Battle Against the Corporate Transparency Act Continues

The National Small Business Association (NSBA) has filed its brief with the Eleventh Circuit urging it to uphold a lower court’s finding that the Corporate Transparency Act (CTA) is unconstitutional. Meanwhile bills in both chambers call for repeal of the law.

Congress passed the CTA in 2021 with good intentions — to combat money-laundering, financing of terrorist activities, and tax evasion. Under the CTA, specified business entities are required to file beneficial ownership information about their owners, officers, and other control persons with Treasury’s Financial Crimes Enforcement Network (FinCEN). The initial reporting requirements went into effect this January, and penalties for noncompliance include substantial fines and imprisonment.

However, the NSBA  alleges that the CTA’s reporting requirements obligate US citizens and residents to report sensitive personal information, in violation of their constitutional rights. An Alabama federal district court agreed this March. (National Small Business United (DC AL 3/1/2024) 133 AFTR 2d 2024-885) That court found that Congress had exceeded its foreign affairs, commerce, and tax powers in enacting the CTA. It enjoined enforcement of the CTA’s beneficial ownership information filing requirements for NSBA members — however, all other business entities are still obligated to file the information.

The case is now on appeal before the Eleventh Circuit. In their appellate brief, attorneys for the NSBA contend that the district court correctly found that the CTA exceeds Congress’ Article I powers. They also argue that, in the alternate, the Eleventh Circuit should enjoin enforcement of the CTA because it violates the Fourth Amendment’s protections against unreasonable searches and seizures. The district court failed to reach that argument in its March decision, finding it sufficient that the CTA did not fall within Congress’ “enumerated powers.”

Fourth Amendment concerns.

Requiring businesses to submit beneficial ownership information for law-enforcement purposes is a “search,” says the NSBA in its brief. “The Fourth Amendment reflected the Framers’ judgment that any claimed governmental need to make law enforcement easier cannot justify suspicionless searches of the citizenry,” the NSBA explains. It alleges that the CTA is being used as “a workaround to the Fourth Amendment’s warrant requirement to fight financial crimes more efficiently.”

The NSBA draws a parallel to a 1979 US Supreme Court case, Brown v. Texas (443 U.S. 47), where the Court struck down a state statute that allowed the police to detain people and require their names and addresses despite lacking a “specific basis” for believing they are involved in a criminal activity. The brief also argues that an exception to the Fourth Amendment for “special needs” is inapplicable because the beneficial ownership information is being gathered for general purposes — not a specific circumstance where obtaining a warrant would be impracticable.

Attorney Thomas Lee, of Hughes Hubbard & Reed, who co-authored the brief, said, “collecting massive amounts of data from millions of law-abiding American small-business owners is not a panacea to our law-enforcement and national-security threats, and it’s not constitutional either. Members of Congress, as well as our Article III judges, are beginning to understand these realities much better than they did in 2021 when the CTA was enacted.”

Zorka Milin of the Financial Accountability and Corporate Transparency (FACT) Coalition disagreed, saying, “the circuit court must reverse the lower court decision. Congress was clearly within its powers to enact this vital financial safeguard, as was made clear in briefs from Congress and from subject matter experts. Legitimate small businesses often publish this information because they want their customers to know where to find them and how to work with them. Information filed under the CTA is routine, easy for the business owners to obtain, and hardly incriminatory, despite what the association’s brief claims.”

The FACT Coalition, along with other organizations; NYU’s Tax Law Center; and a group of lawmakers have filed amicus curiae briefs in the case urging the Eleventh Circuit to find the CTA’s provisions constitutional.

Cases challenging the constitutionality of the CTA have also been filed in Maine and Michigan federal district courts.

Legislative efforts.

Meanwhile, Representative Warren Davidson (R-OH) introduced a bill (HR 8147) to repeal the CTA late last month. And Senator Tommy Tuberville (R-AL) followed with a Senate bill (S 4297) on May 9.

In a press release, the bill authors say the CTA is specifically targeting small business owners. They take issue with penalties for noncompliance — “up to two years of jail time and fines of up to $10,000 per violation.”

FinCEN “is violating the personal privacy of American business owners by forcing them to disclose sensitive information,” said Davidson. “Congress must ensure that the federal government fits within the Constitution.”

Tuberville said, “[f]ailure to register by the end of the year could land you in jail. This unprecedented intrusion into personal privacy must be stopped.”