In Texas Top Cop Shop v. Garland et al. (Case 4:24-cv-00478, December 3, 2024) The U.S. District Court for the Eastern District of Texas issued a nationwide injunction against enforcement of the Corporate Transparency Act (CTA), challenging its constitutionality and its impact on small businesses. The CTA, enacted as part of broader anti-money laundering efforts, requires companies to share their beneficial ownership information with a federal database maintained by the Financial Crimes Enforcement Network (FinCEN).

The court’s reasoning

Judge Mazzant’s opinion sharply criticized the CTA for overstepping constitutional boundaries. He pointed out that business regulation has traditionally been the responsibility of states. By mandating federal oversight of corporate ownership, the CTA upsets the balance of power that is fundamental to the U.S. federal system. Additionally, the court found that the law burdens companies with significant compliance costs, expected to exceed $22 billion in the first year alone, without clear safeguards against misuse of the collected data.

The plaintiffs, including small business owners and a trade association, argued that the CTA compels speech and association in violation of First Amendment protections. They also raised concerns about Fourth Amendment privacy violations given the extensive personal data required.

Nationwide preliminary injunction

The court expressly stated that the injunction applies nationwide. Judge Mazzant found that both the CTA and the Reporting Rule impact approximately 32.6 million businesses in the United States. Because one of the plaintiffs, the National Federation of Independent Business (NFIB), represents members across the country, the court concluded that a nationwide injunction was necessary to provide effective relief and address the extensive constitutional violations identified.

Could the new Trump administration administratively stop the CTA?

A potential Trump administration could take several steps to administratively restrict or stop enforcement of the CTA if it chooses to prioritize deregulation:

1. Revision of the implementing regulations: The administration could direct Treasury and FinCEN to review the CTA’s implementing regulations. Agencies could delay enforcement by revising or repealing these rules, a process that would require notice and comment on rules under the Administrative Procedure Act.
2. Resource allocation: A new administration could deprioritize enforcement of the CTA by limiting funding and personnel for compliance monitoring and enforcement. While the law remains in effect, enforcement actions would be effectively limited.
3. Policy guidelines: Through executive action or regulatory notice, the Administration could issue guidance limiting the circumstances under which beneficial ownership information is collected or used, effectively limiting the application of the law.
4. Legislative cooperation: The administration could work with Congress to repeal or amend the CTA, potentially eliminating or significantly limiting its scope. This would require legislative action that could depend on the makeup of Congress.

Although these administrative actions may limit enforcement, they do not eliminate the legal obligations under the CTA. Companies remain legally obligated to comply unless the law itself is struck down by the courts or made permanent.

Recommended steps for companies

Given this nationwide injunction and potential administrative changes, companies must carefully consider their next steps toward compliance with the CTA. Here’s a breakdown for two categories of companies:

1. Companies that have filed with FinCEN:

• Disrupt compliance efforts: The injunction currently stops enforcement of the CTA. Although FinCEN may appeal, no immediate action is required at this time.
• Monitor legal and administrative developments: Stay updated on litigation outcomes and any policy changes under the next administration.
• Protect data: Ensure that any previously submitted beneficial ownership information is protected from potential misuse.

1. Companies that have not filed with FinCEN:

• Delay submission: The nationwide injunction means no company is currently required to comply with the CTA, but further guidance or court decisions could restore the law’s enforceability.
• Consult legal counsel: Companies should work with legal counsel to assess their exposure to the CTA if the injunction is lifted or enforcement resumes.
• Prepare for possible compliance: If the injunction is overturned on appeal, companies may need to act quickly to meet reporting deadlines. By establishing compliance mechanisms, risks can be mitigated.

Further implications

This decision raises important questions about the role of federal regulation in combating global financial crime. Proponents of the CTA argue that the law is critical for transparency and aligns the U.S. with international anti-money laundering standards. However, opponents see the CTA as an overreach that endangers privacy and puts a disproportionate burden on small businesses.

A precedent for federalism

Legal experts praised the ruling as a significant defense of federalism. Judge Mazzant reiterated that the Constitution’s limitations on federal power remain relevant in addressing modern challenges. This case could set a precedent for courts to consider federal initiatives that encroach on areas historically administered by states.

The way into the future

The nationwide injunction marks just the beginning of what is expected to be a lengthy legal battle. The decision will most likely be appealed, and its outcome could affect the future of the federal regulator. Additionally, a potential new administration could take steps to place administrative restrictions on the CTA, adding another layer of uncertainty for businesses. For now, the ruling serves as a reminder of the judiciary’s role in checking federal overreach, even when it involves well-intentioned measures.