An Alabama federal judge ruled the Corporate Transparency Act, a sweeping bipartisan anti-money-laundering law passed in 2021, was unconstitutional, leaving its future uncertain.
The act became effective Jan. 1. Congress hoped it would help stop money-laundering by rooting out the use of anonymous shell companies and would track the flow of illicit money and protect U.S. national security interests. The law creates a beneficial ownership database and reporting requirements for companies to file ownership information to the U.S. Treasury Department, similar to existing requirements in the U.K. and the European Union. The law focuses primarily on small and private companies and applies to more than 32 million small businesses nationwide.
The National Small Business Association, a small business advocacy group, filed a lawsuit against the U.S. Treasury Department and its leaders in the U.S. District Court for the Northern District of Alabama in 2022, seeking to block the CTA. NSBA argued the bill was unconstitutional because it infringes on protected rights of state sovereignty, privacy and due process.
U.S. District Judge Liles C. Burke, in a ruling Friday, sided with the small business group, saying that the CTA was unconstitutional. Judge Burke raised questions about the corporate formation requirements imposed by the bill, a process which is usually left to state governments, and noted that the law applies to corporate entities even if the entity conducts businesses only within a single state or does no business at all. The judge added that the CTA’s ownership disclosure requirements gave the government “unfettered legislative power.”
“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,” Judge Burke, a Trump appointee, wrote in the ruling.
A spokeswoman for the Treasury Department said in an email Monday the agency is complying with the court’s injunction, but didn’t indicate whether the government would appeal the ruling.
“Congress overwhelmingly voted to enact the bipartisan Corporate Transparency Act in 2021 to crack down on illicit shell companies and combat financial crime,” the spokeswoman said, referring to the Justice Department for any further information about the case.
A spokesman for the Justice Department declined to comment Monday.
Todd McCracken, president and chief executive of NSBA, welcomed the ruling, saying it “justifies the concerns of millions of American businesses about how the CTA is not only a bureaucratic overreach, but a Constitutional infringement.”
“The judge’s decision is an opportunity for Congress to go back to the drawing board and find a solution that will truly protect Americans from bad actors,” McCracken said in a statement Monday.
But many supporters of the CTA, including the U.S. banking industry and anticorruption groups, are cautioning about the impact of striking the law.
“This is a pro-crime, pro-drug cartel, pro-fentanyl ruling which undermines the rule of law and allows criminals to use anonymous shell companies to hide their dirty money from law enforcement,” Ian Gary, executive director of the anticorruption group FACT Coalition, said in a statement.
Scott Greytak, director of advocacy at anticorruption group Transparency International U.S., said that Judge Burke’s ruling failed to recognize the national security interests that were the basis for the CTA.
“Instead, Judge Burke’s opinion imagines a world in which international money laundering simply doesn’t exist,” Greytak said in a statement, adding that the group expects the ruling to be appealed and overturned by the 11th Circuit Court of Appeals.
In practice, the ruling could create confusion for some companies, according to Angela Gamalski, a partner at law firm Honigman specializing in regulatory requirements and compliance.
“Companies that are facing rapidly approaching filing deadlines may be wondering whether compliance is now optional,” Gamalski said. “Companies that already filed may be wondering if they can retract reports of beneficial owners’ personal information.”