Shut the Corporate Transparency Act Trap

What could possibly go wrong with a federal database run by the Financial Crimes Enforcement Network (FinCEN) that includes the date of birth, complete current address, and a “unique identifying number” from a passport or a driver’s license, as well as an image of the document from which the identifying number comes for each “beneficial owner” of some 32.6 million small corporations?

In 2021, Congress imposed that mandate to allow federal authorities to investigate and prosecute financial crimes, like money laundering. The Corporate Transparency Act is a trap that is scheduled to shut in January 2025. It promises draconian penalties for knowing or willful violations even though it is a small, easily overlooked 21-page part buried in the 1,500-page 2001 Defense Authorization Act, and is misdirected.

The Act Punishes Business Owners to Look for Matryoshka Companies

The problem according to the Federal Government is shell companies, some of which are multi-layered, like Russian nesting Matryoshka dolls. That layering of one corporation inside a second and then inside a third facilitates money laundering, drug running, and other financial crimes by hiding their owners and operations from outside viewing. (READ MORE: The Spectator P.M. Podcast Ep. 67: Starbucks Is Losing Money, So It Ousted Its CEO)

The problem is that few of the 32.6 million corporations licensed by the States or Tribes are shell corporations engaged in criminal activity. The vast majority are solo or small firm lawyers and accountants, dry cleaners, restaurants, and other small businesses that have incorporated to get liability protection and other benefits, not to engage in criminal activity. If Congress is concerned about shell corporations or nested entities, it should regulate them, not people who have incorporated for legitimate business reasons.

The people obligated to report are the corporation’s “beneficial owners,” not just the owners of the 32.6 million corporations. These include senior officers, people with the authority to appoint or remove senior officers and board members, people who exercise substantial control over the organization,  and someone who “directly or indirectly, including as the trustee of a trust or similar arrangement, exercise[s] substantial control” over the entity. This means that the FinCEN database will include the personal data of more than 32.6 million people. 

Of course, Congress exempted 24 larger and otherwise regulated entities like banks, credit unions, insurance companies, and investment advisors from the Act. In particular, corporations with more than 20 full-time employees, a physical office inside the United States, and gross receipts over $5 million are exempt. That exemption and the others do no good for the vast majority of small corporations.

An Alabama Court Rejects the Corporate Transparency Act

The burdens are substantial, and six legal challenges to the constitutionality of the Corporate Transparency Act (CTA) have been filed. In March 2024, the U.S. District Court for the Northern District of Alabama found the law unconstitutional. 

The court rejected the government’s reliance on its unenumerated, inherent national security and foreign affairs powers, which, in the government’s hands, can become limitless. It noted that, in 2014, the Supreme Court held that a woman who put a chemical compound on her husband’s mistress’s door handle to inflict irritating, but harmless burns, could not be prosecuted for violating the Chemical Weapons Convention Implementation Act. Rather, the Supreme Court said that the law did not “reach purely local crimes.” In the same way, incorporation is, fundamentally, a matter of state law. (READ MORE: The Wolves of K Street: A Real Threat to Democracy)

The Commerce Clause of the Constitution empowers Congress to “regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” In November 1942, when the United States was embroiled in World War II the Supreme Court held that the Commerce Clause did not prohibit the federal government from regulating an Ohio farmer’s use of the wheat he grew, did not sell, and then used to feed his livestock. That holding goes only so far. 

The government’s reliance on the Commerce Clause is misplaced for several reasons. First, the act of incorporation, according to the government, does not involve commerce. Not all of those 32.6 million incorporated entities actually engage in commerce, but the government wants the personal information of every “beneficial owner.” In addition, Congress nowhere mentioned commerce or its instrumentalities in the text of the law. The court concluded, “Because the CTA doesn’t regulate the channels and instrumentalities of commerce or prevent their use for a specific purpose, it cannot be justified as a valid regulation of those channels and instrumentalities.” Finally, the “connection between incorporation [which the government agrees is not a commercial activity] and criminal activity is far too attenuated to justify the CTA.” (READ MORE: Arkansas AG Claims Temu Is Chinese Spyware)

The court also rejected the government’s reliance on its tax powers, noting that the civil penalties for noncompliance are not taxes.

Returning to the starting point, what could go wrong with a government database containing the personal information of more than 32.6 million people? To ask the question answers it.

Recall the 2015 data breach at the Office of Personnel Management that involved 22.1 million records containing highly sensitive information of federal employees and applicants. More recently, the records of some 15 million veterans were lost in a breach at Change Healthcare. And, litigants claim that every one of our Social Security numbers is out there on the internet for use by bad actors. FinCEN’s database of more than 32.6 million people is just another inviting target.

The post Shut the Corporate Transparency Act Trap appeared first on The American Spectator | USA News and Politics.