Placeholder image of the US Department of the Treasure building, relative to the Corporate Transparency Act

Michigan Small Business Group Sues Feds Over Corporate Transparency Act

March 27, 2024

The Small Business Association of Michigan has filed a lawsuit that challenges the constitutionality of a federal law requiring businesses to report their ownership to the government.

SBAM, which represents more than 32,000 small business owners across the state, contends the Corporate Transparency Act violates constitutional protections guaranteed in the Fourth Amendment against unreasonable search and seizure.

Filed late Tuesday in U.S. District Court for the Western District of Michigan in Grand Rapids, the lawsuit argues that affected businesses must submit proprietary and sensitive information — including passport numbers or drivers’ license numbers — to a federal law enforcement agency without ever having been accused of violating any law.

“We believe that the Corporate Transparency Act violates the Fourth Amendment because it unlawfully or unconstitutionally authorizes the search and seizure of sensitive information on millions of business owners and people who don’t even own the business but may have some substantial control over the business,” Small Business Association of Michigan CEO Brian Calley told Crain’s Grand Rapids Business.

“These are people that are not suspected of any wrongdoing. It’s literally just creating a huge cache of information on small business owners,” Calley said, noting that while the law portends to focus on corporations, “make no mistake that it is individual citizens whose personal information has to be provided to a law enforcement agency of the federal government.”

“If we open the door to the government collecting information on individuals … and say it’s OK in that situation, it really does chip away at that requirement that the government and law enforcement have some reason to collect information,” he said. “That’s where this is such a problematic piece of legislation and new law that’s in place.”

SBAM filed the case against Secretary of the Treasury Janet Yellen and FinCEN with co-plaintiffs that include the 4,000-member Chaldean American Chamber of Commerce in Farmington Hills; Steward Media Group LLC and Power Connections Co. LLC, both in Bloomfield Hills; and Semper Real Estate Advisors LLC in Rochester. Derek Dickow, who holds stakes in Steward Media Group and Power Connections, and Timothy Eisenbraun, who holds an interest in Semper Real Estate Advisors, also are named as plaintiffs.

Attorneys D. Andrew Portinga, Stephen van Stempvoort and Amanda Rauh-Bieri of Miller, Johnson, Snell & Cummiskey PLC’s Grand Rapids office represent SBAM and the other plaintiffs. The case was assigned to Judge Robert Jonker.

The lawsuit asks Judge Jonker to declare the law unconstitutional and issue temporary and permanent injunctions against enforcement and to prohibit FinCEN from sharing or disclosing data collected.

In court documents, SBAM’s attorneys wrote that “instead of meaningfully advancing its stated goals, the CTA imposes significant burdens, especially on small businesses and their owners, investors, directors, and officers.”

“And the CTA allows all of this to occur without any court oversight over any step of the process. The Fourth Amendment does not allow the warrantless, suspicionless searches of American citizens and companies that the CTA authorizes wholesale,” according to the court filings. “The CTA may make it easier for law enforcement agencies to prosecute American citizens. But that does not mean that the courts can overlook its significant Constitutional flaws.”

FinCEN estimates that the law will affect 32.5 million businesses and cost $21.7 billion to comply with in 2024, according to court documents.

Addressing illicit activities

The bipartisan Corporate Transparency Act that Congress enacted in 2021 and that took effect Jan. 1 targets illegal activities such as using shell companies for money laundering, terrorist financing and tax fraud. The law requires legal business entities registered with a state to report their beneficial owners to the U.S. Department of Treasury’s Financial Crimes Enforcement Network, or FinCEN.

“Around the world, opaque corporate structures make it easier to conceal illicit activity and launder ill-gotten gains, and in the case of corrupt actors, facilitate theft from innocent populations often for direct personal gain,” FinCEN Director Andrea Gacki said during an address last month at an anti-money laundering symposium in Puerto Rico. “Access to beneficial ownership information will enhance our law enforcement colleagues’ abilities to investigate, prosecute, and disrupt financial crimes; it will also facilitate compliance by financial institutions with their customer due diligence requirements.”

The U.S. “must do its part to align” with global regulatory standards and “establish a robust beneficial ownership reporting regime,” Gacki said.

The law defines beneficial ownership as anyone who has an ownership interest of 25% or more in a business, a majority of voting ownership, or someone who exerts “substantial control” over the entity, such as executives, senior officers and board directors — even if they do not hold an ownership stake in the company.

Business entities must update their filing to FinCEN when a change occurs. That could be the sale of the business, an exit by a limited partner, the relocation of a business or a change of address for a director. Failure to file required disclosure forms could result in civil or criminal penalties that include fines of $500 per day, or up to $10,000, and a possible two-year prison sentence.

The law exempts from reporting requirements privately owned businesses that have more than 20 full-time employees and more than $5 million in annual sales.

Vagueness poses challenges

The SBAM lawsuit contends that “substantial control” is a vague term that’s left to wide interpretation and requires “a series of judgment calls to be made in terms of which management in an organization or potentially external stakeholders derive some benefit from the business,” Calley said. “When does it become ‘substantial’ that they have to report?”

The SBAM lawsuit also challenges the Corporate Transparency Act as exceeding the authority of Congress to regulate commerce. That’s the same argument the National Small Business Association successfully used in an Alabama case in which a federal judge this month declared the law unconstitutional.

“By imposing requirements on the mere act of entity formation without any relationship as to whether the formed entity will engage in commercial activity, the CTA exceeds Congress’s power to regulate interstate, foreign, and Indian commerce,” the SBAM case contends.

Meanwhile, a federal court’s March 4 ruling on the law has limited scope and only applies to National Small Business Association members. FinCEN issued a notice on March 11 that it planned to appeal the ruling in Alabama.

Lack of awareness persists

Despite federal rules implementing the law and reporting requirements that took effect Jan. 1, few business owners are aware of the Corporate Transparency Act, Calley said. He speaks often about the law to groups and via SBAM’s weekly online issues briefing for members.

“The overwhelming response is, ‘I’ve never heard of this,’ and it is in place right now,” he said.

Under the law, a company created or registered to do business prior to Jan. 1, 2024, has until Dec. 31 to file an initial beneficial ownership information report with FinCEN through an online portal.

A company created or registered on or after Jan. 1, 2024 and before Jan. 1, 2025 has 90 days to file from the date when it receives notice from the state that its registration is effective. Companies formed or registered on or after Jan. 1, 2025 will have 30 days to file an initial report to FinCEN.

A first for SBAM

SBAM regularly advocates on public policy issues at the state level and has filed amicus briefs in the past in lawsuits brought by other parties. The challenge to the Corporate Transparency Act represents a first in pursuing its own litigation challenging a federal law.

“We have a really important constitutional question in front of us: Can you require individuals to report sensitive information to law enforcement, even if they are not suspected of doing anything wrong?” Calley said. “In this case, it’s such an expansive and problematic new law that is aimed squarely at small businesses that we really couldn’t stay on the side and do nothing.”

Calley expects to see other lawsuits by business groups arise across the nation. He hopes that court challenges will ultimately drive Congress to revisit the law and pursue other ways to crack down on illegal activities that the Corporate Transparency Act targets.

“Clearly, law enforcement needs to aggressively root out and prosecute those offenders, but they cannot do it at the expense of treating every single small business owner as though they were a criminal,” he said. “It’s just not an acceptable solution. Our hope is that Congress will just go back to the drawing board and say, ‘This was just not well thought out, it’s not constitutional.’”

By Mark Sanchez, courtesy of Crain’s Grand Rapids Business

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