Editor's Note: Since this story was published, FinCEN has provided guidance on the CTA, and the Justice Department has appealed the Texas court's injunction. Read Modus's follow-up story here.
Family offices and more than 32 million other small businesses are suddenly wondering if they must comply with the Corporate Transparency Act and disclose their stakeholders before a January 1 deadline, after a Texas federal court blocked the law nationwide.
“What a historic ruling, and the timing of it is not lost on me. The deadline’s just around the corner and it certainly puts folks in a very confusing situation,” said Melissa Goldstein, a former attorney for the Financial Crimes Enforcement Network and a current partner at Schulte Roth & Zabel focused on anti-money laundering and regulatory compliance.
In an opinion filed Tuesday, Judge Amos L. Mazzant III of the U.S. District Court for the Eastern District of Texas issued a preliminary injunction requested by Texas Top Cop Shop Inc., a firearms and tactical gear retailer, and other plaintiffs. The lawsuit alleged that Congress overextended its power when it created the CTA, and the court agreed, claiming it was a “departure from history” to attempt to federally regulate companies created under state law and that the CTA eliminated the anonymity of stakeholders — an intended feature of corporate formation in some states.
“For good reason, plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government,” Mazzant wrote in the opinion.
A bipartisan Congress passed the CTA in 2021 to combat money laundering through anonymous companies in the U.S., which can be tools to support corruption, drug trafficking, and terrorism. Proponents of the law say it will bring the U.S. up to international disclosure standards. Requiring entities to share information about their beneficial owners, such as addresses or identifying numbers from a passport or driver’s license, can help law enforcement agencies track wrongdoers. Personal details about owners are submitted to FinCEN, a bureau of the Department of the Treasury, and kept in a private database available to law enforcement agencies.
Opponents of the CTA have filed lawsuits in various states, but the ruling in Texas could have a more dramatic, immediate impact.
In March, an Alabama judge sided with a small business group and said the CTA was unconstitutional, but the court only issued injunctive relief to certain plaintiffs. Three days later, FinCEN issued a statement saying it would comply with the court’s order, and the bureau filed an appeal within two weeks. At the time, attorneys reminded family offices and other clients that unless they were one of the plaintiffs granted the injunction, they still needed to comply with the CTA on January 1 or face significant fines. (Violators face criminal penalties of up to two years imprisonment and a fine of up to $10,000, as well as civil penalties of up to $500 per day they are incompliant.)
The latest nationwide injunction in Texas has left more than just a handful of plaintiffs with an uncertain future. Now, all family offices and millions of other businesses are in limbo, eagerly awaiting guidance from FinCEN.
As of Thursday evening, FinCEN had yet to issue a public statement about the broad injunction in Texas. It is unknown if the bureau will delay the compliance deadline or appeal the ruling. FinCEN acknowledged a request for comments but did not share any before press time.
Some businesses are certainly cheering for the possibility of not having to disclose their beneficiaries. Family offices generally don’t want to share any information about themselves — they are created partly to conceal a family's identity and often for legitimate reasons. Information about a stakeholder could weaken their negotiating power. For example, a billionaire might be interested in purchasing a property, and a seller could raise the price or set terms to take advantage of the information. Wealthy families are also worried they are more susceptible to theft, extortion, kidnapping, and other crimes if their addresses are known.
Businesses that haven't already filed with FinCEN are contacting attorneys about what to do.
Goldstein believes FinCEN is prepared to continue litigating the CTA, which has been in the making for over a decade. For now, her law firm is telling clients to continue preparing to be compliant on January 1, in case the Texas ruling is put on hold. Other attorneys told Modus they are preparing alerts to send to clients and recommending the same thing.
“The concern we have is that there is a stay of the injunction and, either in the next few weeks or in the incoming year, all of these legacy filings will need to be made anyway,” Goldstein said. “It's just unclear at this time what the best approach is, and getting that clarity from [the Department of Justice], Treasury or FinCEN is very important.”
