Within one month of each other recently, two federal judges ruled that a law passed by Congress in 2021 is “likely unconstitutional” and ruled in favor of small businesses. For now.
I’m talking about something you’ve probably never heard about: the Corporate Transparency Act, which Congress passed in 2021, overriding a veto issued by then President Donald Trump. This ominous law requires entities incorporated under state law to disclose the personal information of their stakeholders, including current address, identification documents, and other sensitive information, to the Department of the Treasury’s Financial Crimes Enforcement Network.
In short, and in truth, The Corporate Transparency Act mandates that millions of private entities formed under state law disclose sensitive personal information to federal law enforcement. The Act applies even to entities that are not alleged to be involved in a crime and to entities that are not engaged in interstate or foreign commerce. Failure to comply may result in fines, penalties, and imprisonment.
One judge at the time observed that the CTA “is unprecedented in its breadth and expands federal power beyond constitutional limits. It mandates the disclosure of personal information from millions of private entities while intruding on an area of traditional state concern.”
The office of the Attorney General, which is not a party to any of the lawsuits, says penalties for noncompliance could result in fines of up to $500,000 and 10 years in jail. Even if you’re unaware of what the CTA is or requires. The Treasury Department is currently noting that submitting information is voluntary due to ongoing litigation. Again, for now.Large businesses are exempt; the law applies to companies with 20 or fewer employees. Sounds like most of us, doesn’t it?
Justifications for the law put forward in early versions of the legislation invoked a long list of alleged financial crimes including money laundering and tax evasion. The word “terrorism” appears, too, of course, because that has been the misguided, default justification for legislation for 20-plus years. Basically, the law is targeted at anything that might involve a modicum of financial privacy. And that should scare all of us who run a business.
And what if you don’t comply or even are aware of what the heck CTA is? Well, get ready for a penalty. And maybe even jail time.
According to FinCEN, “a person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000.”
Don’t you think this could be a serious problem for those many Americans who have established corporations or limited liability companies for making a living, but don’t keep track of the federal government’s ongoing efforts to stamp out the scourge of terroristic money launderers among mom and pop storefronts and Etsy vendor? (Pun and irony intended).
Many plaintiffs are arguing that the CTA reporting requirement is worse than an added burden—it’s probably also unconstitutional. They say it allows the federal government to take on roles traditionally reserved to the states, imposes unreasonable searches and seizures, and makes up vague terms such “beneficial owners” which are not normally used by businesses or state agencies. I would advise you to check with an accountant and spread the word to those who haven’t yet heard of this dangerous regulatory burden. And most of us haven’t.
Again, the CTA law was allegedly passed to curb illicit finance by asking many businesses operating in the U.S. to report beneficial ownership information to the Treasury’s Financial Crimes Enforcement Network, also known as FinCEN. Many businesses had a Jan. 1, 2025, deadline to submit an initial Beneficial Ownership Information Report. This includes about 32.6 million businesses, including certain corporations, limited liability companies and others, according to federal estimates.
“Corporate anonymity enables money laundering, drug trafficking, terrorism and corruption,” Treasury Secretary Janet Yellen said in a January announcement of the BOI portal launch. But aren’t we innocent until proven guilty? As an analogy, do we really want the police knocking on our door every single night to make sure nothing illegal is going on inside our residences?
Here’s the kicker though, my friends: Businesses and owners who don’t file may face civil penalties of up to $591 a day for each day their violation continues, according to FinCEN. That sum is adjusted for inflation. Additionally, they can face up to $10,000 in criminal fines and up to two years in prison.
Just get ready: A “beneficial owner” is a person who owns at least 25% of a company’s ownership interests or has “substantial control” of the entity, according to FinCEN. Businesses must report information about these beneficial owners, including name, birth date, address and information from an ID such as a driver’s license or passport, in addition to other data.
Companies that existed prior to 2024 must report by Jan. 1, 2025. Those created in 2024 have 90 calendar days from their effective date of formation or registration to file; those created in 2025 or later have 30 days. Many exempt businesses—such as large companies, banks, credit unions, tax-exempt entities and public utilities—already furnish similar data. But now small businesses that are now under the literal gun.
A federal court in Texas on Dec. 3 temporarily blocked the Treasury Department from enforcing the BOI reporting rules, meaning the agency can’t impose penalties while the court conducts a more thorough review of the rule’s constitutionality. That’s “some” good news.
Thank God for Judge Amos L. Mazzant III of the US District Court for the Eastern District of Texas for issuing the injunction at the request of a family-run firearms and tactical gear retailer, called Texas Top Cop Shop Inc., among other co-plaintiff businesses including our own Libertarian Party of Mississippi. Their lawsuit alleged that the CTA falls outside of Congress’s powers to regulate interstate and foreign commerce because it regulates incorporated entities regardless of whether they engage in commercial activity.
If you own a small business, check with your attorney or accountant to see if you’re covered by the law and to discuss what you should do in case the CTA injunction is later lifted. You don’t want to be caught unprepared for a revived federal leviathan and its power to fine and imprison.The quest for security is too often invoked to justify an infringement of civil liberties. And here we are—again. Good luck. And stay aware.
The CTA empowers FinCEN to function as a new, global tattle-teller. Congress has authorized FinCEN to share beneficial owners’ sensitive information with international law enforcement and international intelligence agencies, US intelligence agencies, the IRS, and state and local law enforcement agencies.
For now, Congress requires Americans to self-report to FinCEN so that international and domestic law enforcement agencies can investigate and prosecute financial crimes. Even worse that that, the CTA criminalizes asserting one’s Fifth Amendment privilege: the refusal to contribute one’s information to this international surveillance system risks civil and criminal penalties.Simply put, the CTA’s records requirement for business and nonprofit managers and their senior employees and family members compels testimonial information in violation of the Fifth Amendment.
Scott Coopwood
