For Whom Does the Bell Toll? It Tolls for CTA

by Samuel Handwerger, CPA 

University of Maryland Justice for Fraud Victims (JFV) student volunteers have experienced exciting times lately. In the past several months, they've completed two forensic accounting cases that were used in court, while also investigating numerous other potential fraud victims in search of evidence.

JFV provides our student volunteers with invaluable real-life experience, something they deeply appreciate since cases often develop in unpredictable ways. This week brought another interesting twist, as our justice system created an unexpected turn in some of our recent casework. It all began with JFV assisting several homeowners’ associations (HOAs) in their efforts to comply with a federal law, the Corporate Transparency Act (CTA).

You might wonder how JFV work relates to this law. That's a great question with a compelling answer tied directly to fraud prevention—the very heart of JFV's mission.

The Corporate Transparency Act, signed into law in 2021, took effect at the beginning of 2024. It requires certain small companies to file beneficial ownership information (BOI), essentially disclosing who their true owners are. The legislation affected an estimated 30-plus million businesses.

Among these, many are HOAs. And given these organizations' small size, their boards often need outside guidance. That’s where JFV volunteers come in…providing guidance for compliance.

But why are fraud fighters concerned about this? The CTA was enacted as the federal government's solution to identifying owners of "shell companies." States grant charters for Limited Liability Companies (LLCs), and typically allow ownership anonymity. While this can protect legitimate business owners from disgruntled customers, it has unfortunately created a precedent for using LLCs to shield money laundering operations. The term "shell company" refers to businesses that serve merely as fronts for money laundering, with anonymity making it difficult for federal authorities to identify the bad actors.

This loophole has long frustrated federal anti-money laundering efforts to crack down on shell companies…they can’t easily identify the owners. The CTA was passed to require disclosure of beneficial owners (BOIs) from companies that fit the typical profile of shell companies used by money launderers. That’s why larger companies are exempt from the requirements.

This is where JFV enters the picture, helping applicable HOAs comply with the law, which had a first-year filing deadline of December 31, 2024. And our student volunteers have been working diligently on this task.

Now they're getting a taste of the real world. In my 40-plus years as a CPA, I've seen these scenarios repeatedly: Congress passes a law, Congress repeals the law. Congress passes a law; the courts overturn it on constitutional grounds. In the compliance world it can be frustrating: learning to comply, implementing changes, and only to be told, "Never mind, the law's gone."

On December 3, 2024, the CTA fell victim to this familiar pattern when a federal district court issued a temporary nationwide injunction. In a 79-page opinion, the court examined the law from multiple angles and couldn't find constitutional justification, concluding that the federal government had overstepped its bounds.

Among the federal government's many defenses rejected by the court was the Commerce Clause of the Constitution—a concept familiar to many Smith business students at UMD. The Commerce Clause gives the federal government authority to regulate interstate commerce to ensure a viable economic system despite states' jurisdictional powers. Fair and open trade is central to a functional “United States.”

However, the District Court couldn't find how the CTA and its requirements supported such interstate commerce. Instead, they found it violated the core principle of our dual system of government—the balance between states' rights and federal powers. The court went so far as to call the CTA a "quasi-Orwellian statute"—strong language indeed.

While stopping short of ruling on constitutionality itself, as the court was only asked to consider an injunction, it affirmed a nationwide injunction despite federal government objections, effective immediately. So, the law is now suspended and will await further action within the judicial system.

And what about our JFV volunteers? Tasting firsthand all the nuances of that real-world experience they crave, these students had just finished addressing compliance issues for our friendly neighborhood HOAs. Oh well, at least they’ll be ready if it comes back to life. 

Samuel Handwerger, CPA, is a full-time lecturer for the Department of Accounting and Information Assurance in the University of Maryland’s Robert H. Smith School of Business, where he also directs the school’s Justice for Fraud Victims initiative.