    [Senate Hearing 109-845]
    [From the U.S. Government Publishing Office]

                                                            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) 512�091800
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            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

                                  ----------

                           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\
    ---------------------------------------------------------------------------
        \1\ See Exhibit 2 which appears in the Appendix on page 149.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        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:

          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.
          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.
          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.
          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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Flynn appears in the Appendix on
    page 140.
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
        \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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