Breaking news from the Eleventh Circuit Court of Appeals. In a 3-0 decision issued this morning, a three-judge panel reversed our landmark district court ruling that the Corporate Transparency Act (CTA) was unconstitutional.
Readers will remember that district court victory as huge win for Main Street. It not only paved the way for additional successful court challenges, it also freed FinCEN to focus on new rules that limited the CTA’s scope significantly.
Unfortunately, today’s ruling goes in the other direction. Writing for the Eleventh Circuit, Judge Brasher concluded that the CTA falls within Congress’s power under the Commerce Clause:
We can safely say that the CTA facially regulates economic activity. The statute is specifically directed at domestic companies created under the laws of a state and foreign companies registered to do business in the United States… By requiring these corporate entities to provide beneficial ownership information, the CTA regulates how they operate and the level of secrecy with which they do business.
We are not sure about facially, but the CTA clearly does not regulate economic activity, or any other activity. The word “commerce” does not appear in the statute. The reporting requirements are triggered when a corporation is formed, not when it does anything. And many of the corporations targeted do not engage in commercial activity – they are personal residences and homeowner’s associations, etc.
At its core, the CTA identifies a large group of individuals – a 100 million or so “beneficial owners” – and requires them (or, more specifically, the legal entity they are affiliated with) to submit their personal information to assist with law enforcement – in this case cracking down on money laundering.
Nonetheless, the court also rejected Fourth Amendment challenges, finding that the CTA’s reporting requirements are reasonable because they’re uniform, limited in scope, and subject to privacy protections:
It is a uniform reporting requirement applied to all businesses that meet the CTA’s definition of ‘reporting company.’ There is nothing arbitrary or discretionary about its application… The information it requires is ‘sufficiently described and limited in nature’ and is no more detailed than the reports in Shultz.
When did “uniform” became a substitute for reasonable and warranted? Is an unconstitutional law exempt from scrutiny if it’s broadly applied? Moreover, the Court appears to hold that because some legal entities are engaged in illicit behavior, all legal entities (and their beneficial owners) can be treated as suspects. As S-Corp noted in a previously filed amicus brief, no other federal information-collection statute presents comparable privacy risks without significant protections against abuse.
The court’s casual treatment of serious constitutional concerns may help in the long run. A more rigorous ruling would be less likely to be granted cert, while their treatment of commerce clause and Fourth Amendment concerns is out of synch with the Supreme Court’s current membership.
The path to success just moved forward one step. It would have been better for the Eleventh Circuit to uphold the lower court’s ruling, but either way this issue was headed to the Supreme Court, and the weakness of today’s adverse ruling may be a benefit in the end.
Meanwhile, the interim final rule issued by FinCEN last spring remains in place. That rule exempted US companies and US citizens from the CTA’s reporting requirements. Treasury has promised to issue final rules within the year (Is that 2025 or twelve months? Not sure.) and S-Corp has been encouraging them to issue the rules and publicly purge the existing database of beneficial ownership information at the same time. According to FinCEN, about half the targeted 32 million entities filed under the CTA, and that data is still on the CTA’s books. Purge away is what we say.
Today’s reversal is disappointing, but it’s not the end of the story. The limited scope of FinCEN’s current rules combined with continued legislative advocacy and potential Supreme Court review means we have multiple paths forward. Much more to come.