[Senate Hearing 111-953]
[From the U.S. Government Publishing Office]
S. Hrg. 111-953
STATE BUSINESS INCORPORATION--2009
=======================================================================
HEARINGS
before the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
of the
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
----------
JUNE 18, 2009
EXAMINING STATE BUSINESS INCORPORATION PRACTICES:
A DISCUSSION OF THE INCORPORATION TRANSPARENCY
AND LAW ENFORCEMENT ASSISTANCE ACT
----------
NOVEMBER 5, 2009
BUSINESS FORMATION AND FINANCIAL CRIME: FINDING A LEGISLATIVE SOLUTION
----------
Available via the World Wide Web: http://www.fdsys.gov
Printed for the use of the
Committee on Homeland Security and Governmental Affairs
STATE BUSINESS INCORPORATION--2009
S. Hrg. 111-953
STATE BUSINESS INCORPORATION--2009
=======================================================================
HEARINGS
before the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
of the
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JUNE 18, 2009
EXAMINING STATE BUSINESS INCORPORATION PRACTICES:
A DISCUSSION OF THE INCORPORATION TRANSPARENCY
AND LAW ENFORCEMENT ASSISTANCE ACT
__________
NOVEMBER 5, 2009
BUSINESS FORMATION AND FINANCIAL CRIME: FINDING A LEGISLATIVE SOLUTION
__________
Available via the World Wide Web: http://www.fdsys.gov
Printed for the use of the
Committee on Homeland Security and Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
51-788 WASHINGTON : 2011
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware JOHN McCAIN, Arizona
MARK PRYOR, Arkansas GEORGE V. VOINOVICH, Ohio
MARY L. LANDRIEU, Louisiana JOHN ENSIGN, Nevada
CLAIRE McCASKILL, Missouri LINDSEY GRAHAM, South Carolina
JON TESTER, Montana ROBERT F. BENNETT, Utah*
ROLAND W. BURRIS, Illinois *Added for November 5, 2009
MICHAEL F. BENNET, Colorado* hearing
*Replaced by Senator Kirk for Nov.
5 hearing
PAUL G. KIRK, JR., Massachusetts*
*Replaced Senator Bennet for Nov. 5
hearing
Michael L. Alexander, Staff Director
Deborah P. Parkinson, Professional Staff Member
Rachel R. Sotsky, Legislative Assistant, Office of Sen. Lieberman
Brandon L. Milhorn, Minority Staff Director and Chief Counsel
Amanda Wood, Minority Director of Governmental Affairs
Trina Driessnack Tyrer, Chief Clerk
Patricia R. Hogan, Publications Clerk and GPO Detailee
Laura W. Kilbride, Hearing Clerk
C O N T E N T S
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Opening statements:
Page
Senator Lieberman............................................ 1, 39
Senator Levin................................................ 3, 42
Senator Carper.............................................. 19, 44
Senator Ensign............................................... 40
Senator Bennett.............................................. 57
Senator McCaskill............................................ 62
Senator Burris............................................... 64
Prepared statements for June 18:
Senator Lieberman............................................ 85
Senator Levin with attachments............................... 90
Senator Carper............................................... 146
Prepared statements for November 5:
Senator Lieberman............................................ 362
Senator Levin with attachments............................... 364
Senator Carper............................................... 369
Senator Ensign............................................... 373
Senator Burris............................................... 375
Senator Kirk................................................. 376
WITNESSES
Thursday, June 18, 2009
Janice Ayala, Deputy Assistant Director, Office of
Investigations, U.S. Immigration and Customs Enforcement, U.S.
Department of Homeland Security................................ 7
Jennifer Shasky Calvery, Senior Counsel to the Deputy Attorney
General, U.S. Department of Justice............................ 10
Elaine F. Marshall, North Carolina Secretary of State, and Co-
Chair, Company Formation Task Force, National Association of
Secretaries of State (NASS).................................... 12
Adam S. Kaufmann, Assistant District Attorney, Chief of
Investigation Division Central, New York County District
Attorney's Office, on behalf of Robert M. Morgenthau, District
Attorney for New York County, State of New York................ 15
Harry J. Haynsworth, Chair, Drafting Committee on the Uniform Law
Enforcement Access to Entity Information Act, Uniform Law
Commission..................................................... 17
Thursday, November 5, 2009
Hon. David S. Cohen, Assistant Secretary for Terrorist Financing,
U.S. Department of the Treasury................................ 46
Jennifer Shasky, Senior Counsel to the Deputy Attorney General,
U.S. Department of Justice..................................... 49
David H. Kellogg, President and Chief Executive Officer, Solers,
Inc............................................................ 67
Kevin L. Shepherd, Member, Task Force on Gatekeeper Regulation
and the Profession, American Bar Association................... 70
John R. Ramsey, National Vice President, Federal Law Enforcement
Officers Association........................................... 72
Jack A. Blum, Chairman, Tax Justice Network USA; and Member,
Advisory Board, Global Financial Integrity..................... 75
Alphabetical List of Witnesses
Ayala, Janice:
Testimony.................................................... 7
Prepared statement........................................... 148
Blum, Jack A.:
Testimony.................................................... 75
Prepared statement with an attachment........................ 418
Cohen, Hon. David S.:
Testimony.................................................... 46
Prepared statement........................................... 377
Haynsworth, Harry J.:
Testimony.................................................... 17
Prepared statement with attachments.......................... 200
Kaufmann, Adam S.:
Testimony.................................................... 15
Prepared statement on behalf of Robert M. Morgenthau......... 192
Kellogg, David H.:
Testimony.................................................... 67
Prepared statement........................................... 395
Marshall, Elaine F.:
Testimony.................................................... 12
Prepared statement with attachments.......................... 172
Morgenthau, Robert M. delivered by Adam S. Kaufmann:
Testimony.................................................... 15
Prepared statement........................................... 192
Ramsey, John R.:
Testimony.................................................... 72
Prepared statement........................................... 414
Shasky, Jennifer:
Testimony.................................................. 10, 49
Prepared statement....................................... 156, 388
Shepherd, Kevin L.:
Testimony.................................................... 70
Prepared statement........................................... 402
APPENDIX
Letters of support for June 18 hearing submitted by Senator Levin 271
Copy of Mr. Geisenberger testimony, November 14, 2006, submitted
by Senator Carper.............................................. 296
Get back to Levin (letter and survey) from Ms. Marshall with
attachments.................................................... 314
Other letters of opposition/support for June 18 hearing.......... 317
Article submitted by Senator Levin............................... 432
Letter to Senator Dodd from Secretary Geithner, submitted by
Senator Levin.................................................. 433
Letter of support/opposition submitted by Senator Ensign......... 435
Other letters of support/opposition for Nov. 5 hearing........... 439
Questions and responses for the Record for June 18 hearing from:
Ms. Ayala.................................................... 353
Mr. Kaufmann................................................. 355
Ms. Shasky Calvery........................................... 358
Questions and responses for the Record for Nov. 5 hearing from:
Mr. Cohen.................................................... 464
Ms. Shasky................................................... 472
Mr. Kellogg.................................................. 476
Mr. Shepherd................................................. 479
Mr. Ramsey................................................... 485
EXAMINING STATE BUSINESS
INCORPORATION PRACTICES: A DISCUSSION
OF THE INCORPORATION TRANSPARENCY
AND LAW ENFORCEMENT ASSISTANCE ACT
----------
THURSDAY, JUNE 18, 2009
U.S. Senate,
Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 2:31 p.m., in
room SD-342, Dirksen Senate Office Building, Hon. Joseph I.
Lieberman, Chairman of the Committee, presiding.
Present: Senators Lieberman, Levin, and Carper.
OPENING STATEMENT OF CHAIRMAN LIEBERMAN
Chairman Lieberman. The hearing will come to order. Good
afternoon. I was waiting a moment. Senator Levin is on his way.
Senator Carper will be here a bit later. Unfortunately, Senator
Collins is involved in Appropriations Committee markup
deliberations, so she cannot be with us.
Welcome to our hearing on the Incorporation Transparency
and Law Enforcement Assistance Act, S. 569, a bill that has
been introduced by Senators Levin and McCaskill on this
Committee and Senator Grassley of Iowa as well. The bill
results from the persistent investigative work of the Permanent
Subcommittee on Investigations (PSI) of this full Committee.
I am about to thank Senator Levin before he is here. I was
once told that if someone praises you in Washington when you
are not in the room, they really mean it. So I am going to do
that quickly before he gets here, because I mean it. I do want
to thank my very good friend and colleague Senator Levin, who
chairs the Permanent Subcommittee on Investigations, for
introducing this legislation after an intensive investigative
review of State incorporation procedures. The PSI staff has
dedicated many hours to this matter, dating back years, and has
identified numerous problems that have become law enforcement
problem that are caused by the use of shell companies for
illicit purposes. And I appreciate very much the work of the
leadership of the Permanent Subcommittee on Investigations of
this Committee and its bipartisan staff.
Each year, nearly 2 million new corporations and limited
liability companies are established in the 50 States and the
District of Columbia. That is more than 5,000 new businesses
per day, just what we want and are proud of. It is part of the
American way, entrepreneurship at its best, generating revenue,
creating jobs, and helping people realize their dreams.
But, each year, some of the new businesses are incorporated
for improper or illegal purposes--to try, for instance, to use
the corporate status to defraud innocent people or to cheat tax
authorities, or to hide the true nature of their transactions,
or even, as we know, to launder ill-gotten funds.
No one can put a figure on the number of corporations set
up for illegitimate purposes, but some analysts have estimated
that billions of dollars may flow through such U.S.
corporations every year.
Right now, a majority of States require some basic
information from those seeking to establish a corporation. Most
require the name and address of the company, the name of a
registered agent who represents the company, and a list of
officers or directors. This information is typically considered
a matter of public record.
It has long been customary, however, for States to allow
the individuals with actual ownership interest--including the
investors who control the corporation or partnership--to remain
anonymous to State authorities and, therefore, to the public.
This has often become a problem for law enforcement officials
who have cause to investigate a company that has aroused their
suspicions. The trail goes cold when they search public records
and find no record of the people behind the incorporation--the
people who may be using the business for illicit purposes.
Senator Levin's bill--and it is, as I said at the outset,
Senator Levin, Senator Grassley, and Senator McCaskill
particularly--is designed with these law enforcement
investigations in mind. It would set a national minimum
standard intended to require States to collect and maintain
information about a corporation's underlying owners to help law
enforcement in its work. The bar is set higher yet for foreign
owners, whose identities must be verified by the company's
registered agent before the State can process the forms and set
up the corporation. This bill gives States the authority to
decide whether to keep the beneficial ownership information
private or to make it a matter of public record.
So this is a classic transparency requiring laws which
includes some new penalties for providing false or insufficient
information. It is sunshine legislation in the best sense of
the word. But we all know that such legislation has to be
weighed against other factors as well, including the privacy
rights of those making in this case personal investment
decisions and, others would argue, the potential costs of
administration and enforcement that would fall on State
governments and companies.
Senator Levin's bill, for example, would not require States
to verify the accuracy of information provided before granting
a new entity its legal status.
The Uniform Law Commission (ULC), which I am pleased to say
is represented here today, has drafted an alternative proposal
that would leave companies in charge of maintaining the
required information. Forty-four out of the 50 States already
ask corporations to keep lists of all members or shareholders
of record, the real owners, at their principal offices. The
ULC's recommendation now seeks to strengthen that practice.
So today, in a matter that really matters, we are going to
try to better identify both the problem and to discuss what the
best solution to it is. We do have a panel of witnesses very
experienced and informed on business incorporations and on
corporate investigations. I look forward to their testimony of
this full Committee, following the excellent investigation of
our Permanent Subcommittee, on this legislation which aims to
limit illegal operations, without damaging the smooth flow of
commerce for legitimate corporate purposes.
Senator Levin, I spoke in highly laudatory terms of you in
your absence. I could repeat those now, but I will just say how
much I appreciate your work on this and so much else, and I
call on you now for an opening statement.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Mr. Chairman, thank you for those comments,
and thanks so much for holding this hearing to focus on the
fact that we are forming about 2 million U.S. corporations and
limited liability companies each year without knowing who is
behind them.
My opening statement, Mr. Chairman, is a bit long, and if
it gets too long, do not hesitate to let me know, and I will
cut off whenever that moment comes.
Chairman Lieberman. It will be a pleasure if that moment
comes. [Laughter.]
Senator Levin. And I think we have a vote, actually, in a
few minutes.
Chairman Lieberman. Go right ahead.
Senator Levin. U.S. corporations with hidden owners have
created a serious law enforcement and a national security
problem. For instance, we are going to hear today from
witnesses about U.S. corporations that, it turns out, were
established by the military in Iran, a state sponsor of
terrorism. We are going to hear about U.S. corporations
involved with money laundering, about U.S. corporations that
are used to commit tax evasion and more, and they all have one
thing in common: Their real owners--the legal term is
``beneficial owners''--are hidden from view. Here is one
example of what is going on.
In 2004, one of our key law enforcement agencies,
Immigration and Customs Enforcement (ICE)--who is here today--
uncovered a collection of U.S. companies that were secretly
controlled by entities located in Panama. The investigation
began when bank reports showed that a single company, formed in
Utah, was participating in nearly $150 million in suspicious
international wire transfers. Further investigation by ICE
uncovered a network of nearly 800 U.S. companies, dispersed
among nearly all 50 States, controlled by the same Panamanian
entities. These companies were transferring large amounts of
money to each other and to high-risk jurisdictions overseas.
The companies claimed they were paying for the import or
export of goods, but it turned out no such goods were being
shipped. In effect, the money transfers were part of a massive
financial shell game in which U.S. companies were being used to
disguise the movement of funds and to mask suspicious activity.
When ICE obtained the incorporation records for the 800
U.S. companies, not one identified a company's true owner.
After analyzing the available information, ICE found that
nearly 200 companies had been formed in Utah and used the same
company formation agent in a small office in a Salt Lake City
suburb. That company formation agent also served as the
company's registered agent within the State to accept service
of process. When questioned by ICE, the Utah registered agent
indicated that he had formed the companies at the request of
another company formation agent located in Delaware, did not
have any beneficial ownership information, and believed that
all were ``shell companies,'' with no real business operations
in the United States.
The Delaware company formation agent was already well known
to law enforcement. No less than eight previous investigations
had led to its doors, each of which involved millions of
dollars in suspected money laundering by U.S. shell companies
associated with the same Panama entities. When questioned by
ICE in the prior cases, the Delaware company formation agent
freely admitted that he knew some of the corporations he formed
or caused to be formed were intended to move money out of
Russia and some former Soviet republics. He also said that he
sometimes sold U.S. companies to the same overseas buyer at the
rate of 40 companies per month. When asked about the actual
owners of the 200 Utah companies, the company formation agent
was unable to provide law enforcement with any names since that
information was not required by law.
The end result was that the ICE investigation, like the
eight before it, hit a dead end, unable to proceed due to the
lack of beneficial ownership information. A hearing exhibit
that is in our books summarizes the case.
Now, Michael Chertoff, former Secretary of the U.S.
Department of Homeland Security (DHS), wrote the following:
``In countless investigations where the criminal targets
utilized shell corporations, the lack of law enforcement's
ability to gain access to true beneficial ownership information
slows, confuses, or impedes the efforts by investigators to
follow criminal proceeds. This is the case in financial fraud,
terrorist financing, and money-laundering investigations. It is
imperative that States maintain beneficial ownership
information while the company is active and to have a set time
frame for preserving those records.''
Here is another aspect of the problem. A few weeks ago,
members of my staff conducted an Internet search and found
numerous company formation agents advertising the sale of U.S.
companies and trumpeting the fact that U.S. companies can be
formed without disclosing the names of any company owner. One
of the most blatant was Corporations Today, Inc., which
advertises its ability to form U.S. corporations in nearly
every State with minimal cost and effort. Copies of some of its
Internet ads are presented in the two hearing exhibits,\1\ and
the chart which I am putting up here reproduces one of its
advertisements offering the sale of aged corporations, meaning
companies which Corporations Today formed years earlier.\1\ One
of the companies on sale for $6,000 is advertised as coming
with 4 years of tax returns and an existing employer
identification number (EIN), issued by the IRS.
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\1\ The exhibits referenced by Senator Levin appear in the Appendix
on page 107.
\1\ The chart referred to by Senator Levin appears in the Appendix
on page 95.
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Why buy an aged corporation? According to Corporations
Today, ``Obtaining bank loans may be easier when you can show
you have history.'' So is ``obtaining corporate credit cards
and leases.'' The quote goes on: ``For example, Dell computers
lease only to corporations 6 months old or more.''
They are selling aged corporations for a price--
corporations that have been in business, allegedly, for 6
months or more. So Dell is told, Hey, this corporation has been
in business for years, so we are now eligible to lease your
product.
So the ad invites fraud. It enables hidden owners to
pretend that they have had a corporation operating in the
United States for years when they have not. Despite mounting
evidence of misconduct by U.S. shell corporations, despite
Internet advertisements selling U.S. corporations with promises
of unanimity, despite the years of law enforcement complaints,
many of our States are reluctant to admit that there is a
problem in established U.S. corporations with hidden owners.
Too many of our States are eager to explain how quick and easy
it is to set up corporations within their borders without
acknowledging that those same quick and easy procedures enable
wrongdoers to utilize U.S. corporations in a variety of ways
both here and abroad.
In 2006, the leading international anti-money-laundering
body in the world, the Financial Action Task Force (FATF) on
Money Laundering, issued a report criticizing the United States
for failing to comply with the FATF standard which requires
countries to obtain beneficial ownership information for the
corporations formed under their laws. FATF gave the United
States 2 years, until July 2008, to make progress towards
compliance with the FATF standard. Next week, FATF is scheduled
to review U.S. actions on this matter. How can we possibly
justify our failure to do what we have committed to do: Obtain
beneficial ownership information for the corporations formed
within the United States?
Our bill, the Levin-Grassley-McCaskill bill, that is the
subject of today's hearing, would assist our law enforcement
community instead of thwarting it and would enable the United
States to meet its commitment to FATF. Our bill would require
States to add a question to their incorporation forms asking
for the names and addresses of the beneficial owners of a
proposed corporation. States would not be required to verify
the information, but penalties would apply to persons who
submit false information.
Prospective corporations with foreign owners would also be
required to submit a certification from an in-state company
formation agency that the agent had verified the owners'
identities and obtained photographs for them.
This beneficial ownership information would have to be
updated annually. If law enforcement issued a subpoena or a
summons to obtain the ownership information, States would
supply the data contained on its forms. And I want to emphasize
that point because the Chairman made an important point here
about privacy. This beneficial ownership information would be
available only when the law enforcement folks issued a summons
or a subpoena.
Funds that are already provided to States on an annual
basis by the Department of Homeland Security could be used to
pay for the minimal cost associated with adding a question to
their incorporation forms.
Now, chart 2 summarizes how the bill would work.\1\ It is a
very simple step. You file a corporation with the Secretary of
State. It has the beneficial ownership information. Law
enforcement can request it with a subpoena or summons, and the
Secretary of State can respond.
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\1\ The chart referred to by Senator Levin appears in the Appendix
on page 96.
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Introducing this legislation, Mr. Chairman, was not our
first choice. In fact, at the request of the States, we delayed
introducing a bill for a year to provide the States with an
opportunity to craft their own solution. But when it became
clear that the States would not step up to the plate, we then
introduced the bill, last time cosponsored by Senator Coleman
and at that time, Senator Obama, in the last Congress--and that
legislation which was introduced last Congress is identical to
the bill which we have introduced in this Congress and which is
before the Committee today.
Now, today's hearing is going to discuss not only our bill
but an alternative proposal developed by the National
Conference of Commissioners on Uniform State Laws (NCCUSL), at
the request of the National Association of Secretaries of
State. But the NCCUSL proposal fails to cure the problem and
would create a host of new ones.
Most significantly, the NCCUSL proposal would not require
those seeking to form a U.S. corporation to provide the names
of the beneficial owners to the State. In fact, the term
``beneficial owner'' never appears anywhere in their proposal.
Instead, the proposal creates a complex and time-consuming
procedure, summarized in the chart which we are putting up
now,\2\ which requires law enforcement to get the name of a
company's so-called records contact person from the State,
chase down that individual, ask that individual to ask the U.S.
company under suspicion for certain ownership information. If
the U.S. company responds, it is still not required to provide
its beneficial owners, but what are essentially its owners of
record, which could be shell companies here or overseas. In
other words, to say that owners of record are going to be
supplied after all that effort does not get to the people who
really control the corporation because shell companies, either
here or abroad, can be the owners of record.
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\2\ The chart referred to by Senator Levin appears in the Appendix
on page 97.
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So if a company has been involved in a crime or has been
dissolved, the records contact individual will likely come back
empty-handed. Instead of getting the beneficial ownership
information it needs, law enforcement is going to be chasing
its tail, and chasing its tail after the misconduct has
occurred, and maybe after the suspect company shut down. And,
to add to the futility of this convoluted process, it may not
produce any useful information.
Another problem involves timing, Mr. Chairman. Instead of
collecting beneficial ownership information at the time that a
new corporation is being formed in the United States, as our
bill does, the NCCUSL proposal would allow hidden persons to
obtain a U.S. corporation, misuse it, and only after the fact
does it set up a process for requesting ownership information.
Worse, the proposal would require law enforcement to direct its
information request not to a State on a confidential basis, but
to the suspect company itself, which would then be alerted to
the investigation. Informing suspects of active U.S. law
enforcement investigations is not a good way to thwart or
punish crime.
There is a long list of endorsers of our legislation,
including the Federal Law Enforcement Officers Association, the
Fraternal Order of Police, the National Association of
Assistant U.S. Attorneys, and more. It has been endorsed by
groups combating financial and corporate abuses, including Tax
Justice Network, Global Financial Integrity, Citizens for Tax
Justice, Public Citizen, and more.\1\ There are letters of
support we will offer for the record, Mr. Chairman, as well as
the balance of my statement. And, again, I thank the Chairman.
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\1\ The letters of support submitted by Senator Levin appears in
the Appendix on page 271.
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Chairman Lieberman. Thank you, Senator Levin, for a very
thoughtful statement, which shows the work that you and the
staff of the PSI did.
I think it is probably best that we recess now. We will go
over and vote. We will come right back. Please do not go too
far because we will start quickly.
The hearing stands in recess.
[Recess.]
Chairman Lieberman. Thank you very much for your patience.
Senator Levin had urged me to reconvene. He has got a quick
meeting of the Armed Services Committee that he is chairing.
So we will go first to Janice Ayala, Deputy Assistant
Director, Office of Investigations, U.S. Immigration and
Customs Enforcement, U.S. Department of Homeland Security. It
takes a while to introduce you these days.
Ms. Ayala. It is a long title.
Chairman Lieberman. Anyway, we appreciate very much your
coming, and obviously we want to hear your reaction to this
proposed piece of legislation.
TESTIMONY OF JANICE AYALA,\2\ DEPUTY ASSISTANT DIRECTOR, OFFICE
OF INVESTIGATIONS, U.S. IMMIGRATION AND CUSTOMS ENFORCEMENT,
U.S. DEPARTMENT OF HOMELAND SECURITY
Ms. Ayala. Thank you. Chairman Lieberman, distinguished
Members of the Committee, on behalf of Secretary Napolitano and
Assistant Secretary John Morton, I would like to thank you for
the opportunity to testify today on the efforts of ICE to
protect the United States from the growing threat of
international money laundering. ICE has expansive investigative
authority and the largest force of investigators in DHS. We
protect national security and uphold public safety by targeting
transnational criminal networks and terrorist organizations
that seek to exploit vulnerabilities at our borders.
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\2\ The prepared statement of Ms. Ayala appears in the Appendix on
page 148.
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ICE also investigates individuals and organizations that
exploit vulnerabilities in the U.S. financial system to launder
illicit proceeds. ICE's financial investigative authorities and
unique capabilities enable it to identify, dismantle, and
disrupt the financial criminal enterprises that threaten our
Nation's economy and security. The combination of Bank Secrecy
Act reporting requirements and Anti-Money-Laundering compliance
efforts has, historically, forced criminal organizations to
seek other means to launder their illicit funds across our
borders. However, in the attempts to accomplish this mission,
law enforcement is often hindered by the lack of information
available as to the true ownership or control of the shell
companies that criminals utilize. Further, this impediment
limits our abilities to work jointly with our international law
enforcement partners and our ability to take quick action where
it may be required.
ICE has long recognized the misuse of corporations and
limited liability companies formed under State law as a serious
threat to the ongoing effort to combat international criminal
activities. The lack of corporate transparency has allowed
criminal entities a gateway into the financial system and
further veils their illicit activity. Investigations can be
significantly hampered, or stalled completely, when criminals
utilize shell companies. It also impedes our ability to follow
criminal proceeds.
Obtaining information on true beneficial corporation owners
and limited liability companies and providing the information
to law enforcement upon receipt of a summons or subpoena would
assist DHS in its endeavor to protect the country.
At this time, I would like to share with you examples of
ICE investigations that demonstrate how shell corporations
established in the United States have been utilized to commit
crimes against individuals across the world.
An investigation was initiated by the New York office
against a criminal organization that defrauded investors out of
millions of dollars and laundered the fraudulently obtained
proceeds. The investigation revealed an enterprise of
individuals offering fictitious instruments for investment
programs described as ``currency leasing trading programs,''
leading to more than $14 million in fraudulent transactions.
These funds were laundered through a network of domestic and
foreign bank accounts utilizing shell corporations, many of
which had been established in the United States.
The perpetrators operated an Internet Web site which
offered investors the opportunity to lease $1 million for a
$35,000 fee. Victims were told these funds would be placed into
a high-yield international trading program and that they could
expect as much as 25 percent biweekly return on their
investment.
A co-conspirator established shell corporations in
Delaware, Nevada, California, and Massachusetts and companies
in Denmark, Sweden, Luxembourg, and the Bahamas, which allowed
them to create a complex web of bank and brokerage accounts.
Another co-conspirator opened cash management accounts at other
brokerage firms to receive the investors' $35,000 fee. Once in
this account, the funds were then transferred to secondary
accounts and further disbursed to various foreign and domestic
accounts and liquidated through the use of checks and debit
cards.
The investors never realized the profits they were promised
nor received the requested refunds. But they did receive a
litany of excuses for the delays and promises that the
transactions would be completed.
In the end six individuals were convicted of violating
money-laundering, wire fraud, and international transportation
of stolen funds statutes. The defendant's use of domestic and
foreign shell companies to layer the funds prevented full
recovery of the fraudulently obtained funds.
In 2003, ICE established a Federal Foreign Corruption Task
Force to conduct investigations into the laundering of proceeds
emanating from foreign public corruption, bribery, or
embezzlement. Investigations are conducted jointly with
representatives of foreign governments to prevent laundered
monies from entering the U.S. financial infrastructure, seize
identified assets in the United States, and repatriate these
funds to the victimized governments.
The following Miami case is another example of how shell
companies are utilized for criminal activity. In this
investigation, the violators utilized shell corporations to
defraud the Government of Trinidad and Tobago out of more than
$100 million. The foreign and domestic shell companies enabled
them to engage in a bid-rigging scheme and then launder the
fraudulently obtained proceeds. The co-conspirators bribed
members of a Trinidad and Tobago bid committee for the
construction of the Piarco International Airport in order to
win a competitive construction bid. The U.S. targets of the
investigation operated a construction company and architectural
firm in South Florida, which submitted a competitive bid for
work in the construction of the airport. A Trinidadian
Government assessor believed the bid was too high and requested
that a second bid be conducted. Based on this, the targets of
the investigation utilized a shell company to submit a second,
much higher bid for the work. As a result of this much higher
second bid, the contract was awarded to the targets of the
investigation.
Once they were paid by the Trinidadian Government, they
laundered the proceeds by layering them through a series of
shell companies in the Bahamas, Liechtenstein, and the United
States. Only through reviews of handwritten notes kept by
Bahamian bankers, ICE investigators were able to identify the
true beneficiaries of the funds. Six of the eight indicted
individuals were found guilty of violating money-laundering and
wire fraud statutes; two are awaiting extradition. As part of
the sentence, the court ordered approximately $22 million in
restitution be paid, but the majority of that ordered
restitution has not been realized.
The use of shell companies to engage in illicit activities,
including money laundering and financial fraud, presents a
number of investigative challenges for law enforcement. Greater
transparency in the corporation formation process and providing
reasonable access to the information will greatly assist our
efforts to combat this threat.
I would like to thank the Committee members for this
opportunity to testify and for your continued support of ICE,
Customs and Border Protection (CBP), DHS, and our law
enforcement mission, and I will be happy to answer any
questions that you may have. Thank you.
Chairman Lieberman. Thanks very much, Ms. Ayala. That was
interesting testimony, and I appreciate the case studies.
Next we are going to hear from Jennifer Shasky, who is
Senior Counsel to the Deputy Attorney General at the Department
of Justice. Welcome.
TESTIMONY OF JENNIFER SHASKY CALVERY,\1\ SENIOR COUNSEL TO THE
DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE
Ms. Shasky. Thank you and good afternoon, Chairman
Lieberman. I am honored to appear before the Homeland Security
Committee to discuss the issue of shell companies. In the time
I have this afternoon, I would like to briefly discuss the
Department's concerns about the abuse of shell companies and
our views on measures designed to address the problem. In using
the term ``shell company,'' I am referring to those legal
entities that have no significant operations and exist
primarily on paper--with any U.S. presence typically consisting
of a postal box or a mail drop.
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\1\ The prepared statement of Ms. Shasky Calvery appears in the
Appendix on page 156.
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Nearly 3 years ago, the Department discussed the
difficulties that U.S. shell companies consistently pose to law
enforcement efforts and the critical need for greater
transparency in corporate formation in this country.
Unfortunately, since the Committee last examined this issue,
the problem has not improved.
Increasingly, professional money launderers use shell
companies as necessary tools of their trade and schemes to
launder money for international criminal organizations and to
finance terrorism. Shell companies are intentionally selected
for this purpose because they are very easily formed, they
provide a level of anonymity in opening domestic and foreign
bank accounts, and in the case of U.S. shells, they offer an
air of legitimacy. Criminals trade on the good names of our
States by sending illicit money through bank accounts
fraudulently disguised as legitimate economic trade.
The use of shell companies to facilitate criminal schemes
has evolved over time. Initially, in the 1970s and 1980s,
criminals opened shell companies 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
companies. As banks began to scrutinize offshore shell
companies more closely, criminals realized that they could
obtain some of the same benefits from U.S. shell companies,
with the added benefit that U.S. companies would not receive
the same level of scrutiny.
The use of domestic shell companies has continued to
evolve. When Congress passed legislation enhancing customer
identification requirements, U.S. banks began to require more
information from domestic companies. This additional scrutiny
resulted in the most recent trend where criminals, both
domestic and foreign, are forming shell companies in the United
States and then opening bank accounts in the names of those
companies in foreign countries where U.S. shells have an aura
of legitimacy.
Finally, the criminals use correspondent accounts at U.S.
financial institutions to anonymously transfer money abroad to
their U.S. shell company. Adding to the complexity, criminals
will perpetrate their schemes using so-called shelf or aged
companies that were created at some point in the past and are
now a valuable commodity for resale because of their history of
good standing, their good credit, and often their existing
banking relationships. In such cases, the trail very often goes
cold, with either the initial company formation agent or the
middleman who is brokering a resale, neither of whom know, or
often care, who has purchased the shelf company.
U.S. shell companies present severe criminal and national
security vulnerabilities for the United States, and all
indications are that the scope of the problem is quite broad.
So we are particularly heartened to see that, through the
leadership of members of the Permanent Subcommittee on
Investigations, the discussion among all of the stakeholders
has moved beyond the stage of merely recognizing the severity
of the problem to developing real and effective solutions. We
are convinced that such a solution is possible and can be
crafted in a manner that is workable for law enforcement, State
governments, and the private sector. We are confident that
there is a solution that will benefit everyone but the would-be
criminals and the would-be terrorists.
It bears emphasizing here that the Department also strongly
believes that Federal legislation is an essential component of
any such solution. Without Federal legislation, we cannot
practically hope to achieve participation by all 50 States. And
with anything short of full participation, the problem will
merely shift and continue unabated in the non-participating
States.
Of course, the Department also recognizes the importance of
refraining from placing undue burdens on the States or the vast
majority of legitimate businesses that are trying to establish
a legal presence in one or more of our States.
It is with this delicate balance in mind that I would now
like to focus my testimony on the four critical issues the
Department believes must be addressed in any legislative
solution.
First, it is critical for law enforcement to be able to
identify the beneficial owner of a legal entity, the living,
breathing person who controls the company and its assets.
Toward this end, the Department strongly recommends
consistently defining ``beneficial ownership'' across all 50
States to ensure that criminals cannot exploit definitional
gaps between differing State systems.
In terms of identification, at formation, beneficial owners
should be required to provide their name, their current
address, and a legible photo ID to provide law enforcement with
a name and a face to further their investigation when the
information provided to the State was either false or
misleading.
It is important to note here that the Department believes
that both U.S. and foreign persons should be required to
furnish such information. To require less from U.S. persons
would invite fraud as foreign individuals could falsely claim
to be a U.S. person or use straw actors to evade the
verification.
To make collection of this beneficial ownership information
meaningful, law enforcement must be able to obtain it an
accurate and timely manner--the second of our four critical
needs. Specifically, law enforcement must be able to obtain
through an appropriate legal process all beneficial ownership
information for a legal entity in a timely fashion. This means
that the information must already be maintained on-site in the
state of formation and cannot be something that a corporate
agent endeavors to collect from outside the State or even
outside the country, only after a request is made by law
enforcement.
This leads us directly to our third critical need. Any
meaningful legislative solution must also address the point of
transfer. When beneficial ownership information is transferred
from one person to the next to the next to the next, currently
criminals can easily throw investigators off the trail by
purchasing shelf companies and transferring the ownership. To
combat this practice, the Department strongly recommends
legislation that both requires all covered legal entities to
provide updated beneficial ownership information anytime there
is a change, and also to certify annually that their
information is up to date.
Finally, the fourth need: The Department believes it is
critical to enact an enforcement regime. Federal criminal
penalties in particular are an essential ingredient for law
enforcement to target professional money launderers and their
clients and the criminal in the extreme underworld.
Specifically, the Department recommends crafting Federal
criminal penalties targeting those who knowingly provide false
information and those who knowingly fail to update that
information.
The Department of Justice looks forward to working with
this Committee to address the issues identified in this
hearing, and I would be happy to answer any questions.
Chairman Lieberman. Thanks very much, Ms. Shasky. I look
forward to a few questions of my own that I have for you.
We are honored on the Committee to have with us as our next
witness the Secretary of State of North Carolina, Elaine
Marshall. Thank you for taking the time to be here, and we
welcome your testimony now.
TESTIMONY OF ELAINE F. MARSHALL,\1\ NORTH CAROLINA SECRETARY OF
STATE, AND CO-CHAIR, COMPANY FORMATION TASK FORCE, NATIONAL
ASSOCIATION OF SECRETARIES OF STATE
Ms. Marshall. Thank you, Chairman Lieberman, Senator
Carper, and Committee Members. I want to thank you from my
personal point but also on behalf of the National Association
of Secretaries of State (NASS). I am wearing two hats here
today: One as North Carolina's Secretary of State since 1997,
and also as the Co-Chair of the NASS task force on this issue
since 2007.
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\1\ The prepared statement of Ms. Marshall with attachments appears
in the Appendix on page 172.
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From the outset, let me say that I am currently opposed to
enactment of S. 569 in its current form because of its
questionable effectiveness and the huge burden it would place
upon North Carolina. NASS has likewise voted twice against the
contents of this bill.
The members of NASS and I support the goal of preventing
money laundering; however, the terms of S. 569 to us do not
appear to achieve that goal with the least amount of burden on
legitimate business. The NASS response to this issue in 2007
committed us to a five-part course of action with great
success.
First, bearer shares have been eliminated by statute.
Second, the 50-State survey of business formation laws has
been completed.
Third, the ULC has risen to the challenge to draft a
uniform law with the American Bar Association (ABA) assistance
and will be going to full vote in about 30 days. We thank
Commissioner Harry Haynsworth and the other commissioners for
this undertaking.
Fourth and fifth, items relating to Trading With the Enemy
Act and the Specially Designated National List remain
incomplete, but not due to our part.
My experience in and out of government is that compliance
with the law is much easier to achieve when people understand
the problem and can see the value of the proposed remedy. The
efficacy of S. 569 is in doubt, especially when contrasted with
the fact that the government has easier ways to deal with the
problem--the burden on legitimate business, the burden on State
government, and the turmoil that will be created. Even FATF
acknowledges in its 2005-06 report the lack of clarity or
consensus over the beneficial owner concept is a problem. S.
569 will require tremendous additional recordkeeping and impose
long-range costs on the States. We believe the ULC approach
will be more effective, prudent, and easily managed.
To the extent that much of the information sought by law
enforcement already resides within institutions such as the IRS
or can be tracked through financial institutions, we
respectfully request that Congress redirect its attention to
requiring those institutions to share it instead of having
State agencies collect it.
From the entity filing standpoint, S. 569 creates a number
of practical problems. Will information collected be
confidential or public? Some of my colleagues have advised that
under their State Constitution they will have a difficult time
in having the information be considered confidential. From my
standpoint, I strongly desire that the information be
designated confidential under our public records law, and I can
explain my reasons later, if you desire.
Another issue with the bill is that the formation agent
definition may be overly broad, and we estimate that 60 percent
of North Carolina's 548,000 filers do not use a formation
agent. What is the default activity when no formation agent is
involved? Does the Secretary of State determine citizenship,
legal permanent residency, or non-U.S. citizenship status? If
no formation agent is used, who holds those passport photos? Is
this REAL ID business class? Does this bill cover only entities
going forward or apply to all existing entities? If it is the
larger group, the education requirement then becomes a much
more serious challenge, and to be meaningful, it would have to
apply to all.
In North Carolina, there is no annual report requirement
for our 94,000 nonprofits. Many nonprofits do not have shares
or ownership interests at all, so absent ``owners,'' the
concept of ``control'' comes into play for a nonprofit. We
currently come into a cross-fire of that issue far too often
with homeowners associations and more. Requiring nonprofits to
begin annual reports, or the evergreen requirement of S. 569
will be met with strong resistance by North Carolina churches
in particular, who feel church and state separation trumps
reporting to any government.
Many of us question the accuracy of self-reported
information in this context. Therefore, verification has always
been a huge concern for NASS. If the intention is that we do
not have to verify the information or compare it to any Federal
list, clear language in that regard would be greatly
appreciated.
Technology changes for North Carolina would be a minor cost
for this act as creating the additional databases and forms
would be under $100,000 for us. But please note that in North
Carolina I have my own technology staff that can do this in-
house at a reduced cost. It would have taken another $150,000
or so to reprogram and re-engineer annual report functions as
much of the collected data would be partly public and partly
confidential.
The educational training component of either of the two
proposals will be significant. We have no ability to determine
exceptions without a mailing. There may be a software matching
program available to determine the Securities and Exchange
Commission (SEC) governed entities as exceptions, but none has
surfaced at this point.
A single mailing to our entire existing database with a
folded, letter-size, single sheet, perforated edges, mailed at
bulk rate is $390,000. This one mailing is more than our entire
Secretary of State total mailing budget for the entire agency
in a year.
We would seek $200,000 to $250,000 for education, for Web
designs, public service announcements (PSAs), printing, Web
announcements, and more. We estimate a minimum of a 40-percent
staff increase in annual reports, for $170,000 annually, and a
50-percent staff increase in the customer service unit of
$226,500 annually. Replacement of one server each year due to
burnout adds $60,000 more, for an annual total cost of
$450,500.
These proposals represent a cultural change, not just to
Secretaries of State but to every business in America. We will
be ground zero for the fallout from this cultural change, and
we are gravely concerned. Viewing the financial and human asset
commitment contrasted with the efficacy of the proposal, it is
hard to find significant added value and meaningfulness, and
none of us relish or expect success in competing with home
State first responders to fund this.
Thank you for this opportunity. My deep thanks to the NASS
staff and my colleague Secretaries of State.
Chairman Lieberman. Well, thank you, Madam Secretary. We
have a pretty lively debate going here now.
Ms. Marshall. We do.
Chairman Lieberman. And we will keep it up.
Next, Adam Kaufmann. Originally, we had hoped, with great
excitement, that Robert Morgenthau, the District Attorney--
really the iconic, the great District Attorney--could be here.
Unfortunately, I know he could not. We are very grateful, Mr.
Kaufmann that you are representing him. I know in your own more
youthful way--not to say that Mr. Morgenthau is not still
youthful--you bring a lot of experience to the table, so we
thank you for being here.
TESTIMONY OF ADAM S. KAUFMANN,\1\ ASSISTANT DISTRICT ATTORNEY,
CHIEF OF INVESTIGATION DIVISION CENTRAL, NEW YORK COUNTY
DISTRICT ATTORNEY'S OFFICE, ON BEHALF OF ROBERT S. MORGENTHAU,
DISTRICT ATTORNEY FOR NEW YORK COUNTY, STATE OF NEW YORK
Mr. Kaufmann. Thank you, Chairman Lieberman, Senator Levin,
Senator Carper, and Committee staff. Thank you for the
opportunity to be here. I note that I am the proverbial booby
prize in my presence here, but I am delighted to be here all
the same.
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\1\ The prepared statement of Mr. Morgenthau delivered by Mr.
Kaufmann appears in the Appendix on page 192.
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I should also note that Mr. Morgenthau sends his regards to
the Committee, his support of the bill, and, to Senator
Lieberman and Senator Levin, his personal regards to you two
gentlemen as well.
For those of us in law enforcement, these issues with shell
companies are not some abstract idea. This is what we do and
deal with every day. We see these shell companies being used by
criminal organizations, and the record is replete with examples
of their use for money laundering, for their use in tax
evasion, and for their use in securities fraud. You almost go
so far as to say any of those crimes cannot function without
the use of shell companies, either domestic or foreign. And, of
course, today we are focusing on the problems presented
specifically by domestic shell companies.
As I was getting ready for my testimony here today, I
reached out to a number of colleagues in law enforcement--
prosecutors, cops, agents, detectives--and every one of them
had the same response, which was that this is a no-brainer.
This is a simple, clear issue for us. These shell companies
have to come to an end. They are a problem, and they have to
stop. In New York, the police and detectives added, ``They got
to do something about this.'' That was the New York take on the
problem.
Mr. Morgenthau again and again boils it down to a very
simple concept, and the concept is transparency. For 45 years,
he has been the top State or Federal prosecutor for Manhattan,
and again and again, he talks about transparency and the need
for daylight on these systems that allow corruption and
criminality to exist. And again and again, we go out and
conduct investigations that prove him right.
We see consistently that increasing transparency inures to
the benefit of law enforcement and to the detriment of the
criminals who use these systems to further their criminal
activity. The written record that we submitted contains
numerous examples of this. A colleague from Immigration and
Customs Enforcement gave some great examples of the use of
shell companies in securities fraud. And we just constantly see
it.
Where we have seen some changes recently is the use of
domestic shell companies relating to terror finance, and I
noted in my prepared statement some of the Federal cases. I
looked at the Hezbollah, the cigarette smuggling cases where
there were domestic shell companies used to channel funds, set
up bank accounts, and get the monies to entities and accounts
controlled by Hezbollah.
A case that we recently conducted at the Manhattan District
Attorney's office focused on the abilities and influence of
Iran in moving money around the world. And one of those cases
we completed with the assistance and cooperation of the
Department of Justice was the Lloyds Bank matter. But when we
were doing those investigations, we found domestic shell
companies that had been set up by entities controlled by the
Government of Iran for the simple purpose of owning U.S. assets
in violation of U.S. sanctions and the International Emergency
Economic Powers Act (IEEPA) laws, and we saw them setting up
bank accounts and moving money offshore.
These are ongoing matters, but I will tell you that
specifically we looked at one New York corporation that was
created and owned assets in New York, and we saw funds going
from the New York corporation to what we would call an offshore
bank secrecy jurisdiction. And we reached out to that bank
secrecy jurisdiction to get information. The irony was that we
were able to get more information from the bank secrecy
jurisdiction located out of the country than we were from the
State of New York. And I think that says a lot about where we
are as a country in terms of our ability to conduct our
affairs.
That problem is one that we should not ignore. We do many
investigations with foreign law enforcement, and there is a
certain moral authority that I submit to the Committee that the
United States should bring to these issues, and it is a moral
authority that is now lacking. It is disturbing that the United
States should be found noncompliant by the FATF. As disturbing
as that may be, 3 years without rectifying that becomes
something of an embarrassment for our country.
It is very hard for us to point a finger at Switzerland or
Liechtenstein for their bank secrecy policies when they can
point back to us--and they do point back to us--and say, ``But
you have bank secrecy corporations in all of your 50 States.
Why are you lecturing to us?''
And not to be glib about it, but I will say that I think
that from a national pride perspective, our statement of our
standard of transparency should be something more than,
``financial transparency in the United States: better than
Panama and trying to catch up with Liechtenstein.'' It is a sad
comment on where we are.
Foreign criminals view a U.S. corporate entity as a
passport to respectability and legitimacy. In our written
record, there is a communication that we received from a
Brazilian case where a Brazilian criminal discussed with a U.S.
incorporating agent the benefits of getting a U.S. corporation.
And they talked about the fact that it did not have to be
public, that the owners do not have to be the registered
individuals. And once the foreign criminal is able to obtain
this U.S. corporate entity, it is an open door to opening bank
accounts in the United States, abroad, and becomes the conduit
by which they can continue to engage in their criminal conduct.
It is a great source of revenue to the agents that are involved
in these packages of incorporation, much like the Wyoming
example that Senator Levin put up.
I am just going to comment briefly on some of the proposed
legislation. I am just about out of time, but I will note that
I can say--I say without hesitation or reservation--that from a
law enforcement perspective, the bill proposed by NCCUSL would
be worse than no bill at all. And there are two very basic
reasons for this.
It eliminates the ability of law enforcement to get
corporate information without alerting the target of the
investigation that the investigation is ongoing. That is the
primary reason.
It also sets up a system that is time-consuming and
complicated, and, of course, if the Committee wants to hear
more, I am happy to go into that or any of the other matters.
I thank you very much for this opportunity.
Chairman Lieberman. Thank you, Mr. Kaufmann. Excellent
statement.
Mr. Haynsworth, Chair of the Drafting Committee on the
Uniform Law Enforcement Access to Entity Information Act of the
Uniform Law Commission. Thanks for being here. Obviously, Mr.
Kaufmann at the end posed a tough challenge to you, so we call
on you now to respond.
TESTIMONY OF HARRY J. HAYNSWORTH,\1\ CHAIR, DRAFTING COMMITTEE
ON THE UNIFORM LAW ENFORCEMENT ACCESS TO ENTITY INFORMATION
ACT, UNIFORM LAW COMMISSION
Mr. Haynsworth. Thank you, Chairman Lieberman, Senator
Levin, and Senator Carper, and thank you for inviting us to be
here. I am speaking on behalf of the Uniform Law Commission and
the Uniform Act that we have developed over a 2-year period.
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\1\ The prepared statement of Mr. Haynsworth with attachments
appears in the Appendix on page 200.
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This Act is one that has involved law enforcement
officials, filing officers, Secretaries of State, practicing
lawyers, every conceivable constituency that would have an
interest in an Act like this has been involved in this drafting
process. And we have had four 2-days drafting sessions and four
conference calls that have lasted multiple hours in trying to
put something together that we feel is something that can be
adopted across the country in a very rapid format, assuming we
can get agreement on the fact that this is what we need to do.
Whatever is done, it will have to end up being State
legislation. Everything to do with what gets filed in a
Secretary of State's office, the content of that access to
records, and what records have to be kept by companies is
something that is a matter of State law, always has been. So it
is going to have to be State law to begin with, and the Uniform
Law Commission, that is what we do. We draft statutes that are
adopted across the country in a uniform fashion so that you
have a uniform standard that applies everywhere. And for this
to have any impact, whatever the ultimate outcome, it must be a
uniform standard across the country.
The Uniform Law Commission has produced numerous acts that
have been adopted in this fashion. I will just mention one: The
Uniform Commercial Code, which is one everybody, I think, would
be familiar with. And so this would be another example of doing
that.
The objectives that we sought were: First and foremost,
recognizing this is a very important and difficult issue, that
law enforcement officials do need to have more effective and
more current accurate information about ownership and control
of companies.
Second, that you have to have some kind of a system that is
workable and does not create more problems than it solves in
terms of having unmanageable burdens on the Secretary of
State's office, which is what Secretary Marshall was referring
to in her concerns about S. 569, and does not cause undue
burdens on companies in terms of their operations and
recordkeeping they have to keep up with.
That is a really major concern about trying to balance
those concerns, plus the privacy concerns that have been
mentioned; and also the concerns about foreign investors in the
United States and not creating barriers that would unduly
restrict their ability to be able to form and operate
businesses. And you have to put this in the context that well
over 99.5 percent, at least, maybe 99.9 percent of all
businesses are legitimate. And so when you put a burden on
everybody, you have to be careful that you are not putting an
undue burden that creates barriers to formation and operation
of legitimate companies. That means 99.9 percent of them.
We think we have accomplished these objectives in a way
that our Act will provide more information, will provide it in
a workable administrative system. And it will be less
burdensome and certainly more cost-effective than S. 569.
The differences between us and S. 569 are significant, but
they are not perhaps as broad as a lot of people seem to think.
One would have to do with coverage, and we believe that in
order to have any kind of effective system, you have got to
have it cover every single type of entity that files in the
Secretary of State's office for its existence. Otherwise, you
have just created an escape hatch. And just corporations and
limited liability companies (LLCs) is not going to do the
trick. That in and of itself would only cover about 80 percent
of the filing entities in this country.
The other thing would be you are also going to skew, once
you say one set of entities is going to be subject to a certain
kind of regulation but another set is not, immediately you are
going to have a migration to that other set. So, it is an
escape hatch that has to be closed if you are going to have
effective regulation.
Second, it has to cover all existing as well as newly
formed entities. Senator Levin talked about the sale of
existing entities. Well, if you are going to have any kind of
control or effective regulation of that, you have got to cover
existing entities and not merely new ones that are formed going
forward.
The second difference is what types of records are required
to be kept by companies, and currently the differences there
would be right now companies only keep what is known as
``record ownership.'' You know who the record owner is, an
individual--if it is a trust, you know that it is a trust and
who the trustee is. If it is an estate, you know who the
administrator of the estate is. If it is a corporation or an
LLC, you know that it is a corporation or an LLC. You would
know. You would have identification of that entity, etc.
So that is the system that exists here, and it is the
system that basically exists throughout the world, this record
ownership concept. So if you are going to change anything
there, you are changing fundamentally what is the recordkeeping
system that you have.
Then the third thing is what gets filed in the office of
the Secretary of State, and here what we have proposed, instead
of filing all this so-called beneficial ownership information--
and I will be glad to answer questions about that. That is an
impossibility to come up with something that will work, and no
country in the world has come up with something that is
workable or is in compliance with what FATF 33 apparently says.
That information filed in the Secretary of State's office is
just going to be a morass of problems and massive noncompliance
would result because of the fact that people cannot even figure
out what it is, and to have it filed and to keep it updated.
And under S. 569, what would happen is that it would be current
only as of day one, and then it is not current until a year
later; whereas, what we are providing, it would be current as
of the time it is requested. And it must be accurate and it
must be current. So there are a lot of things where you
actually get more information, more current information, more
accurate information the way we have established the bill.
What I would like to suggest is this, going forward, if it
is possible: For the Uniform Law Commission (ULC), to be able
to work with the Committee in trying to come up with a format
that we can agree upon that accomplishes the objectives that
are being sought, does provide an effective monitoring system,
provides better access, and is one that then we can go out and
get it approved by the States in a very reasonable fashion. Of
necessity, you are going to have to have a Federal act that
says that this Uniform Act is the one that needs to be adopted
by the States so you get this uniformity across the country in
a very short period of time, and that there needs to be some
kind of mechanism for funding the up-front cost of getting this
established.
Incidentally, under our system, unlike the system as
proposed under S. 569 in terms of what gets filed in the
Secretary of State's office and maintaining the records and
everything, it would be far less expensive, and I do not think
any new employees would have to be hired to be able to monitor
the information. What we file is different, but in any case,
maintaining it.
Then there needs to be probably a penalty of some kind if
States do not adopt it within a given period of time. So the
sort of carrot and/or stick approach I think will be necessary.
But I guess my final comment would be you need us, we need
you, and let us try to work together.
Chairman Lieberman. Thanks, Mr. Haynsworth.
We have had a really good discussion that the five of you
have presented to the Committee, I think very beneficial for
us. Before we proceed to the questions, Senator Carper, I know
you could not be here when we started. Senator Levin and I made
opening statements. Before I start questioning, would you like
to make an opening statement?
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. I would welcome that, and I appreciate that
very much. I apologize for missing the first part of the
hearing. I led a congressional delegation of four other
Senators to Afghanistan and Pakistan last month, and we had an
opportunity to sit down today with, among others, Ambassador
Richard Holbrooke, and this was the one time that he could meet
with our delegation, so I apologize for arriving late. And
thank you very much, Mr. Chairman, for the chance to say a few
words.
I just want to start off by saying to Mr. Haynsworth we
very much appreciate the spirit in which you made your offer
there at the close of your testimony, and I hope that is an
offer that we will seriously consider and, I hope, accept.
I want to thank our Chairman, and I want to thank my
colleague Senator Levin, and each of their staffs for working
closely with my own staff as we studied this topic and as you
all put this hearing together.
The last time that we met on this issue--I think it was in
November 2006--I emphasized the importance of this issue to my
own State. As some of you know, business incorporations and
related fees account for roughly 25 percent of Delaware's
general fund revenues. I continue to be proud that my State of
Delaware is a leading home of incorporation for businesses in
this country. Delaware continues to be a leader in entity
corporations because our State has the expertise to ensure
corporate success from annually updating our laws to meeting
the changing needs of incorporated interests to a well-
respected and a renowned judiciary, some of whom I actually had
the privilege of appointing as governor of Delaware.
Delaware has enacted a number of laws to deter the
formation of illicit businesses and ensure that law enforcement
has better access to the information that they need in order to
prevent crimes and to solve those that occur.
For example, Delaware was the first State, I believe, in
the Nation to adopt legislation responding to the concerns
expressed by law enforcement regarding illicit practices of
registered agents. Delaware now regulates commercial registered
agents and has successfully removed a number of registered
agents from doing business in our State.
Delaware requires every business entity to provide the
name, the address, and the phone number of a designated
communications contact person who is available to law
enforcement. And Delaware has responded to international
criticism that the U.S. company law permits companies to issue
bearer shares--stock certificates whose record of ownership is
not maintained by the issuing company--when we explicitly
banned the practice in statute to be consistent with long-
established Delaware case law.
There are a number of reasons for us to encourage more
transparency and disclosure with respect to ownership of legal
entities. But whenever we undertake legislation, we have to
find the right balance. In this case, we need to provide law
enforcement with the tools that they need in order to prevent
and to prosecute crime. Having said that, we must also ensure
that we do not put additional burdens on our States or our
State budgets, many of which are operating in a deficit.
As I think Mr. Haynsworth alluded to in his comments, I am
told that some 99.9 percent of corporate entities in the United
States are actually good citizens. We should not burden the
vast majority of good citizens with expansive and burdensome
paperwork while trying to find less than 0.1 percent of bad
actors who are likely to try to evade such disclosures anyway.
Whatever solutions we pursue, it is important that we be
careful not to hinder legitimate business activities or invade
the financial privacy rights of risk-taking entrepreneurs who
have historically found the United States to be the freest
economy in the world.
At the last hearing that we held here in November 2006, our
Assistant Secretary of State from Delaware, Rick Geisenberger,
appeared before this Committee and discussed the issues related
to disclosure of beneficial owners of incorporated entities,
and, Mr. Chairman, I would just like to ask unanimous consent
to offer Mr. Geisenberger's testimony from that hearing into
our record today.\1\
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\1\ Senator Carper submitted a copy of Mr. Geisenberger's Prepared
Testimony from November 14, 2006, which appears in the Appendix on page
296.
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Chairman Lieberman. Without objection, so ordered.
Senator Carper. Thank you. In his testimony, Mr.
Geisenberger concluded--and he was not alone. He was joined by,
I think, the National Association of Secretaries of State,
represented here today by Secretary Marshall--requiring
entities that incorporate in any State to disclose who the
beneficial owners of a corporation are at a certain point in
time would be difficult to implement. The act of defining
``beneficial owner'' is not easy and could be interpreted quite
broadly, in some cases requiring the disclosure of hundreds,
even thousands, of names.
After that hearing in 2006, I charged Mr. Geisenberger and
the Delaware Secretary of State's office with the task of
trying to find a compromise on this issue. As we heard today,
the National Association of Secretaries of State represented by
Secretary Marshall created a Company Task Force to examine this
issue in February 2007. The task force asked the Uniform Law
Commission, represented today, as we know, by Mr. Haynsworth,
to develop amendments to various uniform and model entity laws
to help address these issues. The Uniform Law Commission
committee included representatives from, among others, the
American Bar Association and other stakeholders from around the
Nation.
My understanding--and I am sure the witnesses today can
attest to this fact--is that this group has worked diligently,
some would say ferociously, for 2 years, to find a compromise
that would work, that would both assist law enforcement by
providing information that they need without putting an onerous
burden on States or on legitimate American businesses.
I look forward to hearing further from our witnesses today
and to the questioning that is about to take place so that we
can get some further update and maybe even a path forward,
maybe even along the lines that Mr. Haynsworth has suggested.
Again, Mr. Chairman, as you know and my colleagues know,
this is important to my State, and I think it is important to a
lot of States. And my hope is that we can resolve this in a way
that does what we need to in terms of enforcing our laws and
going after the bad guys, at the same time not adversely
affecting the good guys, and particularly the States that have
to administer whatever law we come up with.
Thanks very much.
Chairman Lieberman. Thank you, Senator Carper. We will
begin now with each Senator having 7 minutes of questioning.
I take it, in listening to the panel, that everyone on the
panel agrees that it ought to be easier for law enforcement to
obtain information about who owns corporations, but that the
question is how to achieve that purpose in the best and, I
suppose, most effective and least burdensome way. That is true,
Secretary Marshall?
Ms. Marshall. Yes, sir.
Chairman Lieberman. And you, too, Mr. Haynsworth.
Mr. Haynsworth. Yes, sir.
Chairman Lieberman. I know the three others testified very
strongly in favor of that, and obviously, they are in one form
of law enforcement or another.
Your testimony was very thorough, and you raised some very
good questions, Secretary Marshall. But I wanted to see if I
could draw you out a little bit more on just restating in
summary fashion what you think the most significant burdens of
this would be that essentially tipped the scale against S. 569
as drafted. Why don't you begin with that first?
Ms. Marshall. Well, my colleague Secretaries are incredibly
worried that even though the conversation here today has been
that there would be no verification, that would be the very
next thing that would happen, and that would be a burden way
beyond the abilities and staffing of my colleague Secretaries
of State. Those States which have a stronger public record law
believe that they will have a difficult time in developing a
confidential database.
The other is the confusion with the beneficial owner. Our
front-line people, while well trained, are not lawyers. They
are for the most part high school graduates who are good, hard-
working State employees. Even the best of lawyers have
difficulty in defining ``beneficial ownership'' and ``direct''
benefit. And if that is not possible, the control, defining
control of an entity, it would just be very difficult to convey
that to the public.
The other issue is that all of our State statutes, to the
best of my knowledge, have an evergreen requirement to let
folks know when addresses change, and that kind of information.
And it really does not happen. Most Secretaries have no
enforcement powers in the area of compliance. In my situation,
I actually have a law enforcement staff because I am a quasi-
Attorney General in some cases. But in corporations, I do not.
So, therefore, to get compliance, the only tool that we
really have is dissolution of a corporation, and we really are
reluctant to do that because public policy of most States is
that we encourage and support business.
So the annual report function was created in a lot of
States 10 to 15 years ago to make sure that there is a point
every year annually where you kind of force a corporation's
hand to give you correct, current information. But it is only
as good as the day it was mailed.
Chairman Lieberman. OK. So let me now ask Ms. Ayala, Ms.
Shasky, and Mr. Kaufmann to respond, because I think Senator
Levin's investigation, the PSI investigation, and your
testimony to me--I admit my bias having been a former Attorney
General--makes a compelling case for providing you with easier
access to the question of who owns corporations.
How do you respond to some of the practical problems that
Secretary Marshall has made on behalf of the Secretaries of
State?
Ms. Ayala. Well, we understand that there needs to be a
balance between our efforts to protect our financial
institutions and the homeland and our international reputation
with preserving a flexible business environment and not having
an undue burden on the States. But sometimes there are many
agencies out there or many situations that have conflicting or
competing missions. For example, the CBP and ICE, we are
charged with ensuring and facilitating the timely movement of
trade and people, merchandise, money, and things across our
borders, while at the same time making sure that we prevent
harmful things and harmful people from entering the border.
Chairman Lieberman. That is a good example.
Ms. Ayala. So this is something that is really not
insurmountable, and I am sure that at some point an equitable
solution will be reached. But at the end of the day, while we
are trying to obtain beneficial ownership information, in order
to make sure that we are able to further an investigation,
prevent further crime, disrupt and dismantle criminal
organizations, and really to try to prevent an additional
person from becoming a victim or minimizing the misery of
victims that are already here domestically or abroad. And while
some people view these--we talked a lot about financial fraud
cases and other typical cases in that vein. Also, a lot of the
money that is flowing through these businesses or these
accounts is also the illegal proceeds of human misery, human
trafficking, or potential terrorism funds.
So we really do need to find a solution that while it does
not place an undue burden on the States, also provides us with
an ability to immediately access this information from an
individual that is bound by privacy and confidential laws so
that we can react in exigent circumstances.
Chairman Lieberman. Ms. Shasky, do you want to add anything
to that?
Ms. Shasky. Yes, Senator Lieberman. Thank you. Like my
colleague from the Department of Homeland Security, I echo the
comments that it is very important and the Department
recognizes that it is very important that we strike a delicate
balance between overburdening the States and the legitimate
business owners on the one hand, and addressing very serious
criminal and national security vulnerabilities on the other.
I would point out that we are not recommending at the
Department that States be asked to verify beneficial ownership
information. We do believe that defining beneficial owner is
possible. In fact, in our written testimony, we provided
references to some samples of both domestic and foreign
definitions that are out there. I would point out that S. 569
also accomplishes this objective. And in terms of the
characterization of giving easier access to law enforcement to
this information, it is not just about giving us easier access
to identifying the beneficial owner. It is giving us the
ability to identify that owner at all.
Chairman Lieberman. Thank you. Mr. Kaufmann, do you have a
quick response?
Mr. Kaufmann. I think they said it all, Senator. I will
rest on our opening comments.
Chairman Lieberman. You are resting your case.
Mr. Kaufmann. Absolutely.
Chairman Lieberman. Co-counsel has made the point. Thank
you. Senator Levin.
Senator Levin. Thank you, Mr. Chairman, and thanks to all
of our witnesses.
Mr. Haynsworth, attached to your testimony is a memo which
you wrote in which you say that collection and maintenance of
accurate business entity beneficial ownership and control
information is a key component of the anti-money-laundering
business entity proposals that have been made by the FATF. So,
from the FATF perspective, which is the international
organization trying to get at money laundering, having access
to beneficial ownership information is critically important.
Would you agree with that? Your own memo says that.
Mr. Haynsworth. Yes, sir. Yes, that is written into FATF
Recommendation 33.
Senator Levin. Now, in terms of the definition of
``beneficial owner,'' I am not sure who said that there is a
problem. I think, Madam Secretary, you did. The Treasury
Department has defined ``beneficial owner.'' It is in the
regulations. It is in the law.
Ms. Marshall. Yes, sir, but it was the FATF acknowledgment
that it was a difficult concept.
Senator Levin. All right. But Treasury itself has defined
beneficial owner in 31 CFR Section 203, anti-money laundering
programs definition, beneficial owner of an account means--and
they define it. So it is in law.
I am not sure which of you, because I missed, I am sorry,
some of your testimony. I had to be on the floor. Unlike these
other new concepts, which were put into the Uniform Law
Commission proposal, there is a legal definition of
``beneficial owner.''
Ms. Marshall, you have given us an idea of the cost of what
our bill would be. What would the NCCUSL approach cost?
Ms. Marshall. Well, the NCCUSL cost for the technology
would remain the same. The additional staffing would not be
included in the NCCUSL cost. The mailings certainly, to
segregate out exceptions and those kinds of things, would not
be necessary.
Senator Levin. I am saying what would the cost of the
NCCUSL proposal be.
Ms. Marshall. It would probably be around $500,000, my
staff estimates.
Senator Levin. Could you give us that estimate for the
record?
Ms. Marshall. Yes, sir.
Senator Levin. And that is $500,000 for your State?
Ms. Marshall. Yes, sir.
Senator Levin. OK, and that is the NCCUSL?
Ms. Marshall. Yes, sir.
Senator Levin. OK. Mr. Haynsworth, our bill requires that
filers provide beneficial owner information up front at the
time of incorporation. Your proposal requires that States
collect the names and contact information of two parties--one
is the record contact, and the other is the responsible
individual. But other than that, there is no real information
collected about ownership and control at that point up front.
Is that correct?
Mr. Haynsworth. No, sir, because--if you are talking about
what gets filed in the Secretary of State's office, it is a
responsible individual. If you are talking about what the
company is responsible for maintaining, no, sir, they would
have information relating to ownership and control.
Senator Levin. And if you want to try to get to that
company's beneficial information, under your proposal--if we
could get our chart up here showing how many steps it would
take to do it.\1\
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\1\ The chart referenced by Senator Levin appears in the Appendix
on page 97.
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Law enforcement now wants to find out who the beneficial
owners are, so the first thing they have to do is to find a
record contact and the responsible individual. These are folks
who have never been defined before in law, unlike beneficial
owner, but that is the first thing law enforcement has to do.
Then, assuming you find that responsible individual, then
law enforcement asks that individual to ask the entity for the
names of whom? Under your proposal, it does not say beneficial
owner. You make no reference to beneficial owner at any time in
your proposal. Instead, you say that person is asked to ask the
entity for who are the owners of record.
Mr. Haynsworth. Not only the owners of record, Senator
Levin, but it is all the information relating to who the
managers are, directors, etc. All the records, documents,
anything that would pertain to voting rights, who votes on
what.
Senator Levin. Everything but the beneficial owner.
Mr. Haynsworth. Well, it depends on how you define
beneficial owner.
Senator Levin. No. You do not make a reference to
beneficial owner in your proposal at all, do you?
Mr. Haynsworth. No, sir.
Senator Levin. And yet we have the international
organization that is trying to end money laundering in this
world that says the most important information for law
enforcement to know is the beneficial owner. You make no
reference to it whatsoever. Instead, you have this wild chase
that you, after the fact, set law enforcement on--find that
person that you are creating for the first time, a record
contact, ask that person to ask the entity to give you
information, none of which has to be the key information of who
is the beneficial owner.
So, after that goose chase that you are sending people on,
they still do not get the information that is the most
important to law enforcement, who is the beneficial owner.
Mr. Haynsworth. They get a great deal of information. It
depends on how you are defining beneficial owner.
Senator Levin. I am not defining it. The Treasury
Department is defining it.
Mr. Haynsworth. Yes, sir. And when you try to apply that,
you see that there are a lot of difficulties in trying to
figure out who that is.
Senator Levin. Well, there may be a lot of difficulties in
trying to find out who all those other folks are, voting rights
and owners and everything else. But it all may disappear by the
time you get to it, anyway.
Mr. Haynsworth. Well, may I just say one thing, Senator?
The only country that I know of that has some regulations that
would comply with the FATF 33 recommendation with respect to
beneficial ownership information is Great Britain. I think it
is important to know that this is the FATF report, June 29,
2007, from FATF on the United Kingdom of Great Britain and
Northern Ireland, paragraph 1132, ``The UK authorities stated
that they had considered the possibility of a system requiring
up-front disclosure of beneficial ownership. Consultants were
engaged in 2002 and a report produced. Public consultation on
the report concluded that there were significant disadvantages
and no clear benefits, particularly when taking into account
the costs of introducing such measures. Reasons included:
``Disclosure of beneficial ownership would add no
information of benefit to the register of members.''
``Register'' would be record ownership. ``Those engaged in
criminal activities would not provide true information about
the beneficial owners.
``Two, disclosure would result in misleading information
being included on the register. Because beneficial ownership
is, as a matter of law, impossible to define precisely, any
information requirement designed to require by law disclosure
would have to be complex and detailed. Many ordinary, innocent
shareholders would be unable to understand or comply with it.''
Paragraph 1133: ``In the light of these points, it was
concluded by the UK authorities that the existing register of
members already provides investigators with as much as any
disclosure regime can. The view was taken that attempting to
add details of beneficial ownership to the existing register
would be harmful to investigations through the resulting
misleading information provided by both criminal and innocent
shareholders.''
Senator Levin. OK. Now let us ask Mr. Kaufmann about that
misleading information argument, not useful argument that Mr.
Haynsworth said.
Mr. Kaufmann. That is something, Senator Levin, that we
have discussed a lot in my office, and I think there are a
couple of points about what happens when someone provides false
information that are not readily apparent to those who do not
prosecute crime for a living. And from the perspective of law
enforcement, the very requirement of having someone state
beneficial ownership is important because it brings an aspect
of daylight onto the activities of these criminal corporate
entities. Now, we are not talking about really worrying about
the legitimate corporations out there. I am focused on the
shell companies, the criminals, the money launders, and the tax
cheats.
And so what happens when we ask them to state up front who
is the beneficial owner of the company? When someone gives
false information in that regard, it is tremendously powerful
and persuasive evidence of what the criminal law calls
``consciousness of guilt.'' When we have a statement from a
person that set up a shell company at the time of the
incorporation that lists a nominee or a straw person, it does
not matter that it was not verified by the States. None of us
are asking for State verification. That would be a burden.
What it does is it creates a record at that moment in time
that that person who set up that shell company told a lie. So
when we go to prosecute that person in these types of white-
collar cases, it always comes down to proving intent. That is
the whole ball game in a criminal trial for a white-collar,
money-laundering, security fraud, or tax evasion-type of event.
If we have a lie, we can say to a jury, ``Let me ask you
something. Why would an innocent person have listed a nominee
or a straw man or put their grandmother down as the owner?''
The answer is an innocent person would not have done that. So,
from our perspective, it gives us a very powerful tool to prove
the criminal intent of the person that set up the shell
company.
The other point, this focuses more on the dirty agent that
is setting up shell company after shell company after shell
company. And in this regard, we might be looking at, for
example, an identity theft ring, and we may see that this
identity theft ring went to the same incorporation agent again
and again and again to set up shell company after shell company
after shell company.
If we have a tool that says to the incorporation agent,
``You have to put down the beneficial owner when you create
these shell companies,'' well, if that incorporating agent is
again and again and again filing false and misleading
information with the State, that gives us from the State
perspective a State charge that we can bring against that
incorporating agent. And that is going to be a very powerful
tool to clean up an industry where I think that there are bad
actors out there, and the fact that we cannot necessarily tie
them in to being part of the ring, to being an accomplice in
the money laundering or the securities fraud. But if we can go
after them for their independent conduct of setting up false
companies by filing false statements with States, that gives us
a tool to go after the bad actors and to encourage the good
actors who are out there doing what they are supposed to do and
setting up good corporations and making good business happen in
this country.
Senator Levin. My time is up, but I would just say that we
ask banks all the time for who the beneficial owners of
accounts are, and they provide that information to us. That is
what the Treasury Department definition is for, and we ask for
it all the time.
Mr. Kaufmann. It is the basic cornerstone of all the anti-
money laundering (AML) programs for all the banks, not just in
this country but around the world.
Senator Levin. I wonder if the Justice Department could
just quickly say, don't we ask banks for beneficial owners?
Ms. Shasky. Senator, we do, and we get that information
every day. We do believe it is absolutely possible and that
there are provisions already defining beneficial owner.
Senator Levin. Thank you.
Chairman Lieberman. Thanks, Senator Levin. Senator Carper.
Senator Carper. I think there is probably one thing--I had
not planned on asking this question, but it would seem to me
the beneficial owner of an account at a bank might be fairly
easy to identify. I think the beneficial owners of corporations
change not just every year, not just every month, not just
every week, but every day. The folks that own common stock and
preferred stock in these companies change sometimes by the
minute. So I am not going to pursue that, but I just want to
kind of put that out there, if I could.
Again, we appreciate the testimony of all of you here,
taking your time and really trying to help us work with a
difficult issue and try to come up with something that is, as
they say at Fox News, ``fair and balanced,'' and hopefully
before we are done, we will do that.
The first question I have would be for the Secretary of
State. Ms. Marshall, where are you from in North Carolina,
anyway?
Ms. Marshall. I live in Raleigh.
Senator Carper. OK. My wife is from Boone, and I have a
sister-in-law in Holly Springs and one----
Ms. Marshall. I am one of the elected Secretaries of State,
so let them know. [Laughter.]
Senator Carper. I certainly will. That is great to know.
You must be pretty good at it because you have been doing this
for a while.
If the States are required to obtain beneficial ownership
on every corporation formed in their State, do you think that
is enough for law enforcement? And going back to the question
of verification, does somebody need to verify who all these
people are to determine if they are engaged in legitimate or
non-criminal activities? How do we do one step--that is, the
disclosure--without at some point in time doing the second
step--and that would be the verification.
Ms. Marshall. Well, that is a problem for us. I know that
it has been stated here that is not going to happen, but truly,
as I said in my remarks, for people to believe a law is a good
thing to be able to comply with it, they have to understand
why. And if incorrect information is just as good as correct
information, we are not being fair to ourselves about what we
are all about as State office holders.
I understand that when someone provides that information,
if they are a third party who is providing incorrect
information rather than the Mom-and-Pop's that we deal with all
the time, it is just a tremendous burden on all those people
for something that they will not be able to see the light at
the end of the tunnel as to why this information is being
asked, except that government is just too intrusive.
Senator Carper. You may not know the answer to this
question. If you do not, just feel free to say so. But if
verification is required, any idea how much more this would
require in terms of costs or expenditures or outlays by the
States?
Ms. Marshall. It is impossible to say. It depends upon what
verification you would be doing. In one of our suggestions, we
had talked about a notarization. We have a robust notary law in
North Carolina, and that is to show that the person who is
signing the document actually is that person. We encourage
notaries to keep that photo ID. That would be transferring the
verification somewhere else.
If we had to do that, there is no way--I have 50 people in
my Corporations Division, 200 all together. I would probably
need another 50 people just to be able to do verifications.
Senator Carper. OK. If I could, maybe a question for Mr.
Haynsworth. Do you know your other 49 colleagues from the other
49 States?
Mr. Haynsworth. You mean the Commissioners of Uniform State
Laws?
Senator Carper. Yes.
Mr. Haynsworth. Yes, sir.
Senator Carper. Have you ever met one from Delaware?
Mr. Haynsworth. I have met several from Delaware, yes.
Senator Carper. How long have you been a commissioner?
Mr. Haynsworth. I have been a commissioner for 18 years
now, but I have worked with Delaware lawyers who happened to be
commissioners----
Senator Carper. Michael Houghton is an attorney from
Delaware. I do not know if you have ever----
Mr. Haynsworth. I know Mr. Houghton very well. Yes, sir.
Senator Carper. I appreciate the time that you and others
on your committee have spent on trying to find a workable
compromise on this issue. We all appreciate that. I think we
have a chance here to advance the ball and to help law
enforcement while also not overburdening our States and our
State systems.
How is your proposal less of a burden on the State
framework than what is being proposed by my colleague from
Michigan?
Mr. Haynsworth. Well, one difference would be that what
gets filed in the Secretary of State's office is much less
prolific, if I can use a word like that. You file the name of
the responsible individual, which has to be somebody who is
directly involved in the management of the company. So that is
somebody law enforcement can go to directly and find out what
is going on here, what is this company about, who is involved
in it, and all that. And the other is the name of the record
contact, and that is the person that has to be able to get all
this information about the ownership, control, management, and
all the records the company has with respect to that. So that
is what gets filed in the Secretary of State's office, not all
this beneficial ownership information or any other kind of
ownership information, because that has never been filed, in
any substantial amount, in Secretaries of State offices. So in
that sense, it is much less burdensome.
In terms of the companies, they keep a lot of information
that relates to the ownership, who the individuals are that
own, who the trustees are, other corporations, entities,
whether they are foreign or domestic, contact information for
all those people. And you get all that information. And then
law enforcement could take that information, and if it is a
foreign entity, they know where to go to that entity, foreign
state entity or even an in-state entity, that entity has to
have a records contact person that would provide the
information about who owns that entity.
And companies do not keep that kind of information
themselves. If you are a company, you have the information that
it is a trust, but you do not know who the beneficiaries are.
You have the information about that it is a company, formed in
Delaware or wherever it may be, but you do not know who the
owners are. And you have really no way of getting that
information.
And then if it is going to be inaccurate--say it is an
entity. That entity has a change of ownership. Well,
immediately, unless they alert the company that is keeping this
information, how are they going to know about it? They have no
way of knowing about it.
So you are just creating the possibility that there is just
going to be all this misinformation out there and inaccurate
information, and most of this will be totally unintentional. So
law enforcement, instead of having a benefit, it is going to
actually be more difficult for them to find out the information
than if they could go directly to this record contact and
responsible individual, get as much information as they can,
and then trace back. And if they are worried, the ultimate
individual beneficial owner, they will find out instantly, and
in most situations there is not going to be a beneficial owner
in control.
I will give you one example. You have three individuals,
and they own an equal amount of stock--we will make it simple--
an equal amount of stock in a corporation. And they each elect
one director, and that is it.
Now, is there somebody in control? There is nobody that is
in control because no one individual can control anything. You
have 10 owners of a company, and they have an agreement that it
takes unanimous consent to do anything. Nobody has control.
Ms. Shasky. Senator, if I may, I would suggest to you that
in a criminal organization--
Senator Carper. This is a place where we actually work
under unanimous consent, and sometimes--I would agree--we do
not know who is in control here either. [Laughter.]
Chairman Lieberman. Well, you remember what Alexander Haig
said.
Senator Carper. I do remember.
Chairman Lieberman. He said, ``I am in control here.''
Senator Carper. Go ahead, Ms. Shasky.
Ms. Shasky. Senator, I would submit to you that in a
criminal organization everyone knows who is in control, and
this will not be an issue of determining who is in control.
What we are concerned about here from the law enforcement
perspective are the criminals and the criminal organizations,
and so what we are asking is that when criminals use shell
companies, they provide the name of the beneficial owner. That
is the person who is in control, the criminal in control, as
opposed to the NCCUSL proposal where they are suggesting that
instead two nominees are provided--two nominees between law
enforcement and the criminal in control.
Thank you.
Senator Carper. Ms. Marshall, I saw you shaking your head a
little bit there when Ms. Shasky was speaking. I do not know if
you wanted to say anything on that. If you do, fine. If you do
not, that is all right. But in your testimony, you state that a
number of States--Wyoming was one, I think Delaware is
certainly another--have passed significant legislation that is
designed to combat some of the problems that we have gathered
here to talk about today. And if you can help us with this, I
would appreciate it. Are you in a position to give us an idea
of some of the laws that the States have passed in the last
several years?
Ms. Marshall. Yes. You will find in your materials
statements from both Nevada and Wyoming. Both of those States
were held out as poster children back in the fall of 2006
regarding some of these activities of registered agents----
Senator Carper. Held out in a good way?
Ms. Marshall. In a bad way. And they took that message very
seriously to heart, with both States doing a fairly major
overhaul in their legislation during 2007.
For example, Wyoming now requires each company must have a
registered agent, human being, in the State at a physical
location. No drop boxes are allowed. The registered agent must
keep information about the key players of the company
represented, must have information about a contact person for
each company. They have greatly increased their law enforcement
authority. They have provided a felony provision for filing
false documents.
The State of Nevada has eliminated the bearer shares. They
have a strict prohibition on the bearer shares. The authority
is given to the Secretary of State to investigate forged or
fraudulent filing complaints and to correct documents when they
are deemed forged or fraudulent. The Secretary now requires
information on owners of record be provided upon demand,
requires answers to interrogatories in the course of criminal
investigation, and if information is not received in 3 days,
then certain other things begin to happen.
Those are just highlights of what these different States
have done. And Delaware, of course, has done the Registered
Agent Act requiring an in-state registered agent with
materials, and they can go out and audit. They can revoke their
ability to be a registered agent. They can do criminal
prosecutions, as I understand it.
Senator Carper. Thank you. Mr. Chairman, my time has
expired. Will there be another round?
Chairman Lieberman. Yes, indeed.
Senator Carper. OK. Thanks so much.
Chairman Lieberman. Thank you.
Ms. Shasky, let me start with you. In your opening
statement, you listed four principles or components that from
the perspective of the Department of Justice you would like to
see in legislation that improved corporate transparency
practices as we have described them. I wanted to ask you to
what extent you believe S. 569, which is the subject of this
hearing, fulfills those four objectives.
Ms. Shasky. Absolutely. First of all, the Department would
like to thank Senator Levin for his leadership in this area in
working with his fellow Committee members in developing this
legislation. The Department strongly supports any Federal
legislation that would bring transparency to this area.
Nonetheless, we do feel the bill needs some amendments to align
with the four principles outlined in my opening statement.
We are most supportive of the fact that the bill does
require beneficial ownership information. This is key. And the
bill does have that requirement in it. We would add to that,
requesting, in addition to the name of the beneficial owner and
the current address, that the beneficial owner be asked to
provide a photo ID. The bill allows for this with foreign
beneficial owners but not domestic. So we would make that
change so that both domestic and foreign beneficial owners
provide a copy of the photo ID. We are afraid that to do
otherwise would merely invite fraud. We would expect that
foreign criminals would claim falsely to be U.S. persons or to
use straw actors, if we had that difference there.
In addition, S. 569 requires an annual certainly of who the
beneficial owners of a company are, unless the State does not
have that requirement, in which case it would require an update
to the beneficial ownership every time there is a change.
We would suggest and recommend from the Department
perspective that both of these things be required, so anytime
there is a change in beneficial ownership information, it
should be updated, and then annually it should just be
verified.
Now, I would point out that we do recommend exempting
companies that are already regulated by State or Federal
regulatory bodies and need to provide beneficial ownership
information as a result of that. So like the company that
Senator Carper mentioned that is listed on the stock exchange
with a securities commission, they would be exempted from this
bill.
Finally, we would recommend slightly strengthening the
Federal penalties contained in S. 569 to target those who would
act willfully blind in failing to update information. So we
look forward to continuing to work with Senator Levin and the
Committee and the staff to bring S. 569 on par with the four
principles outlined in my opening statement.
Chairman Lieberman. So would it be fair for me to conclude
that generally the Department of Justice is supportive of this
legislation with the amendments or additions that you just
described?
Ms. Shasky. I think it would be fair, Senator, to say the
Department is supportive of all attempts to craft Federal
legislation bringing transparency, but, unfortunately, the
Administration has not yet taken a position on the bill.
Chairman Lieberman. Understood.
Ms. Ayala, from the vantage point of Immigration and
Customs Enforcement, again, your testimony is very forward-
leaning about certainly the purpose of S. 569. Is there
anything particular you would add or subtract from it?
Ms. Ayala. Again, I also would like to thank you and I
certainly appreciate your efforts in bringing so much attention
to this problem and engaging all the stakeholders in looking
for a solution, and we hope that at the end of the day any
legislation that is passed will enable law enforcement to
immediately obtain this information and to be able to obtain it
from one central point at each State and that it is
consistently obtained. That way we are not in a position of
looking around and spending time, maybe weeks, exhausting so
many individuals in our investigative efforts and, like you
said, run around on a wild goose chase and waste our time in
general.
But we also would like to see that this information is
updated because that is very important for us, not only to make
sure that we are focusing in a correct time frame as to who
owned the company, but to also not waste the time of a
legitimate company or a beneficial owner that might have owned
the company beforehand and have to bother with that person or
look at that person as a target of investigation.
I know that the Secretary has received a letter from this
Committee, and they are formulating a response as to their
position.
Chairman Lieberman. Good.
And, Mr. Kaufmann, I will finally give you the chance to
help us write some good legislation.
Mr. Kaufmann. I think the concept of beneficial ownership
is one that is well established in the law. I think that the
Congress has made great strides in increasing transparency
through the Bank Secrecy Act and the USA PATRIOT Act to make
sure, for example, that banks know who their customers are. I
see this bill as being a simple answer.
I also think it would strengthen the bill to make parallel
provisions for requiring identification from both domestic and
foreign registrants of corporations.
I guess I am a little bit confused as to the perception
that I am hearing that this will be so unduly burdensome. As we
have looked at this, it seems to be simply a question who is
the owner of this company, and I do not see the tremendous
volume or burden that that imposes.
One fundamental disconnect from what I am hearing from my
left and my right, and I do not say this facetiously at all,
but some of the concepts that are being put forth--and we are
trying to achieve a balance here--but they are not rooted in
the reality that we see in how we investigate criminal
organizations. And I think that Ms. Shasky said it well. In a
criminal organization, there is no doubt who is in control.
When we are investigating a criminal organization, we cannot go
to the person designated by the company to contact them because
it is akin to picking up the phone and telling the criminal
that he or she is under investigation. So the fundamental flaw
in the NCCUSL structure is that we have to go to the target of
the investigation to obtain the information that we seek to
further the investigation.
What S. 569 does is it puts that information with the State
so we can get it without going to the target and alerting the
target to the fact that we are investigating them.
Chairman Lieberman. Very helpful answers.
A vote has gone off. I am going to go over and vote. I,
unfortunately, cannot return so I am going to leave it to my
senior colleague to conduct the rest of the hearing and
determine, together with Senator Carper, whether at any point
you want to recess and come back. And I do want to assure the
witnesses with the long knowledge of Senator Levin, I can
assure you he believes not only in equal protection but in due
process. So you will be all right. [Laughter.]
Senator Levin, it is all yours.
Senator Levin [presiding]. Thank you, Mr. Chairman.
Ms. Ayala, when you said that it is important that law
enforcement be able to obtain this information, you were
referring, I believe, to the beneficial ownership. Is that
correct?
Ms. Ayala. Yes, Senator.
Senator Levin. So just to be real clear as to where the
witnesses are, do you believe that it is important that
beneficial ownership information be collected? Ms. Ayala,
first.
Ms. Ayala. Yes, Senator.
Senator Levin. Ms. Shasky.
Ms. Shasky. Absolutely, sir.
Senator Levin. We know where the other three witnesses are,
and I want to just focus on you two.
Where should the ownership be kept, in the United States or
in a foreign jurisdiction? First, Ms. Ayala.
Ms. Ayala. It should be kept in the United States where it
is easily accessible.
Senator Levin. OK. Ms. Shasky.
Ms. Shasky. Senator, that is not even a close question. It
should be in the United States.
Senator Levin. All right. And when should the ownership
information be collected--when the company is formed or after
it is being investigated for suspicious activity? First, Ms.
Ayala.
Ms. Ayala. When it is formed.
Senator Levin. Ms. Shasky.
Ms. Shasky. When it is formed.
Senator Levin. And is it important to be able to determine
beneficial ownership and other basic corporate information
without tipping off the corporation that an investigation is
going on?
Ms. Ayala. Yes, it is absolutely necessary in order to
preserve evidence and make sure that illegal funds are not
being moved or to convolute our investigative process.
Senator Levin. OK. Ms. Shasky.
Ms. Shasky. Senator, our job would certainly be much easier
if all we had to do is ask the criminal to provide us with the
evidence. So it is imperative that not be the case here.
Senator Levin. All right. Now, you both have testified in
terms of your agency's position in terms of this specific bill,
and I think, Ms. Shasky, what you said is that there are four
principles you laid out, which are fine with me. You have also
indicated a number of ways which I would say would strengthen
the bill, would make it a tougher bill: A photograph for
domestic as well as foreign beneficial owners; a regular update
when there is a change in the beneficial ownership, not just
each year; and the other two, I think, qualified as toughening
or strengthening, which would make the bill probably more
objectionable, I would think, although I am not going to speak
for the Secretary, but, Ms. Marshall, would you say those
suggestions would make the bill more objectionable?
Ms. Marshall. Yes, sir.
Senator Levin. All right.
Ms. Marshall. If it is a government-issued ID with a
person's name on it, that is one matter. If it is a photo, we
have no idea if it would match up to the name. Would we be in a
position of rejecting photos? Suppose it is a photo of someone
with heavily draped head wear and all we see are eyes? Do we
reject those, when that is what that person wears for religious
reasons? On and on and on.
Senator Levin. Well, I doubt that the Justice Department
would suggest you reject any photo. I think they just want you
to file it. But I will let them speak for themselves.
Let me also ask you, Mr. Kaufmann, specifically in terms of
the bill, do you and does your office support the bill?
Mr. Kaufmann. Yes, sir, absolutely.
Senator Levin. OK. As to the FATF question, the beneficial
owner standard in FATF has been there for 20 years, by the way.
It has been in U.S. law since the USA PATRIOT Act of 2001, and
it is also in other securities, tax, and anti-money-laundering
bills. So this is a concept which has been defined in a number
of ways and a number of laws.
Finally, in terms of FATF, we have 27 countries that now
require the beneficial ownership information. We are not sure
what the status of all their compliance is, but we know they
have all committed to it. And that is the question, whether we
are going to commit to it as a country, the way other countries
have committed to it.
When you said, Mr. Haynsworth, that this has to apply to
all the States, I think that is clearly true.
Mr. Haynsworth. Yes, sir.
Senator Levin. Uniform law does not have to be adopted by
all the States.
But the bill does not change State law. It adopts a Federal
requirement that the States ask the question on the
incorporation form about beneficial ownership. Are you
suggesting that under the Commerce Clause of the U.S.
Constitution, given what corporations do across boundaries of
States, we do not have the jurisdiction in Congress to require
States to ask the question on their incorporation forms? Is
that what you are saying?
Mr. Haynsworth. No, I am not. What I am saying, Senator, is
for the States to be able to do that, there would have to be
enabling legislation in the State to make that occur.
Senator Levin. Well, if there is a Federal law that
requires them to do it, are you suggesting they are not all
going to do it?
Mr. Haynsworth. Well, what I am suggesting is that you are
likely to end up with very different interpretations of what
that means, and you are going to end up with 53--because you
have to include DC----
Senator Levin. We have a Treasury Department definition. We
have one line. You must ask for the beneficial ownership as
defined in 31 CFR. That is not complicated. Your proposal is a
heck of a lot more complicated and convoluted than that. I do
not see how 50 States can come up with 50 definitions if we say
the definition already in Federal law is the definition in our
law, and we incorporate it by reference.
Mr. Haynsworth. Yes, sir, but there would still have to be
State legislation that says that the States will----
Senator Levin. Comply with Federal law? Really?
Mr. Haynsworth. No. That what would be filed in the
Secretary of State's office and what would be required to be in
those filings, that is a matter of State law.
Senator Levin. Thank you. Senator Carper.
Senator Carper. Thank you. Secretary Marshall, it is my
understanding that the funding from the bill that Senator Levin
has introduced will come from homeland security grants that
States currently receive. Is that correct?
Ms. Marshall. That is correct.
Senator Carper. If you had to prioritize the way that your
State, North Carolina, homeland security grants would be spent,
any idea where this bill's requirements might rank?
Ms. Marshall. I think very low. I mean, I think the
anticipation on homeland security money is that it is already
inadequate to do what all our first responders, all our medical
folks, all our emergency preparedness folks would like for it
to do. And it is not a very enticing place that we would like
to be competing with them for bulletproof vests, respirators,
and training, the types of things that they are using that
money for.
I cannot speak for that grantmaking entity, but this is
certainly very different than the kind of things that they are
entertaining grant requests for.
Senator Carper. OK. We have about 5 minutes to get over to
vote on a big piece of legislation, so I am going to ask a
couple of questions to be answered for the record.
One of the questions I want to say--and I do not have time,
unfortunately, to listen, to hear you out, but, Mr. Haynsworth,
at the conclusion of your statement basically you said let us
just keep working at this and see if there is not some way that
we can meet the legitimate concerns of law enforcement and be
respectful of the concerns of States.
I think we have been working on this for a while, and I
would like to--I am one who does not give up very easily on
almost anything that I think is important. And I am not
inclined to give up here either. But you made an offer, I
think, in good faith that we should maybe redouble our efforts
and see if we cannot come close to where we want and need to
be.
Do you think you are speaking for one person, or do you
think you are speaking for all the commissioners?
Mr. Haynsworth. I am speaking for the Uniform Law
Commission, and I am certainly speaking for my committee and
what we are trying to do. And one thing, Senator, I might just
mention is that we have one shot at this in order to get it
right and to get it then adopted by the States in a way that
makes sense. And one of the things I have been reading about a
little bit is this PASS ID legislation that is aimed at trying
to correct some problems with overburdensome regulations
imposed by Congress under the REAL ID.
Senator Carper. Yes, we are familiar with it.
Mr. Haynsworth. All right, sir. Well, I think you were one
of those.
Senator Levin. We are really familiar with it.
Mr. Haynsworth. But, I mean, we have to avoid that at all
costs because of the Federal-State relations and trying to make
something that really does work and does achieve the purposes
that we are all trying to achieve.
Senator Carper. All right. I think we are out of time.
Senator Levin. Thank you, Senator Carper. Thanks to all of
our witnesses.
Senator Carper. And we will have some more questions to
submit for the record, if we could.
Senator Levin. I will just close with a quick comment,
which is that we are going to have to end the misuse of U.S.
corporations, and there is only one way to do it, and that is
to require those corporations to disclose beneficial ownership.
There is no other way to do it. Otherwise, it is a three-step
wild goose chase after the horse is out of the barn, I guess,
to mix metaphors. We have horses and geese, but the point I
think is pretty clear.
We very much appreciate the testimony, and we will stand
adjourned, with Senators being able to file questions for the
record. Again, we thank you all, and we will stand adjourned.
[Whereupon, at 4:55 p.m., the hearing was adjourned.]
BUSINESS FORMATION AND FINANCIAL CRIME: FINDING A LEGISLATIVE SOLUTION
----------
THURSDAY, NOVEMBER 5, 2009
U.S. Senate,
Committee on Homeland Security
and Governmental Affairs
The Committee met, pursuant to notice, at 10:04 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Joseph I.
Lieberman, Chairman of the Committee, presiding.
Present: Senators Lieberman, Levin, Carper, McCaskill,
Burris, Ensign, and Bennett.
OPENING STATEMENT OF CHAIRMAN LIEBERMAN
Chairman Lieberman. Good morning. The hearing will come to
order. This is our Committee's second hearing on the
Incorporation Transparency and Law Enforcement Assistance Act,
S. 569, which was introduced by Senators Levin and McCaskill,
who are Members of the Committee, and by Senator Grassley, who
is, of course, the ranking member of the Finance Committee.
This legislation, which is the result of work done by
Senator Levin's Permanent Subcommittee on Investigations (PSI),
seeks to increase the transparency of business formation
practices as a way to reduce what is estimated as billions of
dollars in fraud that is perpetrated by shell corporations.
Each year nearly two million new corporations and limited
liability companies (LLCs) are established in the 50 States and
the District of Columbia. That comes to more than 5,000 new
businesses every day. This is really the American way,
entrepreneurship at its best, generating revenue and creating
jobs, people taking risks and building on innovations.
But each year a relatively small number of those
businesses--but nonetheless a significant number--are
incorporated for improper or illegal purposes to try to use
registered corporations to defraud innocent people, to cheat
tax authorities, to hide true transactions or to launder ill-
gotten funds.
Right now a majority of States require basic information
from those seeking to establish a corporation. Most require the
name and address of the company, the name of a registered agent
who represents the company, and a list of officers and/or
directors. This information typically is considered a public
record, but most States allow individuals with actual ownership
interest, including the investors who control the corporation
or partnership, to remain anonymous to State authorities and
therefore to the public, and this is the problem.
This is a problem for law enforcement, of course. Senator
Levin's bill offers one solution to this problem, which is to
set a national minimum standard for State incorporation
practices that require States to collect, maintain and update
so-called beneficial ownership information. But there are
critics of this method who argue that this well-intended desire
for more sunshine should be weighed against other factors,
including the privacy rights of those making personal
investment decisions and the cost of administration and
enforcement that would fall on companies and State governments.
Our goal today is to hear from witnesses who are expert in
various aspects of this problem so that we can make a judgment
now about how best to proceed to deal with what everyone
acknowledges is a problem. On the first panel we will hear from
the Treasury Department, which administers anti-money
laundering laws and leads U.S. efforts to stop the flow of
terrorist financing. Treasury has worked tirelessly on
corporate transparency issues, engaging with stockholders to
consider all the possible approaches to improving practices in
this area.
We're also going to hear from the Department of Justice,
which has first-hand experience, of course, in the challenges
of law enforcement as they try to combat the use of
corporations for nefarious purposes.
Our second panel of witnesses represents the business and
legal communities which have distinct concerns about obviously
the smooth flow of commerce for legitimate corporate purposes.
We are also going to hear from a representative of the Federal
Law Enforcement Officers Association and an expert on tax
havens, both of whom support the general approach taken by the
bill. So this is an interesting and important matter on which
we hope to shed some light this morning.
Senator Ensign, it is a pleasure to have you sitting in for
Senator Collins today. I know she is particularly happy you are
sitting in for her and I welcome you and your opening statement
at this time.
OPENING STATEMENT OF SENATOR ENSIGN
Senator Ensign. Thank you, Mr. Chairman. I think this is a
very important piece of legislation because it affects a number
of different issues, not the least of which is its impact on
the small business community, which serves as the backbone of
our economy.
Corporate law has long been within the State's domain. By
forcing States to amend their individual laws on corporate
formation, Congress is effectively imposing a Federal standard
on business creation, ignoring the particularities of each
State's business culture. With such a new Federal standard,
there is no incentive to choose one State over another when
deciding where to form a business.
I believe that this will hurt many business-friendly States
like my home State of Nevada. Businesses choose Nevada as their
State of incorporation because of our State's regulatory
climate, tax situation, and flexibility for companies to run
their businesses how they see fit. This week I received
comments from the Nevada Secretary of State for this hearing
and I would like at this time to submit his statement and
letter to me for the record.\1\
---------------------------------------------------------------------------
\1\ The letter submitted by Senator Ensign appears in the Appendix
on page 435.
---------------------------------------------------------------------------
Chairman Lieberman. Without objection, so ordered.
Senator Ensign. If enacted, S. 569 would require my State
to add additional staff, undertake an extensive rewrite of the
e-Secretary of State processing system and deploy a new system,
maintain a separate, non-public database, and deal with other
operational infrastructure needs.
And this is a Democrat Secretary of State. According to
their office, the estimated cost for initial implementation
could reach as high as $10 million, with ongoing operating
costs of $1 million annually. These are costs that my home
State of Nevada simply cannot afford at this time.
As a former small business owner, I know firsthand how
difficult it is to start and to grow a business. It is
certainly more difficult in today's economic environment. Every
dollar spent on the burdensome requirements under this bill is
one less that can be reinvested in the business. Too often in
Washington we see unintended consequences of bills that, while
they have a valuable purpose, turn out to be overreaching in
their application. I fear that this is the case with this bill.
It will result in significant regulatory and compliance
costs that may have a chilling effect on the creation of new
businesses and new jobs at a time when our economy can least
afford it. The term ``beneficial ownership'' as defined in the
bill is simply too broad. Rather than qualifying it by some
clear cut standard, the language in the bill is borrowed from
the Treasury Department's use of the term to determine the
proper taxpayer on a bank account.
Because of the number of different entities involved, this
is not a workable comparison for corporations and LLCs. It
leaves open the possibility to interpret the definition
differently. Rather than risk the harsh penalties associated
with non-compliance, entrepreneurs will be encouraged to
register their businesses only after consulting with certain
professionals, such as attorneys and accountants. The expense
associated with this new registration process will simply be
too great for many smaller startup businesses to bear,
resulting in less business activity and less job creation.
Mr. Chairman, we are not the first economic power to
consider the regulatory system proposed under this bill. In
fact, efforts to enact a similar regulatory scheme have failed
in other jurisdictions, most notably in the United Kingdom. I
understand that one of the witnesses in the Committee's last
hearing on this topic mentioned this. The United Kingdom
considered a system requiring upfront disclosure of beneficial
ownership as defined in a manner consistent with the definition
in the bill before us. The U.K. authorities rejected this
approach, concluding that ``there were significant
disadvantages and no clear benefits, particularly when taken
into account the cost of introducing such measures.''
As a basis for their conclusion, these authorities noted
``that those engaged in criminal activities would not provide
true information about beneficial owners'' and that
``disclosure would result in misleading information being
included in the register.''
According to these authorities, requiring further details
of beneficial ownership ``would be harmful to investigations
through the resulting misleading information provided by both
criminal and innocent shareholders.'' Mr. Chairman, it is my
hope that we can continue to work together on this very
important issue to ensure that the needs of law enforcement are
adequately met while not overburdening our States or our
business communities. I thank you for this hearing.
Chairman Lieberman. Thanks very much, Senator Ensign, for
that thoughtful opening statement. Normally we would just have
the Chairman and Ranking Member give opening statements, but
two of our colleagues here, and very valued Members of the
Committee, have been involved in this matter quite a bit and I
think it would be helpful to the Committee, if they are so
inclined, to ask Senator Levin and then Senator Carper also to
deliver some opening comments.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Thank you, Mr. Chairman. Last hearing we
went into a number of examples of how the hidden secret
ownership of corporations in this country denies law
enforcement critical tools and this hidden ownership is a
significant security risk to our country because it frustrates
law enforcement in this country.
Just a number of examples. Viktor Bout, who is a Russian,
one of the most notorious arms traffickers in the world, is
featured in a book called ``Merchant of Death.'' Last year the
United States indicted him for conspiracy to kill U.S.
nationals, the acquisition and use of anti-aircraft missiles,
and providing material support to terrorists. To carry out his
activities, he is known to use a network of shell companies
around the world, including companies formed in countries like
Liberia, Moldova, as well as here.
Now the first chart, which we have up in front of us here,
lists the names of 10 Texas and Florida companies alleged to
have been used by Viktor Bout over the years.\1\ It also
includes two Delaware companies that were alleged in a 2002
Interpol notice, based on information from Belgium, to have
been used by Viktor Bout to transfer $325 million to carry out
his activities. The chart does not include another company,
Garland Global Corporation, which Romania believes may also be
related to Viktor Bout, but whose beneficial owners are
unknown.
---------------------------------------------------------------------------
\1\ The chart submitted by Senator Levin appears in the Appendix on
page 368.
---------------------------------------------------------------------------
In July 2009, Romania filed a formal request with the
United States for the names of the company's owners and other
information, but it is unlikely the United States can supply
the names since as this Committee has heard before, our 50
States are forming nearly two million companies each year and
in virtually all cases, doing so without obtaining the names of
people who will control or benefit from those companies.
The end result is that a U.S. company may be associated
with an alleged arms trafficker and supporter of terrorism, but
we are stymied in finding out in part because our States allow
corporations with hidden ownership. Here is another aspect of
the problem. Last month my staff went on the Internet and typed
in ``shell company'' as a search term. The first entry that
came up was for aged shell companies and provided a link to the
Web site of a company called Go Risk-Free, which offers
corporations for sale in all 50 States.
Chart two, which is in front of us,\1\ shows how Go Risk-
Free promises ``if you need a company that is in a certain
State or age, contact us and we will help you find it.'' On the
date that we checked, Go Risk-Free had over 200 companies
available for sale. The price starts at $3,500. The first was a
Nevada company incorporated in October 1928, 80 years ago. A
secret buyer of this company can pretend to have had a U.S.
business in operation for decades, could use that shell company
to convince a bank to open an account or issue a credit card
and go from there.
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\1\ The chart submitted by Senator Levin appears in the Appendix on
page 367.
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These sales seemingly have no purpose other than to create
a misleading impression. The potential for criminals to buy
these types of companies without ever divulging their names or
interest is a threat to our security and to our well being.
At the Committee's hearing in June, we were told about a
New York corporation that was secretly owned by members of the
Iranian military. Our government learned of that ownership
interest not from New York State records, but because another
country had the beneficial ownership information that we
didn't. We heard about a network of 800 U.S. companies across
the country that had attracted law enforcement attention
because they were transferring suspect funds to each other and
in and out of high-risk jurisdictions.
When the Department of Homeland Security, Immigration and
Customs Enforcement (ICE), tried to find out the company's
owners, all they could learn was that they were associated with
a group of shell companies in Panama. ICE eventually dropped
its investigation, in part because not one of the 800 company
formation documents had any information on the true owners.
Now, these are only a few examples of U.S. companies being used
to engage in a wide range of wrong doing from money laundering
to tax evasion to drug trafficking and worse.
Right now we require people to provide more information to
obtain a driver's license than to acquire a U.S. corporation.
Most of our States allow hidden owners to buy companies online,
within 24 hours of a request in two States. For an extra
$1,000, hidden owners can form a U.S. company within a single
hour.
In 2006, the leading international anti-money laundering
body in the world, the Financial Action Task Force (FATF) on
money laundering, issued a report criticizing the United States
for failing to comply with the FATF standard requiring
countries to obtain the true owners, the beneficial owners of
the corporations formed in their countries.
FATF set a goal of 2 years, until July 2008, for the United
States to strengthen its compliance with the FATF standard. We
are now more than a year past due with no progress to speak of.
That is why we introduced the bill which is the subject of
today's hearing. Beneficial ownership information would be
available to law enforcement presenting a subpoena or a
summons. That information would be available to the public only
if State law so provided.
The minimal cost of adding a question to State
incorporation forms could be paid for with funds already
provided to the States on an annual basis by the Department of
Homeland Security (DHS). Our bill does not require any State
law to be passed. Nevada or other States will still have their
business-friendly tax and regulatory laws in place.
A host of law enforcement groups have endorsed our bill,
including the Federal Law Enforcement Officers Association,
which we will hear from today. It has also been endorsed by
groups combating financial crime, corruption, and tax evasion,
including the Tax Justice Network USA, Global Financial
Integrity, Citizens for Tax Justice, and many more. By the way,
an identical version of the bill was co-sponsored by President
Obama last year when he was a senator.
One final point, we have been fighting offshore secrecy
laws for years. These laws enable wrongdoers to secretly
control offshore corporations. Now we made a little progress on
that front. More is hopefully coming. But one of the
impediments that we run into in combating offshore secrecy is
the point made by offshore jurisdictions that the United
States, itself, promotes corporate secrecy. A report issued by
Tax Justice Network earlier this week asserts that Delaware
provides more corporate secrecy than Switzerland demonstrates
that we have got to get our own house in order and comply with
FATF's international standards on beneficial ownership if we
are going to continue to make progress on offshore tax havens
whose secrecy is a real problem and a real deterrent to law
enforcement.
Corporations were intended to shield owners from personal
liability for corporate acts, not to hide ownership. But today
the corporate form is being corrupted and is serving those who
use the corporate veil to hide their identities while
committing crimes or dodging taxes and robbing our treasury and
taxpayers of billions of dollars each year. It is past time to
stop this misuse of the corporate form and if we want to end
inappropriate corporate secrecy offshore, we have to stop it
here at home when it comes to law enforcement and the needs of
law enforcement.
So I thank you again, Mr. Chairman, for this opportunity to
give an opening statement.
Chairman Lieberman. Thanks very much, Senator Levin.
Senator Carper, good morning.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Good morning and thanks very much for
holding this hearing and giving us, Senator Levin and I, an
opportunity to speak as well.
I know not everyone was anxious to hold this second
hearing. I am glad that we have. I am encouraged, having talked
to a couple of our witnesses today, that it has actually helped
provide an opportunity for us to find a path forward--I think
maybe to a compromise that will actually address the concerns
that Senator Levin has stated and I think all of us share about
combating money laundering and tax evasion, but at the same
time meets, I think, the very legitimate concerns that Senator
Ensign spoke to with respect to undue burdens that we would
place on States, including our own State, and frankly all 49
other States as well.
Let me just say that as currently drafted, the bill exempts
publicly-traded corporations and businesses they form.
Meanwhile, the bill applies to more than 10 million small
businesses in the United States, placing them at a competitive
disadvantage to their larger brethren.
I just want to know, is this really the best possible way
to address money laundering? Since the bill notably exempts
partnerships and several other business forms, including sole
proprietorships, won't criminals just find another entity under
which to conduct their criminal enterprises?
I know that some of us are confused as to why we're
discussing this issue in this Committee and not before the
Banking Committee, which has jurisdiction over money laundering
policies. The reason is that the bill permits States to
redirect their Federal homeland security dollars to comply with
its provisions and we need to ensure that we have very good
reasons to deprive police, firefighters, and first responders
with very limited Federal funds before we move forward.
Recent press articles and reports have unfairly singled out
the United States, and notably my State, for its corporate
laws. A report by the Tax Justice Network which is represented
on our second panel today and notably funded by the Ford
Foundation in Michigan, asserts that the United States and the
subjurisdiction of Delaware are the most secretive
jurisdictions in the world.
The report actually rates the transparency of the United
States above other jurisdictions, but because the report
applies a weighting factor that is based on the size of the
U.S. economy, the formula results in the United States
receiving the highest secrecy index in the world. Without such
a weighting, the United States would be tied with 16 other
jurisdictions for 15th place.
Let me be very clear that the report provides no evidence
to support its assertions. In fact, Delaware State company
formation laws are essentially identical to laws on the books
in Michigan, Connecticut, Missouri, and many other States. Of
the 12 criteria used by this report's authors to establish the
secrecy's rankings, six are matters purely of Federal law or
compliance and one of the criteria was based on whether the
jurisdiction answered a survey which Delaware's Secretary of
State asserts it never received.
Even more troubling, no other State in the United States
was included in the survey. It appears even to the most casual
observer that this report may have been contrived to achieve a
particular result. In fact, Delaware is doing a number of
things to deter criminal enterprises. It has enacted laws that
provide law enforcement with better access to the information
they need to prevent and solve crimes.
Let me just give a couple examples. Delaware was the first
State in our Nation to adopt legislation responding to the
concerns expressed by law enforcement regarding elicit
practices of registered agents. Delaware now regulates
commercial registered agents and has successfully removed a
number of registered agents from doing business in our State.
Delaware requires every business entity to provide the
name, address, and phone number of a designated communications
contact person who is available to law enforcement. And
Delaware responded to international criticism that U.S. company
law permits companies to issue bearer shares, stock
certificates whose records of ownership are not maintained by
the issuing company, when we explicitly banned the practice in
statute to be consistent with long-established Delaware case
law.
We have heard from a number of diverse interests with
respect to this bill, the National Association of Secretaries
of State, the U.S. Chamber of Commerce, the National
Association of Manufacturers, the National Conference of State
Legislatures, and the American Bar Association. Others also
have raised legitimate concerns with S. 569.
We will hear from the Treasury Department in testimony
today, even the international community has been unable to
comply with FATF recommendations on beneficial ownership, and
therefore, unable to find a suitable way to date to address
these complex issues.
We heard from the Uniformed Law Commission at the last
hearing and they worked on an approach that is designed to
balance all the interests, providing greater transparency,
respecting State privacy and mitigating the negative impacts on
the economy and on small businesses. There are a number of
reasons for us to encourage more transparency and disclosure
with respect to ownership of legal entities. However, I fear
that S. 569 would impose undue burdens on State authorities and
on legitimate businesses, especially our struggling small
businesses, at a time when the U.S. financial system and our
domestic economy are under severe stress.
I believe that there is a balance that can be achieved by
working together. We should start by respecting the job that
our governors and secretaries of State are doing in their
individual States and through the Uniform Law Commission. I
also appreciate the work that has been done since our last
hearing by the Department of Treasury and the Department of
Justice. Together, I am confident we can achieve an approach
that works for all stakeholders.
And again, Mr. Chairman, I want to thank you for holding
this hearing and I would just say, I want us to work hard to
get this right. I think together we can find an approach that
works for all of us and that is what my intent is to do.
Chairman Lieberman. I appreciate that very much, Senator
Carper, and I share that goal as well. I thank the two
witnesses, who I introduced, on the first panel. So we will go
immediately to David Cohen, Assistant Secretary of Treasury for
Terrorist Financing and Financial Crime. Thanks very much for
being here. Thanks for your good work and we welcome your
testimony now.
TESTIMONY OF HON. DAVID S. COHEN,\1\ ASSISTANT SECRETARY FOR
TERRORIST FINANCING, U.S. DEPARTMENT OF THE TREASURY
Mr. Cohen. Thank you, Chairman Lieberman, distinguished
Members of the Committee. Thank you for inviting me to testify
today on finding a legislative solution to enhancing access to
beneficial ownership information, a key step in combating the
abuse of legal entities by those engaged in financial crime.
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\1\ The prepared statement of Mr. Cohen appears in the Appendix on
page 377.
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I would like to begin by thanking Senator Levin for his
leadership over the years on this important topic. I would also
like to extend my appreciation to colleagues across the
government, State and Federal, and in the private sector, with
whom we have worked to understand the challenge of beneficial
ownership and develop effective solutions.
At the outset, it is important to recognize a number of key
considerations. First, the ability of elicit actors to form
corporations in the United States without disclosing their true
identify presents a serious vulnerability and there is ample
evidence that criminal organizations and others who threaten
our national security exploit this vulnerability.
Years of research and law enforcement investigations have
conclusively demonstrated the link between the abuse of legal
entities and weapons of mass destruction (WMD) proliferation,
terrorist financing, sanctions evasion, tax evasion,
corruption, and money laundering for virtually all forms of
criminal activity. This abuse is particularly prevalent with
respect to legal entities created in the United States. We know
that elicit actors use the presumed legitimacy of U.S.-based
entities to gain access to the international financial system
and disguise the source of their funds or the purpose of their
transactions.
Second, information on the true beneficial ownership of a
legal entity at the time of formation, as its ownership changes
over time and when it opens accounts it is critical to stopping
the exploitation of legal entities. Third, the challenge of
enhancing access to beneficial ownership information is complex
and requires a global solution. Treasury is working
domestically and internationally to address this challenge.
Fourth, we are keenly aware of the need to preserve an
efficient entity formation process and not to create
unnecessary impediments to accessing the financial system for
legitimate businesses. And finally, we believe even incremental
progress in this area to enhance access to beneficial ownership
information is likely to yield substantial results.
Taking account of these key considerations, Treasury has
developed a comprehensive approach to the issue of beneficial
ownership that includes the following elements. We favor
legislation that requires a submission of beneficial ownership
information at the time of company formation, the obligation to
keep that information updated, and the availability of that
information upon proper request by law enforcement.
Treasury is also working with the Federal financial
regulators to consider guidance and possibly new regulations
for U.S. financial institutions that will clarify when and how
financial institutions should identify and verify beneficial
ownership while conducting customer due diligence.
Internationally, we are working with our counterparts in
the Financial Action Task Force to ensure that its standards
evolve in a way in which compliance is both achievable and
effective. The Administration believes that S. 569 provides a
good platform on which to construct the legislative solution we
favor, provided that it is amended and modified to address
certain key issues.
We are fully committed to working with the Congress and our
interagency partners to craft amendments that will strengthen
S. 569 in the following ways. First, we believe the definition
of beneficial ownership should be modified. Under S. 569, the
ambiguity and breadth of the definition, coupled with
burdensome disclosure requirements, makes compliance uncertain,
time consuming, and costly. We believe the definition of
beneficial ownership should be straightforward and simple in
application to work for the full range of covered legal
entities.
Second, we do not believe the bill should impose anti-money
laundering (AML) obligations on company formation agents. As
drafted, S. 569 would require Treasury to impose AML program
requirements on a new class of financial institutions, so-
called company formation agents, which raises substantial
legal, policy, and practical challenges.
We believe that the bill should not attempt to regulate
company formation agents under the Bank Secrecy Act, but
instead should establish clear and significant Federal,
criminal, and civil liability for persons who fail to provide
accurate beneficial ownership information as required by law.
Third, the bill should establish robust documentation
requirements. As currently drafted, S. 569 does not impose any
documentation requirements for beneficial owners who are U.S.
persons. In our view, S. 569 should require documentation for
all beneficial owners, foreign and domestic, to be held within
the State and made available upon proper demand by law
enforcement.
Fourth, we believe that further study of the
vulnerabilities associated with the transfer of legal entities
is required. S. 569 allows for businesses to update their
beneficial ownership information in an annual filing with the
State. This time gap introduces a significant vulnerability for
abuse upon the transfer of a legal entity and requires further
study.
Fifth, we believe the bill should not draw on State
homeland security grant funds to carry out the obligations
imposed by the law. These funds are already relied upon by
States to finance first responders in preparing for and
responding to emergency situations. Treasury is committed to
working in earnest and expeditiously with the Congress, our
interagency partners, and other interested parties to address
these concerns and develop legislation that will enhance the
availability of beneficial ownership information in an
effective and workable manner.
I would like to thank the Committee for inviting me to
testify today and I look forward to answering your questions.
Chairman Lieberman. Thanks very much, Mr. Cohen. That gets
us off to a good discussion and I am sure we will have a lot of
questions for you.
Next is Jennifer Shasky, who is Senior Counsel to the
Deputy Attorney General at the U.S. Department of Justice. Good
morning.
TESTIMONY OF OF JENNIFER SHASKY,\1\ SENIOR COUNSEL TO THE
DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE
Ms. Shasky. Good morning. Thank you, Chairman Lieberman,
distinguished Members of the Committee. I am honored to appear
before the Homeland Security Committee to discuss S. 569, which
addresses the need for greater transparency in corporate
formation in the United States.
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\1\ The prepared statement of Ms. Shasky appears in the Appendix on
page 388.
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While those of us in the law enforcement community
understand that the topic of corporate transparency does not
readily evoke images of the criminal and extremist underworld
and can often seem quite esoteric, it is important to recognize
that some of the worst actors seek to exploit the lack of
corporate transparency in this country to harm our national and
economic security.
For example, as Senator Levin already pointed out, Viktor
Bout, the infamous arms merchant and war profiteer designated
by the U.S. Department of Treasury, Office of Foreign Assets
Control, used U.S. shell companies to further his illegal arms
trafficking activities.
The Sinaloa Cartel, one of the major Mexican drug
trafficking organizations that figures prominently in our
discussions of trans-border security. The Sinaloa Cartel is
believed by U.S. law enforcement to use U.S. shell companies to
launder its drug proceeds. Semion Mogilevich was recently named
to the Federal Bureau of Investigation's 10 most wanted
fugitives list. Semion Mogilevich and his criminal organization
are charged with using U.S. shell companies to hide their
involvement in fraudulent investment activities and to launder
money.
Yet each of these examples involves the relatively rare
instance in which law enforcement was able to identify the
perpetrator misusing U.S. shell companies. Far too often, we
are unable to do so. Take for example the instance in which a
foreign partner notified U.S. law enforcement after uncovering
a plot to send military cargo which had been mislabeled as farm
equipment to Iran.
Why contact us you might ask? Because in this instance, the
seller listed in the shipping documentation was a U.S. shell
company. Unfortunately, through this case and others, our
foreign partners have learned that in most instances, U.S. law
enforcement cannot identify the individuals who own and misuse
U.S. legal entities, or in the alternative, the significant
investigative delays associated with identifying the
perpetrator result in criminal participants staying several
steps ahead of law enforcement, the trail turning cold, or the
case being terminated for statute of limitations or other
delay-related reasons.
The Administration believes that S. 569 is an important
step in the right direction on this issue and provides a useful
platform on which to construct an effective legislative
solution. We have a number of recommendations that should
strengthen S. 569 and are fully committed to working with the
Congress and our inter-agency partners to craft legislative
texts to amend the bill in order to address our concerns.
We also recognize, however, that no legislation can provide
the perfect solution to this problem. Whatever legislation we
enact will have some costs to legitimate business and will have
some weaknesses that criminals can exploit. Despite this fact,
the Administration is committed to taking what is has learned
from studying this problem and working with Congress to craft a
legislative solution that has maximum effectiveness with
minimum burden on legitimate business.
As noted in the department's previous testimony, the first
and most critical issue facing law enforcement is the ability
to identify the living, breathing, beneficial owner of a legal
entity: A natural person. As currently drafted, S. 569 takes a
significant step forward on this point by including a
definition of beneficial ownership that would apply across all
50 States and ensure that criminals cannot exploit definitional
gaps between differing State systems.
The Administration would like to work with Congress and
this Committee to amend and further refine that definition to
address concerns in the business community that compliance will
be uncertain, time consuming, and costly. We believe the
interests of law enforcement can be met while also ensuring
that the definition is sufficiently straightforward and limited
in application to work for the full range of covered legal
entities.
Once a more limited application is achieved, the
Administration recommends that S. 569 also be strengthened to
require a credible and legible photocopy of government-issued
identification for each beneficial owner to be held within the
State. The provision and retention of such information is
critical to any meaningful effort to promote transparency by
assuring that law enforcement will have a name and a face for
all beneficial owners. Currently S. 569 requires beneficial
owners to provide their names and addresses to the State, a
requirement that should remain in place. However, the bill only
requires foreign beneficial owners to take the additional step
of providing legible photo identification.
The Administration recommends this requirement be extended
to all beneficial owners. Recognizing the challenges, both
fiscal and technological, that come with this effort, we
believe it would be sufficient for the photo identification to
be maintained in the State and not necessarily with the State.
Another issue encountered by law enforcement is the
criminal misuse of so-called shelf or aged companies, also
previously addressed by Senator Levin. We often see companies
transfer through several middlemen before ultimately reaching
the criminal perpetrator. In such cases, the investigation
often leads to a formation agent who has long ago sold the
company with no record of the purchaser and no obligation to
note the ownership change.
While S. 569 partially addresses this problem, the
Administration recommends further study of the vulnerabilities
associated with the transfer of legal entities, including
identifying potential solutions for updating beneficial
ownership information with every change. Additionally, the
Administration recommends eliminating the expansion of anti-
money laundering obligations to company formation agents, a
significant administrative and regulatory burden in favor of
broader civil and criminal Federal liability for non-
compliance.
Specifically, we believe the Federal penalties in S. 569
should be amended to include criminal and civil liability for
persons obligated to hold beneficial ownership information if
they fail to meet their statutory obligations, including to
maintain the confidentiality of subpoenas and other legal
process, thereby eliminating the so-called tipoff problem.
Finally, while the Administration does not have an
affirmative position on which funding mechanism should be used
to carry out the obligations imposed by the bill, we note with
concern that S. 569, as currently drafted, authorizes the use
of State homeland security grant funds since these funds are
already relied upon by the States to fund first responders.
I would like to conclude by expressing the gratitude of the
Department of Justice for the continuing support that this
Committee has demonstrated in assisting law enforcement to
protect our people, businesses and institutions from those who
would do us harm. I would be happy to answer any questions you
have.
Chairman Lieberman. Thanks very much for your testimony,
Ms. Shasky. We will have 7-minute rounds of questioning.
I take it, just to clarify the point, although you said it
pretty clearly, that both of you have testified that the
Administration supports S. 569, but with the amendments that
you both have described; is that correct?
Mr. Cohen. Mr. Chairman, I think the way we would phrase it
is that with the amendments and modifications that Ms. Shasky
has identified that we believe would strengthen the
legislation, we would be in a position to support the bill.
Chairman Lieberman. OK, that is what I thought you had
said. Let me ask you briefly, Mr. Cohen, because this is
obviously the Homeland Security Committee, you are assistant
secretary for, among other things, terrorist financing. If you
can tell us to what extent this problem of shell corporations
has frustrated investigations that you have done in regard to
terrorist financing?
Mr. Cohen. Yes, Mr. Chairman. It has frustrated
investigations and I think Ms. Shasky's testimony and other
testimony that this Committee and Senator Levin's Subcommittee
have received have illustrated a number of instances where
investigations have been frustrated. The difficulty, of course,
is that if there is a lead on a business that may be involved
in any matter of crime, including terrorist financing, that
when you try to get behind that--and what we do at the Treasury
Department is try to map out these networks, map out who is
involved in raising the money and moving the money. If you then
go and try and figure out who the actual people are who are
involved and there is no access to the beneficial ownership
information, that can, of course, stymie the investigation.
It is also, I should add, a problem that some of our
international partners have encountered as they try to
undertake similar efforts.
Chairman Lieberman. In the United States or in their home
countries?
Mr. Cohen. It is particularly a problem with U.S.
corporations.
Chairman Lieberman. Yes. But there have been specific cases
where you have been pursuing, for instance, a terrorist
financing investigation and this shell corporation problem has
frustrated what you have been trying to do.
Mr. Cohen. It has. I do not want to overstate the problem.
I think what we see is a significant vulnerability and we have
seen some exploitation of that vulnerability. But it is a
problem that we have identified.
Chairman Lieberman. In the testimony that you both offered,
in different ways you said something really interesting to me,
which is that the Administration's position is that the law
enforcement community particularly can get the information that
you need even if a company's beneficial ownership information,
including particularly photo identification, is held by a third
party in the State rather than in the State Secretary of
State's office.
That is interesting and I wanted to ask you to just go into
that in a little more detail. How would such a revised
procedure work? In other words, who would hold the information,
particularly the photographic documentation?
Mr. Cohen. I think in our conception of a modified bill,
that information would be held with the State either by someone
who is in the corporation if the corporation is, in fact,
operating in the State, or if the corporation is not operating
in the State of its incorporation, then there would be a
designated person in the State who would be holding that
information. That person in the instance of an out-of-state
corporation or foreign corporation would need to identify
himself or herself to the Secretary of State's office and
certify that they have the credible and legible documentation
information.
So it differs on whether the corporation is operating in
the State or is operating outside the State, but in either
instance, there would be a person in the State who has that
information.
Chairman Lieberman. And the law, if you were drafting it,
would say that the individual holding the information would
have an obligation to present it upon request?
Mr. Cohen. Yes, sir.
Chairman Lieberman. Request of law enforcement?
Mr. Cohen. Exactly.
Chairman Lieberman. Again, in your ideal version of a bill
on this, what would States be required to ask on their
incorporation forms and how would law enforcement access the
necessary information without tipping off a subject of an
investigation of a potential criminal?
Mr. Cohen. The States would be required to obtain the name
and address of the beneficial owner as defined--and we can talk
about the definition of beneficial ownership. The concern about
tipping off is a very serious one and the legislation that we
have in mind would contain a very clear prohibition on tipping
off, whether it is by someone in the State Secretary of State's
office or this third party who may be holding the
documentation. They would be prohibited from notifying the
subject of the investigation that a subpoena has been received.
There are other places in the Federal criminal code where
there are similar prohibitions on tipping off and I think we
would model on those provisions.
Chairman Lieberman. Ms. Shasky, do you want to add anything
to that?
Ms. Shasky. No, I think he has covered it adequately, thank
you.
Chairman Lieberman. From what you have said, I gather that
the Administration does not favor making homeland security
grant funds available to the States for the purposes of this
legislation. Obviously, that provision, I presume, was put in
the legislation because we did not want to create an unfunded
mandate on the States.
So it leaves naturally for me to ask, do you have any
suggestions for how we can help the States pay for the changes
in these procedures, or frankly whether we should help them pay
for those changes? Ms. Shasky.
Ms. Shasky. Sure, we definitely do not support an unfunded
mandate.
Chairman Lieberman. Yes.
Ms. Shasky. We believe it is important to provide both the
capacity and the incentive to States that will enable them to
carry out the legislation. However, we would just note our
concern, quite frankly, in using the State homeland security
funds as the mechanism since they are used by first responders.
The States are already relying on those funds for the first
responders.
We look forward to exploring this issue further with the
Committee in trying to identify, quite frankly, some
appropriate sources of funding.
Chairman Lieberman. So in other words, you do not support
the unfunded mandate, but you do not support the use of the
homeland security grant funds because you believe there are
more priority claims on them, namely from first responders,
correct?
Mr. Cohen. I think that is correct.
Chairman Lieberman. Thanks. My time is up. Senator Ensign.
Senator Ensign. Thank you, Mr. Chairman. Does the
Administration have a definition yet, or when can we expect a
definition on beneficial ownership?
Mr. Cohen. We do not have legislative language that we are
prepared to present this morning. We are working with the
Justice Department and others in the Administration to craft
language on beneficial ownership. I think the principle that is
guiding our work in this area is as you said, Senator Ensign,
that the definition ought to be clear cut. It ought to be
simple and straightforward and a definition that can be easily
applied by the two million or so people a year who form
corporations without needing to consult an attorney, consult an
expert--that the entrepreneur sitting at their kitchen table
can look at this definition and figure out who the beneficial
owners are and submit the form.
Senator Ensign. I just want to encourage you that when you
are coming up with the suggestions for us that you do consult
with some of those small businesses that are going to be
forming, to ensure that we are not putting that kind of burden
on them. These businesses will say that I have all my money
invested in what I have been doing. I just cannot spend more
money on accountants and lawyers to make sure that this thing
is done right. And a lot of these people are just common sense,
street smart people. They do not have a college degree. You
have to take it down basically to their educational level for a
lot of these small businesses and make sure that we are not
putting a burden on them.
Because frankly, job creation is something I think that all
Americans can agree we need right now. So I just want to make
sure we are not placing undue burdens on these businesses and I
look forward to seeing that definition when you get it.
If law enforcement came in and said that they want this
information, who is tasked with verifying that person is who
they said they are? Is it law enforcement? Is it the Secretary
of State's office? Because I think that this is one of the
concerns that the Nevada Secretary of State relayed to us. Who
is going to be in charge of verifying? Because that would be
additional costs from the one's I mentioned earlier.
Ms. Shasky. In our conception, Senator, it would be law
enforcement that would hold that responsibility.
Senator Ensign. So you would just get the information from
the Secretary of State's office and then it would be up to you
to determine whether that was right or not?
Ms. Shasky. That is right. We are merely asking the State
to collect the information, not to verify it.
Senator Ensign. I see. Have you all done cost studies at
all, like what Secretary of State has submitted to us? \1\
Because there is one thing to say that this thing is not an
unfunded mandate, but as we have seen a lot of times, it turns
out to be a lot more expensive than what the estimate are.
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\1\ The prepared statement of Nevada Secretary of State Ross Miller
submitted by Senator Ensign appears in the Appendix on page 435.
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Have you done extensive studies on how much it is going to
cost each State? Because, for instance, Delaware and Nevada, we
incorporate a lot more companies than other States do. How
would you divvy up the money, which is always a problem up
here?
Mr. Cohen. I do not believe that we have conducted any
detail analysis on the cost of implementation. I think what Ms.
Shasky was testifying to on the question of unfunded mandate is
not that we think this is a costless endeavor, but quite the
contrary. We recognize that there are costs associated with the
implementation of this legislation if it were to be enacted and
we are committed to working with the Congress to find a way to
resolve that issue for the States, not that we think that this
is something that is free.
Senator Ensign. Any comments, Ms. Shasky?
Ms. Shasky. I agree wholeheartedly with my colleague from
the Treasury Department. Again, we are committed to working
with Congress to identify appropriate funding mechanisms.
Senator Ensign. Just to summarize, these are my major
concerns. One is that we do not hurt small business. Two is
that we do not have an unfunded mandate to the States, which we
do a lot up here, especially in the past. We do less of it now,
but we still do some up here. There are promises.
And then third is the fairness of the distribution of the
funds. Sometimes we will do a formula and we have to make sure
that it is not just done on population, but it is actually done
on the need for that State based on the numbers. Some of our
States have tried to enact laws that were friendly and made it
easier to get into business. My State is one of those. We think
that we have done a pretty good job of balancing that.
I do think that law enforcement has legitimate concerns;
there is no question about that. But we have to be very careful
that the law of unintended consequences does not make things so
burdensome in the future that when we correct one problem that
we are making other problems much more severe.
Thank you, Mr. Chairman.
Chairman Lieberman. Thanks very much, Senator Ensign. As is
our custom in this Committee, we call Members in order of their
arrival and for the information of my colleagues, that will be
Senators Levin, Bennett, Carper, McCaskill, Burris.
Senator Levin.
Senator Levin. Thank you, Mr. Chairman. I thank both of our
witnesses. Their testimony is very helpful, very supportive.
I look forward to the definition on beneficial owners. We
use the Treasury definition in our bill. We thought the
Treasury would love that. It turns out Treasury does not
particularly like its own definition and if you can simplify
it, great. I think there could be some improvements in your
definition, frankly. Make it clear that we are not going after
single stockholders and those kind of straw man issues which
have been raised by opponents. So we do look forward to your
giving us the legislative language for whatever improvements
and strengthening that you think is appropriate.
One of the issues here in terms of beneficial owners
however is that as Ms. Shasky pointed out, I think very
powerfully, what we need are the living, breathing, natural
persons. We are not looking for some shell corporation to be
called the owner. Would you agree with that?
Mr. Cohen. Yes, Senator.
Senator Levin. Now the National Conference of Commissioners
on Uniform State Law (NCCUSL), in their proposal just requires
a records contact and that records contact could simply be an
owner of record, which could be a shell corporation, putting us
right back into a circle which leads absolutely nowhere in
terms of finding the beneficial owners.
Would you agree that the approach of NCCUSL in this regard
is not acceptable, Ms. Shasky, first of all?
Ms. Shasky. Yes, Senator. To allow companies to provide
anything less than the beneficial owner information merely
provides criminals with an opportunity to evade responsibility
and put nominees between themselves and the true perpetrator.
Senator Levin. Do you agree with that?
Mr. Cohen. I do, Senator.
Senator Levin. The letter which we received, I should say
Senator Dodd received an undated letter, but it came after the
September 22 letter, because the Secretary of the Treasury
refers to the Dodd letter of September 22.\1\ But that letter,
which is a very helpful letter, in one place suggests that the
legislative proposal would be built upon the NCCUSL approach.
And I take it from conversations both with Secretary of the
Treasury Timothy Geithner and from what you have said here
today that is not accurate, that it would not be built on that
proposal. Can you clarify that?
---------------------------------------------------------------------------
\1\ The undated letter to Senator Dodd submitted for the Record by
Senator Lieberman appears in the Appendix on page 433.
---------------------------------------------------------------------------
Mr. Cohen. Certainly, Senator. I think what Secretary
Geithner was driving at in the letter is that the NCCUSL
proposal has some ideas in it that we think are useful and
worthy of developing, not that the Department of Treasury
supported the NCCUSL legislation.
I think the idea is that we will draw from the NCCUSL
legislation. We will draw from other ideas that are out there,
use that to inform our steps forward in terms of building on
the platform of S. 569.
Senator Levin. That their approach to the definition of
beneficial ownership is not one of them.
Mr. Cohen. I think that is right. There are other aspects
of that bill that have some useful ideas, but not that.
Senator Levin. You have also indicated, I believe, this
morning, Mr. Cohen, that the documentation information, such as
passports and photos, which you believe should be provided even
for domestic corporations, which we do not require for domestic
corporations in our bill, we made a big effort to keep this
simple and not to have a big burden, and that was one of the
ways in which we avoided a burden, by saying foreign
corporations, of course, you've got to provide photo
identification, passport, whatever, but not for domestic
corporations.
That was a compromise we made to try to accommodate the
very concerns that had been raised about avoiding complexity.
But when you testified earlier, because you support that
documentation being provided for domestic corporations as well
as foreign corporations, you indicated, I think, that your
intent was that documentation information could be or should be
kept in the hands of a third party in the State rather than
kept by the State.
But I also understand that your intent, and correct me if I
am wrong, is that the actual information, the basic name of who
the beneficial owner is, would be provided with the
incorporation form and updated to the State itself and then
that would be available from the State to law enforcement; is
that correct?
Mr. Cohen. I think you have it exactly right.
Senator Levin. OK, because I think there was a little
confusion on that point, which I wanted to clarify. If false
information is provided on the form, would it be fair to say
that even that information might be helpful? We do not require
verification, again to avoid the very expense and complication
which some of the opponents representing States that do a lot
of incorporation have pointed out they want to avoid.
So one of the ways we avoid it is to not require the State
to verify the name of the beneficial owner. However, even false
information, is it not accurate to say, would be helpful
because it could help to prove the intent element that is a
part of many crimes that somebody intentionally lied; is that
fair, Ms. Shasky, first?
Ms. Shasky. That is exactly right, Senator, and it is
within the jurisdiction of the United States at that point.
Senator Levin. And Mr. Cohen?
Mr. Cohen. I agree with that, Senator.
Senator Levin. In terms of the mandate issue, we want to
avoid a mandate as well, so we provide a possible source of
funds, but we do not require that the source be used and we are
more than happy to have you folks provide additional sources.
We look forward to it being in the Department of Justice budget
perhaps or the Treasury budget. But one way or another, we are
very happy to do that.
But I would point out that the law enforcement community,
very much supports this bill and wants to avoid an unfunded
mandate as well so we do not sink the bill with that issue,
those first responders, those law enforcement community folks
favor this bill and I believe will point out that it will help
them much more to be able to find the criminals than they would
be losing by a fairly minor loss of any funds that go to the
Department of Homeland Security.
So I think we will find out later this morning that the law
enforcement community does favor this approach as a possible
source, not a required source. But in any event, we would
welcome also your suggestions as to alternative sources for
what I think will be fairly nominal funds, but important
expenditures to go after criminals and so forth.
Thank you, Mr. Chairman.
Chairman Lieberman. Thanks very much, Senator Levin.
Senator Bennett.
OPENING STATEMENT OF SENATOR BENNETT
Senator Bennett. Thank you, Mr. Chairman. I have never had
anything to do with law enforcement, but I have run a small
business, a number of businesses, so I come at this with a
different kind of aspect. I do not want to get in the way of
law enforcement under any circumstances, but I do not
understand it, having not any personal experience.
I do see the potential of getting in the way of small
business, indeed medium business or even large business. If I
may without being offensive, suggest that some people in law
enforcement do not understand business any better than I
understand law enforcement. And since it is business that is
going to be affected by this, we have to be very careful how we
do it.
Let me give you some concerns. First question, who is going
to have access to this information? Competitors? If I am a
competitor and I want to know who the beneficial owner is of my
competition, can I go to the State and ask for it and get the
information? Or is it exclusively available to law enforcement?
Ms. Shasky. Senator, we are recommending that it be
exclusively available to law enforcement upon the appropriate
issuance of process.
Senator Bennett. So the information sits there, but nobody
can get at it until somebody shows up with a subpoena?
Ms. Shasky. That is correct, Senator.
Senator Bennett. All right, that lowers my temperature a
little bit. [Laughter.]
Many times, not overwhelmingly----
Senator Ensign. If the Senator would yield? The one point
to make about that is, though, the Secretaries of State will
have to have separate databases for that because right now they
have one that is public and they will have to have one that is
completely private, which is a big part of their expense is
going to be raised.
Senator Levin. Yes. Perhaps just on that point, we could
ask Secretaries of State whether or not it is not true that
already they keep certain information private in a separate
database. If I could also, my next time, just to clarify one
other point, we do allow in our bill the States, if they want
to, could make information available, but we prohibit it in the
bill.
Senator Bennett. You prohibit it, but you make it possible?
Senator Levin. Only if the State----
Senator Bennett. Help me understand that.
Senator Levin. We prohibit it. We say only if a State
decides that they want to make it available for whatever
reason.
Chairman Lieberman. You might call it a State opt-out.
[Laughter.]
Senator Levin. We are trying to protect the rights of the
States here. We are trying not to trample on the rights of the
States. People say do not impose these requirements on the
States, so all we are saying is just collect the name. It is
only available to law enforcement, but we are not going to stop
a State from making it available to someone else.
Senator Bennett. But you force the State to collect it in
the first place.
Senator Levin. We do.
Senator Bennett. That is the circumstance that gives me
concern. If I form a company, and I think it is going to be
marvelously successful over time, and I give shares to my
grandchildren, does the State have to have pictures, baby
pictures, of my grandchildren and as the grandchildren grow up,
are those pictures now false because they do not look anything
like the teenagers or whatever?
This whole thing sounds wonderful, but in the reality of
the way these small companies are often operated, is there a
liability that somebody is going to be sued because the picture
does not match what is in the file?
Ms. Shasky. Senator, we would not recommend a private right
of action based on this bill and would instead support very
limited and focused, targeted civil and criminal Federal
penalties in appropriate circumstances.
Senator Bennett. Well, again, details come down to what
Senator Ensign was talking about. These are definitions. We
want to know who the beneficial owner is by definition and my
grandchild becomes a beneficial owner by definition, is there a
liability if at some point the company gets sold to this
company, but there is still a stock certificate somewhere and
the Federal Bureau of Investigation (FBI) shows up looking for
my grandchildren as being involved in a criminal activity?
You do not need to comment on that because you say it is
probably not going to happen, but is one of the things I raise
that people get concerned about.
Now let me get to the one that I am most concerned about. A
major source of job creation in this country, unique to this
country that no other country understands, is the venture
capital (VC) world. People in the venture capital world have a
variety of avenues through which they can place their money to
try to participate in the explosion of technology.
I am not sure I would do this, but there are some VCs that
say, we see X number of companies in this particular arena, we
are going to invest in every one of them on the assumption that
one of them will hit it and we do not know at this point which
one it is. All right, somebody invests in that VC not knowing
how the VC is going to make the bet among these 10 startups.
One of the startups gets taken over by Mr. Bout. The fellow
who invested in the VC is listed as a beneficial owner in that
particular enterprise. He finds out that he has that kind of
exposure and he says, I am not going to put in any money, I am
not going to run that risk.
Help me understand why he should not be concerned.
Mr. Cohen. Senator, I think the answer to that question
turns on how the term ``beneficial ownership'' will be defined
in the legislation. I think our ideas, I tried to explain
previously, is that it be a simple straightforward definition,
and as well, a definition that does not require small holders
of an interest in a corporation to be identified. But I think
we are looking to set a threshold of ownership at a
sufficiently high level that the beneficial owners, the need to
be identified to the State, are those who have really a truly
significant interest in the corporation.
So I think in your hypothetical I am not sure that the
person who invests in the VC firm, which then invests in a
corporation in the first instance, would be identified as a
beneficial owner and----
Senator Bennett. Well now, if we go where Senator Levin was
going, who is the beneficial owner, the real live breathing
person? It is the ABC Venture Capital Company. We have to get
behind that veil and find out who owns the company. We go
behind the veil and we find several investors, one of which is
Senator Ensign's family foundation. Who are the beneficial
owners of his family foundation?
Now we get to his kids and his kids are tainted with an
investigation that says somehow they are involved. These
definitions have to be very important and I just echo what
Senator Ensign has had to say about as you are putting them
together, do not just talk to law enforcement. Do not talk to
me from the law enforcement side because I do not know anything
about that from personal experience.
But do not just talk to law enforcement. Talk to people in
the business world and have them walk you through scenarios
like the ones I have raised because they are going to come up
with a whole lot more than I have come up with that are going
to say, there will be unintended consequences of enormous
complexity down the road from here that will end up causing
people to say, I will not invest in this venture capital
company or that venture capital company will not invest in
these kinds of startups because we are afraid.
The average law enforcement person says, you do not need to
be afraid. As long as you do not do anything illegal, we are
not coming after you. Yes, well let me tell you how zealous the
attorney general in my State is to embarrass me, and I will not
go any farther with that one, but I think you all know who I am
talking about. Pay attention to the people who are going to be
making this thing work in their real lives.
Chairman Lieberman. Thanks, Senator Bennett. You know, in
terms of the practical implications that you are focused on,
you mention a picture of your grandchildren. Just for the
record, would you indicate how many grandchildren you have been
blessed with?
Senator Bennett. Twenty, Mr. Chairman, and I am a far
second with Senator Bunning.
Chairman Lieberman. But a strong second, I would say.
Senator Carper.
Senator Carper. You just asked. My first question would be
of Senator Bennett. Senator Bennett, would that be 20 and
counting?
Senator Bennett. I believe we have shut down production at
this point. [Laughter.]
But you never can tell.
Senator Carper. I once asked Senator Bunning, how many
grandchildren does he have? It was 30-something, maybe 39. I
once asked him, how do you remember all their names? And he
said, we use nametags. Whatever works.
A question, if I could, for both of our witnesses. Again,
thank you very much for being here and for your input today. I
just want to clarify the Uniform Law Commission approach.
My understanding of the Uniform Law Commission model law is
that the records contact and the responsible individual must be
a real live person. I think in Section 2 it says that the
records contact and responsible person must be a live person,
not another entity. I just wonder, is there some confusion
about the language in the Uniform Law Commission approach?
Mr. Cohen. Senator, I do not think there is any confusion
in what the Uniform Law Commission has done with respect to the
records contact and responsible individual. They do require a
live person. I think one of the concerns that we had with the
legislation is that, I think, there is not an obligation for
that live person to not be a nominee. And what I think is
important in the legislation is that we get at the true
beneficial owner and not someone who may be a nominee.
Senator Carper. I am tempted to say that maybe we could
tweak it a little bit and say really live person as opposed to
real live person, but I think you get my point. We believe the
language is actually pretty straightforward. We are talking
about a real live person.
Secretary Cohen, if I could follow up with you. Would it be
difficult for law enforcement to identify the corporation
formation agents in Delaware?
Mr. Carper. Senator, I think that law enforcement would
have some difficulty in identifying all the corporation
formation agents in Delaware. I think as was previously
indicated, Delaware has required the registered agents to be
known to the State and to have a place of business in the
State, but I think that is distinct from the corporate
formation agents.
And one of the concerns that we have with the bill as
currently drafted is that if the Treasury Department were
required to regulate company formation agents, we would have
some difficulty in identifying all of the corporate formation
agents in Delaware and around the country.
Senator Carper. As I said earlier, and I will say it again,
I think Delaware might have been the first State in our country
to adopt legislation responding to concerns expressed by law
enforcement regarding illicit practices of registered agents
and we now regulate our commercial registered agents. We are
not the only State that does that. I think Nevada does that now
and I believe Wyoming does it as well.
Assistant Secretary Cohen, a lot of attention has been paid
to the Treasury Department's definition of beneficial owner. I
think you alluded to this in your comments, but as it is
defined in the Treasury Department's anti-money laundering
regulations.
Was this definition as drafted intended to apply to
corporations? Wasn't the definition really meant to apply to
bank accounts, not to corporations? And why are these terms not
interchangeable?
Mr. Cohen. I think that's exactly right, Senator. The
definition that is currently in the legislation is taken from a
regulation that is designed to implement the requirements that
when a foreign person is seeking to open a private banking
account that the beneficial owner of that private bank account
be identified.
In that context, you have presumably a sophisticated person
who is opening a private banking account that legislation
requires that there is a $1 million minimum in that bank
account. So you presumably have a sophisticated person dealing
with a private banker and discussing who may be the beneficial
owner of that bank account.
The context that we are considering today, of course, is
beneficial ownership of a corporation, which is obviously a
different question than beneficial owner of a bank account and
also one in which, as I indicated previously, we want to
facilitate the entrepreneur who may not be the sophisticated
foreign person opening a private bank account to be able to
understand readily and easily who the beneficial owners are.
So that is why although we like our definition very much,
for the foreign private banking account context, we do not
think that it can be transferred into this context.
Senator Carper. And I would agree. A follow-up, if I could.
The Treasury Department, as head of the U.S. delegation to the
Financial Action Task Force, plays a key role in developing
guidelines that govern anti-money laundering efforts within the
United States and I think leads the U.S. enforcement
internationally through FATF.
Deep concern was expressed at our last hearing, as you may
recall, that the United States is not in compliance with the
Financial Action Task Force Recommendation 33, which requires
countries to obtain beneficial ownership information for the
corporations formed under their laws.
What countries are in compliance with FATF Recommendation
33?
Mr. Cohen. Senator, there are a few countries who have been
assessed by FATF to be in compliance with Recommendation 33,
although the vast----
Senator Carper. Like 10 or 20?
Mr. Cohen. Something in that neighborhood. The vast
majority of countries, both FATF members and non-FATF members,
have been found not to be in compliance.
Senator Carper. Why are more countries not in compliance?
Mr. Cohen. Well they are not in compliance frankly because
this is a very difficult recommendation to comply with in the
FATF recommendations to obtain beneficial ownership information
and there has been efforts in a number of countries and in the
European Union to come up with a mechanism to obtain beneficial
ownership information at the time of company formation.
Frankly, they have not solved this problem effectively.
I think the one jurisdiction that seems to have done this
well is Jersey, not New Jersey, but the Island of Jersey, which
is obviously----
Senator Carper. I was going to say, I find that hard to
believe. [Laughter.]
But, I will not say that.
Mr. Cohen. But their economy and their business formation
business is far different from what a major economy like the
United States confronts. And so I think the reality is that
most countries have not been in compliance and no country that
is even remotely on par with the United States in terms of its
economy has been able to solve this problem effectively.
Senator Carper. Thank you for your responses. Thank you,
Mr. Chairman.
Chairman Lieberman. Thanks you, Senator Carper. Senator
McCaskill.
OPENING STATEMENT OF SENATOR MCCASKILL
Senator McCaskill. Thank you, Mr. Chairman. I completely
understand why this legislation is important and why we need to
get it passed. Because of my experience in law enforcement and
understanding that having a thread to pull is sometimes the
difference between success and failure in a huge investigation
where if you can't find any threads to pull then you hit that
wall. There is no feeling of helplessness that is more acute
than when you know there is really bad stuff out there and you
cannot find the thread to pull.
I know this legislation, if we do it right, will provide
lots of threads for you all to pull. The problem is we have to
be careful that the benefits outweigh the cost of compliance,
both directly to businesses and indirectly to our economy. And
that is the tricky part and that is why this definition is so
important and why I think you are really going to have to focus
with maybe a broader view than you typically would have.
Because of what you do, you focus laser-like on how you
continue the path of investigation to get the evidence you need
to bring someone to justice and sometimes--I mean, there is a
hyper focus that leaves out some of the things that Senator
Bennett and Senator Ensign have talked about. I do think it is
important though, when we talk about this definition, that we
are talking about someone who is exercising control. I mean,
what we are trying to get here is not who benefits from the
corporation in terms of its success, but rather who is it that
is in control.
While there are many venture capitalist firms that invest
in corporations, they generally are not exercising control. Do
either one of you have a comment on that in terms of that
exercising control that we are trying to get to in this quest
for the right definition?
Ms. Shasky. Senator, I think you are exactly right. That
is, at the end of the day, what we are concerned with, finding
the natural person or persons who are in control of that
company. I provided some examples of instances where we were
able to identify the worst actors out there who used U.S. shell
companies. But really what happens most of the time is we have
a victim who comes to us and reports a very difficult crime. We
are very sympathetic, obviously, to the victimization, but the
victim does not know who it was that perpetrated the crime and
nor do we.
It is these U.S. shell companies that are used as the
shield between law enforcement and the victim on one side, and
on the other side of the shield the criminal perpetrator. If we
cannot get behind that shield and identify who is ultimately
exercising control over that company, we are not going to solve
those crimes because we are unable to solve those crimes.
Senator McCaskill. I think it is important for the record,
I understand--I do not think that anyone has asked this
directly yet--I could give an answer here, but I think it is
more important for you all to give an answer. What is the
argument when someone says well, someone who is a criminal is
not going to really put down the right name? They are going to
make up a name. How do you address that concern that people
have that we may be putting a burden on legitimate businesses
while the bad guys are merely going to give fictitious
information?
Ms. Shasky. There are two answers to that. There are two
results that come from having effective legislation in this
area. We do have a thread on which to pull, as you mentioned
earlier, and the trail does not go cold. So we have an avenue
to go down. Or in the alternative, the criminal chooses not to
use U.S. companies to perpetrate his crimes. We have
successfully hardened ourselves as a target of criminal
perpetrators.
U.S. shell companies are particularly advantageous to
criminals because they come with an air of legitimacy. Using a
shell company from a small offshore haven, that highlights for
law enforcement that there may be a problem and that we need to
look there. The United States, as everyone has mentioned, is
mostly engaged in legitimate commerce, and therefore, it is
very easy for criminals to hide their activities, their
criminal activities in the stream of our legitimate commerce.
If we harden the target, they will no longer be able to do so.
Senator McCaskill. I know you said, Ms. Shasky, that you
guys do not keep statistics on the use of shell corporations,
but can you talk about it as a trend? Are you confident that
this is a growing trend? Are you confident that this is
something that is much worse today than it was a decade ago?
Ms. Shasky. There is no question, Senator, and perhaps the
best kind of anecdotal evidence of that is witnessed by myself
and my colleagues every day as we train on this topic. We
actually train law enforcement and prosecutors, both
domestically and abroad, about the problem of U.S. shell
companies, how you might investigate a case that involves this
complex problem, what steps you can try to take. But we
typically ask your question.
And about a year ago, in fact, we had an audience of about
75 investigators from nine different Federal agencies, as well
as Federal prosecutors from around the country, and we asked
them just by a show of hands to tell us how many of them have
had cases halted because they came to a U.S. shell company and
the trail turned cold. They were no longer able to proceed.
And sitting in that audience, it sure seemed to me that
every hand in the audience was raised. And, if it was not every
hand, it was nearly every hand. This is not a singular
experience. This happens time and again. Every time we go
overseas to talk to our foreign colleagues, lecture on money
laundering, and how to investigate it; after every one of those
classes, we have some member of law enforcement approach us to
discuss the problem of U.S. shell companies. They ask whether
we can do anything to fix it. So it is extensive.
Senator McCaskill. I heard both of you say that you are
opposed to the method of funding that this bill embraces. I
understand that is the company line at this point and I get
that. I really would, though, urge you all to whatever extent
you can, run it up the chain.
You know, I audited the use of these homeland security
monies in my State and it was not good how a lot of this money
was used. Suits sitting around in boxes that had never been
opened, units in rural areas that had never really been formed,
but they were getting money for stuff that probably in the long
run is not a high-risk area.
You all know that terrorists cannot succeed unless they
move money. If shell corporations are being used to help
terrorists move money, then it seems to me that this would be a
great use of homeland security monies to the States because
money is the weapon of choice as it relates to terrorists
activities because we are not talking about putting together
armies.
We are not talking about buying weapon systems. We are
talking about moving money around the world in ways that are
going to kill people. I hope you guys reconsider the position
you are taking on the use of these homeland security monies. I
think it would be important and I think we have to work on
these definitions so we do not have unintended consequences.
But I think this legislation is really important to
national security, Mr. Chairman.
Chairman Lieberman. Thanks very much, Senator McCaskill.
Senator Burris.
OPENING STATEMENT OF SENATOR BURRIS
Senator Burris. Thank you, Mr. Chairman, and to our two
witnesses. This has been a very interesting hearing, and I am
wearing several hats here. I am a former law enforcement
person. I am also a former private business owner. I find this
very interesting in terms of how we are going to deal with
this.
I am looking at several situations in terms of
incorporation. I am talking primarily about the State of
Illinois now. You can get the S Corp. You can do the C Corp.
You can do the LLC. And those are all registered with the
Secretary of State. By the way, I am also a lawyer who did all
these incorporations and I am going to deal with the other
point in a few seconds here.
Now if someone were to form a general partnership, you all
have no access to any type of State records; is that correct?
Mr. Cohen. That is correct, Senator.
Senator Burris. I just want to make sure I get the legal
basis clear. Because you are talking about documents that are
just filed with some entity; is that correct?
Mr. Cohen. [Nodding affirmatively.]
Senator Burris. Now having served as a registered agent for
several corporations and companies, and in your legislation you
talk about the live person that Senator Carper was mentioning,
I just wondered why all of that repository of information
cannot be placed--I am sure you have all thought about this; I
just maybe have not run across your notes--with that registered
agent or require every entity to have a registered agent that
the documents would be with, pictures, and any change in the
corporation would have to be on that registered agent?
That would be a source that law enforcement could go to and
there would be penalties for that registered agent for not
keeping up with the changes in the corporate structure. For
example, Illinois just caught up with this notary requirement.
We can notarize stuff. Your law partner would bring it in and
you would notarize it. There turned out to be a lot of problems
with that, because my church got involved with all these notary
frauds with the transfer of real estate and using defunct
corporations, corporations that failed to file their annual
reports to find out who is now defunct and then reincorporate
the corporations and then take over.
As a matter of fact, he took over our church, owned our
church and sold off some of our empty land. We were able to get
it back because they had a smart lawyer called Roland Burris,
but anyway. [Laughter.]
I am just wondering whether or not the registered agent
extension would be a solution to the problem that would cause
whoever the players are in the corporate structure, that is who
you go to if you--I served on a regulated investment company
board and we created LLCs--LLCs to own LLCs, to own LLCs. Each
one of those LLCs has to have a registered agent.
Any entity that is filed should have an identifying person
who then the Secretary of State could send law enforcement to
and with a picture or whatever that registered agent would need
to have on file, and if that registered agent is not keeping
track of the corporate structure, then there would be certain
liabilities on him. Is that within your thoughts?
Mr. Cohen. Senator, we have been thinking about different
methodologies for how the documentation should be held. I think
our current approach is for corporations that are operating
within the State, that it is sufficient for that corporation to
have the documentation available to law enforcement. If the
corporation is not operating in the State, then someone in the
State needs to have that documentation.
It could certainly be the registered agent who could serve
the dual purpose of being the registered agent for service of
process and other reasons, as well as the person that the
corporation has designated to hold the documentation.
Senator Burris. Would we have to change State laws to some
extent in this regard or would Federal laws be able to strongly
suggest ways that they have gotten around the 10th Amendment
for States to take certain actions?
Mr. Cohen. I think there is a variety of ways to accomplish
this and undoubtedly they will be required to have some changes
in----
Senator Burris. Even if you had a corporation that was
incorporated in Illinois, it still has to have a registered
agent and you still look to the registered agent of that
corporation, have the responsibility on that entity that is
called the agent of that company and that agent should know
every player, have a picture of every player, have a document
of every change in that entity and therefore you have your
strings, as Senator McCaskill was saying, to really pull on.
Mr. Cohen. Senator, I think that is one possible approach.
I think we are in the process of discussing with each other,
and as many of your colleagues have suggested, reaching out to
the business community to formulate of the best approach to
these various questions. No, I think your suggestion is a
useful one.
Senator Burris. Having been a registered agent, having
formed corporations--I mean that is what I did in my legal
practice normally. And I even served as the registered agent
for several companies. The responsibility has been on me to
file those annual reports and get in touch with the principals
and keep them advised. And even if you are a Delaware
corporation, you still are going to have to have a registered
agent in Senator Carper's State, wherever you are, whether
Nevada or wherever.
The other thing I do not want to see--I am not going to
agree with any unfunded mandates here. Let's not put anymore
burdens on these State governments, because I have been trying
now, Mr. Chairman, to get my bill out of this Committee that
deals with giving assistance to those State governments for
their transparency on that stimulus money.
Our State comptrollers, our State auditors--S. 1064 has not
moved out of this Committee and those State governments are
suffering right now with having to do all this accountability
on this stimulus money that is coming in, but they have no
money themselves and we are holding up a piece of legislation
here now that is an unfunded mandate on State governments. They
are now trying to keep up with what the transparency
accountability is supposed to be in those States with all those
billions of dollars coming in and they have no other resources
to do it.
So I am hoping, Mr. Chairman, that S. 1064 can get the hold
off of it and we can get it out of the Committee, because this
is what we are going to do if we pass this legislation; you are
going to have something that the States are going to have to
do. There is not going to be any money and we are then going to
find ourselves with the States struggling and suffering again
and having to tell them they have to raise taxes.
So I am not going to be that supportive of any legislation
that is going to be without some funds going into those States
to carry on this activity, even though with my law enforcement
hat on, I think it is a good idea.
Chairman Lieberman. Thanks, Senator Burris. As you know, I
support that legislation. Unfortunately, there have been holds
on it.
Senator Burris. Yes, and Mr. Chairman, it is now your bill.
Chairman Lieberman. We should reason together----
Senator Burris. You and the Ranking Member took over my
bill with the---- [Laughter.]
Chairman Lieberman. It wasn't an unfriendly takeover.
Senator Burris. It was a great takeover. I loved it because
that gave it impetus and I just knew it was going to sail right
through. I am wondering what happened.
Chairman Lieberman. We will see, I hope. Mr. Cohen and Ms.
Shasky, I thank you very much. I am afraid we have to go on to
the second panel because there is a vote called in about 45
minutes and I want to give the four witnesses time to testify
and Members time to question them.
I am sure there will be questions that will be submitted to
you for the record and I appreciate your testimony. It has been
very thoughtful and very forthcoming. I look forward to working
with you. Thank you very much.
We will call the second panel now, David Kellogg, Kevin
Shepherd, Jack Blum, and John Ramsey. Thank you all very much
for being here. Thanks for your patience in sitting through the
first panel. I thought it was an interesting, helpful panel and
I hope you did too.
This is a group of witnesses from outside the government
who have practical experience and have different points of view
that will be helpful to the Committee in reaching judgment on
this legislation. We have reduced the time to 5 minutes. If you
go over a little bit, we are not going to forcibly evict you, I
assure you.
The first witness is David Kellogg, President and Chief
Executive Officer of Solers, a privately-held company that
provides technology services to the U.S. Government, has more
than 120 employee-owners--interesting--and involves multiple
legal entities.
Mr. Kellogg, we welcome you and invite your testimony now.
TESTIMONY OF DAVID H. KELLOGG,\1\ PRESIDENT AND CHIEF EXECUTIVE
OFFICER, SOLERS, INC.
Mr. Kellogg. Thank you, Chairman Lieberman, and
distinguished Members of the Committee on Homeland Security and
Governmental Affairs, for the opportunity to testify today on
the impact on business of S. 569, Incorporation Transparency
and Law Enforcement Assistance Act.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Kellogg appears in the Appendix
on page 395.
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Solers believes strong corporate governance and capital
formation are a vital part of any vibrant economy. We also
agree with the priority of combating terrorism and money
laundering. However, I must express my serious concerns with S.
569 because it does not appear to combat money laundering and
places additional burdens on American businesses during the
worst economic downturn in 75 years.
Founded in 1999, the Solers employee-owners are proud to be
part of the effort to make our Nation safer through our primary
lines of business, net-centric systems, and mission support
services. We have a strong working relationship with the
Department of Defense and the intelligence community and our
mission at Solers is to find practical and innovative solutions
to meet the challenges they face in fulfilling their vital
missions.
To achieve these critical missions, Solers relies on our
principal asset, our talented staff, which is comprised
primarily of engineers and scientists. An important component
to attracting and retaining our team is that our employees have
the opportunity to own a piece of Solers as shareholders. As a
result, Solers is privately-held by its employees, former
employees and directors, and is a Virginia C Corporation with
about 140 stockholders.
The majority of Solers' staff are owners and we found that
they greatly value this benefit. With our employees owning
stock in the company, they satisfy the broad definition of
beneficial owners under S. 569. Upon review of S. 569, I was
struck by several issues that I believe would both impede the
effectiveness of the legislation such that it would not be an
effective deterrent to illegal activity and at the same time,
penalize legitimate law-abiding businesses and their workers.
First, I would like to speak to the difficulty of
determining beneficial ownership under S. 569. The bill lacks a
clear cut definition of beneficial owner that can be understood
and applied by lawyers, let alone by the common business person
like myself. For example, as the bill is now written, a
beneficial owner could include any number of individuals,
including a shareholder, family member of a shareholder,
individual who has power of attorney for a shareholder, an
accountant employed or retained by the business, a lien holder,
a bondholder of the company, a credit card company or financial
institution extending credit to the business, and any other
individual who may have a legal interest in or entitlement to
the company or its assets.
Further, any change in the relationship between any of
these entities and the business would require new documents to
be compiled and filed with the appropriate legal authorities.
With such an overly broad definition, the company would be
required to track and file information that is beyond its
control. The vagueness and lack of precision in a standard that
requires an assessment of when as a practical matter a person
exercises control is particularly troubling in a law that
carries criminal penalties.
Unquestionably, preventing money laundering, tax evasion
and other illegal activities are laudable goals, but S. 569's
indiscernible requirement to disclose beneficial owners based
on an uncommon and vague definition used in this bill fails to
advance these goals.
Criminals will simply ignore S. 569's requirements and
legitimate companies will be unable to understand or comply
with them. Second, I would like to speak to the privacy rights
of investors, business owners and in Solers' case, our
employee-owners. S. 569 requires States to amend their
incorporation law practices to comply with new federally-
mandated standards. This includes providing and documenting the
detailed personal information, including home addresses of all
beneficial owners.
According to the National Association of Secretaries of
State, at least 38 States require compliance with their own
internal right-to-know laws and other regulations. Once States
collect this data, it is immediately made public. Consequently,
this private information is now in the public domain.
I fear that the beneficial owner list of Solers' employee-
owners will be used by headhunters and competitors to recruit
Solers' staff. Like any other professional services firm,
Solers' staff is its most valuable asset and providing a list
to professional recruiters and competitors puts Solers at a
distinct disadvantage relative to the numerous public companies
that have no such requirement.
We urge you to consider a privacy provision for the
beneficial ownership information to prevent its use by
competitors, recruiters, other parties or activist groups who
would use it for their own purposes.
Third, operating in a competitive environment, businesses
make decisions and seek to conceal them from their competitors.
It is a well-established and legitimate business practice to
protect trade secrets. These companies are not interested in
breaking the law. They are interested in being a competitive,
effective force in their industry.
By passing S. 569, small companies will be placed at a
competitive disadvantage in relation to the large public
companies, partnerships, sole proprietorships, and even foreign
competitors. Venture capital firms invest in new products and
small companies. They form a vital cog in the formation of
capital for small business. However, this financial backing is
typically undisclosed so as to prevent market signaling.
Under S. 569, these financing vehicles will now have to be
publicly disclosed, potentially cutting off start-up financing
for small businesses that account for 80 percent of the job
growth in the United States.
Fourth, S. 569 could also create other unintended
consequences, including new and onerous recordkeeping
requirements on States. While estimates vary by State, the
National Association of Secretaries of State estimate the cost
of implementing S. 569 in California could be as high as $17.5
million.
Finally, it is unclear how S. 569, by targeting only
private and limited liability corporations, would stem money
laundering or terrorist financing. Criminals will not hesitate
to exploit the large loopholes and simply form business
entities not covered by S. 569, leaving legitimate businesses
with an unreasonable burden and criminal penalties for non-
compliance. In that regard, S. 569 punishes the whole class
because of one student's bad behavior.
I appreciate the opportunity to speak to you regarding this
important issue. Again, while we share the goals of protecting
the country, we do have disagreement with the methods being
employed. I seek to make sure that this legislation actually
accomplishes the goal without hurting legitimate business in
the process.
Thank you and I look forward to your questions.
Chairman Lieberman. Thanks, Mr. Kellogg. Am I right that
you are a Virginia business, Virginia-based?
Mr. Kellogg. Yes, we are a Virginia corporation.
Chairman Lieberman. Right. Thank you. Next we are going to
hear from Kevin Shepherd on behalf of the American Bar
Association (ABA) Task Force on Gatekeeper Regulation and the
Profession. If I am correct, you are a lawyer who is with the
Venable law firm?
Mr. Shepherd. Yes, sir.
Chairman Lieberman. Thank you for being here.
Mr. Shepherd. Thank you.
Chairman Lieberman. Please proceed.
TESTIMONY OF KEVIN L. SHEPHERD,\1\ MEMBER, TASK FORCE ON
GATEKEEPER REGULATION AND THE PROFESSION, AMERICAN BAR
ASSOCIATION
Mr. Shepherd. Good morning, Mr. Chairman and distinguished
Members of the Committee. My name is Kevin L. Shepherd. I am a
member of the ABA Task Force on Gatekeeper Regulation and the
Profession. I am also a former chair of the ABA Real Property,
Trust, and Estate Law Section.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Shepherd appears in the Appendix
on page 402.
---------------------------------------------------------------------------
I am a co-chair of the Real Estate Practice Group at
Venable LLP in Baltimore and Washington and I am also the
President of the American College of Real Estate Lawyers. I am
here to present the views today of the ABA on S. 569, the
Incorporation Transparency and Law Enforcement Assistance Act.
I am very pleased to be here and I just want to say at the
outset that the ABA supports all reasonable and necessary
efforts to combat money laundering, tax evasion, and terrorist
financing. Indeed, we have worked very closely with the
Financial Action Task Force (FATF) and the U.S. Department of
Treasury in developing risk-based guidance for the legal
profession, not only domestically, but internationally.
We are also in the process right now of implementing the
FATF guidance for U.S. lawyers. These efforts underscore the
ABA's unwavering commitment to work with national and
international authorities and constituents in combating money
laundering, tax evasion and terrorist financing. The ABA,
however, opposes the proposed regulatory approach set forth in
S. 569 and any other legislation that would unnecessarily
regulate State incorporation practices and impose government-
mandated suspicious activity reports on the legal profession.
The ABA's opposition is grounded in three core principles.
First, S. 569 would essentially federalize State incorporation
practices, meaning the States would have to obtain, keep
current, and make available to law enforcement authorities
beneficial ownership information on corporations and limited
liability companies.
In our view, the imposition of a Federal regulatory regime
focused on beneficial ownership information is not workable,
would be extremely costly, would impose onerous burdens on
State authorities and legitimate businesses, would run counter
to formation practices in other countries, including Canada,
Mexico, Japan, and China, and will not achieve the laudable
goal of assisting Federal law enforcement authorities with
pursuing and prosecuting criminal activity.
These impediments, coupled with a simply unwieldy
definition of beneficial ownership and the bill's focus only on
a limited number of entities, would sow confusion into the
formation process that would not enhance law enforcement's
goals.
Second, S. 569 would create a new class of financial
institutions known as formation agents that would be subject to
enhanced anti-money laundering requirements. Because lawyers
assist clients in forming corporations, partnerships, trusts,
and limited liability companies, the designation of formation
agents as financial institutions subject to the AML
requirements threatens to sweep in U.S. lawyers and treat them
as the functional equivalent of banks.
Third, S. 569 could potentially impose suspicious activity
reporting (SAR) requirements on the legal profession, meaning
that lawyers would have to report to governmental authorities a
suspicion that their clients are engaging in money laundering
or terrorist financing activity, and at the same time, the
lawyers would be prohibited from telling their clients that
they are telling the government about this SAR.
These requirements are in direct conflict with ethical
obligations of confidentiality, the attorney-client privilege,
and the core relationship of the attorney to the client. They
could also undermine the rule of law by dissuading clients from
seeking legal counsel from lawyers on proposed courses of
conduct.
The ABA believes that a more effective and workable
solution would involve collective and collaborative action of
State government representatives working with the U.S.
Departments of Treasury and Justice. Although the ABA has not
taken a position on any such proposal since we favor the State-
based approach, we suggest that Congress give this solution an
opportunity to be implemented and assessed for its
effectiveness before imposing unprecedented Federal regulation
of State incorporation practices.
The ABA believes that the effort to designate formation
agents as financial institutions is premature and does not take
adequate account of the implications for the legal profession.
In light of the other initiatives that the legal profession is
undertaking on a voluntary basis, such as the development of
the good practice guidance I just mentioned, the ABA believes
that the imposition of AML requirements on the legal profession
is unnecessary.
I would like to speak a moment about the significant
efforts of the ABA to respond to the concerns sought to be
addressed by S. 569. For the last 2 years, I have been working
with my ABA task force colleagues, together with legal
professionals from around the world and also with FATF and the
Treasury Department, to develop risk-based guidance for the
legal profession dealing with client due diligence.
FATF has been working actively with specially designated
non-financial businesses and professions, including lawyers, to
produce voluntary risk-based guidance for the legal profession
to ensure that adequate client due diligence is performed at
the outset of the client relationship so as to minimize the
risk that lawyers will be used by unscrupulous clients to
launder illegally obtained money.
We have been working with members of U.S. specialty bar
associations, together with our counterparts from the United
Kingdom, in this effort and we have attended numerous meetings
with FATF officials to prepare this guidance. This proposal for
legal professionals was released by FATF last October. This was
a major achievement for the FATF and resulted directly from the
active and extensive participation of the U.S. legal profession
in this effort.
Education of U.S. lawyers regarding AML and
counterterrorist financing compliance is an important
cornerstone of an effective AML compliance program. The ABA, as
well as members of other specialty bar associations, continue
to be active in this educational area. Through the efforts of
members of the ABA Gatekeeper Task Force, as well as others
within the ABA, the American College of Real Estate Lawyers,
the American College of Mortgage Attorneys, the American
College of Trust and Estate Counsel, and other professional
organizations in the United States, we have been developing
additional voluntary client due diligence guidance in
collaboration with members of the Treasury Department.
On a personal note, I have written extensively on this
topic in an effort to educate the U.S. legal profession on this
important issue: Combating money laundering, tax evasion, and
terrorist financing activity while minimizing the impact on our
economy and State regulators are critical objectives. The ABA,
together with other private and government sector groups, has
expended a considerable amount of resources, but has made great
headway in developing an effective solution to the identified
problem.
We continue to support collaborative State efforts and
oppose premature Federal legislation. We look forward to
working with you to develop a workable solution and a
comprehensive solution that addresses the mutual objectives of
all concerned.
I want to thank you for giving us the opportunity to
present the views of the ABA on S. 569 and I would be delighted
to answer any questions you may have.
Chairman Lieberman. Thank you very much, Mr. Shepherd. Good
testimony. Now we go to John Ramsey, National Vice President of
the Federal Law Enforcement Officers Association. Welcome and
please proceed.
TESTIMONY OF JOHN R. RAMSEY,\1\ NATIONAL VICE PRESIDENT,
FEDERAL LAW ENFORCEMENT OFFICERS ASSOCIATION
Mr. Ramsey. Thank you, Chairman Lieberman, and
distinguished Members of the Committee. I would like to thank
you for the opportunity to testify today. I appear before you
today in my official capacity as the National Vice President
for the Federal Law Enforcement Officers Association (FLEOA).
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\1\ The prepared statement of Mr. Ramsey appears in the Appendix on
page 414.
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On behalf of over 26,000 members of FLEOA, I am
memorializing our support for S. 569. The proposed legislation
is very important to the FBI, Immigration and Customs
Enforcement, and the Internal Revenue Service members, as they
are the lead agencies that investigate money laundering and
terrorist financing cases, as well as other Federal law
enforcement agencies.
Incorporation transparency is an invaluable tool to combat
national and international crime and terrorism, hinder the
financing thereof, and frustrate the ability of perpetrators to
hide and benefit from the proceeds of these crimes. While
criminals cower behind the anonymity of their corporate
filings, they continue to exploit the system as a means to
commit terrorist financing and money laundering.
Using a registered agent or attorney as the front person
for their company, these terrorists and criminals are able to
circumvent law enforcement and accomplish the following five
things, use shell company bank accounts to launder millions of
dollars, use shell companies to attempt to acquire significant
ownership interests in a financial institution, purchase real
property through their shell companies to be used as stash
houses for stockpiles of drugs or weapons, operate money
remitter businesses to move their illegal proceeds to offshore
accounts, and engage in cyber terrorism attacks by
disseminating contaminated e-mails from ostensibly legitimate
companies.
By attacking and addressing the above five mentioned points
would allow for greater protection of our vulnerabilities with
regards to our own homeland security front. We are aware of
some of these concerns that have been voiced by industry and at
the State level with respect to this bill. Specifically, this
bill does not require any State to enact any law with respect
to corporations. It merely requires the States to add the
relevant question to their existing incorporation forms and
make the information available to law enforcement upon
presentation of a legally authorized subpoena or summons.
This information is beneficial to law enforcement and
homeland security to prevent the misuse of U.S. corporations by
criminals and other wrongdoers within or outside of the United
States. With regards to cost, beneficial ownership information
can be collected via existing electronic incorporation methods
and stored in existing electronic databases. Alternatively,
such information can be obtained by adding the relevant
question and space for a response on existing paper
incorporation forms.
The lack of truthful disclosure is not necessarily an
obstacle, but merely identifies the direction in which to
proceed in order to identify the criminal enterprise and
ultimately showing the criminal intent.
Law enforcement's ability to investigate and enforce the
provisions of the Bank Secrecy Act has been impeded by
terrorist and criminals who hide behind the corporate veil.
This costs law enforcement agencies a substantial amount of
time and money, for example, long-term surveillance and
subpoena service on numerous third parties. It also allows the
terrorists and criminals to remain about 10 steps ahead of law
enforcement. FLEOA maintains the identity of the real
beneficial owners should be made available to law enforcement
officers who again make legally authorized requests pursuant to
official investigations.
I would like to share with you one example--I would be glad
to share more later if you would like--regarding a case. The
owner of La Bamba Check Cashing Company, Inc. was sentenced in
connection with $132 million in false currency transaction
reports. On June 23, 2009, in Miami, Florida, Juan Caro and the
company he owned and operated, Maytemar Corporation, doing
business as La Bamba Check Cashing, was sentenced to one count
of conspiracy and 15 substantive counts of failing to file
currency transaction reports.
He was sentenced to 216 months in prison and ordered to pay
a $250,000 fine. The court also ordered the forfeiture of more
than $11 million in cash and property. The Maytemar Corporation
was also sentenced to probation, which is the only possible
sentence for a corporation.
According to the evidence presented at trial, the
defendants executed a scheme to assist individuals and entities
in South Florida to cash checks in anonymity in exchange for a
commission based on the face value of the check. Other
defendants working with Mr. Caro identified and recruited
customers, mostly local construction companies and
subcontractors who were interested in cashing checks at La
Bamba through shell companies that the defendants owned or
controlled.
In this way, the construction companies participating in
the scheme would cash checks payable to the shell companies and
get back cash from La Bamba. Thereafter, the defendants would
file currency transaction reports (CTRs) with the Treasury
Department, falsely stating that the shell company and/or
nominee owner had conducted the transaction, concealing the
true parties involved in the transaction and the source of the
funds.
For this service, La Bamba Check Cashing, Mr. Caro and
others earned substantial fees. Through the course of the
conspiracy, the defendants in this case filed CTRs with the
Treasury Department reflecting transactions in the name of the
shell companies. These transactions totaled more than $132
million.
While our membership respects the free spirit of enterprise
in our country, we do not want to see the United States adopt
the financial safe haven image of other countries around the
world. If our country's laws require individuals to register
firearms and vehicles, the same should apply for a corporation.
The consequences for allowing terrorists and criminals to
exploit our corporate filing system are severe.
In the spirit of homeland security and protecting our great
nation, we cannot permit this to continue. The content of this
bill does not disvalue the American dream, but it addresses the
American deception. We should not continue to allow corporate
secrecy to be used as a shield to hide corporate misconduct.
We hope your Committee will embrace the importance of S.
569 and work together to move it forward. I would like to thank
the Committee Members for my time and would be glad to answer
any questions.
Chairman Lieberman. Thank you very much, Mr. Ramsey. And
last, Jack Blum is the Chairman of Tax Justice Network USA. I
think I am correct that you previously were with Baker and
Hostetler?
Mr. Blum. Yes, that is correct.
Chairman Lieberman. And may have also had service here in
the U.S. Senate?
Mr. Blum. Fourteen years ago.
Chairman Lieberman. It is a pleasure to welcome you back
and we look forward to your testimony now.
TESTIMONY OF JACK A. BLUM,\1\ CHAIRMAN, TAX JUSTICE NETWORK
USA; AND MEMBER, ADVISORY BOARD, GLOBAL FINANCIAL INTEGRITY
Mr. Blum. Thank you, Mr. Chairman, Senator Ensign, and
Members of the Committee. I have a prepared statement. I ask
that it be made part of the record.
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\1\ The prepared statement of Mr. Blum appears in the Appendix on
page 418.
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Chairman Lieberman. Without objection.
Mr. Blum. What I would like to do is simply focus on the
problem and urge all of you not to let the details that we are
talking about here prevent addressing the serious problem we
have.
The serious problem comes from the fact that incorporation
is now available on the Internet to anybody with almost no
checking as to who they are. They get the documents not a
terribly long time after they fill out their Internet forms and
then to try and figure out what is being done with that
corporation is well nigh impossible.
The worst part of it is you do not even have to be the
individual who is setting it up. You can be another corporation
from another jurisdiction which has equally weak controls over
who sets up a corporation. So, for example, if I were trying to
fund a terrorist operating, let's say in the United States,
what I would do would be set up a U.S. company, have that
corporation be owned by some entity, for example, offshore, and
then in turn have the U.S. corporation open the bank account.
They would be able to do that by providing, let's say
officer and director information for the offshore company and
the next thing wire money in from wherever and provide a card
to whoever wants to use it inside the United States.
At the very minimum, we should be checking under all of the
various worldwide sanction lists the identity of individuals
who want to open a corporation. We have focused on the problem
of the individual small business owner and I am terribly
sympathetic to that because in private practice, I have
represented some small business owners. The difficulty that a
small business owner has is not incorporation. I have had to
take them through dealing with regulatory agencies at the State
and local level. I challenge anyone who says the problem will
be the added burden of incorporation to try to open a
restaurant in Maryland.
It turns out that there is a lot more that you have to do
and many other hurdles to jump. So I am very focused on how we
get at these people who are coming in to abuse the system and
misuse the system. I am also terribly concerned about following
the trail. Time and again, conmen have used anonymous
corporations to block any ability on the part of anyone to
figure out who they are.
And it turns out that is both civil and criminal. And here
I would say that I would like to see much more information
available in discovery and private litigation. The reason is,
if a con man moves money to a corporation and there is no
information about who is behind it or what is going on, there
is no way to pursue the recovery of that money through civil
litigation.
It is in the nature of all criminal activity that fraud is
least policed and least enforced by the criminal justice
system. The cases are complicated. If you come in with a client
who has been defrauded, they say to you that is a civil matter.
Well that is fine, but there ought to be some trail of
responsibility and that means being able to identify where the
corporation is, who is behind it, not simply get a corporate
name and a dead blank from there.
So these are the core issues as far as I am concerned. I
think we can get around the problem of identifying beneficial
owners with some pretty easy things. Who is putting up the
money? What kind of business are you going to be in and where
is it located? And with basic information about the live person
who is going to direct the money and the bank accounts, who
that person is. With that kind of information, law enforcement
can move forward and I cannot see that any legitimate business
person would be inhibited by having that available.
I will be happy to answer any questions you might have.
Thank you for letting me speak.
Chairman Lieberman. Thank you very much, Mr. Blum. I am
going to suggest that the Members reduce our time of
questioning to 5 minutes as well, so we can get to the vote on
the Senate floor.
Mr. Shepherd, you have expressed some significant concerns
about the requirements the legislation before us could place on
attorneys who help clients complete the information process.
You have offered some suggestions, certainly intentions to work
together.
I wonder if you would draw it out a little bit more and
tell what steps you think should be taken. I am speaking out
from the other side to make sure that lawyers and other
formation agents are not wittingly--of course, we assume most
times--aiding and abetting fraud, tax evasion, or money
laundering, for instance, for the use of shell companies.
Mr. Shepherd. Yes, Mr. Chairman, I would be happy to answer
that question.
First and foremost, we have been meeting with FATF, on
behalf of the legal profession, for the last 5 or 6 years. We
have asked at every meeting we have had with FATF to show us
examples of typologies where lawyers have been used unwittingly
in the facilitation of money laundering and terrorist
financing.
FATF has been unable to show us one typology globally where
lawyers have been used unwittingly. We have asked that
repeatedly of FATF. No answer forthcoming on that, so that
suggests to us that the problem probably does not exist,
otherwise FATF would have provided typologies on that.
Second, we have been very active in developing risk-based
guidance for the legal profession with FATF. We did not have to
engage with FATF, but we did. We used the financial institution
risk-based guidance as a template that was developed in June
2007 between FATF and the financial institution industry.
Taking that as a template for the designated non-financial
businesses and profession sectors, including lawyers,
accountants, and others, we developed risk-based guidance for
the legal profession over the course of a year and a half with
direct engagement with FATF.
We dealt with some very difficult issues, including
beneficial ownership issues, with FATF during that process, but
we worked through the issues. Suspicious transaction reporting
requirements, we worked through that very difficult issue for
the legal profession. So I think that demonstrates that we are
willing to engage with FATF and with governmental authorities
both domestically and internationally to grapple and resolve
some very difficult issues that face the legal profession.
In fact, what we are doing now is that we have the FATF
risk-based guidance for the legal profession in place. We have
developed good practices guidance that is given out to various
groups, especially bar associations, the ABA, and other
constituents as a implementation tool for what the risk-based
guidance is all about.
Most lawyers are unfamiliar with the FATF risk-based
guidance. What this does, the good practices guidance, is to
get it out to all the U.S. lawyers so they can understand and
appreciate what the risk-based approach means. It is a cost
benefit analysis and I think it is good instruction to the U.S.
legal community.
Chairman Lieberman. Thank you. Mr. Kellogg, a question for
you. You spoke about the practical problems that this
legislation could cause you and your business and I think you
made your point and I heard it clearly. I assume that you also
recognize that there can be a problem here in terms of the law
enforcement and I wonder if you have thought about--and this is
what the Committee is striving for--what is the appropriate
balance between law enforcement's need for useful information
and the understandable concerns of the business community that
you have expressed?
Mr. Kellogg. There has been a fair amount of discussion
about law enforcement only having access of this information if
they were to provide a subpoena or have some other review prior
to going to a State for this information and I think that is a
very sufficient and necessary condition to get the information.
One of my concerns from a privacy standpoint is that at
least 38 States currently publish all of their incorporation
filings, I guess, as a matter of public record and it would
certainly be easy for those States to just go ahead and say, we
are going to publish this beneficial ownership information
along with the State incorporation information.
This is really private information that I think needs to be
protected. Now there have been a number of references to having
to set up separate databases the States would have to do, and
that certainly would be very welcome and I would balance that.
So I think that if you can set up a separate database, that
the State will protect the sensitive information and make it
available to law enforcement under subpoena or other official
requests, I think that would be sufficient.
Chairman Lieberman. Thanks for that answer. My time is up.
Senator Ensign.
Senator Ensign. Mr. Kellogg, I think it is very important
that we had you here and heard your perspective and yours is
just one of many perspectives from small businesses. You have
one type of setup with employee-owners, but there are other
perspectives, I am sure, that are out there as well and that is
why I think that it is important to hear from folks like
yourself about--we need to hear from many others.
Mr. Blum talked about that it would be very easy to just
provide the information on who provides the money. You made the
point. Could you reiterate your point on venture capital and
how that could have a chilling effect on all businesses?
Mr. Kellogg. There has been a fair amount of discussion
today about the difference between who exercises control and
who actually provides the money and there is actually a
difference in most businesses as to who provides the money and
who exercises control. Most businesses have a general manager,
an operator, some person that actually is in control of the
day-to-day operations of the business and the investors and
other folks are more passive in that sense.
The problem that I see more than anything else is that
there is a real complicating factor from the standpoint of
wanting to be able to establish a new business that competes
with say an existing business and you want to keep it quiet
while you are still in the development phase. I mean, a lot of
the times if you are developing a new product or you are
developing a new service, you would like to enjoy some level of
trade secrecy with that and so you want to bring it to market.
And then when you bring it to market, you are going to tell
everybody about it at that point, but you would like to have it
ready to go and be ready to take on customers, and that is a
very legitimate practice. Entrepreneurs and others drive
efficiency in the economy by competing with larger businesses
and finding new ways to do things.
Some level of secrecy is helpful from the standpoint that
if you have good financial backing, people are going to take
you a little bit more seriously and potentially compete with
you more rapidly.
Senator Ensign. Have you or are you aware of any definition
of this beneficial ownership that would strike the balance
between small business and law enforcement?
Mr. Kellogg. I am going to beg that I am not a lawyer. I am
a common businessman and I am not sure that I want to weigh
into saying how are you going to define beneficial owner, so I
am going to decline to say that I am an expert in that area.
Senator Ensign. One of the reasons we do not necessarily
want an expert, because you want the average small business
person to be able to understand it. That is one of the reasons
that the language needs to be that simple, is because you may
not want to hire a lawyer to--no offense to the lawyers with
the ABA at the table--but that is one of the things that
actually the first panel testified. They want to make the
definition simple enough to where you do not have to hire all
these consultants and lawyers to be able to set up a simple
business shell to be able to get into business.
You want to have the proper entity set up that meets your
needs, but you want to make it simple enough and those
definitions need to be simple enough where just the average
person can understand it without hiring a lawyer. So that is
why we need regular people.
Mr. Kellogg. Well, I would concentrate on who controls it
more than the beneficial ownership. I mean, that makes more
sense to me in terms if you want to find this real live person.
Senator Ensign. Is it a percentage of control?
Mr. Kellogg. I think that is a hard question to answer
because any kind of little threshold, criminals are just going
to read whatever it is that the threshold is and try and get
around it.
Senator Ensign. Mr. Chairman, in the State of Nevada, the
Gaming Commission requires certain people to be licensed. These
are usually bigger businesses. These are not smaller businesses
and they are very expensive to get licensed, by the way.
But it goes to the fact of control. It used to be any key
employees, but they have really defined it down now and even a
small percentage of ownership does not necessarily mean that
you have to be identified as one of the key employees. But it
really, over the years--and we may want to even look at some of
the definitions in that regard simply because that is going to
be more of what Mr. Kellogg is talking about.
As far as actual control of the company, I think that is
really what we need to be looking at.
Chairman Lieberman. Thanks, Senator Ensign. It is a good
idea. We should look at that. Senator Levin.
Senator Levin. Thank you, Mr. Chairman. First let me agree,
that is the effort here, is to get to the people who control
the company and the definition of beneficial owner should focus
on control. I think that is an important point. I think that is
a common approach, as a matter of fact.
The Treasury told us this morning, and the Justice
Department, that they are going to work on a definition. I
think it was fairly clear that the definition is going to focus
on that aspect, beneficial ownership not the small
shareholders, but who controls the entity. So I think your
testimony is very helpful in that regard, Mr. Kellogg, and we
thank you for it.
Mr. Ramsey, there is authorization in this bill to allow
DHS grant funds to be used for costs that are incurred by the
States, adding a line to their forms in order to enable them to
collect the beneficial ownership information. Now I am
wondering what your reaction to that is in terms of you
represent law enforcement personnel. Is that a useful
expenditure of DHS grants? Do you view that as something which
we should not even authorize? What is your reaction?
Mr. Ramsey. I do not know if FLEOA would actually take a
position on that, but I would say that it appears that the
monies would be going toward law enforcement in a matter of you
are putting monies into a program that in the long run actually
assist law enforcement in its investigations.
Senator Levin. That is very helpful. Thank you. And that
is, of course, the point of it, and one of the reasons why this
bill has been referred to this Committee. But if your
organization does have any further thoughts on that, would you
just share them with this Committee?
Mr. Ramsey. Sure.
Senator Levin. On that issue. Mr. Shepherd, are you
familiar with the NCCUSL proposal?
Mr. Shepherd. Yes, I am, Senator Levin.
Senator Levin. Would you agree that the proposal does not
require corporations to identify the natural persons who are
the beneficial owners of a corporation and that instead, it
simply requires corporations to identify their owners of
record?
Mr. Shepherd. The act, Senator----
Senator Levin. NCCUSL, their proposal.
Mr. Shepherd. The NCCUSL model legislation, yes. It
contains two concepts of records contact and responsible
individual, both of whom must be natural, breathing, warm
people.
Senator Levin. That is for the contact person.
Mr. Shepherd. That is for the records contact.
Senator Levin. But that person then is supposed to disclose
who the owners of record are and that owner of record under
NCCUSL could be, for instance, another corporation; is that
correct?
Mr. Shepherd. That is right.
Senator Levin. Because there has been some confusion about
that. The living, breathing person that we are looking for is
the beneficial owner, the person that controls, and under the
NCCUSL proposal, there has to be a person to whom you can go,
but that person then is required to say who the owner of record
is. That owner of record need not be a living, breathing
person. It could be a corporation?
Mr. Shepherd. Let me just elaborate on that.
Senator Levin. But is that correct?
Mr. Shepherd. Well I think that requires some
clarification, Senator. On the NCCUSL model, legislation went
through a series--in a evolutionary process and we introduced a
concept of a responsible individual and the purpose of that was
to make sure that law enforcement could contact the responsible
individual because that person should be informed as to the
control, management, and direction of the underlying entity.
Senator Levin. Should be.
Mr. Shepherd. That is right.
Senator Levin. Can they be identified as the record owner
of a corporation?
Mr. Shepherd. Under the NCCUSL proposal, I think that was
certainly the intent, Senator, to do that.
Senator Levin. So they could identify a shell corporation
in Panama or someplace as the record owner of that company?
Mr. Shepherd. That is right, because in some of these
situations, you are talking about tier entities.
Senator Levin. I think we ought to ask FATF. By the way,
there has been a reference to FATF this morning and as to the
conversations which Mr. Shepherd had with FATF. I think it
would be useful for us to ask FATF for their position on this
proposal on the bill, but also give them a chance to comment on
Mr. Shepherd's testimony as well.
Mr. Ramsey, there is a question of tipping off a
corporation to law enforcement under the NCCUSL proposal. Would
you agree that under their proposal there is that problem, that
there would be a tip off to the real owner if they want to give
it to us, of the law enforcement's interest and that is a
problem which we could avoid if we have a confidential
disclosure just to the State and that disclosure could only be
to law enforcement?
Mr. Ramsey. Yes sir, I believe that currently law
enforcement has to go to the company to gather information,
which could actually tip our hand in the investigation. This
bill could actually provide a more discreet avenue of obtaining
this information, possibly through the Secretary of State's
office, without tipping our hand and telling everybody we are
in that investigative mode.
Senator Levin. Finally, because I'm over my time, Mr. Blum,
do you have a comment on the tipoff issue?
Mr. Blum. I think the tipoff issue is very serious because
if you go to the people who are in essence involved with the
perpetrators and say, oh tell us who is really behind this,
they are likely to move the money very quickly. Money moves
with the speed of light and one of the objectives in these
criminal cases is to freeze the money and apply it either for
the benefit of the victims of a crime or to prevent further use
of the money for terrorist or other purposes.
Senator Levin. Thank you. My time is up.
Chairman Lieberman. Thanks, Senator Levin. Senator Carper.
Senator Carper. Thanks. Mr. Shepherd, in your testimony, I
think you discussed the fact that the bill before us is
prospective in nature and it only covers new corporations that
form after the bill's enactment.
I think that leaves maybe 18 million corporations that have
already been formed out of compliance with this bill. Could you
discuss some problems with that?
Mr. Shepherd. Well I think the way I read the bill is that
the intent is to cover corporations and LLCs that are formed
after the effective date of the bill. The concern is you have
an estimated 18 million corporations and LLCs currently in
existence. What do we do with them? Are they covered? Are they
not covered?
So you are in effect creating a dual formation system or
system that will be covered by this bill or not covered by this
bill because you have 18 million entities not covered, not
subject to these disclosure requirements, and then you have the
new ones subject to it. So you are creating a duality that
perhaps is unintentional, but I think that is a shortcoming of
this legislation.
Senator Carper. Wouldn't the Uniformed Law Commission
approach capture more corporations and hopefully more
criminals?
Mr. Shepherd. That is right. The NCCUSL proposal covers not
only LLCs and corporations, but also partnerships and trusts,
plus it contains a transition provision that for a 2-year
period the existing entities would be required to comply with
the NCCUSL provisions.
Senator Carper. All right, thank you. Thanks to all of you
for being here today and for your testimony. Mr. Kellogg, as a
defense contractor, I can imagine that there are potential
national security concerns if employee information is made
public.
Could you describe how this bill would impact companies in
sensitive areas, defense, maybe technology, exports and the
like?
Mr. Kellogg. Well Senator, that is actually one of my
concerns. I will tell you that without going into detail, we
certainly have been concerned about network vulnerability for a
great period of time because we have for official use only,
International Traffic in Arms Regulations ITAR-controlled and
proprietary information on our computer networks, so there is
substantial valuable information that needs to be protected
just from a privacy standpoint.
We would be concerned about a list of employees going out
publicly from the standpoint that foreign intelligence service
potentially would get a list of people in order to target, in
order to say the typical routine would be to steal their laptop
out of their car and try and get a recording of their password
or user name or some other mechanism in order to be able to get
into the network.
And then you would normally try and place a key logger
event on a machine and that would start externally sending
information out. That is a concern that we have, although I
think it is somewhat unique to our industry and there are much
larger implications relative to the competitive advantages of
smaller private businesses and LLCs relative to their larger
competitors of disclosing the ownership information. I think
that is a bigger concern.
Senator Carper. I think those are good to point out. Back
to you if I could, Mr. Shepherd, for my last question before
time expires. As we discussed in the first panel with Assistant
Secretary Cohen, a lot of attention has been paid to the
Treasury Department's definition of beneficial owner. It is
defined in the Treasury Department's anti-money laundering
regulations.
Could you help us better understand why this definition of
beneficial owner is difficult to apply in the corporate
context?
Mr. Shepherd. Yes, Senator. I think there are a number of
issues with that. One deals at the outset with the terms used
in the definition of beneficial ownership. You have the word
``control,'' it is not defined. You have the definition
``indirectly or directly'' nowhere to be defined.
The phrase ``control, direct, or manage,'' is nowhere to be
defined. So you have these concepts in there and what is
troubling about the definition is that you are dealing with
corporations and LLCs, totally different vehicles, and when you
talk about control in the general sense about voting control,
voting power, it is different in a corporation than it is in a
LLC.
So I think the definition needs to respect the distinctions
between these two legal entities.
Senator Carper. And one more quick question, if you can
respond briefly. Mr. Shephard, you mentioned that the ABA is
working with FATF. We discussed the issue on the last panel,
but if you could talk a little bit more about FATF's rating on
the United States.
Why is the recommendation so difficult for other countries,
not just for the United States, to implement?
Mr. Shepherd. Yes, Senator. In 2007, the mutual evaluation
report prepared by FATF on the United Kingdom indicated that
consultants had concluded that the definition of beneficial
ownership is incapable from a law interpretation standpoint of
precise definition as a matter of law. So even the FATF report
included views from consultants that the definition of
beneficial ownership was not very clear.
The definition of beneficial ownership in this legislation
differs from the FATF definition, but both suffer from some
ambiguities. So I think that it is important that FATF
recognized the difficulties in applying the definition of
beneficial ownership to the various countries. And as you can
see from the mutual evaluation reports that I have seen, most
countries received a partially compliant grade. Other
countries, such as the United States, received a non-compliant.
But again, you receive four different grades under FATF,
compliant, largely compliant, partially compliant and non-
compliant. The majority of the countries are partially
compliant. That is just one notch above non-compliant. So I
think that demonstrates the difficulty that FATF has had and
the countries have had, frankly, in complying with
Recommendation 33.
Senator Carper. All right, thanks. Mr. Chairman, I would
just say not every committee hearing that we have provides, I
think, a roadmap to a common sense compromise where there are
legitimate concerns on all sides and a lot of stakeholders
refuse to take--I think this has been very constructive. I
really want to thank you for scheduling this hearing and for
each of our witnesses for coming in and for testifying.
Chairman Lieberman. Well thank you, Senator Carper. I
appreciate what you said and I appreciate the spirit of it.
Senator Levin.
Senator Levin. Just very quickly. Thank you, Mr. Chairman,
for your holding again this hearing. Two quick things. One, if
the ABA has any suggestions relative to a good definition of
beneficial owner, we would welcome that. The Treasury and the
Justice Departments are working on it and if you have problems,
which I think you do, with the current Treasury one or its
application in this circumstance, we would hope the ABA would
offer, not just offer, but actually give us a definition that
you think is a simple, workable one.
And second, finally, Mr. Kellogg, on your comment about
sometimes secrecy is needed in terms of the business needs of
new business, there is a way to address that. We do in our
bill, which is to say that the information must be kept private
unless there is a subpoena. It is up to the State to decide
whether or not to release that information and we could tighten
that further, I think, following your suggestion, which is that
we would say that information is only available by subpoena,
but a State could specifically authorize. It would have to take
a separate legislative action to do it.
We are trying to protect the rights of States here. We are
trying not to intrude on them more than is necessary for
Federal law enforcement purposes. So we put this language in
saying you cannot make this public without a subpoena, and only
to law enforcement. But we had to put it in there to protect
States' rights. Hey, if the States want to release it, they
can. We could tighten that further to make sure it was a
conscious decision on the part of the State to release it, to
take into consideration your concerns, to say this cannot be
released by the State unless they specifically legislate to do
that.
I think you made a legitimate point which we could----
Chairman Lieberman. Forgive me for doing this, but we are
about to miss a vote.
Senator Levin. I thank you again.
Chairman Lieberman. I would welcome a response for the
record. I hope Senator Carper's evocation and invocation is
carried forward based on the very helpful testimony of all
given. It will be great if we can come to a compromise on this,
because we all have the same goal.
The record will be kept open for 15 days to allow for
further questions or statements. I thank you very much. I
apologize for cutting you off. The hearing is adjourned.
[Whereupon, at 12:33 p.m., the Committee was adjourned.]
A P P E N D I X
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