Judge rules against disclosure provision of corporate transparency law

Dealing a blow to the government’s efforts to combat money laundering, a federal court has ruled that the Treasury Department cannot require certain small businesses to turn over personal information about their owners.

Under a section of a 2020 law that took effect Jan. 1, small businesses must share details about their so-called beneficial owners, people who hold financial stakes in a company or have significant power on 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 behind shell companies.

But in a ruling issued Friday evening, Judge Liles C. Burke of the U.S. District Court in Huntsville, Alabama, sided with critics of the law. They argue that asking business owners to submit personal data – names, addresses and copies of their identifying documents – was a case of congressional abuse, however well-intentioned.

“Congress sometimes enacts clever laws that violate the Constitution,” Justice Burke wrote in a 53-page brief. “This case, which concerns the constitutionality of the Corporate Transparency Law, illustrates this principle.”

Judge Burke’s ruling blocked the department from enforcing ownership reporting requirements on plaintiffs in the Alabama case, the National Small Business Association, a nonprofit trade group that represents more than 65,000 member businesses .

Lawyers who have been following the Alabama case said this weekend that they expect the government to quickly request that the injunction be stayed, either by Judge Burke or the Court of Justice. appeal from the 11th Circuit in Atlanta, or both. The Justice Department will almost certainly appeal the Alabama case in circuit court, lawyers said.

Treasury Department defendant Morgan Finkelstein said her agency was “complying with the court’s injunction.” She referred further questions to the Justice Department, which declined to comment.

As lawyers and transparency experts studied Justice Burke’s opinion, the immediate impact of the decision on all small businesses in the United States, which the government estimates at 33 million, was not entirely clear. made clear.

Companies have had a year to comply with reporting requirements for the year 2023, so data is not even expected until the end of 2024. And Judge Burke’s decision, read narrowly, does not does not apply to small businesses that are not members. from the trade organization that filed the Alabama lawsuit, meaning most businesses covered by the mandate still have to comply with it.

“It’s just made it harder for a lot of my clients,” said Angela I. Gamalski, who advises large and small businesses on compliance and regulatory issues at the law firm Honigman LLP in Ann Arbor, Michigan. Ms. Gamalski said some of her clients plan to wait until the summer to look into the reporting requirements and what they mean, given that the filing deadline isn’t until December and law enforcement appears to be evolving.

Supporters of greater transparency denounced the decision.

“This is an aberrant decision by a single Alabama district judge, based on an extraordinarily narrow view of Congress’s constitutional powers that is unsupported by any precedent,” said Senator Sheldon Whitehouse, Democrat from Rhode Island, who is one of the supporters of the law. “I urge the government to quickly appeal to correct the erroneous decision and ensure that the transparency requirements of the law can be fully and uniformly implemented.”