Corporate Transparency Act’s Wild Ride Shows No Sign of Slowing

The Corporate Transparency Act is on life support.

The Treasury Department and its Financial Crimes Enforcement Network are refusing to enforce it in its current form, and late Friday issued regulations scaling back the companies responsible for reporting ownership information. Congress is considering amending or repealing the CTA, and more than a dozen lawsuits are challenging its constitutionality.

Meanwhile, business owners, operators, and their advisers are suffering from CTA whiplash as they wrestle with remaining compliant in an exceedingly complex and unstable regulatory system. Business owners, operators, and their advisers should pay close attention to this evolving landscape and maintain flexibility.

The goal of the CTA is to prevent financial crime, money laundering, and terrorism financing through shell companies. It requires unexempted business entities (each defined as a reporting company) to file information on their beneficial owners. Willful noncompliance carries both civil and criminal penalties, and FinCEN can disclose the information to law enforcement and financial institutions if it follows certain statutory restrictions.

An entity or class of entities can be exempt from disclosure if doing so wouldn’t serve the public interest or be “highly useful” to prevent, detect, or prosecute money laundering, terrorism financing, tax fraud, or other financial crimes.

The Treasury Department can exempt additional categories of entities to limit the burden on reporting companies. However, given the extensive discussion in the CTA and its legislative history, it’s unlikely that the blanket exemption to all domestic reporting companies contained within the regulations released March 21 aligns with Congress’ intent.

While the CTA doesn’t afford Treasury the authority to expand the categories of individuals exempted from reporting beneficial ownership information, the Bank Secrecy Act, which the CTA amends, allows for Treasury to “prescribe an appropriate exemption from a requirement under this subchapter and regulations prescribed under this subchapter.” Treasury’s approach in the new regulations broadly exempting US persons appears technically possible, but whether this approach constitutes an appropriate exemption as originally contemplated by Congress remains unclear.

Sens. Sheldon Whitehouse (D-R.I.) and Chuck Grassley (R-Iowa) sent a letter March 10 asking the Treasury to explain why it suspended CTA enforcement. This bipartisan inquiry signals that Congress is still evaluating the CTA’s future.

Bills to repeal the CTA have garnered little support while bills seeking to retain the CTA but modify the deadlines associated with beneficial ownership information reporting have gained some traction. Those bills wouldn’t enable the Treasury to overhaul the CTA through rulemaking.

Expect new congressional efforts to modify the substance of the CTA, not just beneficial ownership information reporting deadlines. Congress might seek to remove domestic reporting companies from the scope of the CTA and allow the Treasury to add additional excepted categories to the definition of a beneficial owner (such as US citizens).

Without legislative changes, any unilateral actions by the Treasury are open to judicial challenges as not aligning with the plain text meaning of the CTA.

Meanwhile, if a federal appellate court affirms one of the existing or future district court rulings holding the CTA unconstitutional, we could see a return of a nationwide injunction against its enforcement. Because of this, the CTA is likely heading to the US Supreme Court, which probably won’t be in a position to rule on its merits this year.

The wild ride of the CTA won’t be over for some time. The only reasonable approach for those affected by the turmoil may be to wait and see. Taking any action now, even merely preparing information for an eventual report, could be wasted time as who must report and what must be reported could very well change through new legislation or regulation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Marc Weintraub is partner at Stinson in Tampa, Fla., focused on high-stakes commercial transactions and litigation.

Zachary Taylor is an attorney at Stinson in Minneapolis, focused on corporate governance, complex business transactions, and contracting matters.

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