a panel of the U.S. Court of Appeals for the Fifth Circuit lifted the preliminary injunction recently imposed by a Texas district court in the Top Cop case that had blocked the reporting deadline for filing BOI reports.

In response to this ruling, FinCEN has extended its reporting deadline to January 13, 2025, meaning that businesses would have an additional 12 days to file their BOI reports.

It took only seventy-two hours for the situation to take another turn. The U.S. Court of Appeals for the Fifth Circuit halted the effect of a nationwide preliminary injunction imposed by a Texas federal district court blocking the reporting deadline for filing the BOI report; a merits panel of that circuit vacated the order.

Citing a need to “preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments,” the Fifth Circuit issued an order on December 26, 2024, vacating the court’s December 23, 2024 Order that granted the government’s motion to stop the district court’s preliminary injunction enjoining enforcement of the CTA.

In response to the above, FinCEN again posted a notification to its BOI reporting portal that “in light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports”.

In the latest twist in the back-and-forth, on January 23, 2025, the Supreme Court of the United States (“SCOTUS”) once again stayed – temporarily lifted – the nationwide preliminary injunction in the Top Cop case. With the release of this decision, it initially appeared that the CTA may once again be back in effect. However, that is not the case.

For clarity, this SCOTUS decision only temporarily stayed the nationwide injunction created by the Top Cop case pending the conclusion of FinCEN’s current appeal of the court’s decision in that case and disposition of any related petition for writ of certiorari – a process seeking judicial review.

That appeal is sitting with the U.S. Court of Appeals for the Fifth Circuit, which already granted FinCEN’s request for an expedited appeal. The initial briefs are currently due in February, and oral arguments are scheduled for March 25, 2025. More importantly, this SCOTUS decision relates only to the injunction created under the Top Cop case and does not lift or prevent any other injunctions related to the CTA.

While FinCEN has been busy working to appeal the Top Cop decision, on January 7, 2025, a different federal judge in Texas issued a separate injunction against the enforcement of the CTA in the case of Samantha Smith and Robert Means vs. U.S. Department of Treasury (the “Smith case”).

It should also be noted that the judge who issued the injunction in the Smith Case emphasised that it was based on different facts and arguments to Top Cop. In particular, citing 5 U.S. Code Sec. 705 – relief pending review – which provides that a reviewing court “may issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve status or rights pending conclusion of the review proceedings.”

Given that this SCOTUS decision relates only to the injunction created under the Top Cop case, it does not affect the injunction created under the Smith Case. As a result, effectively nothing has changed, and companies are not currently required to comply with the CTA or its reporting obligations.

FinCEN will almost certainly appeal the injunction created by the Smith case just as it did with the Top Cop Case. Moreover, given the comments Justice Gorsuch gave in this SCOTUS decision regarding the lack of power of district courts to issue nationwide injunctions, it should be expected that if the Smith case appeal makes its way to the Supreme Court that injunction would similarly be stayed; regardless of the court’s underlying reasons for issuing it. Until then, however, all we can do is watch and wait.

Taking all the above into consideration, all turns and twists, and a huge deal of insecurity as to the final outcome of these court battles, we strongly recommend that companies that are subject to the CTA not only monitor the status of the CTA and deadlines for its filing obligations, but also have the BOIR report ready to be filed once such filing becomes mandatory, or filing it voluntarily.

This article was authored by Justyna Regan, Partner, Hinshaw & Culbertson LLP