Anti-Money Laundering Law Boosted in US

On 23rd January, 2025, the US Supreme Court declined to block the enforcement of the Corporate Transparency Act (CTA). This anti-money laundering law compels businesses to disclose the identities of their beneficial owners to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

The country’s apex court put on hold a nationwide injunction issued by Texas US District Judge Amos Mazzant on 3rd December. Ruling in favour of the National Federation of Independent Business and small businesses, Mazzant concluded that Congress acted outside its constitutional powers in enacting the CTA in 2021.

The CTA and the US AML Regulations

The Corporate Transparency Act is part of the US Anti-Money Laundering Act (AMLA) and the National Defence Authorization Act enacted in 2021. CTA provisions in the AMLA authorize FinCEN to collect beneficial ownership information (BOI) and disclose it to appropriate users, including federal law enforcement.

In 2024, the CTA introduced requirements for beneficial ownership transparency by creating a new category of “reporting companies”, which covers entities required to comply with this US finance law.

According to the anti-money laundering law, a “beneficial owner” is an individual who controls or owns (directly or indirectly) at least 25% of the ownership interest and exercises substantial control over the company. BOI includes full name, current address, date of birth and a distinctive identification number.

Businesses Challenge the Constitutionality of the CTA

The National Federation of Independent Business and small businesses, represented by lawyers at the Centre for Individual Rights, moved to court to challenge the legality of the CTA. They argued that Congress overstepped its constitutional power in enacting the 2021 US finance law. US District Judge Amos Mazzant in Sherman, Texas, sided with the plaintiffs by concluding that the anti-money laundering law was likely unconstitutional.

Mazzant said the US finance law was an unprecedented attempt by the federal government to legislate economic activities traditionally left to states.

“For good reason, Plaintiffs fear this quasi-Orwellian statute and its implication on our dual system of government,” Mazzant wrote. According to the judge, Congress had no authority to regulate commerce, foreign affairs and taxes to adopt such a law, and it likely violated states’ rights under the Tenth Amendment of the US Constitution. The 10th Amendment provides that any powers not granted to the federal government are reserved for states and the people.

The federal judge issued a nationwide injunction blocking the enforcement of the CTA. The AML compliance law was enacted as part of an annual defence spending during President Trump’s first term in 2021. Supporters of the anti-money laundering law said it was intended to address the growing popularity of the US as a venue for criminals to launder crime proceeds by setting up limited liability companies under state laws without disclosing their involvement.

Mazzant’s decision marked the second time a court has deemed the CTA unconstitutional. In March 2024, an Alabama federal judge reached a similar conclusion in a different case, but issued a narrower injunction that only blocked its enforcement as applied to the plaintiffs, among them the National Small Business Association.

5th US Circuit Court of Appeals Reinstated the Nationwide Injunction

On December 27th, 2024, the New Orleans 5th Circuit Court of Appeals reinstated the nationwide injunction ahead of the 13th January deadline for companies to disclose the identities of their beneficial owners. 

Initially, the appeals court had put the injunction on hold at the application of the US Department of Justice to allow the government to appeal Mazzant’s decision. However, a different panel of judges decided to keep the enforcement of the anti-money laundering law paused to “preserve the constitutional status quo while the court’s merit panel considers the parties’ substantive arguments”.

With the hearing set for March 25th, the merits panel will decide whether to uphold Mazzant’s ruling. The enforcement of the CTA remains suspended, and businesses will not be expected to disclose their real beneficial owners.

US Supreme Court Declined to Block Enforcement

On January 23rd, the US Supreme Court refused to block enforcement of the AML regulation. The justices put on hold the nationwide injunction issued by Judge Mazzant. That notwithstanding, the CTA remains suspended due to a separate order issued in a different case by Texas-based US District Judge Jeremy Kernodle on January 7th.

The Justices’ ruling came after the New Orleans 5th Circuit Court of Appeals upheld the nationwide injunction. Former president Biden’s administration asked the apex court to stay the injunction since millions of businesses had already effected the AML compliance requirements before Mazzant’s ruling.

Conservative Justice Neil Gorsuch agreed that the nationwide injunction would be stayed. He also said he would take up the case to decide if an individual judge in one state can issue such a nationwide injunction.

In her dissenting opinion, liberal Justice Ketanji Brown Jackson said she saw no indication why further delay in the enforcement of the anti-money laundering law would harm the government, which she noted had itself delayed implementation for nearly four years after its enactment.

Lawyers at the Centre for Individual Rights representing small enterprises in the Supreme Court case cited Kernodle’s ruling, saying it is now up to President Trump to decide what to do.

“We remain confident that the law’s invasive reporting requirements and draconian penalties will be ruled unconstitutional,” said Todd Gaziano, the centre’s president.

Justification for the AML Regulations

When writing to the Supreme Court, Biden’s administration Solicitor General Elizabeth Prelogar noted in her brief that the CTA’s reporting requirements allow the government to prevent, detect and prosecute financial crimes, such as tax fraud, money laundering and the financing of terrorism.

The Act is part of the US AML regulations that allow FinCEN to collect and analyse information about financial transactions and share it with law enforcement agencies to combat money laundering and other financial crimes.

In her brief to the US Supreme Court, Prelogar argued that Mazzant’s ruling was wrong and too sweeping. She cited Congress’s constitutional authority under the Commerce Clause, which allows it to regulate economic activities that affect interstate commerce.

Source: Reuters

References:

Comply Advantage

Financial Crimes Enforcement Network

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