GAO Report Finds Anonymous U.S. Companies Pose Risk

WASHINGTON — Today Sen. Carl Levin, D-Mich., and Sen. Norm Coleman, R-Minn., ranking Democrat and Chairman of the Permanent Subcommittee on Investigations, released a Government Accountability Office (GAO) report finding that states routinely incorporate new non-publicly traded companies without learning the identity of the owners, and that the absence of this company ownership information impedes law enforcement.

“We ought to know who is behind U.S. companies doing business in our country, but right now we don’t,” Levin said. “The result is that anonymous non-publicly traded companies are able to engage in illegal activities such as money laundering or other crimes, knowing that U.S. law enforcement has no ready way to identify the company owners. Today people have to supply more information to get a driver’s license than to form a company.”

“Companies form the basis of this country’s economic system, providing valuable goods and services,” Coleman said. “However, some individuals abuse the system and hide their identity behind shell companies that conduct no business except to facilitate criminal activity under the radar of law enforcement agencies. We need to take a closer look to identify the magnitude of this problem.”

In response to a Levin-Coleman request, GAO reviewed the legal requirements in all 50 states to set up non-publicly traded corporations and limited liability companies (LLCs). The GAO report found:

• None of the 50 states routinely requires applicants who want to form a new corporation to disclose who will own the corporation; most states do not require ownership information for LLCs.
• Third-party agents who submit company formation papers and annual reports are not required to and do not collect or verify company ownership information.
• The absence of company ownership information enables individuals to conceal their identities while operating as U.S. companies.
• Law enforcement is hindered by the absence of company ownership information.

The failure of states to collect company ownership information creates a risk that criminals will set up and use U.S. companies for money laundering, tax evasion, terrorist financing, or other crimes. Law enforcement officials told GAO that they are seeing an increase in the use of anonymous U.S. shell companies for illicit activities. The GAO report provided the following examples of law enforcement investigations that involved U.S. shell companies:

• The U.S. Treasury’s Financial Crimes Enforcement Network found that, between April 1996 and January 2004, financial institutions filed 397 suspicious activity reports, concerning a total of almost $4 billion, that involved U.S. shell companies, East European countries, and U.S. bank accounts.
• The FBI told GAO that U.S. shell companies are being used to launder as much as $36 billion from the former Soviet Union. The FBI also reported that they have 103 open cases investigating market manipulation, most of which involve U.S. shell companies.
• Immigration and Customs Enforcement (ICE) officials reported that a U.S. citizen used multiple Oregon shell companies to move $1 million from Libya to a U.S. bank account despite U.S. sanctions on Libya. In another ICE case, a Nevada-based corporation received more than 3,700 suspicious wire transfers totaling $81 million over 2 years; but the case was not prosecuted, because ICE was unable to identify the corporation’s owners.
• The Internal Revenue Service uncovered a scheme involving three individuals who set up U.S. shell companies to conceal nearly $9 million in taxable income in secret accounts in the Turks and Caicos Islands and other foreign countries.
• A Department of Justice report revealed that Russian officials used shell companies in Pennsylvania and Delaware to unlawfully divert $15 million in international aid intended to upgrade the safety of former Soviet nuclear power plants.

The GAO report observes that some offshore jurisdictions, such as the Isle of Man and Jersey, currently require company formation agents to obtain and verify company ownership information.

“Some offshore jurisdictions get company ownership information, but use corporate secrecy laws to make it tough for U.S. law enforcement to get the information,” said Levin. “Here at home, states make it easy for law enforcement to get company documents, but those documents don’t identify company owners. Anonymous U.S. shell companies engaging in criminal activity present a major problem for law enforcement, so we cannot continue to ignore this problem. The security risk and criminal threat posed by anonymous shell companies mean we need to work with law enforcement, the states, and others to address this problem in a reasonable and cost effective way.”

“The ease in which shell companies can be set up for illicit purposes is troubling, yet we need to consider the legitimate business interests and privacy concerns with protecting ownership information,” said Coleman. “We need to find the right balance among individual rights, state rights, and legitimate law enforcement objectives.”

You can find the report here [PDF].