Background

ENFORCEMENT OF CORPORATE TRANSPARENCY ACT HALTED BY FEDERAL DISTRICT COURT IN TEXAS

Under the laws of virtually every state, the owners of business entities formed under the laws of the state; as well as owners of foreign entities registered to do business in the state, are not a matter of public record. Accordingly, it is both possible and likely that this “corporate anonymity” creates opportunities to hide a host of illegal activity by the owners of these companies. The Corporate Transparency Act (together with its implementing Regulation (collectively, the “CTA”) was passed by Congress in 2021 to become effective upon the issuance of final regulation. The purposes of the CTA are to establishing reporting requirements for a wide range of business entities (“collectively, “Reporting Companies”); to authorize the Financial Crimes Enforcement Network of the US Department of Treasury (“FinCEN”] to maintain a non-public database of all information provided and to grant access to the data to government authorities and certain financial institutions. The goal is to address increasing concerns regarding money laundering and countering the financing of terrorism and other illegal activity. In order to accomplish this, the CTA requires Reporting Companies (estimated to number in the millions) to report detailed information regarding the entity and the individuals who organized, own or control such entity. For companies in existence prior to January 1, 2024, the deadline for filing a beneficial ownership report with FinCEN is January 1, 2025. Companies failing to report their beneficial ownership as required by the CTA or knowingly providing false information are subject to severe civil, and in some cases, criminal penalties. Civil penalties can be as much as $500 per day until the failure has been remedied. Criminal penalties may include up to 2 years in prison and a criminal fine of up to $10,000.

The Court’s Decision

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On December 3, 2024, in the case of Texas Top Cop, Inc., et al v. Merrick Garland, Attorney General of the U.S, et al, (the “Top Cop Case”) the court halted enforcement of the CTA on a nationwide basis. None of the plaintiffs in the Top Cop Case have yet to file the mandated report with FinCEN and all assert that doing so would require them to incur compliance costs and would violate their constitutional rights under the 1 st and 14th Amendments to the Constitution and would violate States’ rights under the 9th and 10th Amendments. The Court determined that the plaintiffs had a substantial likelihood of succeeding on the merits of the case and had met all of the other requirements for issuance of a preliminary injunction. The Court’s holding in the case is set forth in a 79-page decision which includes a detailed summary of the purposes and goals of the CTA and a thorough analysis of the Court’s reasoning in granting the injunction which halts its enforcement.
Some Practical Takeaways

It is important to note that the Court’s decision in the Top Cop Case was in response to the plaintiff’s request for a Preliminary Injunction, the effect of which is to “pause” enforcement of the CTA. It did not result from a trial on the merits of the case; and following a trial on the merits, the Court may find that the CTA is unconstitutional and thus unenforceable. Alternatively, the Court could find that the CTA does not represent congressional overreach and the CTA will be found to be enforceable.

In the meantime, the January 1, 2025 deadline for filing the FinCEN beneficial
ownership report is on hold. If we can provide any further information, please contact William F. Miller at 508-420-7159 or bill@businesslawgroup.net.

This memorandum is intended to provide general information of potential interest to clients and others. It does not constitute legal advice. Receipt of this memorandum by any party which is not a current client of the Business Law Group does not create an attorney-client relationship between the recipient and the firm. Under certain circumstances, this memorandum may constitute advertising under the rules of the Massachusetts Supreme Judicial Court and the bar associations of other states.