By Karen Hube

A federal judge has placed on hold a new requirement for more than 32 million businesses to report ownership information by Jan. 1 or face fines of up to $10,000.

The businesses, including private corporations and pass-through entities, would have been required to file ownership information under the Corporate Responsibility Act of 2021 $(CTA.UK)$ by year end, but only 25% were in compliance as of late November.

Calling the requirement quasi-Orwellian and possibly unconstitutional, U.S. District Judge Amos L. Mazzant in Texas issued an injunction on Tuesday after six plaintiffs filed a suit claiming that the CTA's requirements are unconstitutional.

The rule was an effort to build an ownership database to better equip U.S. Treasury to investigate financial crimes, which can be difficult to trace with tiered, complex entities and multiple owners.

Companies that already file ownership information with an arm of the federal government, such as the Securities and Exchange Commission, were exempt.

Lack of awareness of the law and unanswered questions related to filing were keeping compliance rates low.

In March, a federal-district court in Alabama found Congress overstepped its authority by passing the CTA filing rule and applied an injunction only for the plaintiffs, which were the National Small Business Association's 65,000 members and an individual business owner.

Now, the Texas court injunction applies to all businesses under the CTA's purview.

"The judge said that if there are arguments that the CTA is unconstitutional, why should you have to comply now with something that maybe ultimately you won't have to," says Angela Gamalski, a partner and chair of a CTA task force at the law firm Honigman. "The idea is to figure out if this is unconstitutional first."

Even before determining constitutionality, it's possible Congress overturns the CTA requirements based on their likely lack of effectiveness, says Schuyler M. Moore, a partner at Greenberg Glusker.

"The CTA requirements are a swing and a miss," Moore says. "They're making good guys spend money to comply, and bad guys either won't file or will get somebody to sign as beneficial owner. No one will ever know."

While business owners may welcome a reprieve, it may make sense to continue to gather ownership information. If the rule is reinstated, Gamalski says, "the hard work will be done."

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December 06, 2024 12:04 ET (17:04 GMT)

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