Related resource: Common misconceptions about Alabama's Corporate Transparency Act unconstitutional ruling
TRANSCRIPT
Greg Corombos: Hi, I'm Greg Corombos. Our guest in this edition of Expert Insights is Mike Powell, Associate Director of Government Relations for CT Corporation, a Wolters Kluwer company. And Mike, thanks so much for being with us today.
Mike Powell: Thanks for having me, Greg. Appreciate it.
Greg Corombos: The recently instituted Corporate Transparency Act or CTA aims to combat crimes like money laundering, terrorism, financing and other illicit business activities. And we've done a whole series on this piece of legislation — this new law and the new compliance requirements. Today we're going to talk about a recent US District Court of Northern Alabama ruling that deemed the Corporate Transparency Act unconstitutional in order to shed light on its implications and to clarify the misconceptions surrounding the ruling's implementation. So, Mike, where exactly do things stand with us right now?
Mike Powell: Well, on March 1 of this year…just a little background…the US District Court in Alabama issued a summary judgment in favor of the National Small Business Association, which goes by NSBA, and declared the Corporate Transparency Act, also known as the CTA, unconstitutional. And the case originated from a lawsuit filed by the individual NSBA member alleging that the CTA violates the US Constitution, several amendments first, fourth, fifth, ninth and tenth. And to be clear, this is the important part, this injunction only applies to the plaintiffs in the action, namely Isaac Winkles, the reporting companies for which Isaac is the beneficial owner or applicant, the NSBA and members of the NSBA as of March 1, 2024. As expected the US Treasury Department, which FinCEN is a division of, has appealed the decision in the Eleventh Circuit Court of Appeals. FinCEN has stated it will not enforce the CTA against the plaintiffs while litigation is ongoing.
Greg Corombos: Important point there. And FinCEN is the Financial Crimes Enforcement Network inside the Treasury Department. You touched on this a little bit in the previous answer. But can you elaborate a little bit more on who the ruling applies to?
Mike Powell: The Alabama ruling only applies to the plaintiffs in this case, namely the NSBA and its existing members as of March 1, 2024. The CTA remains in effect for all other non-exempt businesses. For the NSBA and its 65,000 members, for now, the CTA cannot be enforced by FinCEN. But notably, 40% of these members are already exempt from the legislation due to falling under one of the Act’s 23 exemptions, including the large operating corporation exemption. All other businesses, like the non-NSBA members and those who were not plaintiffs in the action, must continue to comply with the Corporate Transparency Act’s beneficial ownership information reporting requirements. It's a mouthful, but they still have to comply according to FinCEN. This amounts to about 32 million companies in the United States. I'd also like to point out that businesses that joined the NSBA after the March 1 ruling date are not within the scope of the ruling and must still comply with the CTA unless they are exempt under one of the 23 exemptions.
Greg Corombos: Important clarification there, as well. So until further guidance is issued by the court, or FinCEN, non-exempt companies must continue to comply with the CTA’s BOI reporting requirements. Do I have that right?
Mike Powell: Absolutely. That is correct. CT continues to monitor the appeal and any further actions by FinCEN or the court. But yes, it's still in effect.
Greg Corombos: All right. Let's clarify one other issue here, Mike. And it's this. Is there a misconception on the information required by small businesses being too overwhelming for them?
Mike Powell: Yeah, I think a lot of people do have that perception, that it is a lot of information required of the small businesses and can be seen as overwhelming. It stems from the complexity of all the regulatory requirements, financial management, and administrative tasks that small business owners face. CT has developed resources designed to assist businesses in navigating the necessary steps to ascertain whether a filing beneficial ownership report is required. And if it is, what information, what specific information, must be included in the filing. So [it’s] always good if you're not sure to seek the advice of an attorney. Should any inquiries arise from the information that's required by FinCEN, you can also submit a question to FinCEN for clarification. While the Justice Department on behalf of Treasury is appealing the Alabama ruling, companies who are not plaintiffs in the action or who joined the NSBA after March 1, 2024, should view the CTA as in full force and prepare to make the required BOI filings by the applicable deadlines.
Greg Corombos: Now, Mike, the director of FinCEN, Andrea Gacki, recently testified before Congress and said that FinCEN has no interest in hitting small businesses with excessive fines or penalties. So are we right to interpret her comments as saying the CTA is not looking to take gotcha actions but will penalize willful violations of the law?
Mike Powell: That's right. Compliance is what FinCEN is focused on this first year of requiring the information, not enforcement. But small businesses should be aware of the risk of noncompliance. Penalties for willfully not complying with the BOI reporting requirements can result in criminal and civil penalties. Willful failure to report complete or updated beneficial ownership information to FinCEN, or even willful provision or attempt to provide false or fraudulent beneficial ownership information, could result in civil or criminal penalties, including civil penalties up to $590 for each day that the violation continues. Or criminal penalties, including imprisonment for up to two years and or a fine up to $10,000.
Greg Corombos: Wow, that's pretty severe. So it's important to comply as best you can. Mike, any additional thoughts on this before we wrap up?
Mike Powell: I would say it's easy to get caught up in the headlines. So it's important to get all the facts to avoid missing critical regulatory details that may affect you or your business directly. Additionally, states are collaborating with the federal government to help ensure consistency and clarity and messaging regarding ongoing requirements of implementing the Corporate Transparency Act nationwide. Since the ruling in Alabama, two subsequent lawsuits have been filed. Both lawsuits, one filed in the US District Court in Maine and the other in US District Court in the Western District of Michigan, also dispute the CTA’s constitutionality. As I mentioned, CT is continuing to monitor the legal developments of the Alabama ruling and the other two court cases, including the Department of Treasury's appeal, and will provide additional information as it comes up.
Greg Corombos: Mike, it's always good to pay attention to what might happen. But it's even more important to understand what is required right now. So thank you very much for helping us understand all of this a lot better.
Mike Powell: Thank you for having me, Greg. Appreciate it.
Greg Corombos: Mike Powell is Associate Director of Governmental Relations for CT Corporation, a Wolters Kluwer company. I'm Greg Corombos reporting for Expert Insights. For more information on this subject, please visit ctcorporation.com.
