About the author: John Arensmeyer is the founder and CEO of Small Business Majority.
The pandemic’s emergency loan program was a lifeline for millions of small businesses. For others, the loan amounts weren’t enough, if they arrived at all.
The impact of limited (or stolen) assistance is tragic and, at this point, well-known. Federal Reserve economists estimated that hundreds of thousands of small businesses closed in the first year of the pandemic, numbers that would have been higher without federal rescues. Every dollar counted.
One can only imagine the anger small business owners feel when they read about loans stolen by fraudsters. A U.S. Small Business Administration study from April estimated as much as $84 billion was lost to fraud. There were so many cases, a law firm even created a Covid fraud tracker. Experiences like these are among the reasons small business owners supported a landmark anticorruption measure known as the Corporate Transparency Act that will require businesses to list the true owners of their enterprises at the time of business formation.
Some who may not fully appreciate how business owners experience the costly threats from fraud say the new law is too big a burden. But owners of legitimate businesses have no issues putting their names on their company papers. It’s time to rein in the bad actors.
Fair transparency rules will be particularly important as small businesses try to recover or start anew from the pandemic-induced economic hit.
Congress passed the Corporate Transparency Act on January 1 of this year, and the U.S. Treasury Department is currently drafting rules to implement the law. How those rules are written really matter.
Small business owners will be watching two aspects of the rulemaking in particular. The first is whether the rules will open loopholes that result in honest businesses dutifully filing their ownership information, yet give fraudsters an easy path to evasion. There are a handful of specific exemptions in the law for businesses that already provide this information in other government filings (so they do not have to provide it a second time), but if those exemptions are defined too broadly, it will open the door for bad actors to escape accountability. These exemptions should be written narrowly. Business owners, overwhelmingly, are more concerned about losing out to fraudsters than they are about stating who owns their businesses: In a 2018 survey of small business owners, we found that more than 76% believed listing their true identities would be a benefit rather than a burden.
The second, and perhaps even more important aspect, is whether the rules will put in place some basic protections against false filings. If fraudsters and other criminals can easily enter bogus data, the law will not protect honest small businesses. To this end, the rules must require real-time verification of the ownership information that is provided, and must automatically reject illegitimate entries, similar to how online retailers automatically reject inaccurate or illegitimate credit card information before a purchase can be made.
Real-time verification would protect small business owners. If owners of legitimate businesses mistype a name or address, instant verification means they could simply fix the error immediately. This saves both time and potential embarrassment over inadvertent errors, which could cause delays in a business’s ability to open a bank account or obtain credit. U.S. banks will have access to the new ownership database, though the general public will not. By denying false registrations, real-time verification would also make it harder for criminals to gain access to our financial system. That, in turn, reduces the chances for legitimate small businesses to lose out on loans or contracts that go to illegitimate businesses, among other harms.
The Corporate Transparency Act includes an explicit provision requiring the rule-writers to make every effort to minimize any compliance costs to small business. Real-time verification would be among the most significant ways to achieve that for the vast majority of small businesses.
Neither of these aspects is difficult to write into the new rules. Nor should they be controversial. Exemptions should be available to those who meet the criteria. Real-time verification technology has been around for many years and will ease potential compliance costs.
The new law is the most significant update to our nation’s anti-money-laundering laws in a generation. The Treasury Department should ensure it benefits all stakeholders, including small business owners.
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