SEC Charges Navy Capital in AML Failures: Say What You Do and Do What You Say
The US Securities and Exchange Commission (SEC) released a press release on January 15 announcing that it had charged Navy Capital Green Management, LLC, an investment adviser, with violations of the Investment Advisers Act of 1940 related to its Anti-Money Laundering (AML) policies and procedures.
Navy Capital agreed to a settlement offer in which they did not admit or deny the SEC’s findings and agreed to pay a $150,000 civil penalty, to cease and desist from committing any further violations, and to be censured. The charges against Navy Capital emphasize the SEC’s priority in ensuring registered investment advisers (RIAs) say what they do and do what they say.
Read the SEC’s press release here.
Currently, RIAs do not have any affirmative duties under AML rules and regulations. RIAs may implement AML policies and procedures voluntarily. If an RIA does implement AML policies, then it must ensure that it follows through with its own policies and procedures.
AML-Related Charges Against Navy Capital
The SEC charged Navy Capital with making misrepresentations related to Navy Capital’s AML policies and procedures in various investor and prospective investor materials, and for and failing to ensure that its written investor materials accurately represented its AML policies and procedures. More generally, Navy Capital represented to its investors and prospective investors that it would follow certain procedures to mitigate AML risks.
The SEC’s findings were based on the relevant period of October 2018 through January 2022 when Navy Capital was registered with the SEC. Throughout this period, Navy Capital represented to its investors and prospective investors that it voluntarily maintained robust AML policies and procedures in accordance with the USA Patriot Act, even though it was not required to do so. Navy Capital published these representations in its offering memoranda, subscription booklets and agreements, due diligence questionnaires, and internal compliance manual, which was provided to prospective investors upon request.
In several of the written investor materials, Navy Capital claimed that investment into the funds would not be complete until investors satisfied all of Navy Capital’s AML requirements. However, in several separate instances described in the SEC’s order, Navy Capital approved investments — against its own policies and procedures — without (1) obtaining documents identifying an investor’s beneficial ownership, (2) investigating reported police suspicions that a foreign entity investor’s money was possibly connected to money laundering schemes, (3) resolving contradictory beneficial ownership documents, and (4) sufficiently confirming the source of funds. Also, in violation of its own policies, Navy Capital accepted funds from bank accounts not held in the name of the subscribing investor and from investors that disclosed they had zero assets.
Applicable SEC Rules
The SEC ultimately found that Navy Capital violated Section 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8. By way of background, Rule 206(4)-7 requires an investment adviser to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act. Rule 206(4)-8 makes it unlawful for any investment adviser of a pooled investment vehicle to “[m]ake any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or [o]therwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.”
The SEC held that Navy Capital misled investors about the level of risk they were taking by investing in Navy Capital’s funds.
New RIA AML Responsibilities
In August 2024, the Financial Crimes Enforcement Network (FinCEN) issued a rule that broadens the definition of “financial institution” as used in the Bank Secrecy Act to include RIAs and exempt reporting advisers (ERAs) (some exceptions apply). FinCEN’s new rule goes into effect on January 1, 2026, and will require all RIAs and ERAs under this rule to either implement an AML program, or if they already have one, to ensure their AML policies and procedures comply with the rule.
Briefly, the rule will require RIAs and ERAs to implement a risk-based and reasonably designed AML program, file certain reports with FinCEN, keep certain records, and fulfill certain other obligations applicable to financial institutions subject to the Bank Secrecy Act and FinCEN’s implementing regulations.
For more information on FinCEN’s new rule, see our recent client alert.
Key Takeaways
RIAs should note the distinction between SEC and FinCEN requirements. The SEC does not require RIAs to implement an AML policy. For SEC compliance, RIAs should ensure that they are abiding by their policies and procedures, particularly those that stand to impact funds raised from investors. However, for RIAs to comply with FinCEN rules, they will need to implement an AML policy according to the new rule by the effective date.
Additionally, although the new Administration has promised to repeal several SEC rules, the Trump Administration’s focus remains on repealing SEC rules related to environmental, social, and governance and crypto. At this time, it looks unlikely that any rules related to proper disclosure will be affected. FinCEN’s rule is also likely to be enforced. ArentFox Schiff attorneys are closely monitoring any developments that could impact the effectiveness of FinCEN’s new rule or could impact SEC compliance.
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CMS Publishes Final Rule, Effective January 1, 2025, Addressing the Requirements for Reporting and Returning Overpayments
The standard for an “identified overpayment” under Medicare Parts A–D now aligns with section 1128J(d)(4)(A) of the Social Security Act, which incorporates by reference the Federal False Claim Act’s (the “FCA”) “knowledge” standard. The previous “reasonable diligence” standard, which, as it related to Part C, had been struck down by a Federal court, no longer applies. Under the new standard, a provider, supplier, or Medicare Advantage Organization (“MAO”) has knowledge of an overpayment when it has been identified.
Additionally, the deadline for reporting and returning identified overpayments has also been finalized. An overpayment must be reported and returned by the later of:
The date which is 60 days after the date on which the overpayment was identified, or
The date any corresponding cost report is due, if applicable.
Any identified overpayment retained after the deadline to report and return may create FCA liability.
The foregoing was finalized, as proposed in 2022, pursuant to the Calendar Year 2025 Physician Fee Schedule (the “2025 PFS”). With respect to the timeframe to report and return overpayments, the 2025 PFS suspends a person’s 60-day obligation to report and return overpayments for up to 180 days if the person, after having identified an overpayment, conducts a timely, good-faith investigation to determine whether related overpayments exist. While the 2025 PFS did not expressly define the term “good-faith investigation”, persons “can rely upon [its] plain meaning.” See 2025 PFS at 98338.
Takeaways
This legal change creates new risks for providers who fail to investigate credible information about a potential overpayment. However, this should come as no surprise, as it aligns with what the U.S. Department of Justice may already pursue against a person under the FCA—a reverse false claim. As noted in the commentary of the 2025 PFS, the FCA, from which the “knowledge” qualifier originates, contains an existing body of case law and examples to guide stakeholders and their counsel regarding if a person has the requisite knowledge to have identified an overpayment based on the facts and circumstances presented. See 2025 PFS at 98335–8.
Additionally, once a person has identified an overpayment, the 60-day obligation to report and return such overpayment begins to run. And, that deadline exists regardless of whether the overpayment has been quantified. But, because quantification takes time, the 60-day deadline may be suspended if the person needs to dive deeper into its investigation to determine if related overpayments exist. The timeline to do so, however, is only 180 days. Thus, providers should make every effort to act with “all deliberate speed”, which, in turn, may require providers with fewer resources and expertise to expend a disproportionately high amount of effort. These rules apply across all of Medicare and, thus, are applicable to all providers, suppliers, and MAOs.
Corporate Transparency Act Reporting Remains Voluntary
This Corporate Advisory provides a brief update on recent litigation regarding the Corporate Transparency Act (CTA) and its reporting requirements. It is not intended to, and does not, provide legal, compliance or other advice to any individual or entity. For a general summary of the CTA, please refer to our prior CTA Corporate Advisories from November 8, 2023, and September 17, 2024. Please reach out to your Katten attorney for assistance regarding the application of the CTA to your specific situation.
As of January 24, 2025, the Corporate Transparency Act’s (CTA) reporting requirements remain voluntary. On January 23, 2025, the Supreme Court of the United States (SCOTUS) issued an order that granted the US government’s motion to stay the nationwide injunction issued by the US District Court of the Eastern District of Texas in the case of Texas Top Cop Shop, Inc. v. McHenry (formerly Texas Top Cop Shop, Inc. v. Garland). This headline appeared to have the effect of reinstating the CTA’s reporting requirements and deadlines. However, such SCOTUS order does not appear to impact a separate stay issued against the enforcement of the CTA’s reporting rules issued by the US District Court of the Eastern District of Texas in Smith v U.S. Department of the Treasury. The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has interpreted the SCOTUS ruling similarly. Specifically, FinCEN noted: “On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop.” Accordingly, the CTA’s reporting requirements remain on hold, and reporting companies are not currently required to file Beneficial Ownership Information Reports with FinCEN, and FinCEN has stated that reporting companies are not subject to liability if they fail to file Beneficial Ownership Information Reports with FinCEN while the Smith order remains in force.
Note that this SCOTUS order relates solely on the nationwide injunction and was not a ruling on the constitutionality of the CTA.
The Supreme Court order is available here.
The FinCEN alert is available here.
Our updated CTA Corporate Advisory providing background on the Texas Top Cop Shop case is available here.
Using the False Claims Act to Police Federal Contractors’ Employment Practices
Two recent events — one settlement and one executive order — have heightened the risk that the False Claims Act (FCA) will be used as a tool to enforce the employment obligations of companies doing business with the federal government.
First, on January 16, 2025, the Department of Justice (DOJ) announced a settlement with Bollinger Shipyard. DOJ alleged that Bollinger violated the False Claims Act by knowingly billing the US Coast Guard for labor provided by workers who were not verified in the E-Verify system. Under FAR 52.222-54, federal contractors are required to enroll in the E-Verify program and verify the employment eligibility of all new employees as well as verify the eligibility of existing employees before assigning them to a contract. This is the first case we are aware of where DOJ has used the FCA to enforce the requirement to use the E-Verify system.
Second, included among the flurry of “Day-One” executive orders issued on January 21, 2025, the Trump Administration issued an executive order entitled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity.” Among other things, this sweeping order addressed the “Federal contracting process” in Section 3(b).
Section 3(b) instructs the Office of Federal Contract Compliance Programs to “immediately cease . . . Holding Federal contractors and subcontractors responsible for taking ‘affirmative action’ [and] Allowing or encouraging Federal contractors and subcontractors to engage in workforce balancing based on race, color, sex, sexual preference, religion, or national origin.” (emphasis added).[1] That section further purports to prohibit federal contractors from advancing diversity initiatives by directing that “the employment, procurement, and contracting practices of Federal contractors and subcontractors shall not consider race, color, sex, sexual preference, religion, or national origin in ways that violate the Nation’s civil rights laws.”
To give teeth to this new mandate, the executive order attempts to bring its requirements within the purview of the FCA by providing:
(iv) The head of each agency shall include in every contract or grant award:
(A) A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code; and
(B) A term requiring such counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.
There is tension between this directive and current law. For example, in Escobar, the Supreme Court expressly rejected the notion that the government can establish materiality for FCA purposes through an agreement term. “The materiality standard is demanding. . . A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment. Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.” Universal Health Serv. Inc. v. United States ex rel. Escobar, 579 U.S. 176, 194 (2016).
Further, there are few cases where the FCA was used to enforce a contractor’s employment practice obligations under current law. In Hill, the US Court of Appeals for the Seventh Circuit upheld the dismissal of an FCA case where the whistleblower alleged that the city of Chicago failed to follow its required affirmative action hiring plan. United States ex rel. Hill v. City of Chicago, Ill., 772 F.3d 455 (7th Cir. 2014). The court in that case held that the city’s implementation of a program that was different from the plan could not trigger the knowing element required for a false claim. Id. at 456.
Notably, the anticipated agreement clause and certification required by the executive order do not prohibit all diversity programs, but only those that “violate any applicable Federal anti-discrimination laws.” Accordingly, to be actionable under the FCA a plaintiff would likely need to show that a defendant knew at the time of its certification that it intended to violate applicable law.
[1] On Friday, January 24, 2025, Acting Secretary of Labor Vince Micone issued Secretary’s Order 03-2025, which directs “all DOL employees” to “immediately cease and desist all investigative and enforcement activity under the rescinded Executive Order 11246.” The order clarified that it applied to “all pending cases, conciliation agreements, investigations, complaints, and any other enforcement-related or investigative activity.” Notably, it provides that investigations or reviews under Section 503 and VEVRAA are “held in abeyance pending further guidance.”
In Confirmation Hearings, AG Nominee Pledges to Defend the Constitutionality of the False Claims Act
What may have seemed like an out-of-the-blue question to the casual observer was no surprise to those who represent individuals and entities in the health care and life sciences industries: U.S. Attorney General (AG) nominee Pam Bondi was asked to share her thoughts on the constitutionality of the False Claims Act (FCA) and its qui tam provisions during her January 15, 2025, confirmation hearings.
Senator Chuck Grassley (R-IA) prefaced his questioning by noting that the FCA is “central to fighting government waste and fraud.” And since 1986—when Grassley authored amendments that modernized and strengthened the Civil War-era statute—he has been a fierce defender. Since the 1986 amendments, the FCA has brought in $78 billion for the federal government, with more than $2.9 billion recovered in fiscal year (FY) 2024.
“Most of that is due to patriotic whistleblowers who found the fraud and brought the cases forward at their own risk,” Grassley said.
The U.S. Supreme Court, the senator said, “has long upheld the law’s constitutionality.” Yet Justice Clarence Thomas, in a 2023 dissent,[1] wrote that “[t]he FCA’s qui tam provisions have long inhabited something of a ‘constitutional twilight zone,’” and posited that Article II of the Constitution does not permit Congress to “authorize a private relator to wield executive authority to represent the United States’ interests in civil litigation.” Subsequently, on September 30, 2024, a Middle District of Florida District Judge followed suit and declared the provisions unconstitutional.[2] Former AG William Barr, Grassley noted, once objected to the FCA’s whistleblower provisions—and then retracted that objection in confirmation hearings held six years earlier, to the day.
So, what is Bondi’s position on the constitutionality of the FCA’s qui tam provisions?
“I would defend the constitutionality, of course, of the False Claims Act,” the nominee said.
“If confirmed, would you commit to continuing [the Department of Justice’s (DOJ’s)] defense of the constitutionality of it—and will you ensure the entire staff and funding levels, to properly support and prosecute False Claims cases?” Grassley asked.
“Senator, the False Claims Act is so important and especially by what you said, with whistleblowers, as well, and the protection, and the money it brings back to our country. Yes, sir,” Bondi answered.
As we noted in our blog post analyzing the DOJ’s FY 2024 FCA statistics, also released on January 15, last year whistleblowers filed the highest number of qui tam actions in history—979—with the government and whistleblowers, combined, being parties to 588 settlements and judgments. FCA settlements and judgments topped $2.9 billion in FY 2024, with relator share awards totaling nearly $404 million.
The Middle District of Florida’s Dismissal with Prejudice
The U.S. Court of Appeals for the Eleventh Circuit has yet to weigh in on the matter after U.S. District Court Judge Kathryn Kimball Mizelle dismissed an FCA case brought by a qui tam relator based on her ruling that the qui tam provisions are unconstitutional.
Judge Mizelle, who was appointed to the federal bench by President Trump in his first term, dismissed the suit brought by Clarissa Zafirov, a physician who sued her former employer and others in an otherwise ordinary FCA case for allegedly misrepresenting patients’ medical claims to Medicare using false diagnosis codes to obtain inflated reimbursements.
“Zafirov has determined which defendants to sue, which theories to raise, which motions to file, and which evidence to obtain….Yet no one—not the President, not a department head, and not a court of law—appointed Zafirov to the office of relator,” Judge Mizelle wrote on September 30, 2024. “Instead, relying on an idiosyncratic provision of the False Claims Act, Zafirov appointed herself. This she may not do.”
The plaintiffs appealed to the Eleventh Circuit. Senator Grassley’s office filed an amicus brief on January 15, 2025, “strongly urging the Eleventh Circuit to reverse the lower court’s flawed decision and uphold the constitutionally sound qui tam provision.”
Specifically, Grassley’s 33-page brief rests on three tenets:
Qui tam statutes are deeply rooted in history: Indeed, qui tam provisions were enacted during the First Congress by the framers of the Constitution and are deeply embedded in the United States’ constitutional history.
Courts consistently find the FCA constitutional: Courts that have addressed this issue have uniformly concluded that the qui tam provision is constitutional.
The FCA is an effective (and cost-effective) leveraging of private knowledge and resources: The FCA, strengthened by the qui tam provision, is an effective tool to fight fraud, deter would-be fraudsters, and protect the public from harm.
“And the FCA is a resounding success, as Congress and the Executive Branch have both acknowledged,” Grassley wrote, noting that in health care—the largest area of FCA enforcement—qui tam whistleblowers have prevented harm and have uncovered fraud of which the government might not have been aware. “Additionally, an incalculable but astronomical amount of taxpayer money is saved via the deterrent effect of the whistleblower provisions.”
The United States filed a 77-page opening brief on January 6, 2025, and requested oral argument in the case, noting the importance of the issue. The district court’s decision, the government argued, conflicts with the prior opinions of four U.S. Courts of Appeals, as well as every other court to have considered the question. While the issue applies to cases where the government has not intervened, the government intervened in Zafirov for the limited purpose of defending the qui tam provisions. Specifically, the United States argued that:
Supreme Court precedent is clear that the qui tam provisions comport with Article II (e., relators do not exercise executive power);
the district court erred in applying the Appointments Clause to private citizens (e., relators do not exercise significant government authority and do not occupy a continuing position established by law); and
the district court erred in assessing and dismissing historical evidence bolstering the constitutionality of the FCA’s qui tam provisions, including early qui tam statutes comparable to the FCA.
What This Means for Health Care Enforcement
What might this mean for health care fraud enforcement, as we enter President Trump’s second term? As we noted in our recent blog post on the DOJ’s FCA recovery statistics, the fact that the first Trump administration saw nearly 370 more health care cases brought by relators than during the Biden administration, and the highest number of health care-related FCA cases brought by the DOJ in a single year—combined with Bondi’s support of the constitutionality of the statute—indicates the DOJ’s continued interest in pursuing FCA cases. Focusing on the health care sector continues to generate more FCA enforcement and recovery than any other industry, a trend likely to continue even if we may not yet know if Bondi’s leadership will ultimately prove more favorable to business interests. Stay tuned for more to come once the Eleventh Circuit issues its highly anticipated decision on the constitutionality of the FCA’s qui tam provisions.
Epstein Becker Green Attorney Ann W. Parks contributed to the preparation of this post.
ENDNOTES
[1] See U.S. ex rel. Polansky v. Executive Health Resources, 599 U.S. 419 (2023). In addition to Justice Thomas’ dissent, Justices Kavanaugh and Barrett in a concurrence acknowledged that “[t]here are substantial arguments that the qui tam device is inconsistent with Article II” and suggested that the Court consider those arguments in an “appropriate case.”
[2] See U.S. ex rel. Zafirov v. Florida Medical Associates LLC, 2024 WL 434942 (D. Fla. Sept. 30, 2024).
Business Immigration in 2025: Signals from Recent Executive Orders
Immediately after assuming office on Jan. 20, 2025, President Donald Trump began issuing numerous executive orders. While they may not immediately impact business immigration, many of them presage changes in the business immigration landscape. The following is an analysis of several of these executive orders from that perspective:
Protecting the United States from Foreign Terrorists and Other National Security and Public Safety Threats. This executive order largely reiterates Trump’s Proclamation 9645, Enhancing Vetting Capabilities and Processes for Detecting Attempted Entry Into the United States by Terrorists or Other Public-Safety Threats, an executive order from his previous term. It tasks various government agencies with reviewing all visa programs to prevent foreign nation-states or other hostile actors from hurting the United States. This order will most likely result in an increase in scrutiny of visa applications and an increase in processing times across the board for all business immigration. We can expect an increase in the number of visa applications subject to administrative processing. These effects may discourage business immigration as business realities clash with system slowdowns.
America First Trade Policy. This executive order largely reiterates Trump’s Executive Order 13788, Buy American and Hire American (BAHA), from his previous term. The U.S. Trade Representative has been directed to review the implementation of trade agreements to ensure they favor domestic workers and manufacturers, consistent with the principles of that prior executive order. This may lead to a tightening of the labor market, as companies could be discouraged from hiring available foreign national candidates for positions. This could lead to an immigrant brain-drain as highly skilled immigrants trained at U.S. universities and institutions potentially immigrate to countries such as Canada. The USTR’s review may also affect treaty-based visas, such as the TN, E-1, E-2, and H-1B1 visas. Trump also issued America First Policy Directive to the Secretary of State, which may result in increased scrutiny of employment-based visa applications, as BAHA did under Trump’s previous term.
Guaranteeing the States Protection Against Invasion. This executive order characterizes migration at the southern border as an “invasion” and imposes vetting requirements on those immigrating to the United States. The likely impact is to create enhanced medical and security requirements for immigrants entering the U.S. While this executive order is drafted with the southern border in focus, Customs and Border Protection and the Department of Homeland Security will likely impose additional restrictions on business immigration as well, potentially creating travel disruptions due to inconsistent experiences at points of entry.
Designating Cartels and Other Organizations as Foreign Terrorist Organizations and Specially Designated Global Terrorists. The designation of criminal organizations in the United States and Central America may portend a crackdown on and enhanced vetting of immigrants, including business immigrants, from areas where these organizations operate. This could cause slowdowns in business immigration across the southern border with Mexico.
Protecting the American People Against Invasion. This executive order expands expedited removal and revokes humanitarian parole programs created by the prior administration. Individuals who have secured status under those programs will be unable to renew work permits. It may also result in the return of “public charge” policies, which previously resulted in a slowdown for business immigrants seeking lawful permanent residency status. Furthermore, increased scrutiny and interior enforcement may lead businesses to forego hiring immigrant workers.
Protecting the Meaning and Value of American Citizenship. This executive order seeks to re-interpret the Constitution’s guarantee of citizenship for those born within the United States territory and who are subject to the jurisdiction of the United States. Notably, this executive order attempts to remove the grant of citizenship to certain business immigrants’ children born in the United States. Lawsuits have been filed challenging the impact of this executive order. This action may lead to increased difficulties for companies in recruiting and retaining foreign workers.
Conclusion
While these orders do not have an immediate impact on business immigration, they will likely cause an increase in administrative costs for companies with foreign workers and create retention challenges for companies. This may lead to an immigrant brain-drain, as highly skilled professionals, some of whom have been trained and educated in the United States, potentially seek to leave the country.
Corporate Transparency Act Reporting Remains Stayed—For Now
What Happened
On January 23, 2025, the United States Supreme Court granted the federal government’s request to stay the nationwide injunction on the enforcement of the Corporate Transparency Act (“CTA”) issued by the United States District Court for the Eastern District of Texas in Texas Top Cop Shop v. Garland et al. (Case 4:24-cv-00478).
On January 24, 2025, FinCEN posted the following update to its website:
On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.
The court in the Smith litigation (Smith v. US Department of Treasury, No. 6:24-cv-00336 (E.D. Tx. 2025)) issued an order on January 7, 2025, granted a preliminary injunction staying all reporting under the CTA.
Although FinCEN may provide additional guidance to reporting companies to modify this guidance, for now, reporting companies are still not required to file beneficial ownership information with FinCEN.
The Road Ahead
The lifting of the Texas Top Cop Shop stay and the conflict with the Smith stay is another twist in the road of what are likely to be continued protracted legal battles in these cases and in other pending lawsuits around the country that are challenging the CTA.
A three-judge panel at the Fifth Circuit in Texas Top Cop Shop will hear oral arguments on the constitutionality of the CTA on March 25, 2025. The plaintiffs may also pursue a writ of certiorari and ultimate ruling by the Supreme Court on the merits.
The government will also presumably appeal the injunction in the Smith case as well (citing the rationale of the Supreme Court’s order in the Texas Top Cop Shop case), which will introduce another round of briefing and potentially impactful orders at the appellate levels.
Additionally, the new Trump administration may take steps to limit the CTA administratively, or Congress may revoke the CTA altogether, adding another layer of uncertainty for businesses.
We’re Here to Help
We understand that many of our clients’ needs and transaction structures may require deeper analysis and that updates from FinCEN will be forthcoming. Navigating the intricacies of the CTA can be complex and our team is available to provide counsel tailored to your specific needs. We can assist you in understanding the implications of the CTA for your entities and transactions, and we can provide guidance in ensuring compliance with the new regulatory framework.
Jane Hinton, Amy McDaniel Williams, and Conor Shary contributed to this article
UPDATE: CTA Filings Remain Voluntary After Supreme Court Ruling (For the Moment)
On January 23, 2025, the Supreme Court of the United States acted to lift one of the effective nationwide injunctions on enforcement of the Corporate Transparency Act (CTA) in the Texas Top Cop Shop v. McHenry [originally Garland]case. That case was put into place by a federal district court in the Eastern District of Texas on December 3, 2024 and was subsequently appealed to the Fifth Circuit Court of Appeals, and then an application was made to the Supreme Court to stay the injunction.
A second court, Smith v. Treasury (also in the Eastern District of Texas), issued an order on January 7, 2025, after the Texas Top Cop Shop v. McHenry case was before the Supreme Court. The judge in Smith v. Treasury issued his own nationwide injunction of the CTA, on substantially similar facts and arguments as those found in Texas Top Cop Shop v. McHenry. This injunction remains in place for the moment.
FinCEN, in response to the Supreme Court ruling, issued a press release on January 24, 2025, indicating that its position is that reporting companies are not currently required to file beneficial ownership information reports with FinCEN and are not subject to liability if they fail to file this information, “while the Smith order remains in force.”
In accordance with FinCEN’s latest guidance, reporting companies may continue to voluntarily submit BOIR filings with FinCEN. Parties should remain prepared to file when and if the CTA filing obligations are reinstated in full. We will continue to follow developments and provide updates (please subscribe here).
Client Alert Update: Supreme Court Action and Treasury Department Guidance on CTA Injunction
In our previous alert, we reported that the United States Court of Appeals for the Fifth Circuit upheld a lower court’s suspension of the Corporate Transparency Act (CTA), pausing filing requirements affecting businesses ranging from startups to established companies. Yesterday, the United States Supreme Court overturned the Fifth Circuit’s decision, allowing the CTA and its filing requirements to be enforced.
However, because the Supreme Court has not yet ruled on other litigation also suspending the CTA , today the Treasury Department issued official guidance clarifying that reporting companies are still not required to file Beneficial Ownership Information Reports (BOIRs) with FinCEN.
In light of these developments, we reaffirm our prior guidance:
Reporting companies are not currently required to file BOIRs and will not face penalties for failing to do so.
FinCEN continues to accept voluntary submissions for entities that wish to proactively comply with potential future obligations.
Businesses that have already begun preparing beneficial ownership information may wish to complete the process to ensure readiness in the event FinCEN resumes enforcement of the CTA.
No Enforcement of Corporate Transparency Act Despite SCOTUS Ruling
On January 23, 2025, in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al., the Supreme Court of the United States (SCOTUS) granted the government the ability to lift the injunction which halted enforcement of the Corporate Transparency Agency (CTA) on December 26, 2024. SCOTUS also sent the case back to the Fifth Circuit Court of Appeals to be decided on the merits. Oral arguments are scheduled to take place in March 2025, meaning the future of the CTA remains in question.
However, a separate nationwide injunction, issued on January 7, 2025, in the case of Smith v. U.S. Department of the Treasury, is unaffected by SCOTUS’s order in Texas Top Cop Shop and remains in place.
The Financial Crimes Enforcement Network (FinCEN) issued the below alert on January 24, 2025:
“In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”
Companies wishing to make voluntary filings are reminded that Beneficial Ownership Information (BOI) filings are made at fincen.gov/boi. There is no fee to file.
CTA Still Enjoined: U.S. Supreme Court Grants Stay, But Second Nationwide Injunction Remains in Effect
Highlights
The U.S. Supreme Court granted a stay of an injunction suspending enforcement of the Corporate Transparency Act (CTA) and its Beneficial Ownership Information (BOI) reporting rule
A separate nationwide injunction issued by a different federal judge continues to enjoin enforcement of the CTA
Obligations under the CTA to file BOI reports currently cannot be enforced by FinCEN
Continuing a series of rapid-fire legal developments regarding the Corporate Transparency Act (CTA), on Jan. 23, 2025, the U.S. Supreme Court granted a stay of the amended injunction issued Dec. 5, 2024, by the U.S. District Court for the Eastern District of Texas. However, a separate nationwide injunction – issued by a different federal judge in Texas on Jan. 7, 2025 – continues to enjoin the Financial Crimes Enforcement Network (FinCEN) from enforcing the CTA’s beneficial ownership information (BOI) reporting deadlines.
As a result, reporting obligations under the CTA currently cannot be enforced by FinCEN. It is anticipated that FinCEN will appeal the Jan. 7 injunction.
To recap recent developments:
Dec. 3, 2024 – The U.S. District Court for the Eastern District of Texas issued a nationwide injunction enjoining enforcement of the CTA, suspending all reporting obligations under the act (Texas Top Cop Shop, Inc. v. McHenry – formerly, Texas Top Cop Shop v. Garland). This order was amended Dec. 5, 2024.
Dec. 23, 2024 – The motions panel of the U.S. Court of Appeals for the Fifth Circuit granted a stay of the district court injunction. The stay by the Court of Appeals restored initial reporting deadlines for reporting companies. FinCEN responded by issuing an alert extending initial reporting deadlines.
Dec. 26, 2024 – The merits panel of the Fifth Circuit vacated the stay issued by its motions panel, restoring the district court’s injunction and suspending reporting obligations under the CTA pending resolution of the appeal.
Dec. 31, 2024 – The Department of Justice filed an application for stay with the U.S. Supreme Court requesting that the Dec. 5 injunction be stayed or narrowed while the case proceeds through the Fifth Circuit.
Jan. 7, 2025 – The U.S. District Court for the Northern District of Texas issued a second nationwide injunction enjoining enforcement of the CTA, suspending all reporting obligations under the CTA (Smith v. U.S. Department of the Treasury).
Jan. 23, 2025 – The U.S. Supreme Court granted a stay of the Dec. 3rd injunction pending the disposition of the Texas Top Cop Shop appeal before the Fifth Circuit and the disposition of a petition for a writ of certiorari and related final judgment.
FinCEN, in an alert published Jan. 24, 2025, referenced the Jan. 7 injunction, stating that, “reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop.” FinCEN further noted that for so long as the nationwide injunction issued in Smith remains in force, companies will not be subject to liability for failure to file their BOI reports. Reporting companies may continue to voluntarily submit BOI reports.
DOJ Announces Modest Increase in FCA Recoveries, Fueled Largely by Whistleblower Lawsuits
The Department of Justice (“DOJ”) recently announced a modest increase in monetary recoveries for 2024 from investigations and lawsuits under the False Claims Act (“FCA”), which is the Government’s primary tool for combating fraud, waste, and abuse. In fiscal year 2024, the DOJ recovered over $2.9 billion from FCA settlements and judgments, marking a 5% increase over 2023’s total and the highest amount in three years. Recoveries were fueled largely by qui tam lawsuits previously filed by whistleblowers, which contributed to $2.4 billion of the $2.9 billion recovered. The number of qui tams filed last year was also the highest ever in a single year at 979 cases. While health care fraud continues to be the primary source of enforcement activity, the rise in lawsuits stemmed from non-health care related cases. This underscores the Government’s and private citizens’ intensified enforcement efforts through FCA investigations and litigation in both the health care sector and beyond.
FCA Recoveries by the Numbers
While the nearly $3 billion recovered last year resulted from a record-breaking number of 566 settlements and judgments, last year’s haul remains well below peak year recoveries, such as 2014’s $6.2 billion and 2021’s $5.7 billion. The following chart illustrates the FCA recoveries by fiscal year, showcasing monetary trends over the past decade.
Key Enforcement Areas
In announcing 2024’s recoveries, the Government highlighted several key enforcement areas, such as:
The opioid epidemic. The Government continues to pursue health care industry participants that allegedly contributed to the opioid crisis, focusing primarily on schemes to market opioids and schemes to prescribe or dispense medically unnecessary or illegitimate opioid prescriptions.
Medicare Advantage Program (Medicare Part C). As the Medicare Advantage Program is the largest component of Medicare in terms of reimbursement and beneficiaries impacted, the Government stressed this remains a critical area of importance for FCA enforcement.
COVID-19 related fraud. Given the historic levels of government funding provided as a result of the COVID-19 pandemic, the Government also continues to pursue cases involving improper payment under the Paycheck Protection Program as well as false claims for COVID-19 testing and treatment. Close to half of 2024’s settlements and judgments resolved allegations related to COVID-19.
Anti-Kickback Statute and Stark Law violations. Cases premised on alleged violations of the AKS and Stark Law remain a driving force in FCA litigation for health care providers. In the last several years, there seems to be renewed interest in Stark Law enforcement, in particular.
Medically unnecessary services. The provision of medically unnecessary health care services also remains a widely-used theory of FCA liability, despite this being a historically challenging enforcement area often involving disputes over subjective clinical decisions.