What’s Ahead as Corporate Transparency Act Comes to a Crossroads

The recent whiplash regarding the validity of the Corporate Transparency Act (CTA)—it was enjoined just to particular parties, then enjoined nationwide, then un-enjoined, then enjoined again, while other courts let it stand—reflects the divisions among federal courts that have examined the law. This article explores some of those divisions, and addresses the timing and status of future litigation that may, finally, settle the issue of the law’s validity.

Background on CTA

Congress passed the CTA to combat illicit financial activity, such as money laundering, terrorism financing, and tax evasion. The CTA was spurred in part by a 2011 World Bank report that criticized the United States for its lack of due diligence in monitoring newly formed corporate entities, and the fact that states have inconsistent requirements regarding the disclosure of beneficial ownership information.[1] To address those concerns, the CTA mandates that businesses report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), including the names, dates of birth, and identification numbers (e.g., driver’s license) of individuals who either own at least 25% of a business or exercise substantial control over it.[2]

These reporting requirements aim to increase transparency within corporate structures and close loopholes that have historically allowed bad-actor anonymous entities to facilitate financial crimes. Failure to comply can result in serious consequences, including civil and criminal penalties for willful violations.[3]

The CTA’s requirements and potential punishments reflect an effort to align with global standards, including those advocated by the Financial Action Task Force (FATF), which, in 2016, had found that the United States’ lack of timely access to adequate, accurate and current beneficial ownership information remains one of the fundamental gaps in the U.S. context.[4] As a member of FATF, the United States has an interest in meeting international benchmarks for financial transparency.[5] 

Critics of the CTA, meanwhile, argue that it is over-invasive and an abuse of congressional power. Individuals, businesses, and trade groups alike have challenged the CTA in court, seeking to prevent its enforcement. As discussed below, some of those efforts have failed, while others have succeeded. The disparate outcomes underscore an ongoing debate over federalism and the reach of various constitutional provisions.

The Court Decisions

In March, in National Small Business United v. Yellen, the U.S. District Court for the Northern District of Alabama permanently enjoined the CTA's enforcement against the National Small Business Association and one of its members.[6] Eight months later, the Eastern District of Texas issued a broader ruling, preliminarily enjoining the CTA’s enforcement nationwide.[7] Other district courts, however, have upheld the CTA. In September, the District of Oregon declined to grant preliminary injunctive relief to individuals subject to the CTA’s reporting requirements.[8] And in October, in Community Associations Institute v. Yellen, the U.S. District Court for the Eastern District of Virginia rejected similar relief sought by Community Associations Institute and multiple community associations.[9]

Synthesizing these contrasting rulings reveals several main areas of debate that will likely remain at issue as challenges to the law continue winding through the federal courts.

Among the most polarizing issues is whether the CTA is a permissible use of Congress’s Commerce power, under which Congress may regulate activities having a substantial effect on interstate commerce. The Oregon and Virginia courts said yes, reasoning that the CTA regulates the ongoing conduct of commercial entities that, in the aggregate, have a substantial effect on interstate commerce.[10] Yet the Alabama and Texas courts said no, approaching the matter from a much different perspective. Rather than focusing on the businesses regulated by the CTA, the Alabama court focused on the conduct triggering the CTA—entity formation—and concluded that because such activity was not commercial in nature (a hallmark of substantial effects legislation), the CTA was impermissible.[11] The Texas court agreed but went further, concluding that CTA does not regulate an activity at all, for a business existing anonymously is not engaging in any activity.[12] That court said that the CTA creates an activity.[13]

Another point of contention was the reach of the Necessary and Proper Clause, which empowers Congress to enact laws incidental to enumerated powers, and, as part of that discussion, the weight to be given to congressional findings. The Department of Justice argued that, even if the law itself regulated an activity beyond the reach of Congress’s Commerce (or another enumerated) power, it was justified as a necessary and proper measure to Congress’s ability to carry out its national security, foreign affairs, and taxing powers, as well as the President’s powers to conduct law enforcement, gather intelligence, and prevent terrorism. The Oregon and Virginia courts found the CTA to be an important tool for Congress to exercise its Commerce power in regulating and preventing illicit financial activity.[14] The Oregon court also found the CTA critical to Congress’s authority over foreign affairs, national security, and tax collection.[15] The two courts credited congressional findings for support, including findings that CTA’s reporting requirements were needed to protect interstate and foreign commerce, improve national security, and combat financial crime.[16]

Conversely, the Texas court construed the Necessary and Proper Clause more narrowly. The court declined to authorize the CTA as a necessary and proper use of Commerce power, stating that requiring companies to disclose ownership information to the government simply because they exist does not derive from that power.[17] Nor was it a necessary and proper use of foreign affairs powers, said the court, noting that the government had not identified any foreign affairs power that shared a nexus with the CTA.[18] Finally, the Texas court ruled that the CTA was not a necessary and proper use of the taxing power, emphasizing that the law did not actually impose a tax. In dismissing the government’s arguments, both the Texas and Alabama courts expressed concern that upholding the CTA under the Necessary and Proper Clause would dangerously expand congressional authority. Further, neither court was moved by congressional findings, with both stating that they were insufficient alone to prove that the CTA was related to implementing an enumerated power.[19] The Texas court in particular found unpersuasive a finding that the CTA would bring the United States more into line with international standards.[20]

Though they addressed many of the same issues, the above rulings are not entirely parallel. For example, the Eastern District of Virginia rejected an argument under the Administrative Procedures Act that no other court reached, ruling that FinCEN’s “FAQs” on the CTA did not constitute final agency action reviewable by a court, and further, that FinCEN was not required to pass them through notice-and-comment rulemaking.[21] The District of Oregon was unique in addressing whether the CTA’s civil and criminal penalties constituted cruel and unusual punishment or excessive fines violating the Eighth Amendment. It rejected these arguments, declaring the fines not disproportional to the gravity of the violation. Still other arguments may be raised in future cases. In short, CTA challenges come in a variety of forms, and future courts may seize upon different issues than those raised so far.

Looking Ahead

The CTA’s fate in court is highly uncertain. All four rulings above are on appeal and advancing through the federal appellate courts. The Virginia and Oregon disputes are now before the Fourth and Ninth Circuits, respectively, with the government’s answering briefs due this month. The Alabama case, further along, is before the Eleventh Circuit, where briefing and oral arguments concluded in September 2024. Meanwhile, the Texas Top Cop Shop case has drawn recent attention, with the U.S. Court of Appeals for the Fifth Circuit vacating the nationwide injunction in December, only to reinstate it days later. With the appeal now permitted to proceed, oral argument is scheduled for March. In the meantime, on Dec. 31, the DOJ applied to the U.S. Supreme Court for a stay of the nationwide injunction, pending the Fifth Circuit's decision. Adding to this complexity, other district courts continue to weigh CTA challenges, which may lead to further appellate activity.[22]

Also unclear is whether, under the Trump administration, DOJ will adopt a new approach to defending and enforcing the CTA compared to the Biden administration. Historically, changes in administration bring shifts in legal priorities and strategies, particularly for policies tied closely to the ideological or regulatory agendas of the outgoing leadership. Under the Biden administration, DOJ defended the CTA, emphasizing its alignment with broader policy objectives. However, with the Trump administration's likely focus on deregulation, promotion of corporate interests, and potential interest in protecting those affected by disclosure requirements, DOJ’s stance could diverge significantly. During his last term, President Trump vetoed the bill that contained the CTA; it passed only when Congress overrode his veto. This uncertainty leaves many speculating on whether DOJ will maintain continuity or chart a markedly different course.

The split among district courts, a new administration, and the considerable stakes of financial transparency and regulation create a highly uncertain landscape. The possibility that the appellate courts, like the district courts, reach divergent results, would increase the likelihood of the Supreme Court deciding the CTA’s fate. Meanwhile, businesses subject to the law must stay apprised of the law’s status, as its reporting requirements could take effect with little notice if upheld. The United States’ position with its international allies in this effort may also be at risk should the law be invalidated.  But if it stands, the CTA’s proponents hope that it will usher in a new era of scrutiny, with the government wielding a powerful new tool to uncover illicit financial activity.