Texas is known as the Lone Star State, due to a period of independence in the mid 19th century, which is reflected in the state flag. A Texas court has recently applied the independence which states retain under the Constitution to beneficial ownership reporting.
On 3 December, a federal district court in eastern Texas issued an injunction against implementation of the Corporate Transparency Act (CTA) 2019. The injunction applies across the whole US and has halted the creation of a central beneficial ownership register for use by US law enforcement. The US government agency leading this work, the Treasury’s Financial Crimes Enforcement Network (FinCen) has lodged an appeal against the injunction.
The impact of the injunction (even if the appeal is successful and it is lifted) will be felt beyond US shores and its ripples will disturb efforts to create beneficial ownership registers across the globe. It will give governments legislating for beneficial ownership registers another reason to pause and to consider their position, especially those in a federal system. The Texan court injunction is the latest in a series of developments that have pushed back against the drive to collect beneficial ownership to combat financial crimes and improve the integrity of financial systems (see our blog from 2 December, “Who should get the keys to beneficial ownership information?”)
The Texan injunction has not caused the same shockwave for beneficial ownership that the European Court of Justice’s rule in November 2022 provoked. This is probably because the Texan court injunction was based on a constitutional argument rather on a privacy argument. The Texan court ruled that Congress had overstepped its constitutional mandate by legislating on issues that should be decided at state level. In the US, business registration and much company law is set by the individual states, not the federal government in Washington DC. Courts in other states have disagreed and not accepted the argument that the law is unconstitutional. During the legislative process, the CTA had strong support from both Republicans and Democrats as well as the support of the then President, Donald Trump.
While the arguments used to gain the injunction were constitutional, the motivation behind bringing the case may well be privacy related. There has been considerable commentary in the US (especially from the legal profession) regarding the privacy implications of the CTA’s beneficial ownership reporting obligations. For example, in the immediate aftermath of the injunction, one lawyer anticipating that the injunction may well be overturned, publicly advised companies to continue with their beneficial ownership filing obligations “if there are no privacy concerns”. Another lawyer pointed out that FinCen’s collection of this information will create a database that will be attractive for criminals to hack as it will contain so much personal information.
For governments outside of the US, it will re-ignite the debate about the level of government that should legislate on beneficial ownership. In other countries with federal systems, like in the US, business registration and company law tend to be matters for sub-federal government levels such as states or provinces as in Argentina, Canada and Australia, for example. However, beneficial ownership registers are a tool to deal with transnational threats from money laundering, terrorist financing and other financial crimes which are seen as national security issues and therefore the remit of federal level government.
Those concerned about the impact that beneficial ownership reporting may have on privacy will see that there are other arguments delay or stifle laws on the topic. The Texan court injunction may inspire similar cases not only in other US states but in other countries that are legislating for beneficial ownership reporting systems. These privacy concerns need to be addressed even in cases, such as the US, where the register is not intended to be public. Lack of trust in government and government information systems can feed concerns about how the information will be used and how well it will be protected from hacking and criminals.
So, what can national governments do to ensure that beneficial ownership legislation can be passed that meets privacy concerns:
• Undertake a thorough assessment of the risks that money laundering, terrorist financing and other transnational crimes pose to the country, its financial system and economic stability and especially the role that all types of legal entities and legal arrangements (e.g. trusts) can play in facilitating those crimes,
• Develop a strong rationale for legislating on beneficial ownership and demonstrate that a register is in the national interest and part of the national response to transnational financial crimes,
• Build in safeguards to the legislation that protect privacy where there is a genuine threat to ordinary citizens’ privacy (rather than just protecting the wealthy or influential).
