The US government will no longer require US-based companies or American citizens to comply with beneficial ownership reporting rules under the Corporate Transparency Act (CTA), ending for now a convulsive path that has seen multiple contradictory court rulings, including one just this week in Michigan.
On March 2, barely two weeks after courts had reinstated the CTA reporting mandate, the Treasury Department announced it would not enforce penalties or fines under the existing deadlines and would issue a new rule to narrow the scope of CTA reporting to foreign companies.
“This is a victory for common sense,” Treasury Secretary Scott Bessent said in a statement. “Today’s action is part of President Trump’s bold agenda to unleash American prosperity by reining in burdensome regulations, in particular for small businesses that are the backbone of the American economy.”
The decision effectively exempts millions of American businesses from CTA reporting obligations, a significant reinterpretation of legislation designed to combat money laundering through both domestic and international shell companies.
While some business groups praised the move, first announced via a social media post, pro-transparency groups criticized it, saying it would open the flow of illegal money. The move’s legality is also in question.
“The limitations Treasury proposed Sunday night seem inconsistent with the CTA’s purposes as passed by Congress,” said Jamie A. Schafer, a partner in Perkins Coie’s Washington DC office. “The law (and related Bank Secrecy Act) give Treasury the authority to designate additional appropriate categories of individuals and entities to exempt from CTA compliance beyond those identified by Congress. However, exempting everyone except foreign reporting companies is likely a bridge too far. I would expect challenges to the executive’s authority to pare back the regulations to this degree, which may find traction in the courts post-Loper Bright.”
Regulatory whiplash
The Treasury Department’s announcement caps an extraordinarily chaotic implementation process spanning two presidential administrations and leaving compliance professionals struggling to keep pace with rapidly shifting requirements. Just two weeks ago, on Feb. 18, the US District Court for the Eastern District of Texas granted the government’s request to reinstate the very reporting requirements the department now says it won’t enforce. At that time, FinCEN, the Treasury agency responsible for administering the CTA’s requirements, extended the reporting deadline to March 21.
“Whatever the reason or your preferred outcome, this regulatory whiplash is unprecedented, at least in my 15 years of practice in this area,” Schafer said. “It is also counterproductive and exhausting for business. It’s a challenging time to be a lawyer advising clients in navigating complex global business challenges in a world where legal and regulatory pronouncements are made, retracted, revised and revoked on whims. It is difficult to tell our clients to take any announcements we see coming out of the administration seriously in this environment. Chaos may be good for news cycles, but it is bad for business, even if the end is roll-back of regulations. And this is far from ‘the end’ in that respect.
Since the start, the CTA has been contentious. Passed by Congress at the end of 2020 as part of a defense authorization bill, the law survived a presidential veto, the only one Donald Trump issued during his first term. Its purpose was to address what law enforcement and national security officials had long identified as a vulnerability in the US financial system: the ease with which anonymous shell companies can be used to hide illicit funds. A long bipartisan effort culminated in the CTA, which required corporations, LLCs and many other types of business entities to report details about their beneficial owners — individuals who own 25% or more of the entity or who exercise substantial control — with a list of nearly two dozen exemptions.
In effect, the CTA would be meaningless under these new rules, Schafer said, which is concerning given the impact of the United States on the international flow of illicit funds.
“In the global AML world, the US system’s lack of corporate transparency is regarded as a highly attractive feature for money laundering and sanctions evasion. The CTA was intended to stem that tide and, I believe, ultimately would be a very significant advancement of those priorities,” Schafer said. “There are many common-sense exemptions that could make the CTA both less burdensome and, I suspect, the data more useful to law enforcement authorities as well as many regulatory ambiguities that need to be resolved to lessen unnecessary burdens the CTA imposes on US companies. But it seems to me that the amended rule FinCEN is proposing to issue — applying the requirements only to ‘foreign reporting companies’ — would result in the CTA having very little practical impact on combatting access to US markets by money launderers, sanctioned individuals and countries and corrupt government officials.”
Meanwhile, as court battles have proceeded, the issue of money laundering has not gone away. An estimated $3 trillion in illicit funds flowed through the global financial system in 2023, according to a NASDAQ estimate.
“This law was created to help deter illicit finance through shell companies or other opaque ownership structures,” said Jill DeWitt, senior director of compliance and third-party risk management solutions at Moody’s. “It was also designed to align the US globally with financial transparency, especially around beneficial ownership of entities to help prevent terrorist organizations, organized criminals, and other bad actors from exploiting the US financial system and hide their illicitly obtained financial gains.”
DeWitt acknowledged the compliance burden while emphasizing the security benefits: “While arguments against burdening small businesses with the requirements of beneficial-ownership compliance and of financial reporting are understandable, greater transparency could help raise financial institutions‘ awareness of bad actors in their customer base and support them in avoiding onboarding bad actors who might have otherwise been hidden or overlooked.”
Truly off the hook?
Despite the announcement, legal and compliance observers warn companies may face lingering uncertainty.
“While the rule may be subject to legal challenge, as the narrowing proposed by the Treasury Department is inconsistent with the text of the CTA itself, it is not clear who, if anyone, would challenge the new proposed rules,” said a Pierce Atwood analysis.
And the suspension of enforcement for US-based companies and American citizens does not constitute a repeal of the underlying law. Should a future administration reverse course, US-based companies could once again find themselves subject to the CTA’s requirements. Additionally, the Treasury Department has not indicated what will happen to information entities may have already submitted.
Legislative efforts are underway to revise some aspects of the CTA, with a bill already passing the US House of Representatives that would delay the reporting deadline to 2026; other aspects of the law could also be up for revision.
Given the unpredictability of the Trump Administration, it’s anybody’s guess what might happen, but if federal enforcement of the CTA goes away, companies can expect other jurisdictions to apply pressure, Schafer said.
“If the CTA disappears in the near-term you can expect two things going forward: States will take up the mantle — and New York already has — and pass a patchwork of confusing and potentially more aggressive laws, which will go beyond entities formed in those states’ borders to also capture entities registered to do business in those states in an attempt to close loopholes for formations in states that may not pass CTA-like laws,” Schafer said. “And two, the CTA will either be reenacted or reinvigorated federally in the future, as the US will continue to receive significant pressure from the Financial Action Task Force and foreign banking authorities to implement a corporate transparency database as this is seen as a major US anti-money laundering weakness impacting global markets.”
