The Corporate Transparency Act Is Blocked, But Compliance Risks Haven’t Disappeared

If you’ve been following developments around the Corporate Transparency Act (CTA), you might have spent the past year helping your clients prepare for the first major deadline by gathering documents, creating checklists, clarifying the definition of “beneficial ownership” and painstakingly untangling its 23 different exemptions. And yet, here we are, in a bureaucratic version of Samuel Beckett’s “Waiting for Godot.” The CTA was imminent, you warned your clients, but now it’s been blocked indefinitely with a nationwide preliminary injunction — leaving everyone to wonder if it will ever come at all.

While this pause may feel like respite, it’s anything but a green light to relax.

The clock could start ticking again at any moment, and the consequences of being unprepared aren’t fun. The Texas federal court struck down the CTA, citing constitutional concerns and the burdens it would impose on small businesses, but it’s precisely those compliance challenges that make ongoing preparation essential. 

If the CTA’s Jan. 1, 2025 deadline had remained in place it would have required millions of businesses to disclose details about who owns and controls them — information many companies have never needed to document before. The injunction may be temporary, and if it’s overturned or dissolved, companies could face tight deadlines to meet the law’s reporting requirements.

What’s more, the value of tracking this information extends far beyond CTA. Regulatory trends across the U.S. and internationally show a clear push toward greater transparency. Even if the law is permanently struck down, a similar law or state-level initiative could take its place. Businesses that have already laid the groundwork will find themselves ahead of the curve when new requirements emerge.

Here’s how California law firms can position their clients for what comes next.

Monitor developments closely

As tempting as it is now to breathe a sigh of relief and move on, look out for updates to ensure your clients are ready to comply if enforcement resumes. 

As the name implies, the CTA mandates that private corporations and limited liability partnerships registered to do business in the U.S. must reveal who owns and controls them. FinCEN’s goal was to make it harder for criminals to conceal or benefit from ill-gotten gains via shell companies or other opaque ownership structures. As a bureau of the Department of the Treasury, FinCEN is charged with safeguarding the financial system by detecting and preventing money laundering, terrorist financing, serious tax fraud and other crimes. 

But U.S. District Judge Amos Mazzant in the Eastern District of Texas questioned whether that move infringed upon constitutional rights, labeling it “a drastic twofold departure from history.” In Texas Top Cop Shop v Garland et al, Mazzant reasoned that such corporate regulation typically falls under the purview of state authorities and has traditionally allowed businesses to form with a degree of anonymity, a feature that the CTA seeks to eliminate. The judge also found the CTA was a burden to small businesses, citing the significant costs and administrative challenges of compliance as well as the potential risks of data misuse. FinCEN estimates that filing beneficial ownership reports will cost small businesses $22.7 billion in the first year of compliance and $5.6 billion per year thereafter. 

This is just the start of what promises to be a lengthy legal battle, as FinCEN has appealed the decision. The Trump administration could also take action to limit the CTA, although administrative measures don’t replace statutory obligations. Businesses will need to comply unless the courts repeal or permanently block the law. In the meantime, monitor the related litigation, Congress and FinCEN. Next to weigh in is the U.S. Court of Appeals for the Fifth Circuit, which handles appeals from Texas federal courts, and the U.S. Court of Appeals for the Eleventh Circuit is mulling an Alabama lawsuit that raises similar questions. 

CEB’s DailyNews section is useful for staying informed on the latest updates with articles written by California attorneys and judges. Keeping up with legal commentary around the CTA will be essential for anticipating changes in its enforcement and compliance requirements.

Check if your clients have already filed 

While the first major deadline for the CTA wasn’t until 2025, companies that were formed this year had a shorter turnaround of 90 days to comply — which means they might have already filed their report. If your clients are among them, review the information they sent to FinCEN and ensure it’s safeguarded against potential misuse.

Remember, the information disclosed for CTA compliance can be accessed by other agencies. FinCEN stores the reports in a private database but does grant access to federal, state, local and tribal officials, along with some foreign authorities for reasons related to national security, intelligence and law enforcement. Some financial institutions will be able to access the information, too, with the reporting company’s consent — as will regulators supervising those institutions.

Prepare to pivot in 2025

A ruling lifting the injunction could trigger an immediate need for businesses to comply with the CTA’s reporting requirements, so it’s best to be proactive in preparing your clients. Make sure they understand the key requirements and have a process for gathering and verifying the necessary documentation ahead of time.

Here’s a brief refresher on the CTA’s key requirements:

• Who must report? Most private corporations, LLCs and similar entities, unless they qualify for specific exemptions.
• What information is required? Companies must provide the full legal names, dates of birth, addresses and unique identification numbers (e.g., from a driver’s license or passport) of their beneficial owners.
• Who is a beneficial owner? According to FinCEN, these are individuals who either directly or indirectly own or control at least 25% of the company’s ownership interests or exercise substantial control. 
• When would reporting be due? Had the injunction not been issued, newly formed entities must file within 30 days of incorporation, while existing entities would have been required to comply by Jan. 1, 2025. Note that reporting companies can still opt to file a report with FinCEN while the appeal is pending if they wish to, but it’s no longer required.

For a deeper dive into CTA requirements, check out CEB’s explainer.

Educate clients on financial and legal penalties

Though the CTA’s enforcement is paused, businesses should still be aware of the significant financial and legal penalties for noncompliance because failure to report or false reporting can result in serious repercussions and fines. For every day the violation continues, FinCEN will apply a civil penalty of up to $500. Continued, willful noncompliance can trigger a $10,000 fine and up to two years of imprisonment.

Discuss these potential penalties with your clients to ensure they understand the severity of noncompliance and are fully prepared to meet the CTA’s requirements if and when enforcement resumes.

Don’t Wait for the Winds to Change

The CTA represents an unprecedented shift in how the U.S. addresses financial crimes, particularly money laundering and terrorist financing. While its supporters argue the law is essential for enhancing transparency and aligning the U.S. with global anti-money laundering standards, critics see it as an overreach that compromises privacy and imposes unnecessary burdens on small businesses.

Despite the delay caused by the federal injunction, the clock could restart at any moment. For California lawyers, this is a critical juncture to help commercial clients remain prepared by tracking updates, clarifying exemptions and penalties, and establishing systems for tracking ownership changes.

In uncertain times, one thing remains clear: businesses that take proactive steps now will be far better equipped to meet the CTA’s requirements, avoiding costly penalties and potential disruptions down the road.

For more insights into federal reporting obligations under the CTA and to leverage CEB’s compliance insights, get in touch to schedule a free demo.