The federal government has a message to small businesses across the country: “Please have your credentials.”
A proposed rule from FinCEN, the federal agency that oversees the financial system, would require anyone forming a new corporate entity to self-report all of its “beneficial owners,” meaning anyone with at least a 25 percent ownership stake or who exercises “substantial control over the corporation.” right”.
FinCEN unhelpfully defines “substantial control” as someone who “exerts material influence over important decisions”. Despite the clarity of this definition, every new company must comply or risk FinCEN enforcement action.
FinCEN said it is implementing this new reporting requirement to fill a gap in bank reporting laws. It notes that money launderers, drug dealers and other bad actors can evade detection by conducting financial transactions through anonymous corporate shells.
Money launderers will change tactics
But does anyone really believe that once this rule goes into effect in 2024, those perpetrators will dutifully self-report to FinCEN? of course not. Bad actors just find new ways to cover their tracks.
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The people whose information will actually be collected are innocent business owners who have done nothing wrong.
In effect, the burden of complying with this proposed rule falls on small businesses. It exempts “large operating companies” with more than 20 full-time employees and gross annual revenue of more than $5 million.
But it doesn’t exempt small businesses, and FinCEN estimates that more than 32 million reports will have to be filed in the rule’s first year in effect. After the initial deluge, FinCEN estimates that newly created entities will have to file more than 14 million reports per year at a cost of more than $13.1 billion.
All of this information will be collected into an ever-expanding federal net designed to monitor the financial system. The domestic surveillance program began in 1970 with the paradoxically titled Bank Secrecy Act, which put banks in the awkward position of spying on (and reporting on) their own customers.
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Since then, secrecy laws have broadened and broadened again — sweeping across more and more entities and requiring them to keep a closer eye on their clients. According to the Bank Policy Institute, the largest banks file more than 640,000 suspicious activity reports each year.
Even beyond the government’s own use of such data, this surveillance sprawl creates a honeypot for sensitive information. In 2020, a FinCEN employee leaked bank reports covering over $2 trillion in financial transactions to the media. Reports are also vulnerable to hackers and other bad actors.
The National Small Business Association, an organization that represents more than 65,000 small businesses, is rightfully concerned about its members being drawn into this intrusive federal system. The association filed the lawsuit, arguing that FinCEN’s rule violates the Fourth Amendment because it allows law enforcement to access a business’s private information without requiring a warrant.
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The association’s arguments are strongly supported by fundamentalists. As in the Supreme Court’s groundbreaking 1886 Boyd v. In the United States, the Founding Fathers enacted the Fourth Amendment in response to the British Crown’s use of dragnet enforcement tactics, which sought to prohibit “any coercive and coercive extortion” of private information except through legitimate Search warrant supported by reasons.
The Supreme Court backtracked from Boyd when it first upheld the Bank Secrecy Act in 1974, but even that decision upheld the Small Business Association’s Fourth Amendment challenge. The court narrowly upheld the secrecy law, which seeks only limited existing bank records. Two members of the majority unanimously warned that any “significant expansion of regulatory reporting requirements” would “imply a legitimate expectation of privacy” and would “raise substantive and difficult constitutional questions.”
Where will the expansion of government power stop?
By any measure, FinCEN’s rules are such a “significant extension.” It forces businesses to identify all owners under the pain of fines and penalties.
If the court approves the latest expansion of financial reporting laws, it’s easy to guess what will happen next: money launderers will find new ways to circumvent reporting laws, as they have always done before, and the government will Act again.
In other words, FinCEN is playing a cat-and-mouse game with money launderers, and the only losers are innocent people who play by its rules.
To stamp out money laundering, FinCEN will eventually have to expand its reporting laws to cover every aspect of the financial system — tracking every penny in government databases. Maybe this will stop the bad guys in the end (although that seems unlikely). But it also leaves the rest of us living in a financial fishbowl.
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To imagine what a fishbowl would look like, look at the recent efforts by attorneys general representing 10 states and Washington, D.C. to push credit card companies to monitor financial transactions for gun purchases. The attorney general defended the efforts, saying they were just another “administrative tool to collect data to enhance the work of law enforcement.”
Meanwhile, those on opposite sides of the political spectrum might want a similar administrative tool to monitor the cost of abortion or sex-change surgery.
FinCEN will never eradicate money laundering, but if current trends continue, it could eradicate financial privacy. Small businesses have the right to object.
Rob Johnson is a senior attorney at the Institute of Justice.
This is part of a series on USA TODAY’s perspectives on police accountability and building safer communities. The project began examining qualified waivers in 2021 and continued in 2022 to examine various ways to improve enforcement. This project was funded in part by Stand Together, but no editorial input was provided.