A law requiring millions of American businesses to report information on their owners to the federal government would help protect national security and curtail billions of dollars in financial crime, Justice Department lawyers said.
The government lawyers defended the Corporate Transparency Act as a legitimate law enforcement measure in a Friday filing with the US Court of Appeals for the Fifth Circuit. The filing batted away constitutional concerns raised in a legal challenge from a Texas small business that argues the law unilaterally expands the government’s power into territory that has typically remained in the states.
The brief comes one day after the government filed notice of appeal in a separate legal challenge that is blocking enforcement of the CTA, a clear sign that the administration of President Donald Trump plans to continue implementing the law enacted by Congress in 2021. The law seeks to address misuse of anonymous shell companies that conceal the identities of their so-called beneficial owners.
Arguing for the Financial Crimes Enforcement Network, or FinCEN, the DOJ attorneys played up the law enforcement potential of the act to curtail what they estimate to be $300 billion in domestic tax crimes.
Congressional action to curb money laundering has helped the issue, but there remains a “significant gap” in enforcement because companies don’t report ownership information to the federal government, and US states are inconsistent in their requirements, the brief said.
“While shell companies have legitimate uses, criminals also routinely use them to exploit this enforcement gap,” the government said in its brief.
It also emphasized the national security implications of the law, calling out organized crime and state-owned entities that hide their ownership interest and evade sanctions or generate revenue at the United States’ expense.
“And more broadly, the absence of company-ownership information in the United States undermines the federal government’s longstanding diplomatic efforts to combat cross-border financial crime,” it said.
The government also said useful exceptions have been carved out, such as for banks, trusts, non-profits, and entities regulated with other laws.
FinCEN has estimated that 32 million American businesses would need to report beneficial ownership information for the law as written, in addition to about another 5 million businesses being created each year.
FinCEN said this week that once it is able to enforce the act, it will give companies 30 days to report their ownership information.
Texas Top Cop Shop Inc., a firearms retailer, challenged the law in May 2024, a few months before reporting was to become mandatory, leading to a rapid series of legal actions that resulted in a nationwide injunction blocking its implementation. The US Supreme Court later paused that block while the litigation continues. Oral arguments before the Fifth Circuit are scheduled for March 25.
The act’s implementation remained halted by an injunction in a second case, Smith v. Commissioner, which the government appealed this week.
The case is Texas Top Cop Shop v. Bondi, 5th Cir., No. 24-40792, brief for appellants 2/7/25.
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