BRIAN BENFIELD: Beneficial ownership data collection — tyranny in the making

Since the early 20th century, democratic states across the globe have seen a significant expansion of bureaucratic power, with unelected government agencies exerting increasing control over citizens’ lives. This trend has particularly affected small, medium, and micro enterprises (SMMEs), with regulations in sectors such as employment and finance growing inexorably.

A notable example is SA’s recent implementation of mandatory beneficial ownership information (BOI) reporting, which serves as a profoundly troubling extension of this regulatory trend. 

Introduced by the Companies & Intellectual Property Commission, amendments to the Companies Act of 2008 require companies, trusts and similar entities to disclose detailed information about their “beneficial owners” — those who hold a significant stake or control over a company, widely defined as owning at least 25% of shares or holding board-level authority. In SA this threshold is set significantly lower at 5%, making it yet more onerous for local businesses. Information required includes proof of personal details such as names, birth dates, residential addresses, citizenship and identification numbers. 

While proponents argue that BOI reporting is crucial for combating crimes such as money laundering, tax evasion and terrorism financing, it has sparked considerable controversy. Critics claim that it infringes on privacy rights and imposes heavy burdens on businesses, particularly SMMEs, which often struggle to meet compliance requirements. In fact, failure to comply with the BOI mandates carries severe penalties, including hefty fines or imprisonment.

Implementation of BOI requirements places an additional burden on SMMEs, which are already grappling with economic uncertainty and regulatory overreach.

Many of these businesses are vital to local economies, and the added compliance costs can prove overwhelming. For many, the obligation to adhere to BOI reporting is the last straw, exacerbating their financial difficulties and stifling innovation. 

The primary justification for BOI reporting is to increase transparency and accountability by exposing opaque corporate structures. Law enforcement agencies are expected to use this information to dismantle shell companies and other complex financial arrangements that facilitate illegal conduct. However, the practical implementation of BOI reporting is far from straightforward. Small businesses often lack the resources or expertise to comply with these complex regulations, and the cost of hiring legal professionals to verify sensitive information can be prohibitive. 

Furthermore, the intrusion on privacy is a significant concern. By creating centralised registries of business owners the BOI system makes it easier for government officials to access personal information. Given the rise in data breaches and identity theft, there is a risk that these databases could become targets for malicious actors. Additionally, the limited liability business structure, which traditionally provides protection against frivolous lawsuits and offers a degree of anonymity, is undermined by the BOI requirements, potentially exposing business owners to legal and financial risks. 

Despite government assurances, the effectiveness of BOI reporting in reducing financial crime is debatable. Criminal organisations have repeatedly demonstrated their ability to adapt to new regulations, often exploiting loopholes or shifting their activities to jurisdictions with weaker enforcement. The rise of decentralised technologies such as cryptocurrencies, further complicates the issue. Criminals can easily bypass BOI regulations by operating outside traditional financial systems, rendering these mandates largely ineffective against sophisticated financial crimes. 

The broader question remains: do governments genuinely believe BOI mandates will enhance security for ordinary citizens, and is the expanded government oversight necessary to enforce these measures worth the cost?

This debate is not unique to SA but reflects a broader global issue regarding the balance between security and individual freedoms. Historically, initiatives such as the US War on Terror and War on Drugs, which were justified as essential for national security, have often resulted in infringements on personal privacy and the erosion of civil liberties. Similarly, BOI mandates could ultimately serve as an obstacle to business innovation rather than a meaningful solution to crime. 

While the intention behind BOI regulations may be to enhance transparency and prevent crime, it remains unclear how effective they will be in achieving these goals. Governments must provide a clear explanation of how the costs — financial, privacy-related, and in terms of freedom — are justified by the anticipated benefits. Without this justification, the risk is that the public will become increasingly disillusioned with overreaching regulatory regimes that prioritise control over individual liberty. 

From a governance perspective, regulating corporate crime is often more effectively done at the national level, with jurisdictions tailoring their approaches to local business environments and security needs. Several countries have already implemented such requirements, while others have refrained, with mixed results. A uniform, global approach imposes a regulatory burden that stifles entrepreneurship and innovation, which are critical for economic growth. 

Ultimately, the BOI mandate is part of a larger trend of expanding bureaucratic power, where unelected officials gain more authority to monitor and regulate citizens’ lives. While combating crime is an admirable goal, the consequences of such policies — burdening small businesses, increasing surveillance, and eroding privacy — are deeply concerning. 

Governments must carefully consider whether such measures will genuinely serve the public good or exacerbate the problems they aim to solve. If international legal challenges lead to a re-evaluation of these policies, it may help ensure that individual rights and freedoms are not sacrificed in the name of security. 

While BOI reporting may in theory increase transparency and prevent crime, its implementation raises significant concerns about privacy, business burden, and the effectiveness of the measures. Governments need to ensure that the costs of these regulations are justified by their benefits and reconsider whether they are the most effective means of achieving security without infringing on personal freedom.

BOI is part of a larger conversation about the role of government oversight in a free society. It remains to be seen whether these measures will ultimately protect or harm the public. 

• Dr Benfield, a retired professor of economics at the University of the Witwatersrand, is a senior associate and board member of the Free Market Foundation.