Federal District Court Judge Declares Corporate Transparency Act Unconstitutional

Dmitriy Smirnov
March 5, 2024
Anti-Money Laundering

In a blow to a law that some in the law enforcement community have hailed as the most significant anti-money laundering reform in decades, a federal district court in Alabama has ruled that the Corporate Transparency Act (“CTA”) is unconstitutional. Beginning in January of this year, the CTA requires qualifying companies, including foreign-registered entities doing business in the U.S., to provide information on the beneficial owners of those companies to the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). 

In a 53-page ruling, Federal District Court Judge Liles C. Burke concluded that the CTA “transcends the limits imposed by the Constitution on the legislative branch and lacks a strong connection to any enumerated power to serve as a necessary or appropriate means to achieve Congress’ policy objectives.” Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala. 2022). In other words, the CTA—according to the court—surpassed Congress’ legislative authority as outlined in the Constitution. While Judge Burke did not explore or further explain his concern regarding specific violations of the First, Fourth, and Fifth Amendments by the CTA, he made clear that the law exceeded constitutional boundaries.

The hope when the CTA was passed was—as the law itself states—that it would help align the United States with international guidelines for anti-money laundering and countering terrorism financing. To prove a violation of the federal money laundering statutes, the government must prove that a person engaged in a financial transaction knowing that the funds are the source of some form of unlawful activity, with the intent to conceal the nature and source of or knowing that the funds were the proceeds of a violation of certain enumerated laws—called “specified unlawful activity” in Title 18, United States Code, Section 1956. Because the heart of a money laundering offense is a financial transaction, evidence of beneficial ownership potentially reveals the control person on behalf of a reporting entity who might have caused the transactions or controlled the account at issue. In this way, beneficial ownership information will be a valuable tool for regulators and enforcement agencies pursuing those who violate anti-money laundering, terrorism financing, and sanctions laws, among others.  By forcing businesses to disclose their beneficial owners, the CTA would potentially prevent corrupt companies from manipulating the U.S. financial system toward unlawful ends.

Despite law enforcement’s praise for the statute, the concern on the other side of the coin has been that it imposes disproportionate obligations on small, non-public companies. The plaintiffs in Yellen made this very point, arguing that the CTA unfairly burdens small businesses by requiring them to disclose highly personal details about their owners to FinCEN. The court agreed, viewing this requirement as an excessive and unconstitutional imposition on citizens who are not under suspicion of any wrongdoing. For the time being, Judge Burke’s ruling only suspends the enforcement of the CTA against the Yellen plaintiffs. However, the ruling may potentially impact the reporting obligations of numerous U.S. business entities.

Alejandro Soto is a former federal prosecutor and Deputy Chief with the U.S. Attorney’s Office for the Southern District of Florida and is part of Fridman Fels & Soto, PLLC’s White-Collar Criminal Defense Practice Group.