(English) U.S. Law Enforcement Officials Call for Tougher State Incorporation Rules

By Brian Monroe

Shell companies created in the United States under lax incorporation laws are allowing sanctioned countries to engage in illicit activities, according to three law enforcement officials testifying before a U.S. Senate panel Thursday.

The current incorporation system is plagued by “opacity and secrecy…the best friend of the money launderer, the child pornographer, the tax cheat, the fraudster, the corrupt politician, and indeed, the financier of networks of terror,” said Adam Kaufmann, Assistant District Attorney for New York County. He read from a prepared statement attributed to his boss, Manhattan District Attorney Robert Morgenthau, and spoke off-the-cuff in follow-up answers to questions from Senators.

Kaufmann appeared at the Senate Committee on Homeland Security in support of the Incorporation Transparency and Law Enforcement Assistance Act, which was introduced in the Senate in March. Janice Ayala, of the Office of Investigations, U.S. Immigration and Customs Enforcement, and Senior Counsel to the Deputy Attorney General, U.S. Department of Justice, Jennifer Shasky Calvery, also spoke in support of the proposed legislation.

Each characterized it as an important step toward stemming the creation of shell companies that have opaque ownership structures that are all too often used to launder money and facilitate other criminal activity.

Criticism of the bill came from Harry J. Haynsworth, chairman of a committee that addressed beneficial ownership issues for the Uniform Law Commission, and Elaine F. Marshall, Secretary of State, State of North Carolina. They asserted that the proposed legislation would create undue burdens on states and domestic and foreign businesses seeking to incorporate in the United States.

The bill, S.569, mandates that states collect information on beneficial owners and provide the data to law enforcement if subpoenaed. It was introduced by Senator Carl Levin, a Democrat from Michigan, and cosponsored by Sens. Charles Grassley, an Iowa Republican, and Claire McCaskill, a Democrat from Missouri. Company formation agents would also be required to implement anti-money laundering programs and individuals incorporating an organization who deliberately provided false information would be criminally liable.

Levin introduced the same bill, then cosponsored by Senator Barack Obama, in May 2008 but it didn’t pass out of committee.

In illustrating the current abuses, Kaufmann said that between April 2005 and March 2007 the same U.S.-based incorporation service was named in more than 300 suspicious activity reports (SARs), tied to more than $200 million in suspicious transactions.

Kaufmann also spoke of several high-profile criminal actions his office pursued involving the use of shell companies and hidden beneficial owners. Two involved shell companies used to hide ownership interests and move money tied to Iran, a U.S. country that is the subject of numerous U.S. and international sanctions. Other shell companies were used for tax evasion, mortgage fraud and to move money for bribery and political corruption in Haiti. In many cases, the related transactions were characterized as payment for “consulting services.”

One case involving Iran that was a major news story in New York included the seizure of portion of an office tower by the New York District Attorney. The Manhattan building was owned in part by a domestic shell company secretly controlled by Iran.

In another case, the shell company was used by the Iranian government to move money from the U.S. to secret accounts in an offshore jurisdiction. Ironically, when investigators pressed the unnamed jurisdiction for information, they got more than what was available in New York, Kaufmann said.

Under the latest iteration of the bill, if a criminal uses a false name, it would establish criminal intent and give law enforcement ammunition to bring charges against the individual and the agents intentionally assisting them, Kaufmann said.

However, in her arguments against passage of the bill, Marshall said it would place “additional record keeping requirements” and an undetermined amount of costs on states, which are already suffering under strained budgets.

The Levin bill would also cause confusion for state workers collecting the information, said Marshall, who is also the co-chair of the Company Formation Task Force formed by the National Association of Secretaries of State (NASS). She added that state employees shouldn’t be tasked with defining or identifying beneficial owners.

But the alternative proposals by NASS and the National Conference of Commissioners on Uniform State Laws (NCCUSL) suffer from deficiencies that won’t make key information accessible and will keep law enforcement “chasing their tails,” Levin said during Thursday’s hearing.

In highlighting how great the problem is, Levin pointed to incorporation companies that sell “aged” shell companies a few years old that allow the buyer to more easily get bank and corporate account services because they can provide three or four years of tax returns to give the operation the appearance of legitimacy.

Under the NASS proposal, an “owner of record,” which would hold beneficial ownership and other information, could be “another shell company, straw owner or incorporation service – anything,” Kaufmann said.

Moreover, the NCCUSL initiative, which calls for a “record contact” and a “responsible individual” to be named is “complex and confusing,” said Levin. The proposal requires law enforcement to call up the agent to get the information, rather than going confidentially to the states, he said. “That’s not the way you want to investigate someone.”

At a hearing in November 2006 by the Senate Permanent Subcommittee on Investigations officials from the Internal Revenue Service, Government Accountability Office and Department of Justice agreed the lack of ownership data for companies has been a weakness in the financial system for more than 20 years.

When asked for solutions, however, and calls by Levin, the subcommittee’s ranking Democrat, to be bold, the answers from the agencies included statements such as “out of my scope of responsibility,” the issue is being “studied” and the agency couldn’t decide “policy” on the issue.

The 2006 hearing pitted Richard Geisenberger, Delaware’s assistant secretary of state, against Laurie Flynn, Massachusetts chief legal counsel. She stated that the Commonwealth is able to collect and catalogue company information, while Gisenberger was pressed to answer why his state refused to collect that information.

Flynn, who said Massachusetts doesn’t publish the home addresses of company officials due to privacy concerns, does collect information including the business activity of the operation, name and address of the president, treasurer, registered agents, shareholders who formed the company, and where its records are kept.

The 2006 PSI hearing followed one held in August of the same year after reports by the Treasury Department’s Financial Crimes Enforcement Network and the Paris-based Financial Action Task Force condemned the lack of transparency of ownership and growing incorporation of shell companies that exist only on paper without adequate oversight.

That the FATF deemed the U.S. “non-compliant” related to beneficial owners is an “embarrassment” and that the laws have not significantly changed since is “absurd,” Kaufmann said during the nearly three-hour hearing of the Senate Committee on Homeland Security chaired by Senator Joseph Lieberman (ID-CT).

The national transparency standards of the U.S. “should be something more than: ‘Better than Lichtenstein and trying to catch up to Panama,'” he said. “Simply put, we lag behind many other countries in the world in this regard, and it makes our statements concerning transparency and tax evasion ring hollow and hypocritical.”