TX Federal Court Issues Preliminary Injunction Against Business Ownership Reporting Statute
The U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against an anti-money laundering statute which requires businesses to report information about their beneficial owners to the government.
In 2021, Congress passed the Corporate Transparency Act (CTA) as part of a larger anti-money laundering modernization statute. The CTA, and its implementing regulations, place new reporting requirements on most types of businesses, such as corporations, limited liability companies, and other similar types of entities formed under state law, as well as foreign business entities which are registered to do business in the United States. These businesses must file reports with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) that identify each beneficial owner of the business by name, along with their date of birth, current address, and a unique identification number. A beneficial owner is defined to mean any individual who directly or indirectly exercises substantial control over the business entity or owns at least 25% of the entity. Businesses would have needed to file an initial report on their beneficial owners by the effective date of January 1, 2025, and would need to update those reports over time as beneficial ownership information changed. FinCEN estimated that the CTA would cover approximately 32.6 million existing businesses, and 5 million new reporting companies formed each year. Failures to report under the CTA would be punishable by both civil and criminal penalties.
A group of affected individuals and businesses filed an action in 2024 against FinCEN and several individual defendants to enjoin enforcement of the CTA and sought a preliminary injunction pending resolution of the case.
The court granted the preliminary injunction, finding that the plaintiffs were likely to succeed on the grounds that the statute is unconstitutional. Congress may only pass laws if they fall under one of the enumerated areas where Congress has been given the power to legislate. The court found that the statute does not fall under any of Congress’s enumerated powers, including the Constitution’s Commerce Clause (which is normally interpreted very broadly), nor under Congress’s power to pass legislation which is necessary and proper to effectuate its other enumerated powers. Instead, and contrary to the Tenth Amendment, the statute represents an effort to regulate business entities created under state law, which is an area that has almost exclusively been left to the states. Further, though the statute is designed to defeat the individual anonymity provided through the use of business entities, such anonymity is actually a feature of corporate formation as designed by the states.
Under the injunction, FinCEN may not enforce the statute and implementing regulations against the covered entities, and it has issued a statement acknowledging that covered entities need not report beneficial ownership information while injunction is in effect. FinCEN and the other defendants in the case have appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
