I received an email yesterday from a company regarding CTA compliance. It’s one of those emails that kinda scare you into thinking you have to sign up with their company to get the task completed. I opened the email because I was curious as to what they had to say because I remembered that the CTA was determined to be unconstitutional by the Northern District of Alabama. The information in the email was old.
The CTA, or Corporate Transparency Act, “regulates "reporting company[ies]," defined as "corporation[s], limited liability company[ies], or other similar entit[ies]" that are either "(i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe, or (ii) formed under the law of a foreign country and registered to do business in the United States." In total, FinCEN estimates that the CTA applies to 32.6 million currently existing entities and 5 million new entities formed each year from 2025 to 2034. The CTA requires these millions of entities to disclose the identity and information of any "beneficial owner." A beneficial owner is defined as "an individual who . . . (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity," with some exceptions for children, creditors, and a few others.” Nat'l Small Bus. United v. Yellen, No. 5:22-cv-1448-LCB, 2024 U.S. Dist. LEXIS 36205, at *6-7 (N.D. Ala. Mar. 1, 2024).
2024 was the first year that reporting companies were to comply with the CTA. Penalties for failure to comply are serious. “A willful provision of false or fraudulent beneficial ownership information or failure to report "complete or updated beneficial ownership information to FinCEN" by "any person" is punishable by a $500 per day civil penalty and up to $10,000 in fines and 2 years in federal prison, § 5336(h)(1), (3)(A); a knowing and unauthorized disclosure or use of beneficial ownership information by "any person" is punishable by a $500 per day civil penalty, along with a $250,000 fine and 5 years in federal prison, § 5336(h)(2), (3)(B); and a knowing and unauthorized use or disclosure while violating another federal law "or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period" by "any person" is punishable with a $500,000 fine and 10 years in federal prison, § 5336(h)(3)(B)(ii)(II).” Id. at *8. That was until Isaac Winkles and the National Small Business Association filed a case in district court against Janet Yellen, in her official capacity as the Secretary of the United States Department of the Treasury, the United States Department of the Treasury, and Himamauli Das, in his official capacity as Acting Director of the Financial Crimes Enforcement Network.
In the district court case, Mr. Winkles argued that it was unconstitutional to compel the disclosure of personal identifying information to FinCEN, the Financial Crimes Enforcement Network due to violations of his First, Fourth, and Fifth Amendment rights. The first amendment gives a citizen the freedom of speech and religion, the right to peaceably assemble, and to petition the Government for redress. The fourth amendment prevents the government from unreasonable searches and seizures. The Fifth amendment requires due process of law for every action against an individual; mainly that one cannot be punished for a crime without first being given their opportunity to be heard in court first. With FinCEN being a crime enforcement network, it was argues that the CTA was penalizing business owners that have registered their business before they have done anything wrong by requiring reporting of their personal identifying information to the crime enforcement network.
The Northern District of Alabama agreed and determined that the CTA was unconstitutional; meaning that the judiciary will not enforce the CTA because it does not comply with the Constitution. In re Letennier specifically stated, “Violations of the Corporate Transparency Act are not prosecuted in bankruptcy court. … This Court does not have jurisdiction to hear and determine cases arising under title 31.” No. 23-60531-6-pgr, 2024 Bankr. LEXIS 893, at *22 (Bankr. N.D.N.Y. Apr. 11, 2024). This case was decided after Nat'l Small Bus. United v. Yellen, so we know how the court will proceed regarding the CTA. Is this forever? That answer is up in the air. The defendants in the case filed a Notice of Appeal on March 11, 2024. That does not mean, however, that the case will actually be appealed, that the district court order is not valid, or that the district court order will be overruled. It just means that the Defendants have notified the Court of Appeals that they want them to review the district court decision. How they proceed or how the Court of Appeals reviews the briefs submitted by both parties is to come.
So, what does this mean for business owners? It means that, for the moment, you do not have to disclose your personal identifying information to FinCEN because the law requiring you to do so is unconstitutional. Will this be forever? We will all have to wait and see. Just know that for right now, it is not required and you will not be punished for failure to disclose your personal identifying information because the courts will not enforce a law that is unconstitutional.
Previous blog posts have shown that no business, not even law firms, are exempt from the advertisements that urge action now when it probably is not something that you have to do. This is another one of them.
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