The Corporate Transparency Act (“CTA”), a significant legislative effort aimed at curbing financial crimes by increasing corporate accountability, has been declared unconstitutional by the U.S. District Court for the Northern District of Alabama.[1] On March 1, 2024, Judge Liles Burke permanently enjoined the government from enforcing the CTA, ruling in favor of the National Small Business Association (“NSBA”) and highlighting a need for legislation that respects constitutional limits while addressing the challenges of money laundering and financial transparency.[2]
Examining the Alabama Court’s CTA Decision
In his Memorandum Opinion, Judge Burke reminds us of the late Justice Antonin Scalia’s comment, that “federal judges should have a rubber stamp that says Stupid but Constitutional…” and that the NSBA complaint, “which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.”[3]
The CTA aimed to require over 32 million entities to disclose their beneficial ownership to the Financial Crimes Enforcement Network, a move criticized for disproportionately affecting small businesses and infringing on privacy rights.[4] The NSBA’s lawsuit, filed in November 2022, highlighted these concerns, arguing that the CTA overstepped constitutional boundaries by creating an overly intrusive database of U.S. citizens engaged in lawful activities.[5] Specifically, the NSBA asserted that, while “[m]oney laundering and terrorism funding are important U.S. national security problems…the logical cure is to establish laws that follow the money, not to build a Big-Brother database of predominantly U.S. citizens and permanent residents who are simply engaging in lawful activities.”[6] Sixteen months later, the Court agreed, holding the CTA “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be deemed necessary or proper for achieving Congress’ policy goals.”[7]
Although the Court primarily analyzed three questions, the crux of the holding came down to asking: “Does Congress have authority under the Commerce Clause to regulate non-commercial, intrastate activity when ‘certain entities, which have availed themselves of States’ incorporation laws, use the channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce?’”[8] Judge Burke determined that the explicit wording of the CTA fails to govern the fundamental economic activities claimed by the government and lacks a “jurisdictional hook” — a “standard operating procedure for Commerce Clause legislation” and one which would confine the CTA’s applicability to particular activities directly linked to or impacting interstate commerce.[9]
What’s Next for the Corporate Transparency Act?
Given the ruling’s impact on national security and anti-money laundering initiatives, there is a high likelihood the government will appeal the ruling — a pivotal step in further examining the balance between security interests and constitutional freedoms, particularly concerning privacy and the Commerce Clause’s application. Moreover, the ruling will open a Pandora’s box of potential legal, legislative, and regulatory responses, likely catalyzing a wave of similar lawsuits by other entities, especially small businesses feeling the weight of regulatory overreach. Entities that previously complied may question the implications for their disclosed information, leading to a broader dialogue on privacy and data protection.
Simultaneous with the appeal, the government will also likely continue its efforts by revisiting the drawing board, crafting legislation that targets financial crimes without imposing undue and unconstitutional burdens on businesses. However, any new proposed legislation would need to carefully abide by constitutional constraints set out in the Memorandum Opinion, while providing a more targeted approach specifically geared towards regulating the channels and instrumentalities of commerce — for example, by limiting the act to entities that initiated commercial operations.
It is also important to note that this ruling only applies to members of the NSBA, as the plaintiff of the lawsuit.[10] One way for businesses to avail themselves to Judge Burke’s ruling is to become a member of the NSBA. Another option, especially more viable for those with businesses formed before January 1, 2024 (since the filing deadline is on or before January 1, 2025) is to wait out the appeal process and “copycat” litigations by other business owners until this matter reaches the Supreme Court. Meanwhile, those who are not NSBA members and who formed a new entity in 2024 or made certain changes to their entity may be taking a risk by not filing their applicable reports within the 90-day deadline.
Additionally, certain states have implemented their own versions of the CTA. Specifically, New York has adopted the “LLC Transparency Act” effective December 21, 2024, covering LLCs that are formed in NY or authorized to do business in the state.[11] Consequently, business owners are advised to confer with local counsel to determine whether any other submissions are required.
The Court’s decision to permanently enjoin the CTA has profound implications for the regulatory landscape governing corporate transparency. We should expect to see appeals, similar lawsuits, and further discussions on corporate transparency, privacy rights, and federal powers, and we will be monitoring those developments.
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[1] Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB – Document 51 (N.D. Ala. 2024)
[2] Id.
[3] A Memorandum Opinion is generally an unpublished legal opinion, set out to communicate a court’s decision and its underlying rationale. Although not generally cited as legal authority, they can still provide insight before a final judgment is published.
[4] https://s-corp.org/2024/03/court-cta-ruling-a-huge-win-for-main-street/
[5] https://www.nsba.biz/post/press-nsba-member-suit-over-cta-begins
[6] Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala. 2022)
[7] Id.
[8] Id.
[9] Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB – Document 51 (N.D. Ala. 2024)
[10] https://www.fincen.gov/news/news-releases/notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448-nd-ala
[11] https://www.nysenate.gov/legislation/bills/2023/S995/amendment/B
