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The Corporate Transparency Act's Constitutional Challenge: What It Means for Your Business

Updated: Apr 26

On March 1, 2024, the Corporate Transparency Act (CTA), a landmark legislation aimed at bolstering financial transparency and combating money laundering, encountered a significant legal obstacle. A federal district court in Alabama ruled the act unconstitutional, prompting a swift response from the Financial Crimes Enforcement Network (FinCEN) and raising critical questions about the future of corporate compliance.


For additional information regarding the CTA, and to find out how this could impact your business, please contact our Head of Corporate Transaction, Fiona Xu, at fiona.xu@consultils.com.


Corporate Transparency Act

Understanding the CTA

Introduced in 2021, the CTA represented a major step forward in the U.S. government's efforts to peel back the layers of anonymity in business ownership. By requiring millions of U.S. and international entities to report their beneficial owners to FinCEN, the act aimed to provide a powerful tool for law enforcement to trace illegal financial activities.

 

The Alabama Court's Decision

The challenge to the CTA's constitutionality was spearheaded by the National Small Business Association and an individual member. The court found that the CTA exceeded the powers granted to Congress, specifically questioning the legislative basis for such sweeping requirements. This decision, however, was narrowly applied, only affecting the enforcement of the CTA against the plaintiffs involved in the case.


FinCEN's Position and Response

In the aftermath of the ruling, FinCEN and the Department of the Treasury were quick to assert their intention to continue the implementation of the CTA, signaling a robust defense of the act's legal standing. This includes filing a notice of appeal and emphasizing that, except for the entities directly involved in the lawsuit, compliance expectations remain unchanged.

 

Implications for Business Compliance

The ruling introduces a nuanced landscape for entities under the CTA's jurisdiction. While the direct impact is limited to the plaintiffs, the broader business community must continue to prepare for and comply with the CTA's requirements. Here's the breakdown:


  • Entities formed after January 1, 2024, must report their beneficial ownership information within 90 days of their formation, barring applicability of any of the CTA's exemptions.

  • For entities established on or before December 31, 2023, the deadline to file beneficial ownership information is January 1, 2025. This requires businesses to act swiftly to ensure compliance by the end of the calendar year, especially those managing a large portfolio of entities subject to these rules.


For additional information regarding the CTA, and to find out how this could impact your business, please contact our Head of Corporate Transaction, Fiona Xu, at fiona.xu@consultils.com.


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Partner of ILS

Fiona Xu, Esq. is the Partner and Head of Corporate Transaction of ILS. She works with clients in a wide range of industries and at all stages of their life cycles. She helps companies maximize the value of their strategic relationships and the return on their equity investments, both domestically and internationally.


Email: fiona.xu@consultils.com | Phone: 626-344-8949


*Disclaimer: This article does not constitute legal opinion and does not create any attorney-client relationship.


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