Who needs to know? Small businesses object as feds infringe on Americans' privacy.
The Financial Crimes Enforcement Network will never stamp out money laundering but, if current trends continue, it can obliterate financial privacy. Small businesses are right to object.
The federal government has a message for small businesses across the country: “Your papers, please.”
A proposed rule from FinCEN, a federal agency charged with surveilling the financial system, would require anyone forming a new corporate entity to self-report all its “beneficial owners,” meaning anyone either with at least 25% ownership stake or who exercises “substantial control” over the company.
The Financial Crimes Enforcement Network unhelpfully defines “substantial control” as someone who exercises “substantial influence over important decisions.” Although this definition is clear as mud, every new corporation would have to comply or risk a FinCEN enforcement action.
FinCEN says it is imposing this new reporting requirement to fill gaps in bank reporting laws. It points out that money launderers, drug dealers and other bad actors can evade detection by engaging in financial transactions through anonymous corporate shells.
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But does anyone really believe that, once this rule goes into effect in 2024, those bad actors will dutifully self-report to FinCEN? Of course not. Bad actors will 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 fact, the burden of complying with this proposed rule falls on small enterprises. It exempts “large operating companies” with more than 20 full-time employees and over $5 million in annual gross receipts.
But it does not exempt small businesses, which FinCEN estimates will have to file more than 32 million reports the first year the rule goes into effect. After that initial deluge, FinCEN estimates that newly created entities will have to file over 14 million reports every year, costing them over $13.1 billion.
All of this information will be hoovered up into an ever expanding federal dragnet designed to monitor the financial system. This domestic surveillance program began in 1970 with the oxymoronically named Bank Secrecy Act, which placed banks in the uncomfortable position of being required to spy (and report) on their own customers.
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Since then, the secrecy act has expanded and expanded again – sweeping in more and more entities and requiring those entities to keep ever-closer tabs on their own customers. The largest banks file more than 640,000 suspicious activity reports each year, according to the Bank Policy Institute.
Even apart from government’s own use of such data, this surveillance dragnet creates a honey pot of 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 representing more than 65,000 small businesses, rightly worries about its members being drawn into this intrusive federal regime. The association sued, arguing, among other things, that FinCEN’s rule violates the Fourth Amendment because it gives law enforcement access to business’ private information without requiring a warrant.
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The association's argument has strong originalist support. As the Supreme Court explained in the seminal 1886 case of Boyd v. United States, the Founders enacted the Fourth Amendment in response to the English Crown’s use of dragnet law enforcement tactics, and they sought to bar “any forcible and compulsory extortion” of private information except through a warrant supported by probable cause.
The Supreme Court stepped back from Boyd in 1974, when it first upheld the Bank Secrecy Act, but even that decision supports the Small Business Association's Fourth Amendment challenge. The court narrowly upheld the secrecy act, which sought only limited existing bank records. And two members of the majority filed a concurrence warning that any “significant extension of the regulations’ reporting requirements” would “implicate legitimate expectations of privacy” and would “pose substantial and difficult constitutional questions.”
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By any measure, FinCEN’s rule is such a “significant extension.” It forces businesses to identify all their owners upon pain of fines and penalties.
And if the courts rubber stamp this latest expansion of the financial reporting laws, it is easy to guess what will happen next: Money launderers will find some new way to avoid reporting laws, as they always have before, and the government will respond by expanding its reporting laws yet again.
In other words, FinCEN is playing a cat-and-mouse game with money launderers, and the only losers are the innocent people who comply with its rules.
To stamp out money laundering, FinCEN would eventually have to expand its reporting laws to cover every facet of the financial system – tracking every dollar and cent in a government database. Maybe that would finally pin down bad actors (though even that seems unlikely). But it would also leave the rest of us living in a financial fishbowl.
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To imagine what that fishbowl would be like, look no further than the recent efforts of attorneys general representing 10 states and Washington, D.C., to push credit card companies to monitor financial transactions for purchases of guns. The attorneys general defend such efforts as merely another “administrative tool to gather data that would enhance law enforcement’s ability to do its job.”
Those on the opposite side of the political spectrum, meanwhile, might wish for a similar administrative tool to monitor payments for abortions or sex-reassignment surgeries.
FinCEN will never stamp out money laundering, but, if current trends continue, it can obliterate financial privacy. Small businesses are right to object.
Rob Johnson is a senior attorney at the Institute for Justice.
This is part of a series by USA TODAY Opinion about police accountability and building safer communities. The project began in 2021 by examining qualified immunity and continues in 2022 by examining various ways to improve law enforcement. The project is made possible in part by a grant from Stand Together, which does not provide editorial input.