A Case Study of Pointless (but Costly) Financial Regulation

One of the quirkier aspect of Washington policy making is the strategizing that occurs when proposed laws get names such as the “Social Security 2100 Act,” the “PATRIOT Act” or the “Affordable Care Act“.

The obvious goal is to put pressure on other lawmakers, who don’t want to go on record for…gasp…being unpatriotic or for…heaven forbid…supporting expensive care.

I was reminded of this when reading a new study examining the “Corporate Transparency Act” and the “ILLICIT CASH Act” (an acronym for “Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings Act”).

Who could be for secretive companies, or for criminal activity?

Well, as David Burton explains, these pieces of legislation would be all costs and no benefits.

Both bills…would impose a new, burdensome beneficial owner-ship reporting requirement on the smallest businesses in America, while exempting those most able to abuse the financial system. The Corporate Transparency Act would also burden “exempt” entities, including not-for-profit organizations. Moreover, both reporting regimes would be easily and lawfully avoided by criminal elements with even a rudimentary knowledge of business. Better, more comprehensive information is available from tax forms already provided to government—but jurisdictional turf jealousies in Congress have made it difficult to adopt less burdensome approaches using this tax information.

The report has plenty of details about how these proposals would impose onerous regulatory requirements on small businesses and non-profit organizations – including the fact that there are extremely harsh penalties for inadvertent failure (or inability) to comply with the vague legislative language.

Every small business in America would need to either file the beneficial ownership report or, if the business is in an exempt category, file a certification with FinCEN asserting the exemption. Most would not be exempt. In the case of small firms that have other entities as investors or have any-thing other than entirely conventional corporate governance, the reporting burden may be quite high. …roughly 13 million corporations or LLCs would likely be subject to the new reporting regime and required to either report or seek an exemption. Of those, about 11.2 million are small businesses that are not exempt. If even 9 percent were unaware of this new requirement and fail to file with FinCEN, two years after enactment there would be over 1 million small business owners, religious congregations, and charities in non-compliance, subject to fines and imprisonment. …the likely cost will be over $1 billion annually, and perhaps many billions of dollars each year.

Sadly, congressional supporters presumably don’t care about billions of dollars of costs being imposed on the private sector.

They don’t think beyond the fact that they can issue press releases saying they’re against “dirty money.”

What makes this particular case so disgusting is that the federal government already has all the information that would be collected by the two proposed laws. And it would be relatively simple to make it accessible for financial regulators.

The alternative approach would require the Internal Revenue Service to compile a beneficial ownership database ( based on information already provided to the agency in the ordinary course of tax administration) and to share the information in this database with FinCEN. …This approach would provide more comprehensive information to FinCEN than the proposed reporting regime. Furthermore, the social cost of this approach—creating a database based on information already provided to the IRS—would be a very small fraction of the approach contemplated in the proposed reporting regime. The increase in private compliance costs would be negligible… To implement this approach, Internal Revenue Code § 6103(i)…would need to be amended to allow the IRS to share the information with FinCEN.

So why aren’t politicians choosing this simple, low-cost, and non-intrusive approach?

The answer may cause your jaw to drop.

…this approach involves changes to the tax law (notably Internal Revenue Code § 6103), it falls with the jurisdiction of the House Ways and Means and Senate Finance Committees. …Because the primary congressional proponents of beneficial ownership reporting are on the Financial Services and Banking Committees and are not willing to relinquish control of the issue, the less burdensome, more effective approach has not moved forward.

Not that it would be a good idea to go with the alternative approach.

Yes, it would be a less-misguided way of achieving the goal, but David’s concluding analysis points out that that the entire anti-money laundering regime fails any sort of cost-benefit analysis.

The current U.S. framework is overly complex and burdensome, and its ad hoc nature has likely impeded efforts to combat terrorism, enforce laws, and collect taxes.The proposed beneficial ownership reporting regime would add substantially to the complexity and burden of the existing AML and tax information reporting regime. It would, however, do little to further law enforcement objectives. …there is no actual evidence (as opposed to bare assertions or anecdotes) that the beneficial ownership reporting regimes in other countries have had any material effect on money laundering or terrorism. …The existing AML regime is extraordinary expensive. The AML regime costs an estimated $4.8 billion to $8 billion annually.87 Yet this AML system results in fewer than 700 convictions annually, a substantial proportion (probably most) of which are simply additional counts against persons charged with other predicate crimes. …There is a need to engage in a serious cost-benefit analysis of the AML regime and its constituent parts before adding yet another poorly conceived requirement that burdens the smallest businesses in the country.

Amen.

At the risk of understatement, I’m not a big fan of these laws and regulations.

• They are pointless.
• They are expensive.
• They are intrusive.
• They are discriminatory.
• They are ineffective.
• They disproportionately hurt poor people.

But Democrats don’t care since they see anti-money laundering laws as a way of destroying financial privacy, which they think is necessary to collect more tax revenue.

And Republicans don’t care because they mindlessly support a tough-on-crime approach, regardless of whether it actually produces positive results.

Gee, isn’t bipartisanship wonderful?

P.S. It’s not relevant to big-picture issues such as regulatory burden and cost-benefit analysis, but I want to share one final passage about the The ILLICIT CASH Act from David’s study.

The bill would raise FinCEN salaries to the level of the Federal Reserve. While it is unsurprising that FinCEN personnel want a raise, this is war-ranted only if it is established that FinCEN is systematically having difficulty attracting qualified, competent personnel. Since only five individuals out of 285 (1.8 percent) quit the agency in fiscal year 2018, it is unlikely that its compensation packages are uncompetitive. In contrast, the annual quit rate in the private sector in 2018 was 30 percent; it was 13 percent in the finance and insurance sector.

In other words, the legislation is also a back-door vehicle to further enrich a portion of the already-overpaid federal bureaucracy.

P.P.S. For what it’s worth, I have a 1-1 record in my inadvertent career as a global money launderer.

———
Image credit: geralt | Pixabay License.