Banking and Finance Law Daily Wrap Up, BANK SECRECY ACT—Appellants submit reply brief in Corporate Transparency Act case, (Jun 4, 2024)

By Donielle Tigay Stutland, J.D.

The government argued that the Corporate Transparency Act is a valid exercise of Congress’ powers and serves to prevent money laundering and terrorist financing.

In connection with the appeal of the decision of a district court in Huntsville, Alabama, which facially invalidated the Corporate Transparency Act (CTA), the Treasury Department has filed its reply brief with the Eleventh Circuit. In response to Appellee National Small Business United’s brief, the U.S. Department of the Treasury submitted a reply brief on behalf of the Appellants. Treasury’s reply brief urged the Eleventh Circuit to hold that the CTA is a valid exercise of Congress’ powers. Treasury argues that the CTA is independently authorized by the Necessary and Proper Clause, and as such the CTA effectuates the federal government’s powers to regulate commerce, collect taxes, and protect national security. Additionally, Treasury’s brief argues that reasonable reporting requirements do not raise Fourth Amendment concerns (National Small Business United v. U.S. Dept. of the Treasury, No. 24-10736 (11th Cir.)).

On May 13, 2024, the National Small Business Association (NSBA) filed its brief, which urged the Eleventh Circuit to affirm the federal district court’s ruling, either on the ground that Congress exceeded its powers in enacting the CTA or on the alternative ground that the CTA violates the Fourth Amendment. If not, then it should remand the case to the district court for consideration of the remaining claims—i.e., that the CTA violates the First, Fifth, and Ninth Amendments (see Banking and Finance Law Daily, May 14, 2024).

Background. As previously reported, the federal government appealed the decision of a district court in Huntsville, Alabama, which facially invalidated the Corporate Transparency Act (CTA). The court granted summary judgment in favor of the National Small Business Association (NSBA), finding that the CTA’s mandate for reporting companies to provide certain identifying information regarding all beneficial owners to the U.S. Treasury’s Financial Crimes Enforcement Network exceeded Congress’s power to legislate. The government then appealed that decision to the U.S. Court of Appeals for the Eleventh Circuit on April 15, 2024. Since then, at least three amicus curiae briefs have been filed in support of the government’s argument that the CTA was validly enacted on the bases of the Commerce Clause, congressional authority to levy and collect taxes, and Congress’s foreign affairs and national security power (see Banking and Finance Law Daily, April 24, 2024).

Commerce Clause. In making the argument that the CTA falls within Congress’s authority, the government began by laying out that the CTA is authorized by the Commerce Clause. The Treasury Department argues that the NSBA’s brief mischaracterizes what the statute regulates, as their brief argued that the CTA should be construed as regulating only the “process of incorporation” and that incorporation is a “ministerial act” rather than an economic one. Counters the reply brief, “the CTA is aimed at harmful economic transactions, not the act of incorporation.” The CTA was enacted as part of the Anti-Money Laundering Act of 2020, a regulatory scheme designed to combat “money laundering,” “the financing of terrorism,” and other illicit transactions. The government’s brief stresses that “the CTA cannot plausibly be characterized as regulating the act of incorporation. Rather, it is a reporting requirement applicable to “corporation[s]” and “similar entit[ies]” authorized to do business in the United States, without regard to where, when, or how those businesses are incorporated.

Necessary and Proper Clause. Treasury’s brief next turns to the CTA’s authority under the Necessary and Proper Clause. The reply brief characterizes NSBA’s brief as arguing that “corporate reporting requirements are not a ‘proper means’ for effectuating the legislature’s indisputably valid ends.” However, the brief cites United States v. Comstock to refute this argument: “The Supreme Court has recognized, however, that Congress holds “broad authority” to identify the means for carrying into execution its enumerated powers.” Moreover, under McCulloch v. Maryland, if “the end be legitimate,” “all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the constitution, are constitutional.” The government argues that precedent has sustained under the Necessary and Proper Clause many significant exercises of federal authority, including the creation of a national bank.

In response to NSBA’s argument that the CTA “invades State sovereign power over entity formation,” the reply brief notes that the CTA leaves state oversight of entity formation undisturbed. The government continued by arguing that the authorization under the Necessary and Proper Clause “is especially apparent given that the statute effectuates not just one federal power, but many, including Congress’s tax and foreign-affairs powers and the President’s law enforcement and national-security powers.” Moreover, the reply brief argues that NSBA “downplay[s] the significance of the foreign-policy and national-security interests at stake.” The government stressed that Congress “reasonably concluded” that the reporting requirements would “discourage the use of shell corporations as a tool to disguise and move illicit funds” and would “assist national security, intelligence, and law enforcement agencies with the pursuit of crimes.”

Fourth Amendment. Finally, the reply brief argues that the NSBA’s argument that the CTA violates the Fourth Amendment is “meritless.” The brief points out that the “Supreme Court has recognized that reporting requirements of the kind at issue here raise no Fourth Amendment concern,” with the example of California Bankers Assn v. Shultz, in which the Court upheld a statute requiring banks to report transactions over a specified dollar amount to the government. The reply brief highlighted that in Shulz, the Supreme Court explained, “reporting requirements are by no means per se violations of the Fourth Amendment,” and “a contrary holding might well fly in the face of the settled... history of self-assessment of individual and corporate income taxes in the United States.” Ultimately, the government argues that NSBA “make no attempt to reconcile their Fourth Amendment argument with Shultz or with the many reporting requirements that have long been understood as constitutional.”

Attorneys: Thomas Lee (Law Office of Thomas Lee) for National Small Business United. Steven H. Hazel, U.S. Department of Justice, for U.S. Department of the Treasury.

Companies: National Small Business United d/b/a National Small Business Association

LitigationEnforcement: BankingOperations BankSecrecyAct FinancialStability IdentityTheft Privacy