By Brian Reardon, Washington Examiner, July 3, 2023
Starting next year, millions of small business owners will get a letter from a federal agency they’ve never heard of, telling them they need to comply with a law nobody’s told them about. Most, like reasonable people, will probably think the notice is a scam and throw it away.
But doing so could result in hefty fines or even jail time because the scam is a new law called the Corporate Transparency Act, a particularly ill-conceived statute that manages to be both far-reaching and wholly ineffective at the same time.
Won’t the new law help federal officials identify money launderers and drug smugglers? Hardly. The CTA relies on criminals to self-report accurate information about their illicit activities without any third-party verification. As these criminals are already breaking the law, it’s hard to see how a paperwork violation will compel their good faith participation.
Under the CTA, all newly formed corporations, LLCs, and other covered entities must report the personal information of their “beneficial owners” to the Financial Crimes Enforcement Network beginning next January. The following year, all covered entities, including all corporations, LLCs, charities, and other entities with less than $5 million in revenues and 20 employees, will have to do the same, starting an annual process that FinCEN estimates will result in over 32 million separate reports.
Whose information is being reported? A “beneficial owner” is anyone with a 25% stake, on the board, in senior management, playing a significant consulting role, helping get the entity organized, or otherwise exercising “substantial control,” whatever that means.
Each covered entity will have to collect the name, address, Social Security number, and passport or driver’s license photo of the people involved and report that information to FinCEN annually or within 30 days of any changes. Noncompliance can yield fines of up to $500 a day or two years of imprisonment.
For smaller entities, the rules represent just another federal reporting requirement that demands their time but offers no real value. For more complicated operations, including charities with extensive boards and lots of volunteers, entities with layered ownership, or operations organized with multiple legal entities, collecting the necessary information could be daunting, if not impossible.
If this sounds like a train wreck, it is. Forcing millions of law-abiding business owners to report their personal information to another alphabet soup agency under the threat of jail time is not going to be effective or popular.
The good news is that Washington is beginning to recognize the coming disaster. The National Small Business Association has filed a lawsuit, NSBA v. Yellen, arguing the CTA is simply unconstitutional. If you wondered, “Under what authority is FinCEN compelling business owners to report all this personal information?”, you are not alone. The CTA is an unconstitutional info grab, and we’re confident the courts will agree.
Meanwhile, the threat of the impending rollout is clearly on the minds of some in Congress. House Financial Services Chairman Patrick McHenry (R-NC) recently wrote FinCEN asking for an update on next year’s rollout. As his letter notes: “It is concerning that with six months until its effective date, FinCEN has yet to lay out a clear plan for engagement. … It is highly unlikely that the 32 million small business owners know what FinCEN is let alone know to look for a press release on FinCEN’s website.”
Gee, that might be a problem.
McHenry also introduced legislation requiring FinCEN to delay the rollout if it hasn’t finished all the necessary tasks, including finalizing the “access rule” on who can access the database, as well as an updated “customer due diligence rule” that applies to financial institutions.
This latter rule is another trouble spot. The CTA was enacted with the support of international banks, which would like access to the new database so they can shift their obligations under the existing customer due diligence rules onto their small business customers. Their agenda is another reason why reasonable people doubt the CTA will help in the fight against money laundering. Exactly how does one launder money without a bank account?
As implementation looms, it is crucial for business owners to voice their concerns to their elected officials. The NSBA court challenge should succeed, but whether it does or not, it is unlikely to be the last word on the matter. Lots of special interests want to build and publicize these databases. Some claim to be motivated by law and order, while others want to name and shame business owners for political purposes. Both are mistaken that a massive trove of millions of names and addresses is the ticket to a better or safer world.
Brian Reardon is the president of the S Corporation Association and a former White House official at the National Economic Council.