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Comments from Eric Hylton, Former IRS Commissioner of the Small Business/Self Employed Division; alliantgroup National Director of Compliance
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- Ruling found anti-money laundering law unconstitutional
- Millions of companies still have to report, Treasury says
The US government appealed a district court ruling that the anti-money laundering Corporate Transparency Act is unconstitutional, setting the stage for what could be a lengthy appeals process.
The Department of Justice sent a notice of appeal Monday on behalf of the Treasury Department to take the case to the 11th Circuit Court of Appeals.
US District Court for the Northern District of Alabama Judge Liles Burke ruled March 1 that the law requiring businesses to report their “beneficial ownership” to Treasury is unconstitutional. The suit against the CTA was brought by the National Small Business Association against Treasury, and the ruling applies only to the NSBA and its members.
In a statement, Treasury praised the importance of the law and said businesses not included in the scope of the ruling will still have to adhere to the law.
“Tens of millions of companies are still required to report their beneficial ownership information under the CTA, despite the court’s injunction,” a Treasury official said in the statement.
“Other than for the named plaintiffs and NSBA members as of March 1, 2024, there is no change to the reporting obligations of the vast majority of reporting companies, who are still required to comply with the law.”
As of Jan. 1, companies created before this year are required to report their beneficial ownership—the identities and other information about the people who control the business. Companies that started after Jan. 1 have 90 days from their formation to report the information.
The aim is to stop money laundering and illicit financing by anonymous shell companies, and thus help stop the financing of terrorism, drug trafficking, and other global crime. Treasury estimates about 32 million businesses are required to file the information, with about 5 million new businesses a year joining that list.
Hughes Hubbard & Reed LLP special counsel Thomas Lee, one of the attorneys representing the NSBA, said the DOJ appeal was expected and that the government may also seek a stay to halt the ruling from taking effect until a higher court reaches a decision.
In the meantime, he said to expect businesses that don’t fall under the scope of the ruling to file challenges of their own.
“Because they chose to enjoin enforcement to just the members of NSBA, in all likelihood there are going to be other lawsuits by similar situated parties,” Lee said.
The law has received a flood of criticism from businesses, industry groups, and some members of Congress. Supporters argue it is needed to adequately protect against money laundering and other financial crimes.
Eric Hylton, a former high-level IRS official and now alliantgroup’s national director of compliance, said that getting rid of the CTA would undermine the integrity of the US financial system, and that the law should be thought of as one of a number of other rules on the books to guard against financial crimes.
“When you get into the unconstitutionality of it, I don’t necessarily see it,” he said. “I view this law similarly to bank secrecy law and other anti-money laundering laws.”
Still, Perkins Coie LLP partner Jamie Schafer said there’s no guarantee the government will prevail in its appeal.
“It is an aggressive reading of the commerce clause to be sure, and would have significant implications, but the 11th Circuit is also very friendly to aggressive interpretations of the commerce clause,” she said.
“And it’s really hard to say what this Supreme Court would do.”
The case is NBSA v Janet Yellen, N.D. Ala., No. 5:22-cv-01448-LCB, 3/1/24
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Eric Hylton held several prominent positions at the IRS, including serving as Deputy of the Criminal Investigation Division and as CI’s head of International Operations. As National Director of Compliance, Eric employs his years of experience at the IRS to assist alliantgroup’s clients as an ambassador for U.S. small and medium sized businesses (SMBs) and in helping others become tax compliant.
