By Danny Lynch, Staff Writer
Picture courtesy of pixabay.com
On January 1, 2024, The Corporate Transparency Act (“Act”) went into effect, creating new requirements for gathering information regarding business ownership. The Act requires certain companies to report ownership information to thwart financial crimes such as money laundering and tax fraud. Under the Act, “Reporting Companies” report information about their Beneficial Owners to The United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). A “Beneficial Owner” is defined as an individual who owns or controls at least 25 percent of a company or has substantial control over the company.[1] A “Reporting Company” is defined generally as any corporation or limited liability company created in the United States and any company registered to do business in the United States through the filing of the appropriate form with the Secretary of State or similar office.[2]
The Act specifies that companies qualifying as Reporting Companies are now required to submit their beneficial owner’s full name, address, date of birth, and provide an identification document such as a passport or driver’s license.[3] However, the Act allows certain companies to be exempt from the requirements if they meet any of the 23 exemptions. One exemption, and perhaps the one applicable to most companies, is the “Large Operating Company” exemption. This exemption says that if an entity employs more than 20 full-time employees, and their gross income exceeds $5,000,000, it is exempt from the newly enacted reporting requirements.[4] Thus the Act is aimed at receiving the personal information of the owners of small businesses.
Over a year ago, the National Small Business Association (“NSBA”) filed a complaint in the Northern District of Alabama challenging the reporting requirements of the Act.[5] The complaint raises several constitutional claims, alleging that the Act’s new requirements will supplant the existing obligation of financial institutions to gather ownership information under the Customer Due Diligence Rule.[6] Within the complaint, the NSBA states: “It is the quintessential example of the government prioritizing Wall Street to the detriment of Main Street.”[7] The major issue that the NSBA raises is that the new requirements allow major companies, such as banks, publicly traded companies, and financial advisory firms, to be exempt from the reporting obligations. Rather than focus on the larger players, FinCEN is targeting small businesses. The constitutional rights that the NSBA claims the Act infringes on are the First, Fourth, Fifth, and Ninth Amendments. It also argues that the Act exceeds Congress’s authority to regulate interstate commerce under Article I, Section 8, clause 3 of the U.S. Constitution.[8]
More specifically, the NSBA alleges that the claims raised in the complaint are an unconstitutional usurpation of the states’ power to regulate entity formation, unconstitutional invasion of privacy and unreasonable search and seizure, compelled speech, and unconstitutional violation of due process.[9] The first allegation argues that the Act exceeds the regulatory power that is held by Congress. Congress does not have a regulatory interest or constitutional authority over a newly formed company that has yet to engage in foreign or interstate commerce, nor does it have any authority over a small company that does not engage in interstate commerce.[10] Had the Act not exempted larger, commercial entities from the reporting requirements, the NSBA likely would not have raised this issue. The Fourth Amendment states, “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated.”[11] The requirement of sharing personal information may or may not infringe on this constitutional right. However, similar information is already supplied to the Internal Revenue Service. The next issue, compelled speech, argues that foreign governments may request and receive the reported personal information due to the disclosure provisions of the CTA. Finally, the complaint argues that the language of the CTA is too vague and ambiguous for small businesses to comply.[12] This will be an uphill battle because, generally, courts have ruled that unconstitutional vagueness happens when a statute “specifies no standard of conduct at all.”[13]
It will take strong arguments by the NSBA to prove how the Act infringes on the constitutional rights that the complaint alleges to have been violated. Whether or not this case moves to the Court of Appeals, or even to the Supreme Court of the United States, this issue will likely set a precedent for future laws that people believe infringe on their rights.
[1] www.fincen.gov, 16.
[2] www.fincen.gov, 2.
[3] www.fincen.gov, 38.
[4] www.fincen.gov, 12.
[5] www.nsba.biz/_files/
[6] www.moneylaunderingwatch.com
[7] www.nsba.biz/_files/
[8] www.nsba.biz/_files/
[9] www.nsba.biz/_files/
[10] Plaintiff’s Complaint at 2, National Small Business United v. Janet Yellen, N.D. Ala. (2022) CV-01448.
[11] Amendment IV of the U.S. Constitution.
[12] www.moneylaunderingwatch.com
[13] United States v. Bronstein, 849 F.3d 1101, 1107 (D.C. Cir. 2017).
