    [Senate Hearing 116-64]
    [From the U.S. Government Publishing Office]

                                                         S. Hrg. 116-64

        OUTSIDE PERSPECTIVES ON THE COLLECTION OF BENEFICIAL OWNERSHIP
                                  INFORMATION

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

    EXAMINING HOW THE COLLECTION OF BENEFICIAL OWNERSHIP INFORMATION AT THE
    TIME OF COMPANY FORMATION WOULD IMPACT AMERICAN BUSINESSES, BANKS, LAW
    ENFORCEMENT, AND OTHERS, AND TO EVALUATE THE MOST EFFECTIVE METHODS OF
    COLLECTION, ITS PERIODIC UPDATING, PRIVACY CONCERNS, AND PROTECTING THE
                     ULTIMATE SECURITY OF THAT INFORMATION

                                   __________

                                 JUNE 20, 2019

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

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                    Available at: https: //www.govinfo.gov /

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    37-721 PDF                  WASHINGTON : 2019

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                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                          MIKE CRAPO, Idaho, Chairman

    RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
    PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
    TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
    BEN SASSE, Nebraska                  JON TESTER, Montana
    TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
    MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
    DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
    THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
    JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
    MARTHA MCSALLY, Arizona              DOUG JONES, Alabama
    JERRY MORAN, Kansas                  TINA SMITH, Minnesota
    KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                         Gregg Richard, Staff Director

                    Laura Swanson, Democratic Staff Director

            John O'Hara, Chief Counsel for National Security Policy

                   Jimmy Guiliano, Professional Staff Member

                   Colin McGinnis, Democratic Policy Director

                Phil Rudd, Democratic Professional Staff Member

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                              Jim Crowell, Editor

                                      (ii)

                                C O N T E N T S

                                  ----------

                            WEDNESDAY, JUNE 20, 2019

                                                                       Page

    Opening statement of Chairman Crapo..............................     1
        Prepared statement...........................................    29

    Opening statements, comments, or prepared statements of:
        Senator Brown................................................     3
            Prepared statement.......................................    30

                                   WITNESSES

    Greg Baer, CEO, Bank Policy Institute............................     5
        Prepared statement...........................................    31
        Responses to written questions of:
            Senator Menendez.........................................    45
    Karen Harned, Executive Director, Small Business Legal Center,
      National Federation of Independent Business....................     6
        Prepared statement...........................................    34
        Responses to written questions of:
            Senator Menendez.........................................    46
            Senator Sinema...........................................    47
    Gary Kalman, Executive Director, Financial Accountability and
      Corporate Transparency Coalition...............................     8
        Prepared statement...........................................    37
        Responses to written questions of:
            Senator Menendez.........................................    49
            Senator Warren...........................................    53

                  Additional Material Supplied for the Record

    Letter submitted by the National Association of Federally-Insured
      Credit Unions..................................................    56
    Letter submitted by the American Bar Association.................    57
    Letter submitted by the Consumer Bankers Association.............    62
    Letter submitted by the Credit Union National Association........    64
    Letter submitted by the Fraternal Order of Police................    66
    Letter submitted by the Independent Community Bankers of America.    68
    Letter submitted by the National Association of Manufacturers....    81
    National Security Letter submitted by Chairman Crapo.............    84
    Letter submitted by the National District Attorneys Association..    96
    ``Anonymity Overdose'', by Nathan Proctor and Julia Ladics, Fair
      Share Education Fund...........................................    97
    ``Financial Networks of Mass Destruction'', by Elizabeth
      Rosenberg, Neil Bhatiya, Claire Groden, and Ashley Feng........   117
    ``Opinion Poll--Small Business Owners Support Legislation
      Requiring Transparency in Business Formation'', Small Business
      Majority.......................................................   172
    Letter submitted by Global Financial Integrity...................   178
    ``Hidden Menace'', Global Witness................................   182
    ``Hidden in Plain Sight--How Corporate Secrecy Facilitates Human
      Trafficking in Illicit Massage Parlors'', Polaris..............   184
    ``Anonymous Companies Help Finance Illicit Commerce and Harm
      American Businesses and Citizen'', FACT Coalition..............   190

                                     (iii)

        OUTSIDE PERSPECTIVES ON THE COLLECTION OF BENEFICIAL OWNERSHIP
                                  INFORMATION

                                  ----------

                            WEDNESDAY, JUNE 20, 2019

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10:02 a.m., in room SD-538, Dirksen
    Senate Office Building, Hon. Mike Crapo, Chairman of the
    Committee, presiding.

                OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

        Chairman Crapo. This hearing will come to order.
        Today the Committee will continue its discussion of how
    better collection of beneficial ownership information can deter
    such problems as money laundering, terrorist financing, and
    sanctions evasion through anonymous shell companies.
        I will note at the outset, again, that while the vast
    majority of anonymous corporations can serve legitimate
    purposes, this type of incorporation can also be abused to aid
    and abet all manner of financial crime.
        Last month, the Committee heard from witnesses from law
    enforcement and a banking regulator about what steps the U.S.
    should take to modernize its beneficial ownership regime and
    strengthen its enforcement.
        Today we have invited a panel to give us some perspective
    from the business world on this difficult subject. With that, I
    would like to welcome Mr. Greg Baer, CEO of the Bank Policy
    Institute, whose members confront the ownership issue at
    account openings; Ms. Karen Harned of the National Federation
    of Independent Business, which speaks to the concerns of the
    hundreds of thousands of small businesses it comprises; and Mr.
    Gary Kalman of FACT, or the Financial Accountability and
    Corporate Transparency Coalition, an alliance of organizations
    that is working toward ending the use of anonymous shell
    companies as vehicles for illicit activity and increasing
    transparency for more informed tax policies.
        During last month's hearing, our witnesses assessed the
    need to eliminate anonymous corporations by means of collecting
    beneficial ownership information to protect the U.S. financial
    system, its national security, and citizens from harm.
        The Committee learned that according to estimates from the
    U.N. Office on Drugs and Crime, there is more illicit money
    flowing through the global and U.S. financial systems than ever
    before.
        The U.N. estimate found that global illicit proceeds now
    total some $2 trillion and the proceeds of crime in the United
    States are over $300 billion.
        All of that illicit money has several things in common:
    somebody has to make it, hide it, move it, clean it, and use
    it.
        Despite efforts of U.S. law enforcement and the heavy U.S.
    regulatory framework of the Anti- Money Laundering/Bank Secrecy
    Act regime, which includes a mandate to collect beneficial
    ownership upon opening of a bank account, criminal elements in
    this country and from other countries can and do exploit
    weaknesses in the current U.S. corporate formation system to
    hide identities and illicit assets behind anonymous
    corporations.
        In our last hearing, FinCEN Director Blanco testified that
    a necessary second critical step in closing this national
    security gap is collecting beneficial ownership information at
    the corporate formation stage.
        In agreement with Blanco, FBI Financial Crimes Chief
    D'Antuono cited the need for a central repository to allow law
    enforcement to store and share the information.
        OCC Senior Deputy Comptroller Gardineer also emphasized the
    need for a centralized database, so that businesses could
    provide, update, and verify beneficial ownership information.
    Importantly, she also recommended that foreign entities be
    required to report ownership information either at the time of
    State registration or upon establishing an account relationship
    with a U.S. financial institution.
        Our hearing today comes at a time when bipartisan support
    for beneficial ownership legislation continues to build.
        Last week, the House Financial Services Committee marked up
    H.R. 2513, the Corporate Transparency Act of 2019, which was
    reported out of committee on a 43-16 vote. And on the very same
    day, a bipartisan group of my Senate colleagues here on the
    Banking Committee circulated draft legislation, presently
    called the ILLICIT CASH Act, which provides a number of
    important measures to modernize the AML/BSA regime and to
    address the collection of beneficial ownership information.
        I especially want to acknowledge the hard work of Senators
    Cotton, Warner, and Jones and their staffs, the work that they
    have put in over the last year on this effort, which the
    Committee as a whole shall take close notice of moving forward.
        Each of these legislative vehicles share some of the broad
    themes brought out in the Committee's first hearing, such as a
    requirement for the collection of beneficial information at the
    time of a company's formation, periodic updating, storage of
    that information in FinCEN's secure database, and limiting
    access to that database to Federal law enforcement and its
    qualified State partners.
        We turn now to our panel for their perspectives on the
    important issues underlying further collection of beneficial
    ownership information and how that might impact banking and
    business operations, including concerns that arise with regard
    to privacy and liability issues.
        Given the facts presented to the Committee thus far, there
    are strong law enforcement and national security reasons
    supporting additional collection of beneficial ownership
    information.
        Hopefully, our witnesses will provide some insight on how
    to collect this information at minimal cost and burden to
    businesses.
        Now is the time to critically examine how the AML/BSA
    regime can be modernized and, in particular, how businesses can
    work effectively with Government to efficiently provide
    beneficial ownership information that will in turn provide a
    high degree of usefulness to combat terrorism and crime.
        Senator Brown.

               OPENING STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Mr. Chairman, for calling this
    important hearing, the latest in a series of hearings in this
    Committee on our Bank Secrecy Act and anti- money-laundering
    reform efforts and on critical changes to U.S. beneficial
    ownership laws to combat abuses by owners of anonymous shell
    companies, some of whom have been exploiting our system for
    criminal purposes for years, as we know.
        Unlike in most areas of disclosure and transparency law,
    where the U.S. has led the way, on this issue we have long
    lagged behind other jurisdictions and failed to require uniform
    and clear ownership information for firms at the time of their
    incorporation.
        It is critical to law enforcement. In the U.S., they have
    to spend precious time and resources issuing subpoenas, chasing
    down leads to secure even the most basic information about who
    actually owns a company. That makes no sense and must change.
        Treasury's 2018 Money Laundering Risk Assessment estimates
    that some $300 billion in illicit proceeds from domestic
    financial crime is generated annually, making these funds ripe
    for money laundering through the system.
        Criminals abuse the financial system to launder funds
    gained through narcotics trafficking, organized crime, the sale
    of counterfeit goods, Medicare fraud, Medicaid fraud, and other
    criminal activities. Much of the dirty money is funneled
    through anonymous shell corporations.
        As many of us have observed before, none of the abuses we
    will discuss today--drug trafficking, human trafficking,
    Medicare fraud, money laundering--are victimless crimes. None
    of them are victimless crimes.
        Money laundering for drug cartels has a direct line to the
    opioid crisis in Ohio, where cartel actors have been destroying
    thousands of families. Human traffickers who exploit the misery
    of runaways in truck stops, especially in northwest Ohio at the
    intersection of major interstate highways and across the
    country, use the financial system to launder their profits.
        Medicare fraudsters cost the taxpayers $2.6 billion in
    2017, according to the HHS Inspector General, and tarnish the
    reputation of this lifeline for seniors.
        That is why anti- money laundering and beneficial ownership
    laws are so critical. They protect the integrity of our
    financial system. They provide critical intelligence to law
    enforcement.
        Under Treasury's recent customer due diligence rule,
    bankers must already secure some of this information from
    account holders when they open accounts, and while banks must
    continue to play a key monitoring role, it is important we
    require companies to provide basic information on their
    ownership when they are formed.
        In today's hearing, we will hear from the Financial
    Accountability and Corporate Transparency Coalition--thank you
    for joining us--and from the banks on the many reasons to
    pursue these reforms, including the transparency,
    anticorruption and anti- illicit financing benefits that such
    reforms would offer.
        I ask consent, Mr. Chairman, to include a number of reports
    and letters from outside stakeholders into the hearing record.
        Chairman Crapo. Without objection.
        Senator Brown. Thanks.
        And we will hear from NFIB, some of whose members have
    expressed concern, about the paperwork burden of providing even
    simple ownership information: name, address, copy of a current
    passport or driver license.
        Requiring companies' ownership information, storing it in a
    secure Federal database like FinCEN's, alongside its bank
    secrecy information, would help address longstanding problems
    for U.S. law enforcement. It would help them investigate cases
    involving counterterrorism, drug trafficking, Medicare fraud,
    human trafficking, and other crimes. It would provide ready
    access to this information under long-established and effective
    privacy rules.
        Without these reforms, criminals, terrorists, rogue
    Nations, even, will continue to use layer upon layer of shell
    companies to disguise and launder illicit funds. That makes it
    much harder, surely, to hold bad actors accountable.
        Chairman Crapo and I agree we must move forward to require
    complete ownership information, not front men, not from those
    companies on behalf of those who will pull the strings from
    behind the curtain, but the actual owners of these companies.
        We can do this simply. We can do it efficiently and
    effectively, without unduly burdening small businesses or
    others.
        Updating and strengthening our anti- money laundering and
    beneficial ownership laws will give us a 21st century system to
    combat these crimes.
        Criminals have long been revising, adjusting, and amending
    their tactics to circumvent and evade those laws, often staying
    a step ahead of the sheriff. That is why we must move.
        Thank you.
        Chairman Crapo. Thank you, Senator Brown.
        Mr. Baer, we will begin with your testimony as CEO of the
    Bank Policy Institute. Next, we will turn to Ms. Harned for her
    statement on behalf of the National Federation of Independent
    Businesses and conclude with Mr. Kalman for his statement on
    behalf of the Financial Accountability and Corporate
    Transparency Coalition.
        I want to thank you all for your written testimony. It is
    very helpful to us and will be made a part of the record.
        The Committee has also received several written statements
    in support of today's proceedings that, absent any objection,
    will also be made a part of today's record. The eight
    statements I am referring to are submitted from the American
    Bar Association, the National Fraternal Order of Police,
    National District Attorneys Association, National Association
    of Manufacturers, the Consumer Bankers Association, the
    National Association of federally Insured Credit Unions, the
    Independent Community Bankers of America, and the Credit Union
    National Association.
        Without objection, those will be made a part of the record.
        Finally, I want to ask our witnesses to remember to honor
    and follow the clock and remember your 5 minutes for your
    initial presentation and our Senators to remember your 5-minute
    limitation on your questioning period.
        We will have votes called at some point that may cause us
    to have to move forward more quickly.
        With that, Mr. Baer, please begin.

           STATEMENT OF GREG BAER, CEO, BANK POLICY INSTITUTE

        Mr. Baer. Chairman Crapo, Ranking Member Brown, Members of
    the Committee, my name is Greg Baer, and I am the CEO of the
    Bank Policy Institute.
        BPI is a nonpartisan research and advocacy group,
    representing the Nation's leading banks. We strongly support
    legislation to end the use of anonymous shell companies and
    hope this hearing will prompt congressional action.
        Anonymous shell companies are a key method used by
    criminals to hide assets for a wide range of illicit
    activities, including human trafficking, terrorist financing,
    money laundering, and kleptocracy. All too often, criminal
    investigators have hit a dead end when law enforcement
    encounters a company with hidden ownership and lacks the time
    and resources to peel back the many layers of secrecy. And the
    more sophisticated and sinister the criminal, the more layers
    there generally are.
        In his testimony, Gary Kalman presents numerous cases that
    illustrate that this concern is very real, not hypothetical.
        Legislation to allow law enforcement to look beyond the
    corporate veil, including the draft recently circulated by a
    bipartisan group of Senators on this Committee, would make our
    country safer and enhance the reputation of the United States
    as a country that fights against, not harbors, the worst people
    in the world.
        It has been a pleasure to join on this issue with the
    Fraternal Order of Police and hundreds of former law
    enforcement and national security officials who have attested
    to its importance.
        Currently, the Nation's banks assist law enforcement by
    determining the ownership of companies that open a bank account
    and then using this information to monitor the account for
    activity. However, that regulatory regime has been no
    substitute for beneficial owners of legislation.
        First, it does not cover shell companies that never open a
    bank account because they conduct no business in this country.
    These pure shell companies are virtually invisible. Second,
    while banks gather ownership information from their customers,
    they do not disclose it to law enforcement. Law enforcement
    learns of it only if the bank identifies suspicious activity.
    Legislation would cure these two problems.
        Furthermore, for banks and importantly for the business
    clients who must actually provide this information, legislation
    would centralize the ownership identification process and make
    it more efficient.
        Two primary concerns have been expressed about such
    legislation--burden and privacy. But let us consider a few
    facts. First, the draft legislation requires a business owner
    to disclose only the most basic of information: name, address,
    date of birth, and some form of ID such as a driver's license
    or passport number. That is all. And since the great majority
    of American businesses have only one owner, it would be
    generally provided by and about one person.
        Second, as noted, this information is generally already
    provided any time a company opens a bank account. Of course,
    any legitimate U.S. business, large or small, probably has a
    bank account because any business that earns money or pays
    expenses or employs people must have a bank account. Thus, for
    legitimate businesses, legislation would not increase reporting
    obligations and would likely decrease them.
        Third, with respect to privacy, this basic information is
    already known to various arms of the Government, including the
    DMV and the IRS. Unauthorized disclosure by law enforcement or
    a bank employee would come with severe penalties, and banks
    have a record of keeping such information secret. A FinCEN
    directory should not worry legitimate business owners. It
    should, however, worry a drug trafficker or kleptocrat using a
    shell company to hold a multimillion-dollar condominium in West
    Palm Beach.
        Most small business owners in fact are willing to share
    information to help keep our country safe. According to a poll
    conducted by Morning Consult on behalf of BPI released today,
    small business owners support measures to end anonymous shell
    companies. Of those who had an opinion, 75 percent of small
    business owners supported requiring business owners to provide
    their personal information when forming their company to help
    close this loophole in U.S. law. Furthermore, two-thirds of
    small business owners stated that providing their personal
    information when registering their company would not be
    burdensome.
        Last, it is worth noting that the U.K., EU, and enumerable
    other Nations have adopted such a director without damage to
    their small businesses or any other unintended consequences. We
    can learn from their example.
        The stakes here are very high, and the time has come for
    the United States to act. We look forward to working with you
    on this important issue, and I look forward to your questions.
        Chairman Crapo. Thank you very much.
        Ms. Harned.

     STATEMENT OF KAREN HARNED, EXECUTIVE DIRECTOR, SMALL BUSINESS
       LEGAL CENTER, NATIONAL FEDERATION OF INDEPENDENT BUSINESS

        Ms. Harned. Chairman Crapo, Ranking Member Brown, and
    Members of the Committee, on behalf of NFIB's 300,000 small
    business members, I appreciate the opportunity to testify
    today.
        NFIB opposes proposal likes the Corporate Transparency Act
    of 2019 and the ILLICIT CASH Act. When NFIB surveyed its
    membership on this legislation last year, 80 percent of
    respondents opposed Congress requiring small business owners to
    file paperwork with the Treasury Department reporting on
    beneficial ownership.
        According to the 2016 NFIB Small Business Problems and
    Priorities report, unreasonable Government regulation is the
    second most important problem that small business owners face.
        Compliance costs, difficulty understanding regulatory
    requirements, and extra paperwork are the key drivers for their
    regulatory burdens. NFIB's research shows that the volume of
    regulations poses the largest problem for 55 percent of
    America's small employers.
        The legislation you are contemplating would impose
    mandatory reporting requirements on those least equipped to
    handle that, America's small business owners. Both bills would
    mandate that every corporation or LLC with 20 or fewer
    employees and less than $5 million in gross receipts or sales
    file beneficial ownership information with FinCEN upon
    incorporation and periodically update that information.
        Either the small business owner herself or the accountant
    or attorney that she pays is going to have to ensure these
    documents are filed. One new paperwork requirement may not
    sound that burdensome to someone who does not run a small
    business, but it is quite a different story for the individual
    just starting a business or the small business owner who is
    adding this form to the stack of forms he must already know
    about, fill out, and file.
        Moreover, for many small business owners who have no idea
    what FinCEN is, there is a strong likelihood that they will
    just ignore the information request, and many are going to view
    it with great skepticism.
        Every year, NFIB receives countless calls asking about the
    Census Bureau's Annual Business Survey and that form, whether
    that small business owner really needs to take the time to fill
    it out and provide the information required. It is unrealistic
    to assume that small business owners will simply submit
    personal information, including a passport or driver's license
    and date of birth, to a Government agency that none of them
    have never heard about.
        A well-meaning small business owner who fails to file
    because she never finds out about this new requirement or is
    skeptical about the legitimacy or appropriateness of the form
    would be exposed to civil penalties of $10,000 and criminal
    penalties of up to 3 years in prison.
        These proposals also require small business owners to
    determine and report who is and is not a beneficial owner. That
    is actually not a quick and easy ask for the typical small
    business owner. Calculating who owns 25 percent or more of a
    business should be straightforward, but determining who
    exercises substantial control or receives substantial economic
    benefit from a business many times will not be.
        Imagine the small family run restaurant employing 10
    persons. Their manager has been with them since the opening.
    The financial owners of the restaurant trust her 100 percent in
    all operations of the business. The owners are recent empty
    nesters, and they like to travel. As a result, the manager has
    complete control over the restaurant's operations for several
    weeks a year. She also receives an annual bonus that is
    strictly based on the gross receipts of the business.
        Does she exercise substantial control, or does she receive
    substantial economic benefit from that business under either or
    both bills making her personal information, including driver's
    license and passport number, reportable? How is an average
    small business owner to determine the answer to that question
    on their own? And is that even a question that an outside
    lawyer that they pay could even be able to answer with the kind
    of certainty needed to ensure they are not subject to civil
    money penalties and years in prison for the wrong answer?
        NFIB also has serious privacy concerns with these
    proposals, which are antithetical to the current statutes on
    the books, that even for sensitive kinds of national security
    activities require the Federal Government to focus its
    investigative interest in someone in particular, some business
    in particular, or some account in particular before compelling
    a bank or other business to produce relevant information.
        Finally, NFIB questions whether imposing significant and
    costly beneficial ownership reporting requirements on America's
    small business owners, like your local independent grocer to
    dry cleaner, will stop or deter money laundering or other
    illicit activities.
        NFIB opposes this legislation because it would impose even
    more regulatory burdens on small business.
        Thank you for the opportunity to testify, and I look
    forward to answering your questions.
        Chairman Crapo. Thank you.
        Mr. Kalman.

        STATEMENT OF GARY KALMAN, EXECUTIVE DIRECTOR, FINANCIAL
          ACCOUNTABILITY AND CORPORATE TRANSPARENCY COALITION

        Mr. Kalman. Chairman Crapo, Ranking Member Brown,
    distinguished Members of the Committee, on behalf of the FACT
    Coalition, I thank you and appreciate the opportunity to talk
    about a foundational reform in the global anticorruption
    movement.
        FACT Coalition is a nonpartisan alliance of more than 100
    State, national, and international organizations working to
    combat the harmful impacts of corrupt financial practices.
        There is now overwhelming data detailing the use of
    anonymous companies for money laundering and other criminal
    purposes. In its 2017 ``Tariff Financing Briefing Book'', the
    Foundation for the Defense of Democracies found that anonymous
    companies are being abused by rogue Nations like Iran and
    sanctioned organizations like Hezbollah.
        The anticorruption group Global Witness found that a U.S.
    company had contracted with the Pentagon to supply services to
    troops in Afghanistan and was secretly owned by interests
    associated with the Taliban. We were literally supplying funds
    that could be used to purchase guns and other weapons aimed at
    our troops.
        These chilling reports are why nearly 100 civilian and
    former military national security experts signed a recent
    letter to Congress in support of collection of beneficial
    ownership information.
        Additionally, in the 2018 National Money Laundering Risk
    Assessment, the U.S. Department of Treasury wrote that the
    nature of synthetic drug trafficking has changed with the rise
    of China as a primary supplier if fentanyl. U.S. Drug
    Enforcement Agency has determined that there is an Asian
    version of the Back Market Peso Exchange with goods being
    exports to China by U.S. front companies as payment for drugs.
        Anonymous companies are also used to undermine markets and
    disrupt legitimate businesses. There are numerous examples in
    which anonymous companies disrupt supply chains, fraudulently
    compete for contracts, and engage in illicit commerce through
    the selling of counterfeit and pirated goods.
        Not surprisingly, when businesses were asked, without
    context, if they would support additional regulation, they did
    not.
        However, entrepreneurs understand and manage risk every
    day. When the organization Small Business Majority asked small
    business owners if they were more concerned about the risks and
    burdens of reporting ownership of their businesses or the
    potential loss of contracts to anonymous companies, 76 percent
    said that they were more concerned about losing contracts than
    about the regulatory burdens.
        New data and negotiations over a decade with multiple
    parties have helped to make current proposals more workable and
    compliance easier for businesses.
        An analysis of data collected by the British Beneficial
    Ownership Directory found that the average number of owners per
    business in the U.K. is 1.13, and the most common number of
    owners is one. According to the U.S. Small Business
    Administration, approximately 78 percent of all businesses in
    the United States are nonemployer firms, meaning there is only
    one person in the entity. This suggests that the experience of
    the U.S. would be similar to that of the U.K.
        To address privacy concerns, current proposals place
    information at FinCEN. FinCEN is our Nation's financial
    intelligence unit with the responsibility of housing and
    reviewing data to protect our financial system. The FinCEN
    directory has strict limitations on who can access the
    information and how that information can be used. The directory
    is accessed through a physical portal, meaning that a local
    police officer could not logon during a routine traffic stop.
    Users must be trained and certified and must undergo a
    background check. All searches must be done as part of an
    ongoing investigation, and every file that is reviewed is
    logged so that there is a record of who accessed what
    information. Misuse of that information is a criminal act.
        Like all laws, there would be penalties for violating this
    law; however, under all the current proposals in Congress,
    negligence is not a punishable offense. That means that
    honestly forgetting to add a family member who joins a business
    is not punishable. In fact, the standards in the bills provide
    greater protections for filers against errant prosecutions than
    the American Bar Association's model guidelines in this area
    recommend.
        The U.S. is particularly vulnerable to the abuses of
    anonymous companies. The most recent financial secrecy index
    ranks the U.S. second only to Switzerland among the world's
    secrecy jurisdictions. Progress in the rest of the world means
    the U.S. is likely to become an even more attractive haven for
    illicit cash unless we act.
        We hope this hearing provides Members with an opportunity
    to better understand the dangers posed by anonymous companies
    and move swiftly to address them.
        I am happy to answer your questions.
        Chairman Crapo. Thank you, Mr. Kalman.
        I will begin with a question relating to the storage of
    this information if it is mandated to be collected, and I
    realize there is some discussion about whether this new regime
    of data collection should be adopted.
        But assuming that there will be some kind of beneficial
    ownership storage requirement, there has been some discussion
    about whether the central repository, if you will, should be
    FinCEN, whether it should be the IRS, whether it should be
    banks, whether it should be the States.
        Could each of you just quickly, please, tell me if you have
    an opinion on where that function should be located?
        Mr. Baer.
        Mr. Baer. Thank you, Senator.
        I think FinCEN is the obvious and best candidate. They have
    experience with this type of information. They have the
    database.
        Banks are not really an option because this would include
    filings for companies that, again, do not have bank accounts
    and are simply shell companies. So the bank would not even be
    aware that that company existed, and it certainly would not be
    its client.
        I think the IRS is problematic on a variety of fronts and
    opens up a bunch of new issues.
        FinCEN seems perfectly well suited to do this, and most
    importantly, law enforcement is used to go into FinCEN if they
    need data.
        Chairman Crapo. Thank you.
        Ms. Harned.
        Ms. Harned. I cannot really speak to an opinion on who
    should house it. Again, I would say, like I did in my
    testimony, that our members do not know who FinCEN is, and our
    bigger issue is just the access to the information and ensuring
    that it is secure.
        Chairman Crapo. All right. Thank you.
        Mr. Kalman.
        Mr. Kalman. We also would agree that FinCEN is the right
    repository. We think that it is a good mix of protecting the
    privacy but allowing law enforcement the appropriate access
    that they need in a timely fashion.
        Chairman Crapo. All right. Thank you very much.
        And there has been some comment also today that the United
    States is lagging far behind in terms of having the kind of
    structure to deal with beneficial ownership on a global basis.
        How do most of the other Nations who are ranked as having a
    more effective system operate? I guess the question I am asking
    is, Do they collect the same level of data and so forth, and do
    they have a central repository? And how does that work? Any of
    you, just jump in on that.
        Mr. Kalman. Just quickly. So the first directory that is
    sort of up and running is in the U.K. It is a public directory,
    actually. They do collect similar information.
        There are some exceptions to the publication of that data
    where there is an appropriate reason to do so.
        The European Union has voted that all 28 member States are
    to have a directory up in the next few years, and that also
    includes the Economic Zone. So that is the additional three
    countries. The U.K.'s Crown dependencies and the overseas
    territories are also in line to bring on beneficial ownership,
    and it is all very similar information.
        Chairman Crapo. All right. Thank you.
        I will let you choose among yourselves who wishes to
    respond to this question. Banks already generate and file
    sensitive suspicious activity reports, SARs, and under the
    current CDD rule, they already collect some of this beneficial
    ownership information at the account opening. How do banks
    treat this information and keep it private, and how would this
    legislation keep similar information private?
        Mr. Baer.
        Mr. Baer. Sure, Senator. I mean, with respect to SAR
    filings, there is a whole special regime just around that act,
    where a bank is criminally prohibited from disclosing the
    existence of that SAR to anyone, including the subject of the
    SAR.
        With respect to the information gathered in the account
    opening process, which includes this type of information and a
    lot of other information, historically you have the Right to
    Financial Privacy Act, which is really more directed at keeping
    it private from Government, but also under the Gramm-Leach-
    Bliley Act, there was actually a title of that law that
    established important privacy protections for U.S. citizens and
    bank account holders. And under that, banks not only have to
    keep that private, but they have to, under the FTC safeguards
    rule, have a demonstrated way of ensuring that it is safe and
    sound.
        Chairman Crapo. All right. Thank you.
        Senator Brown.
        Senator Brown. Thank you.
        Mr. Kalman, I want to follow up on your answer to Senator
    Crapo about other countries. Understanding what you said, that
    we lead in a number of things, perhaps on combating terrorism,
    financing terrorism and drug trafficking and other crimes, but
    do not on this, and that Britain especially has moved, the
    current gaps in U.S. laws, how do those affect U.S. efforts to
    enlist international partners in this?
        Mr. Kalman. Actually, in several ways. Thank you for the
    question.
        Let me actually say there are numerous law enforcement
    officials that have told this story in various settings, where
    they go overseas to work with our partners to try and help them
    negotiate and try and strengthen anti- money-laundering laws or
    to train them on how to do these investigations.
        Inevitably, at the end of those trainings, people come up
    to them and say, ``Hey, could you help me with an
    investigation? We have traced the money back to, say,
    Delaware,'' or one of the other States in the country. And they
    are very embarrassed that they cannot help them because there
    is no information.
        So, in short, it not only undermines our ability to find
    this information, but it also inhibits our ability to work with
    other Nations and make this more of a global norm.
        Senator Brown. Thank you.
        Let me ask you about real estate. The abuse of shell
    companies obviously is a real problem. Some of them, we have
    seen the involvement of Russian oligarchs and other
    authoritarians. There are pools of money flowing into cities
    and buying up U.S. real estate. These investments do more than
    just allow fraudulent actors to park illicit money into our
    country. They also potentially--and we have seen examples of
    raising prices and pushing out illegitimate buyers.
        Explain how creating national beneficial ownership
    disclosure requirements and a shared database would strengthen
    efforts to counter that kind of illicit foreign money flowing
    into U.S. real estate.
        Mr. Kalman. The real estate markets are particularly
    vulnerable. They are obviously large attractive ways of
    investing money. It not only drives up prices, but is also
    drives out small businesses that actually rely on people living
    in those entities. And when these buyers come in, they do not
    buy it to live there. They are not residences. They are
    actually using them as bank accounts, and so entire
    neighborhoods are being hollowed out. And you can see that in
    New York and Miami.
        If there was a crime to file beneficial ownership
    information, then the banks would be able to check that
    database. If there were suspicious activity and law enforcement
    figured it out, then they would be able to go and check those
    registries.
        What is interesting is the geographic targeting orders
    issued by FinCEN showed that 30 percent of the transactions
    covered by the geographic targeting orders involved people with
    suspicious activity reports. So this information would be
    valuable to law enforcement.
        Senator Brown. Thank you.
        Ms. Harned, thank you for your concerns representing your
    300,000 members. I have a couple of comments, and then I want
    to ask how we can--this is pretty clearly a bipartisan effort,
    and we want you on board, if at all possible, making easier
    particularly for people, maybe in both parties, but especially
    Republicans to support this effort.
        According to the Census Bureau, 94 percent of firms with
    paid employees have fewer than five owners, the kind of
    membership I know that you thrive on. As you know, we are
    asking for name, address, date of birth, nationality, driver's
    license, or passport.
        Considering that the example you gave us of the restaurant
    owner couple and then the woman who got the bonus when she was
    doing such a good job, that only she would have to only file,
    name, address, date of birth, nationality, driver's license, or
    passport. How do we mitigate your concerns on this so that the
    burden--I know there is always one burden, another burden,
    another burden, but this is pretty simple. It is in our
    national interest. It is to help all of us be more safe, and to
    some of us, it does not seem like a huge burden. Walk through
    what we could do to make you want to support something like
    this.
        Ms. Harned. Well, I just think there are still so many
    questions with this legislation, quite frankly. I mean, again,
    you are starting with the premise that our members are not
    going to support a new paperwork requirement. I mean, we must
    start with that premise.
        But then moving forward from there--you know, I am here for
    the law-abiding, 90-plus percent members or businesses that are
    not--you know, the vast majority that are not criminals. We are
    very concerned that this is very broadly tailored. It is more
    of just let us make everybody report and not really going
    after----
        Senator Brown. Well, can you identify your 1/100th of 1
    percent of NFIB members who might be terrorists?
        Ms. Harned. I do not think we have any.
        Senator Brown. Of course, you cannot, no.
        Ms. Harned. Yeah.
        Senator Brown. But my point is that that is the way these
    things work. Keep going.
        Ms. Harned. I guess my point also is even the bankers
    during the CDD rule comment phase noted that this was going to
    be very hard for small business owners, and when you are
    looking at things like gifting a business to a family member, a
    multigenerational business, and forgetting to fill out the
    form, you are slowly transitioning the son or daughter to
    become more of an owner of the business, take more ownership, a
    divorce, there are so many things that can happen that are
    going to trigger this. If you get that answer wrong, and it is
    a matter of enforcement discretion whether or not you are going
    to see a civil penalty and/or jail time.
        I just think at the end of the day, it seems like a very
    big hammer for a very little nail. I am not doing a good job of
    my analogy, but it is just such a broad--making all the small
    business owners report, rather than just when they are--as we
    currently have under the CDD rule, the bank is doing the
    reporting. It is just very hard for our members because, again,
    when you are asking them for this information--let us say it is
    done through the Secretary of State through a letter. They are
    going to get this letter, and a lot of them are going to be
    like--they might freak out, quite frankly. They might wonder,
    ``Who is FinCEN? Do I really need to do this?'' I mean, there
    is just going to be a lot of--a lot of questions, and I just am
    very concerned there is going to be rampant noncompliance.
        Senator Brown [presiding]. I would hope if this passes--
    and, again, it has got a lot of bipartisan interest--if it
    passes that you would help us in allaying some of the fears of
    your members of your constant ``preaching,'' for want of a
    better term, or educating that Government regulation is always
    evil and that Washington is always a bad actor, that you
    would--and to help make America great, perhaps you would help
    to teach people that sometimes to fight terrorism, maybe this
    is what you have to do.
        But we will continue to work with you.
        Senator Reed.
        Senator Reed. Thank you, Mr. Chairman. Thank you, Mr.
    Ranking Member, to be accurate, and the lady and gentlemen,
    thank you for your testimony.
        Mr. Kalman, I think we understand that this is a grave
    national security issue. Can you give us an idea of what you
    believe the most important tools would be for us to provide to
    deal with this issue of beneficial ownership?
        Mr. Kalman. Thank you for the question, Senator.
        Just yesterday in the Judiciary Committee, Adam Szubin, the
    former Acting Treasury Secretary and Under Secretary for Terror
    Finance, said that collection of the beneficial ownership
    information is perhaps the single most important thing that
    Congress can do to combat the problems associated with
    anonymous companies and national security. Simply collecting
    this information and putting it in an accessible place for law
    enforcement and for the financial institutions that are seeking
    to protect our financial systems seems like the most important
    thing we can do.
        Senator Reed. Very good.
        And we are seeing this problem in terms of infiltrating our
    industrial base, as you pointed out. The Afghan Taliban company
    that was supplying our forces to fight the Taliban is a bitter
    irony. We are seeing it in our political space where we do not
    know some of the corporations who are funding campaigns through
    super PACs. We are seeing it in terms of potentially media
    ownership or other aspects that face the social fabric.
        So this is an issue that is profound. I would hope you
    would agree.
        Mr. Kalman. I would.
        Senator Reed. And I think we can agree on the dimension of
    the problem. We might differ on solutions, but this is not
    going to go away. It is going to get much, much worse.
        In that regard, there is a related issue in my mind--I
    mentioned it to Senator Brown--is that a lot of these sham
    companies are using Bitcoin and other devices to, again,
    undermine our economy in other respects.
        Mr. Kalman, any ideas about improving transparency related
    to these currencies?
        Mr. Kalman. Thank you for the question.
        Two things, I guess I would say on that. First, I should
    say I am not an expert on cryptocurrency, just to be clear, but
    as far as I understand, there is multiple steps, one of which
    is there are entities when you first purchase the
    cryptocurrency. Right now, anonymous companies can get into the
    system. Once they are in there, I am less familiar with how it
    operates, but just to literally get into the system, an
    anonymous company can do that.
        The second thing I would say is it is also yet another
    reason to pass legislation as opposed to just relying on the
    CDD rule. Cryptocurrencies are not going through banks, and so
    it creates another vulnerability.
        Senator Reed. I think interesting is just the announcement
    that Facebook is proposing to create a cryptocurrency, Libra.
    They have 2 billion members all across the world. There are no
    national lines. The potential--and again, 10 years ago, if you
    talked about this nice little application where you could talk
    to your buddy, you would not assume it would gather so much
    power as it has.
        But there is a real danger in terms of the economy that the
    dollar could literally be displaced as the world currency if
    this cryptocurrency spreads rapidly, and that raises profound
    issues. I think the Committee is going to be prepared to
    grapple with them, but both in terms of--I think we have two
    issues here. We have got to fix this beneficial ownership
    problem. All the evidence that we have seen shows it is a
    vulnerability that is significant.
        If you marry that up now with a worldwide cryptocurrency
    which essentially eliminates the Federal Reserve as a moderator
    of economic policy in the United States, we will have a new
    world economy and world power structure that we have never
    anticipated, and that could happen, the way things move, within
    months, or years, not within decades.
        So thank you all for your comments today.
        Thank you, Mr. Chair.
        Senator Brown. Thank you, Senator Reed.
        As you suggested, we have all been talking about this, and
    the Chairman has called a hearing on cryptocurrency, on this
    issue, I believe in July.
        Senator Warner.
        Senator Warner. Thank you, Senator Brown.
        Let me first of all--I appreciate you and the Chairman
    bringing this issue up and recognizing the broad bipartisan
    support. Senator Cotton, Senator Jones, and I have been working
    on legislation called the ILLICIT CASH Act that at least is a
    starting point that I hope you and the Chairman would look at.
        I also want to pick up a little bit where you left off. I
    find it remarkable, Ms. Harned, that any business organization
    would have such a knee jerk reaction. I think the vast majority
    of NIFB businesses in Virginia know that there is abuse, know
    that there are shell companies that are being manipulated.
        We are not talking about putting in place requirements for
    financial records. We are looking for name, ID, pretty basic
    stuff.
        Mr. Kalman, your testimony has done a great job on how this
    approach can strengthen also about national security and
    fighting terrorism, but let us face it. This would also have
    implications well beyond national security and fighting
    terrorism. How can this, the kind of database we are creating
    in our legislation and other proposed legislation, take on
    issues around sex trafficking, opioids, tax evasion,
    counterfeit materials, all concerns that most small businesses
    have?
        And I would point out--and maybe some of the groups have
    not done their full research--that all independent analysis
    shows that America is at the absolute bottom of the pile,
    second from the worst of any Nation in the world, in having too
    much secrecy in our laws.
        So I would be happy to introduce the representative from
    NFIB to Virginia businesses who actually, I think, would
    recognize if we do this in an appropriate way--and I think our
    legislation tries to take those small businesses concerns more
    than maybe what is going on in the House--that they would do
    their patriotic reporting.
        With FinCEN, you have an organization that is not, by any
    means, a gotcha-type organization. They have worked well with
    people. They try to make sure if there is a forgotten filing or
    missed filing, you do not move to penalty. Some of the over-
    the-top rhetoric about, well, you are going to get put in jail
    is either an evidence of ignorance or really not very helpful.
        So, Mr. Kalman, if you could speak about this beyond some
    of the national security and terrorism issues, I would be
    grateful.
        Mr. Kalman. Sure. Thank you for that question.
        The anti- human-trafficking organization Polaris joined our
    coalition last year specifically because of the connection and
    the nexus between human trafficking and anonymous companies. In
    fact, they did a study where they looked at 6,000 illicit
    massage businesses and actually did a deep dive into illicit
    massage businesses in Virginia and found that in over 80
    percent of the cases, there was no individual listed on the
    ownership line. In 21 percent, they did list someone, but it
    was unclear if it was the owner.
        So the found anonymous ownership being one of the leading
    drivers of preventing law enforcement from being able to crack
    down on illicit massage businesses and the human trafficking
    that goes on through there, so that is just one example.
        Senator Warner. And there is some more examples of fake
    fronts, I know, in Southwest Virginia around opioid
    distribution.
        Now, again, many of the small businesses want to get the
    right workforce, I think would like to see a shutdown of those
    kind of enterprises.
        One of the things that we have also tried to address is
    that this information might be used to go after political
    opponents that have not done any--created any criminal
    wrongdoing.
        I think you are aware in our legislation, we exempt (c)(3)s
    and (c)(4)s, but can you speak again to our legislation and how
    we preclude that kind of--any potential for political
    manipulation?
        Mr. Kalman. As I understand it, this bill is not meant to
    address political spending issues, and to be clear, if
    individuals or entities are moving money into the political
    system legally if people are--we may have a debate, a different
    debate over political finance, then this is not going to get
    it. That there is no public release of this information.
        If an actor in a State did somehow get access to the FinCEN
    database, an Attorney General or what have you, who had access
    to the FinCEN database and used it purely to find out dirt on
    their political opponent, that is a criminal act, and they
    would have to be willing to jeopardize their political career.
        I will say, though, that foreign interference in the
    election, if in fact money is coming in from Russia, North
    Korea, or China to influence our elections, and law enforcement
    finds out about it, this would be a way of combating that.
        Senator Warner. Let me also get in one, and let me be
    clear. We are very concerned about undue burden on small
    business. It is why we tried to make sure, unlike the House
    direction, that this reporting was supposed to be integrated
    into the existing processes and procedures and that you would
    only need an additional filing if there is that change in
    ownership.
        I would like to have you comment on that, but I also do
    think, echoing what Senator Brown has said, that if we are
    second worst in the world on this, if we have evidence of
    terrorism and other bad actors, if we have evidence of sex
    trafficking, opioids and other levels of abuse, and we have
    seen a proliferation of these shell companies using these
    tools--I can tell you from the intelligence community side, we
    have seen that proliferation--I would be very anxious to talk
    to any small business about the need for this and work with
    every small business to make sure that we do this in the least
    burdensome way possible.
        But to have simply a knee jerk reaction of any new
    reporting requirement, by definition, is not worth the value of
    that report is frankly a not very sophisticated or helpful
    view.
        So, Mr. Kalman, how else can we make sure we do a better
    job on protecting small businesses from not doing this in a
    burdensome way?
        Mr. Kalman. Well, in your legislation, in the ILLICIT CASH
    Act, I think you all did take some really important steps that
    are new and different ways of collecting this information than
    had been proposed in the past.
        Let me just give you one example, since we have limited
    time. The change to requirement the updates every 90 days
    instead of 60 days, businesses do not interact with Government
    every 60 days. They do interact----
        Senator Warner. Right. They do it on a quarterly basis.
        Mr. Kalman. Most businesses interact on a 90-day basis,
    which means that they do not have to remember independently.
    They do not have to think about this, and when they go on and
    file their payroll taxes or their quarterly estimated taxes or
    what have you, there could be a button on the IRS website that
    takes you to FinCEN. You check the thing going ``Yes, that is
    still me'' or make the updates, and it is a seamless process.
        Senator Warner. Again, that information is not financials;
    it is simply identify.
        Mr. Kalman. It is simply identification, and we think that
    that truly removes one of the burdens for small business and
    makes it a very seamless process in things they are already
    doing.
        Senator Warner. Thank you so much.
        Thank you, Mr. Chairman.
        Senator Brown. I have one more question actually for Mr.
    Baer and for Mr. Kalman, if you would each answer about privacy
    concerns.
        Some have expressed a concern requiring actual ownership
    information that company formation would unnecessarily infringe
    on American's privacy rights. Obviously, it underscores the
    importance of ensuring the information is lodged in a secure
    database where it can only be accessed by law enforcement
    officials with a legitimate public purpose.
        Describe, each of you--start with Mr. Baer--and my really
    only question, could you describe precisely what ownership
    information will be required of companies' information? For
    example, under the Maloney bill in the House, do you think
    current FinCEN safeguards on data privacy are sufficient to
    ensure strict privacy for this kind of beneficial ownership
    information?
        Mr. Baer.
        Mr. Baer. Thank you, Senator.
        Yeah, I believe existing safeguards have proven to work and
    would be sufficient in this area. As Mr. Kalman noted, access
    to FinCEN data is limited to a physical portal. You have to be
    authorized. You have to be pursuing a legitimate investigation.
    This cannot be a fishing expedition or just a fun frolicking
    detour. There are penalties in the event that that does happen.
        And, again, we have a track record with FinCEN of success
    in that area, as well, of course, with the banking industry
    where this information is held and has been kept confidential
    until the end of time.
        Senator Brown. Thanks.
        Mr. Kalman.
        Mr. Kalman. Specifically, the information is name, address,
    date of birth, and identification number. So just to answer
    that question, we think it is limited pieces of information
    that are valuable to law enforcement, without overly providing
    information about finances or other issues.
        And I would just remind that the kind of fishing
    expeditions or concerns about this carry criminal penalties.
    This is a very serious issue.
        One of the things they did in the House bill, which might
    be helpful, is when people--originally they had you access the
    FinCEN database through existing protocols, and people did not
    understand what that means. And so they actually listed out a
    number of the protocols to help people understand the privacy
    protections, and that, I think, gave people with privacy
    concerns a lot more comfort that when they are spelled out in
    the bill that that actually--when they saw it, they said, ``Oh,
    that actually is a reasonable set of protections.''
        Senator Brown. Thank you, Mr. Chairman.
        Chairman Crapo [presiding]. Senator Tills.
        Senator Tillis. Thank you, Mr. Chairman.
        Thank you all for being here.
        I have one question. Anytime we are looking at potential
    investments that are maybe questionable, we want to make sure
    that we have collected the appropriate information, make sure
    these transactions and investments are in the best interest of
    the United States.
        The flip side of it is sometimes, let us say, with CFIUS,
    we know the vast majority of the applications go through the
    process are proven to be valid for the foreign direct
    investments. So when we get on this subject, we have frequent
    investors and those that--if you could think of almost TSA
    preclearance, the concept I am sure you are all familiar with
    and the trusted natural person. Can you give me any thought on
    how you could implement that so that the ones that you have
    based on track record would be fined, actually move them into
    the express line, so that we have more resources to go after
    potential investors and investments that are the ones that we
    are seeking to identify? Just go down the line.
        Mr. Baer. Senator, I think you are right, and this
    certainly is an area where the vast number, vast majority of
    those who file in fact will not ever be objects of law
    enforcement interest. So, clearly, you want to minimize the
    burden on the great majority for whom this information
    eventually will not be that useful to law enforcement.
        But I think the way you do that is by greatly simplifying
    the amount of information that they have to disclose, which
    especially in this day and age, when I am putting this--more
    information than this on every website I seem to visit, to have
    to do that once at formation as part of a bunch of other things
    you are going to be doing anyway and quarterly only if there is
    a change, again, as part of an existing interaction with your
    Government, that seems the best way to minimize this
    obligation.
        It is tough to do precheck when there is so little
    required. They are not doing cavity searches here for anybody.
    So it is really a minimal intrusion, I think, to start with.
        Ms. Harned. Well, again, we are very concerned about the
    burden, and we are concerned about the exposure. It is leaving
    honest American small business owners with--you noted the
    criminal penalties again. If you make a mistake, the way the
    current law is constructed in the legislation we are looking
    at, there are criminal penalties attached. You are now dealing
    with enforcement discretion to make sure that a mistake is not
    penalized that way.
        We just also think that criminals are going to lie, and
    even in the hearing that you all held, I think, last week,
    Mr.--what is his last name?--Blanco said that even FinCEN was
    not going to be able to verify all of this data, and so then
    our question is why are you requiring every small business
    owner in this country to provide it.
        Mr. Kalman. We would be happy to talk with you about
    figuring that out. I think, as Mr. Baer said, because we are
    talking about such a limited set of information, I am not sure
    how you could streamline it further, but we would certainly be
    willing----
        Senator Tillis. Not much.
        Mr. Kalman. But we would be certainly willing to talk about
    that.
        I think that the improvements like in the ILLICIT CASH Act
    that try and match up reporting episodes with existing business
    interactions with Government is a good way of making sure that
    you are minimizing the amount of burden on businesses, but
    happy to talk to you.
        Senator Tillis. Yeah. The issue, when you are a small
    business and you are the CEO, the CFO, the head of marketing,
    the head of regulatory affairs and sales, it may seem like only
    a little bit of information. But when you are acting or
    interacting with Big Government, I have no doubt that there are
    some who may want to move capital, simply will not, because it
    is just one more layer on top of a small business base that is
    already overburdened with just running their businesses.
        So I think just looking at it, trying to figure out a way
    to do it efficiently, because I do know, just like foreign
    direct investment, the vast majority of the transactions are
    not maligned, and the more the merrier. That is how we continue
    our great story to tell in terms of growth.
        Thank you all.
        Chairman Crapo. Thank you.
        I am going to ask one more question too, and then we will
    be done with the questioning, maybe one more quick line of
    questions.
        It focuses on this. I think Ms. Harned has raised
    legitimate questions from the small business concern about
    whether this is yet again another regulatory burden being
    imposed on our many small businesses in the country.
        The response to her has been that this is a very minimal
    set of data and it is not really a significant increased
    burden.
        I can see some concern on the part of the business
    community in the United States that maybe that is what we
    think, that it may not be what it becomes. I am familiar in--I
    am not going to use specifics here, but I am familiar in other
    regulatory arenas where what should have been just filling out
    a little bit of data about somebody has turned into a
    regulatory nightmare for those being regulated because--I will
    use an example that is a real example.
        Penalties imposed for failure to capitalize the State in an
    address, I do not think we contemplate here having FinCEN or
    IRS examiners come into every small business in the United
    States to make sure that they go over their records and be sure
    that they are accurately reporting. I do not need you to--other
    than just give me a yes, that is what you are not
    contemplating. Is that correct, Mr. Baer and Mr. Kalman?
        Mr. Baer. Correct, Senator. There is no examination
    function here.
        And I would also add that at least under the Senate and--
    the draft Senate bill and the House legislation, there is no
    penalty for a mistake. It has to be a knowing, willful act.
        Chairman Crapo. So is there a knowing and willful standard
    in the legislation being proposed?
        Mr. Baer. In the ILLICIT CASH Act, yes, there is.
        Chairman Crapo. OK. So, Ms. Harned, would you feel better--
    maybe I should not say ``feel better.'' Would it be acceptable
    if there were a very solid and clear knowing and willful and
    material standard so that an immaterial or inadvertent mistake
    would not trigger penalties, and if we made it very clear that
    we do not intend for the regulators who will be enforcing this
    system to be stepping up this basic requirement that we are
    putting together and expanding it through rule and regulation
    or what have you?
        Ms. Harned. Well, I cannot negotiate today, right?
        Chairman Crapo. Sure.
        Ms. Harned. But, I mean, that would--what you are
    describing would be something we would definitely want to look
    at because, again, that is a concern. Just saying willful and
    knowing, that does not always come out the way that you might
    think it would for--you know, somebody may still not have bad
    intent there and still get caught up in it or at least have to
    defend themselves and pay money to do that. So we would want to
    look at that language.
        Chairman Crapo. All right. Thank you.
        Either Mr. Baer or Mr. Kalman, would you like to comment on
    that any further, just the general issue here that I raised?
        Mr. Baer. I guess, Mr. Chairman, the only thing I would add
    is, I mean--and to go back to my original testimony, this is
    information that small businesses and large businesses are
    already providing to their banks under the FinCEN Customer Due
    Diligence Rule instead of--it is actually the Social Security
    number instead of the passport or driver's license ID, but
    everything else is the same. That has not proven to be an
    insuperable burden. I do not think you have seen prosecutions.
        So it is something they are already doing, at least any
    small business that has a bank account, which is, in other
    words, any legitimate small business. So that seems to be a
    pretty good foundation on which to believe that this is not
    something that is going to get out of control or be a very
    large burden.
        Chairman Crapo. All right. Well, thank you.
        I see we have a couple of other Senators arrive. Did you
    want to ask questions?
        OK. Then I did not see who was here first. Oh, Senator
    Jones, go ahead.
        Senator Jones. Thank you, Mr. Chairman. I appreciate the
    witnesses being here. Thank you, Mr. Chairman, for calling this
    hearing.
        I know that--and I apologize for being late this morning,
    but I know that there have been a number of concerns raised
    about added paperwork for small business. But when talking
    about information that has the potential for saving lives, I am
    not sure that that--I do not want to get overburdened with
    paperwork, but at the same time, this is really important.
        The bill that we have pending right now makes clear that
    FinCEN should take every step available to combine the
    beneficial ownership reporting with existing procedures that a
    business might already engage with at a State and Federal
    level.
        So let me give you an example. In Alabama, every year, an
    LLC has to file an annual report and business privilege tax
    return. It costs a minimum of $100, and there are multiple
    forms to fill out. This does not even count the various
    business licenses that they have to fill out, the permits that
    are required often to actually conduct business.
        I guess this really--anybody can answer this, or all of you
    can. If the filing of the beneficial ownership, three or four
    names and addresses, could be done alongside processes that
    already exist, like the ones I just described, is this going to
    be a substantial burden on those businesses?
        Ms. Harned. Well, I would argue that you are also kind of
    making my point because you are suggesting all of the reports
    that the small business owner is already having to fill out.
        I hear what you are saying on the protocols that----
        Senator Jones. But you are not suggesting that they should
    not fill those forms out. I mean, a business----
        Ms. Harned. No. I am just saying that that is already--one
    of their biggest burdens on small business is just paperwork
    compliance.
        Senator Jones. OK. Sure.
        Ms. Harned. And when you are talking about adding this to
    existing protocols, my other concern that I raised in my
    testimony is--again, you click on a button that takes you to
    FinCEN. My members do not know who FinCEN is, and they may be
    very skeptical that this is something that they really need to
    do. Are they being scammed? Is this some malware situation?
        I could see that reaction happen often because I have been
    at NFIB for 17 years and we still get numerous calls on the
    Small Business Survey that the Census Bureau does.
        Senator Jones. Right.
        Ms. Harned. ``Do I really need to do this? Do I really need
    to provide this information?''
        So I just--you need to understand that for a business that
    just has five employees, they are very skeptical of these
    questions that are coming from----
        Senator Jones. Is that any reason not to do it, though?
        Ms. Harned. I am sorry?
        Senator Jones. Just because there would be some businesses
    that might be skeptical of doing it and may be afraid to push
    the Send button, is that a reason not to do it? If 90 percent
    of the businesses out there do it and they do not have a
    problem with it, should we just throw the baby out with the
    bath water and let the 10 percent control?
        Ms. Harned. Right. But then there is criminal and
    significant civil penalties for noncompliance.
        Senator Jones. No, I agree with that. Look, I get that,
    that we, you know--but I have also been a prosecutor, and I
    understand that when you see something like that and you have a
    business, you talk to them. You do not run out and prosecute
    somebody just simply because they screw up the first time.
        So I do not think there is a real likelihood, given what my
    history has been with prosecutions, that if somebody does not
    do it as this process gets implemented that they would
    immediately be prosecuted.
        Now, if they do not do it three, four, or five times in a
    row, that is a different story, but I hesitate to not put
    something like this in there just because somebody might be
    hesitant to do it when I think overwhelmingly the small
    businesses out there get it, and they would understand exactly
    why we do it.
        I do not think that this--from my view, it does not
    increase the burden very much. There is a burden on small
    businesses, and I think everybody on this Committee would love
    to see that burden lightened in some way, but yet some of the
    information that they have is just incredibly important. It is
    important for transparency. It is important for people to see
    what is going on in their State.
        So how do you balance that? Do you just not do it? Do you
    just not collect this?
        Ms. Harned. Again, I mean--but now the solution that is
    being proposed is so broad. I mean, it is every single business
    owner.
        Senator Jones. Well, what do you suggest? Give me a
    suggestion on how we narrow it.
        Ms. Harned. Well, were there not businesses that are more
    likely than not? Like we have talked about real estate or
    things like that. Can we not target where we are seeing the
    actual problem?
        Senator Jones. We have excluded a bunch of those. We have
    excluded a bunch of businesses in this bill. For that very
    reason, we have excluded a bunch of these businesses.
        Ms. Harned. No, but where you are seeing more of the
    problems, I guess, is what I am saying.
        Senator Jones. Yeah, but if we see more of the problems--
    just like when I was--if we arrested a drug dealer, when I was
    a prosecutor, on this corner, somebody is going to pop up on
    this corner. So if we start excluding those businesses, guess
    what? Somebody is going to start moving into those businesses
    that have been excluded.
        I think what we have done with this bill is we have put
    some exclusions in there because, historically, there has never
    been an issue, and the burden would be great.
        But we cannot start cherry-picking those exclusions so much
    because I am telling you the bad guys will go there. I know
    that. I have been there. I have done that, and they will go
    there.
        So I am happy to work with you and your staff to try to
    help to tailor this to allay your concerns, but at the same
    time, I do not want to get the fear of a few people who might
    be concerned about hitting a button on the internet to stop
    what I think and what I think my colleagues that have worked on
    this for over a year have done, an incredibly important thing
    that we can collect that might help save lives down the road.
        But thank you. Thank you very much.
        Thank you, Mr. Chairman.
        Chairman Crapo. Senator Cotton.
        Senator Cotton. Thank you, Mr. Chairman.
        Thank you to our witnesses for appearing today.
        I have been working on the ILLICIT CASH Act now since last
    summer, and I want to thank Senator Jones, Senator Warner,
    Senator Rounds, the Chairman and Ranking for their assistance,
    as well as some of the other Senators not on this Committee,
    like Senator Gramm and Senator Feinstein on the Judiciary
    Committee, who held a hearing on this topic yesterday.
        I also want to thank the Bank Policy Institute and the
    Financial Accountability Corporate Transparency Coalition for
    their support for the draft bill we have introduced.
        The bill includes an overhaul of our outdated anti- money-
    laundering laws, and most of it was done months ago, but we
    still have only released a draft, even after consulting with
    more than 50 different stakeholders, like privacy groups and
    law enforcement, FBI, FinCEN, and business groups, because we
    still want more feedback. We do expect to introduce a final
    version later this summer, but we look forward to hearing
    feedback and input from our colleagues here in the Senate as
    well as the organizations who are represented here at this
    hearing and many other representatives of the business
    community.
        We need a beneficial ownership registry for national
    security purposes. I have heard that repeatedly from the FBI,
    from the Department of Justice, from the intelligence
    communities I oversee on the Intelligence Committee. It can
    help not only things like terrorism, but human trafficking and
    other crimes.
        I am also very mindful, however, of the potential burden
    that such a registry could impose on businesses, especially
    small businesses. That is why I have made it a priority over
    the last year to try to find ways to minimize those burdens,
    while also ensuring that our registry helps meet the needs of
    law enforcement in our intelligence communities.
        I think it is better that we work now to create a best-in-
    the-world system if a registry is going to be inevitable rather
    than wait around to have a system that ultimately will hurt
    small businesses.
        That is why we have taken many steps to include sensible
    provisions that will alleviate the potential burdens on small
    business.
        First, the beneficial ownership registration will be
    attached to things that businesses are already doing, like
    creating or renewing their entities at the State level.
        Second, there will be no additional annual reports
    required. After filing a registration, companies do not have to
    do anything more unless there are changes to the company's
    ownership.
        Third, there will be exemptions to the registry that are
    self-effectuating. Things like nonprofits, churches, and other
    regulated entities will not have to prove that they are exempt.
    They will simply be exempt.
        Fourth, going to the points that Senator Jones was making,
    there will be a cure provision. Everyone will get due process,
    which should have the benefit of also getting quality data into
    the database. So if there is any kind of minor discrepancy in a
    company's beneficial ownership registry, that company will have
    the opportunity to address and correct that issue. That also
    means that they will not face the risk of certain penalties
    without the ability to correct inadvertent or good-faith honest
    mistakes or errors.
        Fifth, there will be an ombudsman-like process for any
    business who has questions or complaints about the process as
    well as a semiannual report to Congress summarizing Inspector
    General's activities related to beneficial ownership.
        Sixth, strict protocols for who can access the beneficial
    ownership registry will be adopted. We have also included very
    severe penalties, even prison time, for the improper disclosure
    of any company's beneficial ownership data.
        Seventh, we will have a clear definition of what it
    actually means to be a beneficial owner, clearer than the bill
    that just passed the House Financial Services Committee.
        Eighth and final, it will be easier for companies to open
    bank accounts. Opening business bank accounts ought to be
    easier than it is today, and it will be once companies--or once
    financial institutions can access the high-quality beneficial
    ownership registration.
        So I would like to ask the witnesses--Do these changes make
    it easier to get a beneficial ownership registry up and running
    with minimal disruption and also minimal long-term burden to
    businesses, especially small businesses?
        We will start with Mr. Baer and just go down the panel.
        Mr. Baer. Senator, I think they absolutely would, and I
    should hasten to add, although the focus today has been the
    beneficial ownership portion of the bill, the rest of the
    ILLICIT CASH Act is extremely important and we believe
    extremely well considered and is a very, I think, innovative
    and thoughtful approach to a lot of very difficult issues.
        But with respect to the beneficial ownership provisions in
    particular, we believe this is a very well-thought-through
    approach to mitigating any potential costs and burdens and yet
    still getting law enforcement and national security the
    information they need.
        Senator Cotton. Thank you.
        Ms. Harned.
        Ms. Harned. Well, what you have articulated does sound like
    it would address some of our concerns. We would want to see
    that statutory language and really want those protections
    clearly in the statute for small business owners.
        Senator Cotton. Yeah. Thank you.
        Mr. Kalman. Yes. And thank you for your leadership on this
    and your colleagues.
        We do think the concerns and the issues that have been
    added to the bill improve the bill and does help to strike that
    appropriate balance between privacy, ease of business, and
    making sure that law enforcement has what it needs.
        Senator Cotton. Thank you.
        So my time has expired. As I said, this is draft
    legislation. We want to work together, especially we want to
    work with small businesses. Everyone on this panel, no matter
    what State we come from, represent thousands of small
    businesses like pizza shops and dry cleaners and lawn care
    companies that have very legitimate reasons to need these kind
    of entities. We want to find ways to separate them out with the
    minimal burden while also stopping terrorists and drug
    traffickers and deadbeat dads and people trying to hide assets
    before they get a divorce and all of the other malicious
    reasons that people use these entities.
        So we will appreciate your continued input and feedback on
    the legislation. Thank you.
        Chairman Crapo. Senator Cortez Masto.
        Senator Cortez Masto. Thank you.
        And I agree in the sense that the goal here is to minimize
    the burden to our businesses but still allow our law
    enforcement agencies to go after that criminal element when it
    comes to these shell companies.
        And as somebody who was a former Attorney General of the
    State of Nevada, I agree with my colleagues, particularly
    Senator Jones, that this is happening, and it has been very
    difficult for law enforcement to get the information to really
    take on that criminal element.
        I am talking transnational crime. We do not know, without
    the information, the extent of the criminal activity that is
    going on.
        So let me ask you, Mr. Kalman. We have heard--or the
    Committee has heard from the Fraternal Order of Police, the
    National District Attorneys Association, Federal Law
    Enforcement Officers Association, two dozen State Attorneys
    General, and others that the lack of beneficial ownership
    information in the U.S. frustrates officers and stymies this
    criminal investigation, as I have said. Can you share any
    examples to help us understand why that lack of information has
    stymied criminal investigation?
        Mr. Kalman. Yes. Thank you for the question, Senator.
        I mean, there are thousands of examples of how anonymous
    companies are now being used for everything from fueling the
    opioids crisis to human trafficking, as you said, sanctions
    evasion.
        I think one of the more famous examples that gets batted
    around is how Iran had used a series of anonymous companies,
    including some in New York, through which to purchase property
    in Manhattan. And to think about that just for a second, that
    the safest place in the world for Iran to evade our sanctions,
    our economic sanctions, was to park money in the United States
    and in New York, that should be pretty chilling to folks.
        So we think that while the considerations of privacy and
    small businesses burdens, absolutely we want to work with
    people to make sure we are putting in the appropriate
    protocols, we do think that this is critically important
    information, and law enforcement continues to say it is.
        Senator Cortez Masto. And can you also address--I believe
    in your written testimony, you note a report from the Global
    Witness. The report ``Hidden Menace'' found numerous incidents
    in which the U.S. Department of Defense had contracted with
    anonymous companies that at best defrauded the U.S. military
    and at worst endangered the lives of troops serving overseas.
    Can you expand a little bit on what the ``Hidden Menace''
    report found about Pentagon contracts?
        Mr. Kalman. I mentioned this a little earlier, but just to
    say I share with you, one of the more chilling stories was that
    the Defense Department had contracted with a U.S. company to
    provide services to troops in Afghanistan. It turns out that
    that company was secretly owned by folks affiliated with the
    Taliban, and so we were literally providing the funding to
    potentially buy weapons and other arms, guns and other arms
    that are being aimed at our troops.
        Senator Cortez Masto. Thank you.
        And I appreciate the conversation today. I am sorry I had
    to step out. I have a competing Energy and Natural Resources
    hearing going on at the same time. But please know that this is
    an issue that is so important for us to address, and as
    somebody who was responsible for law enforcement in the State
    of Nevada, it truly is an issue. We know it is happening, and
    we have got to figure out how we stop it.
        I think working with our small businesses and working with
    the businesses, there has got to be a way that we can minimize
    that burden but at the same time give the information to our
    law enforcement to weed out and stop and hold accountable
    anybody, whether it is a foreign adversary or drug cartels or
    anybody that wants to utilize a shell company to defraud others
    or violate the criminal laws of this country.
        So I am looking for that balance. I appreciate the
    legislation that has been introduced and the draft legislation
    that I have seen. We are looking at it right now. I appreciate
    you being here, look forward to more input, but I am hopeful at
    the end of the day, we can all come together and really look at
    good legislation that is going to address the issues that we
    have heard about today as well.
        So thank you.
        Chairman Crapo. Senator Sinema.
        Senator Sinema. Thank you, Mr. Chairman, and thank you to
    our witnesses for being here today.
        At the last beneficial ownership meeting, I spoke about how
    the Sinaloa Cartel and other criminal groups move millions of
    pounds of methamphetamines and heroin from Mexico through
    Arizona. These groups tear our communities apart, and it is
    clear that Arizonans bear the brunt of Washington's failure to
    address the crisis at our southern border.
        So, in the last hearing, we learned how beneficial
    ownership information can help focus and improve the efforts of
    law enforcement to stop these dangerous criminals, and I am
    grateful for the opportunity today to hear from non-Government
    stakeholders about the best way to obtain beneficial ownership
    information.
        So, Mr. Kalman, thank you for being here today. Under the
    proposed ILLICIT CASH Act, what types of information would
    businesses provide to the financial crimes enforcement network
    upon incorporation?
        Mr. Kalman. There are four basic pieces of information,
    which would be the name of the owner, the address, the date of
    birth, and an identification number. There is no financial or
    other information about the company that is being provided.
        Senator Sinema. Great. Thank you.
        Mr. Baer, thank you for being here as well. How much
    overlap is there between disinformation and the information
    that businesses provide to banks when they open a bank account?
        Mr. Baer. Thank you, Senator.
        It is fairly heavy on overlap. The only difference is under
    the customer due diligence rule, the bank would collect the
    Social Security number rather than a passport or a driver's
    license ID.
        The important thing here is that those banks do not collect
    information from a company unless it forms a bank account. So
    if you have a pure shell company that does not employ anybody,
    does not pay anybody, you do not need to have a bank account,
    and you do not ever need to provide that information to your
    bank.
        Also, the bank does not provide that information to law
    enforcement unless they have some reason to file a suspicious
    activity report.
        So if law enforcement is suspicious, they do not have that
    information. They only get the information if the bank is
    suspicious.
        Senator Sinema. That is important to know. Thank you.
        Mr. Kalman, to what extent do drug cartels like Sinaloa use
    shell corporations to conceal their illicit holdings?
        Mr. Kalman. One of our coalition members called Fair Share
    did two reports on this called ``Anonymity Overdose'',
    documenting numerous cases of where drug cartels and drug
    traffickers were using anonymous companies here in the United
    States to push drugs into various communities, and we are happy
    to provide that information to you.
        Senator Sinema. Thank you.
        And how difficult is it, Mr. Kalman, for law enforcement to
    interdict drug cartel financing that is hidden in these shell
    corporations when they do not have comprehensive beneficial
    ownership information?
        Mr. Kalman. Our law enforcement partners say that this is a
    significant priority for them. They begin investigations, and
    all too often, they will hit the brick wall of finding an
    anonymous company. And they will have to drop the case.
        Now, sometimes if there is an enormous amount of resources
    and they have the time and the ability to do that and can
    divert the resources, then they can ferret it out in the long
    term. But most often, as you know, our law enforcement has
    limited resources, and they have to make decisions about what
    they do. These kinds of lengthy investigations unfortunately
    are not getting followed up on, and it is not for lack of want
    or effort. It is literally because they cannot get through the
    brick wall.
        Senator Sinema. So given what you have just described as
    the brick wall and the fact that most law enforcement entities
    do not have unlimited resources in time, would you conclude
    that a beneficial ownership information would be a key tool for
    helping law enforcement, for instance, in Arizona stop drug
    cartels like the Sinaloa Cartel?
        Mr. Kalman. Yes. And the fact that, as I think has been
    said, the National District Attorneys, the Fraternal Order of
    Police, the sheriffs, law enforcement, retired law enforcement
    officials, and also almost 100 civilian and former military
    national security experts to add that lawyer into it as well
    have signed letters saying that this is a top priority. It is
    something that Congress should do.
        And I think as was mentioned earlier, just yesterday in the
    Judiciary Committee, Adam Szubin, former Treasury official, top
    official, said that this is the single most important thing
    that Congress could do.
        Senator Sinema. Wow. Thank you.
        So, Mr. Chairman and Ranking Member Brown, it is clear that
    we need to improve our anti- money-laundering efforts through
    the collection of beneficial ownership information, and I hope
    that we can do so in a way that makes it straightforward for
    small businesses but also crack down on drug cartels and others
    who would do Arizonans harm.
        I, of course, am committed to working with our Committee to
    get this done.
        Thank you. I yield back.
        Chairman Crapo. Thank you, Senator.
        That does conclude our questioning, and for Senators
    wishing to submit questions for the record, those questions are
    due in 1 week, on Thursday, June 27th, and to the witnesses, we
    ask that you respond to the questions you may receive as
    quickly as you can.
        Again, thank you for being here today, and this hearing is
    adjourned.
        [Whereupon, at 11:24 a.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                   PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
        Today, the Committee will continue its discussion of how better
    collection of beneficial ownership information can deter such problems
    as money laundering, terrorist financing, and sanctions evasion through
    anonymous shell companies.
        I will note at the outset, again, that while the vast majority of
    anonymous corporations can serve legitimate purposes, this type of
    incorporation can also be abused to aid and abet all manner of
    financial crime.
        Last month, the Committee heard from witnesses from law enforcement
    and a banking regulator about what steps the U.S. should take to
    modernize its beneficial ownership regime and strengthen its
    enforcement.
        Today, we have invited a panel to give us some perspective from the
    business world on this difficult subject.
        With that, I welcome Mr. Greg Baer, President, of the Bank Policy
    Institute, whose members confront the ownership issue at account
    openings; Ms. Karen Harned, of the National Federation of Independent
    Business, which speaks to the concerns of the hundreds of thousands of
    small businesses it comprises; and, Mr. Gary Kalman, of FACT, or the
    Financial Accountability and Corporate Transparency Coalition, an
    alliance of organizations that is working toward ending the use of
    anonymous shell companies as vehicles for illicit activity, and
    increasing transparency for more informed tax policies.
        During last month's hearing, our witnesses assessed the need to
    eliminate anonymous corporations by means of collecting beneficial
    ownership information to protect the U.S. financial system, its
    national security, and citizens from harm.
        The Committee learned that according to estimates from the U.N.
    Office on Drugs and Crime, there is more illicit money flowing through
    the global and U.S. financial systems than ever before.
        The U.N. estimate found that global illicit proceeds now total some
    $2 trillion and the proceeds of crime in the United States are over
    $300 billion.
        All of that illicit money has several things in common: somebody
    has to make it, hide it, move it, clean it, and use it.
        Despite efforts of U.S. law enforcement and the heavy U.S.
    regulatory framework of the Anti- Money Laundering/Bank Secrecy Act
    (AML/BSA) regime, which includes a mandate to collect beneficial
    ownership upon opening of a bank account, criminal elements in this
    country and from other countries can and do exploit weaknesses in the
    current U.S. corporate formation system to hide identities and illicit
    assets behind anonymous corporations.
        In our last hearing, FinCEN Director Blanco testified that a
    necessary ``second critical step in closing this national security gap
    is collecting beneficial ownership information at the corporate
    formation stage.''
        In agreement with Blanco, FBI Financial Crimes Chief D'Antuono
    cited the need for a ``central repository,'' to allow law enforcement
    to store and share the information.
        OCC Senior Deputy Comptroller Gardineer, also emphasized the need
    for a centralized database, so that businesses could provide, update,
    and verify beneficial ownership information.
        Importantly, she also recommended that ``foreign entities be
    required to report ownership information either at the time of State
    registration or upon establishing an account relationship with a U.S.
    financial institution.''
        Our hearing today comes at a time when bipartisan support for
    beneficial ownership legislation continues to build.
        Last week, the House Financial Services Committee marked up H.R.
    2513, the Corporate Transparency Act of 2019, which was reported out of
    committee on a 43-16 vote.
        And, on the very same day, a bipartisan group of my Senate
    colleagues here on the Banking Committee circulated draft legislation,
    presently called the ILLICIT CASH Act, which provides a number of
    important measures to modernize the AML/BSA regime and to address the
    collection of beneficial ownership information.
        I especially want to acknowledge the hard work Senators Cotton,
    Warner, Rounds, and Jones, and their staffs, put in over the last year
    on this effort, which the Committee, as a whole, shall take close note
    of, moving forward.
        Each of these legislative vehicles share some of the broad themes,
    brought out in the Committee's first hearing, such as a requirement for
    the collection of beneficial information at the time of a company's
    formation, periodic updating, storage of that information in FinCEN's
    secure database, and limiting access to that database to Federal law
    enforcement and its qualified State partners.
        We turn now, to our panel, for their perspectives on the important
    issues underlying any further collection of beneficial ownership
    information, and how that might impact banking and business operations,
    including concerns that arise with regard to privacy and liability
    issues.
        Given the facts presented to the Committee thus far, there are
    strong law enforcement and national security reasons supporting
    additional collection of beneficial ownership information.
        Hopefully, our witnesses will provide some insight on how to
    collect this information at minimal cost and burden to businesses.
        Now is the time to critically examine how the AML/BSA regime can be
    modernized, and, in particular, how businesses can work effectively
    with Government to efficiently provide beneficial ownership information
    that will in turn provide a high degree of usefulness to combat crime
    and terrorism.
                                     ______

                  PREPARED STATEMENT OF SENATOR SHERROD BROWN
        Thank you, Mr. Chairman, for calling this important hearing. This
    is the latest in a series of hearings in the Committee on our Bank
    Secrecy Act and anti- money-laundering reform efforts, and on critical
    changes to U.S. beneficial ownership laws to combat abuses by owners of
    anonymous shell companies, some of whom have been exploiting our system
    for criminal purposes for years.
        Unlike in most areas of disclosure and transparency law, where the
    U.S. has lead the way, on this issue we have long lagged behind other
    jurisdictions, and failed to require uniform and clear ownership
    information for firms at the time of their incorporation.
        This is critical to law enforcement. In the U.S. they have to spend
    precious time and resources issuing subpoenas and chasing down leads to
    secure even the most basic information about who actually owns a
    company. That makes no sense. And it must change.
        Treasury's 2018 Money Laundering Risk Assessment estimates that
    about $300 billion in illicit proceeds from domestic financial crime is
    generated annually, making these funds ripe for money laundering
    through the system.
        Criminals abuse the financial system to launder funds gained
    through narcotics trafficking, organized crime, the sale of counterfeit
    goods, Medicare and Medicaid fraud, and other criminal activities. Much
    of this dirty money is funneled through anonymous shell corporations.
        As I've observed before, none of the abuses we'll discuss today--
    drug trafficking, human trafficking, Medicare fraud, money laundering--
    are victimless crimes.
        Money laundering for drug cartels has a direct line to the opioid
    crisis in Ohio, where Sinaloa cartel actors have been destroying
    thousands of families.
        Human traffickers who exploit the misery of runaways in truckstops
    at the intersections of major interstate highways in Ohio and across
    the country, use the financial system to launder their profits.
        Medicare fraudsters cost the taxpayers $2.6 billion in 2017,
    according to the HHS Inspector General, and tarnish the reputation of
    this lifeline for seniors.
        That's why anti- money-laundering and beneficial ownership laws are
    so critical: they protect the integrity of our financial system, and
    provide critical intelligence to law enforcement to combat crime.
        Under Treasury's recent customer due diligence rule, banks must
    already secure some of this information from account holders when they
    open accounts.
        And while banks must continue to play a key monitoring role, it's
    also important that we require companies to provide basic information
    on their ownership when they're formed.
        In today's hearing, we'll hear from the Financial Accountability
    and Corporate Transparency Coalition, and from the banks, on the many
    reasons to pursue these reforms, including the transparency,
    anticorruption and anti- illicit financing benefits such reforms would
    offer. I ask consent to include a number of their reports into the
    hearing record.
        And we'll hear from NFIB, some of whose members have expressed
    concern about the paperwork burden of providing even simple ownership
    information--name, address, and a copy of a current passport or driver
    license.
        Requiring companies' ownership information and storing it in a
    secure Federal database like FinCEN's, alongside its bank secrecy
    information, would help address longstanding problems for U.S. law
    enforcement.
        It would help them investigate cases involving counterterrorism,
    drug trafficking, Medicare and Medicaid fraud, human trafficking, and
    other crimes. And it would provide ready access to this information
    under long-established and effective privacy rules.
        Without these reforms, criminals, terrorists and even rogue Nations
    will continue to use layer upon layer of shell companies to disguise
    and launder illicit funds. That makes it much harder to hold bad actors
    accountable.
        Chairman Crapo and I agree--we must move forward to require
    complete ownership information--not front men, not those forming
    companies on behalf of those who will pull the strings from behind the
    curtain--but the actual owners of companies.
        We can do this simply, efficiently, and effectively, without unduly
    burdening small businesses or others.
        Updating and strengthening our AML and beneficial ownership laws
    will give us a 21st century system to combat these crimes. I guarantee
    you criminals have long been revising, adjusting, and amending their
    tactics to circumvent and evade those laws.
        I welcome today's witnesses to the Committee, and look forward to
    hearing your perspectives.
                                     ______

                        PREPARED STATEMENT OF GREG BAER
                           CEO, Bank Policy Institute
                                 June 20, 2019
        Chairman Crapo, Ranking Member Brown, and Members of the Committee,
    my name is Greg Baer and I am president and CEO of the Bank Policy
    Institute. BPI is a nonpartisan public policy, research and advocacy
    group, representing the Nation's leading banks. Our members include
    universal banks, regional banks, and major foreign banks doing business
    in the United States. Collectively, they employ nearly 2 million
    Americans, make 72 percent of all loans and nearly half of the Nation's
    small business loans, and serve as an engine for financial innovation
    and economic growth. BPI strongly supports legislation to end the use
    of anonymous shell companies and welcomes this hearing in the hope that
    it will prompt swift Congressional action.
    Introduction
        Anonymous shell companies are a key method used by criminals to
    hide assets for a range of dangerous and illicit activities, including
    human trafficking, terrorist financing, money laundering, and
    kleptocracy. All too often criminal investigations hit a dead end when
    law enforcement encounters a company with hidden ownership and lacks
    the time and resources to peel back the many layers of secrecy
    currently permitted by U.S. law. \1\ And the more sophisticated and
    sinister the criminal, the more layers there generally are.
    ---------------------------------------------------------------------------
         \1\ See Statement of Steven M. D'Antuono before the Committee on
    Baking, Housing, and Urban Affairs, United States Senate, (May 21,
    2019); available at www.banking.senate.gov/imo/media/doc/
    D'Antuono%20Testimony%205-21-19.pdf.
    ---------------------------------------------------------------------------
        This problem is not difficult to solve. It has been solved by most
    countries around the world. While as a general matter our country does
    more than any other to identify and block the proceeds of crime, we are
    among the worst when it comes to allowing criminals to use the
    corporate form to cloak ownership; as a result, the United States has
    become a safe haven for those who wish to hide the proceeds or
    instruments of illegal activity. We have therefore been repeatedly
    criticized by the Financial Action Task Force, an intergovernmental AML
    standard-setting body, for this deficiency in our system.
        Legislation to allow law enforcement to look behind the corporate
    veil, including the draft recently circulated by a bipartisan group of
    Senators on this Committee, would thus reduce crime and terrorist
    activity, and enhance the status of the United States as a country that
    fights against, not harbors, the worst people in the world.
        The Nation's banks already provide significant assistance to law
    enforcement by determining the ownership of most companies that open a
    bank account and then using that information to monitor the account for
    suspicious activity. The requirement for banks to determine corporate
    ownership was put in place by the Treasury Department as a workaround
    to close this gap in the U.S. AML/CFT regime. For banks, and,
    importantly, for the clients who must provide this information,
    legislation now has the potential to centralize that process and make
    it more efficient. Most importantly, this legislation can provide law
    enforcement a first look at true shell companies that never open a bank
    account because they conduct no business--employ no people, earn no
    money, pay no taxes--but rather just hold assets.
        Two relevant concerns have been expressed about such legislation,
    however: potential burdens on small business and privacy. To evaluate
    those concerns, we should consider a few key facts.
        First, the draft Senate legislation requires an individual who owns
    more than 25 percent of a covered company or exercises substantial
    control to, at the most, disclose five pieces of information: (1) name,
    (2) address, (3) date of birth, (4) nationality, and (5) unique
    identifying number (e.g., driver's license or passport number). That is
    all. The House bill includes similar requirements. It is less
    information than one must provide to book a flight on any airline. And
    since the great majority of American businesses have only one owner, it
    would be generally provided by and about one person.
        Second, under current U.S. law, this information is generally
    already provided any time a company opens a bank account, except in
    most cases a social security number is provided in lieu of a driver's
    license or passport number. And it must be provided for each account,
    and to every bank used by the company, separately. Of course, any
    legitimate U.S. business, large or small, probably has a bank account,
    because any business that earns money or pays expenses or employs
    people must have a bank account. Thus, for small businesses,
    legislation would not increase reporting obligations.
        Third, with respect to privacy, establishment of a directory for
    corporate ownership would mean that a law enforcement official could
    obtain an address, date of birth, and driver's license or passport
    number. However, this is information already known to various arms of
    Government, including the DMV and the IRS. It is important to note
    that, unlike beneficial ownership directories established in other
    countries, the bills currently being considered in Congress would keep
    ownership information private from the general public and would only be
    accessible to law enforcement and financial institutions performing due
    diligence requirements. Again, it is difficult to understand how this
    would be a concern of legitimate businesses. It would, however, be a
    concern to a drug trafficker or kleptocrat using a shell company to
    hold a multimillion-dollar condominium in West Palm Beach.
        Most small business owners in fact agree that ending anonymous
    shell companies should be a priority and are willing to share
    additional information to help prevent the abuse of our financial
    system. According to a poll conducted by Morning Consult on behalf of
    BPI, small business owners across the aisle support measures to end
    anonymous shell companies. Of those who had an opinion, 75 percent of
    small business owners surveyed support requiring business owners to
    provide their personal information when forming their company to help
    close this loophole in the U.S. AML/CFT regime. Further, two-thirds of
    small business owners agree that providing their personal information
    when registering their company would not be burdensome. \2\
    ---------------------------------------------------------------------------
         \2\ See The Bank Policy Institute, ``Small Business Owners Say Yes
    To Ending Anonymous Shell Companies'', (June 2019); available at
    https://bpi.com/wp-content/uploads/2019/06/Ending-Anonymous-Shell-
    Companies-Survey-Infographic.pdf.
    ---------------------------------------------------------------------------
        With the potential benefits and cost of legislation now in mind,
    let me turn to the details of such legislation.
    Current Law
        FinCEN finalized in 2016 its customer due diligence rule, which
    requires banks of all sizes to identify and verify the beneficial
    owners of their corporate customers each time they open a new account
    or when a triggering event occurs. \3\ In particular, institutions are
    generally required to collect and certify information on two ownership
    prongs for most business customers: (i) an equity prong that requires
    the identification and verification of individuals who directly or
    indirectly own 25 percent or more; and (ii) a control prong that
    requires the identification and verification of an individual with
    ``significant responsibility to control'' the legal entity. \4\
    ---------------------------------------------------------------------------
         \3\ See 81 FR at 29, 398.
         \4\ While the focus of this hearing is on ending anonymous shell
    companies, BPI remains concerned about the CDD rule's requirement that
    covered financial institutions must reconfirm the beneficial owners of
    an existing customer each time that same customer opens an additional
    account. There is no reason to believe that the opening of a new
    account, in and of itself, is an indication that the beneficial
    ownership of the customer has changed.
    ---------------------------------------------------------------------------
        The FinCEN rule has three gaps that legislation could fill. First,
    while institutions are generally able to rely on the beneficial
    ownership information provided by the business customer, they have no
    reliable, complete external source against which to verify the
    information. Second, information provided under FinCEN's CDD rule is
    not reported to law enforcement. Third, many criminals avoid the
    banking system and launder money by forming LLCs and using them to hold
    real estate, art, jewelry, or other valuables--all without having to
    open a bank account. For them, no one collects this information.
    Key Principles for Legislation
        Weighing these costs and benefits, BPI supports legislation built
    on the following principles.
        First, in order to fulfill their obligations under the Bank Secrecy
    Act and FinCEN's customer due diligence rule, financial institutions
    should be able to rely on the information in the directory to fulfill
    their CDD requirements. Banks are committed to helping law enforcement
    catch criminals and have spent almost 50 years developing methods and
    tools to identify suspicious activity. Indeed, the purpose of the BSA
    is to provide law enforcement with highly useful leads on illicit
    activity.
        Second, any filing requirements for this directory should mirror
    FinCEN's customer due diligence rule in terms of who must provide the
    information and what information must be provided.
        Third, covered entities should only be required to provide minimal,
    but key, information during the incorporation process, which is a
    cornerstone of both the House and Senate bills. With both drafts, we
    believe that small businesses would be required to provide identifying
    information once, at the time they become bank customers, instead of
    each time they open an account, which currently happens under the CDD
    rule.
        Fourth, reporting requirements should be clear and easy to comply
    with. Businesses routinely file documents with State or Federal
    Government, who could assist in educating covered businesses about
    their beneficial ownership reporting obligations.
        Fifth, legal risk for businesses should be minimal. Both the House
    and Senate bills achieve this goal because the legal standard that must
    be met for the imposition of penalties is very high: knowingly
    providing, or attempting to provide, false or fraudulent beneficial
    ownership information or willfully failing to provide complete or
    updated beneficial ownership information to FinCEN. Furthermore,
    policymakers continue to explore various avenues, examples of which are
    included in both the House and Senate bills, to ensure that violations
    that are not knowing or willful can be easily remedied.
        Sixth, the privacy of the information submitted should be
    protected. Under the current bills, the directory as currently
    envisioned would only be accessible by law enforcement and financial
    institutions; it would not be a public directory like those employed in
    other countries such as the United Kingdom. Furthermore, both the House
    and Senate bills impose criminal penalties for the misuse or
    unauthorized disclosure of beneficial ownership information. Of course,
    banks generally already maintain this information under existing law.
        In sum, under these principles, the only type of company that would
    see additional burden are those that have no U.S. bank account--in
    other words, a shell company that spends no money in the United States,
    produces no goods, and employs no Americans.
    The Need for AML Reform
        As I've raised previously with this Committee, banks are spending
    an inordinate amount of resources complying with U.S. AML/CFT
    obligations but are not able to effectively protect our country. \5\
    Instead, today's regime is geared towards compliance expectations that
    bear little relationship to the actual goal of preventing or detecting
    financial crime, and fail to consider collateral consequences for
    national security, global development, and financial inclusion.
    ---------------------------------------------------------------------------
         \5\ See Testimony of Greg Baer before the Before the Senate
    Committee on Banking, Housing, and Urban Affairs ``Combating Money
    Laundering and Other Forms of Illicit Finance: Opportunities To Reform
    and Strengthen BSA Enforcement'', (January 9, 2018); available at
    www.banking.senate.gov/imo/media/doc/Baer%20testimony%201-9-18.pdf.
    ---------------------------------------------------------------------------
        BPI recently conducted an empirical study to better understand the
    effectiveness of the current BSA/AML and sanctions regime. \6\ The goal
    of the BSA regime is to provide information that is of a ``high degree
    of usefulness'' \7\ to law enforcement, yet BPI's study found that
    almost 50 percent of AML personnel are not involved in tasks directly
    focused on reporting to law enforcement. \8\ Instead, they are
    performing other tasks such as issuing policies and procedures;
    conducting quality assurance over data and processes; and auditing of
    such programs and systems, among other things. Furthermore, in 2017,
    survey participants reviewed approximately 16 million alerts and filed
    over 640,000 suspicious activity reports (SARs). Institutions that
    record data regarding law enforcement inquiries reported that a median
    of 4 percent of SARs resulted in follow-up inquiries from law
    enforcement. There is no data on how many prompted an arrest or
    conviction, or whether SAR data proved important when sought, as the
    industry does not have such data. \9\
    ---------------------------------------------------------------------------
         \6\ Getting to Effectiveness--Report on U.S. Financial Institution
    Resources Devoted to BSA/AML and Sanctions Compliance, (October 29,
    2018); available at bpi.com/recent-activity/getting-to-effectiveness-
    report-on-u-s-financial-institution-resources-devoted-to-bsa-aml-
    sanctions-compliance/.
         \7\ See 31 U.S.C. 5311.
         \8\ For example, developing suspicious activity models, screening
    transactions, investigating potentially suspicious activity and filing
    SARs.
         \9\ As discussed in BPI's study, because there is no established
    metric for measuring whether banks' BSA reports are ``useful'' to law
    enforcement a proxy was used, which was derived from tracking instances
    where law enforcement reached out to institutions, including through
    subpoenas, national security letters or requests for SAR backup
    documentation.
    ---------------------------------------------------------------------------
        We are pleased by the bicameral, bipartisan efforts to address this
    imbalance as well as recent efforts by regulators to encourage banks to
    adopt innovative AML compliance methods. \10\ As you are aware,
    Congress vested exclusive authority to implement the BSA in Treasury,
    and the Secretary has delegated that authority to FinCEN. \11\
    Therefore, the Treasury Department should take a more prominent role in
    coordinating AML/CFT policy across the Government to set priorities for
    the regime. \12\ The existing system, where priorities are not clearly
    established and examinations are compliance focused, with zero
    tolerance across all types of activity, does not produce an effective
    U.S. AML/CFT regime.
    ---------------------------------------------------------------------------
         \10\ See ``Joint Statement on Innovative Efforts To Combat Money
    Laundering and Terrorist Financing'', (December 3, 2018); available at
    www.fincen.gov/sites/default/files/2018-12/
    Joint%20Statement%20on%20Innovation%20Statement%20%28Final%2011-30-
    18%29_508.pdf.
         \11\ See Treasury Order 108-01 (July 1, 2014).
         \12\ The production of the National Security Strategy and the
    National Intelligence Priorities Framework both use interagency
    processes to establish priorities.
    ---------------------------------------------------------------------------
        Furthermore, as the data shows, bank resources could be more
    effectively deployed, so we also recommend that Treasury conduct a
    broad review of current BSA requirements and guidance and prioritize
    the reporting of highly useful information to law enforcement. \13\
    Critically evaluating, updating, and streamlining requirements would
    not only improve the utility of SARs, but would also make more
    resources available to other higher value AML/CFT efforts, such as more
    proactively identifying and developing techniques to combat emerging
    trends in illicit activity. Finally, Treasury must take a more
    prominent role in coordinating AML/CFT policy and examinations, which
    is presently dispersed amongst multiple Federal and State regulatory
    agencies. The draft Senate legislation offers a thorough, thoughtful
    response to this state of affairs.
    ---------------------------------------------------------------------------
         \13\ See The Clearing House letter to FinCEN on its ``Request for
    Comments Regarding Suspicious Activity Report and Currency Transaction
    Report Requirements'', (April 10, 2018), available at bpi.com/wp-
    content/uploads/2018/04/20180410-tch-comment-letter-to-fincen-on-sar-
    and-ctr-requirements.pdf.
    ---------------------------------------------------------------------------
        BPI urges Congress to quickly adopt AML reform legislation that
    puts an end to anonymous shell companies and stands ready to engage
    with members of Congress to assist in making the U.S. AML/CFT regime
    more effective.
        I look forward to your questions.
                                     ______

                       PREPARED STATEMENT OF KAREN HARNED
    Executive Director, Small Business Legal Center, National Federation of
                              Independent Business
                                 June 20, 2019
        Chairman Crapo, Ranking Member Brown, and Members of the Committee,
    on behalf of NFIB, I appreciate the opportunity to submit for the
    record this testimony for the Senate Banking, Housing, and Urban
    Affairs Committee hearing entitled, ``Outside Perspectives on the
    Collection of Beneficial Ownership Information''.
        My name is Karen Harned, and I serve as the executive director of
    the NFIB Small Business Legal Center. NFIB is the Nation's leading
    small business advocacy association, representing members in
    Washington, DC, and all 50 State capitals. Founded in 1943 as a
    nonprofit, nonpartisan organization, NFIB's mission is to promote and
    protect the right of its members to own, operate, and grow their
    businesses. NFIB proudly represents approximately 300,000 members
    nationwide from every industry and sector.
        The NFIB Small Business Legal Center is a nonprofit, public
    interest law firm established to provide legal resources and be the
    voice for small businesses in the Nation's courts through
    representation on issues of public interest affecting small businesses.
        The Financial Crimes Enforcement Network's (FinCEN) Customer Due
    Diligence Rule (CDD) took effect in May of 2018. Although this
    regulation has only been Federal law for just over a year, Congress is
    considering replacing the rule with significant statutory expansions.
    Congress does not have any data on the effectiveness of the CDD Rule in
    combating money laundering. Yet last week the House Financial Services
    Committee favorably reported H.R. 2513, the Corporate Transparency Act
    of 2019. Disappointingly, that committee did not invite testimony from
    any organizations representing small businesses--the only stakeholders
    that would be negatively impacted by the legislation.
        NFIB appreciates the opportunity to speak for the millions of small
    business owners who would be negatively impacted by a new small
    business beneficial ownership reporting requirement and registry. My
    testimony today will focus on the small business concerns with the
    Corporate Transparency Act of 2019, and the draft ILLICIT CASH Act--two
    significant beneficial ownership bills under discussion in the 116th
    Congress. NFIB opposes legislative proposals such as the Corporate
    Transparency Act of 2019 and the ILLICIT CASH Act because they impose
    burdensome, costly, and intrusive requirements to file yet more reports
    with the Government and threaten the constitutionally protected privacy
    rights of law-abiding small business owners.
    A Significant New Regulatory Burden for Small Business
        According to the 2016 NFIB Small Business Problems and Priorities
    report, ``unreasonable Government regulations'' ranks second--only
    behind taxes--as the most important problem small business owners face.
    \1\
    ---------------------------------------------------------------------------
         \1\ Holly Wade, ``Small Business Problems and Priorities'', NFIB
    Research Foundation, 17, (August, 2016), available online at https://
    www.nfib.com/assets/NFIB-Problems-and-Priorities-2016.pdf
    ---------------------------------------------------------------------------
        In a Small Business Poll on regulations, NFIB found that almost
    half of small businesses surveyed viewed regulation as a ``very
    serious'' (25 percent) or ``somewhat serious'' (24 percent) problem.
    \2\ NFIB's survey was taken at the end of 2016, and, at that time, 51
    percent of small business owners reported an increase in the number of
    regulations impacting their business over the last 3 years. \3\
    ---------------------------------------------------------------------------
         \2\ Holly Wade, ``Regulations'', Vol. 13, Issue 3, 2017, 6,
    available online at http://411sbfacts.com/files/Regulations%202017.pdf
    (last visited May 16, 2018).
         \3\ Id.
    ---------------------------------------------------------------------------
        Compliance costs, difficulty understanding regulatory requirements,
    and extra paperwork are the key drivers of the regulatory burdens on
    small business. \4\ Understanding how to comply with regulations is a
    bigger problem for those firms with one to nine employees, since 72
    percent of small business owners in that cohort try to figure out how
    to comply themselves, as opposed to assigning that responsibility to
    someone else. \5\
    ---------------------------------------------------------------------------
         \4\ Id.
         \5\ Id. at 10.
    ---------------------------------------------------------------------------
        NFIB's research shows that the volume of regulations poses the
    largest problem for 55 percent of small employers, as compared to 37
    percent who are most troubled by a few specific regulations. \6\
    ---------------------------------------------------------------------------
         \6\ Id. at 9.
    ---------------------------------------------------------------------------
        Both the Corporate Transparency Act of 2019 and the ILLICIT CASH
    Act would impose mandatory reporting requirements on those least
    equipped to handle them--America's small business owners. First, both
    bills would impose a new paperwork requirement on small business owners
    by mandating every corporation or LLC with 20 or fewer employees and
    less than $5 million in gross receipts or sales file beneficial
    ownership information with FinCEN upon incorporation. Updates would be
    required annually, under the Corporate Transparency Act of 2019, and
    within 90 days of the business making any ownership changes under the
    ILLICIT CASH Act. Either the small business owner, herself, or the
    accountant or attorney she pays, will have to ensure these documents
    are filed. One new paperwork requirement may not sound that burdensome
    to someone who does not run a small business, but it is quite a
    different story for the individual just starting a business or the
    small business owner who is adding this new form to the stack of forms
    he must already fill out and file.
        Importantly, it is unclear how small business owners will even find
    out about these requirements. For many, who have no idea who FinCEN is,
    there is a strong likelihood they will just ignore the request. And,
    regardless of their familiarity with FinCEN, many small business owners
    will view this data collection request with great skepticism. For
    example, every single year NFIB receives countless calls asking about
    the Census Bureau's Annual Business Survey form and whether the small
    business owner really needs to take the time to fill out and divulge
    the information required. It is unrealistic to assume that small
    business owners will simply fill out this new form and submit personal
    information, including a passport number/driver's license and date of
    birth, to a Government agency many have not heard of before with no
    questions asked. A well-meaning small business owner who fails to file
    because she (1) never finds out about this new reporting requirement or
    (2) is skeptical about the legitimacy and appropriateness of this new
    form would be exposed to civil penalties of up to $10,000 and criminal
    penalties of up to 3 years in prison.
        In addition to finding out about this new reporting requirement and
    accepting it as a legitimate information request, small business owners
    would then be tasked with determining what information to provide.
    Determining who is and is not a ``beneficial owner'' to be reported
    will not be a quick and easy task for the average small business owner.
    Although the calculation of anyone who owns 25 percent or more of the
    corporation or LLC should be straightforward, determining who
    ``exercises substantial control'' of, or ``receives substantial
    economic benefit'' from the corporation or LLC many times will not be.
    Imagine the small, family-run restaurant employing 10-15 persons. After
    15 years of operation, the manager of the restaurant is the same person
    who helped open it. The financial owners of the restaurant trust her
    100 percent in all operations of the business. The financial owners are
    recent empty-nesters and like to travel. As a result, the manager has
    complete control over the restaurant's operations for several weeks
    each year. She also receives an annual bonus based on the gross
    receipts of the business. Does she ``exercise substantial control''
    under either or both bills thereby making her personal information,
    including driver's license/passport number, reportable? How is an
    average small business owner to determine the answer to that question
    on his own? And, is that even a question his outside, paid lawyer would
    be able to answer with the kind of certainty needed to comply with a
    law imposing civil and criminal penalties for the wrong answer?
        Most important, when NFIB surveyed its membership on this specific
    type of legislation in August of 2018, the opposition was overwhelming.
    Specifically, 80 percent of respondents opposed Congress requiring
    small business owners to file paperwork with the Treasury Department
    reporting on beneficial ownership. \7\
    ---------------------------------------------------------------------------
         \7\ When asked, ``Should Congress require small business owners to
    file paperwork with the Financial Crimes Enforcement Network each time
    they form or change ownership of a business?'' a mere 11 percent said
    ``yes'' and a resounding 80 percent said ``no,'' with 9 percent
    undecided. (NFIB survey, August 2018).
    ---------------------------------------------------------------------------
    Unprecedented Privacy Concerns
        These legislative proposals also raise serious privacy concerns for
    small business owners. Both bills require the Treasury Department to
    keep the beneficial ownership information for the life of the business
    plus 5 years and grant broad access to the information to Federal,
    State, local, or tribal government agencies \8\ through a simple
    request. \9\
    ---------------------------------------------------------------------------
         \8\ The Corporate Transparency Act of 2019 would allow Federal,
    State, and local law enforcement agencies to access information.
         \9\ See proposed 31 U.S.C. 5333(a)(4)(A) (retention for 5 years
    after entity termination) and (B) (disclosure upon request from
    Federal, State, local, or tribal agency). Indeed, the legislation
    raises (H.R. 2513) the specter of having the U.S. Government spy on
    Americans for foreign Governments, as it requires disclosure of the
    beneficial ownership information in certain circumstances to assist
    foreign agency investigations and foreign tribunals. See proposed 31
    U.S.C. 5333(a)(4)(B)(ii).
    ---------------------------------------------------------------------------
        Under the CDD Rule, law enforcement is required to acquire a
    subpoena in order to obtain a company's beneficial ownership
    information from a financial institution unless that information is
    submitted to FinCEN with a suspicious activity report. The Corporate
    Transparency Act would allow any law enforcement agent access to this
    information without a subpoena or warrant. The ILLICIT CASH Act would
    allow ``any Government agency'' access to this information without a
    warrant or a subpoena.
        These bills are antithetical to current statutes on the books,
    which--even for sensitive kinds of national security activities, such
    as protection against international terrorism or clandestine
    intelligence activities--require the Federal Government to focus its
    investigative interest on someone in particular, some business in
    particular, or some account in particular before compelling a bank or
    other business to produce relevant information. \10\
    ---------------------------------------------------------------------------
         \10\ See, for example, Stored Communications Act, 18 U.S.C. 2709;
    Fair Credit Reporting Act, 15 U.S.C. 1681u and 1681v; Right to
    Financial Privacy Act, 12 U.S.C. 3414; and National Security Act, 50
    U.S.C. 3162.
    ---------------------------------------------------------------------------
    Questionable Value to Law Enforcement
        Finally, NFIB questions whether imposing significant and costly
    beneficial ownership reporting requirements on America's small
    businesses--from mom and pop groceries to local plumbers--will stop or
    deter money laundering or other illicit activities. At a hearing before
    this Committee on this same topic on May 21, 2019, Mr. Kenneth A.
    Blanco, the Director of FinCEN, said the following in response to
    questioning from Senator Warner regarding verification of information,
    ``Senator, that gets a little bit more complicated. If what you're
    asking us to do is verify the information, I'll just be candid with
    you. That would be a big mistake. There would be no way that FinCEN
    could be able to verify that information.'' Without verifying the
    accuracy of millions of data points being entered into a new FinCEN
    database, law enforcement could not trust the accuracy of the
    information collected until they investigate a suspected criminal shell
    company. Both the Corporate Transparency Act and the draft ILLICIT CASH
    Act carve out millions of businesses from reporting requirements,
    including sole-proprietors, partnerships, and business trusts. If a
    criminal money launderer has any level of sophistication, they will
    simply set up their new shell company as a partnership or trust and
    evade law-enforcement detection.
        Proponents of these legislative vehicles often cite a Financial
    Action Task Force (FATF) report from 2016 that identified the ``lack of
    timely access to adequate, accurate and current beneficial ownership
    information'' as a fundamental gap in United States efforts to combat
    money laundering and terrorist finance. \11\ What proponents fail to
    mention is that this report was published well before the CDD Rule took
    effect, and beneficial ownership information started to be collected.
    Law enforcement now has access to this beneficial ownership information
    through a subpoena. The report also has very flattering words for the
    current U.S. anti- money-laundering system, including, ``The AML/CFT
    framework in the U.S. is well developed and robust. Domestic
    coordination and cooperation on AML/CFT issues is sophisticated and has
    matured since the previous evaluation in 2006.''
    ---------------------------------------------------------------------------
         \11\ The Financial Action Task Force and The Asia-Pacific Group on
    Money Laundering, ``Anti- Money Laundering and Counterterrorist
    Financing Measures--United States'', December 2016.
    ---------------------------------------------------------------------------
        Proponents continue to fail to comprehend that FinCEN has no way of
    verifying the accuracy of beneficial ownership information today and
    has no plan to verify the accuracy in the future. A key component of
    FATF's recommendations is the verifiable accuracy of beneficial
    ownership information. This legislation would not solve that problem.
    As Director Blanco has admitted, FinCEN has no way of verifying
    beneficial ownership information.
        NFIB opposes both the Corporate Transparency Act and the draft
    ILLICIT CASH Act because both bills would impose even more regulatory
    burdens on America's small businesses and establish an unprecedented
    intrusion into the privacy and civil liberties of millions of small
    business owners.
        Thank you for the opportunity to testify today. I look forward to
    answering any questions you may have.
                                     ______

                       PREPARED STATEMENT OF GARY KALMAN
    Executive Director, Financial Accountability and Corporate Transparency
                                   Coalition
                                 June 20, 2019
        Chairman Crapo, Ranking Member Brown, and Members of the Committee,
    thank you for holding this important hearing and for inviting me to
    testify today.
        On behalf of the Financial Accountability and Corporate
    Transparency (FACT) Coalition and our member organizations, I
    appreciate the opportunity to talk about a foundational reform in the
    global anticorruption movement and the nexus between secrecy
    jurisdictions, crime, corruption, human rights, and national security.
        The FACT Coalition is a nonpartisan alliance of more than 100
    State, national, and international organizations working to combat the
    harmful impacts of corrupt financial practices. \1\
    ---------------------------------------------------------------------------
         \1\ A full list of FACT Coalition members is available at http://
    thefactcoalition.org/about/coalition-members-and-supporters/.
    ---------------------------------------------------------------------------
    What Is an Anonymous Company?
        When people create companies in the United States, they are not
    required to disclose who really profits from their existence or
    controls their activities--the actual ``beneficial owners'' of the
    business. Instead, individuals who benefit can conceal their identity
    by using front people, or ``nominees,'' to represent the company. For
    instance, the real owner's attorney can file paperwork under his or her
    own name even though the attorney has no control or economic stake in
    the company. Finding nominees is not terribly difficult--there are
    corporations whose entire business is to file paperwork and stand in
    for company owners. Additionally, some jurisdictions do not require
    ownership information at all and other jurisdictions allow for
    companies to be listed as the owners of companies, adding layers to an
    opaque corporate structure that makes it difficult--in some cases
    impossible--to identify the true owners.
    Threats Posed by Anonymous Companies
        There is now overwhelming evidence of the use of anonymous
    companies for money laundering and other criminal purposes. In addition
    to human trafficking, drug trafficking, grand corruption, and other
    criminal enterprises, there is growing evidence that anonymous
    structures are used to threaten our national security.
        In a 2018 advisory, the Financial Crimes Enforcement Network
    (FinCEN) issued a warning:

            The Iranian regime has long used front and shell companies to
            exploit financial systems around the world to generate revenues
            and transfer funds in support of malign conduct, which includes
            support to terrorist groups, ballistic missile development,
            human rights abuses, support to the Syrian regime, and other
            destabilizing actions targeted by U.S. sanctions. \2\
    ---------------------------------------------------------------------------
         \2\ FinCEN, ``Advisory on the Iranian Regime's Illicit and Malign
    Activities and Attempts To Exploit the Financial System'', October 11,
    2018, https://www.fincen.gov/resources/advisories/fincen-advisory-fin-
    2018-a006.

        The Center for Sanctions and Illicit Finance at the Foundation for
    the Defense of Democracies (FDD) described in its 2017 ``Terror Finance
    Briefing Book'' how anonymous companies are being abused by rogue
    Nations and sanctioned organizations. \3\ They wrote:
    ---------------------------------------------------------------------------
         \3\ Yaya J. Fanusie and Alex Entz, ``Terror Finance Briefing Book:
    Hezbollah Financial Assessment'', Foundation for Defense of
    Democracies, September 2017, http://bit.ly/2ZxNfjf.

            In February 2017, Treasury sanctioned the Vice President of
            Venezuela, Tareck El Aissami, for his involvement with the drug
            trade. That same month, CNN reported that a 2013 confidential
            intelligence report by a group of Latin American Nations
            assessed that El Aissami had ordered Venezuelan passports to be
            fraudulently issued to 173 people in the Middle East, including
    ---------------------------------------------------------------------------
            individuals connected to Hezbollah.

            Latin American intelligence officials reportedly told an
            American researcher that El Aissami created a network of nearly
            40 shell companies to launder money, including some that were
            based in Miami. This network was used by Hezbollah supporters
            (including the Lebanese Canadian bank), Colombian and Mexican
            cartels, and Ayman Joumaa, discussed above.

        Later in the report, they note:

            Hezbollah supporters run an extensive network of commercial and
            illicit businesses around the globe, including in South America
            and Africa, which may morph into new enterprises to avoid
            scrutiny. By using shell companies, and by renaming companies
            to avoid U.S. sanctions, Hezbollah-linked groups can continue
            to access the international financial system and transact with
            an ever-growing network of companies. The U.S. Treasury
            Department has designated dozens of Lebanon-based firms for
            supporting Hezbollah, including real estate firms and auto care
            companies. It is likely the group will continue its money
            laundering operations, growing into new fields and businesses
            in the future. \4\
    ---------------------------------------------------------------------------
         \4\ Ibid.

        Another disturbing story comes from a report by the anticorruption
    organization (and FACT Coalition member) Global Witness. In their
    report, ``Hidden Menace'', they found numerous incidents in which the
    U.S. Department of Defense had contracted with anonymous companies
    that, at best, defrauded the U.S. military and, at worst, endangered
    the lives of troops serving overseas. In one case, the Pentagon
    contracted with a U.S. company to supply services to troops in
    Afghanistan. The company was secretly owned by interests associated
    with the Taliban. We were literally supplying funds that could be used
    to purchase guns and other weapons aimed at our troops. \5\
    ---------------------------------------------------------------------------
         \5\ Global Witness, ``Hidden Menace: How Secret Company Owners Are
    Putting Troops at Risk and Harming American Taxpayers'', July 12, 2016,
    http://bit.ly/HiddenMenace.
    ---------------------------------------------------------------------------
        These reports are why nearly 100 civilian and former military
    national security experts signed a recent letter to Congress in support
    of the collection of beneficial ownership information.
        Alarmingly, these individual stories are not isolated incidents but
    are part of a larger collection of threats to the safety and security
    of our communities and our Nation.
        According to a 2011 study by the Stolen Asset Recovery Initiative,
    a joint effort of the World Bank and U.N. Office on Drugs and Crime,
    anonymous companies were used to hide the proceeds of corruption in 85
    percent of the grand corruption cases reviewed, with U.S. entities
    being the most common. \6\
    ---------------------------------------------------------------------------
         \6\ Stolen Asset Recovery (StAR) Initiative, ``The Puppet
    Masters'', World Bank and UNODC, Nov. 2011, pp. 34 and 121, http://
    bit.ly/PuppetMasters.
    ---------------------------------------------------------------------------
        According to a 2018 study by the anti- human-trafficking group
    Polaris, anonymous companies play an outsized role in hiding the
    identities of the criminals behind trafficking enterprises,
    specifically illicit massage businesses. \7\ The report found that:
    ---------------------------------------------------------------------------
         \7\ Polaris, ``Hidden in Plain Sight: How Corporate Secrecy
    Facilitates Human Trafficking in Illicit Massage Parlors'', April 2018,
    http://bit.ly/2JEO4lB.

        Of the more than 6,000 illicit massage businesses for which
            Polaris found incorporation records, only 28 percent of these
            illicit massage businesses have an actual person listed on the
    ---------------------------------------------------------------------------
            business registration records at all.

        Only 21 percent of the 6,000 business records found for
            illicit massage parlors actually specifically name the owner--
            although, even in those cases, there is no way to know for sure
            if that information is legitimate.

        In the 2018 ``National Money Laundering Risk Assessment'', the U.S.
    Department of Treasury wrote that, ``The nature of synthetic drug
    trafficking, and associated financial flows, has changed with the rise
    of China as a supplier of fentanyl and its analogues and precursors.
    China is the primary source of fentanyl and fentanyl analogues.'' The
    Assessment noted that the U.S. Drug Enforcement Agency determined there
    is an Asian version of the Black Market Peso Exchange ``with goods
    being exported to China by U.S. front companies as payment for drugs.''
        Anonymous companies are also used to undermine our markets and
    disrupt legitimate business. There are numerous examples in which
    anonymous companies disrupt supply chains, fraudulently compete for
    contracts, and engage in illicit commerce through the selling of
    counterfeit and pirated goods.
        In a recent FACT Coalition report authored by David M. Luna, a
    former U.S. national security official and the current chair of the
    Anti- Illicit Trade Committee of the United States Council for
    International Business, examined the role of anonymous companies in
    facilitating a growing global illegal economy valued at between $500
    billion and $3 trillion. \8\ We found:
    ---------------------------------------------------------------------------
         \8\ David M. Luna, ``Anonymous Companies Help Finance Illicit
    Commerce and Harm American Businesses and Citizens'', The FACT
    Coalition, May 2019, http://bit.ly/2LCOV99.

        Anonymous companies have helped criminals across the United
            States sell in recent years several billion dollars in fake and
            counterfeited luxury handbags and apparel accessories branded
            as Burberry, Louis Vuitton, Gucci, Fendi, Coach, and Chanel, as
            well as sportswear and gear from the NFL, NBA, and MLB
    ---------------------------------------------------------------------------
            including Nike, Adidas, and Under Armour, among many others.

        Anonymous companies were used to import and sell to
            American consumers, through internet pharmacies, counterfeit
            medicines from India and China worth hundreds of millions of
            dollars. These counterfeits included fake versions of Arimidex,
            a breast cancer treatment, Lipitor, the cholesterol drug,
            Diovan, for high blood pressure, and other medications such as
            illicit OxyContin, Percocet, Ritalin, Xanax, Valium, and NS
            Ambien.

        Anonymous companies assisted in selling knock-off parts to
            the Pentagon that have cost the U.S. military tens of millions
            of dollars.

        Anonymous companies helped an organized criminal network
            sell counterfeit cellphones and cellphone accessories on
            Amazon.com and eBay.com. They also misrepresented goods worth
            millions of dollars as new and genuine Apple and Samsung
            products.

        Anonymous companies were leveraged to help criminals sell
            millions of dollars' worth of counterfeit computer antivirus
            software over the internet.

        Not surprisingly, when businesses were asked, without context, if
    they would support additional regulation, they did not. However,
    entrepreneurs understand and manage risk every day. When the
    organization Small Business Majority asked small business owners if
    they were more concerned about the risks and burden of reporting
    ownership of their businesses or the potential loss of contracts to
    fraudulent anonymous companies, 76 percent said they were more
    concerned about losing contracts than about the regulatory burden. \9\
    ---------------------------------------------------------------------------
         \9\ Small Business Majority, ``Opinion Poll: Small Business Owners
    Support Legislation Requiring Transparency in Business Formation'',
    April 4, 2018, https://smallbusinessmajority.org/our-research/
    government-accountability/small-business-owners-support-legislation-
    requiring-transparency-business-formation.
    ---------------------------------------------------------------------------
        The collection of beneficial ownership information strengthens our
    national security, assists law enforcement, and creates a safer
    business environment for the vast majority of honest businesses.
    The U.S. Is Particularly Vulnerable to the Abuses of Anonymous
            Companies
        A 2017 report by the Government Accountability Office (GAO) found
    that, ``GAO was unable to identify ownership information for about one-
    third of GSA's 1,406 high-security leases as of March 2016 because
    ownership information was not readily available for all buildings.''
    \10\ This finding was a leading factor in Congress voting to adopt a
    provision in the FY2018 National Defense Authorization Act for the
    Department of Defense to collect beneficial ownership information for
    all high security office space it leases.
    ---------------------------------------------------------------------------
         \10\ Government Accountability Office, ``GSA Should Inform Tenant
    Agencies When Leasing High Security Space From Foreign Owners'', Jan.
    3, 2017; http://bit.ly/2JiDFwI.
    ---------------------------------------------------------------------------
        A 2014 study by academics from the University of Texas-Austin (UT-
    Austin), Brigham Young University (BYU), and Griffith University found
    that among the 103 countries they studied, the United States is the
    easiest place for suspicious individuals to incorporate an anonymous
    company. \11\
    ---------------------------------------------------------------------------
         \11\ Michael Findley, et al. ``Global Shell Games: Experiments in
    Transnational Relations, Crime, and Terrorism'', Cambridge University
    Press (March 24, 2014), p. 74. http://bit.ly/2uTLptQ.
    ---------------------------------------------------------------------------
        According to a 2019 Global Financial Integrity analysis, ``The
    Library Card Project: The Ease of Forming Anonymous Companies in the
    United States'', in all 50 States and the District of Columbia, ``more
    personal information is needed to obtain a library card than to
    establish a legal entity that can be used to facilitate tax evasion,
    money laundering, fraud, and corruption.'' \12\
    ---------------------------------------------------------------------------
         \12\ Press Release, ``Report Demonstrates Ease of Establishing
    Anonymous Shell Companies'', Global Financial Integrity, March 21,
    2019, accessible at https://www.gfintegrity.org/press-release/report-
    demonstrates-ease-of-establishing-anonymous-shell-companies/.
    ---------------------------------------------------------------------------
        It is data like these that led the Financial Action Task Force--the
    world's recognized body for establishing anti- money-laundering
    standards and of which the U.S. is a founding member--to find in its
    2016 mutual evaluation of the U.S. that the lack of beneficial
    ownership information was a significant gap in the U.S. anti- money-
    laundering framework. \13\
    ---------------------------------------------------------------------------
         \13\ Financial Action Task Force, ``Anti- Money Laundering and
    Counterterrorist Financing Measures--United States'', Fourth Round
    Mutual Evaluation Report, Dec. 2016; http://www.fatf-gafi.org/media/
    fatf/documents/reports/mer4/MER-United-States-2016.pdf.
    ---------------------------------------------------------------------------
        Progress in the rest of the world means the U.S. is likely to
    become an even more attractive haven for illicit cash unless we act. In
    2016, the United Kingdom became one of the first countries to collect
    beneficial ownership information. In 2015, the European Union agreed
    that all 28-member States would establish beneficial ownership
    directories.
    Addressing Concerns, Negotiating Workable Proposals
        Throughout a decade long debate, some concerns have been raised
    about various proposals. Negotiations with multiple parties have made
    the current proposals, like the ILLICIT CASH Act, more workable and
    compliance easier for businesses. The changes have led several
    organizations and constituencies to drop their earlier opposition and
    others to become advocates for reform.
    Small Business
        The proposals call for the collection of four pieces of readily
    known and accessible information--name, address, date of birth, and a
    drivers' license or other identification number of the owner. This is
    less information than is required for an individual to obtain a library
    card in any of the 50 States. \14\
    ---------------------------------------------------------------------------
         \14\ Global Financial Integrity.
    ---------------------------------------------------------------------------
        In the U.K., an analysis by Global Witness of data collected by the
    British beneficial ownership directory found that the average number of
    owners per business in the U.K. is 1.13. The most common number of
    owners is one. More than 99 percent of businesses listed less than six
    owners. \15\
    ---------------------------------------------------------------------------
         \15\ Global Witness, ``Hard Data on Lessons Learned From the U.K.
    Beneficial Ownership Register'', May 2019; http://bit.ly/2FhwX6u.
    ---------------------------------------------------------------------------
        According to the U.S. Small Business Administration, approximately
    78 percent of all businesses in the U.S. are nonemployer firms, meaning
    there is only one person in the enterprise. \16\ This suggests that the
    experience in the U.S. would be similar to that of the U.K.
    ---------------------------------------------------------------------------
         \16\ Small Business Administration, ``Frequently Asked
    Questions'', September 2012; https://www.sba.gov/sites/default/files/
    FAQ_Sept_2012.pdf.
    ---------------------------------------------------------------------------
        Additionally, to my knowledge, there has not been a problem in
    implementing the beneficial ownership rules now in place in the U.S.
    Defense Department when leasing high security office space. And a main
    concern regarding the Treasury Department's Geographic Targeting Orders
    (GTOs), a pilot program to collect beneficial ownership information for
    high-end, cash-financed real estate transactions in 12 metropolitan
    areas, is that they are temporary and keep changing in scope and
    location. One consistent, predictable rule would seem to be preferable.
        New proposals, such as the bipartisan discussion draft of the
    ILLICIT CASH Act \17\ and the House of Representative's Corporate
    Transparency Act of 2019 (H.R. 2513, which was reported favorably out
    of the Committee on Financial Services last week with a strong
    bipartisan vote \18\), have found creative ways to use, where
    practicable, existing structures though which companies can update
    their information.
    ---------------------------------------------------------------------------
         \17\ Senator Mark Warner, ``Warner, Cotton, Jones, Rounds, Unveil
    Draft Legislation To Improve Corporate Transparency and Combat
    Financing of Terrorism, Money Laundering'', U.S. Senate, June 10, 2019,
    http://bit.ly/2ZsmGfo.
         \18\ Committee on Financial Services, ``Committee Passes
    Legislation To Protect Housing Rights, Reform National Flood Insurance
    Program and Strengthen the Financial System'', U.S. House of
    Representatives, June 12, 2019, https://financialservices.house.gov/
    news/documentsingle.aspx?DocumentID=403895.
    ---------------------------------------------------------------------------
        This is why, when asked, more than three quarters of small business
    owners felt the tradeoff--reporting burden vs. benefits--was worth it.
    \19\
    ---------------------------------------------------------------------------
         \19\ Small Business Majority, ``Opinion Poll: Small Business
    Owners Support Legislation Requiring Transparency in Business
    Formation'', April 4, 2018, https://smallbusinessmajority.org/our-
    research/government-accountability/small-business-owners-support-
    legislation-requiring-transparency-business-formation.
    ---------------------------------------------------------------------------
    Privacy
        While there are disagreements about whether this information should
    be made public, the proposals introduced over the last decade chose to
    keep the information private. The discussion draft of the ILLICIT CASH
    Act and the Corporate Transparency Act of 2019 both see FinCEN as the
    best repository of this information.
        The rationale behind that decision is that FinCEN is our Nation's
    financial intelligence unit with the responsibility of housing and
    reviewing data to protect our financial system from abuse by terrorist
    networks and other criminals who seek access to our markets and our
    strong and stable economy. Law enforcement officials and financial
    institutions with legally required anti- money-laundering
    responsibilities have existing relationships with FinCEN.
        FinCEN also has a strong track record of safeguarding sensitive
    data. According to public information on FinCEN's portal system, it
    appears that the database has strict limitations on who can access
    information and how that information can be used. The database is
    accessed through a physical portal, meaning that a local police officer
    could not log on during a routine traffic stop. Users must be trained
    and certified and must undergo a background check. All searches must be
    done as part of an ongoing investigation, and every file that is
    reviewed is logged so that there is a record of who accessed what
    information. Misuse of the information is a criminal act. \20\
    ---------------------------------------------------------------------------
         \20\ Global Witness, ``Memo: Basic Information on Use and Access
    to the FinCEN Portal (a.k.a., the FinCEN Database, or Gateway)'', June
    1, 2019; http://bit.ly/2ILqp0M.
    ---------------------------------------------------------------------------
    Accountability
        Like all laws, there are penalties for violating the law. However,
    the proposals over the last decade have ensured that mistakes by honest
    businesses will not be penalized. Negligence is not a punishable
    offense. That means that honestly forgetting to update the
    information--if, for example, a family member joins a business--is not
    punishable.
        The proposals specifically state that only knowing and willfull
    violations are punishable. In fact, the standards in the bill provide
    greater protections for filers against errant prosecutions than the
    American Bar Association's model guidelines in this area recommend.
    \21\
    ---------------------------------------------------------------------------
         \21\ See: ``A Lawyer's Guide To Detecting and Preventing Money
    Laundering'', American Bar Association, International Bar Association,
    and Council of Bars and Law Societies of Europe, October 2014;
    accessible at http://bit.ly/ABA-AML-Guide.
    ---------------------------------------------------------------------------
    Collecting Beneficial Ownership Information Has an Impact
        The limited data available, since there are very few examples of
    collecting the information to date, suggests the policy will have a
    measurable impact.
        In 2016, FinCEN implemented Geographic Targeting Orders (GTOs). In
    an early analysis, FinCEN found that, ``Within this narrow scope of
    real estate transactions covered by the GTOs, FinCEN data indicate that
    about 30 percent of reported transactions involve a beneficial owner or
    purchaser representative that was also the subject of a previous
    suspicious activity report. This corroborates FinCEN's concerns about
    this small segment of the market in which shell companies are used to
    buy luxury real estate in ``all-cash'' transactions. In addition,
    feedback from law enforcement indicates that the reporting has advanced
    criminal investigations.'' \22\
    ---------------------------------------------------------------------------
         \22\ Steve Hudak, ``FinCEN Targets Shell Companies Purchasing
    Luxury Properties in Seven Major Metropolitan Areas'', FinCEN, August
    22, 2017; https://www.fincen.gov/news/news-releases/fincen-targets-
    shell-companies-purchasing-luxury-properties-seven-major.
    ---------------------------------------------------------------------------
        A second study of the impact of the GTOs, in 2018, by the New York
    Federal Reserve and the University of Miami found, ``After anonymity is
    no longer freely available to domestic and foreign investors, all-cash
    purchases by corporations fall by approximately 70 percent, indicating
    the share of anonymity-seeking investors using LLCs as `shell
    corporations.' '' \23\
    ---------------------------------------------------------------------------
         \23\ Hundtofte, C. Sean, and Rantala, Ville, ``Anonymous Capital
    Flows and U.S. Housing Markets'' (May 28, 2018). University of Miami
    Business School, Research Paper No. 18-3. Available at SSRN: https://
    ssrn.com/abstract=3186634 or http://dx.doi.org/10.2139/ssrn.3186634.
    ---------------------------------------------------------------------------
    The British Experience
        The United Kingdom implemented the first beneficial ownership
    directory, and their experience can be instructive. As I previously
    mentioned, Global Witness did an analysis of the U.K. data in 2019.
    \24\ Among the many findings was the successful early collaboration
    between Companies House (the Government agency hosting the beneficial
    ownership directory) and law enforcement.
    ---------------------------------------------------------------------------
         \24\ Global Witness, ``Getting the U.K.'s House in Order'', May 6,
    2019; https://www.globalwitness.org/en/campaigns/corruption-and-money-
    laundering/anonymous-company-owners/getting-uks-house-order/.
    ---------------------------------------------------------------------------
        They found:

         ``. . . a huge spike in Suspicious Activity Reports filed
            by Companies House, with 2,264 reports being filed between
            April 2017 and April 2018, as compared with 426 reports the
            preceding year.''

         ``. . . enquiries from law enforcement to Companies House
            for help in investigations increased from an average of 11
            requests per month to 125 per month in the last 3 years. While
            the increase has slowed, it continues to grow by more than 50
            percent (2017/18).''

        A ``major drop'' in U.K.-incorporated ``vehicles previously
            associated with crime[.] After becoming part of the new
            transparency rules, incorporation levels of Scottish Limited
            Partnerships--a vehicle previously implicated in countless
            money-laundering scandals--plummeted by 80 percent in the last
            quarter of 2017 from their peak at the end of 2015. [Global
            Witness's] analysis this year [in 2019] confirms it remains at
            historically low levels.''
    Cutting Off Legitimate Channels to the Financial System for Illicit
            Actors
        We also need to recognize that, today, criminals have open access
    to our financial system. Legitimate gatekeepers in the legal and
    accounting professions assist clients that may well be laundering money
    but have no responsibility to ask even the most basic questions. \25\
    ---------------------------------------------------------------------------
         \25\ Steve Kroft (60 Minutes), ``Anonymous, Inc.'', CBS News,
    January 31, 2016; accessible at https://www.cbsnews.com/news/anonymous-
    inc-60-minutes-steve-kroft-investigation/.
    ---------------------------------------------------------------------------
        Earlier in my testimony, I referenced a 2014 study by academics at
    UT-Austin, BYU, and Griffiths University that found that the United
    States is the easiest place in the world for suspect individuals to
    establish an anonymous company. The researchers sent out thousands of
    inquiries to corporate formation agents in over 100 countries with
    details that should have raised red flags for the recipients. An agent
    in Florida responded to a request in an email saying:

            Your stated purpose could well be a front for funding terrorism
            . . . if you wanted a functioning and useful Florida
            corporation, you'd need someone here to put their name on it,
            set up bank accounts, etc. I wouldn't even consider doing that
            for less than 5k a month . . . \26\
    ---------------------------------------------------------------------------
         \26\ Findley, et al.

        While clearly crossing ethical lines, this individual did nothing
    illegal. By requiring the collection of beneficial ownership
    information, gatekeepers across the country would no longer engage with
    these shady clients--thereby cutting off access to the U.S. financial
    system through legitimate channels.
    Conclusion
        The FACT Coalition came together in 2011. One primary concern among
    the international development and antipoverty groups that formed the
    core of the Coalition's leadership was the wealth drain from the
    developing world. Corrupt leaders were siphoning money from their
    national treasuries leaving few resources for basic services,
    impoverishing local populations and propping up dictators and autocrats
    who engaged in widespread abuses of human rights. The realization that
    the illicit proceeds were being moved into the U.S. through anonymous
    companies gave rise to the effort to rein in corporate secrecy.
        Over the years, leaks and a number of painstaking investigations,
    including several by the Senate Permanent Subcommittee on
    Investigations, uncovered the ubiquitous use of anonymous companies for
    a wider array of illicit acts--terrorist financing, sanctions evasion,
    human trafficking, drug trafficking, the illicit trade in counterfeit
    and pirated goods, Medicare fraud, tax evasion, and more. The threats
    to our local communities and our Nation has brought together an
    unprecedented set of allies all calling for reform.
        Support for ending the incorporation of anonymous companies has
    expanded beyond the core anticorruption community to now include
    national security experts, \27\ cops, \28\ sheriffs, \29\ local
    prosecutors, \30\ State Attorneys General, \31\ Federal prosecutors,
    \32\ human rights advocates, \33\ anti- human-trafficking groups, \34\
    faith-based networks, \35\ international development NGOs, \36\ CEOs,
    \37\ big businesses, \38\ small businesses, \39\ banks, \40\ credit
    unions, \41\ real estate professionals, \42\ insurance companies, \43\
    over 125 nongovernmental organizations, \44\ and scholars at both
    conservative \45\ and liberal think tanks, \46\ among others.
    ---------------------------------------------------------------------------
         \27\ Bipartisan Letter from 91 National Security Experts, June 10,
    2019, available at http://bit.ly/2ZvJECj.
         \28\ Letter from the Fraternal Order of Police, May 6, 2019,
    available at http://bit.ly/2KoYC9W.
         \29\ Letter from the National Sheriffs' Association, May 7, 2019,
    available at http://bit.ly/2Fk7vxd.
         \30\ Letter from the National District Attorneys Association, May
    6, 2019, available at http://bit.ly/2KoJDg9.
         \31\ Bipartisan Letter from Two Dozen State Attorneys General,
    August 2, 2018, available at http://bit.ly/2J5Bla3.
         \32\ Letter from the National Association of Assistant United
    States Attorneys, May 6, 2019, available at http://bit.ly/2L0fkvU.
         \33\ Letter from Amnesty International USA, EarthRights
    International, EG Justice, Enough Project, Freedom House, Global
    Witness, Human Rights First, Human Rights Watch, International
    Corporate Accountability Roundtable, and the International Labor Rights
    Forum, April 11, 2019, available at https://www.hrw.org/news/2019/04/
    11/letter-chairwoman-waters-and-ranking-member-mchenry-re-corporate-
    transparency-act.
         \34\ See, for example, Letter from Polaris, May 2, 2019, available
    at http://bit.ly/2WSJeUS; and Letter from Street Grace, March 10, 2019,
    available at http://bit.ly/2WOoti6.
         \35\ Letter from Jubilee Network USA, March 12, 2019, available at
    http://bit.ly/2IXMXLU.
         \36\ Letter from ActionAid USA, Bread for the World, Jubilee USA
    Network, The ONE Campaign, and Oxfam America, June 7, 2019, available
    at http://bit.ly/2MYVPpY.
         \37\ Letter from the CEOs of a dozen major companies, April 30,
    2019, available at http://bit.ly/31Gcd1L.
         \38\ Richard Sawaya, ``A Maximum Pressure Campaign Against the
    Kremlin'', The Hill, April 30, 2019, https://thehill.com/opinion/
    international/441350-a-maximum-pressure-campaign-against-the-kremlin.
         \39\ Letter from Small Business Majority, April 25, 2019,
    available at http://bit.ly/2KtteqK.
         \40\ See, for example: Letter from nine banking associations, May
    7, 2019, available at http://bit.ly/2XpRlwx; Letter from the
    Independent Community Bankers of America, May 8, 2019, available at
    http://bit.ly/31Rbc7o; and Letter from 51 State Banking Associations,
    June 10, 2019, available at http://bit.ly/2Kow6Fh.
         \41\ Letter from the Credit Union National Association, June 11,
    2019, available at http://bit.ly/2KttIgy.
         \42\ Letter from the American Escrow Association, American Land
    Title Association, National Association of REALTORS, and Real Estate
    Services Providers Council, Inc. (RESPRO), May 7, 2019, available at
    http://bit.ly/2E2KQoq.
         \43\ Letter from the Coalition Against Insurance Fraud, April 15,
    2019, available at http://bit.ly/2KYYygz.
         \44\ Letter from 127 Groups Supporting Corporate Transparency Act
    of 2019, June 10, 2019, available at http://bit.ly/2L7yjon.
         \45\ See, for example: Clay R. Fuller, ``Dealing With Anonymity in
    Business Incorporation'', American Enterprise Institute, March 29,
    2019, https://www.aei.org/publication/dealing-with-anonymity-in-
    business-incorporation/.
         \46\ See, for example: Molly Elgin-Cossart and Trevor Sutton,
    ``The Real Scandal Behind the Panama Papers'', Center for American
    Progress, May 10, 2016, https://www.americanprogress.org/issues/
    security/news/2016/05/10/137191/the-real-scandal-behind-the-panama-
    papers/.
    ---------------------------------------------------------------------------
        We hope this hearing provides members an opportunity to better
    understand the dangers posed by anonymous companies and move to address
    them. We thank you for this opportunity to share our views, and we look
    forward to working with you on this important issue.
                   RESPONSES TO WRITTEN QUESTIONS OF
                    SENATOR MENENDEZ FROM GREG BAER

    Q.1. As the ranking member of the Senate Foreign Relations
    Committee and an author of several pieces of sanctions
    legislation, I do not believe the transparency rules on shell
    companies in our country are enough to catch criminal foreign
    actors such as kleptocratic oligarchs, drug cartels, and rogue
    Governments or individuals seeking to evade sanctions. The fact
    is, the U.S. is still an easy place to hide money.
        Would you agree that anonymous companies formed in the U.S.
    make it more difficult for law enforcement and national
    security officials to enforce sanctions and combat kleptocracy?
    If so, please explain.

    A.1. Yes, as I noted in my testimony, the U.S. is an easy and
    safe place for criminals to hide behind the corporate veil by
    keeping their ownership secret from law enforcement, national
    security, and banks tasked with doing due diligence on their
    clients.
        Anyone in the world looking to disguise the source or
    ownership of their funds can establish a U.S. shell company and
    keep the ownership of that company anonymous. That anonymity
    serves as a wall for law enforcement and national security
    officials tasked with safeguarding our system. Sophisticated
    criminals operate through multiple shell companies, whose
    linkages are not clear.
        Every year financial institutions spends billions of
    dollars to prevent and detect money laundering. Such efforts
    target those engaged in organized crime, terror financing,
    human trafficking, kleptocracy, and other offenses, and attempt
    to thwart those seeking to avoid sanctions. Yet those efforts
    are thwarted by the loophole in the U.S. regulatory framework
    that permits the evasion of sanctions, enabling kleptocrats and
    other illicit actors to access the U.S. financial system
    despite the best efforts of law enforcement and national
    security officials.

    Q.2. Would you agree that this has undermined the effectiveness
    of our sanctions regimes on Russia, Venezuela, Iran, North
    Korea, and others? If so, please explain.

    A.2. Yes, the Bank Policy Institute agrees that the lack of a
    beneficial ownership requirement in the United States
    represents a gaping hole in our AML/CFT framework and
    undoubtedly contributes to the evasion of sanctions by illicit
    State actors, including the countries you referenced. As
    detailed by the Center for New American Security in their
    December 2018 report, ``Financial Networks of Mass
    Destruction'', ``the efforts to prevent the financing of
    [weapons of mass destruction] proliferation are only in their
    infancy. The legal framework to prevent the financing of
    proliferation is weak, and implementation across the world is
    spotty . . . . Stepping up action to combat the financing of
    proliferation will take legal change at home, including
    financial transparency measures and new methodologies to
    facilitate information sharing between banks and between banks
    and national authorities.''

    Q.3. Would requiring companies to disclose their true
    beneficial owners at the time of formation assist law
    enforcement in their investigations and help keep Americans
    safe from national security threats? If so, please explain.

    A.3. Yes. As I detailed in my testimony, anonymous shell
    companies are a key method used by criminals to hide assets for
    a range of dangerous and illicit activities, including human
    trafficking, terrorist financing, money laundering, and
    kleptocracy. All too often criminal investigations hit a dead
    end when law enforcement encounters a company with hidden
    ownership and lacks the time and resources to peel back the
    many layers of secrecy currently permitted by U.S. law. And the
    more sophisticated and sinister the criminal, the more layers
    there generally are.
        This problem is not difficult to solve. It has been solved
    by most countries around the world. Generally, our country does
    more than any other to identify and block the proceeds of
    crime, however we are among the worst when it comes to allowing
    criminals to use the corporate form to cloak ownership; as a
    result, the United States has become a safe haven for those who
    wish to hide the proceeds or instruments of illegal activity.
    We have therefore been repeatedly criticized by the Financial
    Action Task Force, an intergovernmental AML standard setting
    body, for this deficiency in our system.
        Requiring companies to disclose their true beneficial
    owners at the time of formation would provide law enforcement,
    and the financial institutions required to collect this
    information, with the key information required to pursue
    investigations and protect national security.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                   SENATOR MENENDEZ FROM KAREN HARNED

    Q.1. As the ranking member of the Senate Foreign Relations
    Committee and an author of several pieces of sanctions
    legislation, I do not believe the transparency rules on shell
    companies in our country are enough to catch criminal foreign
    actors such as kleptocratic oligarchs, drug cartels, and rogue
    Governments or individuals seeking to evade sanctions. The fact
    is, the U.S. is still an easy place to hide money.
        Would you agree that anonymous companies formed in the U.S.
    make it more difficult for law enforcement and national
    security officials to enforce sanctions and combat kleptocracy?
    If so, please explain.
        Would you agree that this has undermined the effectiveness
    of our sanctions regimes on Russia, Venezuela, Iran, North
    Korea, and others? If so, please explain.
        Would requiring companies to disclose their true beneficial
    owners at the time of formation assist law enforcement in their
    investigations and help keep Americans safe from national
    security threats? If so, please explain.

    A.1. As the Executive Director of the NFIB Small Business Legal
    Center, I have expertise in how regulatory and legal statutes
    and proposals affect small business owners. I am not an expert
    on law enforcement, national security, foreign policy, or
    international sanctions. Therefore, I cannot comment with
    authority on any of the questions you proposed.
        However, I will direct you to the comments of an expert.
    FinCEN Director Blanco testified at a hearing before this
    Committee on May 21, 2019. In response to questioning from
    Senator Warner regarding verification of information he said,
    ``Senator, that gets a little bit more complicated. If what
    you're asking us to do is verify the information, I'll just be
    candid with you. That would be a big mistake. There would be no
    way that FinCEN could be able to verify that information.''
    Without verifying the accuracy of millions of data points being
    entered into a FinCEN database, law enforcement could not trust
    the accuracy of the information collected until they begin an
    investigation into a suspected criminal entity.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                           FROM KAREN HARNED

    Q.1. Under the ILLICIT CASH Act, what kind of information would
    small businesses need to supply the Financial Crimes
    Enforcement Network (FinCEN) upon incorporation? Would this
    beneficial ownership information be different from other
    information business owners are currently required to provide
    to financial institutions when opening an account?

    A.1. Under the draft ILLICIT CASH Act businesses with 20 or
    fewer employees and less than $5 million in gross receipts
    would need to file the following information of all beneficial
    owners:

        full legal names,

        business or residential addresses,

        dates of birth,

        jurisdictions of formation,

        dates of formation,

        Employer Identification Numbers (EIN), or, if the
            business is not an employer, driver's license or
            passport number.

        Under the Financial Crimes Enforcement Network's (FinCEN)
    Customer Due Diligence (CDD) Rule, an individual opening an
    account must provide their name and title, as well as the name
    and address of the legal entity for which the account is being
    opened. Businesses must report the following information of all
    beneficial owners to financial institutions when opening new
    accounts:

        full legal names,

        dates of birth,

        business or residential addresses,

        Social Security numbers, or passport number for
            noncitizens. \1\
    ---------------------------------------------------------------------------
         \1\ See Appendix A to section 1010.230--Certification Regarding
    Beneficial Owners of Legal Entity Customers, Customer Due Diligence
    Rule, (May 11, 2016) available online at https://www.regulations.gov/
    document?D=FINCEN-2014-0001-0183.

        The draft ILLICIT CASH Act would require similar
    information but differs in that it requires jurisdictions of
    formation, dates of formation, EINs, and driver's license or
    passport numbers instead of Social Security numbers for a U.S.
    citizen.
        Only businesses opening new accounts since the CDD Rule
    became applicable (May 11, 2018) have been required to report
    this information to financial institutions. The draft ILLICIT
    CASH Act would require all existing businesses to submit
    reports. Small businesses would report more beneficial owners
    as it contains a broader definition of beneficial ownership,
    including those who receive substantial economic benefits from
    the assets of an organization.

    Q.2. What kind of privacy concerns would sharing this
    information with FinCEN raise?

    A.2. The draft ILLICIT CASH Act raises serious privacy concerns
    for small business owners. This draft bill requires the
    Treasury Department to keep the beneficial ownership
    information for the life of the business plus 5 years and grant
    broad access to the information to Federal, State, local, or
    tribal government agencies through a simple request.
        Under the CDD Rule, law enforcement is required to acquire
    a subpoena to obtain a company's beneficial ownership
    information from a financial institution unless that
    information is submitted to FinCEN with a suspicious activity
    report. \2\ The ILLICIT CASH Act would allow ``any Government
    agency'' access to this information without a warrant or a
    subpoena.
    ---------------------------------------------------------------------------
         \2\ FinCEN did not estimate the cost of privacy loss of the CDD
    Rule.
    ---------------------------------------------------------------------------
        These bills are antithetical to current statutes on the
    books, which--even for sensitive kinds of national security
    activities, such as protection against international terrorism
    or clandestine intelligence activities--require the Federal
    Government to focus its investigative interest on someone in
    particular, some business in particular, or some account in
    particular before compelling a bank or other business to
    produce relevant information. \3\
    ---------------------------------------------------------------------------
         \3\ See, for example, Stored Communications Act, 18 U.S.C. 2709;
    Fair Credit Reporting Act, 15 U.S.C. 1681u and 1681v; Right to
    Financial Privacy Act, 12 U.S.C. 3414; and National Security Act, 50
    U.S.C. 3162.
    ---------------------------------------------------------------------------
        A Federal database with personally identifiable information
    of small business owners would be a target for hacks and leaks,
    despite the proposed increase penalties for leaks.

    Q.3. Under the ILLICIT CASH Act, what would be the estimated
    cost of compliance with new beneficial ownership reporting
    requirements?

    A.3. NFIB does not have an estimated cost of compliance for new
    beneficial ownership reporting requirements under the draft
    ILLICIT CASH Act. FinCEN estimated that the CDD Rule would cost
    between $700 million and $1.5 billion over a decade. \4\ FinCEN
    estimated that the CDD Rule would impact 13,952 small entities
    (banks, credit unions, brokers, and mutual funds).
    ---------------------------------------------------------------------------
         \4\ Regulatory Impact Assessment for FinCEN Notice of Proposed
    Rulemaking: ``Customer Due Diligence Requirements for Financial
    Institutions'', Docket No. FinCEN-2014-0001.
    ---------------------------------------------------------------------------
        The draft ILLICIT CASH Act massively expands the number of
    impacted entities and the frequency of reports. The draft bill
    would capture many more entities than the CDD Rule, including
    businesses that have yet to open a new account since May 11,
    2018. According to the U.S. Census Bureau, there are more than
    5.3 million businesses with 20 or fewer employees. The draft
    bill would also require these businesses to update their
    information more frequently than the CDD Rule, requiring
    updates within no more than 90 days if ownership information
    changes. Due to these factors, we can reasonably estimate
    increased compliance costs.
        Some commenters to the CDD Rule suggested the process would
    look like applying for an Employer Identification Number (EIN)
    from the IRS. The IRS estimates that applying for an EIN takes
    10 hours and 10 minutes in total:

        8 hours and 36 minutes for recordkeeping

        42 minutes for learning about the law or the form

        52 minutes for preparing, copying, assembling, and
            sending the form to the IRS \5\
    ---------------------------------------------------------------------------
         \5\ See Privacy Act and Paperwork Reduction Act Notice,
    Instructions for Form SS-4, Application for Employer Identification
    Number, IRS, available online at https://www.irs.gov/pub/irs-pdf/
    iss4.pdf.
    ---------------------------------------------------------------------------
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                   SENATOR MENENDEZ FROM GARY KALMAN

    Q.1. Just last month the FACT coalition released a report on
    how anonymous shell companies fuel trade in counterfeit goods.
    The FACT report points out alarming examples of how criminals
    used shell companies to funnel the profits of counterfeit
    medicines made in China, India, and elsewhere that were sold
    online to unsuspecting U.S. consumers. Some of the medicines
    involved were well-known drugs like OxyContin, Lipitor, Xanax,
    and others. These cases had real health impacts on Americans
    that thought buying online could save them money, only to find
    out later that the medicines had incorrect active ingredients
    or the wrong dose.
        How would beneficial ownership legislation help crack down
    on our country's growing problem of counterfeit medicines and
    other goods sold online?

    A.1. Counterfeit goods pose a series of threats to Americans. A
    2017 report from the International Chamber of Commerce and the
    International Trademark Association projected that the global
    economic value of counterfeit and pirated goods alone will
    reach close to $3 trillion by 2022--enriching criminals,
    undercutting legitimate businesses, threatening jobs and public
    health and safety. The same study predicts that total
    employment losses globally due to counterfeiting and piracy
    will rise from 2-2.6 million jobs lost in 2013 to 4.2-5.4
    million jobs lost in 2022. \1\
    ---------------------------------------------------------------------------
         \1\ Frontier Economics, ``The Economic Impacts of Counterfeiting
    and Piracy--Report prepared for BASCAP and INTA'', February 6, 2017,
    https://cdn.iccwbo.org/content/uploads/sites/3/2017/02/ICC-BASCAP-
    Frontier-report-2016.pdf.
    ---------------------------------------------------------------------------
        Beyond the direct economic damage, the illicit trade in
    counterfeit and pirated goods is a major threat to public
    health and consumer safety. In the case of counterfeit
    pharmaceuticals, incorrect ingredients or doses may not work
    or, perhaps worse, they can be physically harmful. Counterfeit
    food products have been known to include potentially toxic
    ingredients, and counterfeit electronics have exploded--causing
    physical injury. Honest American businesses lose money when
    counterfeit or pirated goods steal market share from them, and
    they risk reputational damage when products sold in their name
    don't work or cause physical harm.
        The problem faced by law enforcement is that the products
    are often marketed and sold through anonymous corporate
    structures. Corporate secrecy makes it harder, sometimes
    impossible, for law enforcement to track down the perpetrators.
    Delayed investigations mean more U.S. consumers are exposed to
    potentially harmful products, and businesses continue to lose
    money and risk longer term reputational damage.
        Should law enforcement get close to identifying the bad
    actors behind these scams, these individuals can shut down one
    anonymous company and quickly open another to continue to sell
    their potentially dangerous products.
        Beneficial ownership transparency would make it far more
    difficult for criminals to access U.S. markets and the U.S.
    financial system. Some criminals may take the risk. If they do,
    law enforcement would be able to more quickly shut down the
    operation and hold the criminals accountable. Others will not
    take the risk. Some will look for nominee directors or stand in
    owners. Under current law, nominees can and do sign their names
    on the proper forms on behalf of illicit actors and have no
    liability. If the legislation is passed, those nominees would
    be criminally liable. The legislation would either chase the
    counterfeiters from U.S. markets or make it far more difficult
    to find front line accomplices.
        As I mentioned in my testimony, beneficial ownership
    transparency is not the only reform necessary to prohibit this
    type of illicit activity, but it is the necessary foundation on
    which to build. We can stiffen fines and penalties but if we
    allow anonymous companies to legally abuse our corporate
    formation laws in this fashion, law enforcement will not have
    the necessary tools to do their jobs to protect the American
    people.

    Q.2. Is there not a danger that foreign actors can engage in
    political money laundering by using anonymous LLCs incorporated
    in the United States to contribute money to super PACs, and
    thereby illegally influence U.S. elections?
        What steps can be taken, both by Congress and the
    Administration, to remove this threat?

    A.2. There have been reported instances of foreign actors using
    anonymous companies to influence our elections. The anonymity
    allows foreign agents to do an end run around existing laws
    against foreign expenditures in U.S. elections.
        Like the issue of counterfeit goods, beneficial ownership
    transparency will guard against easy and open access to the
    U.S. financial system. In relation to foreign political
    interference, the impact would be even more immediate than with
    counterfeit goods. A company registered in the Cayman Islands
    may do business in the U.S., but that same company cannot
    engage in election spending. If foreign agents seek to spend on
    our elections, the only way to escape accountability is to
    incorporate U.S.-based anonymous companies and channel the
    foreign funds through them. Our current laws enable this type
    of abuse of our corporate formation system.

    Q.3. As the ranking member of the Senate Foreign Relations
    Committee and an author of several pieces of sanctions
    legislation, I do not believe the transparency rules on shell
    companies in our country are enough to catch criminal foreign
    actors such as kleptocratic oligarchs, drug cartels, and rogue
    Governments or individuals seeking to evade sanctions. The fact
    is, the U.S. is still an easy place to hide money.
        Would you agree that anonymous companies formed in the U.S.
    make it more difficult for law enforcement and national
    security officials to enforce sanctions and combat kleptocracy?
    If so, please explain.

    A.3. Yes. There are numerous examples of anonymous companies
    being used to undermine our national security. Here are just a
    few examples taken from a fact sheet produced by my Coalition:
    \2\
    ---------------------------------------------------------------------------
         \2\ The FACT Coalition, ``FACT Sheet: Anonymous Companies and
    National Security'', May 17, 2019, https://thefactcoalition.org/fact-
    sheet-anonymous-companies-and-national-security-may-
    2019?utm_medium=policy-analysis/fact-sheets.

        Anonymous companies facilitate the financing of
            weapons of mass destruction. Anonymous companies have
            been featured in proliferation financing cases
            involving North Korea, Syria, and Pakistan. In a
            particularly notable example of a ``serial
            proliferator,'' a Chinese national named Li Fang Wei
            (a.k.a. Karl Lee) repeatedly formed anonymous entities
            to carry out procurement activity, even as his
    ---------------------------------------------------------------------------
            businesses were sanctioned by the U.S.

        Anonymous companies were used to lease high
            security space to the Government, creating security
            risks. The Government Accountability Office ``was
            unable to identify ownership information for about one-
            third of GSA's 1,406 high-security leases as of March
            2016 because ownership information was not readily
            available for all buildings.'' This included the FBI--
            renting space owned by a corrupt Malaysian official and
            his family. In addition to providing funding to money-
            laundering operations that the FBI was supposed to be
            investigating, potential risks include security
            breaches and cyberattacks.

        Anonymous companies assisted an illegal weapons
            dealer when moving hardware into war zones. Viktor
            Bout, a.k.a. ``the Merchant of Death'', used a global
            network of anonymous shell companies, including at
            least 12 incorporated in Delaware, Florida, and Texas,
            to disguise weapons trafficking into conflict zones
            around the world.

        Anonymous companies defrauded the U.S. military,
            put our troops at risk, and overcharged for basic
            supplies. A former America's Most Wanted fugitive made
            millions by defrauding the U.S. taxpayers of $11.2
            million during a time of armed conflict. He supplied
            shoddy, dangerous parts essential to well-functioning
            weapons and to the safety of troops under the disguise
            of nominee companies created in California, Florida,
            New Jersey, New York, Nevada, Oregon, Texas,
            Washington, and Canada. Separately, a U.A.E.-based
            anonymous company was used to overcharge American
            taxpayers in a $48 million scheme to supply food and
            water to troops in Afghanistan.

        In addition, the Kleptocracy Initiative at the Hudson
    Institute has produced numerous reports linking anonymous
    companies to the enabling of kleptocrats. The Kleptocracy
    Initiative's research features studies--including ``Weaponizing
    Kleptocracy: Putin's Hybrid Warfare'', \3\ ``How Non-State
    Actors Export Kleptocratic Norms to the West'', \4\ and
    ``Countering Russian Kleptocracy'', \5\ among others--that
    highlight the different ways kleptocracies can infiltrate
    Western institutions and undermine U.S. national security.
    ---------------------------------------------------------------------------
         \3\ Marius Laurinavicius, ``Weaponizing Kleptocracy: Putin's
    Hybrid Warfare'', Hudson Institute, June 6, 2017, https://
    www.hudson.org/research/13666-weaponizing-kleptocracy-putin-s-hybrid-
    warfare.
         \4\ Ilya Zaslavskiy, ``How Non-State Actors Export Kleptocratic
    Norms to the West'', Hudson Institute, September 7, 2017, https://
    www.hudson.org/research/13875-how-non-state-actors-export-kleptocratic-
    norms-to-the-west.
         \5\ Ben Judah and Nate Sibley, ``Countering Russian Kleptocracy'',
    Hudson Institute, April 5, 2018, https://www.hudson.org/research/14244-
    countering-russian-kleptocracy.

    Q.4. Would you agree that this has undermined the effectiveness
    of our sanctions regimes on Russia, Venezuela, Iran, North
    ---------------------------------------------------------------------------
    Korea, and others? If so, please explain.

    A.4. Yes. There are numerous examples in which anonymous
    companies have been used to evade sanctions. Corporate secrecy
    allows rogue Nations and individuals to easily do so.
        As I mentioned in my testimony, Iran was able to evade
    economic sanctions by purchasing property in Manhattan through
    the use of anonymous companies, including one registered in New
    York.
        According to a report by the Foundation for the Defense of
    Democracies, ``In February 2017, Treasury sanctioned the Vice
    President of Venezuela, Tareck El Aissami, for his involvement
    with the drug trade. That same month, CNN reported that a 2013
    confidential intelligence report by a group of Latin American
    Nations assessed that El Aissami had ordered Venezuelan
    passports to be fraudulently issued to 173 people in the Middle
    East, including individuals connected to Hezbollah. Latin
    American intelligence officials reportedly told an American
    researcher that El Aissami created a network of nearly 40 shell
    companies to launder money, including some that were based in
    Miami. This network was used by Hezbollah supporters (including
    the Lebanese Canadian bank), Colombian and Mexican cartels, and
    Ayman Joumaa, discussed above.'' \6\
    ---------------------------------------------------------------------------
         \6\ Yaya J. Fanusie and Alex Entz, ``Terror Finance Briefing Book:
    Hezbollah Financial Assessment'', Foundation for Defense of
    Democracies, September 2017, http://bit.ly/2ZxNfjf.
    ---------------------------------------------------------------------------
        In 2016, McClatchy News ran a story that began: ``In her
    passport, Nesita Manceau lists her occupation as `housewife.'
    But she does oh-so-much more. On paper at least, she's a
    corporate titan. And she's been tangled in an arms-running
    scandal involving North Korea and Iran.'' \7\
    ---------------------------------------------------------------------------
         \7\ Tim Johnson, ``Did This Panama Papers Housekeeper Really
    Direct a North Korean Arms Deal?'' McClatchy, May 10, 2016, https://
    www.mcclatchydc.com/news/nation-world/national/article76635047.html.
    ---------------------------------------------------------------------------
        The story goes on to explain how nominee owners are used to
    mask the identities of the beneficial owners engaged in
    nefarious activities who, in fact, control the anonymous
    enterprises.
        These are just few examples to demonstrate that anonymous
    companies are used by rogue Nations and individuals to
    undermine sanctions.

    Q.5. Would requiring companies to disclose their true
    beneficial owners at the time of formation assist law
    enforcement in their investigations and help keep Americans
    safe from national security threats? If so, please explain.

    A.5. Yes. As stated above, there are now volumes of evidence of
    anonymous corporate structures being abused in ways that
    potentially threaten our national security. Additional studies
    and articles from scholars at the Atlantic Council, American
    Enterprise Institute, Brookings Institution, Carnegie Endowment
    for International Peace, Center for a New American Security,
    Center for Strategic and International Studies, Council on
    Foreign Relations, Foundation for the Defense of Democracies,
    Hoover Intuition, Hudson Institute and others have all detailed
    how anonymous companies threaten our national security and
    frustrate U.S. efforts to counter those threats.
        This is why more than 100 former military and civilian
    national security experts signed letter to Congress urging the
    adoption of beneficial ownership transparency legislation. In
    March, General David Petraeus coauthored a guest opinion piece
    in the Washington Post with Senator Sheldon Whitehouse
    describing the threats posed by anonymous companies and calling
    for reform. The U.S. Department of Justice and the U.S.
    Department of Treasury in both Republican and Democratic
    Administrations have spoken out on the need for reform. Twenty-
    four State Attorneys General sent a letter to Congress last
    year and the following law enforcement organizations have all
    called for beneficial ownership transparency:

        ATF Association

        Federal Law Enforcement Officers Association
            (FLEOA)

        National Association of Assistant United States
            Attorneys (NAAUSA)

        National District Attorneys Association (NDAA)

        National Fraternal Order of Police (FOP)

        National Sheriff's Association

        Society of Former Special Agents of the FBI

        U.S. Marshals Service Association
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                            FROM GARY KALMAN

    Q.1. Boston is experiencing a building boom, especially in the
    luxury sector. According to a recent report, 35 percent of
    units in the 12 highest-priced luxury developments built in
    Boston from 2008-2018 were purchased by limited liability
    companies or trusts that obscure the beneficial owners. \1\ A
    large number of those units were purchased by anonymous foreign
    buyers with cash. \2\
    ---------------------------------------------------------------------------
         \1\ Institute for Policy Studies, ``Towering Excess: The Perils of
    the Luxury Real Estate Boom for Bostonians'', Chuck Collins and Emma de
    Goede, September 2018, https://ips-dc.org/wp-content/uploads/2018/09/
    ToweringExcessReport-Sept10.pdf.
         \2\ Id.
    ---------------------------------------------------------------------------
        What role does high-cost real estate play in the
    international money-laundering framework?

    A.1. High cost real estate plays an increasingly prominent role
    in international money laundering. In the Boston report that
    you mention, ``Towering Excess'', researchers determined that,
    ``These [high-priced condominium buildings], however, play a
    key role in the global hidden wealth infrastructure, a shadowy
    system that's hiding wealth and masking ownership, all for the
    purpose of helping the holders of private fortunes avoid taxes
    and oversight of illicit activities. Many Boston luxury
    properties are functioning, in effect, as wealth storage
    lockers for global capital.''
        This report is consistent with others done in other U.S.
    cities and cities abroad. Transparency International U.K. had
    similar findings in two reports, Faulty Towers \3\ and
    Corruption on your Doorstep, \4\ regarding the London real
    estate market.
    ---------------------------------------------------------------------------
         \3\ Transparency International U.K., ``Faulty Towers:
    Understanding the Impact of Overseas Corruption on the London Property
    Market'', March 2017, https://www.transparency.org.uk/publications/
    faulty-towers-understanding-the-impact-of-overseas-corruption-on-the-
    london-property-market/.
         \4\ Transparency International U.K., ``Corruption on Your
    Doorstep'', February 2015, https://www.transparency.org.uk/
    publications/corruption-on-your-doorstep/.
    ---------------------------------------------------------------------------
        In Manhattan, eight blocks between Lenox Hill and Central
    Park is nearly 40 percent unoccupied, and on the Upper East
    Side more than a quarter of the properties are owned but
    vacant. \5\ These properties could be occupied by permanent
    low- and moderate-income residents, but instead they are being
    priced out by those looking to hide or protect assets.
    ---------------------------------------------------------------------------
         \5\ Joseph Lawler, ``Money Laundering Is Shaping U.S. Cities'',
    Washington Examiner, March 27, 2017, https://
    www.washingtonexaminer.com/money-laundering-is-shaping-us-cities.
    ---------------------------------------------------------------------------
        In San Francisco, the South Beach neighborhood is one-fifth
    unoccupied, \6\ and--in the competitive California housing
    market--the rent crisis is affecting low- and moderate-income
    families.
    ---------------------------------------------------------------------------
         \6\ Id.
    ---------------------------------------------------------------------------
        Wealthy bad actors from abroad use anonymous companies to
    purchase real estate to undermine economic sanctions, avoid
    fund transfer limits out of their home Nations, evade taxes,
    launder money, and store corrupt cash.
        These rogue individuals, along with rich speculators, bid
    up prices on properties, and then use them as a ``bank'' rather
    than a home. This helps to fuel the loss of affordable housing
    in growing numbers of communities due to skyrocketing real
    estate prices and vastly inflated markets.

    Q.2. Why might Boston be a destination for foreign illicit
    investment?

    A.2. Massachusetts, like every State in the country, allows for
    the incorporation of anonymous companies. Delaware's corporate
    secrecy may be more infamous, but no State collects beneficial
    ownership information. \7\ However, Boston is particularly
    attractive because, like New York and Miami, the real estate
    market is strong. It is a comparatively safe investment over
    time. Or, should the illicit investors need their money, they
    have a reasonably high assurance of selling quickly.
    ---------------------------------------------------------------------------
         \7\ Press Release, ``Report Demonstrates Ease of Establishing
    Anonymous Shell Companies'', Global Financial Integrity, March 21,
    2019, accessible at https://www.gfintegrity.org/press-release/report-
    demonstrates-ease-of-establishing-anonymous-shell-companies/.
    ---------------------------------------------------------------------------
        From my time in the Boston area, it is a terrific place to
    live, but these individuals are not concerned about the quality
    of the schools or access to job opportunities. They are solely
    focused on safely parking their money until such a time as they
    need it.

    Q.3. What impact does the purchase of real estate through
    anonymous shell companies play in housing prices across the
    country?

    A.3. A 2016 story in the Miami Herald about the impact of
    offshore money on the local housing market found that, `` . . .
    the boom also sent home prices soaring beyond the reach of many
    working- and middle-class families. Locals trying to buy homes
    with mortgages can't compete with foreign buyers flush with
    cash and willing to pay the list price or more.'' \8\
    ---------------------------------------------------------------------------
         \8\ Nicholas Nehamas, ``How Secret Offshore Money Helps Fuel
    Miami's Luxury Real-Estate Boom'', Miami Herald, April 3, 2016, https:/
    /www.miamiherald.com/news/business/real-estate-news/
    article69248462.html.
    ---------------------------------------------------------------------------
        Inflated housing prices from these foreign investors create
    multiple problems. Higher prices lock middle-income households
    out from purchasing in neighborhoods close to jobs and schools.
    The increased demand for high-end housing also incentivizes
    developers to build more high-end properties, further reducing
    the affordable housing stock.
        In addition to the national security and law enforcement
    concerns that receive the most attention, anonymous companies
    are playing an increasing role in the lack of affordable
    housing in certain jurisdictions in the United States.

    Q.4. In November 2018, the Treasury Department's Financial
    Crimes Enforcement Network issued a Geographic Targeting Order
    for Boston, which requires title insurance companies to
    identify the individual who is purchasing a property above
    $300,000. \9\ Is that sufficient to keep illicit money from
    being parked in Boston real estate?
    ---------------------------------------------------------------------------
         \9\ Financial Crimes Enforcement Network, ``FinCEN Reissues Real
    Estate Geographic Targeting Orders and Expands Coverage to 12
    Metropolitan Areas'', November 15, 2018, https://www.fincen.gov/news/
    news-releases/fincen-reissues-real-estate-geographic-targeting-orders-
    and-expands-coverage-12.

    A.4. The Geographic Targeting Orders (GTOs) are an important
    step in protecting against illicit actors purchasing real
    estate, but they are not perfect. The GTOs collect ownership
    information through title insurance agents but cash financed
    transactions do not necessarily involve purchasing title
    insurance. The definition of beneficial owner in the GTOs is
    not as strong and comprehensive as in various legislative
    proposals. The GTOs are, by statute, temporary and, while they
    have been extended, they cannot be extended forever.
        The FACT Coalition strongly supports the GTOs and
    encourages their continued extension and expansion, but there
    are limitations.
                  Additional Material Supplied for the Record
       LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF FEDERALLY-INSURED
                                 CREDIT UNIONS
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]