Appeals court breathes new life into Corporate Transparency Act

A federal appeals court has reversed a lower court decision involving the Corporate Transparency Act and its requirement for beneficial ownership information reporting by companies, finding it to be constitutional, although the Treasury Department decided earlier this year not to enforce the requirement against businesses and people in the U.S.

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The U.S. Court of Appeals for the 11th Circuit reversed a lower court decision Tuesday in the case of National Small Business United v. U.S. Department of the Treasury. The anti-money laundering law requires certain U.S. entities to provide basic identifying information to the Treasury Department about their true, or “beneficial,” owners. 

The National Small Business Association, which had launched the lawsuit, noted that today, U.S. small business do not have to file any new beneficial owner reports thanks to the Treasury currently opting not to enforce the CTA against U.S. businesses.

Earlier this year, the Treasury published an interim rule saying it would not take any enforcement actions under the CTA against U.S. citizens or domestic reporting companies or their beneficial owners. The NSBA noted that is still an interim rule, however. If it’s not finalized or a new administration repeals the rule, small businesses could be back in the Treasury’s crosshairs. But for now, there is no change to U.S. small businesses.

“Obviously, we are very disappointed by this ruling and its impact on small businesses,” said NSBA president and CEO Todd McCracken in a statement Tuesday. “While small businesses still remain safe today against the unfair CTA burden, it is now imperative that Congress pass legislation that permanently repeals the CTA.” 

In its decision, the Eleventh Circuit reversed and remanded 3-0 the initial ruling from Judge Liles Burke of the U.S. District Court of the Northern District of Alabama that enjoined enforcement of the CTA.

Some supporters of the CTA hailed the ruling by the appeals court. 

“The Court’s decision confirms what Congress understood and intended when it originally passed this legislation: that anonymous companies are drivers of fraud, drug trafficking, and the threats posed by terrorists and transnational criminal organizations,” said Erica Hanichak, deputy director of the Financial Accountability and Corporate Transparency Coalition, in a statement. “Congress already gave our country’s law enforcement and national security officials the tools they need to address money laundering through shell and front companies. It’s long past time that we empower them to start using these tools to protect our communities.” 

During the court’s deliberation, several friends of the court, including members of Congress, national security and anti-corruption experts, and tax law experts, filed briefs in support of the position that the CTA was constitutional. The FACT Coalition and its partners also filed an amicus brief in the lower court case reversed by the 11th Circuit. The court cited the support of law enforcement, national security experts and industry associations as influential in informing Congress’s findings that the abuse of anonymous U.S. shell companies impacts interstate commerce.

In its opinion, the Eleventh Circuit panel, which included judges appointed by both Republican and Democratic presidents, recognized the harms posed by corporate anonymity, stating that “bad actors have been using the anonymity of the corporate form to commit financial crimes, such as money laundering and financing terrorism,” and that law enforcement has “long suffered from an information gap” because most states do not require disclosure of corporate owners.

The court concluded that the CTA constitutionally addresses these risks by “effectively prohibiting anonymous business dealings” that have a “substantial aggregate impact on interstate commerce,” while imposing only a “uniform and limited reporting requirement” consistent with the Constitution.

Transparency International U.S. submitted an amicus curiae brief in the case as well. “The constitutional case for corporate secrecy has collapsed under appellate scrutiny,” said Scott Greytak, deputy executive director for TI US, in a statement. “The Eleventh Circuit rejected the challengers’ claims and put the Corporate Transparency Act back on firm legal footing. While these questions will continue to move through other courts, today’s message from the highest court yet to review the CTA was unmistakable: The Constitution is not a shield for illicit actors to perpetrate their crimes through anonymous companies.”