Government Overreach or Necessary Law? Corporate Transparency Act Struck Down

Government Overreach or Necessary Law? Corporate Transparency Act Struck Down Image

A U.S. District Court in Alabama declared the Corporate Transparency Act (CTA) unconstitutional in the battle between privacy rights and organized crime. In National Small Business Association v. Yellen (Case No. 5:22-cv-01448), the issue is the CTA's authority over small businesses to disclose the so-called beneficial owners to the government through the Financial Crimes Enforcement Network (FinCEN).

The Yellen court ruled that the CTA "transcends the limits imposed by the Constitution on the legislative branch and lacks a strong connection to any enumerated power to serve as a necessary or appropriate means to achieve Congress' policy objectives." The Court found that the CTA exceeds Congress' authority under the Constitution.

The decision suspended the CTA's enforcement. The case may affect the CTA's required reporting mandates against small businesses and other entities.

Yellen held that the CTA lacked a substantive connection to any enumerated power in the Constitution, rendering it an inadequate or justifiable method of fighting crime.

The CTA unfairly burdens small businesses by forcing owners and others connected to business formation to join the Financial Crimes Enforcement Network (FinCEN). This requirement should be an unconstitutional activity forced upon persons not suspected of criminal activity. It has been asserted that compliance can cost an average of $8,000 in the initial year.

The CTA is supposed to reduce and defeat money laundering and terrorist financing. By requiring entities, primarily small businesses and trust-like entities, to disclose their beneficial owners, the CTA is supposed to anonymously reduce or render transparent criminals using the U.S. financial system.

The CTA allegedly enhances transparency and accountability in business. But do we need such forced governmental oversight of small businesses? FinCEN has the ability to expand its regulatory reach by promulgating regulations, for example.

In RIN 1506-AB54, to be published in the Federal Register (Feb. 16, 2024). (FinCEN) proposes, as part of its efforts to combat money laundering. These regulations require filing a report for nearly every non-financed transfer of residential real estate to a trust, partnership, LLC, or other entity. This requirement would apply to transfers to revocable or irrevocable trusts and transfers to limited liability companies, corporations, and partnerships. The attorney or other professional would need to file the report for specific closing or settlement functions. The report would include information about:

  • Beneficial ownership information for the transferee entity.
  • The individuals representing the transferee entity.
  • The business filing the report.
  • The residential real property being transferred.
  • The transferor.
  • Any payments made.

Every non-financed transfer of residences? Into a revocable trust? Will nothing be kept private? There is a balance between legitimate crime fighting and privacy. But how can the government justify demanding private information such as estate planning and gifts to family members?

The Yellen case will be appealed.