Corporate Transparency Act: Update

The Corporate Transparency Act (CTA) represents a significant development in corporate accountability and transparency within the United States and directly impacts personal financial planning. Signed into law on January 1, 2022, as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2022, the CTA aims to combat illicit activities such as money laundering, terrorism financing, and tax evasion by enhancing the transparency of corporate ownership and control.

Key Provisions of the Corporate Transparency Act:

• Beneficial Ownership Reporting: Under the CTA, certain U.S. companies, including corporations, limited liability companies (LLCs), and other similar entities, are required to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), the criminal enforcement arm of the US Department of the Treasury.
• Reporting Requirements: Covered companies must submit beneficial ownership information, including the full legal name, date of birth, address, and a unique identification number (such as a driver’s license or passport number) of each beneficial owner, to FinCEN.
• Access to Information: Law enforcement agencies, financial institutions, and certain other entities authorized by FinCEN will have access to the beneficial ownership information reported under the CTA.
• Penalties for Noncompliance: Failure to comply with the reporting requirements of the CTA may result in civil and criminal penalties, including fines and imprisonment.
• Exemptions and Exceptions: Certain categories of companies are exempt from the reporting requirements of the CTA, including publicly traded companies, certain financial institutions, and companies with a physical presence in the United States and substantial revenue.  
• Over 20 employees

The implementation of the CTA will likely have far-reaching implications for businesses operating in the United States, particularly those subject to the reporting requirements.

Update

On Friday, March 1, 2024, Judge Liles C. Burke of the United States District Court for the Northern District of Alabama ruled via memorandum opinion in National Small Business United v. Yellen, that the CTA, is unconstitutional because Congress lacks the authority to require companies to disclose personal stakeholder information to FinCEN.

National Small Business United, along with other plaintiffs, challenged the constitutionality of the CTA’s beneficial ownership reporting provisions, arguing that they violated the First, Fourth, Fifth, Ninth, and Tenth Amendments of the U.S. Constitution. The court determined that the plaintiffs were entitled to summary judgment as a matter of law because the CTA could not be justified as an exercise of Congress’s enumerated powers, rejecting the argument that Congress had the power to enact the CTA under its foreign affairs powers, Commerce Clause authority, or as a necessary and proper exercise of its taxing power.

Key Takeaways

• Constitutionality of Reporting Requirements: The central issue in National Small Business United v. Yellen is whether the CTA’s beneficial ownership reporting requirements comply with the Fourth Amendment’s protections against unreasonable searches and seizures. This will most likely be challenged and moved to the Supreme Court. Their ruling will determine the constitutionality of these provisions and could have far-reaching implications for the balance between privacy rights and government regulation.

• Impact on Regulatory Compliance: The outcome of the potential case will affect the implementation and enforcement of the CTA’s reporting requirements. Depending on the potential Supreme Court ruling, companies subject to the CTA may face uncertainty regarding their obligations to disclose beneficial ownership information and the potential consequences of noncompliance.

• Legal Precedent: National Small Business United v. Yellen could establish important legal precedent regarding the government’s authority to collect and access corporate ownership information. The potential Supreme Court decision will likely influence future debates over the scope of regulatory authority and privacy protections in the context of financial regulation and national security.

Implications

The resolution of National Small Business United v. Yellen will have significant implications for businesses, regulatory authorities, personal financial planners and policymakers involved in corporate governance and financial regulation. Depending on the potential Supreme Court ruling, companies may need to adjust their compliance efforts and internal controls to align with the requirements of the CTA or potential changes resulting from the case’s outcome. As the case proceeds, stakeholders will closely monitor developments and assess the potential implications for their operations and regulatory obligations.

The recommendation to form corporations, limited liability companies, and other similar entities are part of the personal financial planning process. It is essential that personal financial planners monitor the progress of the National Small Business United v. Yellen, advise, and inform their clients as matters evolve and make reasoned recommendations accordingly.

Paraklete® Financial, Inc. and it’s CPA/PFS personal financial planners are experienced in CTA compliance as part of the personal financial planning process. For more information please reach out to us at https://www.parakletefinancial.com/.

The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. The information contained in our presentations have been compiled from third party sources and is believed to be reliable; however, accuracy is not guaranteed.