Small Business Crusade – The Frustrated CFO

BOI Reporting: Wellcome, Big Brother?

If you are a business owner and/or executive and you’ve used an online processor, like LegalZoom, to set up your corporate affairs; or outsource some of your in-house functions to a large service provider, like Paychex, for instance; or employ a fairly sizable CPA company to audit your books – it is most likely that these business partners of yours have notified you at some point last year that you are a subject to the new type of government reporting – the Beneficial Ownership Information (BOI), due for submission to Financial Crime Enforcement (FinCEN) bureau of the US Department of Treasury.

The rest of the business owners – those without an exposure to large business and/or professional networks – especially the ones running those small, private, neighborhood companies we supposed to cherish as a backbone of the American economy… Well, I don’t really know how they are meant to find out about this new reporting obligation. FinCEN promised to roll-out a whole awareness campaign with YouTube videos and stuff – but I personally haven’t seen anything like that being pushed at me. Maybe if you search for it, you’ll find something… But how would you know to look in the first place?

I personally discovered it via LegalZoom’s notification sent to an entrepreneur whose books I help to keep. She casually mentioned it to me – I somehow sensed it seriousness and looked into it. Mainly for the sake of the small business owners around me, but also out of the feeling of foreboding this bit of information gave me.

It turned out that FinCEN was formed in 1990 (Wow! The things that fly over our heads! Even if we are somewhat politically alert.) under the parentage of the Office of Terrorism and Financial Intelligence with an official purpose

“to combat domestic and international money laundering, terrorism financing, and other financial crimes”.

Naturally, it is a perfect agency to oversee the specific measures that have been formulated under the Corporate Transparency Act (CTA) signed into power by Congress in 2021 – the federal law pushed through under the banner of

“the government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

fincen.gov, January 29th, 2024

(Again! What ordinary citizen paid attention to that piece of shocking legal maneuvering?!)

One such measure, formulated in March of 2023, is the BOI reporting. I don’t want bore my readers with every single rule and detail pertaining to this new corporate reporting duty. Just bear with me for a few important highlights I’m providing for those who didn’t dive into this issue yet.

A Beneficial Owner is a person who directly or indirectly exercises substantial control over the reporting company or owns at least 25% of its interests. Now, all senior officers – specifically: President, CFO, General Counsel, CEO, and COO; anyone with an ability to appoint or remove officers or a majority of directors; anyone who is an “important decision-maker”; and anyone (listen to this catchall) who has “any other form of substantial control” are qualified as Beneficial Owners and must be reported as such to FinCEN.

There is an interesting caveat: if a person is not a senior officer, but, nevertheless, exercises significant control over the reporting company through her employment there, that person doesn’t need to be reported. I’m thinking: high-power controllers who value their privacy higher than the status, or simply don’t want to expose their personal info for open access, should stop vying for CFO positions (assuming, of course, the pay is satisfactory).

Any and all corporations, LLCs, and other entities created through the filing of a document with a secretary of State or any other similar office in the US is obligated to report. I carefully studied the 23 exceptions and can vouch that I personally never dealt with an entity that would qualify for an exemption. Nevertheless, everyone who deals with corporate matters of their businesses/employers is encouraged to study the relevant material at BOI FAQ.

Anyone whom the reporting company authorizes to act on its behalf may file the BOI report. And this authorized filer, whatever their relationship with the company may be, MUST submit her full name, email address, and phone number.

The information the reporting company must submit about itself is: full legal name, any trade names (DBAs, etc.), current street address of the principal place of business (to be updated when changes), its jurisdiction of formation or registration, and TIN. The whole kit and caboodle.

For the beneficial owners the reportable data is as follows: name, DOB, residential address, and ID# – either US passport or state driver’s license – and the name of the latter’s jurisdiction. And guess what? The reported ID must be uploaded into the database! Some people may feel relieved that at least they are not demanding the SSN’s. But if you ask me: disclosing your picture ID and the place where you live! Seriously?

But get a load of this! In addition to the information on the entities, their beneficial owners, and those assigned to deal with this by their bosses, the financial crime fighters want to further collect the same info on the individuals they call “applicants” (starting with incorporating dates of January 1, 2024 and on), i.e. the individuals who directly file the documents that create or register the company and those who direct and control the filing. And that’s pretty much any intermediary agent whose services you may engage in the process: accountants, lawyers, formation services, even the messengers delivering the application packages into the hands of the clerks.

FinCEN openly discloses that any Federal, State, local, and Tribe as well as “certain” foreign officials will be allowed the access to thus compiled database for activities broadly described as “related to national security, intelligence, and law enforcement.” No consents or even notices of the inquiries’ subjects are required. On the other hand, financial institutions need to obtain a reporting company’s agreement before being allowed to take a peek. But who in their right mind says “no” to a bank considering granting you a credit line, for example? Especially if it’s a small entrepreneurial business. Most eager CFO’s and CEO’s wouldn’t even bother asking who exactly will be looking.

The penalties for refusing or foregoing the BOI reporting include both civil and criminal repercussions: up to $500 per day of the violation, $10,000 fine, and up to 2 years of imprisonment.

So, to summarize: millions and millions of Americans are now forced to make their personal information openly available for access by all and any domestic and international government entities as well as financial institutions, or risk criminal and civil prosecution. I absorbed all that, and I was like: Whoa! What?! George Orwell miscalculated his arrival by 40 years, for sure, but the Big Brother is definitely hear now – not in North Korea, Iran, Russia, China; but here in the United States of A as well as 30-something other “civilized” countries with similar regulations. Of course, I have to be objective about my reactions to such things: I was born and raised under the communist dictatorship of the Soviet Union. Therefore, I have a tendency of seeing things related to governmental interferences in darker lights than most American citizens. I mean, Terry Gilliam’s Brazil (1985) is the avant-garde realism to me, not a dystopian sci-fi as it’s conventionally classified.

Moreover, I’m a libertarian in my political convictions. Thus, personal and socio-economic freedoms are paramount to me. Even more painful for a small-business crusader like myself: Do we really need another negative consideration thrown at potential entrepreneurs considering going into business? It’s fucking depressing – at least to me…

But guess what? It turned out that I was not alone in my fears of the government’s infringing on our democracy. On March 1, 2024, the United States District Court for the Northern District of Alabama held the entire CTA, and BOI requirements in particular, unconstitutional. To the fundamental question of whether the Constitution gives Congress the power to regulate millions of entities and their stakeholders the moment they obtain their formal corporate status from the state, the Court has answered that not only there are no constitutional provisions supporting such excessive claims of power, but there are also no citable precedents or sufficient legal nexus.

For the time being, the Alabama Court’s decision protects from CTA’s enforcement only the specific plaintiffs who filed the claim. We can hope, however, that it will encourage other companies, individuals, civil rights lawyers, etc. in other states, to join the effort of protecting our corporate and individual privacy. Meanwhile, every entity incorporated before January 1, 2024 have to file before the deadline of January 1, 2025 and those incorporated during 2024 – within 90 days after the date of official creation by the state. Starting 2025, the reporting timeframe will be shortened to just 30 days.

Here comes the funny part, though: If you decide to bother yourself with episode 17 of the final (10th) season of The Blacklist, you will be able to see how utterly futile these government efforts are. The vast network the FBI special task force is trying to dismantle during that episode is engaged not only in establishing the fictitious corporate fronts to cover the diverse criminal enterprising, but also in creating flawless, unimpeachable false identities for the individuals – real or virtual – who qualify to be their “Beneficial Owners” under the CTA’s definitions.

I mean, it’s pretty clear to all of us, isn’t it? Those who want to stay hidden – will. Meanwhile, the rest of us will expose our identities to hell knows what kind of breaches and misuses. And if you think that that particular bit of The Blacklist fancy is as phantasmagorical as the rest of the show, we can agree to disagree: I thought it was the most realistic piece of plotting of the entire series. And I watched every single of the 218 episodes and liked quite a few of them too.

Lucky Cab Ride

Let’s face it, NYC cab rides are not what they used be. And it’s not about credit card processing and the built-in monitors – those were inevitable. And it’s not about the signature-yellow black-checkered SUV’s and vans either (though, only God knows how many pairs of pantyhose I’ve ruined getting into them). The main difference are the drivers.

Back in the day your taxi driver talked to you; whether you wanted him to or not. They were the ones who invited the conversation. I mean, hairdressers and cabbies were people’s confidants. A cabby is even better than the hairdresser – most likely you will never see him again. Nowadays, however… Let me put it this way – Taxicab Confessions (1995) would not happen today.

Of course, just 15 years ago, when the medallions were around $250K, cab-driving was still a viable self-employment option for enterprising individual drivers. And a taxi owner-operator cared for the success of his business-on-wheels. Moreover, he felt at home there, ready to chat with his paying customer about this and that. But as soon as the medallions’ prices went over $500K (hitting $1 mil landmark in 2011), the ownership shifted to investment groups, who lease the cabs to drivers known as “hacks.” This resulted in a fundamental attitude transformation. To draw a parallel, it’s like the difference between the treatment you get from some outsourced customer service representative and the care displayed by a business owner whose livelihood depends on the customer’s satisfaction.

Generally speaking, we now get into a cab with an indifferent and dissatisfied employee at the wheel. And most of the time we actually want him to stop talking, because he is blabbering non-stop and not with you – he’s got his earpiece in and he is doing his share of “connecting” to his friends and families at full volume in the language you most likely don’t understand. Sometimes you are not even sure that he heard your destination; and you have to be really insistent if you want him to pay attention to your route instructions.

And me personally? At this point I am simply weary of cab drivers wanting to talk to me and actually prefer when they are preoccupied with their own telecommunications or whatever. I don’t know whether this is because weirdos feel comfortable with me or there are just more weirdos everywhere now, but recently I’ve been having some uncanny cab experiences: Scientology propaganda session; sex proposals (this actually happens regularly, which is unbelievable for many reasons I will not discuss on this blog); self-righteous preaching (also pretty common); pushy sales pitching of the driver’s childishly executed art; a reverse taxicab confession of a middle-aged driver stunning me with graphic details of his affair with a 78-year-old woman (sorry, people, but it’s the honest truth), etc., etc. So, trust me, a quiet ride is fine by me.

But I guess there is indeed a reward through suffering, because sometimes you get lucky!

I was in a cab a few days ago. The driver had an old-Brooklyn accent and was middle-aged. The cab wasn’t new either, but most remarkably it was already lacking the bulletproof divider (TLC announced in April that it can be removed). This is actually very important, because, even though he had the radio on at a low volume, without the glass barrier I could hear it very well (I have no idea what channel it was).

The topic of some political broadcast was the GOP’s opposition to their own likely nominee, Donald J. Trump. One of the guests was commenting on how silly it was and questioning the possibility of some last-moment aspirant’s attempting to steal the nomination in Cleveland from a candidate who won the most Republican primary votes in history – 13.4 million. And both the driver and I laughed out loud at the same time.

For the next 15 minutes I enjoyed the most amicable and satisfying political exchange with a person outside of my very close and very immediate circle, a complete stranger for that matter. And I would like my readers to share some of that experience. So, here you go, ladies and gentlemen, from my cab driver’s mouth to your ears (or rather eyes) – a few bits of pure common sense:

“…He [The Donald] may not say it right, but he says the right things.”

“…Professional politicians didn’t work as the country’s leaders. We’ve got to try something new. If he fails, we will not vote for him [The Donald] again.”

“…Trump is the only one who has full intention to do what he says and actually take care of things.”

“…I may not like Trump as a person and don’t what to be his friend, but he is the only one right now I trust to be my President.”

“…I used to be a big Clinton supporter, but she is a typical political weasel: talks how it’s dangerous to trust Trump with the ‘nuclear button,’ while 20,000 of her emails with government secrets are about to be publicly released by the Russians.”

“…How can she [Hillary Clinton] talk about War on Terrorism, when she is chummy with the Saudis? And how can she claim that she will protect women’s interest when she takes millions from the kings of Oman and such.”

Look, of course I don’t know about all of the 13.4 million of Trump supporters – I’m sure, like in any other group of people, there are plenty of bastards and idiots among them. Yet, every one of those who I met personally, heard talking or read their opinions in various media strikes me as exceptionally reasonable, very informed, logical person, free of fanaticism. Without any bias, in a true objective spirit I so vehemently cultivate on this blog, I cannot say the same about the followers of either of the still-running Democratic candidates. And it makes me wonder: maybe, just maybe, it has something to do with the compelling rationality of Donald Trump’s presidential platform.

Why Do I Stay Subscribed to Quora Digest?

The truth is I have no idea why I receive Quora Digest emails. I don't recall subscribing to the feed. Of course, nowadays one can passively "accept" electronic deliveries of bullshit by failing to unclick some hidden option box. I am certain, however, that I'm not registered on Quora website. I wouldn't.

Quora, as in plural of Quorum – in the same way as Data is plural of Datum. It is basically a blogging hub masked as a Q&A platform: one registered person posts a question and all other registered contributors are invited to answer. Strictly speaking, this unrestricted invitation to participate clashes with the name, which refers to "select groups." Maybe the founders confused it with fora (the Latin plural of forum). I don't know and I don't care: The whole concept reminds me of Coffee Talk with Linda Richman, when Mike Myers would get "all verklempt" and invite us to talk amongst ourselves by providing a discussion topic.

Moreover, many things about Quora simply creep me out. For instance, Quora's T&C state that contributors retain the copyright to their content. Well, it's great that they threw that in, however, the enforcement appears to be highly problematic. Questions posted to the site are open for editing by everyone. This includes official editors and all registered users. Users can also submit unlimited number of suggestions for editing the responses. Therefore, the possibilities for modifications of the original material are endless. The apparent absence of a solution for the copyright sharing basically nullifies the notion of IP protection.

It's weird that the site demands its users to register with their real names instead of handles and go through email verification. It's not that I think people should hide, but they must remember that Quoara automatically releases users' names to the search engines. We don't know whether the site gets some sort of fees in return, but it wouldn't surprise me if they do. Just like it wouldn't surprise me if they intend to sell the subscribers' lists to other marketers as well. But these are just my speculations. In the absence of a clear mission statement, that's the only thing one can do – guess.

In reality, the fact that Adam D'Angelo (CEO) doesn't seem to be interested in generating revenues makes me very suspicious of his actual intentions and motivations. It seems only logical to suggest that they are spying on the contributors, studying their interests, behavioral patterns, and tastes in preparation for eventual commercialization of the site. Or is it something even more sinister? How the hell did they get a $900 million third-round valuation? What sort of potential revenue this number is based on?

As I said, it's creepy. I don't even open Quora Digest emails. But I'm not unsubscribing either – because of the subject line, which always shows the top question of the day. I don't want to give up the opportunity to glance at it. Most of the time, what I see reeks of laziness. I mean, we live in the Internet age – go on Wikipedia or just google this banal crap! But once in a while some amazing shit pops up.

The other day I read: "How can you maximize your happiness in life?" Wow! Is this person for real? 60,000 antelopes just died in Kazakhstan for unknown reason and half of Europe is covered in water and mud, but this human is not only happy, he wants to bring the bliss to the next level! Even crazier, he expects to receive constructive instructions from his fellow Quora members?! Well, good luck with that!

Actually, it's not this kind of oddities that keep me looking. I am more interested in patterns and trends. For instance, recently I've noticed an increase in frequency of the questions concerning material self-sufficiency and economic survival. Well, it's surprising that people on Quora don't talk about their inability to support themselves all the time. I'm guessing that most of them consider bringing it up under their real names in front of the strangers embarrassing. Nevertheless, the number of such queries is apparently spiking.

Below are three questions I found to be most typical; with my brief comments (remember: I'm not subscribed, so I don't know the answers that followed; I can only provide my own):

1. "What kind of salary guarantees comfortable living in NYC?" What a terribly formulated question! It should've come with a separate note explaining what "comfortable" means to the inquirer. Cause, what's comfortable to a person fresh out of Idaho who has never spent more than $100 on a pair of shoes and considers a $350 Michael Kors bag a chic statement may mean financial misery to someone with a different background.

For the sake of argument, let's assume that the questioner is single and actually meant comfortable, but not extravagant, i.e. a good one-bedroom apartment in Manhattan with no roommates; year-round pleasant climate control; full range of cable and streaming entertainments; cell and land phones; a car kept in a garage; designer coffee in a favorite shop; going out for drinks at least once a week; eat out twice a week; cooking with high quality ingredients; good cheese, wine, and fruit in the fridge; mid-range ($800-$1500) outfits; 2-3 new pairs of $500 shoes a year; one new $2000-$3000 bag a year, at least one annual vacation; a play and a concert once in a while. And the answer is – $250K annual salary should do it, assuming the drinking is actually limited to once a week.

And you thought that those who made $250K a year are rich?! Not in this town, baby!

2. "At Facebook and Google, why are many new CS graduates offered 120K+ with a 30-120K signing bonus while those with a few years experience are offered a baseline salary with no bonus?" Well, the direct answer to this question is simple: Computer Science, in a sense, is like Medicine and Pharmacology – they continuously undergo major changes and developments. I mean, double-entry bookkeeping was created 600 years ago and it will remain fundamental as long as accounting records will be needed on this planet. On the other hand, today's standard surgical techniques were experimental only 5 years ago. It happens even faster in high-tech where innovations occur pretty much on a monthly basis.

While doctors never stop studying and researching, most (not all) computer engineers and programmers are not as motivated to stay on top of the game. Those in training are taught the most up-to-date techniques and methods; they are subjected to the most recent trends. And that's what Facebooks and Googles want – the newest and the freshest; in order to keep ahead of the rat race. So, it's not about whether you graduated this year or five years ago – it's the set of skills you put on your resume. Veteran coders who can match the knacks with 22-year-olds can demand pretty much the same level of compensation.

But what interests me the most in this inquiry is its fiscal aspect. There is no way the $120K/year new hires of Facebook and Google will be able to enjoy the comforts similar to those listed in point 1. These companies operate largely in San Francisco Bay area, which, according to my observations of exactly 2 years ago, is even less affordable than NYC. Of course, high-tech nerds of both sexes go to work in khakis and polo shirts and don't carry Prada bags to the office. On the other hand, they buy more electronic devices than any other human and their coffee is far more expensive. So, some corners will need to be cut.

Obviously their lower-compensated older co-workers have even harder time (hence, the exasperation and the bitterness). Let's hope that they are smart enough to share expenses with their partners/spouses and don't plan on having any kids.

3. "I'm unemployed, broke, balding, living with my parents, about to turn 30, friendless, depressed, and miserable. How can I possibly turn it around?"

Ah, and here we come to the reality of the vast majority. This boy probably forgot to mention that he has a degree(s) in Liberal Arts and no practical skills. The horde of young people in similar situations is ever-expanding. They are so far removed from the idea of "comfortable" living that a $120K salary seems just as fantastic to them as a $3 million book advance or a $20 million per movie compensation package.

They were brought up on the illusion that in this Land of Opportunities they have the freedom of pursuing their interests in humanities and, "as long as they work hard," their "rightful" place in the economic system is guaranteed. They failed to realize that this clinically dead ideal has been kept on life support by the tuition-hungry education institutions for years. They probably still don't know that the economic system in question has been deformed and became unrecognizable, just like the sociopolitical structures, environmental conditions, and human relationships.

I can just imagine the answers elicited by this question. They probably fell into two categories: the ones from the peers ("Dude, you are totally fucked!" or "I hear you, bro!") and the ones from the middle-aged politically correct deniers of reality ("It's okay, things will get better" or "There is nothing wrong with being bold").

As for me, only a few years ago I would've still tried to be motivational and push my entrepreneurial agenda, urging this person to crystallize his aptitudes into a small business idea and work hard on making it happen for himself. I used to say that if misplaced children of my peers went into landscaping, housekeeping, and maintenance businesses, it would've solved both the employment and the immigration problems in one sweep. But now we operate under the most severe government interference in the small-business matters (minimum wages, Obamacare tolls, US Treasury restrictions on borrowing, etc.) and the number of illegal immigrants became unmanageable. So, giving such an advice would be adding insult to injury. All I can say is – you are totally fucked, dude!

Rumor Has It… Trouble Is Brewing in Private-Equity World

The other day I had a meeting with some big shots from Citibank's commercial landing. Every single person at the table felt disappointed. On my side of the negotiations, everyone was shocked that the bank came up with some really sneaky changes to the Term Sheet we have originally accepted. Citibank's covert operatives were distressed to realize that their maneuvering didn't work on us and, moreover, we are absolutely ready to walk away from the deal.

Nobody was disgusted more than me, though: I've rejected other lending candidates in Citi's favor based on the conditions of that damn Term Sheet; I've spent so much time and effort making sure that the deal comes to conclusion and closes by June 15th; I've conducted so many detailed discussions with the bank officers; I've plied the Credit Risk Group with tons of information and provided elaborate answers to every single of their drilling questions – dammit, what a waste! I started getting up from the table, determined to say a cold goodbye ("Good day, sirs… I said, 'Good day'," or something like that) and leave everyone in the conference room to their own devices.

But the bank's team leader didn't want to give up. This seasoned warrior (whose bonus depends on the number of deals she closes) quickly swallowed the bitter pill of defeat and started deliberating the possibilities of remedying the unfortunate situation. By way of explaining and excusing their underhanded tactics, she embarked on a tale of pressure and oppression all national banks suffer from the Office of the Controller of the Currency (OCC) that, empowered by the US Treasury's mandate, tightened the regulatory screws on all commercial lenders operating in small and middle markets.

Ring-ding-ding! The government is making it more difficult for small and mid-size businesses to borrow operating funds? Tell me more!

I can only attribute her sudden loquacity to the awkwardness of the impasse we have reached, to the thickness of the room's air that required some sort of easement before our dialogue completely choked. Not only that she went into details of the new pre-lending qualification requirements for private businesses such as lower leverage (i.e. debt/equity) and higher fixed-coverage (EBIT + fixed costs/fixed costs + interest) ratios, but she also divulged some information bankers almost never discuss – she told us about a specific deal just killed by the bank's risk underwriters for the sake of compliance with the government's wishes.

It was the nature of the transaction in question that surprised me at first – a typical leveraged buyout (LBO) of a privately-held manufacturer, with a well-known private equity (PE) firm and a mezzanine lender already in place. Citi was expected to step in as an institutional lender covering 55% of the contractual purchase price. I might've been wrong, since I'm not exposed to M&A on daily basis, but I was under impression that banks are usually hungry for the high-yield rewards of such deals, especially considering the prominence of the PE behind it. The fact that this case was presented to us as an example of insufferable regulatory interference kind of confirmed my suspicion that Citi's bailing out was an unexpected turn of events for the bankers themselves.

So, did they get the explanation from their Risk partners? Yes, they did: The due diligence suggested that the deal had a high probability of a quick turnaround. In other words, it was expected that the PE firm would quickly flip the acquired company's stock for a nice profit leaving the company to deal with the loan repayments. Ok, but isn't that the nature of any private equity transaction, regardless of whether the ownership is sold fast or kept in-house for years? The loan repayments always come out of the company's operational cash flows. The liability is a part of their balance sheet. Hmm…

Anyway, the talkative tactics worked and we all decided to go back to our respective drawing boards instead of walking away from a very promising relationship. Good! But the story of the killed LBO kept gnawing at me.

Ok, on the surface, it may seem that the government is working hard on protecting taxpayers from a possibility of another bailout. But

Citigroup was one of the first bailees to repay the government ($51 billion) with the highest profit on the bailout list (additional $13.5 billion).
As we know, it wasn't the commercial lending, but the sub-prime mortgages and the securitization thereof that was at the core of the financial crisis and the subsequent bailout. That is why the government-sponsored Fannie Mae and Freddie Mac top the bailout chart with $187 billion of the received support between two of them.
Of the top 20 bailout recipients the one with the largest debt still outstanding since 2008 is General Motors (as of 05/29/2014, $11.5 billion is still due)- an automaker, a public company, a NYSE's Blue Chip.

Wait a minute, wait a minute! Private business vs. public company? These Treasury moves have nothing to do with the fiscal protection of the nation. It has to do with the government's continuous prevention of the stock-market crash and massive panic that will follow. Too scared to deal with the long overdue adjustment, it has been doing everything in its power to direct both public and corporate investments into the shares gambling of mythological proportions.

The private businesses and the private equity investors act against this insane agenda by laboring hard under the natural commercial formula of growing capital through realized profits generated by functional enterprises. To undercut these efforts, the proverbial "they" are willing to sabotage private businesses, which hoi poloi knows nothing about, in order to continue ballooning the stock market cancer, so that the general public with their Ameritrade accounts and 401(k) plans invested into "emerging" markets is kept at bay.

Well, I will not fold! I will get that Citi line! As hopeless as it may be in the long run, I take a great satisfaction in the fact that my daily work is essentially a part of the Fiscal Resistance.

Social Networking May Still Redeem Itself as an Instrument of Commercial Quality Control

Today, our minds automatically go to facebook, Twitter, Instagram, etc. when someone uses the words "social network." The Rudin/Sorkin/Fincher team made a movie about Mark "I-violate-your-constitutional-rights" Zuckerberg and used those words as a title!

And it's absolutely ridiculous, because establishing and maintaining connections with friends and "the right people" have been vital for the human species since, like, forever. Folks have always built their settlements, villages, towns, and cities with designated places for meetings. Back in the day (and I don't mean the 1980s), households accepted visitors on certain days of the week; and even on a random day one could come by and leave a calling card with the family's help. And who can deny that, ever since the first Industrial Revolution, the patterns of commercial and financial developments were determined by the who-knows-who principle. It's just that the outreach was far more limited.

Of course, the magnitude of Internet networking is breathtaking. In the early 1990s, when the Internet has connected all seven continents, the miracle of instant world-wide access to knowledge, culture, entertainment, or people was the most important and alluring aspect of this new technology for me. I still experience a thrill every time I look at this blog's dashboard and see that during the last 24 hours my posts have been read not just at home, but also in Denmark, Canada, Germany, South Africa, UK, Vietnam, Australia, Portugal, Spain, India, France, and Taiwan. I love it.

Yet, I hate facebook and Twitter. Okay, push your eyebrows back down and let me explain. I don't hate social networking per se: It's convenient to receive updates on your favorite artists and it's important for business: I've been on LinkedIn since the times it operated exclusively on the basis of professional invitations. But I abhor the contemporary "social network" phenomenon and what it represents: the unrestrained hunger for attention, the vile combination of pathological exhibitionism and a sickly kind of voyeurism; the violation of privacy and the desire to be violated. I cannot stand the stalking by exes, the spying by employers, the snooping by the government agencies – all that shit.

That said, there are some companies with one or another form of social networking at their cores, which I consider not only healthy, but also greatly important due to their positive impact on the commercial environment, especially the consumer sector. I'm not naive and I don't think that any of the entrepreneurs behind these businesses consciously elected to influence the quality of goods and services. Most likely they simply shaped their business models utilizing the exploding patterns of collective participation in the Internet experience, but in the process they unwittingly created an influential force that has a power of strengthening and weakening businesses.

In 1979, Tim and Nina Zagat started imploring their friends into scoring restaurants they visited, eventually turning their social pastime into a ranking business, which was bought by Google in 2011 for a reported $151 million. Being an old-fashioned medium from the start, however, it remained the same under the new high-tech ownership: It's still unclear how the rankings are formulated.

It was Pierre Omidyar's hobby-project turned international conglomerate with an annual revenue of $14 billion, aka eBay that pioneered the concept of building market-place reputations based on the fully-disclosed opinions of the "community members," i.e. users of the eBay services. While everyone was screaming (understandably so) that people will cheat, lie and steal, eBay founders stuck to the most fundamental of the commercial principles: in order to succeed you need to keep your ratings high, because one unresolved accusation of unsavory practices may kill your future transactions for good. It's like what G.W. Bush said, "Fool me once, shame on you. Fool me – you can't get fooled again."

Today, thanks to rating algorithms utilized by various online businesses, we came to rely on communal ratings and individual opinions whenever we buy electronics, computers, household appliances, books, or select entertainment on Netflix, or order food delivery on Seamless, or pick a hotel on TripAdvisor, or make decisions about telecommunications providers. Many of us not only peruse the viewpoints of others, but also actively participate in the polling process by sharing our own thoughts about this or that product, service, establishment, thus affecting a new system of commercial quality control.

It is safe to say, in my opinion, that Yelp has become a flagship of the communal marketing model. Again, not because the ideas of commercial quality control and merit-based rewards are so important to them, but for the sake of the advertising income ($138 million in 2012). Nevertheless, assessing performance and assigning rewards (aka ratings) is exactly what "yelpers" (members expressing their opinions) do.

A few unique traits place Yelp, Inc. in the avant-garde of this movement. They encompass a wide spectrum of consumer services. Right now you can find referrals on businesses in 20 main categories – from restaurants to religious organizations, further subdivided into specialties. In less than 10 years they have achieved an international magnitude. The listings are essentially combined efforts: detailed information about the business is provided by the commercial participants themselves (for a fee) and consumers supply their reviews, photos, and ratings. The search engine is geographically oriented allowing users to find what's around them on the map.

Also, Yelp, Inc. claims that they use an "aggressive" reviews filter, which rejects posts that are suspected to be biased or false. As a result, according to their public releases, about 25% of entries are being dismissed. And I can appreciate that. Like I said, rendering communal judgments on commercial establishments is a serious matter: ultimately it has a power of affecting the livelihood of individual businessmen. So, the filtering is great as long as Yelp conducts their selections, rejections, and other manipulations fairly and without prejudice.

Unfortunately, as with everything touched by greed, the communal quality control as executed by Yelp, Inc. may be seriously misused. While I was writing this piece, TypePad's "related-posts" function has presented me with a few reports (including the one attached below) accusing Yelp of manipulating reviews in exchange for business clients' participation in the site's advertising programs (you can also read about it on Wikipedia). And that's criminal. Not only because it's nothing short of blackmail, but also because, by using individual consumers' personal and freely expressed opinions in this unsavory process, Yelp corrupts the participants' intellectual property and constitutional rights. I sure as hell hope that these accusations are not true. If they are, yelpers should file a class-action suit to bar Yelp, Inc. from using their reviews as the means of racketeering.

Inside Yelp's Wasp Nest: When Social Networking Meets Extortion

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