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On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction temporarily halting enforcement of the Corporate Transparency Act (CTA) and the Treasury Department’s Financial Crimes Enforcement Network’s (FinCEN) regulations on reporting of beneficial ownership information. Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex., Dec. 3, 2024).
Until such time as the injunction is withdrawn, it temporarily suspends the January 1, 2025, compliance deadline for non-publicly traded companies to submit their beneficial ownership information. FinCEN has not yet indicated whether it will challenge the injunction. Since the District court based the preliminary injunction on a finding that the “CTA appears likely unconstitutional,” it is unlikely that the CTA would be upheld at the end of the case, subject to review by the Fifth Circuit Court of Appeals and potentially by the U.S. Supreme Court.
The CTA, enacted in 2021 as part of the National Defense Authorization Act for Fiscal Year 2021, is intended to combat financial crimes by requiring specified U.S. businesses to disclose their beneficial owners to FinCEN. These disclosures are not public but are accessible to law enforcement and regulators under strict guidelines. Reporting includes basic personal and identification details, with exemptions for specific entities. Violations can result in significant civil and criminal penalties.
For small and family-owned businesses, the CTA has an especially negative implications due to the compliance burdens associated with collecting and submitting detailed ownership information. In addition, this could potentially expose sensitive data about beneficial owners, which can be particularly troubling for family businesses with complex ownership structures where privacy is a major concern. In particular, the CTA raises concerns regarding:
- Increased administrative workload:
- Gathering and verifying information about beneficial owners can be time-consuming, especially for smaller businesses with limited staff.
- Privacy concerns:
- While the government claims to protect sensitive ownership data, there is still a risk of data breaches or unauthorized access, which could lead to identity theft or other issues for owners.
- Potential for misuse of information:
- Although intended for combating financial crimes, some worry that the collected ownership data could be misused by competitors or others.
- Compliance costs:
- Filing required reports and maintaining accurate ownership records can incur additional legal and accounting fees.
While Congress passed the CTA at the end of the previous Trump administration, it was enacted over then-President Trump’s veto of the defense bill in which it was included. The incoming second Trump administration may approach the CTA with a more skeptical lens, potentially aligning with broader Republican concerns over regulatory burdens and government overreach. Absent an expedited appeal by the Biden Administration, the preliminary injunction effectively leave the CTA in limbo – and businesses with at least a reprieve – and with the impending change of administrations, the preliminary injunction affords the Trump Administration time to decide its course of action freeing small and family-owned business of the CTA’s onerous responsibilities in the interim. In the interim, Republicans in Congress are seeking a legislative delay in the CTA implementation as part of the year-end appropriations package, which would give the court’s ruling more stability while the long-term prospects for the CTA are determined.
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