Statement of Sen. Carl Levin, D-Mich., on Business Formation and Financial Crime: Finding a Legislative Solution

WASHINGTON - The following is a statement by Sen. Carl Levin, D-Mich., as prepared for delivery at a hearing by the Senate Committee on Homeland Security & Governmental Affairs.

This is the Committee’s second hearing on how current incorporation practices, which allow the formation of U.S. corporations with hidden owners, are fueling the misuse of U.S. corporations to the detriment of our nation. Here’s an example of the problem.

Viktor Bout, a Russian, is one of the most notorious arms traffickers in the world, and is featured in a book called Merchant of Death. Last year, the United States indicted him for conspiracy to kill United States nationals, the acquisition and use anti-aircraft missiles, and providing material support to terrorists. To carry out his activities, he is known to use a network of shell companies around the world, including companies formed in countries like Liberia, Moldova, and the United States.

Chart One (PDF) lists the names of ten Texas and Florida companies alleged to have been used by Viktor Bout over the years. It also includes two Delaware companies that were alleged in a 2002 Interpol notice, based on information from Belgium, to have been used by Viktor Bout to transfer $325 million to carry out his activities.

The chart does not include another Delaware company, Garland Global Corporation, which Romania believes may also relate to Viktor Bout, but whose beneficial owners are unknown. In July 2009, Romania filed a formal request with the United States for the names of the company’s owners and other information. But it is unlikely that the United States can supply the names since, as this Committee has heard before, our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies.

The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.

Here’s another aspect of the problem. Last month, my staff went on the Internet and typed in “shell company” as a search term. The first entry that came up was for “Aged Shell Companies” and provided a link to the website of a company called Go Risk Free which offers corporations for sale in all 50 states. As Chart Two (PDF) shows, Go Risk Free promises: “if you need a company that is … in a certain state or age, CONTACT US, and [we] will help you find it!”

On the date we checked, Go Risk Free had over 200 companies available for sale. The prices start at $3,500. The first was a Nevada company incorporated on October 22, 1928, over 80 years ago. Think about that. A secret buyer of this company could pretend to have had a U.S. business in operation for decades. He could use that shell company to convince a bank to open an account or issue a credit card, and go on from there. These sales seemingly have no purpose other than to create a misleading impression. The potential for criminals to buy these types of U.S. companies without ever divulging their names or interests is a disaster waiting to happen and a threat to our security and well being.

At the Committee’s hearing in June, we were told about a New York corporation that was secretly owned by members of the Iranian military. Our government learned of that ownership interest, not from New York state records, but because another country had the beneficial ownership information that we didn’t.

We also heard about a network of 800 U.S. companies across the country that had attracted law enforcement attention because they were transferring suspect funds to each other and in and out of high-risk jurisdictions. When the Department of Homeland Security’s Immigration and Customs Enforcement or ICE, tried to find out the companies’ owners, all it could learn was that they were associated with a shadowy group of shell companies in Panama. ICE eventually dropped its investigation, in part because not one of the 800 company formation documents had any information on the true owners.

These are only a few examples of U.S. companies being used to engage in a wide range of wrongdoing, from money laundering to tax evasion to drug trafficking, and worse. This abuse is possible in part because our states routinely create corporations with hidden owners.

Right now, we require people to provide more information to obtain a drivers license or a bank account, than to acquire a U.S. corporation. Most of our States allow hidden owners to buy companies online within 24 hours of a request. In two States, for an extra $1,000, hidden owners can form a U.S. company within a single hour.

Despite the significant evidence of misuse of U.S. corporations by hidden owners, and despite years of law enforcement complaints, many of our States are reluctant to admit there is a problem. 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 acquire and abuse U.S. corporations 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 the true owners – the beneficial owners -- of the corporations formed in their countries. FATF set a goal of two years, until July 2008, for the United States to strengthen its compliance with the FATF standard. We are now more than a year past due with no progress to speak of.

That’s why my colleagues and I have introduced S. 569, the Levin-Grassley-McCaskill bill that is the subject of today’s hearing. Our bill would require states to add a question to their existing incorporation forms asking for the names and addresses of the beneficial owners of the proposed company. That means an applicant would have to disclose the real individuals who would own or control the company, without using nominee directors, shell companies, or other phony fronts. Penalties would apply to persons who submit false information, and foreign owners would have to supply a passport photograph to a corporate formation agent within the State. Those corporate formation agents would be required to know their customers and refrain from doing business with suspect clients.

Beneficial ownership information would be made available to law enforcement presenting a subpoena or summons. That information would be available to the public only if State law so provided. The minimal cost of adding a question to State incorporation forms could be paid for with funds already provided to States on an annual basis by the Department of Homeland Security.

Our bill provides a common sense, modest, indeed minimalist approach to solving the law enforcement and homeland security problem created by U.S. corporations with hidden owners. One question, added to existing State incorporation forms, would enable law enforcement to gain access to vital information needed to protect the United States from money laundering, tax evasion, and even terrorist threats. A host of law enforcement groups have endorsed the bill including the Federal Law Enforcement Officers Association which we will hear from today. It has also been endorsed by groups combating financial crime, corruption and tax evasion, including the Tax Justice Network USA, Global Financial Integrity, Citizens for Tax Justice, Public Citizen, and more. An identical version of the bill was cosponsored by President Obama last year when he was a Senator.

Introducing this legislation wasn’t our first choice, as I said at the last hearing. At the request of the States, we waited a year to provide the States with an opportunity to craft their own solution. But the States were unable to devise an effective proposal, in part because they are competing against each other to attract the incorporation fees associated with forming U.S. companies. It’s a classic case of competition causing a race to the bottom -- creating pressure on States to allow quick and easy incorporations, and making it difficult for any one State to do the right thing and request the names of beneficial owners.

Only federal legislation can level the playing field among the States, set minimum standards for obtaining beneficial ownership information, stop the creation of U.S. companies with hidden owners, and bring the United States into compliance with its international commitments.

One last point. Many of you know that, for years, I have been fighting offshore secrecy laws that enable wrongdoers to secretly control offshore corporations. We’ve made some progress on that front, and more is hopefully coming. But one of the impediments we run into in combating offshore secrecy is the claim by some offshore jurisdictions that the United States itself promotes corporate secrecy. A report released by Tax Justice Network earlier this week asserting that Delaware provides more corporate secrecy than Switzerland demonstrates that we need to get our own house in order and comply with FATF’s international standards on beneficial ownership.

Corporations are intended to shield owners from personal liability for corporate acts, not hide ownership. But today, the corporate form is being corrupted into serving those who use the corporate veil to hide their identities while committing crimes or dodging taxes and robbing our treasury and taxpayers of billions of dollars each year. It is past time to stop this misuse of the corporate form. But if we want to end inappropriate corporate secrecy offshore, we need to stop it here at home, and start helping instead of impeding law enforcement efforts to combat terrorism, money laundering, tax evasion, and other wrongdoing.

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