[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
_____________________________________________________________________________
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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.
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    We appreciate the Subcommittee's interest in this important 
issue and your continued support of our efforts to help prevent 
illicit financial activity.
    I am also pleased to be testifying with my colleagues from 
the Department of Justice and Internal Revenue Service. Each of 
these agencies plays an important role in the global fight 
against money laundering and terrorist financing, and our 
collaboration on these issues has greatly improve the 
effectiveness of our efforts.
    FinCEN's mission is to safeguard the financial system from 
the abuses of financial crime, including terrorist financing, 
money laundering, and other illicit activity. Key to our 
mission is the promotion of transparency in the U.S. financial 
system so that money-laundering, terrorist financing, and other 
economic crime can be deterred, detected, investigated, 
prosecuted, and ultimately prevented. Our ability to work 
closely with our regulatory, law-enforcement and international 
partners assists us to achieve consistency across our 
regulatory regime and consequently to better protect the U.S. 
financial system.
    As mentioned in my written testimony, FinCEN has been 
evaluating the vulnerabilities to the financial system by the 
misuse of legal entities. While a lack of detailed reporting or 
disclosure requirements under most State laws allows for 
expeditious formation of legal entities, this practice poses 
potential risks for money laundering and other financial crime.
    In response to concerns raised by law-enforcement 
regulators and financial institutions regarding the lack of 
transparency associated with the formation of shell companies, 
FinCEN prepared an internal report in 2005 on the role of 
domestic shell companies, and particularly LLCs, in financial 
crime and money laundering. An updated version of this report 
was publicly released last week.
    The study concludes that the lack of transparency in the 
formation process of shell companies, the absence of owner 
disclosure requirements, and the ease of formation of these 
legal entities make these corporate vehicles attractive to 
financial criminals to launder money or conduct illicit 
financial activity. This, in turn, poses vulnerabilities to the 
financial system both domestically and internationally.
    That is why finding a way to address the misuse of legal 
entities in the context of the Bank Secrecy Act has been and 
continues to be a priority for FinCEN.
    FinCEN is undertaking three key initiatives to deal with 
and mitigate the risks associated with misuse of legal 
entities. Concurrent with the findings of our report, FinCEN 
issued an advisory to financial institutions highlighting 
indicators of money laundering and other financial crime 
involving shell companies. The advisory emphasizes the 
importance of identifying, assessing, and managing the 
potential risks associated with providing financial services to 
such entities.
    FinCEN is continuing its outreach efforts and communication 
with State governments and trade groups for corporate service 
providers to explore solutions that would address 
vulnerabilities in the State incorporation process, 
particularly the lack of public disclosure and transparency 
regarding beneficial ownership of shell companies and similar 
entities.
    Finally, FinCEN is continuing to collect information and 
studying how best to address the role of certain businesses 
specializing in the formation of business entities and what 
role they might play in addressing the vulnerabilities that are 
the subject of this hearing.
    In conclusion, Mr. Chairman, we are grateful for your 
leadership and that of the other Members of this Subcommittee 
on this issue, and we stand ready to assist in continuing 
efforts to ensure the safety and soundness of our financial 
system.
    Thank you for the opportunity to appear before you today. I 
look forward to any questions you have regarding my testimony.
    Senator Coleman. Thank you very much, Mr. El-Hindi.
    You indicated that money-laundering and terrorist financing 
are the concerns, I just want to reiterate that. These are 
national security issues that are raised by the lack of 
transparency; is that correct?
    Mr. El-Hindi. That is correct.
    Senator Coleman. Ms. Jones, you indicate that a majority of 
companies are certainly legitimate. This is not casting an 
aspersion. But the challenge then becomes, and the challenge of 
the Subcommittee is how do we deal with the potential for abuse 
out there because of the lack of information? Mr. Burgess talks 
about the connection between transparency and accountability. 
If we had more transparency, we would get compliance.
    I would presume on the next panel we are going to hear from 
folks who are going to talk about the importance of speed in 
these transactions and the fact that most companies are 
legitimate.
    Help me figure out a way, I am trying to figure out a way 
that we work through this. Are there specific changes in 
Federal law that could be made. If you were in a position to 
simply change an existing statute, what would be the change 
that you would make to increase the measure of transparency, 
accountability, and compliance without undermining some of the 
business concerns that have been raised? Whoever wants to 
respond to that. To me, that is the $64,000 question.
    Mr. Nash. Mr. Chairman, I think you are right, that is the 
$64,000 question. And we are not yet in a position to propose 
specific statutory fixes. I think, as you pointed out in your 
opening statement, there are a number of interests that need to 
be balanced here. And I do not want to minimize for a second 
the problem. The problem, from a law enforcement perspective, 
is a hugely significant problem and we are having 
investigations, and important investigations, that are hitting 
brick walls because there is no one out there that has the 
information regarding beneficial ownership that we need to 
pursue those investigations.
    But certainly balanced against the magnitude of the problem 
are issues related to both federalism concerns with respect to 
the States, this has been traditionally an area that States 
have regulated at that level. And so I think a Federal response 
should be viewed as the last alternative, and we are not quite 
there yet to say that we are ready for the last alternative.
    And then the third group of concerns is, of course, the 
fact that the vast majority of these corporate institutions are 
legitimate business institutions, and we would not want to be 
doing anything to disrupt the formation of legitimate 
businesses for legitimate commercial activities.
    Senator Coleman. I want to just, if I can though, push back 
a little bit. And by the way, it is not just hitting a brick 
wall in our investigations, but it is impacting our 
relationships with other countries. Other folks are coming in 
and saying hey, can you give us information? Our answer is no, 
because we do not have it.
    Mr. Nash. That is absolutely right.
    Senator Coleman. I am still going to ask you to respond to 
my question for specific changes, but I will throw one 
additional question on the table. I understand the sensitivity 
about a Federal response, but it seems from what we have been 
looking at, reading the various reports, that one of the 
problems you have, absent a Federal uniform standard, is that 
the States who step forward to be accountable put themselves at 
a financial disadvantage. Is there a need for minimal Federal 
standards?
    Are there some things that we can do at the Federal level 
that would provide a level playing field, would help us in our 
ability to get greater transparency, but would not undermine 
legitimate business activity? Mr. Burgess, would you want to 
offer anything here?
    Mr. Burgess. I echo the comments of my colleague. I think 
the sensitivity is while we have been discussing a number of 
issues, there are not any one thing that I can propose. I would 
venture to say it is probably going to be a combination of a 
lot of factors. I heard one of my other colleagues from FinCEN 
talk about outreach. I know that there is efforts by the States 
in terms of understanding the problems it presents.
    So I would venture to say there is probably no one 
solution. But I can say, not being in the policy arm of the 
IRS, I am not able today to offer you a recommendation.
    Senator Coleman. Thank you. Ms. Jones.
    Ms. Jones. Mr. Chairman, as you and the other Members of 
the Subcommittee are aware, our work actually focused on how 
companies are formed in each State and identifying the 
information which is currently collected. Given the State/
Federal issue, it was actually outside the scope of our work to 
look at other possible options or changing existing laws.
    Senator Coleman. And I understand the hesitancy. I am 
asking you to rely upon your own good common sense, without 
putting you at risk in terms of policy for department or 
anything. You have looked at the problem. You have studied the 
problem. I am just trying to get a little guidance here of a 
couple of things that we can put on the table and then we will 
ultimately sort it out ourselves.
    Mr. El-Hindi, do you want to be a little bolder here?
    Mr. El-Hindi. I think what we are focusing on are the 
things that we can actually do within the existing statutory 
framework. And we have identified some things that we can do. 
Outreach and changing the culture of what is going on in the 
United States is key, and making sure that people are aware how 
these vehicles can be misused.
    We also will be considering a regulatory approach in terms 
of trying to work with the Bank Secrecy Act and identifying 
ways in which its promotion of transparency and the entities 
covered under that could be used, as well.
    You mentioned the issue of change in laws. One of the 
things that we point out in our study, in our preliminary 
study, is our preliminary assessment of the laws in place right 
now. Our study indicates that the States changing those laws to 
increase transparency does not necessarily lead to a flight 
away from those jurisdictions.
    Senator Coleman. Thank you, Mr. El-Hindi. Senator Levin.
    Senator Levin. I would like to ask you to be a lot bolder, 
frankly.
    This has been a problem for how long, Mr. Nash?
    Mr. Nash. Well, there has never been a regime in place 
where beneficial ownership----
    Senator Levin. I am talking about law-enforcement's problem 
in getting information it needs. How long has that been a 
problem?
    Mr. Nash. I think it has been a problem since at least the 
late 1970s and probably before.
    Senator Levin. With the IRS, Mr. Burgess, how long has this 
been a problem?
    Mr. Burgess. I think the first State to pass that statute 
was in 1977. So I would say starting from that point forward.
    Senator Levin. When can we expect some recommendations from 
the Executive Branch to get at this problem, which is we cannot 
determine who the real owners are of corporations. Therefore, 
they not only escape tax liability but it opens up the misuse 
of corporations to abuse, to money laundering and so forth. 
When can we expect some specific recommendations from your 
agencies?
    Mr. Nash. There has been a multi-agency task force that was 
set up right in the wake of the FATF finding that found us non-
compliant with respect to Recommendation 33. They are in the 
midst of putting together their thoughts on this and coming up 
with a recommendation. I cannot give you a time frame as to 
when their work will be completed, but I do not want you to 
come away from this with the impression that this is a matter 
that the Administration is throwing up their hands and 
identifying the problem and not going to be in a position to 
come forward with recommendations. I fully expect we will have 
recommendations. I just do not have them for you today.
    Senator Levin. Could you give us some kind of an idea as to 
when those recommendations would be forthcoming?
    Mr. Nash. Other then to tell you that the time frame that 
FATF has given us to come within compliance is--they are going 
to look again at us in 2 years. And so clearly we want to be in 
a position to present any recommendations to Congress well in 
advance of that 2-year time frame. I would expect you could 
expect something within the next calendar year.
    Senator Levin. Mr. Burgess, when is the IRS going to give 
us some recommendations to address this law-enforcement problem 
which you and Mr. Nash have very appropriately described as a 
very significant law-enforcement problem?
    Mr. Burgess. Senator, one of the things we have underway, 
as I mentioned in my testimony, is an issue management team. 
And that is a collection of issue specialists from every realm. 
And what we are doing is looking into the scope of this, trying 
to basically size the problem up from every angle.
    One of the outcomes of that team would be recommendations 
going forward through our legislative channels through 
Treasury.
    As to an exact time frame when they will work their way to 
this Subcommittee, I cannot give you an exact time. Hopefully, 
it would be some time during the next year, in terms of those 
being obviously shared with Treasury. There is a lot of 
discussion.
    One thing I might share with you--I know there was some 
preliminary discussion in preparation, and we have given a lot 
of thought to this--about things that we could currently do? 
One of the suggestions was requiring when someone requests an 
Employee Identification Number to also reveal who the 
beneficial owner is.
    There is a lot of merit to that, but when you look at it, 
it is not quite so simple. First of all, all of these entities 
did not have to have an Employer Identification Number. The 
second thing is ownership of these entities changes. We have no 
way of tracking ownership. Some of the things that I described 
in my testimony, like the bearer shares and some of the other 
things, are frequent by changing.
    The third problem, as Ms. Jones discussed in her testimony, 
is that the information would become part of tax-related 
information. Certainly under Section 6103, it could not be 
freely disclosed. So what I am saying is sometimes under the 
surface of things, it is not quite so simple. But we are 
definitely pursuing the issue and there is much discussion 
going on in terms of ideas we can hopefully advance to you.
    Senator Levin. There is always complexity to issues. There 
is not an issue that I know of that we deal with that is not 
complex. But you have been dealing with this problem for two 
decades or more.
    I think the people who pay taxes in this country and who 
are abused by money laundering and who are less secure because 
of the abuses of money laundering and other problems have a 
right to our agencies and to us acting. And it is not good 
enough, frankly, to simply say you are studying it and it is 
complex. Been there, done that.
    I think we ought to expect from your agencies some kind of 
an estimate as to when we could expect proposals to address 
problems which you acknowledge. I mean, we have a GAO report 
which is one of a series of reports. Your agencies have come up 
with reports. We all know it is a major problem. Your testimony 
is clear about the problem. And it seems to me that we have a 
right to expect from your agencies an estimate as to when you 
will be proposing corrections for what are acknowledged to be 
significant threats to our financial security and to our 
national security.
    Can we expect that you would tell us for the record, after 
going back and consulting with your agencies, approximately 
when we could expect recommendations? Is that a request, Mr. 
Nash?
    Mr. Nash. That is a fair request.
    Let me just say, Senator Levin, that one reason you have 
not got requests before now is that it is only recently that 
this has become the largest problem that we face in the realm 
of trying to get information related to money laundering 
investigations, in large part because of the good work of this 
Subcommittee and Congress, in general. Up until now or up until 
very recently the significant problem was getting information 
out of financial institutions. And a number of the measures 
that were passed in the PATRIOT Act and in response to law-
enforcement concerns in this realm that have come up in recent 
years have taken some of the more significant issues off the 
table that have left this as a very significant issue that is 
yet to be addressed.
    I just throw that out in defense of our agencies and that 
this has gotten to the top of the to do list only because some 
of the more significant issues that were above it have gotten 
crossed off.
    Senator Levin. My time is up. Thank you.
    Senator Coleman. Thank you, Senator Levin. Senator Carper.
    Senator Carper. Thanks, Mr. Chairman.
    Ms. Jones, thank you for your testimony and for the 
submission and the work that GAO has done.
    On page 12 of your testimony, I read in bold print on the 
left-hand margin of that page. It says more company ownership 
information could be useful to law-enforcement but concerns 
exist about collecting it. And then you have four bullet points 
along the side of the second half of that page.
    Just run through those again for me. And what I am really 
interested in are what are those costs? What are the benefits 
if those costs are incurred by States and others? And are the 
benefits worth the costs?
    Ms. Jones. Senator Carper, I can speak about the costs. We 
actually did not try to do a cost-benefit analysis but I can 
give you a little bit more detail about the costs that the 
States could incur.
    First of all, a number of States told us that it could 
require more time, therefore more staff effort. That is where 
the cost comes in. It could increase the workloads for State 
offices and agents if they were required to collect more 
information.
    Because a lot of companies place a lot of emphasis today on 
creating corporations in a short amount of time, the States 
were concerned that requiring more information could mean that 
some companies would feel that the amount of time required to 
create the corporation might not be worth the effort to do so.
    Some of the State officials felt that they could lose State 
revenue, particularly if all 50 States information requirements 
were not uniform. They felt that the States with more stringent 
requirements could lose business to other States or to other 
countries.
    And they also mentioned that there might be a loss of 
business for agents because individuals can form their own 
companies. They might choose that option. And agents also 
thought that it could be difficult to collect and verify more 
company information if they were required to do so.
    Senator Carper. This is sort of an observation. We are 
reluctant in Congress, on the part of the Federal Government, 
to impose unfunded mandates on States, ask them to do certain 
things and to incur certain costs, unless we know what those 
costs are somehow made up for.
    I agree with you that there are costs, and I think you have 
summarized them pretty well. It would be interesting to know 
what the benefits are and how we could quantify those relative 
to the costs.
    I do not know who to direct that to but I would just raise 
that as an issue.
    I would like to ask, and this can be for anyone on the 
panel, are you all aware of any States that have taken action 
on their own to address some of the problems in their laws on 
business formation, on incorporation and registration of new 
businesses, that can lead to things like money laundering and 
to tax evasion?
    Mr. El-Hindi. With respect to Delaware, for example, we 
have completed our initial assessment in 2005. And part of the 
update of our study for the public release enabled us to assess 
changes that had occurred in Delaware. It is referenced in our 
report where, for example, standards of conduct with respect to 
corporate agents or corporate service providers were bolstered. 
That is one step, we would say, in the right direction. And we 
use that as an example of pointing out how outreach to the 
States and discussing with them this problem can lead to some 
developments.
    Senator Carper. Are there other States that you picked up 
as you updated your study?
    Mr. El-Hindi. I could get back to you.
    Senator Carper. Would you do that for the record, please? 
Thanks. Anybody else?
    I think, Mr. Burgess, it was in your testimony that you 
singled out several States--I think Nevada, Wyoming, and 
Delaware--as three States that are--I think your term was most 
accommodating--for those businesses that might want to hide 
their ownership information for one reason or another.
    Is there some reason why these three States or maybe some 
others should be singled out? Is there any legitimate reason 
for some of the features these States and others might have in 
common?
    Mr. Burgess. Let me speak first to Wyoming and Nevada. They 
are two States that have a number of registered agents that can 
also serve as nominees, nominee officers, as well as the 
registered agents, which is unique to that particular State.
    There are also, as I mentioned in my testimony, two States 
that also allow the issuance of bearer shares, meaning that 
anyone who physically is in possession of those is in ownership 
of the corporation.
    In reference to Delaware, the reference there was primarily 
due to the requests we receive from our tax treaty countries. 
Delaware is prominent in that. And one of the reasons it might 
be, and I will offer this, is because Delaware obviously has a 
status in terms of being recognized in terms of a U.S. 
corporation. I think that might be one of the reasons. But 
there is a prominence. And I was really speaking, when I spoke 
of Delaware in the testimony, in that regard. It tends to be 
one of the States that tends to be favored as shell companies 
are actually sold and resold to others outside of this country, 
in Eastern Europe and the Russian Federation. It is one of the 
States that tends to be one of the largest recognized in those 
requests that we receive.
    Senator Carper. Anyone else want to comment on that?
    Would you repeat your answer, Mr. Burgess? [Laughter.]
    Mr. Burgess. That is like asking me to reach over and hit 
that third rail.
    Senator Carper. I did not count the number of times I heard 
the term beneficial owner mentioned, but I heard it a lot. And 
there are obviously beneficial owners and then there are other 
owners. Can somebody give us a primer on the difference between 
beneficial owners and some of the other categories of 
ownership? Why do we focus so much on beneficial ownership?
    Mr. Burgess. Just quite simply, I would say a beneficial 
owner is actually the person in control--that actually 
possesses the control over the operations of the corporation. 
It directs its activities. In many cases, that may not be what 
appears on the surface. You have a president, for instance, 
that may be a nominee officer. But it is the person that truly 
exercises control.
    Senator Carper. My time has expired.
    There is a second half to my question. Mr. Chairman, could 
I just ask them to answer the second half?
    Senator Coleman. Absolutely.
    Senator Carper. Just mention, other than beneficial 
ownership, what are some of the other categories of ownership 
that we should be mindful of?
    Ms. Jones. There are directors and managers of corporations 
and limited liability companies and they can also exercise a 
high degree of control. So it is important to know who those 
people are, too.
    Senator Carper. OK, thank you very much.
    Senator Coleman. Ms. Jones, I think it is very fair to say 
that your report, particularly the conclusion, is very balanced 
in the end. You lay out that on the one hand there are 
legitimate concerns that are raised by the States. On the other 
hand, we have a situation here where there are deep concerns, 
legitimate concerns that law enforcement has.
    Let me ask you, in your conversations--I want to get back 
to solutions if we can. In your conversations with the States, 
did any of the State officials offer up any ways in which the 
system could be improved? Did they offer some solutions? I 
recognize the concerns they have, as I do, about unfunded 
mandates. But did they come up and say here are some things I 
think we could do that we are not doing today?
    Ms. Jones. Senator Coleman, we spoke to a number of States 
in the course of doing our work. And at the moment I do not 
actually recall that any particular State offered solutions. 
But I would be happy to get back to you on that.
    Senator Coleman. I would appreciate it if you would. Again, 
as I said, the report does a very good job of laying out this 
balance.

              INFORMATION PROVIDED FOR THE RECORD FOLLOWS:

          Question from Senator Coleman: In your conversations with the 
        States, did any of the State officials offer up any ways in 
        which the system could be improved? Did they offer some 
        solutions?
          Response of Ms. Yvonne Jones for the record: In our 
        interviews with State officials, we heard of potential changes 
        to the system from one State, Delaware. We learned in our 
        interview with Delaware officials that the Corporations 
        Division of Delaware's Department of State was discussing with 
        the State legislature various approaches to enhancing the 
        State's authority to oversee registered agents. One approach 
        they were discussing would be to require the Secretary of State 
        to verify the ability of a registered agent to serve process. 
        If the State found that the agent did not have the ability to 
        serve process, then the State would refuse to certify the 
        individual or entity to be a registered agent. Another approach 
        would define specific information about Delaware business 
        entities that registered agents must maintain. They also were 
        discussing the idea of requiring registered agents to know 
        beneficial owners and maintain the ownership information but 
        the economic impact on Delaware was a concern. An official said 
        there was some consensus, however, that registered agents 
        should at least know who seeks their services. An official said 
        another idea discussed with the registered agent community was 
        to have the State license registered agents in Delaware, but 
        the State had not explored what the cost implications of this 
        option would be. The official noted that another idea might be 
        to turn the licensing of agents over to the industry. The 
        official said that both options could pose problems for the 
        small registered agents.

    Senator Coleman. The problem is the status quo does not 
reflect the balance. The status quo reflects the concerns. And 
certainly, as the report indicates, they are very legitimate 
concerns. But it does not then say is how we are going to 
address those concerns, here is what we are going to do to deal 
with the potential we have for money laundering, the potential 
we have for hiding assets. The problems with nominees, of not 
knowing who the beneficial owner is. In Nevada, as I think you 
indicated, Mr. Burgess, there is no requirement that the person 
listed in the company registration have any connection with the 
corporation. So you have a sham, a shell owner. That is the 
problem. You can have shell ownership and no way for law-
enforcement to understand where the money is coming from?
    So how do we close this information gap--we load up our 
banks with a whole range of reporting requirements to combat 
money laundering. It seems to me we have a big hole here. We 
have a big hole. And I am looking for some way to fill it, 
being sensitive to the concerns that are raised.
    So please, I would ask you to go back, and if there have 
been specific recommendations, give them to us because we need 
that.
    Mr. Burgess, there has been, I think, a number of 
individuals. Mr. El-Hindi talked about outreach at least as one 
of the things that can be done.
    Does the IRS has some responsibility? Who is going to do 
the outreach? If you are going to talk to States and the 
private sector about some of the concerns and the danger here, 
who has the responsibility of doing that?
    Mr. Burgess. Within the IRS, we have a stakeholder group, 
and we do have a working relationship with the States. And let 
me say, I have not found the States to be uncooperative. I do 
not think that is the issue that we are saying from that 
standpoint. But certainly, we do have an arm that can do 
outreach.
    I think one of the other things that the issue management 
team that I explained to you would also explore is whether 
there is a role for outreach to the registered agents here? One 
of the things that I highlighted in my testimony was dealing 
with registered agents, who also serve as nominees and nominee 
officers and others. Is there a role there in terms of outreach 
that we can do with their organization regarding potential 
guidelines they can mandate for themselves within their own 
industries.
    Senator Coleman. I would urge then that we go back and look 
at this issue of outreach and figure out who has some 
responsibility and then be prepared to move forward on that. 
Senator Levin.
    Senator Levin. Thank you, Mr. Chairman.
    We have to get some more examples of these problems that 
you have summarized in your testimony. And I think there are 
some folks with you today who can describe to us some specific 
incidents, examples, cases. Mr. Burgess, are there one or more 
people with you, for instance, that could tell us what IRS is 
up against? And then I will turn to you, Mr. Nash.
    Mr. Burgess. Yes, Senator. I have Robert Northcutt 
accompanying me today. Robert has first-hand experience in 
dealing with some of these transactions. Robert is our Director 
of our Abusive Transactions Office. I would be happy to have 
him answer.
    Senator Levin. I wonder if you could give us your name. Do 
we need to swear him in? I am not sure.
    Senator Coleman. I think we need to.
    Do you promise that the testimony you are about to give 
before the Subcommittee is the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Northcutt. I do.
    Senator Coleman. You may proceed.

ROBERT NORTHCUTT, ACTING DIRECTOR, ABUSIVE TRANSACTIONS OFFICE, 
SMALL BUSINESS/SELF EMPLOYED DIVISION, INTERNAL REVENUE SERVICE

    Mr. Northcutt. Yes, sir, you asked my name. It is Robert 
Northcutt. Currently I am the Acting Director of Abusive 
Transactions with the Small Business/Self Employed Division.
    Senator Levin. Of the IRS?
    Mr. Northcutt. Yes, sir, with the Internal Revenue Service.
    In addition, I am a program manager who is overseeing this 
particular issue management team that was discussed by Mr. 
Burgess. It is something that originated approximately 4 or 5 
months ago, and essentially what has occurred is, under Code 
Section 6700 of the Internal Revenue Code, we are allowed to go 
ahead and pursue promoter investigations.
    We have pursued a couple of these investigations with 
respect to some of these registered agent or nominee 
incorporating service businesses. We have, at present, a 
cooperative promoter and an uncooperative promoter. With 
respect to the cooperative one, we have managed to secure a 
list of its clientele for every other letter of the alphabet. 
In fact, we did a non-statistical sample of one letter of the 
alphabet. And in checking the records of corporate filings and 
other information, we discovered that roughly 50 percent of the 
entities that have been formed under the letter O, in fact, had 
compliance problems, some of them rather extensive.
    In one particular case, there were even Federal contracts 
that had been entered into with various Federal agencies. And 
this corporation, in fact, was not filing tax returns, and the 
100 percent shareholder was not filing tax returns, to the 
extent of several million dollars.
    With respect to the uncooperative registered agent 
promoter, the difficulty we have is we are not getting access 
to its clientele. And so we are actually having to go in and 
trace the money as far as the funds this registered agent 
received for setting up these corporate entities, and then go 
backwards from where the money originated, identifying the 
entities that are actually involved. In that particular case, 
we are seeing an even higher incidence of noncompliance with 
the Federal tax laws.
    We have recently canvassed our revenue agents and 
collection officers in the field with respect to obstacles that 
they have encountered and some of the issues that they have 
observed. With respect to our collection activities, it is 
extensive in the sense that any time we have a nominee or shell 
corporation, it presents an obstacle in trying to levy or lien 
assets upon which we can collect tax deficiencies. Some of 
these have recently involved listed transactions, specifically 
an intermediary transaction, that falls out under Notice 2001-
16.
    But in addition to that, we have seen these nominee and 
shell corporations set up to facilitate employee stock option 
plans, Roth IRA schemes, corporation sole, obviously offshore 
credit cards and debit cards, LLCs that do not file returns 
because they, in fact, have a separate filing requirement.
    With a limited liability corporation you have what is 
called a ``check the box.'' You can operate as a sole 
proprietorship, a partnership, or a corporation. And depending 
on how the box is checked, it will have a different filing 
requirement.
    Senator Levin. The transactions that you made reference to, 
you are talking there about tax shelters?
    Mr. Northcutt. Yes, sir. I am sorry.
    Senator Levin. But all of these items that you just rattled 
off, each of those could have some real tax compliance 
problems?
    Mr. Northcutt. That is correct, Senator. And there are 
other items, as well, and it is not just with respect to 
Federal taxes. We have also observed situations in which 
parallel corporations will be established, one with an 
operating business in one State and then a shell corporation in 
another State that perhaps has some of the difficulties we have 
described. And what will occur is the shell corporation will 
act as a management company for the operating business, and 
funds will then be transferred from the operating business to 
the shell corporation.
    As I am sure you are aware, there is not a requirement for 
a 1099 reporting or anything like that between corporations. So 
the only thing we observe is a canceled check or wire transfer 
to a separate corporation. In the event that we are looking at 
the operating company, to conduct an examination, to prove the 
expenses we would obviously ask for a receipt, an invoice, 
those kinds of things.
    In this environment, those documents are easy to prepare 
and appear legitimate for our examiners who are looking at the 
operating company. Very rarely would we have that same examiner 
cross State lines to examine the company that received the 
funds or even, for that matter, pursuing whether or not it had, 
in fact, filed a tax return.
    Those are some of the additional things. We have also 
warehouse banking arrangements, offshore brokerage accounts. 
And in fact, as I was pointing out, the State schemes are not 
just defeating our purposes. They also defeat the State income 
tax and sales tax activities.
    Senator Levin. The lack of the ownership information here 
is one of the key problems that you face in tracking and 
tracing these transactions; is that accurate?
    Mr. Northcutt. Yes, sir, it is. That is very accurate, 
Senator.
    Senator Levin. So what you need is to know who the 
beneficial owners, who the real owners are of these entities, 
and that is not available to you?
    Mr. Northcutt. That is correct, Senator.
    Senator Levin. You can do the tracking if you can find out 
who the beneficial owners are; is that correct? In other words, 
the key issue--and this is where, Ms. Jones, it seems to me we 
have to come back to you. You talk about listing and verifying. 
I think they probably, for starters at least, would be happy 
just to have a list of the beneficial owners so they can track 
these folks down. But if they are using nominees or agents that 
are registered agents that have no ownership interest or they 
are using lawyers who say that is a privileged transaction or a 
privileged matter as to who the owners are, they run into blank 
walls.
    So when you look into cost benefit, which is obviously 
relevant, you should look not just at the cost of listing, 
which seems to me to be nominal, but the look at the benefit to 
knowing who the beneficial owners are. A number of States do it 
and we insist that other countries do it. And a lot of the tax 
haven countries do it. They tell us at least they have the 
information. They will not tell us, but they have the 
information as to who the beneficial owners are.
    We cannot get the States to list the beneficial owners, not 
even getting to the verification issue, which involves a cost 
because there is transfer involved and so forth.
    So when you go back and look at this on cost benefit, I 
hope you will look not just at cost of listing and verifying, 
but just the cost of listing to give at least a leg up to our 
law-enforcement people so they can start tracking. And of 
course, if they list fraudulently, or if they do not list the 
real owners, then you have a fraud issue. You have a false 
information issue with the local government.
    Your testimony, Mr. Burgess, is extreme helpful.
    I am way over. Senator Carper, I am holding you up, too.
    Mr. Nash, do you have someone here with you who can do the 
same thing here and give us specific examples?
    Mr. Nash. I am afraid I do not have anyone to take my 
place, but there is one category of cases that I do not think 
has received quite enough attention in this discussion that I 
would like to just discuss briefly, which is the terrorist 
financing cases. I am not sure anyone has quite outlined for 
the Subcommittee yet why it is that this poses a particular 
issue in the area of terrorist financing.
    That is, as you know, Senator Levin, the way our statutory 
regime is set up with respect to terrorist financing, it relies 
on a designation process. And through the State Department and 
through OFAC, certain entities are named and designated as 
entities that our government believes are terrorist 
organizations. And financial transactions with those entities, 
those designated entities, are therefore prohibited. It is 
prohibited to give material support to those organizations. And 
if they appear on the OFAC list, it is a crime to engage in any 
financial transactions with them.
    When you focus on that, it is very easy to see how this 
particular problem that we are talking about today becomes such 
a problem in the area of terrorist financing, because obviously 
a terrorist organization that finds themselves on the State 
Department list or on the OFAC list, the first thing they are 
going to want to do is establish an alter ego that is not 
designated and that to the world is a clean face that can 
engage in financial transactions and the world can engage in 
financial transactions with that entity without the stigma of 
dealing with a designated terrorist organization.
    And so in that realm, it is very important for us to be 
able to track beneficial ownership with respect to company 
formations so that we can track that back to a designated 
terrorist organization.
    Senator Levin. To whom the real owners are, which will be 
the terrorist organization in your example; is that correct?
    Mr. Nash. That is right.
    Senator Levin. And if they just, for instance, buy an old 
shell corporation or have it formed by some company that forms 
corporations for $100 over the Internet, then they appear to 
have a clean company. It is not on the list. But the real 
owner, the beneficial owner, is the terrorist organization.
    Mr. Nash. That is right.
    Senator Levin. And unless the beneficial owner, that 
terrorist organization, is listed, law enforcement is 
frustrated. Is that correct?
    Mr. Nash. That is correct.
    Senator Levin. Thank you. Thank you, Mr. Chairman.
    Senator Coleman. Thank you very much, Senator Levin.
    I will excuse this panel. I want to thank you for your 
testimony.
    If I could paraphrase a movie, ``Houston, we have a 
problem.'' I am not sure that we have arrived at the solutions 
today but clearly, particularly given the last line of 
questioning, Senator Levin, we clearly have a problem that 
needs to be better addressed.
    I want to thank the panel.
    Senator Levin. And if our witnesses could let us know when 
those recommendations would be forthcoming, we would very much 
appreciate it.
    And Mr. El-Hindi, if you would let us know whether or not 
your organization is going to be issuing a regulation next 
year. Do we expect that?
    Mr. El-Hindi. I will follow-up with you on that. Something 
like that is certainly a possibility but it is one of many 
possibilities in terms of how we approach this.
    Senator Levin. Can you fill us in for the record as to 
whether that is going to be forthcoming?
    Mr. El-Hindi. Yes, sir.
    Senator Levin. Thank you, Mr. Chairman.
    Senator Coleman. Thank you.
    I would now like to welcome our second and final panel of 
witnesses to today's hearing. Richard J. Geisenberger, the 
Assistant Secretary of State for Delaware; Scott Anderson, 
Deputy Secretary of State for Commercial Recordings of the 
office of the Secretary of State for the State of Nevada; and 
finally Laurie Flynn, the Chief Legal Counsel for the Office of 
the Secretary of the Commonwealth for the Commonwealth of 
Massachusetts.
    I would welcome each of you to today's hearing and look 
forward to your testimony.
    As you are aware, pursuant to Rule 6, all witnesses who 
testify before this Subcommittee are required to be sworn. At 
this time I would ask you to all stand and raise your right 
hand.
    Do you swear the testimony you are about to give before 
this Subcommittee is the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Anderson. I do.
    Mr. Geisenberger. I do.
    Ms. Flynn. I do.
    Senator Coleman. We have a timing system. I think we have 
the new boxes there, by the way.
    Senator Levin. What are they, Mr. Chairman?
    Senator Coleman. I do not think you have to press a button 
for the sound to go on now. I think it is perhaps a little more 
automated there. High tech. We are getting very high tech, 
Senator Levin.
    I believe that one minute before the red light comes on you 
will see the light change from green to yellow. So at that 
point please summarize your, testimony. Your written testimony 
will be printed into the record in its entirety.
    We will start with you, Mr. Geisenberger, then go to you, 
Mr. Anderson. And finally we will conclude with you, Ms. Flynn, 
and then we will proceed with our questions.
    Mr. Geisenberger, you may proceed.

TESTIMONY OF RICHARD J. GEISENBERGER,\1\ ASSISTANT SECRETARY OF 
           STATE, STATE OF DELAWARE, DOVER, DELAWARE

    Mr. Geisenberger. Mr. Chairman, Members of the 
Subcommittee, thank you for this opportunity to testify on this 
important subject.
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    \1\ The prepared statement of Mr. Geisenberger appears in the 
Appendix on page 115.
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    Delaware is the legal home to more than half of all 
publicly traded companies in the United States and 61 percent 
of the Fortune 500 companies. The reasons to incorporate in 
Delaware are compelling, as mentioned by Senator Carper, modern 
and flexible corporate laws, a highly regarded judiciary to 
name just a few.
    More than 750,000 business entities representing every 
sector of our Nation's economy are registered in Delaware, from 
small mom-and-pop businesses, private investment vehicles, 
religious and charitable organizations, to large well-
capitalized companies, from publicly held General Motors to 
privately held Cargill. Many Delaware legal entities are 
affiliated with such large firms and are created to facilitate 
the financings, alliances and investment vehicles in which 
those large businesses engage.
    We commend the GAO for a generally balanced and factually 
accurate report highlighting the challenges involved in 
collecting beneficial ownership information and the role of 
third parties in the company formation process.
    Unfortunately, it is our view that the money-laundering 
threat assessment and the FATF reports present a far less-
balanced view. We take strong exception to the FATF's 
conclusion that Delaware encourages secrecy and its State 
policies are driven by ``a powerful lobby'' of company 
formation agents. Indeed, as shown in the GAO reports, no State 
does verification and no States collected true beneficial 
ownership information reaching down to the actual individuals 
that own equity and exert control.
    To the contrary, Delaware's laws promote the efficient flow 
of capital by allowing businesses to order their affairs in 
ways that meet ever changing business conditions. Our laws 
reflect the input of corporate attorneys across the United 
States and are driven by a balancing of interests among 
companies, investors, law-enforcement, and others.
    With respect to the role of company formation agencies and 
registered agents, for over a decade Delaware has applied 
standards of conduct to its online agents. The State has also 
led the Nation, enacting a new statute this year that sets 
enhanced qualifications for Commercial Registered Agents and 
creates procedures to put rogue registered agents out of 
business.
    As for beneficial ownership disclosure, it is the view of 
Delaware that: One, a reporting system that includes public 
companies would be a logistical and costly nightmare for 
corporate America; two, that even a self-reporting system that 
exempted public companies and their affiliates would have 
immense verification costs and several definitional problems; 
and three, such a system would impose costs on legitimate 
private businesses that seem vast in relation to the benefits 
that are, at best, uncertain.
    Indeed, FinCEN's recent report acknowledges that a system 
of self-disclosure of managers and members is easily thwarted 
because money-launderers will falsify identities and most U.S. 
investment strategies rely extensively on the use of other 
business entities as equity holders.
    But perhaps the single greatest concern we have is the 
likelihood that the role of Delaware, and indeed the United 
States, would shift from that of providing an attractive 
investment environment for domestic and international capital, 
one that values privacy, efficiency and the ease of capital 
formation, to being replaced by one of having regulatory and 
investigative oversight of the equity holders of the millions 
of legitimate enterprises in the United States.
    Indeed, we believe that reforms are best focused on 
enhancing the ability of government officials to follow the 
money through the financial services system and providing 
resources needed to investigate and deter illicit activities. 
Delaware's recent amendments are a step in the right direction 
and deserve consideration in other jurisdictions. We also 
recommend that the Federal Government study whether existing 
Federal laws should be augmented.
    For example, to create the level playing field mentioned by 
Senator Coleman, the Federal Government could study the costs 
and benefits of gathering additional beneficial ownership 
information through the Federal Tax ID application process.
    Delaware is merely one stakeholder in this issue. We 
recommend that any discussion of these issues have input from 
the countless large and small companies and investors that 
would be most affected by a beneficial ownership disclosure 
requirement. It is critically important to hear their voices on 
the relative costs and benefits of such a system.
    On behalf of the State of Delaware, I thank you for this 
opportunity to share these oral comments and our written 
testimony and look forward to answering any questions.
    Senator Coleman. Thank you, Mr. Geisenberger. Mr. Anderson.

 TESTIMONY OF SCOTT W. ANDERSON,\1\ DEPUTY SECRETARY OF STATE 
 FOR COMMERCIAL RECORDINGS, OFFICE OF THE SECRETARY OF STATE, 
              STATE OF NEVADA, CARSON CITY, NEVADA

    Mr. Anderson. Thank you, Mr. Chairman.
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    \1\ The prepared statement of Mr. Anderson with an attachment 
appears in the Appendix on page 133.
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    Good afternoon, Mr. Chairman, Mr. Levin, and Subcommittee 
Members. My name is Scott W. Anderson. I am Deputy Secretary of 
State for Commercial Recordings for Nevada Secretary of State, 
Dean Heller.
    It is an honor to be here before you today and I thank you 
very much for the opportunity to participate in this hearing.
    My comments today will be a brief summary of the 
information included in my written presentation that was 
submitted earlier to the Subcommittee. To begin, I would like 
to qualify my written statement, included in your materials, 
regarding the GAO report ``The U.S. Money-Laundering Threat 
Assessment and the FATF Report.'' My comments were strictly 
from a Nevada filing officer's standpoint and do not reflect 
the standpoint of others on issues outside the processes of the 
filing office.
    The Commercial Recordings Division of the Nevada Secretary 
of State's Office is responsible for the processing and filing 
of the organizational and amendatory documents of entities 
organized pursuant to Title 7 of the Nevada Revised Statutes. 
Nevada's business friendly statutes, tax structure, liability 
protections, and commitment to service, and an active resident 
agent and service provider industry have all helped make Nevada 
a leader in the business entity formation.
    Historically, the Commercial Recordings Division of the 
Secretary of State has been strictly a filing office with no 
regulatory authority over the entities on file. Documents are 
reviewed for statutory requirements for filing and if those 
requirements are present, the documents must be filed. Minimal 
filing requirements allow for ease of filing. No beneficial 
ownership information is or has been required for entities 
filing in our office.
    Additionally, the information contained in the filings 
submitted is not verified.
    In fiscal year 2006, the Commercial Recordings Division 
processed over 85,000 new entities and over 300,000 initial, 
amended and annual lists. Over 40,000 each of corporations and 
limited liability companies were formed last year.
    The Secretary of State's Office provides electronic 
services for the e-filing of initial and amended annual lists 
which is available on our website. There are plans to develop 
online services for the filing of articles of incorporation and 
other filing processes.
    The Secretary of State does not actively promote the 
advantages of organizing in the State of Nevada. The resident 
agents and service companies actively promote the State of 
Nevada. It is estimated that 60 percent of the filings received 
in our offices are submitted through use of a resident agent. 
The Secretary of State does not regulate the resident agents 
that do business with our office. It is my understanding that 
portions of the Model Resident Agents Act, as proposed by the 
National Conference Committee on Uniform State Laws, will be 
introduced during the 2007 session of the Nevada Legislature.
    In regards to beneficial ownership, beneficial ownership 
information is not required for filing in the Office of the 
Secretary of State and therefore is not maintained by the State 
or by resident agents. Resident agents are required to maintain 
a copy of the stock ledger or a statement as to the location of 
the ledger and our Nevada Department of Taxation may have some 
beneficial ownership information from the annual business 
license filings it receives.
    As noted in the reports, some beneficial ownership 
information may be present on the public record from the 
information required for filing and that is provided by those 
filing in our office. We have received no specific requests for 
beneficial ownership information from law enforcement agencies, 
and additionally we have received no complaints from law 
enforcement other than what was stated in the reports and the 
meetings preliminary to the report, such as the GAO report, 
that a lack of beneficial ownership information has impeded any 
investigation.
    Nevada has been working on several of the issues that have 
been brought forth in the different reports. Proposed 
legislation for the prohibition of bearer shares and a 
limitation on the use of nominee officers, as well as the 
provisions of the Model Resident Agents Act, are expected to be 
introduced during the 2007 Nevada legislature. Additionally, in 
the 2005 legislative session, provisions making it a Category C 
felony to knowingly offer fraudulent documents in the Office of 
the Secretary of State, and requiring beneficial ownership 
information on certain transactions were passed.
    Currently the Secretary of State is attempting to 
facilitate a meeting with the Resident Agent Association in the 
State of Nevada, the State Bar Association and State 
legislators to fully discuss the collection of beneficial 
ownership information.
    The entire issue is of great interest to our office and we 
recognize the importance of being involved in assisting this 
Subcommittee in its work.
    Thank you again for this opportunity to participate today 
and I would be happy to answer any of your questions.
    Senator Coleman. Thank you, Mr. Anderson. Ms. Flynn.

 TESTIMONY OF LAURIE FLYNN,\1\ CHIEF LEGAL COUNSEL, OFFICE OF 
  THE SECRETARY OF THE COMMONWEALTH OF MASSACHUSETTS, BOSTON, 
                         MASSACHUSETTS

    Ms. Flynn. Good afternoon. Thank you, Mr. Chairman, Senator 
Levin, and Subcommittee Members. My name is Laurie Flynn. I am 
Chief Legal Counsel to the Secretary of the Commonwealth.
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    \1\ The prepared statement of Ms. Flynn appears in the Appendix on 
page 140.
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    I applaud the Subcommittee's efforts for providing a 
national forum to discuss the adequacy of public disclosure in 
the business entity formation process. I hope that 
Massachusetts' recent deliberations and resulting resolutions 
in this area will assist the Subcommittee in its effort to 
balance the need for beneficial ownership information with the 
privacy concerns of legitimate business interests.
    By way of background, Massachusetts recently adopted a new 
corporation law, Chapter 156D of the General Laws. The act was 
the first comprehensive revision of the corporate laws in 
Massachusetts in over 100 years and was prepared by a joint 
task force of the Boston Bar Association and the Massachusetts 
Bar Association, aptly named the Task Force on the Revision of 
the Massachusetts Business Corporation Law.
    The task force consisted of over 50 experienced corporate 
practitioners, members of the legislature and representatives 
of the Office of the State Secretary. The task force chose the 
American Bar Association's Model Business Corporation Act as 
the basis for its corporate statute because the act had been 
adopted in a substantial majority of States.
    However, Massachusetts deviated from the Model Act in a 
number of relevant areas, including the role of the Secretary 
of State in the entity formation process and the type of 
information disclosed in business organization documents. Such 
differences reflect a carefully crafted balance between public 
interest in adequate disclosure and the privacy concerns of the 
business community.
    With regard to the role of the Secretary of State, 
Massachusetts retained the authority of the Secretary of State 
to review documents for compliance with law. Such provision is 
the basis for the Secretary's ability to hold administrative 
hearings if information provided in organizing documents is 
inaccurate or otherwise fails to comply with law. The Model 
Business Corporation Act relegates State authority in this area 
to a ministerial function. So essentially, if anything is 
provided, you have to take it.
    Second, the new act authorizes the Secretary to require 
more information in the formation process than is collected in 
a Model Act State. In Massachusetts, the articles of 
organization contain a supplemental information that includes a 
description of the business activity, the name and address of 
the president, treasurer, secretary, and each of the directors, 
the name and address of the registered agent, the location of 
the corporation's principal office, and the location of the 
office in the Commonwealth where certain records required to be 
maintained by the act will be kept. One of the required records 
is indeed a list of the names and addresses of all 
shareholders, in alphabetical order, by class of shares, 
showing the number and class of shares held by each.
    The new act does not authorize the issuance of bearer 
shares nor does it permit the use of nominee directors and/or 
officers. With regard to nominee shareholders, though, 
Massachusetts corporate law recognizes registered and 
beneficial holders. Nevertheless, the statute contemplates that 
standard bylaws will contain explicit statements to the effect 
that the corporation will only recognize the registered holder 
for purposes of voting, dividend distribution and other 
shareholder actions and entitlements. The exception that proves 
the rule are the appraisal provisions of 156D, under which 
beneficial holders may assert statutory appraisal rights only 
if the registered holder has filed a nominee certificate with 
the corporation.
    The Massachusetts Limited Liability Company Act, Chapter 
156C, and the Massachusetts Revised Uniform Limited Partnership 
Act, contain similar provisions. Each requires the Secretary to 
review documents for compliance with law and requires the 
disclosure of managers or authorized principals and general 
partners. Each also requires the entity keep a list of members 
or limited partners in the State at the statutorily required 
office.
    Furthermore, the limited partnership statute requires that 
such lists be made available to the State Secretary within five 
business days of receipt of a written request by the Secretary 
stating that said information is required in connection with an 
investigation or an enforcement proceeding.
    These provisions, the ability to review for compliance with 
law, the identification on the public record of officers, 
directors, managers or principals--and not nominees--and the 
requirement that shareholder, member, or partnership lists be 
maintained in the Commonwealth accessible to the State 
Secretary, reflect Massachusetts' attempt to balance public 
interest in disclosure with the anonymity demanded by the 
institutional and individual investors in today's capital 
markets.
    As I have not yet received any complaints from law-
enforcement or from the business community and very few 
complaints from the public, I assume we have been successful.
    I will just highlight, in response to your questions, a 
number of provisions that I think are helpful. Massachusetts 
has about 232,169 non-publicly traded corporations and 67,493 
limited liability companies. The process for each of those in 
forming them would be for a document to be submitted with the 
appropriate information. That information would then be 
reviewed. If it was found to comply with law it would be filed. 
Once it is filed, it is scanned into our system, summary 
information is data entered, and it is available on the web, 
immediately by 7 o'clock that night.
    The fees for forming a corporation are $275 if submitted in 
person or by mail and $250 if filed online. All documents are 
reviewed by both a clerk and an attorney. The fees for forming 
a limited liability company are somewhat higher, they are $500.
    Again, Massachusetts does not collect beneficial ownership 
information during or subsequent to the incorporation process. 
That has been since 1951. Prior to 1951, we did collect that 
information.
    We do, however, require that that information be maintained 
in the Commonwealth and accessible to law enforcement and the 
Secretary.
    Massachusetts does not provide for third-party agents. We 
have only registered agents whose only role is to accept 
service of process on behalf of corporations.
    We do not permit the use of nominee officers or directors. 
We do allow for nominee shareholders. We do not allow for 
bearer shares.
    Massachusetts has not received any requests from law 
enforcement for beneficial ownership information in the last 5 
years, and that may be because they can get that information 
directly.
    One of the things that we have been determined to do as a 
result of these ongoing discussions with the Subcommittee and 
with the GAO is that the Secretary will file legislation in 
this upcoming session that will require limited liability 
companies and corporations to disclose members and shareholders 
to the State Secretary if, in his judgment, the public interest 
requires such disclosure. And we will require that disclosure 
must be made within 48 hours. Failure to provide such 
information will result in involuntary dissolution of the 
entity and the imposition of fines and penalties.
    Last, I would like to say Massachusetts, after September 
11, was notified that there were two nonprofit corporations 
that were suspected of funneling money to terrorist 
organizations and we promptly revoked their charters. We gave 
them notice, opportunity to be heard, and revoked their 
charters. So we have been somewhat more proactive in this area. 
Thank you.
    Chairman Coleman. Thank you, Ms. Flynn.
    I think it is fair to say that some of the things you are 
talking about are certainly movement in the right direction and 
we appreciate it.
    Is it fair to say, by the way, across the board, Mr. 
Geisenberger, in Delaware you do not have bearer shares? That 
is not something that you allow in Delaware.
    Mr. Geisenberger. Delaware law has never permitted bearer 
shares. We made it explicit in our statute in 2002, in response 
to the FATF report.
    Senator Coleman. In Nevada, you are moving in that 
direction.
    Mr. Anderson. We are moving in that direction.
    Senator Coleman. Is there any question that bearer shares 
are problematic and should be prohibited?
    Mr. Anderson. According to the Bar Association, in my 
discussions with the Bar Association, there has not been a 
large problem with bearer shares. However, because there is no 
prohibition of bearer shares in State law, there is this belief 
that there is wide use of bearer shares. So with that, they are 
proposing changes to legislation to prohibit the use of bearer 
shares in the State of Nevada.
    Senator Coleman. I would question the accuracy of your 
statement that it has not been a problem. And I think 
everything that we have seen and we have heard confirms that 
the potential for abuse is great. But, again, I understand you 
are moving in that direction.
    I am trying to find some common ground that everyone says 
we know this is a problem. Limitations of use of nominee 
officers, how is that handled in Delaware, Mr. Geisenberger?
    Mr. Geisenberger. With respect to corporations, officers 
have to be natural persons and directors have to be natural 
persons. Shareholders can be nominees, and obviously in 
publicly traded companies they are almost exclusively nominees. 
With respect to limited liability companies, the managers and 
the members can be other business entities. And that is really 
the issue we are talking about here. Most investment vehicles 
in the United States, that is how they are structured. It is a 
business owning a business owning a business before you get to 
the actual human being that has the beneficial interest in the 
asset. And reaching down to that level raises lots of issues 
about costs and certainly questions about privacy and the 
legitimate anonymity of being able to--for everyone not to know 
exactly what you are invested in.
    Senator Coleman. Ms. Flynn, in the Commonwealth of 
Massachusetts, do you have any limitations on the use of 
nominee officers?
    Ms. Flynn. Massachusetts does not permit the use of nominee 
officers or directors.
    Senator Coleman. Mr. Anderson.
    Mr. Anderson. It is common practice in the State of Nevada 
that there be nominee officers. However, the Nevada Resident 
Agents Association is looking at legislation in the 2007 
session of the Nevada legislature to limit that use, and I do 
not know what that limitation would be? However, we are moving 
away from that.
    Senator Coleman. Mr. Geisenberger, you indicated it would 
be important as we move forward, to bring in a broad array of 
stakeholders in this discussion. I agree with you on that. I do 
think we have to strive for the balance, but again understand 
that there is a problem today and one that exposes us, as we 
heard from the other panel, to risks--that you could have 
terrorist organizations and our ability to deal with those is 
an ID system. We know that this is a terrorist organization. 
And they literally can move in and take over existing 
corporations without any risk of exposure. And I think that is 
problematic. To me it just seems like we have a big gaping 
loophole there.
    A question, if I can, about Delaware law. You did mention 
that Delaware is doing some things dealing with registered 
agents. My question on that, and just from my information, 
please correct me if I am wrong, that the Delaware law dealing 
with registered agents which would require more stringent 
qualifications applies to--I have information that it applies 
to 237 out of 32,000 registered agents. Is my information 
incorrect?
    Mr. Geisenberger. That is correct. There are 32,000 
registered agents in Delaware. I would imagine they have very 
large numbers in other States, as well, because a company can 
form itself. Most registered agents in the State of Delaware, 
indeed the vast majority, represent three or fewer entities. 
Ninety-six percent of our 32,000 agents maybe just represent a 
civic association or a not-for-profit. They could be the 
company themselves, a small mom-and-pop business.
    Senator Coleman. Your testimony indicated the new statute 
for registered agents would put rogue registered agents out of 
business. My only question is does this new statute apply to 
more than 237 out of the 32,000 registered agents?
    Mr. Geisenberger. The new statute establishing additional 
qualifications, like having a business license, applies only to 
the 237. However, the statute allowing the Court of Chancery to 
enjoin a registered agent from doing business for not meeting 
certain qualifications about having an address, not meeting 
certain qualifications about retaining customer information, 
applies to all 32,000 registered agents in the State.
    Senator Coleman. My time is up. I am going to come back to 
one other line of questioning but I will turn to my colleague, 
Senator Levin.
    Senator Levin. Thank you.
    Ms. Flynn, you said near the end of your testimony that the 
reason that there is not a request from law enforcement to your 
agency for the list of beneficial owners is that they can get 
that information directly?
    Ms. Flynn. That is correct. Massachusetts entities are 
required to maintain lists of shareholders, lists of limited 
partners in an LLC's instance, list of members at their 
principal office or statutorily required office in the 
Commonwealth.
    Senator Levin. Is that true in Delaware?
    Mr. Geisenberger. No, there is no requirement to maintain 
that list in the State of Delaware.
    Senator Levin. So in one State law enforcement has access, 
in another State it does not have access to the beneficial 
owners. Why is that such a huge burden in Massachusetts? 
Obviously, it is not a huge burden, they are able to do it. So 
why do you think it is such a huge burden in Delaware?
    Mr. Geisenberger. Massachusetts, to put it in perspective, 
I believe you form 25,000 new entities a year. We form about 
135,000 new entities a year. The types of entities that we are 
forming in Delaware tend to be everything from large publicly 
traded companies to their affiliates. As I mentioned earlier, 
it may be possible to create a requirement for director and 
officer, or even manager and member information.
    I think it is important to recognize the distinction 
between manager and member information, director and officer 
information, and true beneficial ownership--an actual natural 
person who owns the business. So were you to go down that path 
and require that in Delaware, which is something that certainly 
could be examined, you would still end up with a list of other 
business entities being the beneficial owners or being the 
registered holders of these other businesses.
    Senator Levin. Of course, but that allows law enforcement 
to track those other business owners.
    Mr. Geisenberger. That is correct.
    Senator Levin. It is important that we have that 
capability. And you do not seem to recognize the importance of 
that. You talk about the cost of it but you have another State 
and that did not turn out to be a very burdensome cost.
    Mr. Geisenberger. I think it needs to be, as I mentioned in 
my testimony, balanced against the interests of privacy and 
efficiency.
    Senator Levin. Don't they have those interests in 
Massachusetts?
    Mr. Geisenberger. I do not have.
    Senator Levin. Let me tell you they do. They care just as 
much about their privacy and efficiency as people in Delaware 
or all over the world that use Delaware or Nevada or anyone 
else. There is no difference in terms of human beings wanting 
anonymity or privacy, but they just do not allow it in 
Massachusetts. They say you can get to those owners by going to 
the companies that have registered agents.
    So I do not know why you say that your privacy interest is 
any greater than any other States' concern for privacy.
    Mr. Geisenberger. Our concern, and this is not unique to 
Delaware, I think it is a concern that we have generally from a 
national perspective, which is that if we create a requirement 
that says that the beneficial ownership of every business 
entity in the United States is a matter of public record or is 
easily accessible, that it creates a number of issues ranging 
from identity theft to not the technical publicly-traded 
securities definition of insider trading, but the possible use 
that information by the people who are collecting it, the 
resident agent community and others.
    Senator Levin. That is not what anybody is proposing, it is 
a straw man. Just go to what Massachusetts does, try that. You 
say that could be done. That is helpful. Law enforcement finds 
that helpful. Why doesn't Delaware do it?
    Mr. Geisenberger. Delaware does not do it because we have a 
concern--the reason the Secretary of State does not do it is 
because it is not part of our statute.
    Senator Levin. Why do you resist?
    Mr. Geisenberger. The reason we do not advocate it is a 
concern----
    Senator Levin. Why do you resist it?
    Mr. Geisenberger. We have resisted because we believe that 
there are legitimate business transactions and that the vast--
as you mentioned, I believe, earlier in your discussion, there 
are 15 million business entities in the United States. If 0.1 
percent of them are engaged in illegitimate practices and the 
other 99.9 are in legitimate enterprises, we have concerns 
about how that information put on the public record could be 
misused.
    Senator Levin. Thank you.
    Mr. Anderson, if you could take a look at Exhibit 1,\1\ 
this is formacompanyoffshore.com that talks about Nevada 
company formations. It is one of those first four pages. I am 
not sure which of the first four it is but it is--we are going 
to put the board up there. I think you may be able to read it 
there.
---------------------------------------------------------------------------
    \1\ See Exhibit 1 which appears in the Appendix on page 144.
---------------------------------------------------------------------------
    It talks about Nevada. No IRS information sharing. 
Stockholders are not on public record, allowing complete 
anonymity. Do you see that that could create a problem for law-
enforcement? That is advertised as why go to Nevada.
    Mr. Anderson. The reason Nevada does not have an IRS 
sharing agreement is because Nevada does not have a personal or 
corporate income tax, and therefore we do not have information 
to share with the Internal Revenue Service.
    Now all the information that we do require for filing is 
available to the Internal Revenue Service, just as it is 
available to any other person wishing to look at the public 
record.
    Senator Levin. In terms of the ownership, stockholders are 
not on public record, allowing complete anonymity. That is one 
of the selling points for Nevada, as it is for Delaware and 
other States.
    Mr. Anderson. I could see this as being a potential 
problem. However, resident agents are required to hold the 
stock ledger or a statement of where the stock ledger is 
located, so that law enforcement officers should be able to get 
that information.
    Senator Levin. The actual owners?
    Mr. Anderson. It is a list of the stockholders, the stock 
ledger that is part of Nevada revised statutes.
    Senator Levin. Which could be nominees and other 
corporations; is that correct?
    Mr. Anderson. Potentially, yes.
    Senator Levin. If you would take a look at Exhibit 9,\2\ 
perhaps both of you, representing both Delaware here and 
Nevada. This is a country comparison chart. This is people who 
are telling folks all over the world, ``Hey, incorporate in 
these States and you will have no taxes and you will have 
anonymity.''
---------------------------------------------------------------------------
    \2\ See Exhibit 9 which appears in the Appendix on page 352.
---------------------------------------------------------------------------
    Take a look at what it says here. Incorporate in Delaware 
and Nevada for top-notch privacy.
    Can you see the problem for law-enforcement when that is 
peddled as the reason to incorporate in your States?
    Mr. Geisenberger. I can tell you, Senator, that when we put 
together our statute this year, looking at the question of what 
should be the reasons that would allow our Court of Chancery to 
enjoin a registered agent from doing business, we looked at 
this issue because obviously it is this kind of--we certainly 
do not advocate this sort of promotion of Delaware. It is not 
how we promote Delaware.
    Senator Levin. Are you troubled when Delaware is promoted 
this way?
    Mr. Geisenberger. I am very troubled that Delaware is 
promoted this way. Unfortunately, we could not come to 
consensus on a statutory remedy that would limit the free 
speech of these types of businesses. They are not prohibited.
    Senator Levin [presiding].7 Try the Massachusetts approach.
    My time is up. Senator Carper.
    Senator Carper. Thanks, Mr. Chairman.
    Let me just say, by way of introduction, let me ask Mr. 
Geisenberger a question. Have you always worked in the Division 
of Corporations, Department of State?
    Mr. Geisenberger. No, I have not.
    Senator Carper. Did you ever have a previous stint in State 
government?
    Mr. Geisenberger. Yes, I had a wonderful stint in State 
government as the economic policy advisor for Governor Thomas 
Carper.
    Senator Carper. I knew I had seen you before. [Laughter.]
    Senator Levin. I was distracted. Is there some kind of a 
conflict that I missed here?
    Senator Carper. I hope not.
    It is great to see you. Thank you very much for your 
service to the people of Delaware. And thanks very much for 
being here today and joined by your colleagues, Mr. Anderson 
and Ms. Flynn.
    Go back again and just take another minute and explain to 
us the changes that were made in Delaware law earlier this 
year. Why the State made those, why you think that is a good 
thing, and whether or not other States might want to consider 
doing something similar to that.
    Mr. Geisenberger. I think to the points that were made 
earlier that outreach is important, and we have been doing a 
lot of work over the last 6 years, and we have had FinCEN and 
OFAC come to Delaware, meet with our registered agent 
community, educate them on what their responsibilities are. We 
have had discussions with the FATF, with the U.S. Department of 
Treasury and others about what kinds of things we could and 
should be doing.
    In response to that, we decided to look at our existing 
registered agent statute and see what we could do. One of our 
biggest concerns, and we think it was a legitimate concern, was 
when law-enforcement said what happens if you have a bad 
registered agent? How do you get rid of them? And the answer 
was we had no mechanism within which to do that.
    So we adopted a statute that said there are these 
qualifications. If you are in the business of being a 
registered agent there is certain information you need to 
provide the Secretary of State so that we know exactly who you 
are, so that we know who the people are who are doing business 
in Delaware. Again, those companies representing 50 or more 
entities.
    We established a requirement that they have a Delaware 
business license which means they have to fill out certain tax 
forms in Delaware which give us more information about who they 
are. We established a requirement that every Delaware 
registered agent or that every company and every LLC and the 
State is required to keep with their registered agent the name 
of a natural person who is the communications contact for that 
business entity. So that when a law enforcement agency goes to 
a registered agent, the registered agent is not a dead end in 
the investigatory process. The registered agent has to have on 
file the name of the communications contact for that business 
entity so that law enforcement can continue down that trail.
    And then we said if an agent is failing to do that, failing 
to retain this information, failing to have a business license, 
failing to have an office open for business during normal 
business hours, the Secretary of State can go to the Court of 
Chancery and get them enjoined from doing business in the State 
or their officers and directors.
    This act takes effect January 1, 2007 and we look forward 
to enforcing it. There may be some registered agents in 
Delaware that may not be in Delaware anymore after we take 
certain actions.
    Senator Carper. Are there other changes? Delaware corporate 
law is dynamic and it changes from time to time and updated by 
the legislature and governor. Are there other changes that you 
foresee that might be considered along these lines?
    Mr. Geisenberger. I think the question of whether Delaware 
would eventually require that a manager be part of the public 
filing is something that the State may consider, taking the 
input of corporate attorneys and others in the law-enforcement 
community. I think our biggest concern is requiring that every 
business entity in Delaware and in the United States then track 
that ownership down to the level of a natural person because in 
so many legitimate business transactions the managers and 
members are other business entities.
    Senator Carper. As Ms. Flynn reviewed the law in the 
Commonwealth, one of the questions I had, and I again direct it 
to Mr. Anderson and Mr. Geisenberger, did you hear anything 
there that she described and said that might make sense for us?
    Mr. Anderson. Yes, Senator Carper. While it may make sense, 
it is something that I would definitely take back and discuss 
with our resident agents and with our business law section of 
the State Bar Association. The Secretary of State generally 
does not make the substantive changes to the commercial law and 
I would definitely have to defer to the business law section of 
the State Bar and the resident agents in regards to this.
    However, in hearing some of the ideas brought forth from 
the State of Massachusetts and from Delaware, this is 
information that I can take back to them as part of our 
discussion.
    Senator Carper. Mr. Geisenberger, before you respond, Ms. 
Flynn as you heard your fellow witnesses from Nevada and 
Delaware testify with respect to what we do in our State and 
what they do in Nevada, does anything pop up for you that says 
they may want to do that differently and we have some ideas 
that might apply?
    Ms. Flynn. There are two things that I think I would 
suggest they do differently, and the first would be to change 
the way in which they review documents. I think presently both 
Nevada and Delaware, the review of documents submitted is a 
ministerial review, which does not give them room to determine 
that documents comply with law. So if there is something that 
appears unlawful on their face, they have no ability to take 
action. So I would suggest that is the more appropriate 
standard for a corporate formation agency.
    And second, I think that there are a number of things that 
they can do with regard to beneficial ownership. I understand 
the concerns that maybe investors do not want beneficial 
ownership on the public record, because everything in our 
office is immediately accessible online and there are some very 
strong privacy concerns. But I think that those concerns can 
be----
    Senator Carper. Could you give an example or two of one of 
those privacy concerns?
    Ms. Flynn. I will give you an example. Jerry Lewis was an 
officer and director of the Jerry Lewis Telethon. And at one 
point, under Massachusetts law he had to provide his 
residential address on filings with our office. That was fine 
when those documents were just microfilmed. But when those 
documents were now scanned and put out on the web for anyone to 
see, his home address became accessible to anyone who had the 
ability to do a little bit of searching and therefore his 
security was jeopardized.
    Senator Carper. Where does he live?
    Ms. Flynn. He has since moved.
    And there are concerns of others, law-enforcement personnel 
and that type of thing, those types of people who necessarily 
do not want their home address on the public record, people who 
have been involved in peacekeeping in other countries who now 
return home where they do not want their addresses on the 
public record.
    So one of the things that we did was to change from 
residential addresses to business addresses.
    And with regard to beneficial owners, that list is not 
maintained in the Secretary of State's office where it would be 
public record but it is maintained in the Commonwealth and is 
accessible to law enforcement upon request and to the 
Secretary.
    Senator Carper. Mr. Chairman, if I could just bounce it 
back to Mr. Geisenberger, and if you have any response to the 
points that Ms. Flynn made and some areas that we might want to 
take under advisement in Delaware.
    Mr. Geisenberger. First, I need to say that the review that 
Delaware officials take of documents is not a ministerial 
function.
    Senator Carper. How would you describe it?
    Mr. Geisenberger. If there is something that does not 
follow the law, we reject the document or suspend the document 
until such time as the document comes into compliance with the 
law.
    We get dozens of requests every single day in Delaware for 
beneficial ownership information. The typical phone call that I 
get is from somebody with a small-town newspaper in wherever it 
might be, North Dakota, saying we want to know who owns ABC 
LLC, a Delaware corporation. We will frequently ask why because 
we are kind of interested. And they will say well, they are 
trying to build a development and people want to oppose that 
development and we need to know who really owns it.
    My concern about making this kind of information on the 
public record is that if that is the kind of thing--I think 
that could have tremendous economic impact on the United 
States. If we put information on the public record that will 
actually prevent legitimate businesses from assembling parcels 
of real estate, investing in various investment vehicles, if it 
creates situations where an investor wishes to invest in 
multiple funds that maybe compete with each other, and then 
everybody knows oh, that guy is invested in my competitor, 
which creates a lot of issues for the types of businesses that 
form in Delaware.
    Keeping the record with the registered office is certainly 
something, as you know we have a Corporation Law Council, it is 
really something they can be reviewed by that Corporation Law 
Council. I think it raises a lot of issues because, as we said, 
one of the things we want to make sure of is that we are not 
inhibiting the free flow of capital and the ease of capital 
formation.
    Frequently shares of corporations, certainly publicly 
traded companies, but even privately held companies, those 
shares freely flow to different owners every single day of the 
year. Even on an intraday basis. So the lists you are likely to 
have at the time that law enforcement makes a request, I think 
it would be very difficult for those types of business entities 
that have thousands of beneficial owners, or in some cases 
millions of beneficial owners, to be able to keep track of that 
in their registered office on a daily basis or an intraday 
basis.
    Senator Carper. My thanks to each of you and we appreciate 
your testimony and we appreciate your responses to our 
questions. Thanks so much.
    Senator Levin. In Delaware now there is a communication 
contact. Is that what is required by law?
    Mr. Geisenberger. That is correct. Every business entity 
must provide a communications contact to their registered 
agent.
    Senator Levin. Does that person have knowledge of the 
beneficial owners?
    Mr. Geisenberger. They may or they may not.
    Senator Levin. They are not required to?
    Mr. Geisenberger. They are not required to.
    Senator Levin. Is there any reason not to require them to 
have the beneficial owners?
    Mr. Geisenberger. I think it raises the same question I 
just mentioned to Senator Carper, which is that the beneficial 
owners frequently are changing on a regular basis, on a daily 
basis, and even an intraday basis for both corporations and for 
LLCs.
    Senator Levin. Is that not true in Massachusetts?
    Mr. Geisenberger. I believe it is. I do not know how many 
public traded or large companies----
    Senator Levin. We are not talking publicly traded.
    Mr. Geisenberger. Even large privately held companies.
    Senator Levin. It is true in all the States, I assume? We 
all incorporate. Delaware may have more than others, but we all 
incorporate.
    Mr. Geisenberger. It may well be true that the same 
situation exists in those other States.
    Senator Levin. But if they are able to keep track of it, 
why cannot your communications person keep track of it in a 
non-public corporation?
    Mr. Geisenberger. I will use an example. I mentioned 
Cargill, which is one of the largest privately held companies 
in the country. They have 2.7 billion authorized shares. They 
are not publicly traded. Those 2.7 billion shares are owned by 
thousands of individuals. I do not know how those shares trade 
on a daily basis or do not trade on a daily basis or get 
transferred to other individuals on a daily basis.
    I think it would be difficult to keep that in the State of 
Delaware and to say to a resident agent ``from now on you are 
the recorder of who are the owners of this entity at any given 
moment.''
    Senator Levin. Does anybody keep track of the beneficial 
owner?
    Mr. Geisenberger. I would assume that Cargill keeps a 
shareholder registry of their own.
    Senator Levin. Could not the communications person say go 
to Cargill?
    Mr. Geisenberger. That would be the holder of record, not 
necessarily the actual beneficial owner.
    Senator Levin. Does anybody keep a record of all of those 
beneficial owners, do you think?
    Mr. Geisenberger. Certainly these large companies do not 
know the actual beneficial holders of trusts, LLCs and others 
that are the beneficial holders of shares in privately held 
institutions.
    Senator Levin. Do most States require annual reports?
    Mr. Geisenberger. Most States require an annual report of 
directors and some officers for corporations. Many States do 
not require an annual report for limited liability companies.
    Senator Levin. So what you are saying is that when it comes 
to beneficial ownership in non-publicly traded corporations 
that there is no central place where those lists are kept 
inside the company? That is what you are saying?
    Mr. Geisenberger. I am saying that the actual natural 
person that is the beneficial owner, no, there is no 
requirement.
    Senator Levin. I am not saying requirement. There is no 
place inside that company where those owners are named and 
listed? That is the ordinary course of business, that inside a 
non-publicly traded company----
    Mr. Geisenberger. There is no requirement to do so.
    Senator Levin. I am not saying a requirement. I am saying 
that when a company is formed, a corporation is formed, that is 
not a publicly traded corporation, you are saying as a matter 
of common practice that there is no place where the owners of 
that company are listed?
    Mr. Geisenberger. Typically an LLC, certainly one with one 
or two members, would have, in their own office, a record of 
who are the owners of that entity.
    Senator Levin. Who would ordinarily keep the list of the 
owners of a non-publicly traded company? Would they not almost 
ordinarily have a----
    Mr. Geisenberger. With respect to an LLC, it would probably 
be the manager of the LLC, which could be another business 
entity.
    Senator Levin. Would the manager of a non-publicly owned 
company ordinarily keep a list of the owners of that company?
    Mr. Geisenberger. They would keep a list of the owners or 
business entities that are the owners, yes.
    Senator Levin. So is there any reason why your 
communications person could not let the law enforcement person 
know who the manager is that keeps that list?
    Mr. Geisenberger. You mean require that the communications 
contact be the person that maintains that list?
    Senator Levin. No, that they cooperate with law enforcement 
to identify who that owner is, who that manager is?
    Mr. Geisenberger. It is certainly something to consider. I 
think it could be a requirement, that the communications 
contact is aware of the--is able to communicate with the 
manager that is tracking the holders of record. It is worthy of 
consideration, sir.
    Senator Levin. That would be very helpful. Somehow or 
another we are going to have to crack this nut. It is not 
acceptable that we just simply say that we are not going to be 
able to identify the owners of companies and we are going to 
allow them to be anonymous and therefore do whatever nefarious 
action they might be engaged in. We are going to have to find 
ways and if the States cannot do it, it seems to me the Federal 
Government is going to have to have some kind of a minimal 
requirement to do it.
    That is not a particularly onerous requirement, to say 
since there is a communications connection to a corporation 
that that person be able to identify the manager who keeps a 
list of the beneficial owners. There is no great problem in 
terms of an unfunded mandate in that regard.
    Hopefully the States are going to do this on their own and 
recognize the importance to all of our security and all of our 
well-being that we know who these folks are who own these 
companies.
    I do not think the purpose of a corporation ever was to 
provide anonymity. I used to study corporation law about 50 
years ago, so maybe my memory is a little off. But we have 
checked with more current--with people who teach corporation 
law and that is not the purpose of a corporation, to provide 
anonymity to shareholders. It is to provide limited liability, 
it is to provide easy ability to transfer stocks, but it is not 
to provide anonymity.
    We have people who file assumed name certificates who form 
companies, who form partnerships. Those are listed in our 
Secretary of State's offices and in our local clerks' offices. 
It is done all the time and should be done.
    I agree and I understand the sensitivity about home 
addresses. I am 100 percent with Jerry Lewis, both in his 
telethon and in protecting his home address. Those addresses 
should be and are protected.
    But in terms of the identity as to who the owners are of 
companies, I just do not think that we can argue that the 
owners of companies can incorporate, thereby protecting 
themselves from being identified from law-enforcement. The 
stakes are too high, it seems to me, in terms of law 
enforcement for us to accept that as the rule.
    I would hope that all of the States, I include Delaware, I 
include Nevada, all of the States would really be concerned 
when they see the way incorporating in their States are being 
peddled around the world. When you look at these websites, it 
is not that you have a great judiciary or wonderful corporation 
law that is selling Delaware on these websites. It is that 
owners' names are not disclosed. It is that we have top notch 
privacy restrictions. It is that you can use a lawyer, I think 
in the case of Wyoming, they claim that you can have a lawyer 
to be your incorporator. And that lawyer can assert a lawyer-
client privilege to stop law enforcement from getting access to 
information, which I do not believe is right. But nonetheless, 
that is what they claim.
    I think there is a shared responsibility that we all have. 
Corporations serve obviously a very important function. We all 
acknowledge that. We also have to bring those disclosures into 
the real world that we have to deal with, which is a world 
where there is money laundering, where there is fraud, where 
there is misuse of the corporate entity, where now globally you 
are able to incorporate in some island in the Caribbean or some 
guy in some country can incorporate in one of our States on a 
computer in 10 minutes and thereby gain the kind of anonymity 
which then allows that corporation to be the person or entity 
that is shipping and laundering money coming into the United 
States.
    Everyone talks about globalization. We need our corporate 
citizens--and you are citizens--to meet these needs.
    In the meantime, the problem has existed apparently since 
1977, we were told earlier today, more immediately and with 
greater immediacy, with the recent changes in our laws, 
including the PATRIOT Act. And so we are going to have to ask 
our States to seriously consider what law enforcement needs 
are. But in the meantime we have to do what we did earlier 
today, I believe, which is to ask law enforcement to tell 
Congress what it is they need to know and how are we going to 
require access to that information, hoping that it will not be 
necessary to pass Federal requirements. But if it is, hopefully 
they will be minimal, non-obtrusive, non-expensive, but at 
least require information to be maintained which would be 
accessible. If not verified, at least maintained so that our 
law enforcement people would have an opportunity then to track 
the names that are needed.
    We extended an invitation to the Financial Action Task 
Force's Executive Secretary to appear at today's hearing. Due 
to prior commitments he was unable to attend. He did submit a 
written statement. This statement will be included in the 
printed hearing record as an exhibit.\1\
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    \1\ The prepared statement from Financial Action Task Force appears 
in the Appendix as Exhibit 3 on page 225.
---------------------------------------------------------------------------
    Senator Carper. I am all done.
    Senator Levin. I want to thank you, as always, for your 
contributions. I will not interject too partisan a note here, 
but I think every Member of this body, Democratic or 
Republican, is thrilled with the decision of the people of 
Delaware to return our dear colleague, Tom Carper, to the 
Senate. And I do not think if there were Republicans sitting 
over here, there would be any disagreement on that.
    Thank you for your coming here today to this panel and we 
will stand adjourned.
    [Whereupon, at 5:02 p.m., the Subcommittee was adjourned.]


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