Federal Court Halts Corporate Transparency Act: Implications for U.S. Businesses

On December 3, 2024, U.S. District Judge Amos Mazzant of the Eastern District of Texas issued a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (CTA), deeming it likely unconstitutional. This decision temporarily halts the requirement for certain U.S. companies to disclose their beneficial owners to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Background on the Corporate Transparency Act

Enacted in 2021, the CTA mandates that corporations, limited liability companies (LLCs), and similar entities report information about their beneficial owners—individuals who exercise substantial control or own at least 25% of the company—to FinCEN. The primary aim is to combat illicit activities such as money laundering and terrorist financing by increasing corporate transparency. The reporting requirements were set to take effect on January 1, 2025.

The Court’s Rationale

Judge Mazzant’s ruling aligns with a similar decision by an Alabama federal judge earlier this year. He argued that the CTA represents an “unprecedented” federal overreach into areas traditionally governed by state law, thereby infringing upon states’ rights as protected by the Tenth Amendment. The judge expressed concerns that the law encroaches on state sovereignty by imposing federal mandates on entities created under state laws.
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Implications for Businesses

The injunction provides temporary relief for businesses that would have been subject to the CTA’s reporting requirements. Companies are no longer required to comply with the January 1, 2025, deadline for submitting beneficial ownership information, pending further legal developments. However, businesses should remain vigilant, as the injunction is not a final determination of the law’s constitutionality. The case is expected to progress through higher courts, and the reporting requirements could be reinstated if the injunction is overturned.
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Next Steps

The Justice Department has declined to comment on the ruling, but an appeal is anticipated. The legal journey may ultimately lead to the Supreme Court, which would provide a definitive resolution on the CTA’s constitutionality. In the meantime, businesses should stay informed about the status of the CTA and be prepared to comply with reporting requirements if they are reinstated.

Conclusion

The recent injunction against the Corporate Transparency Act underscores the ongoing tension between federal authority and states’ rights. While the goal of the CTA is to enhance corporate transparency and combat financial crimes, its implementation has raised significant constitutional questions. As the legal process unfolds, businesses must remain attentive to developments to ensure compliance with any future regulatory obligations.