[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

                                 ------                                
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The chart referred to by Senator Levin appears in the Appendix 
on page 96.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \2\ The chart referred to by Senator Levin appears in the Appendix 
on page 97.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The letters of support submitted by Senator Levin appears in 
the Appendix on page 271.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \2\ The prepared statement of Ms. Ayala appears in the Appendix on 
page 148.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Shasky Calvery appears in the 
Appendix on page 156.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Marshall with attachments appears 
in the Appendix on page 172.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Morgenthau delivered by Mr. 
Kaufmann appears in the Appendix on page 192.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Haynsworth with attachments 
appears in the Appendix on page 200.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \1\ Senator Carper submitted a copy of Mr. Geisenberger's Prepared 
Testimony from November 14, 2006, which appears in the Appendix on page 
296.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \1\ The chart referenced by Senator Levin appears in the Appendix 
on page 97.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The chart submitted by Senator Levin appears in the Appendix on 
page 367.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Cohen appears in the Appendix on 
page 377.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Shasky appears in the Appendix on 
page 388.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Nevada Secretary of State Ross Miller 
submitted by Senator Ensign appears in the Appendix on page 435.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Ramsey appears in the Appendix on 
page 414.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.]


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