Legal Challenges and Uncertainty Surrounding the Corporate Transparency Act
Legal Update: Corporate Transparency Act Compliance on Hold Amid Federal Injunction
A recent federal court order has paused the requirement for reporting companies to submit beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). While this injunction remains in effect, companies are not obligated to file such reports and face no liability for non-compliance. However, they may still choose to voluntarily submit their beneficial ownership information.
The Corporate Transparency Act (CTA) was enacted to safeguard U.S. and global financial systems from threats such as money laundering, drug trafficking, and terrorist financing. By addressing these risks, the CTA aims to ensure fair competition for millions of small businesses across the United States and close loopholes often exploited by bad actors.
Key Litigation Developments
On December 3, 2024, the U.S. District Court for the Eastern District of Texas, Sherman Division, granted a nationwide preliminary injunction in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al. This case, one of several legal challenges to the CTA, has temporarily halted the enforcement of the reporting requirements.
While several other district courts have upheld the constitutionality of the CTA, including rulings in favor of the Department of the Treasury, the Texas decision represents a significant obstacle. The Department of Justice, acting on behalf of the Treasury, has filed an appeal and sought a stay of the injunction.
Timeline of Events
December 5, 2024: The Department of Justice filed a Notice of Appeal and requested a stay of the preliminary injunction.
December 23, 2024: A panel of the U.S. Court of Appeals for the Fifth Circuit granted a temporary stay of the district court’s injunction, allowing the CTA requirements to be enforced during the appeal. FinCEN responded by notifying the public and extending compliance deadlines.
December 26, 2024: A separate Fifth Circuit panel vacated the stay, reinstating the district court’s injunction.
Current Status
As of December 26, 2024, the injunction issued in Texas Top Cop Shop, Inc. v. Garland remains in effect. Reporting companies are not currently required to file beneficial ownership information with FinCEN. The ongoing legal battle leaves the future of CTA compliance requirements uncertain, with further developments expected as the appellate process continues.
Implications for Businesses
This evolving legal landscape underscores the importance of staying informed about compliance obligations under the CTA. While reporting companies are not presently required to submit beneficial ownership information, they should monitor updates from FinCEN and other regulatory authorities to ensure readiness for potential changes.
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