A Texas federal court has stopped the government from enforcing the Corporate Transparency Act (CTA) across the entire country. The CTA required businesses to share private details about their beneficial owners with the Financial Crimes Enforcement Network (FinCEN). The court ruled that the law is likely unconstitutional, calling it “quasi-Orwellian” and a threat to states’ rights.
What Happened?
The Corporate Transparency Act (CTA) would have taken effect on January 1, 2025. Mandating over 32.5 million U.S. companies to share sensitive information about their owners, including names, addresses, and personal details. Companies that didn’t follow the rules faced heavy fines and even criminal charges.
On December 3, 2024, Judge Amos L. Mazzant of the U.S. District Court for the Eastern District of Texas ruled on a lawsuit challenging the constitutionality of the Corporate Transparency Act (CTA) and its Reporting Rule. The judge granted the plaintiffs’ request for a preliminary injunction, which halts enforcement of the CTA and Reporting Rule across the entire country.
Unlike a previous court decision that only found the CTA unconstitutional, this ruling stopped its enforcement nationwide. The judge also used his authority under the Administrative Procedure Act (5 U.S.C. § 705) to delay the effective date of the Reporting Rule.
What’s Next?
On December 5, 2024, the Department of Justice, representing the Department of the Treasury, filed an appeal with the U.S. Court of Appeals for the Fifth Circuit challenging the court’s decision.
The Financial Crimes Network (FinCEN) shared an update on its website, stating that, due to the court’s order, companies are not required to submit their beneficial ownership information to FinCEN and will not face penalties for not doing so while the injunction is in place. However, companies can still choose to submit their information voluntarily. FinCEN also mentioned the ongoing appeal by the Department of Justice.
What Should You Do Now?
If the Fifth Circuit or Supreme Court decides to lift the district court’s order while the case is being appealed, the Reporting Rule could be enforced again. FinCEN may change the deadlines depending on how long the order stays in effect. It is also unclear if the incoming Trump administration will continue to defend the CTA’s constitutionality, though the Department of Justice typically defends federal laws regardless of administration.
Businesses that may be affected by the Reporting Rule should stay updated on the situation and talk to their CTA advisors to understand when they may need to comply and how to prepare their BOI reports. Our Corporate and Securities team is here to help – contact us today to determine if this ruling impacts you and your business and ensure that you are fully compliant.
