The judge’s ruling establishes a law intended to combat money laundering

In a counterbalance to government efforts to combat money laundering, a federal court has ruled that the Treasury Department cannot require some small businesses to turn over personal information about their owners.

Under a section of a 2020 law that took effect Jan. 1, small businesses must share details about their so-called beneficial owners, individuals who have financial interests in a company or significant power over its business decisions. The law, the Corporate Transparency Act, was passed in Congress with bipartisan support and was intended to help the Treasury Department’s Financial Crimes Unit identify money launderers hiding behind shell companies.

But in a ruling issued late Friday, Judge Liles C. Burke of the U.S. District Court in Huntsville, Alabama, sided with the law’s critics. They argue that asking business owners to provide personal information — names, addresses and copies of their identification documents — was an act of congressional overreach, no matter how well-intentioned.

“Congress sometimes passes clever laws that violate the Constitution,” Judge Liles wrote in a 53-page filing. “This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.”

Judge Liles’ ruling prevented the department from enforcing the property reporting requirements on the plaintiff in the Alabama case, the National Small Business Association, a nonprofit trade group representing more than 65,000 member businesses.

Lawyers who have been following the case in Alabama said last weekend that they expected the government would soon seek a stay of the order, either by Judge Liles or the 11th Circuit Court of Appeals in Atlanta, or both. The Justice Department will almost certainly appeal the Alabama case to the state court, the lawyers said.

Morgan Finkelstein, a spokeswoman for the Treasury Department, said her agency was “complying with the court’s order.” She referred further questions to the Justice Department, which declined to comment.

As attorneys and transparency experts pored over Judge Liles’ opinion, the immediate impact of the ruling on the universe of small businesses in the United States, which the government estimates at 33 million, was not entirely clear.

Companies were given one year to comply with reporting requirements covering the year 2023, so the data will not be available until the end of 2024. And Judge Liles’ ruling, strictly read, does not apply to small businesses that are not members. from the trade group that filed the Alabama lawsuit, meaning most companies covered by the mandate still have to comply.

“This has only made things more complicated for many of my clients,” said Angela I. Gamalski, who advises large and small companies on compliance and regulatory matters at the law firm Honigman LLP in Ann Arbor, Michigan. Ms. Gamalski said she planned to wait until the summer to delve into the reporting requirements and what they meant for her clients, since the filing deadline isn’t until December and enforcement of the law appeared to be in flux.

Advocates for more transparency have rejected the ruling.

“This is an anomalous decision by a lone Alabama district judge based on an extraordinarily narrow view of Congress’s constitutional powers that is unsupported by precedent,” said Senator Sheldon Whitehouse, the Rhode Island Democrat who was one of the advocates. of the law. “I would urge the government to swiftly appeal to correct the incorrect decision and ensure that the law’s transparency requirements can be fully and uniformly implemented.”