BOI Updates and Analysis

As its happening now:

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• January 23, 2025, in the case of Texas Top Cop Shop et al v. Garland, the Supreme Court lifted the injunctive relief awarded by a Texas District court. Case is still ongoing and is scheduled for oral arguments in the federal court the 5th Circuit Court of Appeals March 25, 2025

• Concurrent with the developments in the Texas Top Cop Shop case, Smith et al v. The United States Department of the Treasury is expected to be appealed to federal court as it too garnered national injunctive relief via a district court.

• Legislative: Senators Jimmy Risch and Tommy Tuberville introduced the Repealing the Big Brother Act on January 24, 2025, which would repeal the legislation responsible for BOI reporting requirements

• Legislative: The Protect Small Businesses from Excessive Paperwork act, which would extend the Boi reporting deadline to 2026, passed the house 2/10 with a vote 408-0 and is now in the Senate.

• Smith case: the government has asked that the nationwide injunction be lifted. The plaintiffs will submit a response by Friday 2/21 for the court to consider

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CTA Lawsuits and Litigation

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Informative: What is currently happening with CTA litigation? What are the updates on the cases and the viability on specific cases? When are the dates for new hearings and decisions?

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Intro

If the term “Beneficial Ownership” is mentioned in normal conversation most wouldn’t recognize such a term, and yet, associated with the term is a fierce national legal battle, all beginning in 2021. Beneficial Ownership originates in legislation passed in 2021 called the Corporate Transparency Act or CTA and the Anti-Money Laundering Act of 2020 or the AMLA, both of which are aimed at curbing money laundering within the United States. Both the CTA and AMLA are buried within the much larger William M. Thornberry National Defense Authorization Act for Fiscal Year 2021or NDAA. Legislation like this includes their stated goals, which help understand what it is trying to do.

This article seeks to help the reader understand the legislation itself, its goals, and the current legal battle around the legislation. The CTA and its challenges represent an important discussion of federal power and its limits. However, these discussions, especially when they are in the court system, are sometimes difficult to understand as they are fraught with specific legal definitions and references to past cases or constitutional arguments that are hard to follow. This piece seeks to simplify the situation and articulate the discourse in a reasonable manner.

The reason for this is that the CTA affects 32.6 million companies, many of which are small businesses. The fate of the CTA and its compliance requirements could have large consequences for those individuals. This article seeks to give clarity and understandability to the issue.

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Legislation

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A term like “Beneficial Ownership: comes from legislation passed in 2021 called the Corporate Transparency Act or CTA and the Anti-Money Laundering Act of 2020 or the AMLA, both of which are aimed at curbing money laundering within the United States. Both the CTA and AMLA are buried within the much larger William M. Thornberry National Defense Authorization Act for Fiscal Year 2021or NDAA. Legislation like this includes their stated goals, which help understand what it is trying to do. In the big picture, the NDAA is a larger piece of legislation, 1,482 pages to be exact. Within the NDAA are the AMLA and the CTA. The AMLA establishes a bevy of desires and protocols to update and encourage coordination among government agencies against money laundering. The AMLA also establishes a database for what it calls beneficial ownership information. The CTA is a 21-page piece that compels individuals and businesses to provide its information and regulates companies that report their information or what the CTA would call “reporting companies”.

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Goals of the CTA and AMLA

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Both the CTA and AMLA include enumerated goals which are listed below:

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AMLA’s goals include:

1. the improvement of coordination among participating agencies who administer anti-money laundering procedures,

2. the modernization of anti-money laundering and terror financing laws,

3. to encourage the innovation and adoption of new technology against money laundering,

4. That the policies against money laundering and terror financing shall be risk-based

5. To establish uniform beneficial information reporting requirements

6. To establish a database at the Financial Crimes Enforcement Network or FinCEN for beneficial ownership information,

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CTA’s goals include:

1. To compel disclosure of beneficial ownership information to control financial crime

2. To collect beneficial ownership information and make it available to authorized government authorities.

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Specifically, the CTA and AMLA target, in addition to requirements for all entities that are not political organizations, shell corporations which are corporations with minimal employees or assets. The CTA describes such corporations as Russian dolls, ones that can easily separate to endless, smaller entities that are difficult to track. The CTA and AMLA desire regulations that make is more difficult for illicit actors to use such structures.

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Terms and Definitions

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In the discussion of the AMLA and the CTA there are some terms to know and understand. The two main terms are “reporting company” or who is required to report and “beneficial owner” those individuals required to give their information who significantly influence those eligible companies.

In the big picture, the NDAA is a larger piece of legislation, 1,482 pages to be exact, and congress regularly embeds other acts within the larger piece. Within the NDAA are the AMLA and the CTA. The AMLA establishes a bevy of desires and protocols to update and encourage coordination among government agencies against money laundering. The AMLA also establishes a database for what it calls beneficial ownership information. The CTA is the piece that compels individuals and businesses to provide its information and overall regulates companies that report their information or what the CTA would call “reporting companies”.

To be clear, under the CTA a “reporting company” is a “corporation, limited liability company, or other similar entity that is created by the filing with a secretary of state or a similar office under the law of a State or Indian Tribe under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe.”.

The reporting company must then submit a report that includes identities of each beneficial owner, residential or business street address, and a identifying number from an acceptable identification document or FinCEN identifier.

Now to the other important term, “beneficial owner”, which the CTA defines as “an individual who, directly or indirectly, through a contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity; or owns or controls not less than twenty-five percent of the ownership interests of the entity.”. Exceptions from beneficial owners include minors, agents or custodians, employees, individuals whose only interest is through inheritance, and creditors.

So then, the CTA determines that there are reporting companies who have beneficial owners who need to submit a report detailing the information about the beneficial owners as well as the residential or business address of the reporting company. The CTA delegates to the Secretary of the Treasury the establishment of an effective date for filing beneficial owner reports, the deadline for the first reports is January 1, 2025.

The database for beneficial ownership reports or BOI reports is maintained by FinCEN, who under the CTA are allowed to keep the information from the BOI reports for at least five years after a reporting company terminates.

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Failure to comply properly with he CTA and the reporting requirements incurs certain penalties. The CTA makes it illegal to:

1. “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information”

2. To “willfully fail to report complete or updated beneficial ownership information”

Penalties include fines up to $500 each day that “the violation continues or has not been remedied”. Any individual guilty of violating either of the above acts the CTA makes illegal may be incarcerated for up to two years and fined up to $10,000.

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The Complaints

Fairly quickly, complaints were filed on the grounds that the act itself and the following requirements were unconstitutional. Currently 20 states have registered complaints against the Corporate Transparency Act. The complaints vary in their arguments, but many centralize on the grounds that the Corporate Transparency Act is unconstitutional. The arguments cite several amendments, but the gist is that the federal government cannot regulate intra-state commerce. The registering of corporations falls under the responsibility of the state and the CTA represents an overreach of federal power.

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Below is a list of the most notable cases in the discourse surrounding the CTA:

1. NBSU v. Yellen – notable in that it is one of the earlier complaints and one of the two that has rendered any substantial decision. In trial, the court found the CTA to be unconstitutional. However, the decision was appealed to the 11th circuit court and is awaiting judgement after oral argument on September 27th

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2. Gargasz v. Yellen – A case in abeyance pending NBSU v. Yellen

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3. Boyle v. Yellen – a complaint filed after the NBSU decision on grounds of usurpation of the state’s powers, pending. Hearing January, 3, 2025

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4. Small Business Ass’n of Michigan v. Yellen – used similar arguments to NBSU with the hearing took place December 16, 2024

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5. Texas Top Cop Shop, Inc. v. Garland – the core is the federal government infringing on the state control of “incorporation” (a term used to reference corporations, partnerships, and LLCs), the requirement of incurring compliance costs, and on grounds of violation of the first and fourth amendment. Last action taken October 9, 2024.

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6. Black Economic Council of Massachusetts, Inc. v. Yellen - case is still pending, alleges that the CTA violates the 4th amendment rights of beneficial owners and it is outside of Congresses enumerated powers. Specifically in the complaint it argues that the power of the state to charter, register, and regulate domestic corporate entities resides with the state and the CTA tries to subvert this by essentially making domestic corporate entities register with the federal entity. In addition, the complaint argues that the CTA mandates the reporting of personal identifying information without any articulable suspicion given by the federal government. No probable cause given for a potential crime should not coerce one into giving away private information. This case seeks nationwide injunction against enforcement of the CTA. Will not be resolved before the CTA’s January 1, 2025 deadline

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7. Firestone v. Yellen – September 20, 2024 court decision denying injunctive relief

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8. Trustees of the Lewis Warf Condominium Trust v. Yellen -Pending decision on lack of jurisdiction, last action taken October 17, 2024

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9. Taylor v. Yellen – Hearing was December 19, 2024

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10. Anthony Washington / AW Washington Consulting LLC v. U.S. Dept. of the Treasury – To be dismissed due to lack of representation

11. Community Association Institute v. Yellen – Last action November 15, 2024

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12. Smith v. U.S. Dept. of the Treasury – The gist is that the plaintiffs argue that the federal government has no authority to regulate intra-state economic activity and also that the CTA forces individuals to provide private information. Appointed new judge as of November 4, 2024. – Granted injunctive relief January 7, 2025, awaiting further action.

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13. Hotze v. Dept. of the Treasury – As of November 15, 2024, no schedule for responses or pleading has been posted

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14. Midwest Association of Housing Cooperatives v. Yellen - The plaintiffs seek a declaration that housing cooperatives be exempt from compliance.  

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15. Smith et al v. United States Department of Treasury – Granted injunctive relief January 7, 2025, awaiting further action

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16. Texas Top Cop Shop et al v. Garland – Top cop Shop and a small business association garnered injunctive relief from Texas district court on the grounds of federal overreach. Currently in Federal court, next arguments to be heard March 2025.

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Discussion of the Complaints

At the outset, the CTA might seem innocuous and even noble in its goal seeking to tackle those using legitimate business structures as a means for laundering money. All the CTA is asking is that all those who are significant in the ownership of the business report that information. The report itself isn’t too lengthy even, what obstacles then are there to the safeguards the CTA will grant with the information provided by BOI reporting?

The main issue taken up by the complaints is constitutionality and the three most substantive cases in the discussion are NBSU v. Yellen, Firestone v. Yellen, and Texas Top Cop Shop v. Yellen.

The first case to discuss is NBSU v. Yellen, which was filed November 15, 2022 in the Alabama Northern District Court and garnered the first substantive decision against the CTA. The complaint centers on the first, fourth, and fifth amendment and covers issues such as congress’s power in relation to commerce, taxing, and the necessary and proper clause. On March 11, 2024 the Alabama judge of the case ruled the CTA unconstitutional and granted NBSU relief from enforcement by the CTA. Important to note in the case is that the relief was granted only to the NBSU organization, meaning that the scope of the decision is limited.

The government appealed the decision to the 11th circuit court and the most recent arguments were heard on September 27th, 2024. The case is noteworthy because a judge granted that while limited in scope, the CTA was ruled unconstitutional on the grounds that Congress exceeded its constitutional limits with the CTA. NBSU v. Yellen is a significant piece in the discourse surrounding the CTA and is now styled National Small Business United v. Department of Treasury in the 11th circuit court.

In the case of Texas Top Cop Shop v. Garland the complaint was filed in the United States District Court in the Eastern District of Texas, Sherman division. The plaintiffs include NFIB, a business organization comprised of small independent businesses. They used similar arguments and scope as did NBSU v. Yellen, arguing that the CTA represents an overreach of Congress’ power, and that relief should be granted to Texas Top Cop Shop and the NFIB.

On December 3, 2024, the court issued its decision, granting a preliminary injunction against the CTA. The court called the CTA “quasi-Orwellian” and found the legislation “is likely unconstitutional as outside of Congress’s power.” The court rejected the arguments of the government that the CTA had the power to enact the CTA under the Commerce Clause and the necessary and Proper Clause.

For the commerce clause the court stated that the CTA act as a law enforcement tool and not a commerce protection tool, which the Commerce Clause requires. The CTA then is an exercise of police power rather than a regulation of activity that might harm commerce.

Regarding the Necessary and Proper Clause, the government argued that under the Necessary and Proper Clause Congress has the power to enact legislation for matters of foreign affairs and national security. The court ruled that the CTA regulates domestically, businesses registered to do business in the United States and so the Necessary and Proper does not apply.

In the mechanics of the arguments that led to the decision of the court was how the regulation trigged in the CTA. The CTA says that when a company is registered with a secretary of a state of a State then they are required to comply with the CTA. The court said in its decision that the CTA sought to regulate companies that idly existed for existing and not for any action that they did or did not do, which in this way is completely outside the scop of what Congress is allowed to do, such power is held securely buy the States, such as why the company is required to register with the State itself and not the federal government.

Notable in this case, however, is that instead of granting limited relief to NFIB from enforcement of the CTA the court granted national relief from the CTA. The Texas National relief in that all eligible companies and entities, all 32 million of them, are not required to comply with the CTA as of the writing of this piece.

Interestingly, the court decided to grant relief nationally as a result from arguments used by the government. The government argued that the initial relief sought by the plaintiffs was inadequate and that national relief was necessary to properly meet the needs of NFIB, as the organization has members in numerous states. The government was arguing that the initial relief should not be granted of course but it ended up playing against the arguments of the government.

Texas Top Cop Shop represents a second repudiation of the CTA, with a more significant enjoinment of the enforcement of the law.

In the mechanics of the arguments that led to the decision of the court was how the regulation trigged in the CTA. The CTA says that when a company is registered with a secretary of a state of a State then they are required to comply with the CTA. The court said in its decision that the CTA sought to regulate companies that idly existed for existing and not for any action that they did or did not do, which in this way is completely outside the scop of what Congress is allowed to do, such power is held securely buy the States, such as why the company is required to register with the State itself and not the federal government.

In contrast to the two above cases Firestone v. Yellen produced a decision that denied the injunction the plaintiffs sought. The Oregon court asserted that under the Commerce and Necessary and Proper Clause the CTA is authorized to enact the CTA.

Regarding the Commerce clause, the court focused on the fact the CTA sought to deter money laundering and other illicit schemes. The CTA requires entities engaging in commerce to “identify the human beings standing behind the corporate form”. These individuals fall inside the real of commerce between the states, and so the court argued in its September 20, 2024 decision that since the CTA’s reporting requirements are “needed” then they are applicable in relation tot eh commerce clause as the individuals they regulate participate in commerce.

For the necessary and Proper Clause, the court established that the power to regulate the interstate and foreign commerce falls within the enumerated powers of congress. The court pulled from United States v. Goodwin to say that “money laundering is a quintessential economic activity.” In addition to the other illicit actions targeted by the CTA. Such actions then have interstate commerce implications; thus they fall under the Necessary and Proper Clause and are within Congress’s power to regulate.

Firestone v. Yellen represents a contrast to the previous two cases discussed and provides substantive and serious counter arguments to the questions about the constitutionality of the CTA.

Legislative Updates

In the legislative world, lawmakers have proposed serval bills to address this issue with the CTA. Some bills seek to extend the reporting deadline such as H.R. 4035, 5119, and 9278. Others such as H.R. 4187 / S. 4297, seek to repeal the CTA altogether.

Most recently, a continuing resolution proposed in the House would extend the deadline for Boi reports by one year. The resolution, a 1,500 short-term funding bill, includes a section that would push the deadline for Boi reporting back one year and allow the legal challenges to be properly heard and considered. The resolution still has some way to go as it needs to be passed in the House and then the Senate, but the resolution would extend the reporting deadline to January 1, 2026. The house is expected to vote December 18, 2024, and the Senate vote would follow shortly after.

General Discussion

In its decision on the Texas Top Cop Shop case, the District Court of Texas wrote that “Modern Problems may well warrant modern solutions, but modernity does not grant Congress a roving license to legislate outside the boundaries of our timeless, written Constitution.” Before it was written, the idea of federal power and its extent was at the core of many debates that fueled the shape of the Constitution and the new nation of America. In the form of the CTA and Boi reporting these debates resurface. The CTA represents yet another attempt at extended federal power that must be curbed. Such action seeks expanded powers for the federal government in the name of security and safety.

While the stated intentions of the CTA seem noble, this cannot be the only metric by which legislation is measured. Such legislation gives far too much power to the federal government and makes it even harder to keep them accountable. Our Constitution balances power between the federal and the state in order to serve its people, to seek to bound power as close to the people who are beholden to it.

The CTA is an attempt to allocate power to the federal, seeking to add yet another federal database of private information of American citizens. In addition, it adds another hurdle to either owning or starting a small business in America. Two of the biggest cases on the CTA are from the NBSU and NFIB, both small business organizations. The moment small businesses are created in their respective states the CTA wishes to regulate them, Small businesses truly are the backbone of any stable economy and the CTA represents another threat to them.

Conclusion

The CTA is yet another in a long list of legislation that has sought to expand federal power. Such legislation is usually buried beneath thousands of pages of other unrelated legislation. Challenges like this are important to understand and oppose because it’s the balance between state and federal power that has made America prosperous in the past and will continue to do so as long as we safeguard this balance.

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