The Corporate Transparency Act (“CTA”) has hit a roadblock, and it is now subject to a nationwide injunction on both its implementation and its enforcement. On December 3, 2024, stemming from a lawsuit filed by several businesses and individual plaintiffs (Texas Top Cops Shop, Inc., et al., v. Merrick Garland, Attorney General of the United States, et al.), Judge Amos L. Mazzant, United States District Court Judge for the Eastern District of Texas, Sherman Division, issued an order imposing a preliminary injunction on the CTA and its Reporting Rule. The CTA was passed by Congress in January of 2021 as part of the fiscal year 2021 National Defense Authorization Act and the included Anti-Money Laundering Act of 2020. The CTA reflected Congress’ efforts to thwart money laundering and financing of terrorist organizations by imposing obligations for transparency on business entities across the country through the CTA’s Reporting Rule by requiring disclosure of names, identifying information, and credentials (tagged as “Beneficial Ownership Information” or “BOI”) of individuals who are beneficial owners of corporations, limited liability companies, and similar entities formed under state laws, and establishing federally controlled databases for retention of such information.
Implementation and enforcement of the Reporting Rule would have required millions of companies across the U.S. to submit BOI – sensitive personal information of tens of millions of individuals – to the U.S. Government by certain deadlines, with one critical deadline of January 1, 2025, imminently approaching. The Court ordered that the compliance deadlines shall be stayed, stating without exception that the government may not enforce the Reporting Rule and explicitly ordering that reporting companies need not comply with the January 1, 2025, filing deadline. The Court recognized that Congress had “admirable ends” in its enactment of the CTA, but nevertheless noted the plaintiffs’ arguments that the CTA was unconstitutional in that it violated the States’ authority under the Ninth and Tenth Amendments, violated individuals’ First Amendment rights of association and compelled speech, and violated the Fourth Amendment by compelling disclosure of private information.
This injunction is preliminary only, and as the Court noted, is not fully conclusive as to whether the CTA will be ultimately upheld; but it does signal that the plaintiffs met their burden of showing the substantial likelihood of success, as well as, showing that there is a substantial risk of harm to individual, beneficial owners by its enforcement. Unlike prior injunctions, this one applies across the board to all beneficial owners nationwide, not just those that are litigating the case in the Fifth Circuit.
Corporations, LLCs, and other business entities with an interest in this ruling should consult with their attorneys to determine the scope of their obligations in light of this order. If the injunction is lifted on appeal, the timing of any required reporting under the CTA will need to be considered. As well, if the injunction remains in effect and the CTA is eventually overturned, questions will be raised as to how individuals and companies can protect the multitude of personal data that they have submitted already.
