[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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            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\
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     \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.
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    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\
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     \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.
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    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.
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     \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\
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     \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.
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    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\
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     \1\ A full list of FACT Coalition members is available at http://
thefactcoalition.org/about/coalition-members-and-supporters/.
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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\
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     \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.
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    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.
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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]