Since the turn of the new year, we’ve started discussing the Corporate Transparency Act’s (“CTA”) requirements that every small business – including your homeowner, condominium and cooperative association – register its business information with the US Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). The registration required providing the identities of your Board of Directors. Why – to combat money laundering and financial crimes. Many community association legal professionals – including your author – questioned the breadth of this law. How many community associations are fronts for money laundering?!?!

The National Small Business Association stepped in with a challenge to the CTA. Below is a breakdown on the US District Court’s ruling that the CTA is unconstitutional. A finding that the CTA is unconstitutional likely eliminates the need for your community association to register. As this is a quickly developing matter, stand by for further discussion on how this ruling affects the FloridaRoc community.

United States District Court for the Northern District of Alabama, National Small Business Association et al. versus Janet Yellen et al. regarding the constitutionality of the Corporate Transparency Act (CTA):

  • Background of the Case: The plaintiffs challenged the constitutionality of the CTA, which was part of the 2021 National Defense Authorization Act, arguing that its requirements for most entities incorporated under state law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm exceeded Congress’s constitutional authority and violated multiple amendments of the Constitution.
  • Key Holding: The court granted the plaintiffs’ motion for summary judgment, finding the CTA unconstitutional as it exceeds the constitutional limits on legislative power, lacking a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’s policy goals. The court denied the government’s motion to dismiss and its cross-motion for summary judgment.
  • Legal Arguments and Analysis:
    • Constitutional Powers and Limits: The court analyzed the constitutional powers under which Congress claimed authority to enact the CTA, including the Commerce Clause, the Necessary and Proper Clause, and powers related to foreign affairs and national security. The court found that the CTA’s requirements did not fit within these constitutional powers.
    • Commerce Clause: The court determined that the CTA’s provisions could not be justified under Congress’s power to regulate commerce among the states, with foreign nations, or with Indian tribes. The act of corporate formation, the court argued, was not itself an activity that substantially affects interstate commerce in the way the Commerce Clause requires.
    • Necessary and Proper Clause: The court concluded that the CTA was not a proper exercise of Congress’s powers under the Necessary and Proper Clause because the requirement for entities to report detailed personal information about their beneficial owners did not constitute a means that was necessary and proper for carrying into execution Congress’s powers.
    • Foreign Affairs and National Security: The court rejected the argument that the CTA was justified under Congress’s foreign affairs and national security powers. It held that the regulation of domestic entities’ formation and reporting did not directly relate to national security or foreign policy in a manner that would justify the CTA’s broad sweep.

Conclusion: The court’s decision emphasized the constitutional principle that federal powers are limited to those expressly granted by the Constitution or necessary and proper for executing those powers. The CTA, according to the court, overstepped these bounds by imposing broad reporting requirements on a vast number of domestic entities based on the potential for foreign misuse of those entities, without a direct and substantial connection to interstate commerce, foreign affairs, or national security.*

* Credit to Alexander Dobrev and the Florida Bar condomania listserv for this summary.