13 January 2025

The Future of the Corporate Transparency Act Is in Doubt

 Robert Moses famously said that “Once you sink that first stake, they’ll never make you pull it up.” His statement was about public physical infrastructure, but there is a parallel, albeit weaker, truth in the law: The “law of the land” is at its most reversible soon after enactment; it is the stake in the ground of implementation that gives a law the firmer power of the status quo. 

The Corporate Transparency Act (“CTA”), which provides for the creation of a non-public beneficial ownership registry of certain entities formed or doing business in the United States, was on the cusp of fully taking effect on 1 January 2025. But now the implementation of the CTA has been stayed by the Fifth Circuit Court of Appeals. The timing of the course of future litigation in the Fifth Circuit and in the Supreme Court means that the incoming Trump Administration will have the opportunity to keep that first stake from ever reaching the ground. 

 Background to Passage of the CTA 

 Since the issuance in 1988 of a watershed report by the Bank for International Settlements (BIS), through its Basel Committee on Banking Supervision, international efforts to prevent money-laundering through the banking system have focused on anonymous and disguised payments. The Financial Action Task Force in 2003 introduced beneficial ownership information collection and verification standards and has strengthened those recommendations since. 

As long ago as 2000, the Government Accountability Office (GAO), at Senator Levin’s request, conducted an investigation and released a report entitled Suspicious Banking Activities: Possible Money Laundering by U.S. Corporations Formed for Russian Entities. This report revealed that one person was able to set up more than 2,000 Delaware shell corporations and, without disclosing the identity of the beneficial owners, open U.S. bank accounts for those corporations, which then collectively moved about $1.4 billion through the accounts. 

In April 2006, the GAO released a report entitled, Company Formations: Minimal Ownership Information Is Collected and Available, which reviewed the corporate formation laws in all 50 States. GAO disclosed that the vast majority of the States do not collect any information at all on the beneficial owners of the corporations and LLCs formed under their laws. Also in 2006, FATF criticized the United States for failing to comply with a FATF standard on the need to collect beneficial ownership information. 

In May 2008, Senators Levin, Coleman, and Obama (later US President) introduced the Incorporation Transparency and Law Enforcement Assistance Act. This legislation required the States to maintain records of beneficial owners, but the legislation was not enacted. As part of the push to pass this proposed legislation, a report from the U.S. Senate Permanent Subcommittee on Investigations indicated that Immigration and Customs Enforcement (ICE) reported that a Nevada-based corporation received more than 3,700 suspicious wire transfers totaling $81 million over 2 years. The case was not prosecuted, however, because ICE was unable to identify the corporation’s owners. 

Congresswoman Maloney first introduced legislation to combat anonymous shell companies in 2009, then named the Incorporation Transparency and Law Enforcement Assistance Act, and she further introduced a version of the bill in every subsequent Congress. A version of this bill, titled the Corporate Transparency Act, was passed by the House of Representatives with a bipartisan vote of 249-173 on 22 October 2019, but did not immediately progress to enactment. Rather, following this showing of support, the bill was incorporated into the Fiscal Year 2021 National Defense Authorization Act (“FY 21 NDAA”). The NDAA is an annual appropriations bill for military spending. It has an unbroken sixty-year annual enactment record and is considered a “must-pass” bill more than any other regular legislation.1 

Stunningly, after the FY 21 NDAA bill was presented to a lame-duck President Trump, he held the bill until the last day of the Constitutional veto window and then vetoed the bill on 23 December 2020. Trump issued fewer vetoes than any President since Warren G. Harding, and this was one of only two bills that Trump vetoed during his Presidency. (His other vetoes were of joint resolutions, not bills.) Veto overrides are rare (Biden had none, Obama one, George W. Bush four, and Clinton two), but Congress successfully overrode Trump’s veto of the FY 21 NDAA. 

In his veto message, Trump did not specifically cite the CTA as a reason for vetoing the FY 21 NDAA. Rather, following the addition of the CTA to the FY 21 NDAA, Trump made an 11th-hour demand that the FY 21 NDAA include unrelated legislation to repeal Section 230 of the Communications Decency Act. Given the likely pretextual nature of this demand, it is reasonable to assume that Trump’s true objection to the FY 21 NDAA was the inclusion of the CTA. 

Implementation Efforts Thus Far 

Final regulations to implement the CTA were released in tranches, with the first tranche published on 30 September 2022. New entities qualifying as “reporting companies” formed on or after 1 January 2024 were required to report beneficial ownership and applicant information within 30 days. Legacy entities, those formed before 1 January 2024, had until 1 January 2025 to report beneficial ownership information. 

Because new entities would be formed with the knowledge that reporting was required, beneficial owners were free to consider alternative structures (e.g., using non-US entities). In comparing the annual number of new companies required to report under the CTA (estimated at 5 million) against the estimated over 30 million existing companies that would be forced to report before 2025 once the law took full effect, it is clear that the brunt of effect of the law was to occur near the January 2025 deadline.   

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1 Pointedly, when Congresswoman Maloney, together with a retired FBI assistant director, spoke at a venue to applaud the inclusion of the bill in the NDAA, the building where the event was held, 650 5th Avenue in New York, had previously been partly owned in secret by the government of Iran with the aid of a Jersey shell company.  

Courts Block Implementation of the CTA 

On 1 March 2024, in the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), an Alabama federal district court in the Fifth Circuit concluded that the CTA was unconstitutional. Enforcement against the plaintiffs in the case, primarily the members of the National Small Business Association, is halted pending appeal. However, courts in three other circuits have refused to enjoin enforcement on CTA cases before them. 

Surprisingly, a federal district court in Texas subsequently issued a nationwide preliminary injunction against enforcement of the CTA on 3 December 2024 in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex.) even though neither party to the case requested such an injunction. Then, on 23 December 2024, a Fifth Circuit panel granted a stay against the Texas’s court’s injunction. But just three days later, in another twist, a different Fifth Circuit Panel vacated the stay. Reporting under the CTA was once again on hold nationwide. 

Next Steps 

First, the courts: The Yellen case is on appeal in the Fifth Circuit. Oral arguments were held in September 2024. But even if the court ultimately rules for the government in the Yellen case, that would not end the injunction issued in Texas Top Cop Shop. In that latter case, it will take some time for the Texas federal district court to reach a decision on the merits, with oral arguments on just the preliminary injunction only scheduled for late March 2025. Meanwhile, the DOJ has filed an emergency appeal of the nationwide injunction to the Supreme Court. Under the Supreme Court’s emergency docket process, the DOJ’s request first goes to Justice Samuel Alito, who is responsible for emergency appeals from the Fifth Circuit. On 3 January 2025, Justice Alito requested that the challengers file a response by 10 January 2025. Alito’s further response upon receipt of the response is speculative, but Alito could refer the case to the full Supreme Court. However, the multitude of cases currently pending weigh against Alito or the full Court taking swift action to stay the injunction. So there is at least the strong possibility that the Supreme Court does not take expedited action to stay the preliminary injunction, and that the Trump administration takes power with the nationwide injunction in effect. 

Second, the Trump administration: If Trump wishes to kill the CTA, as this author believes he does, the simplest approach is to start with a regulatory freeze. Trump simply directs Treasury to postpone enforcement of the existing regulations, while a more permanent solution is sought. It is possible for the Trump administration to later reverse the existing final regulations through the notice-and-comment process under the Administrative Procedure Act, although such an action is potentially subject to judicial review. The Trump administration could also work with Congress to remove FinCEN’s enforcement funding for this area. A full or partial repeal of the CTA through Congressional legislation is also at least theoretically possible. While Trump is in a much stronger political position now than in 2020, it does seem somewhat unlikely that there is support in the Congress for complete repeal of the CTA given the strength of the 2020 vote to override Trump’s veto. 

In any case, a final ruling from the Supreme Court on the constitutionality of the CTA is likely in the coming years as these lower court cases wind their way up through the federal circuit courts. Even if the Supreme Court ultimately upholds the constitutionality of the CTA, the intervening time gives the Trump administration a chance to delay enforcement or even end the CTA altogether. If Trump can do so before the CTA has become an expected feature of the American regulatory landscape, that is, “settled law”, the pre-enforcement status quo will have prevailed. 

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Author: James Gifford

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