Opening Statement of Senator Carl Levin Before the U.S. Senate Committee on Homeland Security and Governmental Affairs on State Business Incorporation Practices: A Discussion of the Incorporation Transparency and Law Enforcement Act

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Senator Lieberman, thank you for holding this hearing to focus on the fact that we are forming about 2 million U.S. corporations and limited liability companies each year without knowing who is behind them.

U.S. corporations with hidden owners have created a serious law enforcement and national security problem. We will hear today from witnesses about U.S. corporations established by the military in Iran which is a state sponsor of terrorism; we will hear about U.S. corporations involved with money laundering; about U.S. corporations used to commit tax evasion, and more. They all have one thing in common: their real owners – the legal term is “beneficial owners” -- are hidden from view. Here is one example of what is going on.

In 2004, one of our key law enforcement agencies, Immigration and Customs Enforcement or ICE -- who is here today – uncovered a collection of U.S. companies that were secretly controlled from entities located in Panama. The investigation began when bank reports showed that a single company formed in Utah was participating in nearly $150 million in suspicious international wire transfers. Further investigation by ICE uncovered a network of nearly 800 hundred U.S. companies, dispersed among nearly all 50 States, controlled by the same Panamanian entities. These companies were transferring large amounts of money to each other and to high-risk jurisdictions overseas. The companies claimed they were paying for the import or export of goods, but foreign authorities indicated no such goods were being shipped. In effect, the money transfers were part of a massive financial shell game, in which U.S. companies were being used to disguise the movement of funds and mask suspicious activity.

When ICE obtained the incorporation records for the 800 U.S. companies, not one identified a company’s true owner. After analyzing the available information, ICE found that nearly 200 companies had been formed in Utah and used the same company formation agent in a small office in a Salt Lake City suburb. That company formation agent also served as the companies’ registered agent within the State to accept service of process. When questioned by ICE, the Utah registered agent indicated that he had formed the companies at the request of another company formation agent located in Delaware and believed all were “shell companies” with no real business operations in the United States.

The Delaware company formation agent was already well known to law enforcement. No less than eight previous investigations had led to its doors, each of which involved millions of dollars in suspected money laundering by U.S. shell companies. When questioned by ICE in prior cases, the Delaware company formation agent freely admitted that he knew some of the corporations he formed or caused to be formed were intended to move money out of Russia and some former Soviet republics. He also said that he sometimes sold U.S. companies to the same overseas buyer at the rate of 40 companies per month. When asked about the actual owners of the 200 Utah companies, the company formation agent was unable to provide law enforcement with any names, since that information was not required by law. The end result was that the ICE investigation, like the eight before it, hit a dead end, unable to proceed due to the lack of beneficial ownership information. A hearing exhibit summarizes this case.

Michael Chertoff, former Secretary of the U.S. Department of Homeland Security (DHS), wrote the following:

“In countless investigations, where the criminal targets utilize shell corporations, the lack of law enforcement’s ability to gain access to true beneficial ownership information slows, confuses or impedes the efforts by investigators to follow criminal proceeds. This is the case in financial fraud, terrorist financing and money laundering investigations. … It is imperative that states maintain beneficial ownership information while the company is active and to have a set time frame for preserving those records.”

Here’s another aspect of the problem. A few weeks ago, members of my staff conducted an Internet search and found numerous company formation agents advertising the sale of U.S. companies and trumpeting the fact that U.S. companies can be formed without disclosing the names of any company owner.

One of the most blatant was Corporations Today Inc., which advertises its ability to form U.S. corporations in nearly every State with minimal cost and effort. A copy of some of its internet ads is presented in two hearing exhibits. This chart [Chart One] reproduces one of its advertisements offering the sale of “aged” corporations, meaning companies which Corporations Today formed years earlier. One of the companies, on sale for $6,000, is advertised as coming with four years of tax returns and an existing employer identification number (EIN) issued by the IRS. Why buy an aged corporation? According to Corporations Today, “obtaining bank loans may be easier when you can show you have history.” So is “obtaining corporate credit cards and leases. For example, Dell Computers lease only to corporations 6 months old or more.” This ad invites fraud – enabling hidden owners to pretend they’ve had a corporation operating in the United States for years when they haven’t.

These are not isolated cases. In the previous hearing we held on this topic, we presented evidence on Nevada First Holdings, a company formation agent which formed thousands of companies, allowed over 1,800 of them to use its address as their business address, provided nominee directors and officers to enable the true company owners to “retain a higher level of anonymity,” and instructed its employees to open bank accounts and obtain Employer Identification Numbers from the IRS for companies sold to hidden third parties. That U.S. shell corporations are used in numerous crimes within the United States is well known, as described in reports we obtained in our last hearing from the Justice Department, DHS, IRS, Treasury and others, identifying U.S. corporations with hidden owners as a significant law enforcement problem. What may be less well known is the parade of requests being made by foreign law enforcement trying to track down the owners of U.S. corporations suspected of committing crimes in their countries. Some of those requests are set out in another hearing exhibit.

Despite mounting evidence of misconduct by U.S. shell corporations, despite Internet advertisements selling U.S. corporations with promises of anonymity, despite the years of law enforcement complaints, many of our States are reluctant to admit there is a problem in establishing U.S. corporations with hidden owners. Too many of our States are eager to explain how quick and easy it is to set up corporations within their borders, without acknowledging that those same quick and easy procedures enable wrongdoers to utilize U.S. corporations in a variety of ways both here and abroad.

In 2006, the leading international anti-money laundering body in the world, the Financial Action Task Force on Money Laundering – known as FATF – issued a report criticizing the United States for failing to comply with the FATF standard requiring countries to obtain beneficial ownership information for the corporations formed under their laws. FATF gave the United States two years, until July 2008, to make progress toward compliance with the FATF standard. Next week, FATF is scheduled to review U.S. actions on this matter. How can we justify our failure to do what we have committed to do – obtain beneficial ownership information for the corporations formed within the United States? We can’t.

For those who say that if the United States tightens its incorporation rules new companies will be formed elsewhere, it is appropriate to ask exactly where they will go. In compliance with the FATF standard, every country in the European Union is now required to get beneficial ownership information for the corporations formed under their laws. Even many offshore secrecy jurisdictions request this information, including the Bahamas, Cayman Islands, Jersey, and the Isle of Man.

The Levin-Grassley-McCaskill bill that is the subject of today’s hearing, S. 569, would assist our law enforcement community instead of thwarting it, and would also enable the United States to meet its commitment to FATF. Our bill would require States to add a question to their incorporation forms asking for the names and addresses of the beneficial owners of a proposed corporation. States would not be required to verify the information, but penalties would apply to persons who submit false information. Prospective corporations with foreign owners would also be required to submit a certification from an in-state company formation agent that the agent had verified the owners’ identities and obtained passport photographs for them. This beneficial ownership information would have to be updated annually. If law enforcement issued a subpoena or summons to obtain the ownership information, States would supply the data contained on its forms. Funds that are already provided to States on an annual basis by the Department of Homeland Security (DHS) could be used to pay for the minimal cost associated with adding a question to their incorporation forms. This chart [Chart Two] summarizes how the bill would work.

Introducing this legislation wasn’t our first choice. In fact, at the request of the States, we delayed introducing any bill for a year to provide the States with an opportunity to craft their own solution. But when it became clear that the States would not step up to the plate, I introduced a bill cosponsored by Senator Coleman and then Senator Obama in the last Congress. That legislation is identical to the Levin-Grassley-McCaskill bill before this Committee today.

S. 569 has since been endorsed by a host of law enforcement groups including the Federal Law Enforcement Officers Association, the Fraternal Order of Police, the National Association of Assistant United States Attorneys, and more. It has also been endorsed by good government groups combating financial and corporate abuses, including the Tax Justice Network USA, Global Financial Integrity, Citizens for Tax Justice, Public Citizen, and more. I have submitted their letters of support for inclusion in the hearing record.

Today’s hearing will discuss, not only our bill, but also an alternative proposal developed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) at the request of the National Association of Secretaries of State (NASS). Unfortunately, the NCCUSL proposal fails to cure the problem and would create a host of new ones.

Most significantly, the NCCUSL proposal would not require those seeking to form a U.S. corporation to provide the names of the beneficial owners to the State. In fact, the term “beneficial owner” never appears anywhere in the proposal.

Instead, the proposal creates a complex and time-consuming procedure, summarized in this chart [Chart Three], which requires law enforcement to get the name of a company’s so-called records contact from the State, chase down that individual, and ask that individual to ask the U.S. company under suspicion for certain ownership information. If the U.S. company responds, it is not required to provide its beneficial owners, but what are essentially its owners of record, which could be shell companies here or offshore. If the company is involved in crime or has been dissolved, the records contact individual will likely come back empty handed. So instead of getting the beneficial ownership information it needs, law enforcement will be chasing its tail after the misconduct has occurred and maybe after the suspect company has shut down. And to add to the futility of this convoluted process, it may not produce useful information.

Another problem involves timing. Instead of collecting beneficial ownership information at the time a new U.S. corporation is being formed as our bill does, the NCCUSL proposal would allow hidden persons to obtain a U.S. corporation, misuse it, and only after the fact, set up a process for requesting ownership information. Worse, the proposal would require law enforcement to direct its information request, not to a State on a confidential basis, but to the suspect company itself which would then be alerted to the investigation. Informing suspects of active U.S. law enforcement investigations is not a good way to thwart or punish crime.

There are other problems with the NCCUSL proposal as well. For example, it would create confusing new terminology and incorporation requirements, including requiring persons forming a new corporation to supply a “record contact,” “responsible individual,” “initial public organic record,” and “entity information statement.” Defining those new terms and requirements would require wholesale changes in State law, instead of using the minimalist approach in S. 569 of simply adding a new question to existing State incorporation forms.

Another problem is that the “responsible individual” referenced in the proposal is defined so loosely that a nominee corporate director or officer in an offshore jurisdiction could qualify as such a party, and deny law enforcement requests for information by invoking offshore secrecy laws. Still another flaw is that the NCCUSL proposal is strictly voluntary, and any State that adopted it would be placed at an immediate competitive disadvantage by requiring more ownership information than its peers.

The fact is that only federal legislation can level the playing field among the States and, by requiring all States to take the same action within the same period of time, ensure that no State suffers a competitive disadvantage from collecting beneficial ownership information. In addition, only federal legislation can impose consistent, nationwide penalties on persons who submit false information to obtain use of a U.S. corporation. Only federal legislation can end the misuse of U.S. corporations, assist our law enforcement in combating this misuse, and bring the United States into compliance with its international commitments within a reasonable timeframe.

The purpose of corporations is not to hide owners and thwart law enforcement; the purpose is to limit financial liability for owners. Our States should not be enabling corporate owners to remain hidden from law enforcement. It is time to stop wrongdoers from turning U.S. corporations into convenient vehicles for crime and other misconduct.

Again, thank you, Senator Lieberman for holding this hearing today.