A US federal appellate court on Tuesday upheld a 2019 law that requires certain corporations to disclose ownership information to the Treasury Department, reversing a lower court opinion that found the law unconstitutional.
“We believe that, by effectively prohibiting anonymous business dealings, the [Corporate Transparency Act] facially regulates economic activities having a substantial aggregate impact on interstate commerce,” the court wrote. “Accordingly, we reverse.”
The case, argued before the US Court of Appeals for the Eleventh Circuit, involved a challenge to the Corporate Transparency Act (CTA). Congress passed the law as a response to findings that crimes like money laundering and terrorism financing cost “the government billions of dollars every year.” However, corporate use of shell companies and the lack of state disclosure requirements has created a perceived “information gap” between violators and law enforcement. Legislators sought to bolster “national security, intelligence, and law enforcement efforts to combat” this activity and close the gap.
The law requires certain corporations to disclose names, addresses, and other identifying information of their “beneficial owners” and “applicants.” Beneficial owners are those who control at least 25 percent interest or otherwise exercise “substantial control” over a company. Applicants are those who file the paperwork to form a company.
Plaintiffs argued that the law exceeded congressional power under the Commerce Clause or, conversely, violated the Fourth Amendment.
Under the Commerce Clause, Congress has broad power to “regulate Commerce … among the several States,” which has been understood to extend in part to “activities that substantially affect interstate commerce.” For a law like the CTA to survive this test, it must address something “economic in nature” and Congress must rationally determine that the issue has some “aggregate” and substantial effect on interstate commerce.
The lower court had found that the issue was not sufficiently “economic in nature.” It reasoned that because corporations are “creatures of state law,” and because the CTA regulated incorporation activity rather than economic activity, the law unconstitutionally regulated non-economic, intrastate activity.
However, the appellate court disagreed, writing:
These entities are commercial by their very nature … [A] corporation is never created “for its own sake,” but instead exists “for the purpose of [affecting] something else.” For profit business entities are a means to an economic end … Considering the nature of the corporate form and modern business, we can safely say that the CTA facially regulates economic activity.
The court went on to rule that the CTA also did not constitute an “unreasonable search or seizure” of corporate information because its requests are uniform and not “arbitrary or discretionary” invasions of privacy.
While momentarily vindicated from a legislative perspective, the CTA has also been hamstringed administratively. The act delegates significant authority to the Treasury Department to establish class exemptions from reporting requirements. In March, President Donald Trump’s administration issued regulations that considerably limit the number of entities subject to requirements.
