Senators Trying to Add Beneficial Ownership Requirements to Latest National Defense Authorization Act

COMMENTARY Markets and Finance

Senators Trying to Add Beneficial Ownership Requirements to Latest National Defense Authorization Act

Jul 3rd, 2020 8 min read
COMMENTARY BY
Norbert J. Michel, Ph.D.

Director, Center for Data Analysis

Norbert Michel studies and writes about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.
Senate Banking Committee leaders Mike Crapo (R-Wyo.) and Sherrod Brown (D-Ohio) have introduced a beneficial ownership amendment to the 2021 NDAA. Tom Williams / Contributor / Getty Images

Key Takeaways

The NDAA is all but guaranteed to pass Congress, so if the amendment sticks, small businesses will be forced to comply with a burdensome new regulatory regime.

Even though the AML rules have been expanded consistently throughout the last four decades, it remains difficult to discern any net benefit

A simple alternative to the new beneficial ownership framework would be to allow FinCEN to look at information currently provided to the IRS.

For several years now, large banks have lobbied Congress to impose a beneficial ownership requirement on small businesses. Their efforts have failed so far, but that could change soon. Senate Banking Committee leaders Mike Crapo (R-Wyo.) and Sherrod Brown (D-Ohio) have introduced a beneficial ownership amendment to the 2021 National Defense Authorization Act (NDAA).

The NDAA is all but guaranteed to pass Congress, so if the amendment sticks, small businesses will be forced to comply with a burdensome new regulatory regime. (And if it doesn’t stick, odds are that the senators will try to tack the amendment onto the next piece of must-pass legislation.)

The amendment borrows heavily from two bills that have repeatedly stalled: the House’s Corporate Transparency Act and the Senate’s ILLICIT CASH Act. It includes familiar items, such as a $500 per day civil penalty and a possible jail term for failure to file the proper forms with the federal government.

Like its predecessors, this proposal contains ambiguities that make compliance difficult, and it keeps roughly the same set of exemptions for banks, credit unions, other financial firms, nonprofits, and any business with more than 20 employees and gross receipts over $20 million.

The exemption for financial firms is due partly to the fact that they already have to comply with a burdensome set of anti-money laundering (AML) rules. That regulatory regime has expanded steadily since the 1970s, and financial companies (defined more broadly than ever) now collectively file millions of forms every year to report so-called suspicious activity.

The big problem, though, is that there is no reason to believe that this regulatory regime works as advertised. The original intent of these rules (starting with the Bank Secrecy Act of 1970) was to reduce predicate crimes, such as illegal drug distribution, rather than money laundering itself. Judged by this standard, virtually no empirical evidence supports the notion that the rules have worked. 

In fact, even though the AML rules have been expanded consistently throughout the last four decades, it remains difficult to discern any net benefit of the overall BSA/AML regulatory framework. Rep. Patrick McHenry (R-N.C.), ranking member of the House Financial Services Committee, has repeatedly asked the Treasury Department and the Financial Crimes Enforcement Network (FinCEN) for evidence—not mere anecdotes—that the regime provides a net benefit. Yet the information provided thus far, he says, “does not justify the burden placed on small businesses.”

It makes little sense to expand any part of this regime, much less apply anything like it to an even broader set of companies, few of which are likely to engage in criminal activity.

As my colleague David Burton has argued, broadening the reach of this regulatory regime, as the Crapo-Brown amendment does, “would create a large compliance burden on 11 million businesses with 20 or fewer employees and do little to aid law enforcement.”

Oddly, the U.S. Treasury has also supported these recent efforts, even though Trump administration otherwise touts its deregulatory agenda. It is even stranger that the administration would support adding a significant burden to small businesses now, in the midst of the COVID-19 economic slowdown.

As Burton and I have demonstrated, the existing AML framework now costs Americans billions of dollars per year. This conservative estimate amounts to more than $7 million for every conviction obtained, and the bulk of these AML convictions are simply add-ons, applied only after an arrest for some other crime, such as selling illegal drugs. 

Nonetheless, Congress is trying to expand this framework to small businesses.

The main point of the new beneficial ownership requirements is to force any “applicant” who wishes to form a corporation or limited liability company to file a report (with FinCEN) that contains a list of the company’s beneficial owners. As Cato’s Diego Zuluaga points out, “Bankers calling for the change argue that extending the obligation to small businesses would improve the accuracy of reporting and reduce total compliance costs.” 

Nonsense. 

The new rules might lower the banks’ total compliance costs, because the new regime would give banks access to a beneficial ownership database. But it is entirely unclear how total compliance costs would decrease. (For what it’s worth, back in 2016, the word from the banks was that a beneficial ownership framework was necessary for banks to comply with a new AML rule, one that would ultimately go into effect in 2018.) 

It is also puzzling why the U.S. would want to become more like Europe, where, as Zuluaga points out, “authorities now require beneficial ownership databases to be public.” He notes that “The United Kingdom, for example, has had a public database since 2016, but experts regard the information it contains as largely useless, riddled with inaccuracies, and ineffective.”

This lack of a benefit in Europe—just as the lack of evidence on the existing AML framework in the U.S.—is hardly surprising. Criminals, by definition, do not care what the law says. All these rules have accomplished is to saddle law-abiding citizens with a bunch of rules and regulations.

The truly sad part of this saga is that essentially all of the necessary information is already collected by the federal government. A simple alternative to the new beneficial ownership framework would be to allow FinCEN to look at information currently provided to the IRS—something already permitted for certain law enforcement purposes. 

Essentially, all that would be necessary is for Congress to force two government agencies—both bureaus of the Treasury Department—to share information with each other. 

Given the amount of time that the AML rules have been in place, it should be very easy for supporters of these new bills to demonstrate that the benefits of the AML regime outweigh the costs and justify an expansion. If they cannot do so, Congress should work to lessen the burden on ordinary law-abiding Americans rather than make it even worse.

This piece originally appeared in Forbes https://www.forbes.com/sites/norbertmichel/2020/07/01/senators-trying-to-add-beneficial-ownership-requirements-to-latest-national-defense-authorization-act/#2becc3fe59a1