[Senate Hearing 116-64]
[From the U.S. Government Publishing Office]
S. Hrg. 116-64
OUTSIDE PERSPECTIVES ON THE COLLECTION OF BENEFICIAL OWNERSHIP
INFORMATION
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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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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
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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
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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.
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\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.
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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.
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\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.
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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\
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\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\
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\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.
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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.
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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.
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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\
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\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\
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\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\
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\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.
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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.
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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:
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\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
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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\
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\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.
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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\
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\6\ Stolen Asset Recovery (StAR) Initiative, ``The Puppet
Masters'', World Bank and UNODC, Nov. 2011, pp. 34 and 121, http://
bit.ly/PuppetMasters.
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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:
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\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.
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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.
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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.
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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\
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\15\ Global Witness, ``Hard Data on Lessons Learned From the U.K.
Beneficial Ownership Register'', May 2019; http://bit.ly/2FhwX6u.
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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.
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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\
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\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\
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\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.
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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\
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\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.
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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.
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\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/.
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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/.
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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.
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\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/.
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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]