Corporate Transparency Act Enforcement Blocked: What Now?

The Corporate Transparency Act (CTA) was set to enhance transparency in corporate ownership by mandating that businesses disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). However, with the reporting deadline rapidly approaching, recent legal challenges have thrown enforcement of the CTA into uncertainty.

What is the Corporate Transparency Act?

The CTA, which took effect on January 1, 2024, was designed to curb illicit financial activities, such as money laundering, by requiring reporting companies to submit details of their beneficial owners to FinCEN. Beneficial owners are individuals who either own 25% or more of a company or exercise significant control over it.Companies formed before January 1, 2024, had until January 1, 2025, to comply with these reporting requirements, while new companies formed in 2024 were required to file within 90 days of their formation.

Recent Legal Developments

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction, temporarily halting FinCEN's enforcement of the CTA's reporting requirements. This decision arose from a lawsuit challenging the CTA's constitutionality, with the court suggesting that the act may exceed Congress's authority.On December 5, 2024, the Department of Justice, representing the Department of the Treasury, filed an appeal notice. They are also requesting a stay of the preliminary injunction during the appeal process. If granted, the CTA could be enforced again while the appeal is ongoing.On December 9, 2024, FinCEN issued a statement on its website, noting that due to the preliminary injunction, reporting companies are not currently required to file beneficial ownership information (BOI) reports with FinCEN and will not face penalties for failing to do so while the injunction is in effect. However, companies may choose to voluntarily submit BOI reports during this period.If the preliminary injunction is stayed or overturned, it is unclear how much additional time, if any, will be given to reporting companies to submit BOI reports that would have been due without the injunction. Therefore, companies that have not yet filed their initial BOI reports, as well as those with updates to report, should continue gathering the necessary information and be prepared to file promptly. Companies should also stay informed about developments in the Texas case and other related cases concerning the CTA.

Implications of the Court Ruling

1. Reporting Requirements Paused: FinCEN is currently unable to enforce the CTA’s reporting obligations. Businesses are not required to file beneficial ownership information while the injunction remains in effect.
2. Ongoing Appeal: The U.S. Department of Justice (DOJ) is appealing the decision, and the legal battle is far from over. Depending on the outcome, the injunction could be lifted, and enforcement could resume swiftly.
3. Uncertain Deadlines: If the injunction is overturned, businesses might still face tight deadlines to comply. Companies that have not yet gathered their beneficial ownership information may want to remain prepared to file quickly if required.
4. State Compliance: While federal enforcement is paused, businesses should stay aware of any state-level regulations or compliance requirements related to transparency.

What Should Businesses Do Now?

1. Stay Informed: This legal situation is fluid, and developments could occur quickly. Businesses should closely monitor updates from FinCEN and the courts.
2. Prepare for Compliance: Even though enforcement is blocked, it’s wise to be ready in case the injunction is overturned. This means gathering the necessary beneficial ownership information now to avoid a last-minute scramble.
3. Consult Legal Advisors: Given the complexities of the CTA and the ongoing legal challenges, consulting with legal and compliance experts can help businesses navigate this period of uncertainty.

Conclusion

The Corporate Transparency Act was designed to bring greater transparency to business ownership, but the recent court decision has paused its enforcement. As the appeal process unfolds, businesses should remain vigilant, prepared, and proactive in managing their compliance obligations. Whether the CTA ultimately stands or falls, transparency and compliance remain key considerations for all companies moving forward. Please let us know if you have any questions and we'll also be sure to provide updates once known.