Companies Breathe Sigh of Relief With Halt to Disclosure Mandate

A Texas federal judge’s order to temporarily block the government from enforcing the Corporate Transparency Act has prompted businesses across the US to pause disclosure preparations just weeks before the law’s original 2025 deadline, potentially saving them tens of thousands in compliance costs.

Judge Amos L. Mazzant III of the US District Court for the Eastern District of Texas issued a preliminary injunction Dec. 3, ruling the law likely went beyond Congress’s constitutional authority to regulate interstate and foreign commerce.

Tax practitioners say their clients view the order as an opportunity to save money by avoiding what they’ve called burdensome compliance costs—at least, for now.

“We think it’s highly unlikely that, if this injunction is dissolved, that companies will be under penalty if they end up not having filed by January,” said Seth Ashby, the chair of Varnum LLP’s CTA Task Force.

Ashby said his team had advised several businesses with complex capital structures, for which beneficial ownership reporting was difficult.

“Those clients are incurring a fair amount of legal fees to engage us, to help navigate that analysis, and that’s where it makes sense for them to kind of pause,” Ashby said. “With year-end deals trying to get done and all the other transactional work that we’re doing for clients, this is going to quickly fall to the bottom of the priority list.”

The court’s ruling came less than one month before the law’s Jan. 1, 2025, deadline for preexisting US business entities to disclose their beneficial owners’ identities to the Treasury Department’s Financial Crimes Enforcement Network. Before the injunction, about 32.6 million of those reporting companies would’ve needed to file beneficial ownership disclosures to FinCEN, according to the bureau’s estimates.

“I was surprised at the timing; I had really thought that if a judge seriously intended to enjoin the CTA, they would have done so earlier,” said Matthew Bisanz, a partner in Mayer Brown LLP’s financial services practice. “A lot of businesses are surprised, happy, and to some extent, relieved.”

First Nationwide Injunction

Congress passed the CTA as part of a broader anti-money laundering package in the 2021 National Defense Authorization Act, with the intention of cracking down on illicit financial schemes that use anonymous shell companies.

The law requires US entities to disclose to FinCEN the identities of their beneficial owners—individuals who directly or indirectly own or control the business.

FinCEN began accepting disclosures of companies’ beneficial owners in January 2024, requiring newly formed entities to report within 90 days and preexisting entities by 2025.

The law drew legal action from small businesses, which said they were caught in the crossfire of excessive law enforcement measures that imposed onerous requirements.

Mazzant’s order was the first nationwide order blocking the CTA, but not the first time a court ruled the law potentially invalid.

The US Court of Appeals for the Eleventh Circuit is considering another CTA injunction issued by an Alabama district court earlier this year, which blocked enforcement solely against members of the association National Small Business United, which brought the suit.

Other federal district courts in Virginia and Oregon have declined to preliminarily block CTA enforcement.

“We continue to believe—consistent with the conclusions of other federal courts—that the CTA is constitutional,” a FinCEN spokesperson said, noting the agency is reviewing the ruling to determine next steps. The law “plays a vital role in protecting the US financial system, as well as people across the country, from illicit finance threats like terrorist financing, drug trafficking, and money laundering.”

The Justice Department, which represented FinCEN and the Treasury Department, declined to comment on the case.

Most Effective Route

Mazzant, however, held that the Commerce Clause likely can’t support the CTA because the law doesn’t regulate any existing channel of commerce under Congress’ purview, but instead creates and compels a new activity triggered when the entity is incorporated.

Even if Congress can regulate a corporation’s mere existence, the Commerce Clause can’t be leveraged to compel law enforcement disclosures, he said

“I think that’s missing the forest for the trees,” said Zorka Milin, policy director for the Financial Accountability and Corporate Transparency Coalition, which advocates for combating illicit finance. “It’s really hard to imagine a situation where the law would apply to a company that was not engaged in interstate or foreign commerce.”

Proponents of the CTA, including congressional Democrats, say the law’s anti-money laundering goals align with Congress’ national security responsibilities and are a conventional legislative response to combating illicit finance. Milin said the CTA affects a broad set of entities because that is the most effective route to address the policy problem at hand.

“It’s really difficult to separate the wheat from the chaff, so to speak,” she said.

It’s uncertain how long the nationwide injunction will stand, but Bisanz said he expects the government to appeal the case to the Fifth Circuit and potentially the US Supreme Court.

“If the nationwide injunction aspect of this doesn’t force the issue to the Supreme Court, we will see a circuit split,” Bisanz said. “Not necessarily between the Fifth and Eleventh, but there almost certainly will be a circuit split given the squishiness of some of the legal principles involved here.”

The case is Texas Top Cop Shop, Inc. v. Garland, E.D. Tex., No. 4:24-cv-00478, 12/3/24.