The Treasury Department has filed a responsive brief in NSBU v. Yellen, a case brought in federal court in Alabama that seeks to have the Corporate Transparency Act on constitutional grounds. The 78-page document marshals an array of constitutional arguments in support of the statute.
Constitutional Standing
To bring a case to overturn a statute on constitutional grounds, Treasury argues, a plaintiff must have “standing” to sue. If a plaintiff lacks standing, then the court lacks jurisdiction over the claims in the complaint and must dismiss it.
Treasury’s brief argues that NSBU (and the individual business owner on whose behalf the NSBU brought the case) lack standing to assert their claims. The legal test for standing is that the plaintiff must show that he is (i) under threat of suffering an ‘injury in fact’ that is concrete, (ii) the threat must be actual an imminent, not conjectural or hypothetical, (iii) the threat must be ‘fairly traceable to the challenged action’ and (iv) it must be likely that a favorable judicial decision will prevent or redress the injury.
Treasury argues that neither the NSBU (as an association representing business owners) nor the particular individual named in the suit have standing. While business owners might dislike the idea of providing their information to FinCEN under its beneficial ownership reporting rules, doing so causes them no harm. These individuals will have already disclosed the information required by the law (name, date of birth, residential address, drivers license number) in other functions (such as income tax returns, passport forms and bank account applications).
The standing argument applies throughout Treasury’s brief, relating to each constitutional theory that the NSBU urged in its complaint.
The CTA is Authorized by the Government’s Foreign Affairs and National Security Powers and Necessary and Proper Clause
Treasury argues that the CTA is authorized by Congress’ powers under Article I of the constitution.
Article I authorizes the Congress and the President to regulate foreign affairs. Additionally, the Constitution provides that “Congress shall have Power . . . [t]o make all Laws which shall be necessary and proper for carrying into Execution the [Article I] Powers and all other Powers vested by the[e] Constitution in the Government of the United States . . . “
The Treasury brief recounts brief Supreme Court cases for the proposition that Congress has broad powers under the Necessary and Proper Clause to adopt laws that regulate foreign affairs. In enacting the CTA, Treasury argues, Congress made specific findings relating to the impact of money laundering on foreign affairs. In the Congressional findings that accompanied the CTA, Congress wrote that, “malign actors seek to conceal their ownership of corporations, limited liability companies, or other similar entities in the United States to facilitate illicit activity . . . harming the national security interests of the United States and allies of the United States.” [Brief at 26-27].
Treasury cited Congressional findings in the statute that it was intended to “bring the United States into compliance with international anti-money laundering . . . standards” and to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.” [Brief at 27].
The CTA is Authorized by the Interstate Commerce Clause
The Treasury brief also claimed that the CTA is authorized by the interstate commerce claim in which the Constitution grants Congress the power to “make all Laws which shall be necessary and proper . . [to] regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”
Treasury cites several Supreme Court cases holding that the interstate commerce clause is broad and empowers Congress to pass laws that have a rational impact on interstate commerce.
Treasury argues that “Congress rationally concluded that the ability of certain legal entities to withhold beneficial ownership and applicant information “taken in the aggregate, substantially affect interstate commerce.” Congress found that more than 2 million corporations and LLCs are formed each year and that “money launderers and others involved in commercial activity intentionally conduct transactions through corporate structures in order to evade detection.” [Brief at 29].
Plaintiff’s argument had been that “the CTA does not regulate commerce” and instead regulates the “entirely ministerial act” of incorporation. In reply, Treasury argues that “The CTA requires certain entities, which have availed themselves of States’ incorporation laws, must also disclose discrete categories of information to the federal government. [citation omitted] It imposes no licensing requirement and it does not “nullify, expanded upon, or relax” State incorporation laws . . . even if corporate formation is a necessary predicate to operation.”
Treasury’s brief cites Gonzalez v. Raich for the proposition that Congress has “substantial leeway to regulate purely intrastate activity (whether economic or not) that it deems to have the capability, in the aggregate, of frustrating the broader regulation of interstate economic activity. In Raich, the Supreme Court upheld the Controlled Substances Act (which prohibits the interstate cultivation, possession and distribution of marijuana) even in the case of a criminal defendant whose possession and distribution was entirely intrastate and was permitted by state law.
Next Steps in NSBU v. Yellen
Under the scheduling order in the case, the plaintiff, National Small Business United, has until May 2, 2023 to file a brief in reply to Treasury’s brief. After that, Treasury will have until May 25, 2023 to file its rebuttal.
The court has not signaled when it might rule on the parties’ competing motions.
About The Author
Jonathan Wilson is the co-founder of FinCEN Report Company with 31 years of experience in corporate, M&A and securities matters. He is the author of The Corporate Transparency Act Compliance Guide (to be published by Lexis Nexis in the summer of 2023) and the Lexis Practical Guidance Practice Note on the Corporate Transparency Act.
