The United States Congress, in a bold attempt to curb the abuse of anonymously owned companies by foreign criminals, passed the bipartisan Corporate Transparency Act (CTA) in 2020. Such companies had become notorious hideouts for foreign kleptocrats, drug traffickers, and other such characters for stashing their illicit gains. This updating of the US anti-money laundering law represents a significant shift from past regulations.
In a rather surprising twist, an Alabama federal district judge ruled on March 1 that the CTA is unconstitutional. The judge argued that the power to enact such a law was beyond Congress, as the incorporation of companies is not economic activity that could impact interstate commerce. The law was also considered to overstep into areas of foreign affairs and taxation.
This decision challenges a law that received backing from various stakeholders, including small businesses and financial accountability organizations. Amongst its supportive actions, the Financial Accountability and Corporate Transparency Coalition posted an amicus brief in support of the government. The ruling does not have widespread immediate implications as it bars only the named plaintiffs from enforcement by the Treasury Department.
Despite the ruling, the Financial Crimes Enforcement Network notified of its continued enforcement of the law, with exceptions only for Isaac Winkles and other members of the NSBA as of March 1. In response to the decision, a larger number of law-abiding companies have complied without pushing back, once again highlighting support for the CTA and its role in combating financial crime.
The Justice Department has taken steps to challenge the judge’s ruling by appealing the decision. The call is out to the US Court of Appeals for the Eleventh Circuit to reverse this decision, given that it is considered to have been too narrow in construing the statute at issue along with Congress’ established powers to counter money laundering and tax evasion.
The CTA’s objective is to target and shed light on the secret ownership of companies. A majority state attorneys have recognized this problem as a global issue directly within Congress’ power, requiring congressional action. The CTA applies in particular to economic actors, excluding non-profits and inactive entities in its scope.
Judgments from previous cases, such as California Bankers Ass’n v. Shultz, show the Supreme Court has backed provisions of the Bank Secrecy Act relevant to banks in the past. Rulings showed that Congress was well within its power of enacting regulations to curb activities designed to evade US regulatory mechanisms.
Having the decision hold may lead to undermining America’s fight against money laundering during a time of progress. It also carries potential troublesome implications for the scope of congressional powers beyond the CTA. CTA plays a crucial role in the protection of America from financial crime. It’s expected that most companies will continue to comply and that the appellate court will rectify the lower court’s erroneous decision.
The case, referred to as Nat’l Small Bus. United v. Yellen, remains a significant development for those tracking the evolution of anti-money laundering regulation in the United States.