A federal court has dealt a blow to the government's efforts to combat money laundering, ruling that the Treasury Department cannot require some small businesses to disclose personal information about their owners.
Under a section of a 2020 law that took effect Jan. 1, small businesses must disclose details about their so-called beneficial owners, people who hold financial interests in a company or have significant power over its business decisions. The law, the Corporate Transparency Act, passed with bipartisan support in Congress and was intended to help the Treasury Department's Financial Crimes Unit identify money launderers hiding behind shell companies.
But in a ruling issued late Friday, Judge Liles C. Burke of the U.S. District Court in Huntsville, Alabama, sided with the law's critics. They argue that requiring business owners to provide personal information — names, addresses and copies of their identification documents — is an overreach by Congress, however well-intentioned.
“Congress sometimes enacts prudent laws that violate the Constitution,” Judge Burke wrote in a 53-page brief. “This case involving the constitutionality of the Corporate Transparency Act exemplifies that principle.”
Judge Burke's decision prevented the department from enforcing ownership reporting requirements against the plaintiff 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 prosecuting the case in Alabama said over the weekend that they expected the government to quickly seek a stay of the injunction, either through Judge Burke or the 11th Circuit Court of Appeals in Atlanta, or both. The Justice Department will almost certainly appeal the Alabama case to the district court, lawyers said.
Morgan Finkelstein, a spokeswoman for the Treasury Department, said her agency “complied with the court's preliminary injunction.” She referred further questions to the Justice Department, which declined to comment.
While lawyers and transparency experts pored over Judge Burke's opinion, the immediate impact of the ruling on small businesses in the United States, which the government estimates at 33 million, was not entirely clear.
Companies were given one year to comply with the reporting requirements as these related to 2023, meaning the data is not due until the end of 2024. And Judge Burke's decision, narrowly defined, does not apply to small businesses that are not members of the trade organization that filed the lawsuit in Alabama, meaning most businesses affected by the mandate must continue to comply.
“This has only made things more complicated for many of my clients,” said Angela I. Gamalski, who advises large and small companies on compliance and regulatory issues at the law firm Honigman LLP in Ann Arbor, Michigan. Ms. Gamalski said some of her clients wanted to wait until the summer to deal with the reporting requirements and what they mean, since the filing deadline doesn't end until December and enforcement of the law appears to be in flux.
Advocates of greater transparency criticized the ruling.
“This is a dissenting decision by a single district judge in Alabama based on an extraordinarily narrow view of Congress’s constitutional powers that is unsupported by precedent,” said Sen. Sheldon Whitehouse, the Rhode Island Democrat who was one of the law’s sponsors is. “I call on the government to quickly appeal to correct the flawed decision and ensure that the law’s transparency requirements can be fully and consistently implemented.”