Does it matter if a law is valid if the Government refuses to enforce it? For months, we have watched (and blogged on) courts grappling with the constitutionality and enforceability of the Corporate Transparency Act (“CTA”). While, as we have blogged most recently here, courts have produced mixed returns on the validity of the CTA, the Department of the Treasury (“Treasury”) has now significantly mooted those questions. On March 2, Treasury announced in a Press Release that it will not enforce significant provisions of the the CTA.
Hold on Current Enforcement
The Press Release is short and states, in pertinent part, that the Treasury Department “will it not enforce any penalties or fines associated with the beneficial ownership information reporting rule under the existing regulatory deadlines.” The Department’s decision does not remove the CTA from the laws of the United States. It still means that reporting companies have to comply with their BOI filing obligations, as put forth in the regulations; but there will be no penalties or fines should a report be filed late, not updated on time, etc. The tumultuous litigation developments leave entities subject to the CTA in constant flux: one week, the CTA is stayed nation-wide, another week the deadlines are back in force but extended. In the absence of a fine or penalty for non-compliance with the CTA, reporting companies will undoubtedly ask their advisors as to whether or not to file BOI reports as they become due. Operationally, is it better to file the BOI report and be “on the safe side” (but having to expend resources) or are the risks tolerable if the entity foregoes to expend the efforts and does not submit the appropriate BOI report in a timely manner? Of course, the CTA is still good law. So, the question is, effectively, is it more efficient to just break the law if there will be no penalties – for now.
Future Enforcement and Rule Change
The Press Release also signals how the new administration would like to reshape the CTA. According to the Press Release, the Department of the Treasury “will further not enforce any penalties or fines against U.S. citizens or domestic reporting companies or their beneficial owners after the forthcoming rule changes take effect either” and “will further be issuing a proposed rulemaking that will narrow the scope of the rule to foreign reporting companies only.”
A potentially narrower application scope begs the question how the executive department can follow the Congressional goal of the CTA: increasing accountability in entities operating within or organized in the United States to combat money laundering, fraud, corruption, tax crimes, and other civil and criminal violations, nationally and internationally. In its final rule on the BOI reporting regime, FinCEN estimated about 71,000 foreign entities “operating in the United States that may be subject to BOI reporting requirements” in 2024, with about 10,900 new foreign entities subject to reporting per year after 2024. Limiting “the scope of the rule to foreign reporting companies only” would unquestionably result in the non-availability of a massive amount of BOI to law enforcement and agencies.
The government’s reasoning for these next steps is that they are, “in the interest of supporting hard-working American taxpayers and small businesses and ensuring that the rule is appropriately tailored to advance the public interest.” The CTA has been criticized as being too burdensome on small entities and that FinCEN has considerably underestimated the amount of time required to accurately complete a BOI report. It remains to be seen how the new proposed rule alleviates and address concerns on small businesses – and whether it imposes an obligation on smaller entities at all.
Perhaps the promised rule changes will address these questions. You will hear here if they do.
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