Texas court halts FinCEN beneficial ownership reporting requirements

An AML requirement that businesses operating in the U.S. submit company beneficial ownership information (BOI) to FINCEN has been halted by a Texas court.

Companies doing business in the U.S. were required starting in 2025 to provide basic information about anyone with 25 percent or more ownership to FINCEN, under the BOI reporting rule of the 2021 CTA. The information would include names, dates of birth, addresses, and copies of driver’s licenses or passports of the owners. Approximately 37 million owners would have been required to file the reports.

A growing opposition arguing against the rule’s constitutionality finally reached a tipping point with the Texas court’s decision. While compliance professionals should take note, the ruling is likely to be appealed to the Supreme Court.

The plan was for the reports to go into a secure, restricted database at FinCEN where law enforcement, federal agencies, and banks conducting due diligence on customers could check the beneficial ownership details of companies.

Some businesses have bristled at the requirement, considering it government overreach.

“Though seemingly benign, this federal mandate marks a drastic two-fold departure from history. First, it represents a Federal attempt to monitor companies created under state law–a matter our federalist system has left almost exclusively to the several states. Second, the CTA ends a feature of corporate formation as designed by various states–anonymity. For good reason, plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government.” 

– Judge Amos Mazzant, U.S. District Court for the Eastern District of Texas

On Tuesday, the U.S. District Court for the Eastern District of Texas ordered a preliminary injunction in a case brought against the CTA. The six plaintiffs include the National Federation of Independent Business, three companies, an owner, and the Libertarian Party of Mississippi.

The court, one of the more conservative federal courts in the nation, agreed with the plaintiffs that the law may violate the Constitution and that states, not the federal government, should oversee corporate regulation. District Court Judge Amos Mazzant also agreed that the CTA may be overly burdensome to small businesses.

“Though seemingly benign, this federal mandate marks a drastic two-fold departure from history. First, it represents a Federal attempt to monitor companies created under state law–a matter our federalist system has left almost exclusively to the several states. Second, the CTA ends a feature of corporate formation as designed by various states–anonymity. For good reason, plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government,” Mazzant wrote in the ruling.

“The CTA is likely unconstitutional as outside of Congress’s power. Because the reporting rule implements the CTA, it is likely unconstitutional for the same reasons,” he wrote. “ … [R]eporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the court.”

The Texas ruling follows a similar, but less clear, ruling in March by a federal court in Alabama. FINCEN voluntarily decided it would not enforce the reporting requirement on the 65,000 members of the National Small Business Association, who had brought the suit.

It was not immediately known if FINCEN will appeal the injunction but Erin Bryan, a partner at law firm Dorsey & Whitney, believes an appeal is likely.

“While many are rightfully greeting this ruling with enthusiasm, this is not the end of the CTA or even the end of the beneficial ownership reporting requirements,” Bryan said in an email. If contested, the case could head to the Supreme Court, she said.

Other courts have taken up similar challenges and ruled in the other direction. For that reason, the case could end up before the Supreme Court, Bryan said.

In the meantime, “those who will benefit the most from this ruling are the individuals who, for whatever reason had not yet completed their companies’ filings, and especially those who had delayed filings because they were still deliberating on how to handle some of FinCEN’s conundrums,” Bryan said.