Introduction
Picture a bustling metropolis where a seemingly innocent storefront is a façade for a sprawling criminal network. Behind its polished exterior lies a web of deceit, funneling illicit funds through intricate corporate structures designed to evade the law. As law enforcement agencies scramble to solve this knot of financial crime, they face a formidable adversary—the veil of corporate anonymity. Enter the hypothetical scenario of “XYZ Consulting,” a fictitious entity entangled in the crosshairs of suspicion. Despite its appearance as a legitimate business, whispers of nefarious dealings lurk beneath the surface. Unbeknownst to authorities, XYZ Consulting serves as a critical cog in the money laundering machinery, facilitating the flow of dirty money through its labyrinthine corporate structure.
As legislators grapple with the insidious threat of money laundering, the Corporate Transparency Act (CTA) emerges as a beacon of hope—a legislative sword poised to pierce the corporate veil and expose the hidden actors orchestrating financial crimes. Yet, as the hypothetical saga of XYZ Consulting unfolds, constitutional challenges loom large on the horizon. In this hypothetical dilemma, the fate of XYZ Consulting mirrors the broader struggle between governmental authority and individual liberties—a struggle that companies and legislators currently face.
While this struggle grows, one thing remains clear: the outcome of the CTA’s constitutional conundrum will shape the trajectory of money laundering legislation for years to come. Money laundering is a process where criminals conceal their illegally obtained assets, enabling them to profit from their illicit activities without detection from law enforcement.[1] One may wonder how such activity affects anyone outside the IRS, but such activity is much more than tax evasion. Money laundering allows criminal activity to continue to be funded, impacting more individuals as these illegal markets grow. Criminals such as drug traffickers, human traffickers, terrorist financiers, and white-collar professionals engage in money laundering frequently.[2] While most United States citizens would want Congress to enact laws that protect our country from such crimes, it may not have the authority to do so. As Judge Burke said, “the wisdom of a policy is no guarantee of its constitutionality. [3]
I. Background
In 2021, Congress passed the 2021 National Defense Authorization Act, which included the CTA.[4] The CTA went into effect on January 1, 2024.[5] The CTA requires the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to enforce a beneficial ownership reporting regime, which requires companies to provide information about their beneficial owners, senior officers, and other control persons to the federal government.[6] Unless exempt, every business entity created through incorporation with a Secretary of State or similar office must file a Beneficial Ownership Information (BOI) report.[7] If the entity is not exempt, it is a domestic reporting company.[8] However, most exemptions apply to entities already subject to heavy federal and state regulation, such as publicly traded companies, credit unions, insurance companies, and accounting firms.[9]
Companies created before the CTA’s effective date must provide information about the company and its beneficial owners.[10] However, companies created after the date will have to supply additional information on their company’s applicants. [11] Regarding information about the company itself, the report must set forth: (1) the company’s full legal name; (2) any trade or “doing business as” names; (3) the complete current street address of the principal place of business; (4) jurisdiction of formation; and (5) taxpayer identification number. [12] Regarding the information about the company’s beneficial owners and applicants, the report must set forth the individual’s: (1) full legal name; (2) date of birth; (3) complete current residential street address; (4) unique identifying number, and the issuing jurisdiction from either a current (i) U.S. passport, (ii) state or local ID document, (iii) driver’s license, or (iv) if the individual has none of those, a foreign passport; and (5) an image of the document from which the unique identifying number was obtained.[13] Failure to comply with the CTA can result in both civil and criminal penalties, including up to $10,000 in fines and two years of imprisonment for willfully providing false information or failing to provide or update information.[14]
Congress sought to prevent financial crimes committed through shell corporations’ aid, such as money laundering and tax evasion.[15] A shell corporation is a business without active operations or significant assets.[16] While not all shell companies are illegal they are sometimes used illegitimately to disguise business ownership from the public.[17] Shell corporations enable criminals to disguise the identity of interested individuals and the flow of money through complex corporate formations, making it difficult for investigators to pinpoint corporate criminals.[18]
However, the CTA is considered “the furthest- and widest-reaching federal business entity law ever enacted” as it will apply to 32.6 million current businesses and 5 million newly formed businesses each year.[19] Although many recognize its favorable policy-oriented goal, the CTA significantly burdens small businesses who are forced to comply with the CTA’s rigorous reporting requirements.[20] However, the recent decision of National Small Business Unites, d/b/a the National Small Business Association, et al. v. Janet Yellen, in her official capacity as Secretary of the Treasury (NSBU), evidences that the new corporate law will face constitutional battles.[21]
II. National Small Business United, d/b/a the National Small Business Association, et al. v. Yellen, et al.
FinCEN issued a final rule implementing the CTA on September 29, 2022, which would be effective as of January 1, 2024.[22] Six weeks later, the NSBU plaintiffs sued the Treasury Department; the Treasury Secretary, Janet Yellen; and the Acting Director of FinCEN, Himamuli Das, in their official capacities (Government). [23] The plaintiffs alleged that the CTA’s mandatory disclosure requirements exceed Congress’s authority under Article 1 of the Constitution and violate the First, Fourth, Ninth, and Tenth Amendments.[24] The plaintiffs include the National Small Business Association (NSBA); an Ohio non-profit corporation that represents and protects the rights of small businesses across the United States; and Isaac Winkles, an NSBA member and owner of two small businesses.[25]
On the issue of constitutionality, the Government offered three sources for its authority.[26] First, it argued that the political branches have plenary power to conduct foreign affairs under its Constitutional foreign affairs power.[27] Congress’s motivating interest in fighting foreign money laundering places the CTA within those powers.[28] Second, the Government argued that the CTA is constitutional under the Commerce Clause because many state entities engage in activities that qualify as or affect commerce.[29] Lastly, the Government argued that the CTA is a necessary and proper exercise of Congress’s taxing power because the CTA’s FinCEN database assists in efficient tax administration.[30] However, the United States District Court for the Northern District of Alabama found none of these arguments persuasive and ultimately held that the CTA was unconstitutional.[31]
Examining Congress’s extensive powers over foreign affairs and national security, the Government urged that in enacting the CTA, Congress believed that collecting beneficial ownership information was needed to protect the United States’ national security interest, enable critical national security intelligence, aid law enforcement efforts to counter corporate crimes, and comply with international anti-money laundering standards.[32] Additionally, the Government argued that the court should defer to the political branches’ policy determination that compliance with international financial standards is best achieved through the CTA.[33] The court agreed that it should defer to the political branches on matters of national security policy because the Judiciary is not equipped for such policies.[34] However, the court found that it cannot defer in such a way that violates the Constitution’s restraints on federal power.[35]
The court pointed out that the Constitution’s enumerated powers place a limitation on Congress, and incorporation is an internal affair as corporations are creatures of state law.[36] The court explained that although the CTA does not directly interfere with or commandeer State incorporation practices, it effectively converts a large portion of local conduct into a matter of federal enforcement.[37] Therefore, the CTA also could not be justified as a proper exercise of the necessary and proper powers to carry out Congress’s foreign affairs powers because such power must assist a validly granted power, which the Government failed to establish.[38] The found that the CTA’s congressional findings of harm to the national security interest of the U.S. were not enough to conclude that regulation in a purely domestic area of incorporation was constitutional.[39] Additionally, compliance with international money laundering standards is good policy, but it is insufficient to make the CTA necessary and proper.[40]
In support of the Government’s Commerce Clause argument, it argued that the CTA’s regulations fit within all three categories of activity that Congress may regulate under its commerce powers, which include: (1) channels of interstate and foreign commerce, (2) the instrumentalities of, and things and persons in, interstate and foreign commerce, and (3) activities that have a substantial effect on interstate and foreign commerce.[41] However, the court found that the CTA does not regulate the channels and instrumentalities of commerce because it applies to reporting companies created by states registered to do business in the U.S. and mandates these entities to report information about their beneficial owners and applications to FinCEN.[42] The court pointed out that the CTA neither uses nor references the words commerce, channel, or instrumentality of commerce.[43] Additionally, the court found that the CTA did not fall into the substantial activity category because it did not regulate commerce on its face, contain a jurisdictional hook, or serve as an essential part of a comprehensive regulatory scheme.[44]
Finally, considering the last justification for the CTA’s constitutionality, the Government urged that it is a proper exercise of Congress’s taxing power.[45] The Government further argued that collecting beneficial ownership information is necessary and proper to ensure taxable income is appropriately reported.[46] Congress recognized this relationship by drafting the CTA to grant the Treasury Department access to this information for tax administration purposes.[47] However, the court found that providing access to the CTA’s database for tax administration is not enough to establish a sufficiently close relationship with Congress’s taxing power.[48] The court found that accepting the Government’s argument would elicit a substantial expansion of federal authority to permit Congress to exercise its taxing power as long as the law provided for collecting valuable information for tax administration.[49]
The court ultimately found the CTA unconstitutional because it cannot be justified as exercising Congress’s enumerated powers.[50] Further, the court noted it unnecessary to address whether the CTA violates the First, Fourth, and Fifth Amendments.[51] Following this opinion, the court entered a final declaratory judgment enjoining the Treasury Department and FinCEN from enforcing the CTA against the named plaintiffs.[52] FinCEN has stated that it plans to comply with the court’s order as long as it remains in effect and is not currently enforcing the CTA against the plaintiffs in that action.[53]
III. The Future of the CTA
Currently, the relief granted in NSBU is limited to the named plaintiffs in the case.[54] Therefore, no other companies or individuals can rely on the holding to avoid compliance with the CTA.[55] Typically, when a law is ruled unconstitutional by a district court, the federal agency overseeing it will indicate whether it plans to appeal or accept the decision.[56] A few law firms expect the Treasury to appeal the decision but recognize that the CTA’s future is unclear.[57] FinCEN issued a press release acknowledging the court’s holding and promising to follow the court’s order for the named plaintiffs in the case.[58] However, the release did not address enforcement against other persons under the CTA or the agency’s procedural plan.[59] If the Treasury appeals this decision to the Eleventh Circuit Court of Appeals, it may seek a stay of judgment, which, if granted, would lift the district court’s order to cease enforcement of the CTA against the named plaintiffs.[60] The Treasury will likely appeal that decision if it is not granted.[61] Mark Friedlich, the Vice President of Government Affairs at Wolters Kluwer Tax & Accounting believes that if the case reaches the Eleventh Circuit, regardless of the appellate court’s holding, it will reach the United States Supreme Court.[62]
The American Institute of Certified Public Accountants (AICPA) has encouraged small businesses to continue to file BOI reports but has also said it continues pushing for the BOI reporting rule suspension.[63] Those who fail to timely file on behalf of the businesses will end up putting their faith into NSBA winning on appeal.[64] If NSBA loses its appeal, these businesses will likely face fines and penalties under the CTA.[65]
* J.D. 2024, Paul M. Hebert Law Center, Louisiana State University. I dedicate this Article to Morgan Moore, my mentor. Thank you for igniting my passion for corporate law and offering unwavering support as I embark on this new career journey. Your guidance has been invaluable.
[1] What is Money Laundering?, LexisNexis, https://www.lexisnexis.com/en-gb/glossary/money-laundering (last visited Mar. 6, 2024), [https://perma.cc/PR7Q-WS2W].
[2] Id.
[3] Nat’l Small Bus. United v. Yellen, No. 5:22-CV-1448-LCB, 2024 WL 899372, at *1 (N.D. Ala. Mar. 1, 2024).
[4] Id.
[5] Id. at *2.
[6] Satish M. Kini , Corporate Transparency Act Ruled Unconstitutional, but Scope of Judgment is Limited, Debevoise & Plimpton (Mar. 5, 2024), https://www.debevoise.com/insights/publications/2024/03/corporate-transparency-act-ruled-unconstitutional [https://perma.cc/VR7P-DFPS].
[7] Sandra Feldman, What every small business needs to know about the Corporate Transparency Act and Beneficial Ownership Information Reporting, Wolters Kluwer (Jan. 2, 2024), https://www.wolterskluwer.com/en/expert-insights/small-businesses-and-the-corporate-transparency-act [https://perma.cc/Q9HW-94ZE].
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Samuel Toth, Corporate Transparency Act: An Overview, JDSUPRA (Oct. 9, 2023), https://www.jdsupra.com/legalnews/corporate-transparency-act-an-overview-3316856/ [https://perma.cc/NMC6-GKGC].
[15] Nat’l Small Bus. United v. Yellen, No. 5:22-CV-1448-LCB, 2024 WL 899372, at *1 (N.D. Ala. Mar. 1, 2024).
[16] Will Kenton, What Is a Shell Corporation? How It’s Used, Examples and Legality, Investopedia (July 17, 2022), https://www.investopedia.com/terms/s/shellcorporation.asp [https://perma.cc/4ZK5-H7V3].
[17] Id.
[18]Nat’l Small Bus. United, 2024 WL 899372, at *1.
[19] William E H Quick, The Corporate Transparency Act: Deniers Beware, ABA (July 10, 2023), https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-july/the-corporate-transparency-act-deniers-beware/ [https://perma.cc/SP34-PSGN].
[20] Id.
[21] See generally Nat’l Small Bus. United, 2024 WL 899372
[22]Id. at *2.
[23] Id.
[24] Id.
[25] Id.
[26] Id. at *7.
[27] Id.
[28] Id.
[29] Id.
[30] Id.
[31] See generally id.
[32] Id.
[33] Id.
[34] Id.
[35] Id.
[36] Id. at *8.
[37] Id.
[38] Id. at *9.
[39] Id.
[40] Id. at *10.
[41] Id.
[42] Id. at *11.
[43] Id.
[44] Id. at *20.
[45] Id.
[46] Id.
[47] Id.
[48] Id.
[49] Id.
[50] Id.
[51] Id.
[52] Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), FinCEN, https://www.fincen.gov/news/news-releases/notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448-nd-ala (last updated Mar. 11, 2024) [https://perma.cc/E6KJ-EVTR].
[53] Id.
[54] See id.
[55] Andrew Grossman, Corporate Transparency Act Declared Unconstitutional: How Does This Impact Your Company?, JDSUPRA, https://www.jdsupra.com/legalnews/corporate-transparency-act-declared-3646421/ [https://perma.cc/Q5E5-LDKY].
[56] Id.
[57] Id.
[58] Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), supra note 52.
[59] See id.
[60] Mark Friedlich, Corporate Transparency Act ruled unconstitutional: What it means for Beneficial Ownership Reporting, Wolters Kluwer (Mar. 5, 2024), https://www.wolterskluwer.com/en/expert-insights/corporate-transparency-act-ruled-unconstitutional-what-it-means-for-beneficial-ownership-reporting [https://perma.cc/SQT9-G3E6].
[61] Id.
[62] Id.
[63] Id.
[64] Id.
[65] Id.