By Anahit Baghshetsyan & Geoffrey Lawrence, Nevada Policy | Nevada Business Magazine, February 1, 2025
In 2021, Congress passed the Corporate Transparency Act (CTA) as a new component of the National Defense Authorization Act. This new law aimed to strengthen the surveillance power of the Treasury Department with the nominal goal of rooting out financial support for terrorism, drug trafficking (including by state-legal marijuana companies), piracy and fraud. The law does this not by narrowly targeting suspected wrongdoers, but by increasing federal surveillance over every American business owner and usurping state powers in the process.
Effective January 2024, the law required small businesses nationwide to submit Beneficial Ownership Information report (BOI) to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) by year end. BOI reports outline information about the business itself, its beneficiaries and owners. These are verified by personal details such as taxpayer identification numbers, employer identification numbers, identification documents and photos. With vague definitions for many of the terms – “substantial control,” “beneficial owner,” etc. – many small businesses became concerned about the way these requirements would be interpreted and filed legal challenges.
By creating a federal database, including sensitive personal information about every American small business and their owners, the CTA raises serious Constitutional concerns. At its core, this systematic surveillance is a violation of the Fourth Amendment, which protects people from unreasonable searches and seizures by the government. Although the database is expected to have restricted access, it opens the door to wrongful usage of the data. The BOI database, for instance, could be exploited by ideological political appointees to target specific Americans, as happened in the Lois Lerner scandal. As IRS director in the Obama administration, Lerner systematically targeted organizations that included key words such as “Tea Party” in their names for audit procedures. The BOI database would expressly empower FinCEN to require financial institutions to increase surveillance procedures on specific individuals and business entities over which FinCEN holds concerns.
Next, the Tenth Amendment states that the federal government only has the powers delegated to it in the Constitution. Any powers not expressly delegated to the federal government belong to the states or the people. Business registration and entity creation has been a state power throughout the history of the republic and does not fall within the enumerated powers granted to the federal government. Some states have chosen to allow anonymous business registration. Congress holds no jurisdiction over business formation and FinCEN’s actions would directly undermine many state laws. Further, the CTA violates the Ninth Amendments, which states that the Constitution’s enumeration of rights does not deny or disparage other rights that the people retain. This may include infringing on individuals’ privacy rights by forcing them to disclose sensitive personal information about their beneficial ownership in a company.
Given these issues, the CTA has become a hot topic in courts across the country. U.S. District Judge Liles C. Burke of the Northern District of Alabama, Northeastern Division ruled the CTA unconstitutional after the National Small Business Association (NSBA) challenged the constitutionality of the law. In his opinion, Judge Burke stated that “The Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers.” He held this conclusion so obvious that it was unnecessary to even consider additional claims about the law violating the First, Fourth, and Fifth Amendments. As the CTA meets more and more resistance from federal courts, entities have been granted extensions or exemptions to file their BOI reports. The U.S. Supreme Court has set an expedited briefing schedule for the emergency application with oral arguments scheduled on March 25th.
The Corporate Transparency Act is a blatant act of unconstitutional overreach by Congress. By mandating excessive reporting requirements that violate the Fourth, Ninth, and Tenth Amendments, the CTA imposes a threat on the economic freedom and privacy of American businesses. As the courts weigh its constitutionality, lawmakers must act to address the flaws of this legislation to protect the backbone of our nation’s economy – small businesses.