‘Corporate Transparency’ Won’t Put a Dent in Money Laundering, but It Will Hurt Small Business

Angela Marsden recently received a gut punch from her local government, and she’s about to receive another from Congress. The owner of Pineapple Hill Saloon & Grill in Los Angeles posted a video of a movie company’s government-approved outdoor restaurant facility while hers, just a few feet away, was banned.

Now, Congress is set to put a new regulatory burden on millions of small businesses already reeling from seemingly arbitrary COVID-19 shutdowns via the Defense Authorization Act.

The latest gut punch is the Corporate Transparency Act, an anti-money laundering bill now rolled into the Defense Authorization bill. While it offers worthwhile needed reforms, it will require the smallest of small businesses – the vast majority – to review, report, file and keep up to date their “beneficial owners” with Treasury’s Financial Crimes Enforcement Network (FinCen).

Most have never even heard of FinCen, and the legislation shifts the burden from large banks who understand it to millions of small businesses who don’t and who can’t afford it. If they don’t comply, the Angela Marsdens of the country would face the threat of $10,000 in fines and/or two years in jail.

While the Corporate Transparency Act’s proponents hope to stop criminals from laundering money through corporate shell companies, this legislation will not do the job. No one has ever shown small companies are a problem, but there is ample evidence to suggest big banks are.

The legislation will not work because it requires filing any change in reportable information “not later than one year after the date on which there is a change in beneficial ownership.” It is clear – almost guaranteed – if the bill passes, you will see fraudsters buy legitimate businesses, use them as money-laundering conduits for 11 months and then dissolve them. Just wash, rinse and repeat.

Another exemption actually makes charities and nonprofits available to money launderers. Nonprofits can funnel money and transact business like anyone else, and anyone can start or buy a nonprofit. Just fill out the long form for the exemption, and you greatly diminish audit risk. Or better yet, form a 501(c)3, give up the exemption and then you have six months to freely launder money with no reporting requirement before closing the doors.

The Congressional Budget Office estimates “that the total costs to comply with the mandate would be substantial” because of the number of the businesses it impacts. Using the Census Bureau’s published figures, 89 percent of New York’s 465,566 small business firms are affected, 80 percent of West Virginia’s 27,749 firms, 86 percent of Wyoming’s 18,125 firms, 86 percent of Michigan’s 174,092 firms, and 89 percent of California’s 763,803 firms would meet the criteria.

So, who pushes this? The international Financial Action Task Force, which the United States helped establish. But for years, the United States avoided buying into the task force’s existing 28 European members’ view that America must collect this information just like the Europeans, despite a European money-laundering detection success rate worse than ours.

Law enforcement’s desire for every possible tool to fight crime also drives the Corporate Transparency Act. But the worthwhile interest of American law enforcement must always be tempered by the Constitution and good sense. FinCen already collects 20 million different forms annually. These forms are available to law enforcement and could be useful, but few use them in investigations.

Laundering dirty money is an exercise without borders, laws, morals and constraints. The vast bulk of money laundering takes place through the very institutions excempt from the Corporate Transparency Act – banks, insurance companies, exchanges, etc.

Instead of generating more paperwork and creating another government database of personal information, Congress should look for existing or better solutions. First, try the other anti-money laundering improvements before pushing the Corporate Transparency Act. Or use the $136 million of taxpayer money required just to set up a new warehouse for this folly in the development of an AI financial analysis software tool for money flows in banks and use innovative machine learning to detect the problem. Or $136 million in block grants to increase investigative personnel would also yield more results by putting more “eyes” on “systems” of marginal utility.

Put simply, the Corporate Transparency Act unfairly places new regulatory burdens with significant criminal and civil penalties on businesses across America. Simply collecting corporate beneficial ownership has not worked in any of the 28 European countries that have implemented it. The legislation is more likely to catch good, hard-working business owners who make an honest mistake than it would the criminals. More incisive study and an effort to create constitutional, efficient and less costly solutions are certainly a better path.

Christopher A. Byrne joined the FDIC in 1982 and was later appointed the first FDIC assistant director (Investigations) in charge of what was then a corps of 1,800 FDIC bank failure investigators. He left the FDIC in 1992 and has since been in private practice concentrating in finance and related litigation, including fraud and other failures of corporate governance.


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