A U.S. District Court in Alabama issued a major setback to efforts to detect and combat terrorism, money laundering, and other misconduct through small business entities. On March 1, 2024, the Northern District of Alabama issued a final judgment in favor of National Small Business Association’s (NSBA) motion for summary judgment against the United States Treasury Department, effectively curbing the government’s ability to enforce the requirements of the Corporate Transparency Act (CTA) against NSBA or its members.

The Ruling

In its 53-page opinion, the court rejected each of the arguments offered by the government. First, the court rejected the government’s claim that NSBA lacked standing to even assert a challenge against the CTA in federal court. The court found “the interests at stake are germane to the [NSBA]’s purpose, and neither the claim asserted, nor the relief requested require[d] the participation of individual members in the lawsuit.”  

Next, the court held that the CTA was unconstitutional because it “exceed[ed] the Constitution’s limits on the legislative branch and lack[ed] a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.” Specifically, the court examined and rejected each of the three main arguments the government offered regarding the constitutionality of the CTA.  

First, the court rejected the government’s argument that the CTA was properly enacted under Congress’ foreign affairs powers. The court found that the CTA reporting requirements stemmed from an internal function of government (state regulations regarding incorporated business entities) and the praiseworthy goal of combatting money laundering did not confer such a power on Congress. “[T]he CTA is not authorized by Congress’ foreign affairs powers, because those powers do not extend to purely internal affairs, especially in an arena traditionally left to the States.'' 

Second, the court rejected the government’s argument that the CTA was a proper use of Congress’ Commerce Clause authority. The court found the CTA lacked any basis invoking proper use of Congress’ authority under the Commerce Clause. “Because the CTA does not regulate commerce on its face, contain a jurisdictional hook, or serve an essential part of a comprehensive regulatory scheme, it falls outside Congress’ power to regulate non-commercial, intrastate activity.”

Finally, the court rejected the government’s argument that the CTA was a necessary and proper exercise of Congress’ taxing authority. The court found the government’s arguments that the collection of additional taxpayer information by FinCEN (the Treasury Department’s enforcement arm) even for a useful purpose like combatting money laundering, would be an unconstitutional expansion of federal authority. “It would be a ‘substantial expansion of federal authority’ to permit Congress to bring its taxing power to bear just by collecting ‘useful’ data and allowing tax-enforcement officials access to that data.” 

The court concluded that the CTA was unconstitutional “because it cannot be justified as an exercise of Congress’ enumerated powers.” The court held this was sufficient basis and declined to consider NSBA’s arguments that the CTA violated the First, Fourth, and Fifth Amendments.

What Does this Mean for CTA Compliance?

The implications of the court’s opinion declaring the CTA unconstitutional are still unclear given the recency of the court’s decision. The government will almost certainly appeal the decision to the Eleventh Circuit Court of Appeals and seek to pause the permanent injunction against it from enforcing the CTA. However, this does not mean that the CTA is stopped, nor does it mean that the estimated 32.6 million covered small businesses and other reporting entities should abandon plans to comply with any impending filing deadlines under the CTA.

This is especially important because the final judgment entered by the court only narrowly enjoins FinCEN from enforcing the CTA against the Plaintiffs — namely the Ohio-based nonprofit NSBA and its 65,000 business members. This means that the permanent injunction does not apply to more than an estimated 32 million other entities who are not members of the NSBA.  

It is also important to note that even absent the Alabama Court’s judgment, FinCEN has yet to collect any data from any covered entity. In fact, any data required to be reported to FinCEN under the CTA would not be required to be disclosed until at least January 1, 2025, because the rule required entities to have a full year from the CTA’s effective date of January 1, 2024, to meet the CTA’s reporting requirements. Therefore, if a company is likely covered under the CTA’s reporting requirements, it should fully continue to assess compliance with the CTA as to its business operations.  

Specifically, it is still important for all covered small businesses — even those who are members of the NSBA — to continue to monitor this case during the appeals process. Furthermore, to the extent that companies are part of other trade organizations, it is possible that lawsuits in other jurisdictions will take place that impact the CTA. As such, companies should be aware of other litigation that may impact requirements to comply with the CTA.