On Thursday, June 18^th the US Senate Homeland Security and Governmental Affairs Committee will hold a hearing on the Incorporation Transparency and Law Enforcement Assistance Act, a bill to help law enforcement stop the misuse of U.S. corporations.  The bill was introduced in March by Sen. Carl Levin, D-Mich., Sen. Chuck Grassley, R.-Iowa, and Sen. Claire McCaskill, D-Mo. Carl Levin has said:

At the same time that we are calling for an end to offshore secrecy we need to put our own house in order and meet our international commitments by obtaining ownership information for corporations formed within the United States.  The Levin-Grassley-McCaskill bill would do just that.

Currently, nearly two million corporations and limited liability companies (LLCs) are formed within the United States each year.  The States generally form these corporations without asking for the identity of the corporation’s beneficial owners, meaning the real owners.  Law enforcement and national security problems have resulted when some of these corporations have become involved with money laundering, tax evasion, or other misconduct.  The new Act would require the States to obtain beneficial ownership information for the corporations formed under their laws and to provide access to this information to law enforcement upon receipt of a subpoena or summons.

The Senate Permanent Subcommittee on Investigations, chaired by Senator Levin, has been pursuing this issue since 2000, when the Government Accountability Office (GAO) conducted an investigation, at the Subcommittee’s request, into an individual who set up over 2,000 Delaware shell companies, established bank accounts for some of those companies, and without revealing their identities, moved $1.4 billion dollars through the bank accounts.  In April 2006, the GAO prepared another report at the Subcommittee’s request entitled, “Company Formations: Minimal Ownership Information Is Collected and Available.”  This GAO report reviewed the legal requirements in all 50 states to set up corporations and LLCs, found that most states failed to request beneficial ownership information, and reported that the absence of this ownership information impeded law enforcement investigations of suspect corporations.

In November 2006, the Subcommittee held a hearing in which the GAO report was released, and officials from the Department of Justice (DOJ), Internal Revenue Service (IRS), and Treasury Department’s Financial Crimes Enforcement Network (FinCEN) testified about an increase in the use of U.S. shell companies for illicit activities, and the problems caused by the lack of beneficial ownership information.  The Subcommittee has collected numerous examples of these shell company problems, including the following.

¬? The Manhattan District Attorney’s Office recently announced several cases which involved the movement of funds through New York banks by entities controlled by the Iranian military and two related matters in which U.S. shell companies were established to hide secret Iranian interests.

¬? The Immigration and Customs Enforcement (ICE) arm of the Department of Homeland Security (DHS) uncovered a network of nearly 800 U.S. companies in 2004, that were located in nearly all 50 states, were engaged in hundreds of millions of dollars in suspect money transfers, and were associated with shell entities in Panama, an offshore secrecy jurisdiction.  None of the 800 incorporation forms identified a true company owner.  Nearly 200 had been formed in Utah by the same Utah company formation agent, which told ICE it had formed them at the request of a Delaware company formation agent.  Neither the Utah nor Delaware company formation agent could provide information on the true company owners, since that information is not required by law.  The ICE investigation was unable to proceed due to the lack of ownership information.

¬? A company formation agent called Corporations Today Inc. offers to sell U.S. “aged” companies via the Internet, claiming: “We have the largest inventory of aged shell corporations in the United States.”  Corporations Today recently offered for sale, for a price of nearly $6,000, a Wyoming shell company with 4 years of tax returns and an Employer Identification Number issued by the IRS, even though it had never actually been used since incorporation.

¬? A 2005 analysis by FinCEN of suspicious activity reports indicated that as much as $18 billion in suspicious transactions have occurred through international wire transfers utilizing U.S. shell companies.

¬? In recent years, the U.S. Department of Justice and DHS have received, but have been unable to answer, hundreds of requests from foreign law enforcement agencies for beneficial ownership information on U.S. companies suspected of criminal misconduct.

Bill Summary

The Transparency and Law Enforcement Assistance Act would:

Beneficial Ownership Information.  Require the States to obtain a list of the beneficial owners of each corporation or LLC formed under their laws, ensure this information is updated annually, and provide the information to civil or criminal law enforcement upon receipt of a subpoena or summons.

Non-U.S. Beneficial Owners.  Require corporations and LLCs with non-U.S. beneficial owners to provide a certification from an in-state formation agent that the agent has verified the identity of those owners.

Penalties for False Information.  Establish civil and criminal penalties under federal law for persons who knowingly provide false beneficial ownership information or intentionally fail to provide required beneficial ownership information to a State.

Exemptions.  Provide exemptions for certain corporations, including publicly traded corporations and the corporations and LLCs they form, since the Securities and Exchange Commission already oversees them; and corporations which a State has determined, with concurrence from the Homeland Security and Justice Departments, should be exempt because requiring beneficial ownership information from them would not serve the public interest or assist law enforcement.

Funding.  Authorize States to use an existing DHS grant program, and authorize DHS to use already appropriated funds, to meet the requirements of this Act.

State Compliance Report. Clarify that nothing in the Act authorizes DHS to withhold funds from a State for failing to comply with the beneficial ownership requirements.  Require a GAO report by 2013 identifying which States are not in compliance so that a future Congress can determine at that time what steps to take.

Transition Period.  Give the States until October 2012 to require beneficial ownership information for the corporations and LLCs formed under their laws.  

Anti-Money Laundering Rule.  Require the Treasury Secretary to issue a rule requiring formation agents to establish anti-money laundering programs to ensure they are not forming U.S. corporations or other entities for criminals or other suspect persons.

GAO Study.  Require GAO to complete a study of State beneficial ownership information requirements for domestic partnerships and trusts.

This is good news.

Now we need this here in the UK.

And we should demand that this data is also on public record. This is because limited liability is a privilege granted by the state: we should know who is using it. Disclosure and paying tax are the quid pro quos of limited liability.