The United States District Court in the Eastern District of Texas granted a motion for a preliminary injunction halting the U.S. government from implementing and enforcing the Corporate Transparency Act (CTA). In his 79-page memorandum opinion and order issued Dec. 3, Judge Amos L. Mazzant called the act a “flanking, quasiOrwellian statute.”
The CTA took effect Jan. 1, requiring certain companies to report beneficial ownership information to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Its intent is to “combat illicit activity including tax fraud, money laundering, and financing for terrorism by capturing more ownership information for specific U.S. businesses operating in or accessing the country’s market,” according to the U.S. Chamber of Commerce. And the act imposes “chilling” penalties for businesses in violation of the act: civil penalties of up to $500 for each day that the violation continues and criminal penalties of up to two years in prison and/or a fine of up to $10,000.
And cannabis businesses are impacted by the CTA to a significant extent. “Although there are 23 exceptions to the CTA, very few of them are likely to apply to reporting companies in the cannabis industry,” wrote Frantz Ward attorneys Alex Koenig, Keenan Jones and Tom Haren in a column for Cannabis Business Times.
FinCEN’s Final Rules regarding the CTA caused “confusion and headaches for business owners across the country as they grappled with compliance under new rules and regulations,” wrote the attorneys, noting that FinCEN estimates that 32.6 million companies formed prior to Jan. 1, 2024, will need to register with FinCEN by the end of 2024, with up to 5 million additional initial reports for companies formed after Jan. 1, 2024, to be filed on an ongoing basis.
In a 40-page complaint filed against U.S. Attorney General Merrick Garland; Secretary of the Treasury Janet L. Yellen; U.S. Department of the Treasury; FinCEN Director Andrea Gacki; and FinCEN in May, the plaintiffs asserted that the federal government is overstepping its constitutional bounds regarding general corporate formation of U.S. businesses, and the CTA is an “unconstitutional affront to the individual rights of Americans.”
The plaintiffs—Texas Top Cop Shop Inc.; Data Comm for Business Inc.; Russell Straayer; Mustardseed Livestock LLC; Libertarian Party of Mississippi; and National Federation of Independent Business Inc.—called for a “permanent injunction prohibiting defendants from enforcing the Act and vacating its implementing regulations.”
“It is a unique feature of our federalist system that the national government has no constitutional authority over general corporate formation,” the complaint stated. “And yet, buried within almost 1500 pages of statutory text as a part of an end-of-the-year budget bill, the Corporate Transparency Act (CTA or Act) … seeks to federalize the internal affairs of tens of millions of entities, whether they constitute for-profit commercial enterprises, political advocacy organizations, or even religious groups, while compelling invasive disclosures to federal regulators for the express purpose of criminal investigation. By so doing, the Act threatens cherished privacy and associational interests in those entities, upsets the careful balance between state and federal actors, and imposes chilling criminal consequences for millions of presumptively innocent people.”
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In granting the motion for the preliminary injunction, Mazzant agreed. “For good reason, Plaintiffs fear this flanking, quasiOrwellian statute and its implications on our dual system of government,” he wrote. “As a result, Plaintiffs contend that the CTA violates the promises our Constitution makes to the People and the States. Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power. And even in the face of the deference the Court must give Congress, the CTA appears likely unconstitutional. Accordingly, the CTA and its Implementing Regulations must be enjoined.”
To gain further insights into the suit, what will happen next and what this means for cannabis businesses owners, Cannabis Business Times spoke with Stuart Oberman, founder and president of Oberman Law Firm, which has practices in both corporate and cannabis law. Here’s what he shared with CBT.
Stuart ObermanPhoto courtesy Oberman Law Firm
Noelle Skodzinski: A couple of things stood out to me in the judge’s order—that he called the CTA a “flanking, quasiOrwellian statute” and that a national injunction was granted, not just one pertaining to the plaintiffs. What can you tell us about the case and the judge’s order?
Stuart Oberman: [The plaintiffs] filed it in the Eastern District of Texas, which is one of the most conservative districts in the country. It seems they knew exactly where they were going to start this.
And yes, sometimes the judge will issue an order that is in relation just to those plaintiffs; but the National Federation of Independent Business joined in this lawsuit, so it had national implications.
The case was that the CTA is unconstitutional, that Congress grossly over exceeded its authority under the Administrative Practice Act (APA). It’s irreparable harm to the business owners because when business owners have to file all this information, they have to file the legal name, the address, taxpayer ID information, date of birth, driver’s license numbers—and all of this is in the federal database. Statistically, the government said 32.6 million companies would be required to file under the CTA. That is an amazing number.
And they have said that 5 million companies are created each year and that in November alone, they had 8 million register for the CTA—8 million in one month.
One of the things the court mentioned [in the order] is that you have all this information, so where is it being stored, and who is protecting it? The government is constantly being hacked, even with the FBI and the CCIA, and, I mean, what are they doing with all this information? There’s no guideline, no security, there are no protocols.
The court said this is just not acceptable, especially with all this data.
The interesting part is that the states regulate business entities, and the court was like, “If the state regulates the corporate business entities, why is the government involved in this?” Again, it goes to the overreaching side of collecting all this information.
Skodzinski: The preliminary injunction is obviously not permanent. What happens next?
Oberman: This will probably be appealed to the Fifth Circuit Court of Appeals in that district, which again, is very, very conservative. And it will make its way through that process and will ultimately probably end up in the Supreme Court.
And with the new administration coming in, there’s certain things that they can do. They could file for deregulation under the APA, or potentially they can sort of non-prioritize this and defund it. You can almost use it like a nol pros in a criminal prosecution, where they could just say, “We’re not going to have the resources, the manpower, the money to do this. So we’re going to defund it, if you will. But I think the court will make their way through that.”
Skodzinski: To back up a little, the premise of the CTA is supposed to be to weed out “bad actors,” as I think they’ve been called. But anyone who files is probably not going to be a “bad actor,” correct? And those making the most money are exempt?
Oberman: Well, that’s correct. It was to prevent money laundering under FinCEN. But if you look at what the exemptions are, [they include exemptions for] companies with $5 million in revenue, and those with more than 20 employees. There are 23 exact exemptions, but most businesses are not $5 million in revenue, so it does greatly affect small businesses. Go figure how many small businesses there are.
In the cannabis industry, most businesses are small. So, this affects across the whole spectrum of the cannabis industry.
And the penalties for not filing—what small business can afford $500 a day? Small businesses right now are struggling anyhow, with inflation and hiring. But I mean $500 a day—that’ll bankrupt people. And [not to mention] if you get to such an extent where it could mean jail time, but that’s a long way off.
And you’re right, if you’re laundering money, you’re not going to file this anyhow.
Skodzinski: What about the businesses that have already filed? Is there any impact for them right now?
Oberman: No. If you’ve already filed—and millions of businesses have already filed it—there’s not much you can really do. The information is out there. Just hope that your data doesn’t get hacked or leaked, and I really would encourage business owners to continually look at their credit reports because you just don’t know what’s out there.
Then you’ve got businesses that are incorporating now, in December, and under the act, they have 90 days to file; but all that is on hold now.
Skodzinski: What kind of timeframe do you think we’re looking at for it moving to the next step and then potentially heading to the Supreme Court?
Oberman: I would like to say we’re going to see some stuff pretty quick.
I think because of the urgency now, the government may say, “We’ve got a new administration coming in. We know they’re not in favor of this, just for the political oversight, putting all politics aside. We know that the new administration is absolutely for deregulation and pro-business , and this fits right into that scenario for defunding. Especially with the conservative court that we have now, this is just prime for overreaching on the government side. Again, this goes back to the states should regulate this and not the federal government.
So, the government may not even choose to appeal this, but I think they will, in a matter of principle, and I think they’ll move on it pretty quick. I would say within 30 to 60 days we’ll know something, if not sooner.
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