Since at least the Progressive Era, American governance has been characterized by a federal bureaucracy with ever-expanding regulatory power. Agencies like the EPA, SEC and IRS can dictate or even ruin citizens’ lives. I have argued on this site that, when mixed with state and local rules (see occupational licensing), it amounts to a form of “soft tyranny” in which basic, necessary everyday life activities are made illegal. The Treasury Department’s Beneficial Ownership Information (BOI) reporting requirement, if it takes effect, would add to this trend. While its goal is to make society more secure, in practice, it extends the federal government’s reach into the private affairs of individuals, and adds costs that could cripple small businesses.
Introduced in 2021 under the Democrat-sponsored Corporate Transparency Act (CTA), the rule aims to prevent illicit financial activities such as money laundering, tax evasion and financing of terrorism. The BOI reporting requirement, enforced by the Financial Crimes Enforcement Network (FinCEN), calls on most U.S. corporations, limited liability companies (LLCs), and similar entities to disclose detailed information about their “beneficial owners”. A beneficial owner is defined as anyone who owns at least 25% of a company or exercises significant control over it, such as via board positions. The information to be reported includes names, birthdates, addresses, and identification numbers. The law was slated to go into effect this year, but is now held up in appeals court due to a Texas judge who ruled it unconstitutional.
Proponents argue that this data collection is needed to combat financial crimes by shining a light on opaque corporate structures that criminals exploit to hide illicit activities. The idea is that a centralized database of beneficial ownership will provide law enforcement with tools to prosecute crimes involving shell companies and other complex arrangements.
But BOI reporting imposes significant compliance costs on businesses – namely, small businesses that lack the time and funding to navigate such demands. Companies will need to track down and verify information on their beneficial owners, prepare detailed filings, and potentially hire lawyers to ensure compliance. Non-compliance could result in fines of up to $10,000 or prison, adding further risk for entrepreneurs who already operate in a shaky economy.
For individual business owners, the invasion of privacy is particularly troubling. This mandate creates a national registry of those involved in private enterprises for government officials to access. The Treasury Department has recently experienced data breaches, and runs that same risk with FinCen. It’s worth noting that much of the point of the LLC business structure, in particular, is to create veils of anonymity around individuals and their assets, so that they’re less subject to frivolous lawsuits. This BOI rule may negate that.
For this reason, various small business alliances, including the National Federation of Independent Business, challenged the law in court.
Despite the government’s claims, the BOI requirement is unlikely to deliver on its promise of reducing financial crime. Criminal enterprises have long shown an ability to adapt to new regulations, finding loopholes and alternative methods to evade detection. The latest example is through cryptocurrency, the anonymity of which allows shell companies to transfer funds – a trend that BOI is designed in part to crack down on. But it is naïve to think that bad actors, many of whom operate across borders and in jurisdictions with weak oversight, would be deterred by this U.S.-centric reporting requirement.
Instead, the law will disproportionately harm law-abiding individuals and businesses that lack the expertise to comply, while opening up their data to be hacked. In this sense, the BOI requirement may unintentionally harm the people it claims to protect.
Speaking of “protection”: does Treasury really think it will protect the average American through BOI, and is the heightened enforcement needed for success really worth it?
This is the debate about tradeoffs that underlies every government security effort. The War on Terror may prevent some terrorism, but also created new foreign wars, domestic surveillance, and millions of Americans getting frisked at airports. The War on Drugs brought that same invasiveness into urban neighborhoods. The aforementioned licensing rules provide some degree of public health & safety, but are mostly just a protectionist racket.
BOI will increase government surveillance on millions of Americans, but how many actual crimes will it stop? Don’t expect Treasury to give a coherent answer.
The prevention of some corporate crime may, in the spirit of American federalism, happen through decentralization to the states. Some state governments, such as New York and California, already have BOI-style mandates. Others do not – which is likely one reason they’re considered more business friendly. The point is that by having different policies across 50 states, we can zero in on what compliance efforts are effective, and which are excessive.
But the Treasury Department, through FinCEN, just adds another layer to all this. It reinforces the fears that many Americans have about the growing power of unelected agencies to spy on and regulate them. Hopefully BOI will be thrown out in court.
Cover image use authorized under the Creative Commons Attribution 2.0 Generic license.
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