Appeals Court Halts Enforcement Of Beneficial Ownership Reporting Requirement For Small Businesses

Authored by Tom Ozimek via The Epoch Times (emphasis ours),

A federal appeals court has halted enforcement of the Corporate Transparency Act (CTA), an anti-money laundering measure requiring small businesses to disclose beneficial ownership information, drawing praise from America’s biggest small business lobby, which has panned the law as “burdensome” and battled it in court.

The U.S. Court of Appeals for the Fifth Circuit issued the ruling on Dec. 26, temporarily blocking compliance obligations under the CTA, which mandates that certain U.S.-based businesses submit detailed reports on their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). Prior to the ruling, most businesses faced a Jan. 1, 2025, deadline to submit initial beneficial ownership information (BOI) reports to FinCEN. Businesses with more than 20 employees, $5 million in annual sales, and a U.S. office qualify for exemptions from CTA reporting requirements.

Supporters of the law, including the Treasury, argue that the reporting requirement is designed to boost transparency, deter illicit financial activities, and combat money laundering. They highlight the growing use of the United States as a haven for criminals who launder illicit funds by establishing entities, such as limited liability companies, under state laws without revealing their involvement.

Opponents, including the National Federation of Independent Business (NFIB), argue that the law disproportionately impacts small businesses by saddling them with complex compliance requirements and significant administrative costs.

The case, Texas Top Cop Shop, Inc. v. Garland, originated in the U.S. District Court for the Eastern District of Texas, where plaintiffs—a coalition of small businesses, the Libertarian Party of Mississippi, and the NFIB—filed suit against the U.S. Department of the Treasury and other federal officials. The plaintiffs contended that the CTA’s reporting requirements violate constitutional rights and place undue burdens on small businesses.

On Dec. 5, U.S. District Judge Amos Mazzant issued a preliminary injunction blocking nationwide enforcement of the CTA, calling it “likely unconstitutional.” Mazzant characterized the CTA as a sweeping overreach of federal authority, undermining the longstanding state-regulated framework of corporate formation and dismantling the anonymity traditionally afforded to business owners, a feature he deemed integral to the federalist system.

“For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government,” Mazzant wrote.

The government promptly appealed Mazzant’s decision, and on Dec. 23, a motions panel of the Fifth Circuit temporarily stayed the district court’s injunction, allowing the law’s requirements to remain in effect pending further review.

Disagreeing with Mazzant’s finding of likely unconstitutionality, the motions panel wrote, “The government has made a strong showing that it is likely to succeed on the merits in defending CTA’s constitutionality.”

The government contended that the CTA is justified under Congress’s authority related to foreign commerce, taxation, and foreign affairs, as well as the president’s powers in law enforcement and national security. While the Fifth Circuit’s motion panel declined to address these arguments in detail, it found that the government’s analysis under the commerce clause was sufficient to establish a likelihood of the success of the merits.

However, in a reversal of the ruling, the Fifth Circuit vacated the stay on Dec. 26, effectively reinstating the district court’s injunction and halting enforcement of the CTA. The appellate court emphasized the need to preserve the constitutional status quo while substantive arguments are reviewed by a merits panel of the Fifth Circuit in an expedited process.

The ruling marks a victory for small businesses and their advocates, who have long argued that the CTA’s mandates are overly broad and costly. Many small business owners contend they lack the resources to navigate the complex reporting requirements without risking penalties for noncompliance.

The Fifth Circuit’s decision to halt enforcement of the CTA was praised by Rob Smith, senior attorney of the NFIB’s small business legal center.

“The court’s reinstatement of the nationwide injunction is a welcome sigh of relief for small businesses,” Smith said in a statement. “Since being told earlier this week that they must urgently submit their [beneficial ownership information] BOI reports, our nation’s small businesses have experienced enormous chaos and confusion.”

Proponents of the CTA maintain that beneficial ownership reporting is crucial to closing loopholes exploited by criminal enterprises. The Treasury Department has defended the law as a vital tool in the fight against financial crimes.

“Unmasking shell corporations is the single most significant thing we can do to make our financial system inhospitable to corrupt actors,” said Treasury Secretary Janet Yellen, according to a December 2023 fact sheet from the Treasury Department.

The Fifth Circuit has expedited the appeal, meaning that a final ruling on the CTA’s constitutionality could come as early as 2025. While legal challenges to the CTA unfold, the NFIB and other advocates continue to push for the repeal of the CTA through legislative efforts, such as the proposed Repealing Big Brother Overreach Act.

This case highlights the broader debate over balancing regulatory burdens with illicit finance and national security interests, with a decision having the potential to shape future policy on anti-money laundering regulations.