Case Status: Pending

Federal Reporting Law Threatens Privacy of 32 Million Small Business Owners

  • Federal District Courts
Lead plaintiff, Texas Top Cop Shop’s president Steve Schneider awards police in front of his store
Texas Top Cop Shop, Et Al. V. Merrick Garland, Et Al.

The Corporate Transparency Act (CTA) is a sweeping and unconstitutional law that requires more than 32 million small businesses and nonprofit organizations to supply “beneficial ownership reports” to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) by December 31, 2024 under threat of criminal punishment.

FinCEN will then allow state and federal law enforcement agencies to search its database of confidential information for evidence of crimes.

CIR has filed a suit challenging this invasive law for exceeding Congress’ legislative authority under the Commerce Clause, violating First Amendment free association rights, and subjecting tens of millions of Americans to unconstitutional warrantless searches.

The Prying Eyes of Government

The CTA mandate applies to almost every pre-existing or newly formed “corporation, limited liability company, or other similar entity that is” “created by the filing of a document with a secretary of state.” Each entity must file a report that contains the name, address, date of birth, and a copy of an unexpired passport or driver’s license of each “beneficial owner[].” 

The term “beneficial owner” is far broader than appears at first glance.  Any person who exercises “substantial control” over an entity qualifies as a “beneficial owner” whether they “own” anything at all. The language is dangerously unclear and could even capture family members of a small business owner who provide start-up loans and exercise informal influence. These determinations will be made by unaccountable enforcers at the Treasury Department.

The act was pitched as a way of countering financial crimes by disclosing the identities of corporate decision-makers, but lobbyists for 23 categories of corporate entities secured statutory exemptions, including those most likely to be involved in financial crimes—banks and financial services, publicly traded corporations, and large closely held corporations. Unfortunately, that leaves mostly small businesses and some nonprofits to comply or suffer criminal liability.

By the government’s count, the law reaches 32.6 million existing businesses and 5 million new businesses per year. Any entity that fails to submit a report by December 31, 2024 is subject to criminal penalties and a $500 per day fine for every day that the report is late, incomplete, or inaccurate. Sadly, most Americans do not even know that the law exists and cannot submit a report, even if they have no objections to compliance. Only a small percent of the obligated businesses have submitted reports. The remaining companies will be subject to penalties at the Treasury Department’s discretion.

It’s Not Just Bad, It’s Unconstitutional

CIR filed a federal lawsuit on behalf of a coalition of small businesses, such as lead plaintiff, Texas Top Cop Shop, as well as the Libertarian Party of Mississippi, who rightly object to providing the government with confidential and sensitive information. The suit is also joined by the National Federation of Independent Businesses, an advocacy organization that speaks for nearly 300,000 small business members nationwide.

The CTA violates three separate provisions of the Constitution.  First and foremost, the Constitution gives Congress no authority to supervise internal corporate governance, which has always been an exclusive state law responsibility. While the Constitution does allow federal regulation of interstate commerce, it does not grant regulatory authority over purely local activity, including advocacy on local issues.

The CTA also violates the First Amendment. In NAACP v. Alabama (1958), the Supreme Court struck down an Alabama law that required organizations registered in the state to provide its membership rolls, hoping to suppress political organizations like the NAACP.  The Court found that “compelled disclosure of affiliation with groups engaged in advocacy may constitute as effective a restraint on freedom of association” as outright suppression. One of the original sponsors of the CTA, Senator Sheldon Whitehouse, argued that it would help the federal government track “dark money” that was used for advocacy he didn’t like.

The CTA also violates the Fourth Amendment, by forcing millions of entities to file reports disclosing admittedly confidential information with no individualized suspicion or judicial process.

This case marks the first challenge in CIR’ Project to Restore Competitive Federalism. Victory will set a precedent that undermines expansive readings of the Commerce Clause used to put every aspect of American life under the control of federal agencies.

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