As we’ve observed previously, the Corporate Transparency Act is a poorly constructed bit of law. It will do little to combat money laundering as the criminals will simply refrain from self-reporting their crimes, but it will saddle millions of lawful small business owners with yet another reporting requirement as well as an opportunity to have their personal information spread all over the internet.
On Tuesday the National Small Business Association (NSBA) highlighted another reason to dislike the CTA: it’s unconstitutional. A lawsuit filed by the group in the U.S. District Court for the Northern District of Alabama argues the CTA violates a number of fundamental constitutional principles, including protections against unreasonable search and seizure.
The S Corporation Association strongly supports this effort as do two prominent legal organizations, FreedomWorks and the Due Process Institute, whose statement backing the legal challenge reads in part:
The CTA exposes “beneficial owners” of reporting companies to a criminal penalty of up to two years of imprisonment for conduct that is essentially a paperwork violation—even for a first-time offender. Given the CTA’s broad reach and vague definitions, the CTA could result in the conviction of individuals who have no intent to violate the law, whose greatest offense may simply be not understanding vague, complicated rules, and whose conduct causes no social harm.
Everyone supports combating money laundering and the financing of terrorists, but the new law is a step backward in that effort. It shifts the focus from a “follow the money” approach targeted at banks and economic transactions to a shotgun approach requiring 32 million entities to report the private information of their owners or go to jail, all with no notion that any of them are doing anything illegal, or that they are even engaged in commerce. As the complaint notes:
(i) the federal government does not know in what activities the reporting company is engaged or will engage;
(ii) the federal government does not know whether the activities engaged in, or to be engaged in, by the reporting company constitute “commerce with foreign Nations, and among the several States, and with the Indian Tribes” such that they are subject to Congress’s authority under Article I of the United States Constitution;
(iii) the federal government does not know or suspect that the reporting company is engaging in, or will engage in, any illegal activity or any activity that is subject to federal regulation; and
(iv) the federal government has no suspicion of wrongdoing, probable cause, or any other basis justifying the imposition of an obligation to divulge sensitive personal information to FinCEN for law enforcement purposes.
Thus, the CTA is a law enforcement dragnet of sweeping proportions imposed by Congress on law-abiding U.S. citizens and permanent residents who own or control small businesses in the United States (as well as upon non-business entities), where neither Congress nor any other branch of the federal government has established any legal or regulatory predicate to justify this demand for personal information.
To top it all off, larger entities are exempt from these requirements, as are banks, accountants, financial advisors and every other profession that’s often at the heart of money laundering schemes. Instead, the burden will fall on 32 million entities with fewer than 20 employees and less than $5 million in gross revenues, exactly those businesses who lack the necessary experience or funds to comply with this complex new reporting requirements.
The Treasury Department recently finalized its regulations defining who has to report under the CTA. Those rules will take effect beginning in 2024, so that gives the courts more than a year to recognize that the CTA is a blatant overreach of federal power and it needs to be struck down.