The Corporate Transparency Act (the “CTA”), enacted in 2021 to combat money laundering and other illicit activities, has been blocked, as of December 3, 2024, by a federal district court in Texas. The Court issued a nationwide injunction, temporarily halting the enforcement of the CTA, including its controversial beneficial ownership information (“BOI”) reporting requirements.
We wrote previously about the CTA here. As we described in that article, since the reporting requirements went into effect earlier this year, eligible business entities (“Reporting Companies”), which include nearly all U.S. corporations and LLCs, are required to file extensive information about their equityholders and control persons (“Beneficial Owners”) with the Financial Crimes Enforcement Network (“FinCEN”), an agency of the U.S. Treasury Department. The information required to be reported includes driver licenses and residential addresses of Beneficial Owners, all of which must be continually updated while a Reporting Company remains in existence (such reports and updates, “BOI Reports”). Violations of the CTA can result in severe criminal penalties, including fines up to $10,000 and imprisonment for up to two years for willful non-compliance.
Since it came into effect on January 1, 2024, the CTA has faced a series of legal challenges from business groups who argue that the law is overinclusive and burdensome in requiring such extensive information to be reported for such a broad range of companies, including many small businesses and real property holding companies which may not have the resources to easily provide the continual updates required.
The injunction comes as welcome news to corporations, LLCs, and other business entities that qualify as Reporting Companies under the CTA, as, at least for the time being, they will not have to disclose identifying information about their Beneficial Owners. As we indicated in our prior article, until this injunction, all Reporting Companies formed prior to 2024 were required to file initial BOI Reports with FinCEN by December 31,2024; all Reporting Companies formed during 2024 were required to file within 90 days of formation; and all Reporting Companies formed from 2025 onward were to be required to file within 30 days of formation. However, due to the injunction, these deadlines are currently stayed and Reporting Companies are not required to file at all while the litigation is pending.
The Legal Challenge and Nationwide Injunction
On December 3, 2024, Judge Amos L. Mazzant III of the U.S. District Court for the Eastern District of Texas issued a nationwide injunction in the case of Texas Top Cop Shop, Inc. v. Garland. The plaintiffs, which included small businesses, business advocacy groups, and the Libertarian Party of Mississippi, contended that the CTA exceeded Congress’s constitutional authority. The Court agreed, describing the law as “quasi-Orwellian” and an overreach of Congress’s legislative power under the U.S. Constitution. Judge Mazzant’s entire memorandum opinion and order can be read here.
This is not the first successful challenge to the CTA. Back in March of this year, in the case of National Small Business United v. Yellen, a federal district court in the Northern District of Alabama entered a final declaratory judgment, concluding that the Corporate Transparency Act exceeds the Constitution’s limits on Congress’s power and enjoining FinCEN from enforcing the Corporate Transparency Act against the plaintiffs. However, the applicability of that ruling was limited only to the plaintiffs in that case, which primarily included members of the National Small Business Association.
In contrast to the decision in National Small Business United v. Yellen, the current injunction applies nationwide, preventing the enforcement of the CTA against all Reporting Companies or business entities that may be Reporting Companies throughout the United States.
Implications of the Injunction
The Court’s decision has significant implications for millions of businesses across the United States. With the CTA’s reporting deadline for Reporting Companies created prior to 2024 just weeks away, the injunction provides temporary relief from compliance obligations, pending further legal developments.
Of course, many Reporting Companies have already filed BOI Reports. The status of those BOI Reports is unclear; at least until the litigation is resolved, it is unlikely that Reporting Companies who have already filed can “undo” their reports. However, as long as the injunction is outstanding, presumably they will not be required to provide updated BOI Reports if and when the underlying identification information about their Beneficial Owners changes.
Meanwhile, FinCEN has issued a statement (see below) indicating that while it will comply with the order, the Department of Justice, on behalf of the Treasury Department (of which FinCEN is a part), has filed a Notice of Appeal contesting the order.
FinCEN’s Response and Ongoing Controversy
In response to the Court’s ruling, the Financial Crimes Enforcement Network (FinCEN) issued a statement on December 9, 2024, which reads, in part: “While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.”
Therefore, the deadline for submitting BOI Reports for Reporting Companies formed prior to 2024 will no longer be December 31, 2024, and any further compliance with the reporting requirements of the CTA (whether for Reporting Companies formed in 2024 or prior to 2024) is, as of now, “voluntary.”
Future Outlook
FinCEN’s statement further indicates that the Justice Department is appealing this case. Therefore, it will advance to the Fifth Circuit Court of Appeals. The preliminary injunction is expected to remain in place throughout the appeals process or until a further court order is issued.
This means that the litigation will continue, and the ultimate outcome is unknown. However, unless the Fifth Circuit agrees to hear the case on an expedited basis, such litigation is expected to take, at a minimum, several months to unfold. Additionally, given the results of the recent presidential election and the potentially deregulatory leanings of the incoming Trump administration, it is unknown whether the Department of Justice will even continue to pursue the appeal.
In any case, even if the Justice Department does pursue and win on appeal, it would have to provide guidance on new reporting deadlines so that Reporting Companies would have time to comply. (Our Firm will be monitoring this situation for further developments.)
For now, businesses should stay informed and continue preparing for compliance, as the legal landscape surrounding the CTA remains fluid.
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Prepared by Ethan S. Moore of the Corporate Law Practice Group at Rossway Swan Tierney Barry & Oliver, P.L. Contact Kevin M. Barry or Ethan S. Moore for more information.
