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Anti-Corruption

United States: Nationwide preliminary injunction on Corporate Transparency Act enforcement

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Tax News and Developments

In brief

The Corporate Transparency Act (CTA) requires “reporting companies” to file “beneficial owner” information and “company applicants” (“BOIR“) with the Financial Crimes Enforcement Network (FinCEN) as early as January 1, 2025. In a “last minute” December 3, 2024 decision, the US District Court for the Eastern District of Texas in Top Cop Shop, Inc., et al. v. Garland1, issued an order (Court Order) temporarily enjoining the US government from enforcing the CTA and CTA regulations. Specifically, the Court Order:

  • Stayed the CTA’s January 1, 2025 filing deadline for BOIR required filed by domestic and foreign reporting companies that were formed or registered before 2024, and
  • Enjoined the US government from enforcing the CTA and the implementing regulations as promulgated by FinCEN.

Observation

Based on the plain language of the decision, while FinCEN’s enforcement of the CTA against all reporting companies is preliminarily enjoined, the BOIR filing stay does not appear to apply to the 90-day BOIR filing deadline for reporting companies formed or registered during 2024. However, FinCEN’s alert posted on its website on December 6, 2024 (FinCEN Alert) states that in light of the Court Order, reporting companies are not currently required to file BOIRs with FinCEN and will not be subject to liability if they fail to do so while the Court Order remains in force.2 The implication of the FinCEN Alert is that CTA penalties will not be imposed as long as the Court Order remains in effect to reporting companies:

  • Formed or registered before 2024 that had a January 1, 2025 filing deadline,
  • Formed during 2024 that had a 90 day filing deadline, or
  • That had a 30-day deadline to file a corrected or updated BOIR.

Nevertheless, FinCEN confirmed in the FinCEN Alert that reporting companies may continue to submit BOIR voluntarily.

Under these circumstances, officers of such companies responsible for BOIR, in particular foreign reporting companies, should consider applicable duty of confidentiality under contractual arrangements or foreign privacy laws before filing with FinCEN its BOIR or before obtaining FinCEN identifier voluntary.

In any case, it would be prudent for reporting companies to continue to gather their beneficial ownership information for filing of FinCEN identifiers or for the initial, correct, or updated BOIR, as applicable. In this manner, the reporting companies will be prepared to make the filings if or when again required to do so.

In more detail

As background, the CTA and regulations thereunder went into effect January 1, 2024. Passed back in January 2021, the CTA requires “reporting companies” to file a report regarding their BOIR. More than 32 million entities are expected to file BOIR to FinCEN.

FinCEN released the final regulations regarding BOIR requirements on September 29, 2022 and regarding access to BOIR by individuals and entities other than FinCEN on December 22, 2023, both of which were effective as of January 1, 2024. The CTA regulations require domestic and foreign reporting companies formed or registered before 2024 to file their initial BOIRs by January 1, 2025, and domestic and foreign reporting companies formed or registered during 2024 to file their initial BOIRs within 90 days after formation or registration. The filing requirements are discussed in detail in our previous client alert, Corporate Transparency Act ─Three Months In.

The Court Order imposes a preliminary injunction, and the Top Cop Shop Court has not issued a final decision as to the constitutionality of the CTA or its implementing regulations as promulgated by FinCEN. However, the Court found that the CTA and its implementing regulations are “likely unconstitutional” for purposes of issuing the preliminary injunction. The preliminary injunction should remain in place until further order of the Court. An appeal by the US government has been filed.

Reporting companies appear to continue to have a legal obligation to file their BOIRs. However, due to the Court Order stay of the January 1, 2025 deadline and FinCEN confirmation that it will not enforce any of the CTA compliance deadlines, reporting companies may wait to file BOIR until further guidance is issued by FinCEN or the Court Order is overturned.

The Court Order’s BOIR filing stay arguably applies only to the January 1, 2025 compliance deadline for reporting companies formed or registered before 2024. The plain language of the decision does not appear to apply to the 90-day BOIR filing deadline for reporting companies formed or registered during 2024 or to the 30-day deadline to correct previously filed BOIRs. However, based on the FinCEN Alert, as long as the preliminary injunction under the Court Order remains in effect, FinCEN will not impose the daily monetary penalties to reporting companies that do not file their initial, corrected or updated BOIR.

As a reminder, the CTA imposes criminal and civil penalties for willfully providing false or fraudulent beneficial ownership information, or willfully failing to report complete or updated beneficial ownership information. A violation may result in a civil penalty of USD 500 per day for each day that the violation continues or is not remedied, or a criminal fine of not more than USD 10,000, imprisonment for not more than two years, or both. A safe harbor (i.e. no civil or criminal penalties) may apply if a person has reason to believe a submitted report contained inaccurate information and within 90 days “voluntarily and promptly” submits a corrected report. However, the safe harbor is not available if the person knowingly submitted false information in the first report.

Reporting companies should continue to monitor any guidance from the Court in Top Cop Shop, US Treasury, and FinCEN to confirm any updates to their filing obligations accordingly. As an observation, even if the current Department of Justice seeks to overturn the Top Cop Shop decision on appeal, it is noteworthy that in 2021, then-President Trump vetoed the CTA. His veto was ultimately overridden by a two-thirds vote in both the House and the Senate. This may be an indication that new Department of Justice leadership would not seek to defend the CTA.

As a reminder, as posted on the FinCEN website, among other pending lawsuits, on March 1, 2024, the US District Court for the Northern District of Alabama, Northeastern Division, entered a declaratory judgment, determining that the CTA violates the Constitution’s limits on Congress’s power and enjoining US Treasury and FinCEN from enforcing the CTA against the specific plaintiffs, namely: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association (NSBA) and NSBA members.3 FinCEN has stated in a prior notice posted on its website that it will comply with the court order for as long as it remains in effect in respect of the plaintiffs in the case, currently pending on appeal by the US government.

1 Texas Top Cop Shop, Inc. v. Garland, No. 4:24-cv-00478 (E.D. Tex. Dec. 3, 2024).

2 Original content updated after the release of FinCEN alert.

3 National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.).

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Glenn G. Fox is a partner of Baker McKenzie's Wealth Management and Tax Practice Groups in New York and a member of the firm’s Global Tax Wealth Management Steering Committee. He is a domestic and international tax, estate planning, and tax-exempt (charitable) organizations lawyer with vast experience working with closely held businesses, families and charitable organizations from the US and overseas. Glenn is a member of the American College of Trust and Estate Counsel and of the Society of Trust and Estate Practitioners and has been recognized for fourteen consecutive years (2007-2020) as a "New York Super Lawyer" by the New York Times.

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Terry Gilroy is a partner in the New York office of Baker McKenzie and a member of the Compliance and Investigations Practice Group. Prior to joining the Firm in 2018, Terry served as Americas Head of the Financial Crime Legal function at Barclays. Terry advises businesses and individuals on white collar and financial crime issues and has significant experience conducting investigations relating to compliance with the US Foreign Corrupt Practices Act (FCPA) and related bribery and corruption statutes, economic sanctions regulations as administered by the US Department of the Treasury's Office of Foreign Assets Control (OFAC), and the Bank Secrecy Act and related anti-money laundering (AML) regulations and statutes. Terry spent six years on active duty in the United States Army as a Field Artillery officer.

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Justin Whittenburg is a partner in the Corporate and Securities Practice Group in the Houston office, having joined Baker McKenzie in 2003 as a summer associate. In the interim, Mr. Whittenburg spent four years as senior corporate and compliance counsel at a Houston-based leading global distributor of pipe, valve and fitting (PVF) products.
Mr. Whittenburg is currently a member of Baker McKenzie's North America steering committee for cross-border transactions and integrations. Prior to his life as a corporate lawyer, he was involved in project management for industrial construction projects in the petroleum and chemical industries.

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Lyubomir Georgiev has practiced law since 2003 in the United States and Switzerland. He has assisted banks, insurance companies, fiduciaries, family offices, asset managers, and high net worth individuals. Lyubomir participated in the negotiations of the special arrangements between the Government of the Principality of Liechtenstein and the UK on voluntary disclosure, tax compliance certification and tax information exchange. He heads the International Tax and Global Wealth Management practice in Zurich. Lyubomir has worked in Washington, DC and New York. Previously he was a member of the EMEA Wealth Management Steering Committee and Knowledge Management & Training head. Lyubomir is admitted to practice in Washington, DC, US Tax Court, England and Wales, and Switzerland as a foreign-qualified solicitor. He has been ranked in Chambers Global since 2012 as a foreign expert in practice areas such as UK tax and private clients, US private clients, and Liechtenstein tax and general business law.

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Mathew Slootsky is a member of Baker McKenzie's North America Practice Group in the Miami office and practices in the area of international and M&A tax as well as wealth management.

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