.svg)
A federal judge in Texas has temporarily blocked the enforcement of an "unprecedented" anti-money laundering (AML) law, describing it as "likely unconstitutional".
On Thursday (December 5), Judge Amos Mazzant responded to a motion from five small business plaintiffs and one individual, seeking a preliminary injunction on the Corporate Transparency Act (CTA).
Led by Texas Top Cop Shop, a retailer of first responder tactical gear and apparel, the plaintiffs’ motion challenged the CTA on privacy and constitutionality grounds.
Judge Mazzant agreed with the plaintiff’s arguments, acknowledging their fears that the CTA will create a “quasi-Orwellian” surveillance regime targeting all US business owners.
As one of the plaintiffs, the National Federation of Independent Business (NFIB), represents members nationwide, a nationwide injunction was deemed appropriate.
Mazzant’s decision was welcomed by other trade associations that have previously opposed the CTA.
Kristen Swearingen, vice president of legislative and political affairs at Associated Builders and Contractors (ABC), said the judgment is a “significant win” for small businesses.
“The CTA’s onerous reporting requirements would have significantly affected small business operations, forcing companies to dedicate time and resources or risk costly penalties,” she said.
“ABC applauds the court’s decision and will continue to promote a regulatory environment that protects America’s small business community.”
A ‘drastic’ departure from legal precedent
The CTA is a bipartisan piece of legislation that was enacted in 2021 and came into effect in January this year.
Seeking to curb the use of US companies in illicit finance schemes, the CTA imposes beneficial ownership reporting requirements on almost all small businesses in the US.
If a company is in scope, the individuals who own or ultimately control it are required to declare their identities to the US government.
Generally, reporting companies must provide the names, dates of birth, addresses and a valid government-issued ID number of each beneficial owner.
Judge Mazzant said the “seemingly benign” CTA marks a “drastic two-fold departure” from the US constitution and established legal precedent.
First, it represents a federal attempt to monitor companies created under state law, and second, it over-rides the anonymity provisions that are embedded into the laws on corporate formation in multiple states.
“Despite attempting to reconcile the CTA with the Constitution at every turn, the government is unable to provide the court with any tenable theory that the CTA falls within Congress’s power,” Mazzant wrote.
“And even in the face of the deference the court must give Congress, the CTA appears likely unconstitutional.”
Accordingly, the CTA is now enjoined and the deadline for compliance with its reporting requirements — January 1, 2025 — is now stayed.
'Onerous' requirements and 'severe' penalties
The CTA is intended to target shell corporations engaged in illicit transactions, but it covers all legal entities with less than $5m in revenue and fewer than 20 employees.
Failure to comply with the reporting requirements can result in fines of more than $590 per day, felony charges and up to two years' imprisonment.
Mazzant described the penalties as “severe”, and sympathised with the plaintiffs’ argument that the compliance costs associated with the reporting requirements constitute a form of “irreparable harm”.
As covered by Vixio, only 10 percent of in-scope companies have so far complied with the reporting requirements, despite submissions having been open since January this year.
In November, more than 40 House Republican lawmakers wrote to the US Treasury to ask for a one-year extension to the compliance deadline for the reporting requirements.
The lawmakers noted that they oppose the CTA in its totality, but limited their demands to a deadline extension.
