As U.S. Treasury Secretary Janet Yellen said last year, “Unmasking shell corporations is the single most significant thing we can do to make our financial system inhospitable to corrupt actors.” Illicit shell networks span states and continents, threatening American public safety and national security. There is evidence that these networks foster cross-continental fentanyl trafficking rings, proliferate tax evasion schemes, and facilitate egregious circumvention of sanctions on U.S. adversaries, among other crucial harms.
In an exercise of clearly constitutional powers, Congress responded to the dangers posed by anonymous U.S. shell companies in 2021, by passing the bipartisan Corporate Transparency Act (CTA). The Act is the product of 20 years of careful congressional deliberation on the scourge of anonymous shell companies. The CTA requires certain U.S. entities to disclose their true, “beneficial” owners to a database housed at Treasury’s Financial Crimes Enforcement Network (FinCEN). When passed, the Act had one of the broadest coalition of supporters in recent legislative history: including national security experts, law enforcement associations, consumer protection champions, financial services trade groups, climate justice advocates, faith-based organizations, and businesses large and small. The Act came into effect as of January 1, and more than 1.7 million entities have already filed ownership information with FinCEN.
Nevertheless, in March, Judge Liles Burke of the Northern District of Alabama passed down a decision finding the CTA unconstitutional because he determined it exceeded the reach of congressional powers to legislate on matters of foreign affairs, interstate commerce, and taxes. (FACT filed an amicus brief in the case, together with Transparency International U.S. and Main Street Alliance.) Following the district court decision, FACT noted the high stakes of this litigation in a Bloomberg Law op-ed: FACT outlined how the judge too narrowly interpreted both the CTA and Congress’ well-established powers under the Constitution to address money laundering and tax dodging.
The federal government is now appealing the district court decision in NSBU v. Yellen before the U.S. Court of Appeals for the 11th Circuit. In its brief, the government explains that the purpose of this law is to prevent financial crime, and that Congress, not the courts, have the right to decide the best way to accomplish the anti-financial crime purposes of the law. Per the government brief, in second-guessing Congress, the district court misconstrued both the constitutional precedent and the scope and purpose of the CTA statute. As the brief summarizes:
The district court’s contrary conclusion rests on two principal errors. First, although the court construed the CTA as regulating the isolated act of filing incorporation papers, the statute in fact regulates a class of commercial entities. It refers to the state incorporation process only as a means of identifying entities with legal authority to conduct commercial transactions. Second, although the district court viewed the CTA as unrelated to the government’s broader efforts to curb financial crime, there is no proper basis for disregarding the elected Branches’ shared judgment that the reporting requirements are needed for those efforts.
In so asserting, the brief makes clear the interstate commerce and economic benefits of the Corporate Transparency Act.
In addition, several amici curiae (“friends of the court”) – including Members of Congress, national security and anti-corruption experts, and tax law experts – filed briefs in support of the Government’s position that made compelling cases defending the CTA as constitutional.
In a brief submitted by Members of Congress – including Senators Whitehouse (D-RI), Wyden (D-OR), Warren (D-MA), and Reed (D-RI), as well as Representative Waters (D-CA) – submitted a brief reminding the court that the congressional record is clear that anonymous shell companies are routinely used by financial criminals. These champions of the Act participated in dozens of hearings to understand the problem of anonymous shell companies. Further, the legislative solutions they shaped evolved many times over the years, based on feedback from numerous stakeholders, before landing on the final, bipartisan text of the CTA. As the brief states, “The CTA is a garden-variety, valid exercise of Congress’s core Article I authorities…The district court’s contrary holding rests on a cramped reading of Congress’s Article I authority, contravenes decades of precedent, and without record support impermissibly second-guesses Congress’s copious factual findings.” There is no question that Congress adequately deliberated on its authorities and the nature of its proposed solution to tackle the issue of shell companies.
A second brief – from anti-corruption and national security experts Transparency International U.S. (TI US), the Foundation for Defense Against Democracies (FDD), and Nate Sibley of the Hudson Institute – focuses on Congress’ foreign affairs power. The brief lists numerous examples where anonymous shell companies were used to finance terrorism, evade sanctions relating to Russia, Iran, and Venezuela, and traffic fentanyl into dozens of states, and undermining the U.S. fight against corruption. Building on these examples, the brief concludes:
[T]he only true means of addressing the national security and foreign policy hazards identified above is to lift the veil of anonymity protecting these entities. As this is precisely what the CTA accomplishes, it therefore indisputably provides the U.S. Government with a means of protecting American national security and furthering American foreign policy goals.
Finally, tax experts from the Tax Law Center at NYU explained in their brief that the CTA is also authorized by Congress’ constitutional power to lay and collect taxes, which includes the authority to collect information such as beneficial ownership collected under the CTA. As the brief notes, “Tax evaders erect entities between themselves and their income for this very reason: to hide their tracks and thwart the law. The CTA counteracts this method of tax evasion. It gives the IRS the data it needs to assess and collect taxes at the correct rates and amounts, and from the correct taxpayer. It is constitutional.” The CTA will make audits and investigations into tax non-compliance more effective and efficient, improve targeting for investigations, and facilitate voluntary compliance. There is no doubt that the CTA will have a clear impact on U.S. revenue collection. The brief also explains the interrelated nature of tax and other financial crimes and how identifying, stopping and deterring tax evasion also supports efforts to identify and stop money laundering.
Taken together, the three briefs clearly demonstrate that the CTA is constitutional as an exercise of three Congressional powers: interstate commerce, foreign affairs, and taxing powers. Ultimately, the Court need only support one justification to rule that the CTA as constitutional and overturn the lower court’s decision. The plaintiffs are due to file their briefs in mid-May, and the U.S. government can submit a response to those briefs by early June. Following an oral argument, a panel of three judges will make a decision on the case.
The Court of Appeals must find the Corporate Transparency Act constitutional and allow this long overdue U.S. financial reform to continue to be fully implemented. If not, the Court will give a free pass to fentanyl traffickers, tax evaders, and U.S. adversaries to abuse the opacity of the U.S. financial system.