On December 3, 2024, Judge Amos L. Mazzant of the U.S. District Court for the Eastern District of Texas entered a nationwide preliminary injunction preventing the federal government from enforcing the Corporate Transparency Act (“the Act”) and its implementing regulations. Congress enacted the Act in 2021 in an effort to require certain entities to disclose information about their private stakeholders to the Treasury Department and its “Financial Crimes Enforcement Network,” known as “FinCEN.”

The Law

Congress passed the Act in January 2021 over President Trump’s veto, with bipartisan support, providing for the most significant overhaul of the nation’s bank secrecy and anti-money laundering laws since the USA PATRIOT Act of 2001. The Act authorizes FinCEN to collect beneficial ownership information about many entities created or registered in the U.S., regardless of business activities. This new reporting regime is intended to combat money laundering, terrorist financing, tax fraud, and other illicit activities by making it harder for bad actors to operate through shell companies or other opaque ownership structures. Information collected by FinCEN is kept in a secure, non-public database and under the Act access is limited to certain government officials and authorized financial institutions.

The Act specifically requires any non-exempt “reporting company” to submit to FinCEN a report that identifies each beneficial owner of the company. A “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity; or owns or controls not less than 25% of the ownership interests of the entity. A person exercises “substantial control” if the person: (1) serves as a senior officer of the reporting company; (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); or (3) directs, determines, or has substantial influence over important decisions made by the reporting company.

Under the Act, reporting companies created or registered in the U.S. before January 1, 2024 have until January 1, 2025 to file an initial beneficial ownership report. Failure to comply with these requirements carries significant civil and criminal penalties.

The Challenge

Several businesses and individuals sued the federal government arguing that the Act and its implementing regulations were unconstitutional. Specifically, the plaintiffs argued that the law and its regulations were unconstitutional because: (1) Congress has no enumerated power to regulate state corporate organizations that have traditionally been regulated exclusively by the states; (2) the Act restricts First Amendment associational rights because it forces entities to disclose the identities of individuals associated with the entity’s expressive activities; and (3) the Act violates the Fourth Amendment because it mandates invasive disclosures on pain of criminal punishment without any particularized suspicion or pre-compliance review by a neutral party. Plaintiffs moved for a preliminary injunction to avoid having to submit reports to FinCEN by the January 1, 2025 deadline.

The Decision

The district court granted plaintiffs a nationwide preliminary injunction, holding that (1) plaintiffs were likely to succeed on the merits of their challenge, (2) plaintiffs would be irreparably harmed absent an injunction, and (3) the public interest and equity favor an injunction.

On the merits, the court concluded that it is unlikely that the Constitution gives Congress the enumerated power to impose the obligations in the Act, and therefore the Act is likely unconstitutional because the powers Congress exercised were reserved to the States under the Tenth Amendment. The government argued that the Act was within Congress’s powers under the Commerce Clause. The court, however, noted that the Act neither regulates channels of (or instrumentalities in) commerce, nor does it regulate any commercial activity—in fact, it creates an activity that companies are required to do. The court further concluded that even if “the anonymous existence and operation of corporations” is an “activity” regulable under the Commerce Clause, plaintiffs had satisfied their burden to establish that, in the aggregate, this “anonymous existence and operation of corporations” does not substantially impact interstate commerce. Next, the government argued that the Necessary and Proper Clause—paired with Congress’s Commerce, Foreign Affairs, or Taxing Powers—gives Congress the power to impose the obligations under the Act. The court rejected each of these arguments. Because the court concluded it is unlikely Congress possesses the enumerated power to impose the requirements in the Act, the court held that plaintiffs were likely to succeed on their claims that the Act is facially unconstitutional under the Tenth Amendment. Given this conclusion, the court did not address plaintiffs’ First and Fourth Amendment arguments, but instead reserved those for judgment at a later date.

Moving Forward

The injunction—while only preliminary—applies nationwide. Therefore, unless and until the injunction is stayed or lifted, the Act and its implementing regulations may not be enforced, “and reporting companies need not comply with the [Act]’s January 1, 2025” reporting deadline “pending further order of the Court.”

On December 6, 2024, the federal government appealed the preliminary injunction to the U.S. Court of Appeals for the Fifth Circuit. The government may now choose to seek an emergency stay of the injunction in the Fifth Circuit. A stay of the injunction would revive the reporting requirements until the government’s appeal is decided.  The government may seek a stay of the injunction in its entirety, or it may ask for the court to narrow the nationwide scope of the injunction to apply only to (a) the litigants in the case, or (b) entities within the geographic scope of the Fifth Circuit (Texas, Louisiana, and Mississippi). If the Fifth Circuit denies a stay, the government may seek similar relief in the Supreme Court.

On December 7, 2024, FinCEN issued an alert on its website titled “Impact of Ongoing Litigation – Deadline Stay – Voluntary Submission Only.” The alert indicates that “reporting companies are not currently required to file beneficial ownership information to FinCEN and are not subject to liability if they fail to do so while the [preliminary injunction] remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.” The alert does not state whether the government intends to seek a stay of the preliminary injunction. https://fincen.gov/boi (last visited Dec. 9, 2024).

Given the potential for a federal government response in the near-term, reporting companies should continue working towards the January 1, 2025 reporting deadline. The government could seek a stay and/or narrowing of the nationwide injunction before the upcoming deadline. If successful, the deadline may go into effect for some or all entities. It seems possible that the government will provide some guidance to reporting companies in the near-term (e.g., by press release). Ideally the government will act quickly so reporting companies better understand their obligations in light of these developments and in advance of the reporting deadline.

Meanwhile, in a companion case in Oregon district court, the court denied a preliminary injunction, and plaintiffs there have appealed that denial in the Ninth Circuit. Similarly, a district court in Alabama granted a permanent injunction but limited its scope to the parties involved in that case. Given the limited nature of the injunction in the Alabama case, the government did not seek a stay in the Eleventh Circuit, but the parties did agree to expedite the case given the impending deadlines. That appeal has been briefed and argued and is now pending in the Eleventh Circuit. These companion cases increase the likelihood of courts reaching different outcomes about the constitutionality of the Act, which heightens the likelihood of Supreme Court review down the line.

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