News & Insights

By Phil Jelsma & Ulrick Matsunaga

The Corporate Transparency Act (CTA) — passed by Congress in 2021 to protect the U.S. financial system from illicit use and prevent bad actors from abusing legal entities — officially went into effect in January of this year. Yet since it was enacted, the law — focused on minimizing financial crimes such as money laundering, tax fraud, and terrorism financing — has been plagued by legal setbacks.

As part of the Anti-Money Laundering Act of 2020, the CTA established beneficial ownership information reporting requirements for corporations, limited liability companies, and other entities created in or registered to do business in the United States. The law requires that these U.S. legal entities and foreign entities disclose information regarding their beneficial owners and persons who register or form them to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) via a beneficial ownership information (BOI) filing.

While the CTA was passed with good intentions, it has faced mounting criticism, with six cases now pending in the federal court system challenging its constitutionality.

Filed on Nov. 15, 2022, in Alabama, the earliest case and the one that has progressed the furthest is National Small Business United, et al. v. Yellen, et al., United States District Court, Northern District of Alabama, Case No. 5:22-cv-01448-LCB. On March 1, 2024, the U.S. District Court in Alabama issued an opinion that the CTA is unconstitutional, concluding that the law exceeded the legislative branch’s authority and lacked sufficient nexus to any enumerated power to be a “necessary or proper means of achieving Congress’ policy goals.” However, this ruling permanently enjoined enforcement of the CTA only against the plaintiffs in this specific case. Furthermore, on March 4, 2024, FinCEN issued a notice that it would not currently enforce the CTA against those same plaintiffs. While it was not explicitly stated, it is apparent that all other entities are still subject to the CTA. This case is currently pending an appeal.

The second case challenging the constitutionality of the CTA was filed on Dec. 29, 2023, in Ohio — Robert J. Gargasz Co. LPA, et al. v. Janet Yellen, et al., United States District Court, Northern District of Ohio, Case No. 1:23-cv-02468-CEF. On April 17, 2024, the defendants moved for an order staying the proceedings pending the resolution and outcome of the Alabama lawsuit’s Eleventh Circuit appeal.

A third case was filed on March 15, 2024, in Maine, William Boyle v. Janet Yellen, et al., United States District Court, District of Massachusetts, Case No. 2:24-cv-00081-LEW. The plaintiff in this case also argues that the CTA infringes on Maine’s sovereignty as a state to regulate entity formation. In a recent filing, plaintiff William Boyle responded to the defendants’ motion to dismiss and filed a cross-motion for summary judgment. The court has set an Aug. 30, 2024, deadline for replies and responses.

On March 26, 2024, a fourth case was filed in Michigan, Small Business Association of Michigan, et al. v. Yellen, et al., United States District Court, Western District of Michigan, Case No. 1:24-cv-00314-RJJ-SJB.The plaintiff in this case argues that the CTA is an unconstitutional violation of the Fourth Amendment — an unlawful search infringing on the privacy of citizens. Responses to plaintiff’s motion for summary judgment are also due by Aug. 30, 2024.

A subsequent case was filed on May 28, 2024, in Texas. In Texas Top Cop Shop, Inc. et al. v. Merrick Garland, et al., United States District Court for the Eastern District of Texas, Case No. 4:24-cv-00478-ALM, the plaintiff argues the CTA exceeds Congress’s enumerated powers — burdening the rights of entities and citizens to participate in a wide variety of expressive activities and that it consists of an unreasonable search and seizure within the Fourth Amendment.

The sixth case was filed on May 29, 2024, in Massachusetts, Black Economic Council of Massachusetts, Inc., et al. v. Janet Yellen, et al., United States District Court, District of Massachusetts, Case No. 1:24-cv-11411-PBS. This case also challenges the constitutionality of the CTA, but it differs from the other cases in that it does not limit its request for relief to the plaintiffs of the case, but to all parties affected by the CTA.

These cases indicate that the fate of the CTA is far from certain, yet it is still recommended that non-exempt business organizations comply with the reporting requirements of the CTA to mitigate the risks of penalties and imprisonment. Failure to comply with the CTA carries serious civil and criminal violations — false or fraudulent beneficial ownership reports or a failure to file is punishable by $500 a day, up to $10,000 in fines and two years in prison. A wait-and-see approach is — at the very least — risky.

The reporting deadline of Dec. 31, 2024, for existing business organizations is fast approaching. Now is the time to collect the necessary information on the beneficial owners of your business organization in order to accurately submit your entity’s BOI filing.

Phil Jelsma is a partner and chair of the Tax Practice Group, and Ulrick Matsunaga is an associate attorney and works in the Entity Formation and Tax Practice Group at Crosbie Gliner Schiffman Southard & Swanson (CGS3). The article was published in The Daily Journal and The Daily Transcript.