Judge rules against disclosure requirement under corporate transparency law

In a blow to the government's anti-money laundering efforts, a federal court has ruled that the Treasury cannot require certain small businesses to report personal details about their owners.

Under a section of the 2020 law that took effect on January 1, small businesses must share details about so-called beneficial owners, which are individuals who own financial stakes in the company or have significant power over their business decisions. The law, the Corporate Transparency Act, was passed with bipartisan support in Congress and was intended to help the Treasury Department's Financial Crimes Division identify money launderers hiding behind shell companies.

But in a ruling late Friday, Judge Lyles C. Burke of the U.S. District Court in Huntsville, Alabama, sided with the law's critics. They argue that requiring company owners to provide their personal data — names, addresses and copies of their identification documents — was a case of congressional overreach, no matter how well-intentioned.

“Congress sometimes enacts clever laws that violate the Constitution,” Judge Burke wrote in a 53-page filing. “This case, involving the constitutionality of a corporate transparency law, illustrates that principle.”

Judge Burke's ruling prevented the department from imposing ownership reporting requirements on the plaintiff in the Alabama case, the National Small Business Association, a nonprofit trade group representing more than 65,000 member businesses.

Lawyers who followed the Alabama case over the weekend said they expect the government to quickly ask that the injunction be temporarily halted, either by Judge Burke or the 11th Circuit Court of Appeals in Atlanta, or both. The Justice Department will almost certainly appeal the Alabama case to the circuit court, the lawyers said.

Morgan Finkelstein, a Treasury Department spokeswoman, said her agency was “complying with the court order.” She referred further questions to the Ministry of Justice, which declined to comment.

As lawyers and transparency experts scrutinized Judge Burke's opinion, the ruling's direct impact on the universe of small businesses in the United States, which the government estimates at 33 million, was not entirely clear.

Businesses were given a year to comply with reporting requirements with respect to 2023, so the data is not due until the end of 2024. Judge Burke's ruling, narrowly read, does not apply to small businesses that are not members of the trade organization that filed the Alabama lawsuit, meaning most businesses Those affected by the mandate must still comply.

“This has made things more complicated for a lot of my clients,” said Angela Jamalski, who advises large and small businesses on compliance and regulatory issues at the law firm Honigman LLP in Ann Arbor, Michigan. of her clients planned to wait until the summer to delve deeper into the reporting requirements and what they mean, since the reporting deadline isn't until December, and law enforcement appears to be in flux.

Supporters of greater transparency criticized the ruling.

“This is an anomalous decision by a single judge in Alabama that is based on a very narrow view of Congress’ constitutional powers that is not supported by precedent,” said Senator Sheldon Whitehouse, a Democrat from Rhode Island and one of the law’s supporters. “I would urge the government to quickly appeal to correct the wrong decision and ensure that the transparency requirements imposed by the law are fully and uniformly implemented.”