<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:32353.wais]
S. Hrg. 109-845
FAILURE TO IDENTIFY COMPANY OWNERS IMPEDES LAW ENFORCEMENT
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
----------
NOVEMBER 14, 2006
----------
Printed for the use of the Committee on Homeland Security
and Governmental Affairs
FAILURE TO IDENTIFY COMPANY OWNERS IMPEDES LAW ENFORCEMENT
32-353 PDF
2007
S. Hrg. 109-845
FAILURE TO IDENTIFY COMPANY OWNERS IMPEDES LAW ENFORCEMENT
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
NOVEMBER 14, 2006
__________
Printed for the use of the Committee on Homeland Security
and Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
32-353 WASHINGTON : 2007
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800
Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001
COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia
Michael D. Bopp, Staff Director and Chief Counsel
Michael L. Alexander, Minority Staff Director
Trina Driessnack Tyrer, Chief Clerk
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska CARL LEVIN, Michigan
TOM COBURN, Oklahoma DANIEL K. AKAKA, Hawaii
LINCOLN D. CHAFEE, Rhode Island THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia MARK PRYOR, Arkansas
Raymond V. Shepherd, III, Staff Director and Chief Counsel
Mark D. Nelson, Senior Counsel
Elise J. Bean, Staff Director and Chief Counsel to the Minority
Robert L. Roach, Counsel and Chief Investigator to the Minority
Laura E. Stuber, Counsel to the Minority
Zachary I. Schram, Professional Staff Member to the Minority
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Coleman.............................................. 1
Senator Levin................................................ 4
Senator Carper............................................... 10
WITNESSES
Tuesday, November 14, 2006
Stuart G. Nash, Associate Attorney General and Director,
Organized Crime Drug Enforcement Task Force, U.S. Department of
Justice........................................................ 12
K. Steven Burgess, Director of Examinations, Small Business/Self
Employed Division, Internal Revenue Services, accompanied by
Robert Northcutt, Acting Director, Abusive Transactions Office,
Small Business/Self Employed Division, Internal Revenue Service 14
Yvonne D. Jones, Director, Financial Markets and Community
Investment Team, U.S. Government Accountability Office......... 16
Jamal El-Hindi, Associate Director for Regulatory Policy and
Programs, Financial Crimes Enforcement Network................. 18
Richard J. Geisenberger, Assistant Secretary of State of
Delaware, Delaware............................................. 32
Scott W. Anderson, Deputy Secretary for Commercial Recordings,
Office of the Secretary of State, State of Nevada, Carson City,
Nevada......................................................... 33
Laurie Flynn, Chief Legal Counsel, Office of the Secretary of the
Commonwealth of Massachusetts, Boston, Massachusetts........... 35
Alphabetical List of Witnesses
Anderson, Scott W.:
Testimony.................................................... 33
Prepared statement with an attachment........................ 133
Burgess, K. Steven:
Testimony.................................................... 14
Prepared statement........................................... 75
El-Hindi, Jamal:
Testimony.................................................... 18
Prepared statement........................................... 107
Flynn, Laurie:
Testimony.................................................... 35
Prepared statement........................................... 140
Geisenberger, Richard J.:
Testimony.................................................... 32
Prepared statement........................................... 115
Jones, Yvonne D.:
Testimony.................................................... 16
Prepared statement........................................... 83
Nash, Stuart G.:
Testimony.................................................... 12
Prepared statement........................................... 49
Northuctt, Robert:
Testimony.................................................... 27
EXHIBITS
1. GCharts...................................................... 144
2. GU.S. Government Accountability Office (GAO) Report to the
Permanent Subcommittee on Investigations, Committee on Homeland
Security and Governmental Affairs, U.S. Senate, COMPANY
FORMATIONS--Minimal Ownership Information Is Collected and
Available, April 2006, GAO-06-376.............................. 149
3. GExcerpts from the June 2006 Third Mutual Evaluation Report
on Anti-Money Laundering and Combating the Financing of
Terrorism, United States of America, prepared by the Financial
Action Task Force (FATF): Section 5--Legal Persons and
Arrangements & Non-Profit Organizations; Table 1: Ratings of
Compliance with FATF Recommendations; and Table 2: Recommended
Action Plan to Improve the AML/CFT System...................... 225
4. GChapter 8--Shell Companies and Trusts, U.S. Money Laundering
Threat Assessment, December 2005............................... 251
5. GReport of the Financial Crimes Enforcement Network (FinCEN),
The Role of Domestic Shell Companies in Financial Crime and
Money Laundering: Limited Liability Companies, November 2006... 259
6. GFinancial Crimes Enforcement Network (FinCEN) Guidance,
Subject: Potential Money Laundering Risks Related to Shell
Companies, issued November 9, 2006............................. 285
7. Gwyomingcompany.com--Excerpts from website of a Nevada based
Company Formation Firm......................................... 290
8. Gnevadafirst.com--Excerpts from website of a Nevada based
Company Formation Firm......................................... 322
9. GOffshore Inc. Country Comparison Chart...................... 352
10. GResponses to supplemental questions for the record submitted
to Stuart G. Nash, Associate Deputy Attorney General and
Director, Organized Crime Drug Enforcement Task Force, U.S.
Department of Justice.......................................... 355
11. GResponses to supplemental questions for the record submitted
to K. Steven Burgess, Director of Examinations, Small Business/
Self Employed Division, Internal Revenue Service............... 357
16. GResponses to supplemental questions for the record submitted
to Jamal El-Hindi, Associate Director for Regulatory Policy and
Programs, Financial Crimes Enforcement Network................. 360
13. GResponses to supplemental questions for the record submitted
to Richard J. Geisenberger, Assistant Secretary of State, State
of Delaware.................................................... 363
14. GResponses to supplemental questions for the record submitted
to Scott W. Anderson, Deputy Secretary of State for Commercial
Recordings, Office of the Secretary of State, State of Nevada.. 366
15. GResponses to supplemental questions for the record submitted
to Laurie Flynn, Chief Legal Counsel, Office of the Secretary
of the Commonwealth of Massachusetts........................... 368
16. GResponses to supplemental questions for the record submitted
to Alain Damais, Executive Secretary, Financial Action Task
Force (FATF)................................................... 372
FAILURE TO IDENTIFY COMPANY OWNERS IMPEDES LAW ENFORCEMENT
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TUESDAY, NOVEMBER 14, 2006
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:32 p.m., in
room 342, Dirksen Senate Office Building, Hon. Norm Coleman,
Chairman of the Subcommittee, presiding.
Present: Senators Coleman, Levin, and Carper.
Staff Present: Raymond V. Shepherd, III, Staff Director and
Chief Counsel; Mary D. Robertson, Chief Clerk; Mark D. Nelson,
Senior Counsel; Elise J. Bean, Staff Director and Chief Counsel
to the Minority; Robert L. Roach, Counsel and Chief
Investigator to the Minority; Laura Stuber, Counsel to the
Minority; Zachary Schram, Professional Staff to the Minority;
Steven Groves, Senior Counsel; John McDougal (Detailee, IRS);
Kate Bittinger (Detailee, GAO); JoAnna I. Durie (Detailee,
ICE); Cindy Barnes (Detailee, GAO); Emily Germain, Intern;
Jennifer Boone (Senator Collins); Robin Landauer (Senator
Coburn); Teresa Meoni, Intern; Mark LeBron, Intern; and John
Kilvington (Senator Carper).
OPENING STATEMENT OF SENATOR COLEMAN
Senator Coleman. This hearing of the Permanent Subcommittee
on Investigations is called to order.
Good afternoon, and thank you for attending today's
hearing. I informed Senator Levin that I have to be on the
floor of the Senate at 2:50, so I will give my opening
statement and turn the gavel over to Senator Levin. He will do
the introduction of the first panel and then I will come back.
I said I was kind of easing myself into passing the gavel
over, so it is not like cold turkey in January.
I also want to personally thank the Senator and to say very
publicly that this investigation--Senator Levin has really been
driving this. He has been driving this issue about
transparency, both internationally and if we are dealing with
it internationally, we have to deal with it at home. So I want
to commend him for his continued efforts in addressing the
abuses of shell companies, both here and abroad.
The purpose of today's hearing is to examine the lack of
information collected by various States regarding the ownership
of non-publicly traded companies, and the extent to which U.S.
shell companies are being used to conceal the identities of
those engaged in illicit activity.
In the United States, State governments authorize the
formation of nearly 2 million new domestic companies each year.
Although the vast majority of these companies are formed to
serve legitimate commercial purposes, the potential for abuse
is great. The absence of ownership disclosure requirements and
lax regulatory regimes in many of our States make U.S. shell
companies attractive vehicles for those seeking to launder
money, evade taxes, finance terrorism, or conduct other illicit
activity anonymously.
In fact, we generally have no idea who owns the millions of
U.S. companies formed each year because most States do not ask
for this information. In a recent report prepared at the
request of this Subcommittee, the Government Accountability
Office found that none of the 50 States requires applicants to
disclose who will own a new corporation and only a few States
require this information for a new limited liability company
(LLC).\1\
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\1\ See Exhibit 2 which appears in the Appendix on page 149.
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Moreover, although most States require corporations and
LLCs to file periodic reports, only three States require
corporations to report ownership information in these filings,
and only five States require the same of LLCs.
Perhaps most troubling, the GAO found that none of the
States screens company information against criminal watch lists
or verifies the identity of company officials. This lack of
transparency not only creates obvious vulnerabilities in our
financial system, but it also threatens our homeland security.
GAO reports that the FBI has 103 open investigations
involving financial market manipulation. Most of these cases
involve U.S. shell companies. A Department of Justice report
revealed that Russian officials used shell companies in
Pennsylvania and Delaware to unlawfully divert $15 million in
international aid intended to upgrade the safety of former
Soviet nuclear power plants.
Schemes like these are not uncommon. But without sufficient
company ownership information, it is often difficult for law
enforcement to identify and prosecute the criminals behind
them. For example, Immigration and Customs Enforcement (ICE)
officials reported that over a 2-year period one Nevada-based
corporation received more than 3,700 suspicious wire transfers
totaling $81 million. This case has not been prosecuted,
however, because ICE was unable to identify the corporation's
owners.
Clearly, our failure to identify the owners of U.S. shell
companies is a significant deficiency in our anti-money
laundering and terrorist financing efforts. I am concerned that
the competition among States to attract company filing revenue
and franchise taxes has, in some instances, resulted in a race
to the bottom.
Internet searches reveal that in the race to provide
faster, cheaper company formation processes, States that
collect company ownership information are at a competitive
disadvantage. Numerous websites laud the advantages of
incorporating in States that protect privacy and limit
information reporting requirements.
Company formation and service of process agents in these
States advertise packages that include nominee shareholders,
nominee directors, local telephone listings, live
receptionists, and other devices designed to provide the veneer
of legitimacy to shell companies that employ no one and have no
physical presence other than a mailing address. That these
formation and support services rival those offered in some of
the most notorious offshore tax and financial secrecy havens is
simply unacceptable.
This is an issue again that this Subcommittee has explored,
and Senator Levin has been really passionate about rooting out
that level of corruption.
The United States should never be the situs of choice for
international crime, but that is exactly what the lax
regulatory regimes in some of our States are inviting. U.S.
shell companies have been used to obscure the ownership and
purpose of billions of dollars in international wire transfers
and to facilitate criminal activity throughout the world. The
FBI believes that U.S. shell companies have been used to
launder as much as $36 billion from the former Soviet Union.
The U.S. Treasury's Financial Crime Enforcement Network--
FinCEN--found that between April 1966 and January 2004, U.S.
financial institutions filed 397 suspicious activity reports
concerning a total of almost $4 billion that involve U.S. shell
companies and Eastern European companies.
It is embarrassing that foreign law enforcement agencies
report being frustrated by the lack of ownership information
available on U.S. companies and that the Department of Justice
is often unable to respond to requests for company ownership
information from our treaty partners. In our fight to win the
war on terrorism, opportunities to assist law enforcement
efforts of our allies are too precious to sacrifice.
International criminal activities that exploit the lack of
transparency in our company registrations serve to tarnish our
country's reputation internationally and are more costly than
ever.
At the same time, there are obvious costs and
inefficiencies associated with the collection and verification
of ownership information. Many States recognize Federal law
enforcement's need for more company ownership information, but
the States do not need an unfunded mandate from Congress. The
States raise legitimate concerns that collecting ownership
information could delay or derail legitimate business deals and
drain limited State resources from other, more pressing, needs.
Moreover, it is likely that when more stringent disclosure
requirements are passed in one State, companies will simply
move to those States or countries with less stringent
requirements.
It appears to me that what is needed is a level playing
field, a system that avoids a race to the bottom. It would be
nonsensical for someone to lock the front door but leave the
back door wide open and then go to sleep believing that their
home is secured. Yet, in our efforts to secure this Nation, we
seem to have done exactly that. We have enhanced our security
and identification requirements at ports, airports and along
the borders, but we have ignored the obvious vulnerabilities
created by anonymously-owned U.S. companies. We must find a
common sense solution that balances our need to protect our
financial system, our homeland, and our international
reputation with our need to preserve an efficient, flexible
business environment.
I look forward to the testimony we will hear during today's
hearing. It is important that we understand the specific nature
of the vulnerabilities created by anonymously-owned U.S. shell
companies and to hear proposals for steps that we can take to
reduce the potential for abuse while preserving a system that
does not derail or necessarily delay legitimate business.
After today's hearing and assessing the testimony, I intend
to discuss with Senator Levin what follow up action we need to
take in order to further address the problems exposed by this
investigation.
Again, I want to thank my colleague, the Ranking Member,
for his leadership on this issue. I will turn the gavel over to
him and will return after I deal with issues on the floor.
Senator Levin [presiding]. Mr. Chairman, before you leave,
let me just take a moment to thank you. As true of all
investigations and inquiries of this Subcommittee, these are
partnerships. These are working relationships which are
established which are critically important to the success of
this Subcommittee.
You have carried on that tradition as Chairman, of working
on a bipartisan basis, working together with ranking members
and other members of our Subcommittee to try to make progress
in areas we look at. But nothing that has happened or could
happen without the support of you and your staff and the full
partnership of both of you and we thank you for that.
Senator Coleman. Thank you, Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. In 2004 the United States was home to 12
million companies, including about 9 million corporations and
3.8 million limited liability corporations, or LLCs. In that
year alone, our 50 States incorporated more than 1.9 million
new corporations and LLCs. The vast majority of these companies
operate legitimately, but a small percentage do not,
functioning instead as conduits for organized crime, money
laundering, securities fraud, tax evasion and other misconduct.
In most cases, our States have no idea who is behind the
companies that they have incorporated. A person who wants to
set up a U.S. company typically provides less information than
is required to open a bank account or get a drivers license. In
most cases, they do not have to provide the name, address or
proof of identification of a single owner of the new company.
That is because our States have been competing with each other
to set up new companies not only faster than ever, at less cost
than ever, but with greater anonymity for the company's owners.
Most U.S. States offer electronic services that incorporate
a new company and many will set up a new company in less than
24 hours. The median fee is less than $100. In Delaware and
Nevada, for an extra $1,000, an applicant can set up a company
in less than an hour. Colorado, which incorporates about 5,000
companies each month, told the Subcommittee that it now sets up
99 percent of its companies by computer without any human
intervention or review of the information provided.
Incorporating all of these new companies generates annual
revenues totaling hundreds of millions of dollars for our
States.
The problem with incorporating nearly 2 million new U.S.
companies each year without knowing anything about who is
behind them is that it becomes an open invitation for criminal
abuse. Take a look at a few websites from firms in the business
of incorporating companies around the world.\1\
---------------------------------------------------------------------------
\1\ See Exhibit 1 which appears in the Appendix on page 144.
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This website, which is hard to read so I will quote from
it, from an international incorporation company promotes
setting up companies in Delaware by saying ``Delaware, an
offshore tax haven for non-U.S. residents.'' One of the cited
advantages is that ``owners' names are not disclosed to the
State.''
Another website from a United Kingdom firm called
formacompanyoffshore.com lists a number of advantages to
incorporating in Nevada. The cited advantages include ``no IRS
information sharing agreement'' and ``stockholders are not on
public record, allowing complete anonymity.''
These are just two of the dozens of websites that portray
our States as welcoming those who want to operate U.S.
companies with anonymity.
That anonymity is exactly what this Subcommittee has been
criticizing offshore tax havens for offering to their clients.
In fact, our last Subcommittee hearing lambasted offshore
jurisdictions for setting up offshore corporations with secret
U.S. owners engaged in transactions designed to evade U.S.
taxes, leaving honest taxpayers to pick up the slack. Some U.S.
company formation firms advertise the same type of anonymity
and take the same type of actions that this Subcommittee has
been criticizing in the offshore jurisdictions for years.
Take a look, for instance, at a Nevada firm called Nevada
First Holdings.\1\ Nevada First advertises on the Internet,
offering for sale an aged or a shelf company or companies that
were set up in Nevada years earlier, pointing out that an older
company can lend credibility to an operation.
It sells these companies that are no longer functioning to
companies, to anyone, who can pay the price without obtaining
any information on the true owners of the companies since there
is no obligation to do so.
Nevada First offers a host of services to further hide the
identity of a company's owners. For example, Nevada First
employees can serve as a company's nominee director or officer
to enable the true owners to ``retain a higher level of
anonymity.'' A Nevada First employee, acting as a company
officer or director, can provide his own name and Social
Security number to open a company bank account or obtain an
Employer Identification Number from the IRS. So the true owners
do not have to use their name. That is why that employee of
Nevada First uses his name, in order to keep the real owners
anonymous.
Nevada First will also allow a company to use Nevada
First's own business address and provide a company with mail
forwarding and telephone services, all the bells and whistles
needed to make a phony operation look like it is actually
operating in Nevada.
Nevada First told the Subcommittee it has already assigned
1,850 addresses for so-called ``suites'' within its offices to
the companies it has formed and at least 850 of those shell
companies are still in operation.
Now there is a picture here of that building where 850
companies have their offices. And you can see, just by the
relationship to the automobiles in front of that building, that
is truly a facade. There is no room in that building for 850
companies' offices. It reminds me very much of that building in
the Caymans where thousands of addresses were linked to a
building that nobody ever went to or saw.
The potential for abuse in this situation, where the
companies do not actually operate out of these offices, is
obvious. It is compounded by the fact that Nevada First is far
from unique in offering these services, none of which by the
way is illegal on its face. The key to this entire charade is
the lack of any U.S. requirement to get the names of the true
owners of the U.S. companies that are being formed.
Law-enforcement officials testifying today are expected to
describe how U.S. companies are being used for money
laundering, drug sales, securities fraud, and other misconduct
and how, in too many cases, when law-enforcement agents try to
find out who the company owners are they run smack into a blank
wall. In most cases, the States that set up the companies ask
no questions about the true owners and therefore have no
ownership information for law enforcement to investigate.
Here are just a few examples of the problems that have
resulted. Immigrations and Customs Enforcement officials
reported that a Nevada-based corporation received more than
3,700 suspicious wire transfers totaling $81 million over 2
years but the case was not pursued because the Agency was
unable to identify the corporation's owners. The FBI told the
GAO that anonymously held U.S. shell companies are being used
to launder as much as $36 billion from the former Soviet Union.
The FBI reported that they have 103 open cases
investigating stock market manipulation, most of which involve
anonymously-held U.S. shell companies.
U.S. Treasury's Financial Crimes Enforcement Network
reported that between April 1996 and January 2004 financial
institutions filed 397 suspicious activity reports involving a
total of almost $4 billion deposited in or wired through U.S.
financial institutions by anonymously held U.S. shell
companies.
A Department of Justice report revealed that Russian
officials used anonymously held shell companies in Pennsylvania
and Delaware to unlawfully divert $15 million in international
aid intended to upgrade the safety of former Soviet nuclear
power plants.
For decades, the leading international body fighting money
laundering, called the Financial Action Task Force on Money
Laundering has warned countries not to set up companies without
first finding out who was really behind them. In a set of 40
recommendations that have become international benchmarks for
strong and effective anti-money laundering laws, the Financial
Action Task Force has urged countries to identify the
beneficial owners of the companies that they establish.
FATF recommendation number 33: Countries should ensure that
there is adequate, accurate, and timely information on the
beneficial ownership and control of legal persons--which
includes companies--that can be obtained or accessed in a
timely fashion by competent authorities.
The United States is a leading member of that Financial
Action Task Force. It has worked with that organization to
convince countries around the world to comply with those 40
recommendations of that task force.
Today even a number of offshore secrecy jurisdictions, such
as the Caymans, Bahamas, Jersey, and the Isle of Man, at least
obtain the information that is part of those recommendations.
They comply with the recommendation to identify the owners of
companies that they establish. But the United States does not
comply and we were just formally cited for that failure in the
year 2006 in that task force review of U.S. anti-money
laundering laws.
So now we have 2 years to comply with recommendations that
we supported in a task force that we helped create or else we
risk expulsion from that task force.
We should not need the threat of expulsion from that task
force, which is aimed at ending the abuses of money laundering,
to force us to address this problem. We ought to correct this
problem for our own sake, to eliminate a gaping vulnerability
to criminal misconduct.
Criminals are using U.S. companies inside our borders to
commit crimes. They are also using U.S. companies to commit
crimes outside of our borders, which will not only give us a
bad name but also means that U.S. companies are being used to
facilitate crimes related to drug trafficking, financial fraud,
corruption and other wrongdoing that harm our national
interest.
Four reports issued in the past year describe the law
enforcement problems caused by U.S. companies with unknown
owners, and these reports are described in my statement, which
I will insert in the record in full.
It is difficult to judge the scope of this law-enforcement
threat since we do not know how many companies are involved in
wrongdoing, but if just one-tenth of 1 percent of the 12
million existing U.S. companies are engaged in misconduct, that
would mean that 12,000 suspect companies are loose in this
country and the world with no record of their beneficial
ownership. That is an unacceptable risk to our national
security and our treasury.
Our lax standards have created real problems for our
country in the international arena. The United States has been
a leading advocate for transparency and openness. We have
criticized offshore tax havens for their secrecy and lack of
transparency. We have pressed them to change their ways. But
look what is going on in our own backyard. The irony is that we
do not suffer from a lack of transparency, there is just no
information to disclose. And when other countries ask us for
company owners, we have to stand red-faced and empty-handed. It
undermines our credibility and our ability to go after offshore
tax havens that help rob honest U.S. taxpayers.
It also places us in the position of being in noncompliance
with the guidelines of the very international organization
promoting our message of openness and transparency.
There are a number of possible solutions to this problem
and we can perhaps explore them at the end of this hearing so
that we can get on with the hearing. But we must address this
problem for the sake of our law enforcement, for the sake of
our security, and for the sake of our international reputation
in trying to enforce laws which will promote transparency and
attack money laundering and other crimes.
Again, I want to thank our Chairman for the strong position
that he has taken, for the support that he and his staff have
provided for the partnership that they have always provided,
and for maintaining a strong bipartisan reputation of this
Subcommittee, which will continue in the years ahead.
[The prepared statement of Senator Levin follows:]
PREPARED STATEMENT BY SENATOR CARL LEVIN
In 2004, the United States was home to 12 million companies,
including about 9 million corporations and 3.8 million limited
liability corporations or LLCs. In that year alone, our 50 states
incorporated more than 1.9 million new corporations and LLCs. The vast
majority of those companies operate legitimately. But a small
percentage do not, functioning instead as conduits for organized crime,
money laundering, securities fraud, tax evasion, and other misconduct.
In most cases, our states have no idea who is behind the companies
they have incorporated. A person who wants to set up a U.S. company
typically provides less information than is required to open a bank
account or get a driver's license. In most cases, they don't have to
provide the name, address, or proof of identification of a single owner
of the new company. That's because our states have been competing with
each other to set up new companies faster than ever, at less cost, and
with greater anonymity for the company owners.
Most U.S. states offer electronic services that incorporate a new
company, and many will set up a new company in less than 24 hours. The
median fee is less than $100. In Delaware and Nevada, for an extra
$1,000, an applicant can set up a company in less than an hour.
Colorado, which incorporates about 5,000 new companies each month, told
the Subcommittee that it now sets up 99% of its companies by computer,
without any human intervention or review of the information provided.
Incorporating all these new companies generates annual revenues
totaling hundreds of millions of dollars for the states.
The problem with incorporating nearly two million new U.S.
companies each year--without knowing anything about who is behind
them--is that it becomes an open invitation for criminal abuse. Take a
look at a few websites from firms in the business of incorporating
companies around the world. [Show chart.] This website from an
international incorporation company promotes setting up companies in
Delaware by saying: ``DELAWARE--An Offshore Tax Haven for Non US
Residents.'' One of the cited advantages is that ``Owners' names are
not disclosed to the state.'' Another website from a United Kingdom
firm called ``formacompany-offshore.com'' lists a number of advantages
to incorporating in Nevada. [Show chart.] The cited advantages include:
``No I.R.S. Information Sharing Agreement'' and ``Stockholders are not
on Public Record allowing complete anonymity.'' These are just two of
dozens of websites that portray our states as welcoming those who want
to operate U.S. companies with anonymity.
That type of anonymity is exactly what we've been criticizing
offshore tax havens for offering to their clients. In fact, our last
Subcommittee hearing lambasted offshore jurisdictions for setting up
offshore corporations with secret U.S. owners engaged in transactions
designed to evade U.S. taxes, leaving honest taxpayers to pick up the
slack.
Some U.S. company formation firms advertise the same type of
anonymity and take the same type of actions that this Subcommittee has
been criticizing in the offshore community for years. Take a look, for
example, at a Nevada firm called Nevada First Holdings. Nevada First
advertises on the Internet, offering for sale ``aged" or ``shelf"
companies that were set up in Nevada years earlier, pointing out that
an older company can lend credibility to an operation. It sells these
companies to anyone who can pay the price, without obtaining any
information on the true owners of the companies, since it has no legal
obligation to do so.
Nevada First offers a host of services to further shield the
identity of a company's owners. For example, Nevada First employees can
serve as a company's nominee directors or officers to enable the true
owners to ``retain a higher level of anonymity.'' A Nevada First
employee, acting as a company officer or director, can provide his own
name and social security number to open a company bank account or
obtain an Employer Identification Number from the IRS, so the true
owners don't have to. Nevada First will also allow a company to use
Nevada First's own business address, and provide the company with mail
forwarding and telephone services--all the bells and whistles needed to
make a phony operation look like it is actually operating in Nevada.
Nevada First told the Subcommittee that it has already assigned 1,850
addresses for ``suites" within its offices to the companies it has
formed, at least 850 of which are still in operation. None of those
companies, of course, actually operates out of those offices. The
potential for abuse in this situation is obvious, and is compounded by
the fact that Nevada First is far from unique in offering these
services--none of which, by the way, is illegal on its face. Key to
this entire charade is the lack of any U.S. requirement to get the
names of the true owners of the U.S. companies being formed.
Law enforcement officials testifying today are expected to describe
how U.S. companies are being used for money laundering, drug sales,
securities fraud, and other misconduct, and how, in too many cases,
when law enforcement agents try to find out the company owners, they
run smack into a blank wall. In most cases, the states that set up the
companies asked no questions about the true owners and therefore have
no ownership information for law enforcement to investigate. Here are a
few examples of the problems that have resulted:
<bullet> Immigration and Customs Enforcement officials reported
that a Nevada-based corporation received more than 3,700 suspicious
wire transfers totaling $81million over 2 years, but the case was not
pursued, because the agency was unable to identify the corporation's
owners.
<bullet> The FBI told GAO that anonymously-held U.S. shell
companies are being used to launder as much as $36 billion from the
former Soviet Union. The FBI also reported that they have 103 open
cases investigating stock market manipulation,most of which involve
anonymously-held U.S. shell companies.
<bullet> The U.S. Treasury's Financial Crimes Enforcement Network
(FinCEN) reported that, between April 1996 and January 2004, financial
institutions filed 397suspicious activity reports involving a total of
almost $4 billion deposited in or wired through U.S. financial
institutions by anonymously-held U.S. shell companies.
<bullet> A Department of Justice report revealed that Russian
officials used anonymously-held shell companies in Pennsylvania and
Delaware to unlawfully divert $15million in international aid intended
to upgrade the safety of former Soviet nuclear power plants.
For decades, the leading international body fighting money
laundering, called the Financial Action Task Force on Money Laundering
or FATF, has warned countries not to set up companies without first
finding who is really behind them. In a set of 40 recommendations that
have become international benchmarks for strong and effective anti-
money laundering laws, FATF has urged countries to identify the
beneficial owners of the companies they establish. Recommendation 33
states: ``Countries should ensure that there is adequate, accurate and
timely information on beneficial ownership and control of legal
persons''--that includes companies--``that can be obtained or accessed
in a timely fashion by competent authorities.''
The United States is a leading member of FATF and has worked with
that organization to convince countries around the world to comply with
FATF's 40 recommendations. Today, even a number of offshore secrecy
jurisdictions such as the Cayman Islands, Bahamas, Jersey, and Isle of
Man comply with the recommendation to identify the owners of the
companies they establish. But the United States doesn't comply, and we
just got formally cited for that failure in a 2006 FATF review of U.S.
anti-money laundering laws. We now have two years to comply, or we risk
expulsion from FATF which, by the way, the United States was
instrumental in forming.
We shouldn't need the threat of expulsion from FATF to force us to
address this problem. We should correct it for our own sake, to
eliminate a gaping vulnerability to criminal misconduct. Criminals are
using U.S. companies inside our borders to commit crimes. They are also
using U.S. companies to commit crimes outside of our borders, which not
only gives us a bad name but also means U.S. companies are being used
to facilitate crimes related to drug trafficking, financial fraud,
corruption, and other wrongdoing that harm our national interest.
Four reports issued in the past year describe the law enforcement
problems posed by U.S. companies with unknown owners. The first is the
U.S. Money Laundering Threat Assessment, a joint report issued in
December 2005 by the Departments of Justice, Treasury, Homeland
Security, and others, to identify the most significant money laundering
problems we face. It devotes an entire chapter to law enforcement
problems caused by anonymously-held U.S. shell companies and trusts.
Next was the April 2006 report prepared by the Government
Accountability Office (GAO) at the request of the Subcommittee,
entitled Company Formations: Minimal Ownership Information Is Collected
and Available, which reviewed the laws of all 50 states, determined
that most states have no information on the true owners of the
companies being set up within their borders, and described a variety of
related law enforcement concerns. A third report, issued in June 2006
by FATF, entitled the Third Mutual Evaluation Report on Anti-Money
Laundering and Combating the Financing of Terrorism: United States of
America, criticizes the United States for failing to obtain beneficial
ownership information for U.S. companies and flatly states that the
U.S. is not in compliance with this FATF standard. Most recent is a
report released last week by the Department of Treasury's Financial
Crimes Enforcement Network which focuses squarely on the problem of
LLCs with unknown owners.
Together, these four reports paint a picture of rogue U.S.
companies breaking laws inside and outside of U.S. borders, operating
with inadequate government records that make it hard for law
enforcement to find the companies' true owners, conduct investigations,
and cooperate with international requests. It is difficult to judge the
scope of this law enforcement threat, since we don't know how many
companies are involved in wrongdoing. But if just one-tenth of one
percent of the 12 million existing U.S. companies are engaged in
misconduct, that means about 12,000 suspect companies are loose in this
country and the world with no record of their beneficial ownership.
That's an unacceptable risk to our national security and our treasury.
Our lax standards have also created problems for our country in the
international arena. The United States has been a leading advocate for
transparency and openness. We have criticized offshore tax havens for
their secrecy and lack of transparency, and pressed them to change
their ways. But look what's going on in our own backyard. The irony is
that we don't suffer from lack of transparency--there is just no
information to disclose. And when other countries ask us for company
owners and we have to stand red-faced and empty-handed, it undermines
our credibility and our ability to go after offshore tax havens that
help rob honest U.S. taxpayers. It also places us in the position of
being in non-compliance with the guidelines of the very international
organization promoting our message of openness and transparency.
There are many possible solutions to this problem if we have the
will to act. FinCEN is considering issuing new regulations requiring
company formation agents to establish risk-based anti-money laundering
programs which would require careful evaluations of requests for new
companies made by high-risk persons. Another approach would be for
Congress to set minimum standards, so that no state would be placed at
a competitive disadvantage when asking for the name of a company's true
owners. This nationwide approach would also ensure U.S. compliance with
international anti-money laundering standards. Still another approach
would be to expand on the work of a few states which already identify
some ownership information, and ask the National Conference Committee
on Uniform State Laws to strengthen existing model state incorporation
laws by including requirements for beneficial ownership information,
monetary penalties for false information, and annual information
updates.
These and other solutions become possible only if we are first
willing to admit there is a problem. I thank our Chairman, Senator
Coleman, for his and his staff's strong support of this effort and for
their ongoing work to help find solutions to the law enforcement
problems created by anonymously-held U.S. companies.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Thank you, Mr. Chairman.
Senator Levin. Almost.
Senator Carper. The once and future king.
Thank you, Mr. Chairman, and to Chairman Coleman as well,
first of all for your diligence on your issue.
I want to welcome our witnesses today. Thank you for
joining us and for your input.
I want to thank both Senator Levin and his staff and the
Chairman of the Subcommittee for working closely with my staff,
with our Secretary of State's office in Dover, Delaware as you
studied this topic and put this hearing together.
As some of you may know, this is an important issue in my
State. Business in corporations and related fees account for
roughly 25 percent of Delaware's general fund revenues. We have
been successful, as Delaware Assistant Secretary of State Rick
Geisenberger is going to put out later today, I think for a
number of reasons. We have a very highly regarded judicial
system and a commitment to excellence on the part of our
elected leaders and Mr. Geisenberger and his staff, on the part
of their predecessors as well. I continue to be proud that
Delaware is the leading home of incorporations for businesses
in this country.
I am also proud that Delaware has also been a leader in
addressing some of the issues and the concerns that we are
going to be discussing here today. In fact, our General
Assembly passed legislation earlier this year that strengthens
qualification standards for the firms that help businesses to
organize or register under Delaware State law.
I hope we can come away from this hearing later today with
a number of constructive ideas from Delaware and elsewhere on
how we can prevent the varying State laws on business formation
from being abused. Whatever solutions that we do pursue, it is
important that we are careful though not to hinder legitimate
business activity.
There are a number of reasons for us to encourage more
transparency with respect to who is really in control of a
business that might form in Delaware or might form in Michigan
or might form in Minnesota. At the same time, we need to
recognize that the vast majority of businesses set up in most
States are created with absolutely no intention whatsoever of
breaking the law. We do not want to do anything that would put
so many burdens on legitimate business and the people in State
Governments across the country who work with them that we see
less economic activity and less job creation as a result.
So to my friend, Senator Levin, and to our Chairman,
Chairman Coleman, I just want to say thanks again. Thank you
for your commitment to getting to the bottom of this problem
and for working constructively to find the right solutions or
maybe the right set of solutions as we attempt to address them
today and in the months ahead.
Thanks very much.
Senator Levin. Thank you very much, Senator.
We will now proceed to swear in our first panel.
I want to welcome the four witnesses, Stuart Nash, the
Department of Justice's Associate Deputy Attorney General and
Director of the Organized Crime Drug Enforcement Task Force;
Steven Burgess, the Director of Examination of the Small
Business/Self-Employed Division of the IRS; Yvonne Jones,
Director of the Government Accountability Office's Financial
Markets and Community Investment Team; and finally, Jamal El-
Hindi, the Associate Director for Regulatory Policy and
Programs of the Financial Crimes Enforcement Network, FinCEN.
I welcome each of you here today. We look forward to your
testimony.
Pursuant to Rule 6 of the Subcommittee, all witnesses who
testify before the Subcommittee are required to be sworn. At
this time, I would ask each of you to please stand and raise
your right hand.
Do you swear the testimony you will give before this
Subcommittee will be the truth, the whole truth, and nothing
but the truth, so help you God.
Mr. Nash. I do.
Mr. Burgess. I do.
Ms. Jones. I do.
Mr. El-Hindi. I do.
Senator Levin. Thank you all.
We will be using a timing system today. Approximately one
minute before the red light comes on you will see the light
change from green to yellow, which would give you an
opportunity to conclude your remarks. We ask that each if you
limit your testimony to not more than 5 minutes to give us a
chance to ask questions and to have time for the second panel.
Your written testimony will be printed in the record in its
entirety.
Mr. Nash, we will have you go first, followed by Mr.
Burgess, then Ms. Jones, then Mr. El-Hindi. Thank you, Mr.
Nash.
TESTIMONY OF STUART G. NASH,\1\ ASSOCIATE DEPUTY ATTORNEY
GENERAL AND DIRECTOR, ORGANIZED CRIME DRUG ENFORCEMENT TASK
FORCE, U.S. DEPARTMENT OF JUSTICE
Mr. Nash. Thank you. My thanks to Chairman Coleman, to
Senator Levin, and to all the Members of the Subcommittee. I am
pleased and honored to appear before you today to discuss an
important topic, the abuse of the company formation process in
this country, especially in the context of the highly
informative report that this Subcommittee commissioned from GAO
earlier this year.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Nash appears in the Appendix on
page 49.
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In the time that I have this afternoon, I would like to
address how the abuse of the corporate formation process in
this country has had a negative impact on our law enforcement
efforts here and abroad. Corporate vehicles play an important
and legitimate role in the global economy. Nevertheless, they
may be used for illicit purposes, including money laundering,
corruption, financing of terrorism, insider dealing, tax fraud,
and other illegal activities.
The use of shell corporations to facilitate criminal
schemes has evolved over time. Initially, in the 1970s and
1980s, criminals opened shell corporations and trusts in
offshore jurisdictions to conceal their ownership of assets.
They would then open bank accounts in the United States and
abroad in the names of these corporations or trusts.
As banks and law enforcement began to scrutinize off-shore
shell corporations more closely, criminals realized that they
could obtain some of the same benefits of offshore corporations
from U.S. domestic shell corporations with the added benefit
that the U.S. corporations would not receive the same level of
scrutiny.
The recent prosecution of Garri Grigorian illustrates this
development. In the Grigorian case, a 43-year-old Russian
national laundered $130 million on behalf of the Moscow-based
Intellect Bank and its customers through bank accounts located
in the small town of Sandy, Utah. As part of the scheme,
Grigorian and his associates established three U.S. shell
companies and then opened bank accounts in Utah in the names of
these companies. The shell companies never did any actual
business. They existed merely to provide a veil of legitimacy
to explain the huge amount of money flowing through the U.S.
accounts.
When Federal investigators tried to identify the beneficial
owners behind these shell corporations, they learned that
records from the pertinent Utah State agency provided only
limited details. Public documents for two of the companies
provided no information about the beneficial owners of the
companies. While the records of the third company did identify
an owner, no address other than Moscow, Russia was listed for
that owner.
Subsequent investigation revealed that this so-called owner
was nothing more than a straw owner in any case. State law
imposed no obligation on anyone to verify in any way the
information provided during the company formation process.
It was only because the true owners established bank
accounts in the names of the shell companies, and the fact that
the bank maintained information that was not maintained by the
State agency, that the true perpetrators of this scheme were
eventually identified.
The use of domestic shell corporations has continued to
evolve. After the implementation of enhanced customer
identification requirements that resulted from the USA PATRIOT
Act, U.S. banks began to require more information about
domestic corporations that opened accounts at their
institutions. This additional scrutiny resulted in the most
recent phenomenon, whereby criminals, domestic and foreign, are
opening shell corporations in the United States and then
opening bank accounts on behalf of these shell corporations in
foreign countries where U.S.-based corporations have an aura of
legitimacy and where U.S. anti-money laundering regulations do
not apply.
Not only has the use of U.S. shell corporations hampered
our ability to conduct our own criminal investigations, it has
also frustrated our ability to assist foreign law enforcement
agents. In cases where criminals use U.S.-based shell
corporations to open foreign bank accounts, a foreign law
enforcement agency investigating a crime within its
jurisdiction may obtain information about the foreign bank that
identifies a U.S. corporation as the account holder. Having
identified a U.S. corporation, the foreign agency will seek
assistance from the United States, most commonly through a
Mutual Legal Assistance Treaty request to identify the
beneficial owners of a U.S. shell corporation.
Our Office of International Affairs (OIA) has received an
increasing number of incoming requests for assistance involving
U.S. shell corporations. In 2004, for example, OIA received 198
legal assistance requests from Eastern European countries, of
which 122 involved requests related to U.S. shell corporations.
In 2005, these figures increased to 281 requests, of which 143
involved U.S. shell corporations. In most of these cases OIA,
has had to respond by saying that the information about the
beneficial owners of these U.S. shell corporations was simply
unavailable.
Finally, I would like to address the impact of our
corporate formation policies on our standing and reputation in
the global community. In June 2006, the Financial Action Task
Force (FATF), the preeminent multilateral group that addresses
worldwide money laundering issues, presented its evaluation of
the U.S.'s anti-money laundering regime.
Its evaluation confirmed that the United States had strong
and effective money laundering laws, some of the strongest in
the world. Nonetheless, FATF found that the U.S. anti-money
laundering regime was noncompliant in areas implicated by
today's hearing, including the States' collection and
maintenance of information related to the beneficial ownership
of companies formed in the United States.
Many foreign jurisdictions, including several that have in
the past developed reputations as money-laundering havens, have
taken steps in recent years to bring themselves into compliance
with FATF recommendations in this area.
I conclude by expressing the gratitude of the Department of
Justice for the continuing support that this Subcommittee has
demonstrated to anti-money laundering enforcement. The
Department believes that both the Federal Government and the
States must continue to strengthen and adapt our anti-money
laundering laws to confront new challenges in drug trafficking,
terrorist financing, white-collar crime, and all other forms of
criminal activity that generate or utilize illegal proceeds.
We look forward to working alongside our Treasury and
Homeland Security colleagues, with this Subcommittee, and with
Congress as a whole to address the issues identified at this
hearing.
Thank you and I would welcome any questions you might have.
Senator Coleman [presiding]. Thank you, Mr. Nash. Mr.
Burgess.
TESTIMONY OF K. STEVEN BURGESS,\1\ DIRECTOR OF EXAMINATIONS,
SMALL BUSINESS/SELF EMPLOYED DIVISION, INTERNAL REVENUE
SERVICE, ACCOMPANIED BY ROBERT NORTHCUTT, ACTING DIRECTOR,
ABUSIVE TRANSACTIONS OFFICE, SMALL BUSINESS/SELF EMPLOYED
DIVISION, INTERNAL REVENUE SERVICE
Mr. Burgess. Good afternoon, Chairman Coleman, Ranking
Member Levin, and other Members of the Subcommittee. I am
accompanied this afternoon by Robert Northcutt, the Acting
Director of Small Business/Self Employed Abusive Transactions
Office. He has first-hand knowledge of some of the issues that
will be discussed this afternoon and will also be available for
questions.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Burgess appears in the Appendix
on page 75.
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This Subcommittee has a long and distinguished history of
investigating abuses of the tax code. Last August we held an
important hearing regarding offshore tax shelters. But as you
are already well aware, it is not just the secrecy laws in
these foreign tax havens that can be exploited by persons to
evade taxes or conceal transactions. Within our own borders,
the laws of some States regarding the formation of legal
entities have significant transparency gaps which may even
rival the ownership secrecy afforded in the most attractive
offshore tax havens.
This domestic transparency gap is an impediment to both
U.S. law enforcement and the enforcement of the tax laws in
other countries. The lack of transparency inherent in shell
companies, whether in the form of corporations, trusts, limited
liability companies or other entities, enables countless
numbers of taxpayers to hide their noncompliance behind a legal
entity. This noncompliance would include such things as the
non-filing of proper returns and the concealment of taxable
income.
State laws govern the legal formation of business entities
within respective State boundaries as well as the informational
and reporting requirements imposed on such entities. While
requirements vary from State to State, in each instance a
minimal amount of information is required in order to form the
new entity. Generally, information concerning the beneficial
ownership of the entity is not required.
The money-laundering threat assessment, issued jointly by
several government law-enforcement agencies late last year,
cited three States as being the most accommodating
jurisdictions for the organization of these legal entities:
Delaware, Nevada, and Wyoming.
From an IRS perspective, we see two major problems arise as
we investigate companies registered in these States. First,
Nevada and Wyoming are the only two States that permit bearer
shares, which are very effective in hiding corporate ownership.
Bearer shares are issued by the corporation upon formation and
actually deem ownership of the corporation to the holder of the
shares. To determine ownership, one must actually find who has
physical possession of these shares.
Second, the use of nominee officers in Nevada and Wyoming
also make it easy for noncompliant taxpayers to establish a
corporation and remain completely anonymous. While most States
require that corporate officers have some meaningful
relationship to the corporation, that is not required in Nevada
and Wyoming.
We have authorized several investigations into promoters of
Nevada corporations and resident agents. These investigations
have revealed widespread abuse as well as problems in
curtailing it. For example, our office has obtained client
lists. They are being used as a source for potential non-filer
audits. An initial sampling of the client list reflected a
range of 50 to 90 percent of those listed were currently or
have been previously noncompliant with Federal tax laws.
We have also seen instances where a promoter advises its
clients to place their stock ledger and bearer shares in an
offshore entity, thereby further ensuring that the identity of
the beneficial owners remains anonymous, thus thwarting a
Nevada requirement that the resident agents know the location
of the stock ledger. If asked who owns a particular entity, the
resident agent can say that all he or she knows is that it is
owned by an entity in an offshore country.
There is also a problem for our tax treaty partners. Most
of the tax treaty requests for exchange of information
involving U.S. shell companies are received from Eastern
European countries and the Russian Federation. These U.S. shell
companies, organized mainly in Delaware, Nevada, Arkansas,
Oklahoma, and Oregon, are used extensively in Eastern Europe
and the Russian Federation to commit value-added tax or VAT
fraud. While assisting as much as we can, we are generally
unable to determine the beneficial owner of these U.S. shell
companies.
Moving forward, we are looking at a number of strategies to
target the widespread tax noncompliance by many of the shell
companies represented by resident agents and promoters. One of
the key elements is the establishment of an issue management
team (IMT), similar to teams we have formed in other
significant areas of potential noncompliance. We also expect to
continue audits of both promoters and their clients. We may
also consider utilization of John Doe summonses to promoters
similar to what we did with the credit card issuers that issued
cards to offshore customers.
We will continue coordinating our efforts with those of
other Federal agencies. The lack of corporate transparency is a
problem for many governmental agencies, including the FBI,
FinCEN, and the Department of Homeland Security.
In summary, Mr. Chairman, the issue of disguised corporate
ownership is a serious one for the IRS in terms of its ability
to enforce the tax laws and our efforts to reduce the tax gap.
Our experience has shown us that the clearer the transaction
and the identity and the role of the parties to that
transaction, the higher the rate of compliance with the tax
laws and the anti-money-laundering statutes.
I appreciate the opportunity to be here this afternoon, and
Robert and I will be happy to respond to any questions you may
have.
Senator Coleman. Thank you very much, Mr. Burgess. Ms.
Jones.
Senator Levin. I wonder if I could just interrupt Ms. Jones
for one minute? I know that I am speaking for all of us in
thanking the GAO for this report, which really lays out the
problems in very clear detail. The Government Accountability
Office, as always, has performed an absolutely essential
function for the Senate and we are grateful to you.
TESTIMONY OF YVONNE D. JONES,\1\ DIRECTOR, FINANCIAL MARKETS
AND COMMUNITY INVESTMENT TEAM, U.S. GOVERNMENT ACCOUNTABILITY
OFFICE
Ms. Jones. Thank you very much, Senator.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Jones appears in the Appendix on
page 83.
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Mr. Chairman and Members of the Subcommittee, we are here
today to talk about the information that is available on the
ownership and management of non-public companies, corporations,
and limited liability companies, LLCs. The majority of
companies in the United States are legitimate businesses that
carry out an array of vital activities. But companies can be
used for illicit purposes like money-laundering or shielding
assets from creditors. Government and international reports
have said that shell companies have become popular tools for
criminal activity because people owning or managing the company
cannot easily be identified.
In my statement today, I will talk about three main points.
First, I will describe the ownership information that States
collect and their efforts to review and verify it. Next, I will
address the concerns of law enforcement agencies about how
those companies are used to hide illicit activities. I will
also discuss how information on those companies or the lack of
it can affect investigations. Finally, I will discuss the
implications requiring that States and others collect
information on the owners of companies formed in each State.
Please look at the chart to your left on ownership
information that States collect.\1\ As you can see in figure
one, in the map on the left, all States that are colored white
did not require ownership information in the articles of
incorporation. For periodic reports like annual reports, please
look at the map on the right. None of the States that are
colored white ask for ownership information in the reports.
---------------------------------------------------------------------------
\1\ The chart referred to appears in the prepared statement of Ms.
Jones in the Appendix on page 84.
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Now please look at our next figure, which is Figure 2.\1\
Figure 2 is the management information that States require on
articles and periodic reports. In the map on the left more than
half of all States, the white ones, do not ask for management
information in the articles of incorporation. Roughly 25
percent of the States, the gray ones, require this information
for LLCs only. For periodic reports, the map on the right shows
that 28 States, the black ones, require management information
for corporations and LLCs. Roughly a third of the States, the
gray ones, require management information for corporations
only.
---------------------------------------------------------------------------
\1\ Figure 2 referred to appears in the prepared statement of Ms.
Jones in the Appendix on page 91.
---------------------------------------------------------------------------
Besides States, third-party agents collect information on
companies for billing and for sending legal and tax documents.
Most agents told us that they rarely collect information
because the States do not require them to, and the States do
not ask them to verify the information they collect.
A few agents said that they verify identities by asking for
passports or checking against the OFAC lists.
States themselves do not review filings to verify
identities. They review findings for accuracy of the
information they request on applications.
Besides States and agents, a few other places might have
information on company ownership and company management.
Financial institutions have some information but they said that
they already have significant reporting requirements to their
regulators. The IRS is also a potential source but it does not
have information on all companies. Also, statutes prevent
sharing of some IRS information with law enforcement agencies.
Law enforcement agencies, we learned, feel some sense of
frustration because they are unable to collect information that
they need from the States and from third-party agents for many
of the reasons that have been mentioned earlier.
Occasionally law-enforcement agencies can collect relevant
information from State websites or articles of incorporation
and sometimes they may find information about agent clients.
Occasionally, some of the owners of these companies actually
put their names and addresses on their incorporation documents
or in their periodic reports.
To summarize, any requirement that States, agents, or both
collect more ownership information would need to balance these
conflicting concerns between law-enforcement officials, States,
and agents. Those conflicting concerns include potentially
increased costs that the States or the agents might incur if
they had to collect more information. It might also require, in
some States, that State statutes be changed. It may also
require that data collection systems be changed in some States.
What would need to happen is that the conflicting concerns
between law-enforcement officials and States and agents would
need to be balanced and any changes would need to be uniformly
applied in all U.S. jurisdictions. Otherwise, people wanting to
set up shell companies for illicit activities could simply move
to the jurisdiction with the fewest obstacles. This would
undermine the intent of the requirements.
Mr. Chairman, this concludes my prepared statement. I would
be happy to respond to any questions that you or other Members
of the Subcommittee may have at this time.
Senator Coleman. Thank you, Ms. Jones. Mr. El-Hindi.
TESTIMONY OF JAMAL EL-HINDI,\1\ ASSOCIATE DIRECTOR FOR
REGULATORY POLICY AND PROGRAMS, FINANCIAL CRIMES ENFORCEMENT
NETWORK, VIENNA, VIRGINIA
Mr. El-Hindi. Thank you. Chairman Coleman, Senator Levin
and distinguished Members of the Subcommittee, thank you for
the opportunity to appear before you today to discuss the
Financial Crimes Enforcement Network's (FinCEN) ongoing efforts
to address money laundering and terrorist financing concerns
associated with the lack of transparency in the ownership of
certain legal entities.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. El-Hindi appears in the Appendix
on page 107.
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We appreciate the Subcommittee's interest in this important
issue and your continued support of our efforts to help prevent
illicit financial activity.
I am also pleased to be testifying with my colleagues from
the Department of Justice and Internal Revenue Service. Each of
these agencies plays an important role in the global fight
against money laundering and terrorist financing, and our
collaboration on these issues has greatly improve the
effectiveness of our efforts.
FinCEN's mission is to safeguard the financial system from
the abuses of financial crime, including terrorist financing,
money laundering, and other illicit activity. Key to our
mission is the promotion of transparency in the U.S. financial
system so that money-laundering, terrorist financing, and other
economic crime can be deterred, detected, investigated,
prosecuted, and ultimately prevented. Our ability to work
closely with our regulatory, law-enforcement and international
partners assists us to achieve consistency across our
regulatory regime and consequently to better protect the U.S.
financial system.
As mentioned in my written testimony, FinCEN has been
evaluating the vulnerabilities to the financial system by the
misuse of legal entities. While a lack of detailed reporting or
disclosure requirements under most State laws allows for
expeditious formation of legal entities, this practice poses
potential risks for money laundering and other financial crime.
In response to concerns raised by law-enforcement
regulators and financial institutions regarding the lack of
transparency associated with the formation of shell companies,
FinCEN prepared an internal report in 2005 on the role of
domestic shell companies, and particularly LLCs, in financial
crime and money laundering. An updated version of this report
was publicly released last week.
The study concludes that the lack of transparency in the
formation process of shell companies, the absence of owner
disclosure requirements, and the ease of formation of these
legal entities make these corporate vehicles attractive to
financial criminals to launder money or conduct illicit
financial activity. This, in turn, poses vulnerabilities to the
financial system both domestically and internationally.
That is why finding a way to address the misuse of legal
entities in the context of the Bank Secrecy Act has been and
continues to be a priority for FinCEN.
FinCEN is undertaking three key initiatives to deal with
and mitigate the risks associated with misuse of legal
entities. Concurrent with the findings of our report, FinCEN
issued an advisory to financial institutions highlighting
indicators of money laundering and other financial crime
involving shell companies. The advisory emphasizes the
importance of identifying, assessing, and managing the
potential risks associated with providing financial services to
such entities.
FinCEN is continuing its outreach efforts and communication
with State governments and trade groups for corporate service
providers to explore solutions that would address
vulnerabilities in the State incorporation process,
particularly the lack of public disclosure and transparency
regarding beneficial ownership of shell companies and similar
entities.
Finally, FinCEN is continuing to collect information and
studying how best to address the role of certain businesses
specializing in the formation of business entities and what
role they might play in addressing the vulnerabilities that are
the subject of this hearing.
In conclusion, Mr. Chairman, we are grateful for your
leadership and that of the other Members of this Subcommittee
on this issue, and we stand ready to assist in continuing
efforts to ensure the safety and soundness of our financial
system.
Thank you for the opportunity to appear before you today. I
look forward to any questions you have regarding my testimony.
Senator Coleman. Thank you very much, Mr. El-Hindi.
You indicated that money-laundering and terrorist financing
are the concerns, I just want to reiterate that. These are
national security issues that are raised by the lack of
transparency; is that correct?
Mr. El-Hindi. That is correct.
Senator Coleman. Ms. Jones, you indicate that a majority of
companies are certainly legitimate. This is not casting an
aspersion. But the challenge then becomes, and the challenge of
the Subcommittee is how do we deal with the potential for abuse
out there because of the lack of information? Mr. Burgess talks
about the connection between transparency and accountability.
If we had more transparency, we would get compliance.
I would presume on the next panel we are going to hear from
folks who are going to talk about the importance of speed in
these transactions and the fact that most companies are
legitimate.
Help me figure out a way, I am trying to figure out a way
that we work through this. Are there specific changes in
Federal law that could be made. If you were in a position to
simply change an existing statute, what would be the change
that you would make to increase the measure of transparency,
accountability, and compliance without undermining some of the
business concerns that have been raised? Whoever wants to
respond to that. To me, that is the $64,000 question.
Mr. Nash. Mr. Chairman, I think you are right, that is the
$64,000 question. And we are not yet in a position to propose
specific statutory fixes. I think, as you pointed out in your
opening statement, there are a number of interests that need to
be balanced here. And I do not want to minimize for a second
the problem. The problem, from a law enforcement perspective,
is a hugely significant problem and we are having
investigations, and important investigations, that are hitting
brick walls because there is no one out there that has the
information regarding beneficial ownership that we need to
pursue those investigations.
But certainly balanced against the magnitude of the problem
are issues related to both federalism concerns with respect to
the States, this has been traditionally an area that States
have regulated at that level. And so I think a Federal response
should be viewed as the last alternative, and we are not quite
there yet to say that we are ready for the last alternative.
And then the third group of concerns is, of course, the
fact that the vast majority of these corporate institutions are
legitimate business institutions, and we would not want to be
doing anything to disrupt the formation of legitimate
businesses for legitimate commercial activities.
Senator Coleman. I want to just, if I can though, push back
a little bit. And by the way, it is not just hitting a brick
wall in our investigations, but it is impacting our
relationships with other countries. Other folks are coming in
and saying hey, can you give us information? Our answer is no,
because we do not have it.
Mr. Nash. That is absolutely right.
Senator Coleman. I am still going to ask you to respond to
my question for specific changes, but I will throw one
additional question on the table. I understand the sensitivity
about a Federal response, but it seems from what we have been
looking at, reading the various reports, that one of the
problems you have, absent a Federal uniform standard, is that
the States who step forward to be accountable put themselves at
a financial disadvantage. Is there a need for minimal Federal
standards?
Are there some things that we can do at the Federal level
that would provide a level playing field, would help us in our
ability to get greater transparency, but would not undermine
legitimate business activity? Mr. Burgess, would you want to
offer anything here?
Mr. Burgess. I echo the comments of my colleague. I think
the sensitivity is while we have been discussing a number of
issues, there are not any one thing that I can propose. I would
venture to say it is probably going to be a combination of a
lot of factors. I heard one of my other colleagues from FinCEN
talk about outreach. I know that there is efforts by the States
in terms of understanding the problems it presents.
So I would venture to say there is probably no one
solution. But I can say, not being in the policy arm of the
IRS, I am not able today to offer you a recommendation.
Senator Coleman. Thank you. Ms. Jones.
Ms. Jones. Mr. Chairman, as you and the other Members of
the Subcommittee are aware, our work actually focused on how
companies are formed in each State and identifying the
information which is currently collected. Given the State/
Federal issue, it was actually outside the scope of our work to
look at other possible options or changing existing laws.
Senator Coleman. And I understand the hesitancy. I am
asking you to rely upon your own good common sense, without
putting you at risk in terms of policy for department or
anything. You have looked at the problem. You have studied the
problem. I am just trying to get a little guidance here of a
couple of things that we can put on the table and then we will
ultimately sort it out ourselves.
Mr. El-Hindi, do you want to be a little bolder here?
Mr. El-Hindi. I think what we are focusing on are the
things that we can actually do within the existing statutory
framework. And we have identified some things that we can do.
Outreach and changing the culture of what is going on in the
United States is key, and making sure that people are aware how
these vehicles can be misused.
We also will be considering a regulatory approach in terms
of trying to work with the Bank Secrecy Act and identifying
ways in which its promotion of transparency and the entities
covered under that could be used, as well.
You mentioned the issue of change in laws. One of the
things that we point out in our study, in our preliminary
study, is our preliminary assessment of the laws in place right
now. Our study indicates that the States changing those laws to
increase transparency does not necessarily lead to a flight
away from those jurisdictions.
Senator Coleman. Thank you, Mr. El-Hindi. Senator Levin.
Senator Levin. I would like to ask you to be a lot bolder,
frankly.
This has been a problem for how long, Mr. Nash?
Mr. Nash. Well, there has never been a regime in place
where beneficial ownership----
Senator Levin. I am talking about law-enforcement's problem
in getting information it needs. How long has that been a
problem?
Mr. Nash. I think it has been a problem since at least the
late 1970s and probably before.
Senator Levin. With the IRS, Mr. Burgess, how long has this
been a problem?
Mr. Burgess. I think the first State to pass that statute
was in 1977. So I would say starting from that point forward.
Senator Levin. When can we expect some recommendations from
the Executive Branch to get at this problem, which is we cannot
determine who the real owners are of corporations. Therefore,
they not only escape tax liability but it opens up the misuse
of corporations to abuse, to money laundering and so forth.
When can we expect some specific recommendations from your
agencies?
Mr. Nash. There has been a multi-agency task force that was
set up right in the wake of the FATF finding that found us non-
compliant with respect to Recommendation 33. They are in the
midst of putting together their thoughts on this and coming up
with a recommendation. I cannot give you a time frame as to
when their work will be completed, but I do not want you to
come away from this with the impression that this is a matter
that the Administration is throwing up their hands and
identifying the problem and not going to be in a position to
come forward with recommendations. I fully expect we will have
recommendations. I just do not have them for you today.
Senator Levin. Could you give us some kind of an idea as to
when those recommendations would be forthcoming?
Mr. Nash. Other then to tell you that the time frame that
FATF has given us to come within compliance is--they are going
to look again at us in 2 years. And so clearly we want to be in
a position to present any recommendations to Congress well in
advance of that 2-year time frame. I would expect you could
expect something within the next calendar year.
Senator Levin. Mr. Burgess, when is the IRS going to give
us some recommendations to address this law-enforcement problem
which you and Mr. Nash have very appropriately described as a
very significant law-enforcement problem?
Mr. Burgess. Senator, one of the things we have underway,
as I mentioned in my testimony, is an issue management team.
And that is a collection of issue specialists from every realm.
And what we are doing is looking into the scope of this, trying
to basically size the problem up from every angle.
One of the outcomes of that team would be recommendations
going forward through our legislative channels through
Treasury.
As to an exact time frame when they will work their way to
this Subcommittee, I cannot give you an exact time. Hopefully,
it would be some time during the next year, in terms of those
being obviously shared with Treasury. There is a lot of
discussion.
One thing I might share with you--I know there was some
preliminary discussion in preparation, and we have given a lot
of thought to this--about things that we could currently do?
One of the suggestions was requiring when someone requests an
Employee Identification Number to also reveal who the
beneficial owner is.
There is a lot of merit to that, but when you look at it,
it is not quite so simple. First of all, all of these entities
did not have to have an Employer Identification Number. The
second thing is ownership of these entities changes. We have no
way of tracking ownership. Some of the things that I described
in my testimony, like the bearer shares and some of the other
things, are frequent by changing.
The third problem, as Ms. Jones discussed in her testimony,
is that the information would become part of tax-related
information. Certainly under Section 6103, it could not be
freely disclosed. So what I am saying is sometimes under the
surface of things, it is not quite so simple. But we are
definitely pursuing the issue and there is much discussion
going on in terms of ideas we can hopefully advance to you.
Senator Levin. There is always complexity to issues. There
is not an issue that I know of that we deal with that is not
complex. But you have been dealing with this problem for two
decades or more.
I think the people who pay taxes in this country and who
are abused by money laundering and who are less secure because
of the abuses of money laundering and other problems have a
right to our agencies and to us acting. And it is not good
enough, frankly, to simply say you are studying it and it is
complex. Been there, done that.
I think we ought to expect from your agencies some kind of
an estimate as to when we could expect proposals to address
problems which you acknowledge. I mean, we have a GAO report
which is one of a series of reports. Your agencies have come up
with reports. We all know it is a major problem. Your testimony
is clear about the problem. And it seems to me that we have a
right to expect from your agencies an estimate as to when you
will be proposing corrections for what are acknowledged to be
significant threats to our financial security and to our
national security.
Can we expect that you would tell us for the record, after
going back and consulting with your agencies, approximately
when we could expect recommendations? Is that a request, Mr.
Nash?
Mr. Nash. That is a fair request.
Let me just say, Senator Levin, that one reason you have
not got requests before now is that it is only recently that
this has become the largest problem that we face in the realm
of trying to get information related to money laundering
investigations, in large part because of the good work of this
Subcommittee and Congress, in general. Up until now or up until
very recently the significant problem was getting information
out of financial institutions. And a number of the measures
that were passed in the PATRIOT Act and in response to law-
enforcement concerns in this realm that have come up in recent
years have taken some of the more significant issues off the
table that have left this as a very significant issue that is
yet to be addressed.
I just throw that out in defense of our agencies and that
this has gotten to the top of the to do list only because some
of the more significant issues that were above it have gotten
crossed off.
Senator Levin. My time is up. Thank you.
Senator Coleman. Thank you, Senator Levin. Senator Carper.
Senator Carper. Thanks, Mr. Chairman.
Ms. Jones, thank you for your testimony and for the
submission and the work that GAO has done.
On page 12 of your testimony, I read in bold print on the
left-hand margin of that page. It says more company ownership
information could be useful to law-enforcement but concerns
exist about collecting it. And then you have four bullet points
along the side of the second half of that page.
Just run through those again for me. And what I am really
interested in are what are those costs? What are the benefits
if those costs are incurred by States and others? And are the
benefits worth the costs?
Ms. Jones. Senator Carper, I can speak about the costs. We
actually did not try to do a cost-benefit analysis but I can
give you a little bit more detail about the costs that the
States could incur.
First of all, a number of States told us that it could
require more time, therefore more staff effort. That is where
the cost comes in. It could increase the workloads for State
offices and agents if they were required to collect more
information.
Because a lot of companies place a lot of emphasis today on
creating corporations in a short amount of time, the States
were concerned that requiring more information could mean that
some companies would feel that the amount of time required to
create the corporation might not be worth the effort to do so.
Some of the State officials felt that they could lose State
revenue, particularly if all 50 States information requirements
were not uniform. They felt that the States with more stringent
requirements could lose business to other States or to other
countries.
And they also mentioned that there might be a loss of
business for agents because individuals can form their own
companies. They might choose that option. And agents also
thought that it could be difficult to collect and verify more
company information if they were required to do so.
Senator Carper. This is sort of an observation. We are
reluctant in Congress, on the part of the Federal Government,
to impose unfunded mandates on States, ask them to do certain
things and to incur certain costs, unless we know what those
costs are somehow made up for.
I agree with you that there are costs, and I think you have
summarized them pretty well. It would be interesting to know
what the benefits are and how we could quantify those relative
to the costs.
I do not know who to direct that to but I would just raise
that as an issue.
I would like to ask, and this can be for anyone on the
panel, are you all aware of any States that have taken action
on their own to address some of the problems in their laws on
business formation, on incorporation and registration of new
businesses, that can lead to things like money laundering and
to tax evasion?
Mr. El-Hindi. With respect to Delaware, for example, we
have completed our initial assessment in 2005. And part of the
update of our study for the public release enabled us to assess
changes that had occurred in Delaware. It is referenced in our
report where, for example, standards of conduct with respect to
corporate agents or corporate service providers were bolstered.
That is one step, we would say, in the right direction. And we
use that as an example of pointing out how outreach to the
States and discussing with them this problem can lead to some
developments.
Senator Carper. Are there other States that you picked up
as you updated your study?
Mr. El-Hindi. I could get back to you.
Senator Carper. Would you do that for the record, please?
Thanks. Anybody else?
I think, Mr. Burgess, it was in your testimony that you
singled out several States--I think Nevada, Wyoming, and
Delaware--as three States that are--I think your term was most
accommodating--for those businesses that might want to hide
their ownership information for one reason or another.
Is there some reason why these three States or maybe some
others should be singled out? Is there any legitimate reason
for some of the features these States and others might have in
common?
Mr. Burgess. Let me speak first to Wyoming and Nevada. They
are two States that have a number of registered agents that can
also serve as nominees, nominee officers, as well as the
registered agents, which is unique to that particular State.
There are also, as I mentioned in my testimony, two States
that also allow the issuance of bearer shares, meaning that
anyone who physically is in possession of those is in ownership
of the corporation.
In reference to Delaware, the reference there was primarily
due to the requests we receive from our tax treaty countries.
Delaware is prominent in that. And one of the reasons it might
be, and I will offer this, is because Delaware obviously has a
status in terms of being recognized in terms of a U.S.
corporation. I think that might be one of the reasons. But
there is a prominence. And I was really speaking, when I spoke
of Delaware in the testimony, in that regard. It tends to be
one of the States that tends to be favored as shell companies
are actually sold and resold to others outside of this country,
in Eastern Europe and the Russian Federation. It is one of the
States that tends to be one of the largest recognized in those
requests that we receive.
Senator Carper. Anyone else want to comment on that?
Would you repeat your answer, Mr. Burgess? [Laughter.]
Mr. Burgess. That is like asking me to reach over and hit
that third rail.
Senator Carper. I did not count the number of times I heard
the term beneficial owner mentioned, but I heard it a lot. And
there are obviously beneficial owners and then there are other
owners. Can somebody give us a primer on the difference between
beneficial owners and some of the other categories of
ownership? Why do we focus so much on beneficial ownership?
Mr. Burgess. Just quite simply, I would say a beneficial
owner is actually the person in control--that actually
possesses the control over the operations of the corporation.
It directs its activities. In many cases, that may not be what
appears on the surface. You have a president, for instance,
that may be a nominee officer. But it is the person that truly
exercises control.
Senator Carper. My time has expired.
There is a second half to my question. Mr. Chairman, could
I just ask them to answer the second half?
Senator Coleman. Absolutely.
Senator Carper. Just mention, other than beneficial
ownership, what are some of the other categories of ownership
that we should be mindful of?
Ms. Jones. There are directors and managers of corporations
and limited liability companies and they can also exercise a
high degree of control. So it is important to know who those
people are, too.
Senator Carper. OK, thank you very much.
Senator Coleman. Ms. Jones, I think it is very fair to say
that your report, particularly the conclusion, is very balanced
in the end. You lay out that on the one hand there are
legitimate concerns that are raised by the States. On the other
hand, we have a situation here where there are deep concerns,
legitimate concerns that law enforcement has.
Let me ask you, in your conversations--I want to get back
to solutions if we can. In your conversations with the States,
did any of the State officials offer up any ways in which the
system could be improved? Did they offer some solutions? I
recognize the concerns they have, as I do, about unfunded
mandates. But did they come up and say here are some things I
think we could do that we are not doing today?
Ms. Jones. Senator Coleman, we spoke to a number of States
in the course of doing our work. And at the moment I do not
actually recall that any particular State offered solutions.
But I would be happy to get back to you on that.
Senator Coleman. I would appreciate it if you would. Again,
as I said, the report does a very good job of laying out this
balance.
INFORMATION PROVIDED FOR THE RECORD FOLLOWS:
Question from Senator Coleman: In your conversations with the
States, did any of the State officials offer up any ways in
which the system could be improved? Did they offer some
solutions?
Response of Ms. Yvonne Jones for the record: In our
interviews with State officials, we heard of potential changes
to the system from one State, Delaware. We learned in our
interview with Delaware officials that the Corporations
Division of Delaware's Department of State was discussing with
the State legislature various approaches to enhancing the
State's authority to oversee registered agents. One approach
they were discussing would be to require the Secretary of State
to verify the ability of a registered agent to serve process.
If the State found that the agent did not have the ability to
serve process, then the State would refuse to certify the
individual or entity to be a registered agent. Another approach
would define specific information about Delaware business
entities that registered agents must maintain. They also were
discussing the idea of requiring registered agents to know
beneficial owners and maintain the ownership information but
the economic impact on Delaware was a concern. An official said
there was some consensus, however, that registered agents
should at least know who seeks their services. An official said
another idea discussed with the registered agent community was
to have the State license registered agents in Delaware, but
the State had not explored what the cost implications of this
option would be. The official noted that another idea might be
to turn the licensing of agents over to the industry. The
official said that both options could pose problems for the
small registered agents.
Senator Coleman. The problem is the status quo does not
reflect the balance. The status quo reflects the concerns. And
certainly, as the report indicates, they are very legitimate
concerns. But it does not then say is how we are going to
address those concerns, here is what we are going to do to deal
with the potential we have for money laundering, the potential
we have for hiding assets. The problems with nominees, of not
knowing who the beneficial owner is. In Nevada, as I think you
indicated, Mr. Burgess, there is no requirement that the person
listed in the company registration have any connection with the
corporation. So you have a sham, a shell owner. That is the
problem. You can have shell ownership and no way for law-
enforcement to understand where the money is coming from?
So how do we close this information gap--we load up our
banks with a whole range of reporting requirements to combat
money laundering. It seems to me we have a big hole here. We
have a big hole. And I am looking for some way to fill it,
being sensitive to the concerns that are raised.
So please, I would ask you to go back, and if there have
been specific recommendations, give them to us because we need
that.
Mr. Burgess, there has been, I think, a number of
individuals. Mr. El-Hindi talked about outreach at least as one
of the things that can be done.
Does the IRS has some responsibility? Who is going to do
the outreach? If you are going to talk to States and the
private sector about some of the concerns and the danger here,
who has the responsibility of doing that?
Mr. Burgess. Within the IRS, we have a stakeholder group,
and we do have a working relationship with the States. And let
me say, I have not found the States to be uncooperative. I do
not think that is the issue that we are saying from that
standpoint. But certainly, we do have an arm that can do
outreach.
I think one of the other things that the issue management
team that I explained to you would also explore is whether
there is a role for outreach to the registered agents here? One
of the things that I highlighted in my testimony was dealing
with registered agents, who also serve as nominees and nominee
officers and others. Is there a role there in terms of outreach
that we can do with their organization regarding potential
guidelines they can mandate for themselves within their own
industries.
Senator Coleman. I would urge then that we go back and look
at this issue of outreach and figure out who has some
responsibility and then be prepared to move forward on that.
Senator Levin.
Senator Levin. Thank you, Mr. Chairman.
We have to get some more examples of these problems that
you have summarized in your testimony. And I think there are
some folks with you today who can describe to us some specific
incidents, examples, cases. Mr. Burgess, are there one or more
people with you, for instance, that could tell us what IRS is
up against? And then I will turn to you, Mr. Nash.
Mr. Burgess. Yes, Senator. I have Robert Northcutt
accompanying me today. Robert has first-hand experience in
dealing with some of these transactions. Robert is our Director
of our Abusive Transactions Office. I would be happy to have
him answer.
Senator Levin. I wonder if you could give us your name. Do
we need to swear him in? I am not sure.
Senator Coleman. I think we need to.
Do you promise that the testimony you are about to give
before the Subcommittee is the truth, the whole truth, and
nothing but the truth, so help you, God?
Mr. Northcutt. I do.
Senator Coleman. You may proceed.
ROBERT NORTHCUTT, ACTING DIRECTOR, ABUSIVE TRANSACTIONS OFFICE,
SMALL BUSINESS/SELF EMPLOYED DIVISION, INTERNAL REVENUE SERVICE
Mr. Northcutt. Yes, sir, you asked my name. It is Robert
Northcutt. Currently I am the Acting Director of Abusive
Transactions with the Small Business/Self Employed Division.
Senator Levin. Of the IRS?
Mr. Northcutt. Yes, sir, with the Internal Revenue Service.
In addition, I am a program manager who is overseeing this
particular issue management team that was discussed by Mr.
Burgess. It is something that originated approximately 4 or 5
months ago, and essentially what has occurred is, under Code
Section 6700 of the Internal Revenue Code, we are allowed to go
ahead and pursue promoter investigations.
We have pursued a couple of these investigations with
respect to some of these registered agent or nominee
incorporating service businesses. We have, at present, a
cooperative promoter and an uncooperative promoter. With
respect to the cooperative one, we have managed to secure a
list of its clientele for every other letter of the alphabet.
In fact, we did a non-statistical sample of one letter of the
alphabet. And in checking the records of corporate filings and
other information, we discovered that roughly 50 percent of the
entities that have been formed under the letter O, in fact, had
compliance problems, some of them rather extensive.
In one particular case, there were even Federal contracts
that had been entered into with various Federal agencies. And
this corporation, in fact, was not filing tax returns, and the
100 percent shareholder was not filing tax returns, to the
extent of several million dollars.
With respect to the uncooperative registered agent
promoter, the difficulty we have is we are not getting access
to its clientele. And so we are actually having to go in and
trace the money as far as the funds this registered agent
received for setting up these corporate entities, and then go
backwards from where the money originated, identifying the
entities that are actually involved. In that particular case,
we are seeing an even higher incidence of noncompliance with
the Federal tax laws.
We have recently canvassed our revenue agents and
collection officers in the field with respect to obstacles that
they have encountered and some of the issues that they have
observed. With respect to our collection activities, it is
extensive in the sense that any time we have a nominee or shell
corporation, it presents an obstacle in trying to levy or lien
assets upon which we can collect tax deficiencies. Some of
these have recently involved listed transactions, specifically
an intermediary transaction, that falls out under Notice 2001-
16.
But in addition to that, we have seen these nominee and
shell corporations set up to facilitate employee stock option
plans, Roth IRA schemes, corporation sole, obviously offshore
credit cards and debit cards, LLCs that do not file returns
because they, in fact, have a separate filing requirement.
With a limited liability corporation you have what is
called a ``check the box.'' You can operate as a sole
proprietorship, a partnership, or a corporation. And depending
on how the box is checked, it will have a different filing
requirement.
Senator Levin. The transactions that you made reference to,
you are talking there about tax shelters?
Mr. Northcutt. Yes, sir. I am sorry.
Senator Levin. But all of these items that you just rattled
off, each of those could have some real tax compliance
problems?
Mr. Northcutt. That is correct, Senator. And there are
other items, as well, and it is not just with respect to
Federal taxes. We have also observed situations in which
parallel corporations will be established, one with an
operating business in one State and then a shell corporation in
another State that perhaps has some of the difficulties we have
described. And what will occur is the shell corporation will
act as a management company for the operating business, and
funds will then be transferred from the operating business to
the shell corporation.
As I am sure you are aware, there is not a requirement for
a 1099 reporting or anything like that between corporations. So
the only thing we observe is a canceled check or wire transfer
to a separate corporation. In the event that we are looking at
the operating company, to conduct an examination, to prove the
expenses we would obviously ask for a receipt, an invoice,
those kinds of things.
In this environment, those documents are easy to prepare
and appear legitimate for our examiners who are looking at the
operating company. Very rarely would we have that same examiner
cross State lines to examine the company that received the
funds or even, for that matter, pursuing whether or not it had,
in fact, filed a tax return.
Those are some of the additional things. We have also
warehouse banking arrangements, offshore brokerage accounts.
And in fact, as I was pointing out, the State schemes are not
just defeating our purposes. They also defeat the State income
tax and sales tax activities.
Senator Levin. The lack of the ownership information here
is one of the key problems that you face in tracking and
tracing these transactions; is that accurate?
Mr. Northcutt. Yes, sir, it is. That is very accurate,
Senator.
Senator Levin. So what you need is to know who the
beneficial owners, who the real owners are of these entities,
and that is not available to you?
Mr. Northcutt. That is correct, Senator.
Senator Levin. You can do the tracking if you can find out
who the beneficial owners are; is that correct? In other words,
the key issue--and this is where, Ms. Jones, it seems to me we
have to come back to you. You talk about listing and verifying.
I think they probably, for starters at least, would be happy
just to have a list of the beneficial owners so they can track
these folks down. But if they are using nominees or agents that
are registered agents that have no ownership interest or they
are using lawyers who say that is a privileged transaction or a
privileged matter as to who the owners are, they run into blank
walls.
So when you look into cost benefit, which is obviously
relevant, you should look not just at the cost of listing,
which seems to me to be nominal, but the look at the benefit to
knowing who the beneficial owners are. A number of States do it
and we insist that other countries do it. And a lot of the tax
haven countries do it. They tell us at least they have the
information. They will not tell us, but they have the
information as to who the beneficial owners are.
We cannot get the States to list the beneficial owners, not
even getting to the verification issue, which involves a cost
because there is transfer involved and so forth.
So when you go back and look at this on cost benefit, I
hope you will look not just at cost of listing and verifying,
but just the cost of listing to give at least a leg up to our
law-enforcement people so they can start tracking. And of
course, if they list fraudulently, or if they do not list the
real owners, then you have a fraud issue. You have a false
information issue with the local government.
Your testimony, Mr. Burgess, is extreme helpful.
I am way over. Senator Carper, I am holding you up, too.
Mr. Nash, do you have someone here with you who can do the
same thing here and give us specific examples?
Mr. Nash. I am afraid I do not have anyone to take my
place, but there is one category of cases that I do not think
has received quite enough attention in this discussion that I
would like to just discuss briefly, which is the terrorist
financing cases. I am not sure anyone has quite outlined for
the Subcommittee yet why it is that this poses a particular
issue in the area of terrorist financing.
That is, as you know, Senator Levin, the way our statutory
regime is set up with respect to terrorist financing, it relies
on a designation process. And through the State Department and
through OFAC, certain entities are named and designated as
entities that our government believes are terrorist
organizations. And financial transactions with those entities,
those designated entities, are therefore prohibited. It is
prohibited to give material support to those organizations. And
if they appear on the OFAC list, it is a crime to engage in any
financial transactions with them.
When you focus on that, it is very easy to see how this
particular problem that we are talking about today becomes such
a problem in the area of terrorist financing, because obviously
a terrorist organization that finds themselves on the State
Department list or on the OFAC list, the first thing they are
going to want to do is establish an alter ego that is not
designated and that to the world is a clean face that can
engage in financial transactions and the world can engage in
financial transactions with that entity without the stigma of
dealing with a designated terrorist organization.
And so in that realm, it is very important for us to be
able to track beneficial ownership with respect to company
formations so that we can track that back to a designated
terrorist organization.
Senator Levin. To whom the real owners are, which will be
the terrorist organization in your example; is that correct?
Mr. Nash. That is right.
Senator Levin. And if they just, for instance, buy an old
shell corporation or have it formed by some company that forms
corporations for $100 over the Internet, then they appear to
have a clean company. It is not on the list. But the real
owner, the beneficial owner, is the terrorist organization.
Mr. Nash. That is right.
Senator Levin. And unless the beneficial owner, that
terrorist organization, is listed, law enforcement is
frustrated. Is that correct?
Mr. Nash. That is correct.
Senator Levin. Thank you. Thank you, Mr. Chairman.
Senator Coleman. Thank you very much, Senator Levin.
I will excuse this panel. I want to thank you for your
testimony.
If I could paraphrase a movie, ``Houston, we have a
problem.'' I am not sure that we have arrived at the solutions
today but clearly, particularly given the last line of
questioning, Senator Levin, we clearly have a problem that
needs to be better addressed.
I want to thank the panel.
Senator Levin. And if our witnesses could let us know when
those recommendations would be forthcoming, we would very much
appreciate it.
And Mr. El-Hindi, if you would let us know whether or not
your organization is going to be issuing a regulation next
year. Do we expect that?
Mr. El-Hindi. I will follow-up with you on that. Something
like that is certainly a possibility but it is one of many
possibilities in terms of how we approach this.
Senator Levin. Can you fill us in for the record as to
whether that is going to be forthcoming?
Mr. El-Hindi. Yes, sir.
Senator Levin. Thank you, Mr. Chairman.
Senator Coleman. Thank you.
I would now like to welcome our second and final panel of
witnesses to today's hearing. Richard J. Geisenberger, the
Assistant Secretary of State for Delaware; Scott Anderson,
Deputy Secretary of State for Commercial Recordings of the
office of the Secretary of State for the State of Nevada; and
finally Laurie Flynn, the Chief Legal Counsel for the Office of
the Secretary of the Commonwealth for the Commonwealth of
Massachusetts.
I would welcome each of you to today's hearing and look
forward to your testimony.
As you are aware, pursuant to Rule 6, all witnesses who
testify before this Subcommittee are required to be sworn. At
this time I would ask you to all stand and raise your right
hand.
Do you swear the testimony you are about to give before
this Subcommittee is the truth, the whole truth, and nothing
but the truth, so help you, God?
Mr. Anderson. I do.
Mr. Geisenberger. I do.
Ms. Flynn. I do.
Senator Coleman. We have a timing system. I think we have
the new boxes there, by the way.
Senator Levin. What are they, Mr. Chairman?
Senator Coleman. I do not think you have to press a button
for the sound to go on now. I think it is perhaps a little more
automated there. High tech. We are getting very high tech,
Senator Levin.
I believe that one minute before the red light comes on you
will see the light change from green to yellow. So at that
point please summarize your, testimony. Your written testimony
will be printed into the record in its entirety.
We will start with you, Mr. Geisenberger, then go to you,
Mr. Anderson. And finally we will conclude with you, Ms. Flynn,
and then we will proceed with our questions.
Mr. Geisenberger, you may proceed.
TESTIMONY OF RICHARD J. GEISENBERGER,\1\ ASSISTANT SECRETARY OF
STATE, STATE OF DELAWARE, DOVER, DELAWARE
Mr. Geisenberger. Mr. Chairman, Members of the
Subcommittee, thank you for this opportunity to testify on this
important subject.
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\1\ The prepared statement of Mr. Geisenberger appears in the
Appendix on page 115.
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Delaware is the legal home to more than half of all
publicly traded companies in the United States and 61 percent
of the Fortune 500 companies. The reasons to incorporate in
Delaware are compelling, as mentioned by Senator Carper, modern
and flexible corporate laws, a highly regarded judiciary to
name just a few.
More than 750,000 business entities representing every
sector of our Nation's economy are registered in Delaware, from
small mom-and-pop businesses, private investment vehicles,
religious and charitable organizations, to large well-
capitalized companies, from publicly held General Motors to
privately held Cargill. Many Delaware legal entities are
affiliated with such large firms and are created to facilitate
the financings, alliances and investment vehicles in which
those large businesses engage.
We commend the GAO for a generally balanced and factually
accurate report highlighting the challenges involved in
collecting beneficial ownership information and the role of
third parties in the company formation process.
Unfortunately, it is our view that the money-laundering
threat assessment and the FATF reports present a far less-
balanced view. We take strong exception to the FATF's
conclusion that Delaware encourages secrecy and its State
policies are driven by ``a powerful lobby'' of company
formation agents. Indeed, as shown in the GAO reports, no State
does verification and no States collected true beneficial
ownership information reaching down to the actual individuals
that own equity and exert control.
To the contrary, Delaware's laws promote the efficient flow
of capital by allowing businesses to order their affairs in
ways that meet ever changing business conditions. Our laws
reflect the input of corporate attorneys across the United
States and are driven by a balancing of interests among
companies, investors, law-enforcement, and others.
With respect to the role of company formation agencies and
registered agents, for over a decade Delaware has applied
standards of conduct to its online agents. The State has also
led the Nation, enacting a new statute this year that sets
enhanced qualifications for Commercial Registered Agents and
creates procedures to put rogue registered agents out of
business.
As for beneficial ownership disclosure, it is the view of
Delaware that: One, a reporting system that includes public
companies would be a logistical and costly nightmare for
corporate America; two, that even a self-reporting system that
exempted public companies and their affiliates would have
immense verification costs and several definitional problems;
and three, such a system would impose costs on legitimate
private businesses that seem vast in relation to the benefits
that are, at best, uncertain.
Indeed, FinCEN's recent report acknowledges that a system
of self-disclosure of managers and members is easily thwarted
because money-launderers will falsify identities and most U.S.
investment strategies rely extensively on the use of other
business entities as equity holders.
But perhaps the single greatest concern we have is the
likelihood that the role of Delaware, and indeed the United
States, would shift from that of providing an attractive
investment environment for domestic and international capital,
one that values privacy, efficiency and the ease of capital
formation, to being replaced by one of having regulatory and
investigative oversight of the equity holders of the millions
of legitimate enterprises in the United States.
Indeed, we believe that reforms are best focused on
enhancing the ability of government officials to follow the
money through the financial services system and providing
resources needed to investigate and deter illicit activities.
Delaware's recent amendments are a step in the right direction
and deserve consideration in other jurisdictions. We also
recommend that the Federal Government study whether existing
Federal laws should be augmented.
For example, to create the level playing field mentioned by
Senator Coleman, the Federal Government could study the costs
and benefits of gathering additional beneficial ownership
information through the Federal Tax ID application process.
Delaware is merely one stakeholder in this issue. We
recommend that any discussion of these issues have input from
the countless large and small companies and investors that
would be most affected by a beneficial ownership disclosure
requirement. It is critically important to hear their voices on
the relative costs and benefits of such a system.
On behalf of the State of Delaware, I thank you for this
opportunity to share these oral comments and our written
testimony and look forward to answering any questions.
Senator Coleman. Thank you, Mr. Geisenberger. Mr. Anderson.
TESTIMONY OF SCOTT W. ANDERSON,\1\ DEPUTY SECRETARY OF STATE
FOR COMMERCIAL RECORDINGS, OFFICE OF THE SECRETARY OF STATE,
STATE OF NEVADA, CARSON CITY, NEVADA
Mr. Anderson. Thank you, Mr. Chairman.
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\1\ The prepared statement of Mr. Anderson with an attachment
appears in the Appendix on page 133.
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Good afternoon, Mr. Chairman, Mr. Levin, and Subcommittee
Members. My name is Scott W. Anderson. I am Deputy Secretary of
State for Commercial Recordings for Nevada Secretary of State,
Dean Heller.
It is an honor to be here before you today and I thank you
very much for the opportunity to participate in this hearing.
My comments today will be a brief summary of the
information included in my written presentation that was
submitted earlier to the Subcommittee. To begin, I would like
to qualify my written statement, included in your materials,
regarding the GAO report ``The U.S. Money-Laundering Threat
Assessment and the FATF Report.'' My comments were strictly
from a Nevada filing officer's standpoint and do not reflect
the standpoint of others on issues outside the processes of the
filing office.
The Commercial Recordings Division of the Nevada Secretary
of State's Office is responsible for the processing and filing
of the organizational and amendatory documents of entities
organized pursuant to Title 7 of the Nevada Revised Statutes.
Nevada's business friendly statutes, tax structure, liability
protections, and commitment to service, and an active resident
agent and service provider industry have all helped make Nevada
a leader in the business entity formation.
Historically, the Commercial Recordings Division of the
Secretary of State has been strictly a filing office with no
regulatory authority over the entities on file. Documents are
reviewed for statutory requirements for filing and if those
requirements are present, the documents must be filed. Minimal
filing requirements allow for ease of filing. No beneficial
ownership information is or has been required for entities
filing in our office.
Additionally, the information contained in the filings
submitted is not verified.
In fiscal year 2006, the Commercial Recordings Division
processed over 85,000 new entities and over 300,000 initial,
amended and annual lists. Over 40,000 each of corporations and
limited liability companies were formed last year.
The Secretary of State's Office provides electronic
services for the e-filing of initial and amended annual lists
which is available on our website. There are plans to develop
online services for the filing of articles of incorporation and
other filing processes.
The Secretary of State does not actively promote the
advantages of organizing in the State of Nevada. The resident
agents and service companies actively promote the State of
Nevada. It is estimated that 60 percent of the filings received
in our offices are submitted through use of a resident agent.
The Secretary of State does not regulate the resident agents
that do business with our office. It is my understanding that
portions of the Model Resident Agents Act, as proposed by the
National Conference Committee on Uniform State Laws, will be
introduced during the 2007 session of the Nevada Legislature.
In regards to beneficial ownership, beneficial ownership
information is not required for filing in the Office of the
Secretary of State and therefore is not maintained by the State
or by resident agents. Resident agents are required to maintain
a copy of the stock ledger or a statement as to the location of
the ledger and our Nevada Department of Taxation may have some
beneficial ownership information from the annual business
license filings it receives.
As noted in the reports, some beneficial ownership
information may be present on the public record from the
information required for filing and that is provided by those
filing in our office. We have received no specific requests for
beneficial ownership information from law enforcement agencies,
and additionally we have received no complaints from law
enforcement other than what was stated in the reports and the
meetings preliminary to the report, such as the GAO report,
that a lack of beneficial ownership information has impeded any
investigation.
Nevada has been working on several of the issues that have
been brought forth in the different reports. Proposed
legislation for the prohibition of bearer shares and a
limitation on the use of nominee officers, as well as the
provisions of the Model Resident Agents Act, are expected to be
introduced during the 2007 Nevada legislature. Additionally, in
the 2005 legislative session, provisions making it a Category C
felony to knowingly offer fraudulent documents in the Office of
the Secretary of State, and requiring beneficial ownership
information on certain transactions were passed.
Currently the Secretary of State is attempting to
facilitate a meeting with the Resident Agent Association in the
State of Nevada, the State Bar Association and State
legislators to fully discuss the collection of beneficial
ownership information.
The entire issue is of great interest to our office and we
recognize the importance of being involved in assisting this
Subcommittee in its work.
Thank you again for this opportunity to participate today
and I would be happy to answer any of your questions.
Senator Coleman. Thank you, Mr. Anderson. Ms. Flynn.
TESTIMONY OF LAURIE FLYNN,\1\ CHIEF LEGAL COUNSEL, OFFICE OF
THE SECRETARY OF THE COMMONWEALTH OF MASSACHUSETTS, BOSTON,
MASSACHUSETTS
Ms. Flynn. Good afternoon. Thank you, Mr. Chairman, Senator
Levin, and Subcommittee Members. My name is Laurie Flynn. I am
Chief Legal Counsel to the Secretary of the Commonwealth.
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\1\ The prepared statement of Ms. Flynn appears in the Appendix on
page 140.
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I applaud the Subcommittee's efforts for providing a
national forum to discuss the adequacy of public disclosure in
the business entity formation process. I hope that
Massachusetts' recent deliberations and resulting resolutions
in this area will assist the Subcommittee in its effort to
balance the need for beneficial ownership information with the
privacy concerns of legitimate business interests.
By way of background, Massachusetts recently adopted a new
corporation law, Chapter 156D of the General Laws. The act was
the first comprehensive revision of the corporate laws in
Massachusetts in over 100 years and was prepared by a joint
task force of the Boston Bar Association and the Massachusetts
Bar Association, aptly named the Task Force on the Revision of
the Massachusetts Business Corporation Law.
The task force consisted of over 50 experienced corporate
practitioners, members of the legislature and representatives
of the Office of the State Secretary. The task force chose the
American Bar Association's Model Business Corporation Act as
the basis for its corporate statute because the act had been
adopted in a substantial majority of States.
However, Massachusetts deviated from the Model Act in a
number of relevant areas, including the role of the Secretary
of State in the entity formation process and the type of
information disclosed in business organization documents. Such
differences reflect a carefully crafted balance between public
interest in adequate disclosure and the privacy concerns of the
business community.
With regard to the role of the Secretary of State,
Massachusetts retained the authority of the Secretary of State
to review documents for compliance with law. Such provision is
the basis for the Secretary's ability to hold administrative
hearings if information provided in organizing documents is
inaccurate or otherwise fails to comply with law. The Model
Business Corporation Act relegates State authority in this area
to a ministerial function. So essentially, if anything is
provided, you have to take it.
Second, the new act authorizes the Secretary to require
more information in the formation process than is collected in
a Model Act State. In Massachusetts, the articles of
organization contain a supplemental information that includes a
description of the business activity, the name and address of
the president, treasurer, secretary, and each of the directors,
the name and address of the registered agent, the location of
the corporation's principal office, and the location of the
office in the Commonwealth where certain records required to be
maintained by the act will be kept. One of the required records
is indeed a list of the names and addresses of all
shareholders, in alphabetical order, by class of shares,
showing the number and class of shares held by each.
The new act does not authorize the issuance of bearer
shares nor does it permit the use of nominee directors and/or
officers. With regard to nominee shareholders, though,
Massachusetts corporate law recognizes registered and
beneficial holders. Nevertheless, the statute contemplates that
standard bylaws will contain explicit statements to the effect
that the corporation will only recognize the registered holder
for purposes of voting, dividend distribution and other
shareholder actions and entitlements. The exception that proves
the rule are the appraisal provisions of 156D, under which
beneficial holders may assert statutory appraisal rights only
if the registered holder has filed a nominee certificate with
the corporation.
The Massachusetts Limited Liability Company Act, Chapter
156C, and the Massachusetts Revised Uniform Limited Partnership
Act, contain similar provisions. Each requires the Secretary to
review documents for compliance with law and requires the
disclosure of managers or authorized principals and general
partners. Each also requires the entity keep a list of members
or limited partners in the State at the statutorily required
office.
Furthermore, the limited partnership statute requires that
such lists be made available to the State Secretary within five
business days of receipt of a written request by the Secretary
stating that said information is required in connection with an
investigation or an enforcement proceeding.
These provisions, the ability to review for compliance with
law, the identification on the public record of officers,
directors, managers or principals--and not nominees--and the
requirement that shareholder, member, or partnership lists be
maintained in the Commonwealth accessible to the State
Secretary, reflect Massachusetts' attempt to balance public
interest in disclosure with the anonymity demanded by the
institutional and individual investors in today's capital
markets.
As I have not yet received any complaints from law-
enforcement or from the business community and very few
complaints from the public, I assume we have been successful.
I will just highlight, in response to your questions, a
number of provisions that I think are helpful. Massachusetts
has about 232,169 non-publicly traded corporations and 67,493
limited liability companies. The process for each of those in
forming them would be for a document to be submitted with the
appropriate information. That information would then be
reviewed. If it was found to comply with law it would be filed.
Once it is filed, it is scanned into our system, summary
information is data entered, and it is available on the web,
immediately by 7 o'clock that night.
The fees for forming a corporation are $275 if submitted in
person or by mail and $250 if filed online. All documents are
reviewed by both a clerk and an attorney. The fees for forming
a limited liability company are somewhat higher, they are $500.
Again, Massachusetts does not collect beneficial ownership
information during or subsequent to the incorporation process.
That has been since 1951. Prior to 1951, we did collect that
information.
We do, however, require that that information be maintained
in the Commonwealth and accessible to law enforcement and the
Secretary.
Massachusetts does not provide for third-party agents. We
have only registered agents whose only role is to accept
service of process on behalf of corporations.
We do not permit the use of nominee officers or directors.
We do allow for nominee shareholders. We do not allow for
bearer shares.
Massachusetts has not received any requests from law
enforcement for beneficial ownership information in the last 5
years, and that may be because they can get that information
directly.
One of the things that we have been determined to do as a
result of these ongoing discussions with the Subcommittee and
with the GAO is that the Secretary will file legislation in
this upcoming session that will require limited liability
companies and corporations to disclose members and shareholders
to the State Secretary if, in his judgment, the public interest
requires such disclosure. And we will require that disclosure
must be made within 48 hours. Failure to provide such
information will result in involuntary dissolution of the
entity and the imposition of fines and penalties.
Last, I would like to say Massachusetts, after September
11, was notified that there were two nonprofit corporations
that were suspected of funneling money to terrorist
organizations and we promptly revoked their charters. We gave
them notice, opportunity to be heard, and revoked their
charters. So we have been somewhat more proactive in this area.
Thank you.
Chairman Coleman. Thank you, Ms. Flynn.
I think it is fair to say that some of the things you are
talking about are certainly movement in the right direction and
we appreciate it.
Is it fair to say, by the way, across the board, Mr.
Geisenberger, in Delaware you do not have bearer shares? That
is not something that you allow in Delaware.
Mr. Geisenberger. Delaware law has never permitted bearer
shares. We made it explicit in our statute in 2002, in response
to the FATF report.
Senator Coleman. In Nevada, you are moving in that
direction.
Mr. Anderson. We are moving in that direction.
Senator Coleman. Is there any question that bearer shares
are problematic and should be prohibited?
Mr. Anderson. According to the Bar Association, in my
discussions with the Bar Association, there has not been a
large problem with bearer shares. However, because there is no
prohibition of bearer shares in State law, there is this belief
that there is wide use of bearer shares. So with that, they are
proposing changes to legislation to prohibit the use of bearer
shares in the State of Nevada.
Senator Coleman. I would question the accuracy of your
statement that it has not been a problem. And I think
everything that we have seen and we have heard confirms that
the potential for abuse is great. But, again, I understand you
are moving in that direction.
I am trying to find some common ground that everyone says
we know this is a problem. Limitations of use of nominee
officers, how is that handled in Delaware, Mr. Geisenberger?
Mr. Geisenberger. With respect to corporations, officers
have to be natural persons and directors have to be natural
persons. Shareholders can be nominees, and obviously in
publicly traded companies they are almost exclusively nominees.
With respect to limited liability companies, the managers and
the members can be other business entities. And that is really
the issue we are talking about here. Most investment vehicles
in the United States, that is how they are structured. It is a
business owning a business owning a business before you get to
the actual human being that has the beneficial interest in the
asset. And reaching down to that level raises lots of issues
about costs and certainly questions about privacy and the
legitimate anonymity of being able to--for everyone not to know
exactly what you are invested in.
Senator Coleman. Ms. Flynn, in the Commonwealth of
Massachusetts, do you have any limitations on the use of
nominee officers?
Ms. Flynn. Massachusetts does not permit the use of nominee
officers or directors.
Senator Coleman. Mr. Anderson.
Mr. Anderson. It is common practice in the State of Nevada
that there be nominee officers. However, the Nevada Resident
Agents Association is looking at legislation in the 2007
session of the Nevada legislature to limit that use, and I do
not know what that limitation would be? However, we are moving
away from that.
Senator Coleman. Mr. Geisenberger, you indicated it would
be important as we move forward, to bring in a broad array of
stakeholders in this discussion. I agree with you on that. I do
think we have to strive for the balance, but again understand
that there is a problem today and one that exposes us, as we
heard from the other panel, to risks--that you could have
terrorist organizations and our ability to deal with those is
an ID system. We know that this is a terrorist organization.
And they literally can move in and take over existing
corporations without any risk of exposure. And I think that is
problematic. To me it just seems like we have a big gaping
loophole there.
A question, if I can, about Delaware law. You did mention
that Delaware is doing some things dealing with registered
agents. My question on that, and just from my information,
please correct me if I am wrong, that the Delaware law dealing
with registered agents which would require more stringent
qualifications applies to--I have information that it applies
to 237 out of 32,000 registered agents. Is my information
incorrect?
Mr. Geisenberger. That is correct. There are 32,000
registered agents in Delaware. I would imagine they have very
large numbers in other States, as well, because a company can
form itself. Most registered agents in the State of Delaware,
indeed the vast majority, represent three or fewer entities.
Ninety-six percent of our 32,000 agents maybe just represent a
civic association or a not-for-profit. They could be the
company themselves, a small mom-and-pop business.
Senator Coleman. Your testimony indicated the new statute
for registered agents would put rogue registered agents out of
business. My only question is does this new statute apply to
more than 237 out of the 32,000 registered agents?
Mr. Geisenberger. The new statute establishing additional
qualifications, like having a business license, applies only to
the 237. However, the statute allowing the Court of Chancery to
enjoin a registered agent from doing business for not meeting
certain qualifications about having an address, not meeting
certain qualifications about retaining customer information,
applies to all 32,000 registered agents in the State.
Senator Coleman. My time is up. I am going to come back to
one other line of questioning but I will turn to my colleague,
Senator Levin.
Senator Levin. Thank you.
Ms. Flynn, you said near the end of your testimony that the
reason that there is not a request from law enforcement to your
agency for the list of beneficial owners is that they can get
that information directly?
Ms. Flynn. That is correct. Massachusetts entities are
required to maintain lists of shareholders, lists of limited
partners in an LLC's instance, list of members at their
principal office or statutorily required office in the
Commonwealth.
Senator Levin. Is that true in Delaware?
Mr. Geisenberger. No, there is no requirement to maintain
that list in the State of Delaware.
Senator Levin. So in one State law enforcement has access,
in another State it does not have access to the beneficial
owners. Why is that such a huge burden in Massachusetts?
Obviously, it is not a huge burden, they are able to do it. So
why do you think it is such a huge burden in Delaware?
Mr. Geisenberger. Massachusetts, to put it in perspective,
I believe you form 25,000 new entities a year. We form about
135,000 new entities a year. The types of entities that we are
forming in Delaware tend to be everything from large publicly
traded companies to their affiliates. As I mentioned earlier,
it may be possible to create a requirement for director and
officer, or even manager and member information.
I think it is important to recognize the distinction
between manager and member information, director and officer
information, and true beneficial ownership--an actual natural
person who owns the business. So were you to go down that path
and require that in Delaware, which is something that certainly
could be examined, you would still end up with a list of other
business entities being the beneficial owners or being the
registered holders of these other businesses.
Senator Levin. Of course, but that allows law enforcement
to track those other business owners.
Mr. Geisenberger. That is correct.
Senator Levin. It is important that we have that
capability. And you do not seem to recognize the importance of
that. You talk about the cost of it but you have another State
and that did not turn out to be a very burdensome cost.
Mr. Geisenberger. I think it needs to be, as I mentioned in
my testimony, balanced against the interests of privacy and
efficiency.
Senator Levin. Don't they have those interests in
Massachusetts?
Mr. Geisenberger. I do not have.
Senator Levin. Let me tell you they do. They care just as
much about their privacy and efficiency as people in Delaware
or all over the world that use Delaware or Nevada or anyone
else. There is no difference in terms of human beings wanting
anonymity or privacy, but they just do not allow it in
Massachusetts. They say you can get to those owners by going to
the companies that have registered agents.
So I do not know why you say that your privacy interest is
any greater than any other States' concern for privacy.
Mr. Geisenberger. Our concern, and this is not unique to
Delaware, I think it is a concern that we have generally from a
national perspective, which is that if we create a requirement
that says that the beneficial ownership of every business
entity in the United States is a matter of public record or is
easily accessible, that it creates a number of issues ranging
from identity theft to not the technical publicly-traded
securities definition of insider trading, but the possible use
that information by the people who are collecting it, the
resident agent community and others.
Senator Levin. That is not what anybody is proposing, it is
a straw man. Just go to what Massachusetts does, try that. You
say that could be done. That is helpful. Law enforcement finds
that helpful. Why doesn't Delaware do it?
Mr. Geisenberger. Delaware does not do it because we have a
concern--the reason the Secretary of State does not do it is
because it is not part of our statute.
Senator Levin. Why do you resist?
Mr. Geisenberger. The reason we do not advocate it is a
concern----
Senator Levin. Why do you resist it?
Mr. Geisenberger. We have resisted because we believe that
there are legitimate business transactions and that the vast--
as you mentioned, I believe, earlier in your discussion, there
are 15 million business entities in the United States. If 0.1
percent of them are engaged in illegitimate practices and the
other 99.9 are in legitimate enterprises, we have concerns
about how that information put on the public record could be
misused.
Senator Levin. Thank you.
Mr. Anderson, if you could take a look at Exhibit 1,\1\
this is formacompanyoffshore.com that talks about Nevada
company formations. It is one of those first four pages. I am
not sure which of the first four it is but it is--we are going
to put the board up there. I think you may be able to read it
there.
---------------------------------------------------------------------------
\1\ See Exhibit 1 which appears in the Appendix on page 144.
---------------------------------------------------------------------------
It talks about Nevada. No IRS information sharing.
Stockholders are not on public record, allowing complete
anonymity. Do you see that that could create a problem for law-
enforcement? That is advertised as why go to Nevada.
Mr. Anderson. The reason Nevada does not have an IRS
sharing agreement is because Nevada does not have a personal or
corporate income tax, and therefore we do not have information
to share with the Internal Revenue Service.
Now all the information that we do require for filing is
available to the Internal Revenue Service, just as it is
available to any other person wishing to look at the public
record.
Senator Levin. In terms of the ownership, stockholders are
not on public record, allowing complete anonymity. That is one
of the selling points for Nevada, as it is for Delaware and
other States.
Mr. Anderson. I could see this as being a potential
problem. However, resident agents are required to hold the
stock ledger or a statement of where the stock ledger is
located, so that law enforcement officers should be able to get
that information.
Senator Levin. The actual owners?
Mr. Anderson. It is a list of the stockholders, the stock
ledger that is part of Nevada revised statutes.
Senator Levin. Which could be nominees and other
corporations; is that correct?
Mr. Anderson. Potentially, yes.
Senator Levin. If you would take a look at Exhibit 9,\2\
perhaps both of you, representing both Delaware here and
Nevada. This is a country comparison chart. This is people who
are telling folks all over the world, ``Hey, incorporate in
these States and you will have no taxes and you will have
anonymity.''
---------------------------------------------------------------------------
\2\ See Exhibit 9 which appears in the Appendix on page 352.
---------------------------------------------------------------------------
Take a look at what it says here. Incorporate in Delaware
and Nevada for top-notch privacy.
Can you see the problem for law-enforcement when that is
peddled as the reason to incorporate in your States?
Mr. Geisenberger. I can tell you, Senator, that when we put
together our statute this year, looking at the question of what
should be the reasons that would allow our Court of Chancery to
enjoin a registered agent from doing business, we looked at
this issue because obviously it is this kind of--we certainly
do not advocate this sort of promotion of Delaware. It is not
how we promote Delaware.
Senator Levin. Are you troubled when Delaware is promoted
this way?
Mr. Geisenberger. I am very troubled that Delaware is
promoted this way. Unfortunately, we could not come to
consensus on a statutory remedy that would limit the free
speech of these types of businesses. They are not prohibited.
Senator Levin [presiding].7 Try the Massachusetts approach.
My time is up. Senator Carper.
Senator Carper. Thanks, Mr. Chairman.
Let me just say, by way of introduction, let me ask Mr.
Geisenberger a question. Have you always worked in the Division
of Corporations, Department of State?
Mr. Geisenberger. No, I have not.
Senator Carper. Did you ever have a previous stint in State
government?
Mr. Geisenberger. Yes, I had a wonderful stint in State
government as the economic policy advisor for Governor Thomas
Carper.
Senator Carper. I knew I had seen you before. [Laughter.]
Senator Levin. I was distracted. Is there some kind of a
conflict that I missed here?
Senator Carper. I hope not.
It is great to see you. Thank you very much for your
service to the people of Delaware. And thanks very much for
being here today and joined by your colleagues, Mr. Anderson
and Ms. Flynn.
Go back again and just take another minute and explain to
us the changes that were made in Delaware law earlier this
year. Why the State made those, why you think that is a good
thing, and whether or not other States might want to consider
doing something similar to that.
Mr. Geisenberger. I think to the points that were made
earlier that outreach is important, and we have been doing a
lot of work over the last 6 years, and we have had FinCEN and
OFAC come to Delaware, meet with our registered agent
community, educate them on what their responsibilities are. We
have had discussions with the FATF, with the U.S. Department of
Treasury and others about what kinds of things we could and
should be doing.
In response to that, we decided to look at our existing
registered agent statute and see what we could do. One of our
biggest concerns, and we think it was a legitimate concern, was
when law-enforcement said what happens if you have a bad
registered agent? How do you get rid of them? And the answer
was we had no mechanism within which to do that.
So we adopted a statute that said there are these
qualifications. If you are in the business of being a
registered agent there is certain information you need to
provide the Secretary of State so that we know exactly who you
are, so that we know who the people are who are doing business
in Delaware. Again, those companies representing 50 or more
entities.
We established a requirement that they have a Delaware
business license which means they have to fill out certain tax
forms in Delaware which give us more information about who they
are. We established a requirement that every Delaware
registered agent or that every company and every LLC and the
State is required to keep with their registered agent the name
of a natural person who is the communications contact for that
business entity. So that when a law enforcement agency goes to
a registered agent, the registered agent is not a dead end in
the investigatory process. The registered agent has to have on
file the name of the communications contact for that business
entity so that law enforcement can continue down that trail.
And then we said if an agent is failing to do that, failing
to retain this information, failing to have a business license,
failing to have an office open for business during normal
business hours, the Secretary of State can go to the Court of
Chancery and get them enjoined from doing business in the State
or their officers and directors.
This act takes effect January 1, 2007 and we look forward
to enforcing it. There may be some registered agents in
Delaware that may not be in Delaware anymore after we take
certain actions.
Senator Carper. Are there other changes? Delaware corporate
law is dynamic and it changes from time to time and updated by
the legislature and governor. Are there other changes that you
foresee that might be considered along these lines?
Mr. Geisenberger. I think the question of whether Delaware
would eventually require that a manager be part of the public
filing is something that the State may consider, taking the
input of corporate attorneys and others in the law-enforcement
community. I think our biggest concern is requiring that every
business entity in Delaware and in the United States then track
that ownership down to the level of a natural person because in
so many legitimate business transactions the managers and
members are other business entities.
Senator Carper. As Ms. Flynn reviewed the law in the
Commonwealth, one of the questions I had, and I again direct it
to Mr. Anderson and Mr. Geisenberger, did you hear anything
there that she described and said that might make sense for us?
Mr. Anderson. Yes, Senator Carper. While it may make sense,
it is something that I would definitely take back and discuss
with our resident agents and with our business law section of
the State Bar Association. The Secretary of State generally
does not make the substantive changes to the commercial law and
I would definitely have to defer to the business law section of
the State Bar and the resident agents in regards to this.
However, in hearing some of the ideas brought forth from
the State of Massachusetts and from Delaware, this is
information that I can take back to them as part of our
discussion.
Senator Carper. Mr. Geisenberger, before you respond, Ms.
Flynn as you heard your fellow witnesses from Nevada and
Delaware testify with respect to what we do in our State and
what they do in Nevada, does anything pop up for you that says
they may want to do that differently and we have some ideas
that might apply?
Ms. Flynn. There are two things that I think I would
suggest they do differently, and the first would be to change
the way in which they review documents. I think presently both
Nevada and Delaware, the review of documents submitted is a
ministerial review, which does not give them room to determine
that documents comply with law. So if there is something that
appears unlawful on their face, they have no ability to take
action. So I would suggest that is the more appropriate
standard for a corporate formation agency.
And second, I think that there are a number of things that
they can do with regard to beneficial ownership. I understand
the concerns that maybe investors do not want beneficial
ownership on the public record, because everything in our
office is immediately accessible online and there are some very
strong privacy concerns. But I think that those concerns can
be----
Senator Carper. Could you give an example or two of one of
those privacy concerns?
Ms. Flynn. I will give you an example. Jerry Lewis was an
officer and director of the Jerry Lewis Telethon. And at one
point, under Massachusetts law he had to provide his
residential address on filings with our office. That was fine
when those documents were just microfilmed. But when those
documents were now scanned and put out on the web for anyone to
see, his home address became accessible to anyone who had the
ability to do a little bit of searching and therefore his
security was jeopardized.
Senator Carper. Where does he live?
Ms. Flynn. He has since moved.
And there are concerns of others, law-enforcement personnel
and that type of thing, those types of people who necessarily
do not want their home address on the public record, people who
have been involved in peacekeeping in other countries who now
return home where they do not want their addresses on the
public record.
So one of the things that we did was to change from
residential addresses to business addresses.
And with regard to beneficial owners, that list is not
maintained in the Secretary of State's office where it would be
public record but it is maintained in the Commonwealth and is
accessible to law enforcement upon request and to the
Secretary.
Senator Carper. Mr. Chairman, if I could just bounce it
back to Mr. Geisenberger, and if you have any response to the
points that Ms. Flynn made and some areas that we might want to
take under advisement in Delaware.
Mr. Geisenberger. First, I need to say that the review that
Delaware officials take of documents is not a ministerial
function.
Senator Carper. How would you describe it?
Mr. Geisenberger. If there is something that does not
follow the law, we reject the document or suspend the document
until such time as the document comes into compliance with the
law.
We get dozens of requests every single day in Delaware for
beneficial ownership information. The typical phone call that I
get is from somebody with a small-town newspaper in wherever it
might be, North Dakota, saying we want to know who owns ABC
LLC, a Delaware corporation. We will frequently ask why because
we are kind of interested. And they will say well, they are
trying to build a development and people want to oppose that
development and we need to know who really owns it.
My concern about making this kind of information on the
public record is that if that is the kind of thing--I think
that could have tremendous economic impact on the United
States. If we put information on the public record that will
actually prevent legitimate businesses from assembling parcels
of real estate, investing in various investment vehicles, if it
creates situations where an investor wishes to invest in
multiple funds that maybe compete with each other, and then
everybody knows oh, that guy is invested in my competitor,
which creates a lot of issues for the types of businesses that
form in Delaware.
Keeping the record with the registered office is certainly
something, as you know we have a Corporation Law Council, it is
really something they can be reviewed by that Corporation Law
Council. I think it raises a lot of issues because, as we said,
one of the things we want to make sure of is that we are not
inhibiting the free flow of capital and the ease of capital
formation.
Frequently shares of corporations, certainly publicly
traded companies, but even privately held companies, those
shares freely flow to different owners every single day of the
year. Even on an intraday basis. So the lists you are likely to
have at the time that law enforcement makes a request, I think
it would be very difficult for those types of business entities
that have thousands of beneficial owners, or in some cases
millions of beneficial owners, to be able to keep track of that
in their registered office on a daily basis or an intraday
basis.
Senator Carper. My thanks to each of you and we appreciate
your testimony and we appreciate your responses to our
questions. Thanks so much.
Senator Levin. In Delaware now there is a communication
contact. Is that what is required by law?
Mr. Geisenberger. That is correct. Every business entity
must provide a communications contact to their registered
agent.
Senator Levin. Does that person have knowledge of the
beneficial owners?
Mr. Geisenberger. They may or they may not.
Senator Levin. They are not required to?
Mr. Geisenberger. They are not required to.
Senator Levin. Is there any reason not to require them to
have the beneficial owners?
Mr. Geisenberger. I think it raises the same question I
just mentioned to Senator Carper, which is that the beneficial
owners frequently are changing on a regular basis, on a daily
basis, and even an intraday basis for both corporations and for
LLCs.
Senator Levin. Is that not true in Massachusetts?
Mr. Geisenberger. I believe it is. I do not know how many
public traded or large companies----
Senator Levin. We are not talking publicly traded.
Mr. Geisenberger. Even large privately held companies.
Senator Levin. It is true in all the States, I assume? We
all incorporate. Delaware may have more than others, but we all
incorporate.
Mr. Geisenberger. It may well be true that the same
situation exists in those other States.
Senator Levin. But if they are able to keep track of it,
why cannot your communications person keep track of it in a
non-public corporation?
Mr. Geisenberger. I will use an example. I mentioned
Cargill, which is one of the largest privately held companies
in the country. They have 2.7 billion authorized shares. They
are not publicly traded. Those 2.7 billion shares are owned by
thousands of individuals. I do not know how those shares trade
on a daily basis or do not trade on a daily basis or get
transferred to other individuals on a daily basis.
I think it would be difficult to keep that in the State of
Delaware and to say to a resident agent ``from now on you are
the recorder of who are the owners of this entity at any given
moment.''
Senator Levin. Does anybody keep track of the beneficial
owner?
Mr. Geisenberger. I would assume that Cargill keeps a
shareholder registry of their own.
Senator Levin. Could not the communications person say go
to Cargill?
Mr. Geisenberger. That would be the holder of record, not
necessarily the actual beneficial owner.
Senator Levin. Does anybody keep a record of all of those
beneficial owners, do you think?
Mr. Geisenberger. Certainly these large companies do not
know the actual beneficial holders of trusts, LLCs and others
that are the beneficial holders of shares in privately held
institutions.
Senator Levin. Do most States require annual reports?
Mr. Geisenberger. Most States require an annual report of
directors and some officers for corporations. Many States do
not require an annual report for limited liability companies.
Senator Levin. So what you are saying is that when it comes
to beneficial ownership in non-publicly traded corporations
that there is no central place where those lists are kept
inside the company? That is what you are saying?
Mr. Geisenberger. I am saying that the actual natural
person that is the beneficial owner, no, there is no
requirement.
Senator Levin. I am not saying requirement. There is no
place inside that company where those owners are named and
listed? That is the ordinary course of business, that inside a
non-publicly traded company----
Mr. Geisenberger. There is no requirement to do so.
Senator Levin. I am not saying a requirement. I am saying
that when a company is formed, a corporation is formed, that is
not a publicly traded corporation, you are saying as a matter
of common practice that there is no place where the owners of
that company are listed?
Mr. Geisenberger. Typically an LLC, certainly one with one
or two members, would have, in their own office, a record of
who are the owners of that entity.
Senator Levin. Who would ordinarily keep the list of the
owners of a non-publicly traded company? Would they not almost
ordinarily have a----
Mr. Geisenberger. With respect to an LLC, it would probably
be the manager of the LLC, which could be another business
entity.
Senator Levin. Would the manager of a non-publicly owned
company ordinarily keep a list of the owners of that company?
Mr. Geisenberger. They would keep a list of the owners or
business entities that are the owners, yes.
Senator Levin. So is there any reason why your
communications person could not let the law enforcement person
know who the manager is that keeps that list?
Mr. Geisenberger. You mean require that the communications
contact be the person that maintains that list?
Senator Levin. No, that they cooperate with law enforcement
to identify who that owner is, who that manager is?
Mr. Geisenberger. It is certainly something to consider. I
think it could be a requirement, that the communications
contact is aware of the--is able to communicate with the
manager that is tracking the holders of record. It is worthy of
consideration, sir.
Senator Levin. That would be very helpful. Somehow or
another we are going to have to crack this nut. It is not
acceptable that we just simply say that we are not going to be
able to identify the owners of companies and we are going to
allow them to be anonymous and therefore do whatever nefarious
action they might be engaged in. We are going to have to find
ways and if the States cannot do it, it seems to me the Federal
Government is going to have to have some kind of a minimal
requirement to do it.
That is not a particularly onerous requirement, to say
since there is a communications connection to a corporation
that that person be able to identify the manager who keeps a
list of the beneficial owners. There is no great problem in
terms of an unfunded mandate in that regard.
Hopefully the States are going to do this on their own and
recognize the importance to all of our security and all of our
well-being that we know who these folks are who own these
companies.
I do not think the purpose of a corporation ever was to
provide anonymity. I used to study corporation law about 50
years ago, so maybe my memory is a little off. But we have
checked with more current--with people who teach corporation
law and that is not the purpose of a corporation, to provide
anonymity to shareholders. It is to provide limited liability,
it is to provide easy ability to transfer stocks, but it is not
to provide anonymity.
We have people who file assumed name certificates who form
companies, who form partnerships. Those are listed in our
Secretary of State's offices and in our local clerks' offices.
It is done all the time and should be done.
I agree and I understand the sensitivity about home
addresses. I am 100 percent with Jerry Lewis, both in his
telethon and in protecting his home address. Those addresses
should be and are protected.
But in terms of the identity as to who the owners are of
companies, I just do not think that we can argue that the
owners of companies can incorporate, thereby protecting
themselves from being identified from law-enforcement. The
stakes are too high, it seems to me, in terms of law
enforcement for us to accept that as the rule.
I would hope that all of the States, I include Delaware, I
include Nevada, all of the States would really be concerned
when they see the way incorporating in their States are being
peddled around the world. When you look at these websites, it
is not that you have a great judiciary or wonderful corporation
law that is selling Delaware on these websites. It is that
owners' names are not disclosed. It is that we have top notch
privacy restrictions. It is that you can use a lawyer, I think
in the case of Wyoming, they claim that you can have a lawyer
to be your incorporator. And that lawyer can assert a lawyer-
client privilege to stop law enforcement from getting access to
information, which I do not believe is right. But nonetheless,
that is what they claim.
I think there is a shared responsibility that we all have.
Corporations serve obviously a very important function. We all
acknowledge that. We also have to bring those disclosures into
the real world that we have to deal with, which is a world
where there is money laundering, where there is fraud, where
there is misuse of the corporate entity, where now globally you
are able to incorporate in some island in the Caribbean or some
guy in some country can incorporate in one of our States on a
computer in 10 minutes and thereby gain the kind of anonymity
which then allows that corporation to be the person or entity
that is shipping and laundering money coming into the United
States.
Everyone talks about globalization. We need our corporate
citizens--and you are citizens--to meet these needs.
In the meantime, the problem has existed apparently since
1977, we were told earlier today, more immediately and with
greater immediacy, with the recent changes in our laws,
including the PATRIOT Act. And so we are going to have to ask
our States to seriously consider what law enforcement needs
are. But in the meantime we have to do what we did earlier
today, I believe, which is to ask law enforcement to tell
Congress what it is they need to know and how are we going to
require access to that information, hoping that it will not be
necessary to pass Federal requirements. But if it is, hopefully
they will be minimal, non-obtrusive, non-expensive, but at
least require information to be maintained which would be
accessible. If not verified, at least maintained so that our
law enforcement people would have an opportunity then to track
the names that are needed.
We extended an invitation to the Financial Action Task
Force's Executive Secretary to appear at today's hearing. Due
to prior commitments he was unable to attend. He did submit a
written statement. This statement will be included in the
printed hearing record as an exhibit.\1\
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\1\ The prepared statement from Financial Action Task Force appears
in the Appendix as Exhibit 3 on page 225.
---------------------------------------------------------------------------
Senator Carper. I am all done.
Senator Levin. I want to thank you, as always, for your
contributions. I will not interject too partisan a note here,
but I think every Member of this body, Democratic or
Republican, is thrilled with the decision of the people of
Delaware to return our dear colleague, Tom Carper, to the
Senate. And I do not think if there were Republicans sitting
over here, there would be any disagreement on that.
Thank you for your coming here today to this panel and we
will stand adjourned.
[Whereupon, at 5:02 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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<all>