Millions of corporate entities will not be required to disclose information about their owners to the Treasury Department following a recent decision by an appeals court. This ruling reverses a previous order that mandated compliance by January 1.
The Corporate Transparency Act, enacted in 2020 as part of anti-money-laundering legislation, stipulated that companies must reveal the identities of their "beneficial owners," defined as individuals owning 25 percent or more of a company or exercising significant control. However, the law has faced legal challenges.
Earlier this week, a three-judge panel from the U.S. Court of Appeals for the Fifth Circuit temporarily lifted an injunction imposed by a lower court, which had allowed the law to take effect. On Thursday, the court reversed its earlier decision, stating it was necessary "to preserve the constitutional status quo."
This new order maintains a nationwide injunction issued by Judge Amos L. Mazzant III of the Eastern District of Texas, which prevents the enforcement of the Corporate Transparency Act while its constitutionality is under judicial review.
In a recent filing, opponents of the Corporate Transparency Act described it as “a shockingly unconstitutional statute.” They argued that the law's requirement for companies to disclose their ultimate owners to the Financial Crimes Enforcement Network (FinCEN) could impose significant costs on millions of Americans in terms of paperwork and compliance.
Critics claim that the law violates the First Amendment rights of anonymous owners regarding free association and the Fourth Amendment rights concerning the privacy of their information. They also contend that it encroaches on the rights of states where these companies are registered.
Supporters of the law argue it is essential due to the ease with which corporations can be formed in the U.S. without revealing ownership details. They assert that criminals and terrorists exploit current practices to conceal assets from law enforcement.
Following the Fifth Circuit's decision to stay the injunction, FinCEN provided companies with a 12-day extension for filing, later clarifying that companies are not obligated to file "while the applicable order remains in force."
Litigation surrounding the Corporate Transparency Act is currently progressing through four federal appeals courts. The injunction by Judge Mazzant represents the first nationwide pause on the law's enforcement.
Legal experts suggest that this case is likely to reach the Supreme Court in the near future. FinCEN estimates that approximately 32.6 million companies would need to register under the law, with the number of affected individuals projected to be at least three times that figure.