Smart but unconstitutional? Trump appointee inverts Scalia maxim in striking corporate transparency law

"Corporate Transparency," Seattle
by Daniel Foster via Flickr CC BY-NC 2.0

A federal district court in Alabama ruled the Corporate Transparency Act, a key anti-corruption statute, unconstitutional upon the inverse of a maxim of the late Justice Antonin Scalia.

There's much commentary on the reading-people's internet about the significance of the March 1, 2024, decision, which is certain to be reviewed by the Eleventh Circuit Court of Appeals. The dry question of business regulation might not make the cut on the TikTok news cycle, meanwhile, but the issue is immensely important.

Effective in January 2024, the Corporate Transparency Act, part of the Anti-Money Laundering Act of 2020, which in turn is part of the National Defense Authorization Act for Fiscal Year 2021 ("NDAA"), requires most businesses to report their "beneficial owners" with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department. The information is not then public, but can be shared with law enforcement, including tax authorities.

The change in law has been in the works for some 20 years, conceived initially in the years after 9-11 to combat the financing of terrorism. The ABA Business Law Section has a deeper dive for subscribers.

Critically, the transparency around beneficial corporate ownership brings the United States into compliance with transnational norms. We had become something of a money-laundering haven in the world because of the secrecy we allow around ownership of corporations, namely (pun intended) anonymous shell corporations.

People who are keen to exert dark-money influence in politics, to hide assets, or to launder money, of course, tend to have a lot of it. So the law did not come about quickly or easily. But Congress was determined enough in the end to enact the law by a super-majority, overriding President Trump's veto of the NDAA.

Constitutional objections to the law are abundant, based in the First, Fourth, and Fifth Amendments, besides the limits of congressional power under Article I, as amended. It was only the latter theory on which Judge Liles Burke ruled. He concluded that the Corporate Transparency Act strays beyond the necessary-and-proper latitude afforded Congress for any of its constitutional powers, including the Commerce Clause and the Sixteenth Amendment taxing power. It's a problem in vertical federalism; if there is to be transparency in corporate beneficial ownership, then, it must come from the states. Burke is a Trump appointee.

I'm skeptical of the winning argument. Congress's powers in business regulation are substantial, and corruption and tax evasion are almost invariably interstate endeavors. Thus, the significance of the decision: for if it is right, a great deal more of our federal regulatory and taxing machinery will be suspect.

To be fair, small businesses objected to the added burdens of FinCEN compliance amid their already hefty costs in tax compliance, and I am empathetic. We might ought do something about that. But I suspect the legislative obstacles have more to do with keeping commercial-tax preparers in business and keeping the law arcane to shield loopholes, than with flat aversion to transparency.

The other constitutional objections are not frivolous, even if they don't hold up in the end; the rights-based theories have more romantic appeal to the classical liberal. The Fifth Amendment claim is based on due process, not so strong by itself; the Fourth Amendment claim is creative: search or seizure without reasonable suspicion. The First Amendment claim gave me pause: Compelled transparency compromises anonymous speech.

It happens that just last month, I (pro se) created a nonprofit entity to operate an academic research project. To free my New York nonprofit of minimum tax obligations—even though it has and anticipates no money—I applied for a 501(c)(3) determination from the IRS—which costs, by the way, a $275 tip to Uncle Sam.

The IRS informed me that upon approval, I will have to report my nonprofit's beneficial owners to FinCEN. It's irritating; mostly, I'm put off just wondering whether there will be yet another fee.  But it did occur to me that my nonprofit will be engaged in academic expression, and it might have things to say that will upset people in power. So there is a hint of Orwellianism in having to register my state entity with the federal FinCEN and identify my "beneficial owners"—remember, not even with any money in the mix.

At the same time, this is the uneasy balance we always have struck with the nonprofit tax registrations of First Amendment-sensitive enterprises, such as churches and issue advocates. In essence, this is the Citizens United problem, which I've always thought is more layered than it gets credit for. We have not found a principled way to differentiate Nike-as-speaker from the ACLU-as-speaker without some office of government problematically intervening to make the call.

Anyway, what attracted me to this ruling from Alabama is none of the above; rather, it was page one of Judge Burke's opinion. Have a read:

The late Justice Antonin Scalia once remarked that federal judges should have a rubber stamp that says STUPID BUT CONSTITUTIONAL. See Jennifer Senior, In Conversation: Antonin Scalia, New York Magazine, Oct. 4, 2013. The Constitution, in other words, does not allow judges to strike down a law merely because it is burdensome, foolish, or offensive. Yet the inverse is also true—the wisdom of a policy is no guarantee of its constitutionality. Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.

If that doesn't suck you into a 53-page opinion on financial regulation, nothing will.

For the time being, as of March 4, 2024, FinCEN has suspended reporting obligations for plaintiffs in the action only, including members of the National Small Business Association.

The case is National Small Business United v. Yellen (N.D. Ala. Mar. 1, 2024). The plaintiff is a 501(c)(6) nonprofit, I'm guessing a business league, though it sounds like a not-too-exciting football league.

Court greats both cautioned us on NYT v. Sullivan

I'm indebted to Trump Litigation Seminar student Kevin Burchill, who timely unearthed this interview with the late Justices Ruth Bader Ginsburg and Antonin Scalia by journalist and journalism professor Marvin Kalb.  From the cue linked below (at 21:42, for six or so minutes), they discuss New York Times v. Sullivan (U.S. 1964).

 

Nonetheless a First Amendment advocate, I have long shared Justice Scalia's unpopular position that Sullivan was incorrectly decided.  I don't contend that the newspaper should have lost.  In the civil rights context in which the case arose, Sullivan played a critical role in relieving segregationists of state tort law as a weapon.  However, there were many paths to that outcome that did not require the wholesale federalization and constitutionalization of state defamation torts.

The consequences, as suggested even by chapter 19 ("Back to the Drawing Board?") of Anthony Lewis's classic 1991 panegyric and case biography, Make No Law, have been disastrous, because Sullivan undermined the laboratory of common law experimentation in the states.  Today, for example, the "public interest" approach to public-figure defamation in the UK Defamation Act shows great promise as a model to balance the rights of reputation and free speech.  And other countries, such as Australia, seem to be getting along well with much more limited Sullivan-like protection for free speech on public affairs, without the big sky of democracy collapsing across the outback.  Yet we in the United States remain tethered to a near-immunity doctrine born of a bygone era.

RBG (Kalb Report)

In this interview with Kalb, Justices Ginsburg and Scalia characteristically state their opposing positions on the correctness of Sullivan, for and against, respectively.  What I find compelling, though, is that Justice Ginsburg acknowledged Sullivan's unintended problematic consequences.  Sullivan was a product of civil rights exigency, she reiterated.  But, she recognized, its doctrine was tailor-made for a press on the same page of mighty ideals in the mission and ethics of journalism.

What if, say, new technology caused mass media entry barriers to fall?  And then we had a proliferation of partisan pundits, or even disinformation, pouring through our information flows?  If Sullivan were then not up to the job, we might find our hands tied by unyielding constitutional cable.  We might flail, helpless, in trying to restore integrity to the democratic space.

Perish the thought.