A federal appeals court has lifted a nationwide injunction that had blocked enforcement of the Corporate Transparency Act (CTA), a crucial anti-money laundering law designed to combat illicit financial activities. The 5th U.S. Circuit Court of Appeals in New Orleans ruled on Monday, allowing the law to take effect while legal challenges continue.
The ruling overturned a decision earlier this month by U.S. District Judge Amos Mazzant in Sherman, Texas, who had found the CTA unconstitutional. Judge Mazzant’s ruling, issued on December 3, had been sought by the National Federation of Independent Business (NFIB) and several small businesses ahead of a key deadline for businesses to file their first reports under the CTA by January 1, 2024.
The CTA, enacted as part of the 2021 National Defense Authorization Act during the final year of President Donald Trump’s term, requires U.S. corporations and limited liability companies (LLCs) to disclose the identities of their “beneficial owners” to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The goal is to prevent criminal organizations and corrupt actors from using anonymous shell companies to launder illicit funds and evade taxes.
The 5th Circuit panel’s decision to lift the injunction was based on its belief that the U.S. Department of Justice had made a compelling case for the CTA’s constitutionality. In its ruling, the court emphasized that Congress has broad authority under the U.S. Constitution’s Commerce Clause to regulate economic activities that impact interstate commerce.
The three-judge panel was divided on some aspects of the ruling, with Judge Catharina Haynes, a George W. Bush appointee, dissenting in part. She agreed that the nationwide injunction should be lifted, but argued that the reporting requirement should still be paused for the plaintiffs, including NFIB members.
Following the 5th Circuit’s decision, FinCEN has confirmed that the CTA’s reporting requirement is back in effect. However, to accommodate businesses affected by the legal uncertainty, the agency has extended the deadline for companies formed before 2024 to submit their initial reports. These businesses now have until January 13, 2024, to comply with the new regulations.
The Corporate Transparency Act has faced multiple legal challenges since its enactment, with opponents arguing that it infringes on privacy and states’ rights. Judge Mazzant’s decision was the first to issue a nationwide injunction against the law. However, a separate legal challenge in Alabama has resulted in a more limited injunction that is currently on appeal.
Judge Mazzant had previously argued that the CTA violated the Tenth Amendment, which reserves certain powers to the states, and that Congress lacked the authority to impose such a sweeping requirement. He described the law as a “quasi-Orwellian statute.” However, the 5th Circuit disagreed, underscoring Congress’s constitutional authority to regulate economic activities related to interstate commerce.
The case, Texas Top Cop Shop v. Garland, will continue to make its way through the courts. Meanwhile, businesses are urged to review their compliance obligations under the Corporate Transparency Act.
For the NFIB, which represents over 300,000 small businesses across the U.S., this decision is a setback. Caleb Kruckenberg, representing NFIB through the Center for Individual Rights, has pledged to pursue further appeals.
The Corporate Transparency Act has been heralded as a landmark piece of legislation to curb money laundering and improve the U.S.’s ability to track illicit financial flows. By closing loopholes that allowed bad actors to hide behind anonymous entities, the CTA aims to level the playing field for law-abiding businesses and enhance global financial transparency.
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