A Federal District Court in Alabama has ruled unconstitutional the US Corporate Transparency Act, which requires a number of categories of companies to report their beneficial owners to a registry run by the Financial Crimes Enforcement Network - FinCEN. The decision was made as part of the National Small Business Association's lawsuit against US Treasury Secretary Janet Yellen.
The Court ruled that the US Congress exceeded its constitutional authority when accepting the Corporate Transparency Act, even though this regulation may have reasonable and laudable purposes. According to the Court, the government's arguments that Congress has the power to regulate millions of organisations on the basis of their obtaining formal corporate status are without merit.
The government attempted to link the passage of the Act to three congressional powers: foreign affairs and national security; implementation of the Commerce Clause; and tax policy. However, the Court found this reasoning to be a stretch. For example, it refused to consider the penalties in the Corporate Transparency Act to be "taxes," and noted that companies are not necessarily engaged in interstate commerce. Accordingly, anything related to business registration was considered by the Court to be an "internal matter" of the individual states.
The Court's decision has created legal uncertainty. At the very least, its future prospects are unclear, as the federal authorities are clearly going to appeal it. In addition, it is not clear who it applies to: the National Association of Small Businesses itself, its 65,000 members, or all 32.6 million companies that are required to submit reports under the Law.
«This is an aberrant decision issued by a lone district judge in Alabama, based on an extraordinarily narrow view of Congress’s constitutional powers that is unsupported by precedent. I would urge the government to appeal quickly to correct the erroneous decision and ensure the law’s transparency requirements can be fully and uniformly implemented.», — the New York Times quoted Democratic Senator Sheldon Whitehouse, one of the law's supporters, as saying.
As a reminder, in September 2022, FinCEN published Reporting Rules with an effective date of 1 January 2024.
These Regulations require certain corporations, limited liability companies and other similar entities, referred to as "reporting companies", to report information about the beneficial owners who own or control such entities, as well as the applicants of the companies that create or incorporate them. These requirements are aimed at ensuring that beneficial ownership data is available to law enforcement and regulatory authorities to combat money laundering and terrorist financing.
