Corporate Transparency Act Ruling Misses Mark on Congress’ Power

For decades, the US has been a favored place for foreign kleptocrats, drug traffickers, and other bad actors to stash their ill-gotten gains in anonymously owned companies. To address the problem, Congress passed the bipartisan Corporate Transparency Act in 2020 to require most US companies, including anonymous shell companies, to disclose their true owners to the government. This was the most significant update to US anti-money laundering law in a generation.

A federal district judge in Alabama ruled on March 1 that the CTA is unconstitutional—on grounds that it was beyond Congress’ power to enact because incorporation of companies is supposedly “in no sense an economic activity” that might affect interstate commerce. He also found it was beyond Congress’ powers to legislate on matters of foreign affairs and taxation.

The judge’s decision is mistaken on both the Constitution and anti-money laundering law and should be overturned on appeal.

The decision was handed down in a challenge brought by the National Small Business Association and one of its individual members, Isaac Winkles. Our organization, the Financial Accountability and Corporate Transparency Coalition filed an amicus brief with the small business organization Main Street Alliance and Transparency International US, in support of the government.

The immediate practical impact of the court’s order is narrow, and even that impact will be only temporary if the decision is ultimately overturned. Because the case wasn’t brought as a class action and the final order isn’t a sweeping nationwide injunction, the Treasury Department is only barred from enforcing the CTA against the named plaintiffs.

Everyone else is still required to comply with the law. Following the court’s order, the Financial Crimes Enforcement Network, the Treasury bureau tasked with implementing the CTA, notified that it would continue to enforce the law, other than with respect to Isaac Winkles and other members of the NSBA as of March 1.

The 65,000 NSBA members represent a relatively small fraction of all in-scope entities. A far larger number, close to a million, of law-abiding companies have already complied, without any issues. Many small businesses support the CTA and recognize its importance in fighting financial crime and ensuring criminals can’t outcompete and defraud honest businesses.

We applaud the Justice Department for promptly appealing. The US Court of Appeals for the Eleventh Circuit should reverse the lower court’s decision—the district court judge erred in too narrowly construing the statute at issue and Congress’ well-established powers under the Constitution to address money laundering and tax dodging.

First, to set the record straight: The CTA isn’t aimed at regulating the corporate formation process, which the district court understood as traditionally an issue for regulation by states, not Congress.

With or without the CTA, states remain free to permit any kind of corporate entity and to permit anyone to form them. The CTA only requires disclosure of the owners of the entities that are created; that disclosure requirement targets the secret ownership of companies.

The abuse of anonymously-owned companies by foreign and domestic criminals—who almost never reside in the state of incorporation—is a global problem that falls squarely within Congress’ power. The vast majority of state attorneys general have recognized the need for congressional action.

Second, as part of the federal anti-money laundering legal framework, the CTA clearly regulates economic activity. Its text exempts non-economic actors such as non-profits and inactive entities. The CTA is aimed at what’s obviously an economic problem—the use of anonymous companies to launder money.

In California Bankers Ass’n v. Shultz, the US Supreme Court has upheld a challenge to certain provisions of the Bank Secrecy Act applicable to banks, finding “Congress recognized that the use of financial institutions, both domestic and foreign, in furtherance of activities designed to evade the regulatory mechanisms of the United States, had markedly increased,” and therefore Congress was well within its powers to act.

The same applies here: Congress has similarly recognized that secretly owned companies are increasingly being abused and was well within its constitutional powers to address the growing problem.

Lastly, the lower court judge repeatedly second-guessed Congress’ judgment on foreign policy, tax, and financial policy matters. Fighting foreign criminals and oligarchs’ use of anonymous companies is unquestionably a foreign policy concern and a national security priority. Unlike the judge’s cursory and unfounded conclusions, Congress took time over many years to consider views of police, national security, and other experts, all who were unanimous that the fight against dirty money requires addressing the problem of anonymously owned companies.

Allowing this decision to stand would undermine America’s fight against money laundering, at a moment when we’re finally seeing progress. It would also have troubling constitutional implications for the scope of congressional powers that could reach far beyond the CTA.

The stakes of the case are high: The CTA is vital to protecting America from financial crime. We expect most companies will continue to comply, and we expect the appellate court to reverse the district court’s erroneous decision.

The case is Nat’l Small Bus. United v. Yellen, Ala. Dist. Ct., 5:22-cv-1448-LCB, 3/1/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Zorka Milin is policy director at the FACT coalition, where she leads on international tax policy and other transparency priorities.

The FACT Coalition and Transparency International US filed an amicus brief with the court in support of the CTA.

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