```

[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]

                       COMBATING KLEPTOCRACY WITH
                       INCORPORATION TRANSPARENCY

=======================================================================

                                HEARING

                               before the

            COMMISSION ON SECURITY AND COOPERATION IN EUROPE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 3, 2017

                               __________

                       Printed for the use of the
            Commission on Security and Cooperation in Europe

                             [CSCE 115-1-6]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                       Available via www.csce.gov

                                   ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

27-157 PDF                     WASHINGTON : 2017 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Publishing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001

            COMMISSION ON SECURITY AND COOPERATION IN EUROPE

                    LEGISLATIVE BRANCH COMMISSIONERS

               HOUSE

                                                   SENATE

CHRISTOPHER H. SMITH, New Jersey,    ROGER F. WICKER, Mississippi,
Co-Chairman                          Chairman
ALCEE L. HASTINGS, Florida           BENJAMIN L. CARDIN, Maryland
ROBERT B. ADERHOLT, Alabama          JOHN BOOZMAN, Arkansas
MICHAEL C. BURGESS, Texas            CORY GARDNER, Colorado
STEVE COHEN, Tennessee               MARCO RUBIO, Florida
RICHARD HUDSON, North Carolina       JEANNE SHAHEEN, New Hampshire
RANDY HULTGREN, Illinois             THOM TILLIS, North Carolina
SHIELA JACKSON LEE, Texas            TOM UDALL, New Mexico
GWEN MOORE, Wisconsin                SHELDON WHITEHOUSE, Rhode Island

                                   

                     EXECUTIVE BRANCH COMMISSIONERS

                      Vacant, Department of State
                     Vacant, Department of Commerce
                     Vacant, Department of Defense

                                  [ii]

                       COMBATING KLEPTOCRACY WITH
                       INCORPORATION TRANSPARENCY

                              ----------                               
October 3, 2017

                             COMMISSIONERS

                                                                   Page
Hon. Sheldon D. Whitehouse, Commissioner, Commission on Security 
  and Cooperation in Europe......................................     1
Hon. John Boozman, Commissioner, Commission on Security and 
  Cooperation in Europe..........................................    11
Hon. Jeanne Shaheen, Commissioner, Commission on Security and 
  Cooperation in Europe..........................................    12
Hon. Gwen Moore, Commissioner, Commission on Security and 
  Cooperation in Europe..........................................    15
Hon. Benjamin Cardin, Ranking Member, Commission on Security and 
  Cooperation in Europe..........................................    18

                               WITNESSES

Charles Davidson, Executive Director, Kleptocracy Initiative, 
  Hudson Institute...............................................     3
Patrick P. O'Carroll, Executive Director, Federal Law Enforcement 
  Officers Association [FLEOA]...................................     6
Caroline Vicini, Deputy Head of Delegation, Delegation of the 
  European Union to the United States............................     7
Gary Kalman, Executive Director, FACT Coalition..................     9

                               APPENDICES

Prepared statement of Hon. Sheldon Whitehouse....................    29
Prepared statement of Charles Davidson...........................    31
Prepared statement of Patrick P. O'Carroll.......................    34
Prepared statement of Caroline Vicini............................    36
Prepared statement of Gary Kalman................................    39

                                 [iii]

 
                       COMBATING KLEPTOCRACY WITH
                       INCORPORATION TRANSPARENCY

                              ----------                              

                            October 3, 2017

           Commission on Security and Cooperation in Europe

                                             Washington, DC

    The hearing was held at 2:36 p.m. in Room 562, Dirksen 
Senate Office Building, Washington, DC, Hon. Sheldon D. 
Whitehouse, Commissioner, Commission on Security and 
Cooperation in Europe, presiding.
    Commissioners present: Hon. Sheldon D. Whitehouse, 
Commissioner, Commission on Security and Cooperation in Europe; 
Hon. John Boozman, Commissioner, Commission on Security and 
Cooperation in Europe; Hon. Jeanne Shaheen, Commissioner, 
Commission on Security and Cooperation in Europe; Hon. Gwen 
Moore, Commissioner, Commission on Security and Cooperation in 
Europe; and Hon. Benjamin Cardin, Ranking Member, Commission on 

Security and Cooperation in Europe.
    Witnesses present: Charles Davidson, Executive Director, 
Kleptocracy Initiative, Hudson Institute; Patrick P. O'Carroll, 
Executive Director, Federal Law Enforcement Officers 
Association [FLEOA]; Caroline Vicini, Deputy Head of 
Delegation, Delegation of the European Union to the United 
States; and Gary Kalman, 
Executive Director, FACT Coalition.

    HON. SHELDON D. WHITEHOUSE, COMMISSIONER, COMMISSION ON 
               SECURITY AND COOPERATION IN EUROPE

    Mr. Whitehouse. Thank you, everyone. My apologies for being 
a little bit late. I am very, very grateful to the panel for 
being here and to Chairman Wicker for working with me to hold 
this hearing on combatting crime and corruption through 
increased transparency.
    From 2012 to 2015, the Azerbaijani Government reportedly 
funneled 2.5 billion euros from four U.K.-based shell 
companies, through an Estonian branch of a Danish bank, to 
bribe European politicians and Azerbaijani elites in a scheme 
dubbed the ``Azerbaijani Laundromat.'' According to a report 
from the Organized Crime and Corruption Project, the money 
bought silence during a time when the Azerbaijani Government, 
and I quote, ``Threw more than 90 human rights activists, 
opposition politicians, and journalists into prison on 
politically motivated charges.''
    The Azerbaijani Laundromat is not a unique scheme. In 2015, 
the Panama Papers exposed what many in the law enforcement and 
anticorruption world already knew, that corrupt officials, tax 
cheats, drug traffickers, terrorists and criminals from around 
the world routinely use shell companies to hide assets and 
obscure illegal activities. America's lax corporation laws have 
made the United States a favorite destination for money 
laundering. Make no mistake, we are now a facilitator as well 
as a target in this racket.
    With every passing day, we learn more about how Russian and 
Russian kleptocrats exploit opaque business laws to hide the 
ill-gotten riches, bribe corrupt officials, and undermine the 
world economy and democratic institutions. Heather Conley at 
the Center for Strategic and International Studies [CSIS] wrote 
in her report, ``The Kremlin Playbook,'' that corruption is 
the, quote, ``lubricant'' with which the Russians operate. CSIS 
warns that to fight the corruption that gives Russia this 
channel of influence, and I quote them, ``enhancing 
transparency and the effectiveness of the Western democratic 
tools, instruments and institutions is critical.''
    Russian kleptocrats, foreign drug dealers, and 
international tax cheats all use the same tool to launder their 
ill-gotten gains and evade law enforcement: the shell 
corporation. A shell corporation serves no economic purpose and 
conducts no real business. Instead, these entities exist to 
hold legal title to bank accounts, real estate, or other assets 
hiding the true owners. America's a haven now for those doing 
mischief through shell corporations. It fact, starting a shell 
corporation in this country can be easier than getting a 
library card.
    Currently, no state requires the disclosure of beneficial 
owners, the real human beings who own the companies. Instead, 
corporate records can identify the owner as just another shell 
corporation or a professional agent who was paid to sign the 
needed forms and never speak of them again, or a lawyer who 
refuses to disclose a client, citing attorney-client privilege. 
We have seen over and over how foreign governments and criminal 
organizations have abused our lax incorporation laws.
    The Iranian Government used a string of generic businesses 
to obscure its ownership of a 5th Avenue skyscraper. A Mexican 
drug cartel used an Oklahoma corporation to launder money 
through a horse farm. A crime syndicate set up a web of 
corporations in eight states as part of a $100 million Medicaid 
fraud scheme. A human trafficking ring based in Moldova hid its 
crimes behind anonymous corporations in Kansas, Missouri and 
Ohio. Then, there are the Panama Papers, over 11 million 
documents leaked from a Panamanian law firm. They reveal 
mischief conducted through shell corporations like the 2011 
purchase of a $3 million oceanfront condo in Miami by a 
Brazilian politician facing corruption charges. And in 2015, 
after a lengthy investigation, The New York Times uncovered 
that a Russian banker, suspected of ties to organized crime, 
purchased a nearly $16 million condo in Manhattan's Time Warner 
Center. FinCEN, the Financial Crimes Enforcement Network, a 
division of the U.S. Treasury Department, found that 30 percent 
of the cash purchases of high-end real estate by shell 
companies in six major cities involved a suspicious buyer--30 
percent. With so many properties serving essentially as lavish 
safe deposit boxes, the housing supply tightens, raising costs 
for American families.
    The crimes being hidden may be complex and the assets they 
conceal may be elaborate, but the answer to the problem of 
shell corporations is simple: Require private corporations to 
report and update their beneficial ownership information. I've 
introduced legislation with Senators Grassley and Feinstein 
that does just that. Senators Rubio and Wyden have also teamed 
up on related legislation. Transparency into shell corporations 
is not a novel idea. As we will hear from the panel, every 
member of the European Union has committed to ensuring such 
transparency. The United Kingdom has already implemented its 
own transparency law.
    The light of transparency is about to shine on criminal 
assets hidden in European shell companies, which means that 
lots of money will be looking for new, dark homes. We cannot 
let America become that new, dark home for corruption and 
crime. In the year 1630, John Winthrop told his fellow early 
settlers that we must always consider that we shall be as a 
city upon a hill. The eyes of all people are upon us, he said. 
If we become the new, dark home, I fear we will risk losing our 
place as that city on the hill, as a beacon of justice. In the 
global battle of ideas, chaining our American reputation to 
international crime and corruption is a self-
inflicted stain that we do not need.
    So I'm delighted to have this hearing today. I look forward 
to hearing from our distinguished witnesses. And I'm delighted 
that Senator Shaheen and Senator Boozman have joined us. 
Everybody's full statement will be made a matter of the record, 
so if you can leave your spoken remarks to less than five 
minutes, we'll have more time for back and forth.
    Please proceed, Mr. Davidson.

 CHARLES DAVIDSON, EXECUTIVE DIRECTOR, KLEPTOCRACY INITIATIVE, 
                        HUDSON INSTITUTE

    Mr. Davidson. Certainly. Thank you.
     Acting Chairman Whitehouse, Co-chairman Smith, and members 
of the Helsinki Commission, thank you for inviting me to 
testify today. I would also like to thank Paul Massaro, staff 
of the Commission, for helping to arrange this important 
discussion. My name is Charles Davidson and I am the executive 
director of the Hudson Institute's Kleptocracy Initiative, 
which researches how authoritarian regimes and globalized 
corruption threaten democracy, capitalism, and security.
    Kleptocracy, the business model of 21st century 
authoritarianism. Today, the most dangerous threat to our 
national security is the aggression of authoritarian regimes 
that actively seek to undermine our freedom and democracy, and 
to export authoritarianism into the OSCE region and around the 
globe. And let us not be mistaken: What is at stake is the 
survival of our civilization. These regimes have already 
upended the post-World War II international order via invasion 
and violation of treaties, perverted a rules-based global 
system of relatively fair economic exchange via intellectual 
property theft and corrosive business practices, and attacked 
our government's computer systems. And these regimes are 
sharing best practices and increasingly behaving like an axis 
of evil.
    The most important thing I want to bring to our attention 
today: It is essential to understand that these authoritarian 
regimes have all adopted the business model of 21st century 
authoritarianism, a model whereby those who govern--usually a 
very small group, family, or even individual--loot their own 
country and store the proceeds in free and democratic nations 
such as ours, whose rule of law and reliable institutions serve 
to protect their ill-gotten gains. That business model equals 
kleptocracy. So 21st century authoritarianism, and all the 
threats that it poses, cannot be dissociated from kleptocracy. 
They have tied the knot. Where we find one, we find the other. 
And the situation is serious. Authoritarian kleptocracy has 
been growing, while freedom and democracy has been in 
recession.
    But the authoritarian/kleptocratic model has an obvious 
vulnerability. Given that kleptocratic loot is stored within 
our shores, we have huge leverage over this business model. The 
problem is, we often don't know where they've stored their 
loot, due to the ease with which one can establish anonymity of 
ownership. And we, the United States of America, are the 
easiest and safest place to establish anonymity of ownership. 
For a superb summary of this disgraceful situation, I recommend 
Kara Scannell and Vanessa Houlder's piece in the Financial 
Times published May 8th, 2016, ``U.S. Tax Havens: The New 
Switzerland.''
    As a general proposition, as an overarching challenge our 
society faces, as a fundamental existential issue for our 
civilization as we know it, it should be obvious that we cannot 
push back and reverse the authoritarian surge while being the 
bankers, lawyers, yacht builders, luxury lifestyle purveyors, 
to those who seek the destruction of freedom and democracy.
    Kleptocracy, a vector of political decay. How is 
kleptocracy undermining our freedom and democracy, promoting 
political decay? When the kleptocrats come here, they bring 
along their values, which are not ours. We were naive. We 
thought their offspring would go to school here and become 
freedom and democracy lovers. That hasn't happened. Instead, 
the kleptocratic life-juice of only valuing money and power has 
perverted our system. Kleptocratic regimes have become 
increasingly adept at purchasing many of the less morally 
vigilant members of our elites. In Europe, this is often 
referred to as schroederization. And this pimping is often done 
surreptitiously, via obscure ownership structures where 
beneficial ownership is not known, providing among other things 
plausible deniability. Does that sound familiar?
    Kleptocracy, we incentivize it. As I said in testimony last 
December to the House's Subcommittee on Europe, Eurasia, and 
Emerging Threats, ``Providing a safe haven for the proceeds of 
corruption establishes an incentive for corrupt practices. In 
my view this question of incentivization has been neglected, 
and is key to understanding the overall political challenge 
faced in terms of reform.''
    Anonymous companies, the asset protection they provide 
assured by our rule of law and reliable institutions, 
incentivizes kleptocracy. We must take away the punch bowl. And 
we must be aware of the struggles of those trying to escape a 
kleptocratic past, and the role played by our European allies.
    Ben Judah, in ``How Offshore Finance Sank Western Soft 
Power,'' that appeared in The American Interest May 8th, 2014, 
quotes Daria Kaleniuk, head of Kiev's Anti-Corruption Action 
Centre--she still is head of this--``What we found was that the 
money stolen in Ukraine was heading into British and European 
tax havens and hidden using shell companies inside the European 
Union. This was very uncomfortable to find out. What we felt is 
the Western elites were being hypocritical to us--preaching 
anti-corruption but allowing this.''
    Judah quotes Mustafa Nayem, one of the leaders of the 
Maidan Revolution: ``Why do they only now investigate the 
hidden fortunes that were stolen and hidden in Austria and in 
Switzerland? We told the Europeans and we told their embassies 
a hundred times this money was stolen and hidden in their 
countries. And nothing happened. Now that the regime has 
fallen, they suddenly--in a matter of days--can reveal the 
stolen money. But why did they not do this before? They are 
guilty--guilty of leaving us alone with these thieves. They are 
guilty of allowing them to plunder us.''
    As per my above referenced congressional testimony, ``As 
Western diplomats struggled to impress on Kyiv's politicians 
the value of the rule of law, Ukrainian elites,''--and elites 
really should be in quotes, pardon me--``were stashing wealth 
in the West. This happens across Eurasia, where authoritarian 
elites now treat London, New York, and other Western 
jurisdictions as corruption services centers.''
    And what of the demand for better government and democracy 
in such a situation? As Francis Fukuyama said introducing 
Senator Carl Levin at a conference organized by Global 
Financial Integrity in 2008, ``There can be no demand for 
democracy if all the rich people, if all the elites in the 
country, can manage to protect their own private fortunes. They 
have no reason to work with other people to resist the 
government, to demand democracy, to demand accountable 
government. There's no demand for less corrupt government 
because everybody has taken care of themselves as an individual 
and it delegitimizes democracy . . . anything that can be done 
to reduce the ability of people to transfer assets and to avoid 
the sovereignty of the state, it seems to me, is very 
important.''
    As we know from the difficulties of asset recovery efforts, 
including our Department of Justice's Kleptocracy Asset 
Recovery Initiative, it is often very difficult to find assets 
hidden via anonymous companies. We must stop incentivizing 
corrupt and kleptocratic practices.
    Kleptocracy: reform, or submit to tyranny. As described, 
the anonymous ownership of assets is a dirty secret behind the 
rise of authoritarianism. We must dramatically curtail secrecy 
in the ownership of assets: abolish the anonymous ownership of 
assets in the United States of America and, further, pressure 
other jurisdictions to do the same. We have the power to do it, 
and if we clean up our act here it will lay the groundwork for 
improving what is a global cancer.
    Thank you.
    Mr. Whitehouse. Thank you, Mr. Davidson.
    Mr. O'Carroll, thank you for bringing the perspective of 
the Federal Law Enforcement Officers Association. You may 
proceed.

     PATRICK P. O'CARROLL, EXECUTIVE DIRECTOR, FEDERAL LAW 
            ENFORCEMENT OFFICERS ASSOCIATION [FLEOA]

    Mr. O'Carroll. Good afternoon, Acting Chairman Whitehouse, 
Senator Shaheen, Senator Boozman, and Representative Moore.
    I am the executive director of the Federal Law Enforcement 
Officers Association, or FLEOA, which is a not-for-profit, 
nonpartisan, professional association which represents more 
than 26,000 federal law enforcement officers and agents from 65 
federal agencies.
    FLEOA applauds your Commission's focus on incorporation 
transparency, the prevention of money laundering, and the 
financing of criminal enterprises and terrorism. FLEOA agrees 
with the report of the Financial Fraud Task Force and its 
findings that the United States has many laudable anti-money-
laundering efforts, but also has serious gaps in law 
enforcement's ability to identify the owners of companies, 
leaving our financial system vulnerable to dirty money.
    Recently, one of our New York Secret Service agent members 
began a routine check forgery investigation into a stolen check 
being deposited into a bank account. The agent examined the 
available bank information and found that the account was for a 
Florida business with a single owner, no business plan filed, 
and no apparent product or service. Further investigation 
utilizing court orders and subpoenas revealed multinational 
wires and transfers involving millions of dollars passing 
through this account. The agent enlisted the assistance of the 
Treasury Department, and identified 80 sub-companies and 
accounts transferring about $1 billion dollars between them.
    This is a classic example of money laundering with ties to 
financial crime, narcotics trafficking and terrorism. Yet, 
because of the insidious protections afforded by shell 
corporations, only one person was arrested and the proceeds of 
one account was seized.
    The Financial Crimes Enforcement Network, or FinCEN, is a 
U.S. Treasury bureau whose mission is to safeguard the 
financial system from illicit use, combat money laundering, and 
promote national security. FinCEN has found that shell 
companies--which are business entities without active business 
or significant assets--are an attractive vehicle for those 
seeking to launder money or conduct illicit activities, both 
domestically and internationally. FinCEN also believes that all 
these shell companies have been used domestically as vehicles 
for financial crimes with credit cards, purchasing fraud and 
fraudulent loans. In addition, FinCEN cautions that 
international wire transfers allow for the movement of billions 
of dollars by unknown owners, which can facilitate money 
laundering and terrorist activities.
    New York Representatives Carolyn Maloney and Peter King, 
along with nine cosponsors, have introduced House Bill 3089, 
The Corporate Transparency Act of 2017. In introducing the 
bill, Congresswoman Maloney stated, ``Anonymous and shell 
companies have become the preferred vehicle for money 
launderers, criminal organizations, and terrorist groups 
because they can't be traced back to their real owners and the 
U.S. is one of the easiest places in the world to set up 
anonymous shell companies.'' Congressman King also said: ``The 
Act targets this problem by requiring a company that has the 
characteristics of a shell corporation to disclose who benefits 
from the company's operations and make that information 
available to law enforcement.'' The Corporate Transparency Act 
of 2017 has subsequently been introduced in the Senate by 
Senators Wyden and Rubio. FLEOA strongly endorses this bill.
    We are also supportive of the TITLE Act, introduced by you, 
Senator Whitehouse, and Senators Grassley and Feinstein. FLEOA 
strongly believes that legislation requiring companies to 
disclose their purpose, actual ownership, and appropriate 
contact information would assist law enforcement in identifying 
the criminal and terrorist organizations that are exploiting 
this weakness. Only with full transparency can we prevent the 
scourge of illicit funding provided by the anonymity of shell 
corporations.
    Thank you for this opportunity to testify today and I'll be 
happy to answer any of your questions.
    Mr. Whitehouse. Thank you very much, Mr. O'Carroll.
    We are very honored to have Ms. Vicini here as the deputy 
head of the Delegation of the European Union to the United 
States. We thank you for taking the trouble to join us and 
welcome your remarks.

 CAROLINE VICINI, DEPUTY HEAD OF DELEGATION, DELEGATION OF THE 
              EUROPEAN UNION TO THE UNITED STATES

    Ms. Vicini. Thank you, Chairman Whitehouse, Senators 
Boozman and Shaheen, and Representative Moore.
    Allow me to start this with presenting our condolences for 
the horrible shooting in Las Vegas. We are terribly sorry for 
you all, and hope that you have not family and friends that 
have been touched by this. And our thoughts are going to all 
the victims and their families.
    This is my privilege to have this opportunity to present to 
you today. I'm here to exchange views and provide an overview 
of the European Union's response to money laundering, in 
particular in terms of transparency of beneficial ownership 
information.
    We live in a world where terrorist groups and organized 
crime organizations expand the scope and complexity of their 
illicit activities. Their corruption exploits the freedoms and 
benefits offered by globalization and the huge number of 
financial transactions processed every day by a diverse number 
of financial actors. Across the globe, open-service shell 
companies, trusts, private foundations, and other entities 
serve as vehicles through which money flows. These complex 
structures are composed of companies with unknown owners and 
beneficiaries, serviced by multiple bank accounts housed in 
numerous banks, situated in jurisdictions with strong bank-
secrecy legislation that are unlikely to cooperate with foreign 
authorities.
    The European Union is at the forefront of global efforts to 
make corporate transparency effective to combat global 
financial crime, including corruption. Europe's response is 
centered around three key elements: the current EU rules in 
force, proposals to reinforce these rules, and international 
cooperation.
    The current EU rules in force, the so-called Fourth Anti-
Money Laundering Directive--the EU has accomplished much in 
terms of the traceability of financial transactions through a 
series of money-laundering directives. The landmark Fourth 
Anti-Money Laundering Directive entered into force on the 26th 
of June this year, some 20 years after the first such 
directive. Banks should, of course, possess information about a 
customer--if it is Mr. or Mrs. Smith--before they open a bank 
account. However, the situation is much more difficult when the 
bank does not deal with the customer directly, but rather with 
company A or trust B. In these cases, if the bank is not able 
to identify who is behind a company or trust, the ability to 
collect relevant information such as the source of funds or the 
reason why the account is opened is severely compromised. The 
bank needs to be sure that the company or the trust is not a 
shell for disguising illicit activities.
    That is why the Fourth Directive forces identifying the 
beneficial owners of a company or a trust mandatory at the 
start of every new business relationship. But that is not all. 
The directive requires this information to be recorded 
centrally on a register or data-retrieval system in the EU 
member states.
    The purpose is fundamental: To allow swift and efficient 
access to important information by banks that will also allow 
them to fulfill their legal obligations, but also access by all 
national competent authorities that play a role in preventing 
money laundering and terrorism financing. This includes the 
Financial Intelligence Units, which are equivalent in the 
member states to the U.S. FinCEN. The EU member states are 
currently setting up their registers.
    But the EU has also proposed to reinforce these rules. The 
EU has faced heinous terrorist attacks in recent years. While 
less dramatic but equally telling, there was a strong public 
reaction to the Panama Papers scandal. In these circumstances, 
the European Commission took further steps in July 2016 with a 
new proposal to present targeted measures to strengthen the 
Fourth Directive. The European Commission proposed the 
interconnection of these central registers of beneficial 
ownership information. Given the increasing number of cross-
border financial transactions, authorities would be able to 
consult registers and access information across member states 
much more easily.
    Public access to the beneficial ownership information for 
for-
profit companies and trusts--corporate structures would be 
incentivized to provide that they're run as clean businesses. 
We are not talking about unfettered access to information, 
rather granted in a full respect to the right of privacy. 
Sensitive information such as family-trust structures would be 
excluded from public access.
    And, finally, the international context. The promotion of 
reforms, good governance, democracy, the rule of law and human 
rights, and public administration reform is integral to the 
European Union's approach to both the Western Balkans and the 
east European Union's approach--and to the Eastern Partnership 
countries. Countering corruption and organized crime are 
significant elements in our approach. Considerable direct 
assistance is provided at the national and regional level. We 
have seen major reforms in Georgia and Ukraine on the back of 
EU support. And in the Western Balkans, as potential members of 
the European Union, our policy is one of fundamentals first.
    But the European Union is not alone. We share 
responsibility with the United States, complementing each other 
as key players in this joint fight. We recognize the commitment 
of the United States, underpinned by strong enforcement 
capabilities. Furthermore, the European Commission, some of the 
EU member states, and the United States are vocal members of 
the Financial Action Task Force.
    Honorable members, to conclude, I would like to reiterate 
that the success of a policy to fight against money laundering 
and terrorist financing is based on complementary policies, 
both preventive and enforcement. Strong beneficial ownership 
requirements are not a panacea, but a key element if we want to 
address both money laundering and terrorism financing risks.
    The United States and the European Union must continue to 
support the successes we have achieved together on the 
international stage, driving up the standards. We must continue 
to speak with the same voice to convince our partners that 
there is still room for improvement.
    Thank you very much.
    Mr. Whitehouse. Thank you very much.
    And our final witness, Mr. Kalman from the FACT Coalition.

        GARY KALMAN, EXECUTIVE DIRECTOR, FACT COALITION

    Mr. Kalman. Senator Whitehouse, Senators Boozman, Shaheen, 
and Representative Moore, thank you for holding this important 
hearing. On behalf of the Financial Accountability and 
Corporate Transparency Coalition, or the FACT Coalition, I 
appreciate the opportunity to talk about a foundational reform 
in the global anticorruption movement.
    The coalition is a nonpartisan alliance of more than 100 
state, national, and international organizations working to 
combat the harmful impacts of corrupt financial practices. The 
coalition formed in 2011, but I joined just last year, one week 
after the release of the Panama Papers. It was an interesting 
start.
    The incident exposed the direct connection between corrupt 
and criminal practices and the secrecy that affords kleptocrats 
and others a vehicle to hide the money, fund illicit activity, 
and move those funds around the globe with impunity. This 
hearing is an important opportunity to further explore the 
link.
    Traffickers in counterfeit and other illicit goods and 
services hide behind secret corporate entities and make it more 
costly for legitimate businesses to engage in global commerce. 
This cost is the reason that CEOs of Dow Chemical and several 
other multinational corporations have written in support of 
transparency. In a recent letter to Congress, they wrote that 
``When the true owners of companies put their own names on 
corporate formation papers, it increases the integrity of the 
system and provides a higher level of confidence when managing 
risk, developing supply chains, and allocating capital.''
    These CEOs are not alone. According to Ernst and Young's 
2016 Global Fraud Survey, 91 percent--91 percent--of senior 
executives believe it is important to know the ultimate owner 
of the entities with which you do business.
    Despite the importance, we are not winning this battle. In 
a report written by former U.S. Treasury Special Agent John 
Casarra for our coalition, he noted that in efforts to reclaim 
laundered money we are currently, quote, ``a decimal point away 
from total failure.'' His analysis is based on estimates that 
globally we catch only about 0.1 percent of laundered money.
    While kleptocrats and other criminal enterprises have 
updated their tools for the 21st century by utilizing anonymous 
companies, we have not updated our laws to catch them. And in 
2016, the Financial Action Task Force, as has been mentioned, 
reported that the ``lack of timely access to accurate and 
current beneficial ownership information remains one of the 
fundamental gaps in the U.S. context.''
    That said, there is some meaningful progress being made. 
You've just heard that there's progress in the European Union. 
In the Ukraine, a nation compromised by secrecy and 
kleptocracy, a new generation of public officials has 
identified incorporation transparency as a critical first step 
in lifting the veil of secrecy. The country has begun 
collecting beneficial ownership information and posting it 
online.
    Here in the U.S., bills have been introduced in this 
Congress. And I want to thank Senators Whitehouse and Rubio, 
Representatives Smith and Moore for sponsoring the legislation. 
The TITLE Act and the Corporate Transparency Act would each 
directly address the problem we are discussing today. While 
slightly different, each bill includes critical provisions 
needed to identify corporate owners. The definition of 
beneficial owner, with its focus on natural persons, is 
important to prevent the shell games in which one company owns 
another or the naming of nominee directors in lieu of the true 
owners. Mossack Fonseca, the now-infamous Panamanian law firm, 
employed a woman who was named as the director for 
approximately 20,000 companies. The value in collecting this 
information is one of the reasons that multiple trade groups, 
representing large and small banks and credit unions, have 
indicated their support.
    In a separate but related effort to combat anonymous 
corporations active in U.S. real estate markets, the Financial 
Crimes Enforcement Network, or FinCEN, recently extended and 
expanded an initiative known as Geographic Targeting Orders, or 
GTOs. The GTOs require the collection of beneficial ownership 
information for certain cash-financed, high-end real estate 
transactions. In renewing the GTOs in August, FinCEN noted--as 
Senator Whitehouse also said--that in 30 percent of the real 
estate transactions covered by the rule the purchaser was 
someone who had a suspicious activity report filed on them.
    We are seeing progress globally, in Congress, in the 
administration, and in the private sector, and continued 
support from a wide range of anticorruption, human rights, and 
other organizations. We now have an opportunity to lift the 
veil of secrecy. We must end the use and abuse of anonymous 
companies.
    I thank you for this opportunity and look forward to 
answering any questions.
    Mr. Whitehouse. Thank you, Mr. Kalman.
    I will turn first to Senator Boozman for any questions or 
comments he may have.

  HON. JOHN BOOZMAN, COMMISSIONER, COMMISSION ON SECURITY AND 
                     COOPERATION IN EUROPE

    Mr. Boozman. Thank you, Senator Whitehouse. And, again, 
thank you so much for having this very interesting and timely 
hearing.
    I'd like to ask you a little bit about how this works in 
the sense that--can you talk about a little bit--perhaps you, 
Mr. O'Carroll--about the specific methods that are used to 
launder money through anonymous shell companies and real 
estate? Talk to us a little bit about the specifics of how that 
exactly works.
    Mr. O'Carroll. Yes, Senator. I guess going back to the 
investigation that I spoke about in my testimony, what happens 
is that when an individual wants to open up a shell company, 
they go into a bank and they basically are just asked for some 
very superficial information to open up the account, which 
doesn't necessarily mean--you don't have explain what your 
business does. You don't have to show anything about the 
ownership of it. You don't have to show anything about the 
beneficiaries of it. It's really just a very simple 
transaction, probably with even less paperwork than opening up 
a savings account.
    Anyway, once that happens, what will happen then is that 
you will start doing the sub-accounts, which is what happened 
in this case here. And each of the people trying to launder 
their money will then put money into one sub-account and then 
transfer it into another. And as they transfer the money back 
and forth, it's going internationally in many cases, and it 
gets pretty much washed. So by the time we start our 
investigation on it, we'll be able to see transactions of large 
amounts going back and forth, but we really don't know from who 
to who.
    And then again, as one of my colleagues there at the table 
said, is that oftentimes the U.S. Government is incapable then 
of being able to target that account and do anything to, you 
know, grab the assets in it, or anything else. I think it was, 
like, 0.1 percent is recovered.
    Mr. Boozman. Right. So we have pretty strict laws about 
individuals going in and depositing money. And that triggers 
certain things, or withdrawals--cash withdrawals. So this 
allows, through that, to essentially counter that?
    Mr. O'Carroll. Agreed. The example is, is that if someone 
who's doing more than $10,000 in a personal account, that 
information would be provided to the government. In this case, 
it isn't.
    Mr. Boozman. Right. We've talked about the bills that have 
been introduced and things. Is there anything else that we 
could do to help law enforcement to identify shell corporations 
conducting money laundering? And the rest of you all can jump 
in if you'd like.
    Mr. O'Carroll. I'll just take the first crack at it, if you 
don't mind.
    Mr. Boozman. Sure.
    Mr. O'Carroll. In terms of that, one of the things that 
we're interested in is that if the banking community would 
cooperate with law enforcement, it would help a lot. If 
somebody comes in and says that they have a pretty simplistic 
corporation doing, you know, whatever type of business or 
service it is. And let's say for months, years--whatever, small 
transactions are going back and forth, very normal, looks like 
a normal business. But then all of a sudden, when millions of 
dollars start going back and forth into that account, what we'd 
like is for the banking community to do due diligence and 
either go in and ask the account holder, is this accurate? Is 
this part of your business? And put them at ease. Or, probably 
the best part, would be notify law enforcement that this 
account now is becoming very active. That would be one of the 
of the requests we'd have.
    Mr. Boozman. Anybody else? Are we cooperating with Interpol 
and Europol and those agencies to any extent with this? The 
international?
    Mr. O'Carroll. As an example, the Financial Crimes Network 
in the United States, FinCEN, does deal very closely with the 
European agencies and international agencies on sharing that 
information.
    Mr. Kalman. I would add that we've talked with a number of 
Treasury special agents and folks involved in trying to combat 
financial crimes, and one of the things we heard was when they 
go overseas and do trainings--our State Department will provide 
trainings for other law enforcement agencies in other 
countries--one of them said almost every time he goes, somebody 
in the audience will raise their hand and say: You know, we 
have this issue in our country, and we've been following this 
case, and it goes back to someplace called Delaware. Could you 
help us? And he said, I'm embarrassed to say that here I am 
preaching the virtues of anticorruption, here I am telling them 
that they need to do better, and yet we're the ones that 
actually have limited opportunity to help them.
    Mr. Boozman. Right. No, it's a good point.
    Thank you, Senator Whitehouse.
    Mr. Whitehouse. Thank you very much, Senator.
    We'll turn to Senator Shaheen, and then I want to also 
recognize that Representative Moore has joined us. She is one 
of the authors of the principal legislation. I'm delighted that 
she has joined us. And we will turn to her after Senator 
Shaheen.

 HON. JEANNE SHAHEEN, COMMISSIONER, COMMISSION ON SECURITY AND 
                     COOPERATION IN EUROPE

    Mrs. Shaheen. I think this is for Mr. Davidson and Mr. 
Kalman. My perception is that the public does not seem to be 
outraged about this. Can you speculate about why there's not 
more outrage about what's going on?
    Mr. Davidson. With pleasure. My first reflex to that is 
that it's hard to be outraged by what is secret. And I almost 
added a little section in my talk about secrecy, because this 
is a huge, huge problem, and it's really part of a global 
problem of financial secrecy and how much money or how much 
value in assets is held via offshore secrecy jurisdictions that 
we just don't know. But it's something like at least $32 
trillion, maybe as much as $60 trillion. But of course, nobody 
knows. And so this whole anonymous company issue--the secrecy 
element makes it very, very difficult to explain it to the 
citizen voter.
     I think if we look at what the secrecy is doing and what 
anonymous companies are permitting politically--and recent 
events in our country have underscored some of this problem a 
little bit--without mentioning any names--I think if we look 
at, in particular, authoritarianism--and there we have lot of 
evidence that's in the newspapers, that's evident, that people 
see--they can see how this is corrosive politically, and that 
can uncork a perhaps broader understanding of the issue. 
Obviously the fourth estate has a huge role to play in this, 
and I think they've been playing that role increasingly.
    One of the things we very much try to do in our work at 
Hudson's kleptocracy initiative is feed stuff to the fourth 
estate, and they've very eager for it. And I think we're far 
ahead of where we were a few years ago. And current events may 
help goose that. But authoritarianism, I think, is a real key. 
And when we look at that and what's going on--and not just 
Russia, everybody's obsessed with Russia--but if we look at 
China, and all sorts of surreptitious ways in which they are 
influencing with a sort of new kind of soft power, events here 
and all over the world, we'll find that anonymity is absolutely 
key, because it's how you can disguise what you're doing.
    And we find this time and time again. We're seeing this 
with a lot of the websites that have been used, increasingly. 
There's the Facebook business, but there are all these websites 
and operations that have been owned by LLCs or anonymous 
companies. A lot of this has started coming to light. That's 
actually a big dossier, potentially, in terms of the public 
becoming much more attuned to this problem.
    Mrs. Shaheen. Mr. Kalman, did you want to add anything?
    Mr. Kalman. I would agree that you can't be outraged about 
what you don't know, so that is a problem. But when you look at 
the opioid crisis--and we actually produced a report, or one of 
our coalition partners did--talking about that connection 
between anonymous companies and opioids, that that is an issue 
that outraged people. Now, they may not know that anonymous 
companies are facilitating the money--it's not that the drug 
dealers are actually doing it because they care about drugs, 
it's that they want money, and so they have to launder the 
money. And so these vehicles are used.
     I think there's a lot of outrage and work going on on 
anti-human trafficking. We just had an anti-human trafficking 
group, Polaris, join our coalition because law enforcement 
would shut down an illicit massage parlor in one part of the 
neighborhood, and then another one would pop up. Same owners, 
different location, and the cops are playing whack-a-mole. So I 
do think that the crimes that they facilitate are the kinds of 
things that actually are eliciting the outrage. They just don't 
know that what's behind it and what makes it all possible is 
the topic we're talking about today.
    Mrs. Shaheen. Thank you.
    Before the scandal broke about Russian interference in our 
elections, I introduced legislation to beef up the Foreign 
Agents Registration Act, which really doesn't have much in the 
way of teeth to enforce whether anything that's being 
advertised in the U.S. is a requirement that people know who's 
paying for that. I wonder if you have any thoughts about 
whether we need to increase the ability of the Department of 
Justice to put more teeth into that act. Anyone? Yes, Mr. 
Davidson.
    Mr. Davidson. I'd be happy to address that. We've looked at 
FARA a great deal, published a few things about that, and met 
with the lady who runs FARA. And it needs more teeth and all of 
that, but I think we've sort of gone beyond that. I mean, we 
need a very, very reinforced FARA.
    And, I think, speaking of public outrage, link FARA to 
public outrage and where we should be. I don't see why anyone 
should be lobbying for a hostile foreign government. I think 
that that actually is an issue that a lot of people can get 
behind. And FARA could be more than beefed up. But we want to 
talk about the swamp and doing something about it, FARA and 
what it is supposed to control would be a good place to start.
    Mrs. Shaheen. Well, I certainly agree with that. I would 
suggest that one of the challenges has been the perception 
that--in the public, that attacks around Russian interference 
in our elections are partisan, and therefore it's become a 
partisan issue which has prevented a strong response to address 
the underlying legislation. I'll just throw that out as 
speculation.
    Thank you, Mr. Chairman.
    Mr. Whitehouse. Thank you. I'm going to turn to 
Representative Moore, but because it's directly on point to 
Senator Shaheen's question, could I ask Mr. Davidson to fill in 
how getting around FARA might be facilitated by the use of 
shell corporations.
    Mr. Davidson. Oh. [Laughter.] Well, we've got a lot of 
examples of that, actually. [Laughs.]
    Mr. Whitehouse. Would ``easily'' be an accurate response?
    Mr. Davidson. Sorry?
    Mr. Whitehouse. Would ``easily'' be correct?
    Mr. Davidson. Yes. Easily--[laughs]--well, yes, easily 
would be a correct response. I mean, the fact of the matter is 
if you want somebody to do some work for you without having to 
be registered with FARA, it's very easy to pay people via U.S. 
shell companies. But they don't need to be U.S. I mean, we've 
seen all of this evidence and a lot of publicity about certain 
individuals who may have been paid abroad very significant sums 
for actions that they've taken in the United States. But if we 
just look at U.S. shell companies, I mean, you can disguise 
basically anything by paying someone via an anonymously owned 
vehicle. And this would include not only political lobbying and 
interference but pretty much anything. That's why when I say 
it's a threat to our civilization as we know it, it really is.
    Soon after I co-founded Global Financial Integrity in 2006, 
in 2008 I met with Jack Blum and Raymond Baker, the author of 
``Capitalism's Achilles Heel'' and the co-founder of Global 
Financial Integrity, and Senator John Kerry. And Senator Kerry 
had done a lot on the subject with the Bank of Credit Commerce 
International scandal, helping to break that, with Jack Blum, 
early in his career, and all of that. And Senator Kerry, very 
sadly--it was just the four or five of us in the room--said: 
Well, yes, absolutely it is a threat to our civilization. And 
that was many, many years ago. And we haven't done anything 
about this problem, and it's gotten worse. So we really need to 
wake up. And, Senator Whitehouse, I commend you for your 
efforts in this area, and the occasional vulgarity in your 
language, which I thoroughly approve of. [Laughter.]
    Mr. Whitehouse. [Laughs.] Thank you.
    Representative Moore.

   HON. GWEN MOORE, COMMISSIONER, COMMISSION ON SECURITY AND 
                     COOPERATION IN EUROPE

    Ms. Moore. Thank you so much, Senator Whitehouse. I just 
want to thank this distinguished panel for taking the time to 
give us this testimony. I appreciate, Senator Whitehouse, your 
cosponsoring this legislation over here in the Senate. And I 
have been a cosponsor of Representative Maloney's legislation 
since she first introduced it.
    Now, you would think, to listen to you all here, that this 
would be a slam dunk here in the United States. I have a couple 
of questions. First of all, I want to comment on Senator 
Shaheen's question: I mean, why aren't people outraged? Because 
people had thought we had fixed this. You know, with stuff like 
the Bank Secrecy Act, when people walk into a bank they know 
they can't bring their $10,000 worth of cocaine sales money 
into the bank. And so they thought they had fixed this. They 
didn't know that. Human trafficking, we didn't know how that 
could be financed.
    So you would think that with all of the research, the 
release of the Panama Papers, that this would be a slam dunk. 
I'm wondering if you all could describe to us--and then I'm 
going to ask you a question too, Ms. Caroline, don't feel left 
out here in the EU--what do you think are the barriers to 
getting this legislation passed here in the United States?
    Mr. Kalman. Let me start off by saying that I think we are 
actually making progress after all this time. I think some of 
the barriers are lifting. And I think some of the opponents are 
engaging. There are, and have been, historic concerns from the 
state secretary's estate over this legislation. And people have 
been engaging with them. And we hope that there's a pathway 
forward that they will no longer oppose these bills. We've made 
some changes to the bills to try and accommodate reasonable 
concerns from the business community.
    Ms. Moore. Like?
    Mr. Kalman. Years ago, when the bill was first introduced 
there weren't exemptions in the bill. For example, today your 
bills exempt publicly traded companies because they already 
report this information to the SEC. You exempt companies that 
have 20 employees, $5 million in sales, and a brick and mortar 
presence because law enforcement tells us that, you know what, 
that's big enough that we'll find the real guy or real gal. And 
so those are the kinds of things that we've tried to iron out, 
where reasonable requests have been made. And we said, oh, 
actually, these bills can be implemented with those changes.
    So there are still some hurdles and some questions, I know. 
But the business community has come on board--or, I should say, 
portions of the business community, not the entire business 
community. The Chamber of Commerce still has concerns, as you 
all know. But with multinational companies saying, hey, this is 
about supply chains, the global nature of their operations and 
the places where they are running into problems is getting 
worse and worse. And so this kind of information is more and 
more valuable.
    Here's a thing I will say about the banks--you probably 
know this better than I--but years ago they said, hey, don't 
make us do any anti-money laundering responsibilities, this is 
a law enforcement thing, we don't want to get involved. Today, 
if you go and talk to them--and we've talked to the 
clearinghouse and major banks--and they say, look, we 
understand we're going to have a role in these. The bad guys 
use our banks and we don't want them to use our banks. We just 
want it to be the most efficient that it can be, and so you all 
have discussions about that. But on this issue, they believe 
that this will help them do their due diligence. It will help 
them ferret out bad guys that are trying to use their banks to 
launder money. You now have a situation where large sections of 
the business community now support this legislation. We hope 
that we can make progress in this Congress.
    Ms. Moore. There was the conversation here among the 
panelists about the United States perhaps taking some 
leadership and affecting the entire financial community. I'm 
wondering if this legislation were passed, what would prevent 
our passage of these laws from driving this business into 
Europe and/or solidifying these crimes in Russia or China or 
other places? What parallel sort of legislation do we have to 
prevent it just from moving to some other jurisdiction?
    Ms. Vicini.
    Ms. Vicini. Well, thank you for the question. First of all, 
I want to come back to the outrage, the question of Senator 
Shaheen. Actually, there was a kind of an outrage in Europe 
after the Panama Papers. The fourth anti-money-laundering 
directive had just been signed in May, and then in the fall, 
there was a decision to amend it. So very quickly, although 
this was a big piece of legislation, very quickly it was 
realized that this could be improved.
    And there were a number of issues that were discovered 
through the Panama Papers that this new, improved fourth 
directive, or the amended one, will also take into account, the 
new technologies that we have for financial transactions. It 
will strengthen and harmonize checks on financial flows from 
high-risk third countries. It will increase the transparency, 
also make it easier for investigative journalists and NGOs and 
other organizations that are working on this to get access to 
this information. And it will confer also more power to the 
national finance intelligence units that will also be bound 
together by a stronger network.
    The work is continuing. And hopefully, therefore, if the 
U.S. is strengthening its own legislation, the money will not 
come to Europe. That's what we hope, that we have already in 
place--or putting in place right now registers, and also this 
directive talks about much more than the beneficial owners' 
registry. It's also a question of due diligence, of what 
sectors are covered. I mean, there's many more sectors than the 
pure financial organizations and banks. It's also notaries, 
lawyers, real-estate brokers, high-value luxury item vendors, 
et cetera.
    It's a very wide net where people actually have to perform 
due diligence at quite low numbers, and repeated transactions 
of smaller transactions. Hopefully we are able in that sense to 
prevent it from coming to Europe. And then we work, as I said 
before, in the Financial Action Taskforce, to try to lift up 
the standards in the rest of the world and keep an eye on those 
countries where people can hide money, or where these 
institutions are not functioning as they should.
    Ms. Moore. Thank you. I'm concerned about money laundering, 
but other activities like human trafficking, which you all have 
mentioned, and I am concerned about the exemptions. What would 
prevent me from saying that I'm an LLC, sole proprietor, have 
my lawyer go set up my company and still have these 50 massage 
parlors engaging in human trafficking? You know, if I keep my 
employee size down to what the exemptions are?
     I don't know exactly what the number is that would be 
exempt, but say if you got under 20 employees you're exempt. 
Explain the exemptions a little bit better, and what kind of 
language or legislation we should craft to make sure that no 
matter how big or how small you are, you can't do things like 
human trafficking.
    Mr. Kalman. Thank you for that question. Two things I would 
say: When we say publicly traded companies, for example, are 
exempt, because they already report beneficial ownership 
information--or, to the extent, above 5 percent of a company's 
ownership, to the Securities and Exchange Commission, so you 
already know that. We don't need to duplicate that.
    Ms. Moore. Right.
    Mr. Kalman. The exemption that we hear from our law 
enforcement folks is the opposite of what you are suggesting, 
precisely because of the point you're getting at. In other 
words, it's if you are big enough, not if you're small enough. 
The idea is we're trying to get at the shell companies, the 
actual entities that are being used as passthroughs for money. 
But as Senator Whitehouse said, there's no productive economic 
activity that's being used. So the exemption is at the lower 
level.
    Let me also say that if in fact you had a trafficking 
operation going on, but the beneficial ownership information is 
collected on the company, one of two things would happen. 
Either you wouldn't create the company and you'd have to find 
some other way to do it, or law enforcement would be able to 
get access to that and not just shut down the individual 
facility but in fact the entire operation.
    The bills that you all are proposing we believe are a 
foundational first step. You can strengthen laws, you can share 
information, but unless you have this information, then the 
rest of those laws are going to ring hollow. This is a first 
step. It is not the end of the line. There's going to be more 
bills and legislation and proposals we're going to need to 
consider. But without this, we cannot make the kind of progress 
you're looking to make.
    Ms. Moore. OK. And Senator Whitehouse, thank you for your 
indulgence. I just have one more question, and this is a crazy 
question. I don't know whether you guys can answer it or not. 
But our Supreme Court has weighed in about First Amendment 
rights and free speech and so forth, and corporations are 
people and so on. And I just wonder how any legislation would 
square with Supreme Court findings, or won't that matter? The 
Chamber of Commerce, are they objecting on the basis of 
corporations having rights and so on?
    Mr. Kalman. I have not seen that as an objection.
    Ms. Moore. Good.
    Mr. Kalman. I am not a lawyer, so I don't----
    Ms. Moore. Right. I don't want to offer them the excuse. 
[Laughter.] Thank you. I yield back.
    Mr. Whitehouse. Let me recognize Senator Cardin, who I'm 
particularly pleased is here as the ranking member of the 
Helsinki Commission and also as the ranking member of the 
Senator Committee on Foreign Relations. Thank you for being 
here, Ben.

HON. BENJAMIN L. CARDIN, RANKING MEMBER, COMMISSION ON SECURITY 
                   AND COOPERATION IN EUROPE

    Mr. Cardin. Well, thank you, Chairman Whitehouse.
    I came by for a couple purposes. First, I wanted to thank 
Senator Whitehouse for the inspiration of this hearing under 
the banner of the Helsinki Commission, because I think it's 
critically important. But I also want to thank him for his 
leadership in the United States Senate on transparency in so 
many different areas, and dealing with the danger of what we 
see here in shell companies.
    Let me first share with you that a little over a year ago I 
was in the Situation Room with the National Security Council, 
and this was the theme. This was the theme concerning our 
national security, and the need to improve our transparency 
laws on corporations because we can't track what is happening. 
We were very concerned at that time that it was being used for 
many different purposes--one of which is to avoid the sanctions 
in the United States that are very important to our foreign 
policy. Another was financing corrupt activities, including 
trafficking, including illegal drugs, including illegal guns. 
Some of it we thought was being used to finance terrorism. And 
that was one of the main focuses that we were looking at, 
trying to trace money that ends up supporting terrorism. And 
these shell companies were operating in a way that compromised 
our national security.
    So this is an extremely important subject. It's not easy to 
get a handle on what we need to do in the United States, but 
the weakness of our domestic laws are clearly very much in the 
forefront. So it should be no surprise that the World Bank has 
found that when it comes to corruption on a grand scale, 
American shell companies move more illegal money than any other 
country. That's a leadership that we do not want to have. So we 
need to act. And, Mr. Chairman, it's more complicated because 
many of these laws fall within the domains of our states, so 
that when look at how corporations are structured, the Federal 
Government can play a role. But in the absence of a federal 
role, the states are the controlling regulatory structure, and 
illegal entities can find the easiest state in which to 
operate.
    So what the United States needs to do is be a leader in 
fighting the use of shell companies globally to hide monies 
that are going to terrorists and for other illegal purposes. 
But we can't do that unless we first get our own house in 
order. And that's what Senator Whitehouse has been arguing and 
pressing for here in the United States. I have been working on 
the Senate Foreign Relations Committee with my colleagues on 
both sides of the aisle to get an indicator on how well 
countries are doing in fighting corruption. To me, corruption's 
one of the great challenges we have on good governance 
globally. It's the fuel for corruption. All you have to do is 
look at Russia and how it uses corruption in order to finance 
its system and its funding of different operations around the 
world.
    And one of those indicators is transparency, how well you 
know what's going on in that country. That should be one of the 
major ways to judge how well a country is fighting corruption 
by how well it promotes transparency. And although we don't 
have this index in place today--we do for trafficking in 
persons, and every country is rated, including the United 
States--we don't have that for corruption. There are outside 
groups that do corruption indexes, but we don't. I hope that we 
will, with this legislation passing. It's passed our committee, 
it just hasn't passed the Senate yet. I'm afraid the United 
States may not get a great grade, because we're not doing what 
we need to do on transparency.
    From the point of view of our own self-interest, but also 
in the point of view of global leadership, we're behind. And 
we've got to do a much more effective job. And it's not going 
to be easy because of the jurisdictional differences here, and 
the fact that illegal entities always try to stay one step 
ahead of what we're doing. I just wanted to make those 
observations. If any of the panelists want to respond, I'm more 
than happy to let them do that.
    What would you think is the most important thing for the 
United States to do to show leadership to the global community 
that we need to work together to end this type of lack of 
transparency in financial operations globally? What's the one 
thing that America needs to do? Who's the volunteer?
    Mr. Kalman. Let me just say, I would like us to see that we 
could pass either Mr. Whitehouse's bill or Ms. Moore's bill.
    Mr. Cardin. That was an easy answer. They were hoping you 
would say that.
    Mr. Davidson. Well, I'll take something totally different, 
which is that we need to get out the pillory and put it back on 
the village green. We can't continue to enable this system and 
to treat the professionals in our society who cater to all of 
this as respectable members of our society. And I think that's 
an area that could have huge leverage. And it's a deep, 
cultural problem that we have also, because we don't censure 
our fellow citizens when they engage in money laundering for 
kleptocrats or criminals.
    Mr. Cardin. I've heard that a long time, that corruption 
has a cultural background. You can't accept that. You can't 
accept that. Lack of transparency, there is no justification 
for that. And there's no justification for corruption. You 
can't say, well, that's how we do business.
    Mr. Davidson. Indeed.
    Mr. Cardin. Yes, sir.
    Mr. O'Carroll. Just to follow up on that thought process 
there of transparency, probably the biggest issue with law 
enforcement is just follow the money. And that's the whole 
reason for this thing, is to shade the area so that we can't do 
that. I think if we do pass these bills and get some 
transparency, that's the way we can start enforcing it and 
start making examples of the people that are abusing our 
system.
    Mr. Davidson. May I just add one thing to that, Senator?
    Mr. Cardin. Sure.
    Mr. Davidson. I was going to put this in my brief talk 
initially, but I think that passing this bill, just like the 
Magnitsky Act--that had a cultural affect also, because it was 
saying to everyone: This is not OK. We pass the abolishing of 
anonymous companies, it's going to have ancillary effects, or 
what economists like to call externalities, because no longer 
will it be possible to say well, look, this is perfectly OK and 
the U.S. law allows it. And then one can go on to the next 
step.
    Mr. Cardin. I agree. And just as a sidebar on this, 
Congress passed the transparency in extractive industries 
provision. \1\ And we showed international leadership. Other 
countries followed. They enacted the law. And then this 
Congress repealed the rule, so the United States fell behind. 
Yes.
---------------------------------------------------------------------------
    \1\  See Section 1504 of the Dodd-Frank Act.
---------------------------------------------------------------------------
    Ms. Vicini. Well, Senator, it's not my place really to give 
any advice to the United States Congress----
    Mr. Cardin. We advise other countries all the time. 
[Laughter.]
    Ms. Vicini. [Laughs.] But in our view, maybe what is what 
is good is to try to act preventively. And that's what the EU 
is trying to do with this register of beneficiary owners, for 
example. To try to prevent these companies from being shaped, 
or these companies from making any business because if they are 
not in the register they will not be able to make any business. 
We haven't seen if it works yet, because the directive has just 
been transposed into national legislation. We have 28 nations, 
as you know, so it takes a little while. The machinery grinds 
slowly.
    But as an example, as we say in the EU, from the country 
that I know best, is it's a country of 9 million people. And 
they have estimated that 800,000 economic entities will be 
registered there, in this register, just to give you a feeling 
that there are not many that will be able to escape, because 
you have cooperatives for buildings, you have a number of 
economic entities that will fall under this register.
    Mr. Cardin. Let me just conclude by also thanking 
Congresswoman Moore. We've been together for a long time on the 
Helsinki Commission and I thank you very much for your 
leadership on this issue. It's also great to have Senator 
Shaheen here as well; she has been a great member of this 
Commission, and also a member of the Senator Foreign Relations 
Committee.
    This has our attention. It's time for us to act.
    Thank you all very much.
    Mr. Whitehouse. Thank you very much, Senator Cardin.
    Let me start by asking Ms. Vicini, have you seen any 
effects--I know that the amendments to the fourth directive 
only went into effect in June, so it may not be that you've 
seen any observed consequences, either out of your law 
enforcement community or anywhere else. Are people actually 
closing accounts and fleeing elsewhere once they have to 
disclose? Is law enforcement finding new tools that they didn't 
have? What have been the consequences of the directive, if you 
can describe any?
    Ms. Vicini. No, as you point out yourself, Senator, it's 
quite early to see if there are any effects from this 
particular directive. I find, though, that the due diligence 
that so many of the not only financial institutions have to do 
but also many other areas of the economy, there it has started 
earlier. Banks and others have started to take it on, and it's 
become widespread. So we see in the network of the financial 
intelligence unit--the FIU.net, they have the secure network 
where they exchange information on suspicious transaction 
reports. And there is an enormous amount of reports coming in 
there.
    That poses then another problem, how do you handle all 
these reports, and how much can you follow up? So that you have 
law enforcement issue at the other end. But certainly this has 
put the light on this area. I think there is no economic 
operator today who is not aware of this, and particularly those 
who are advising people, tax consultants and lawyers and 
notaries and banks and those who service companies for trusts, 
et cetera. They are very vigilant. And we see that they do 
their due diligence and sort of bring this information into the 
system.
    Mr. Whitehouse. Mr. Davidson, could I ask you to speak a 
little bit more about what you touched on in your testimony, I 
think in a very eloquent way, which is the damage that 
America's role in supporting this kleptocratic effort--the 
damage that that does to our standing and to our reputation? 
You described the frustration of the Ukrainian official who was 
being lectured at about good governance and honesty at the same 
time that it was Western banks, Western lawyers who were 
facilitating the thievery and the looting of that country by 
allowing those individuals to cash their assets overseas. Both 
in terms of enabling foreign corruption, very often enabling 
great wealth and power to people who are our enemies, and in 
terms of hypocrisy to our reputation, how does this play into 
America's soft power around the world?
    Mr. Davidson. Well, obviously it's not good for our soft 
power. And I think what we see, and what I tried to show with 
the Ukrainian examples--and I see a lot of young Ukrainians--
and they are very, very distraught about all of this. I think 
what we need to be concerned about is that this really spreads, 
that this duplicity becomes a commonplace perception, at which 
point we are no longer perceived as a place with good 
governance and something to aspire to. And therefore, 
authoritarianism becomes much more attractive to people in the 
other countries.
    Now, when I started the kleptocracy initiative at Hudson 
three and a half years ago, the front was definitely not on our 
shores. But the front had an ocean between the offices of 
Hudson Institute and what we were trying to oppose. And then 
the front moved across the street, basically. So I think a 
very----
    Mr. Whitehouse. Thanks to the actions of the European Union 
and the United Kingdom in cleaning up their own transparency 
issues, so that it jumped them to come to the United States.
    Mr. Davidson. Yes, well, that's part of it, actually. I 
mean, I was at a yearly conference called Offshore Alert where 
the cops the robbers all congregate. But a Swiss lawyer--I 
don't know if he was Swiss--but a guy with five addresses on 
his card from all over the world got up and was very upset 
about the fact that business was leaving Switzerland and coming 
to the United States. And this wasn't good for his particular 
business in question. But it's ironic that we have become the 
leading haven at a time when, in all sorts of other ways, we've 
been trying to push back against this rise of authoritarianism.
    I mean, America's soft power is in so much trouble right 
now that I think we need to focus on this really as a national 
security threat. It's not about soft, soft power. We need new 
words for these things, because they aren't the same as they 
were 10 or 20 years ago. If we look at China, for instance, and 
what they're doing, or Russia, this isn't soft power. It's 
something else. And we're not very effective at resisting it.
    Mr. Whitehouse. Moving over to harder power, let's say, if 
we are enabling kleptocracy and corruption by providing safe 
haven and refuge for the proceeds of kleptocracy and 
corruption, what is the relationship between, let's say, in a 
given country on another continent, a high level of kleptocracy 
and corruption and security and stability in that country? Is 
there an established correlation of any kind?
    Mr. Davidson. Well, right now the correlation might be that 
the kleptocratic, authoritarian government, since it doesn't 
have to deal with any accountability vis-a-vis the people, it 
can have much more concentrated wealth, not only for itself but 
to build up the military. And we see this happening in, say, 
Russia, where there's less and less revenue. Oil prices are 
down. The sanctions do a lot more damage than some people might 
think. I mean, why are they so upset about the sanctions? Why 
are they so upset about Magnitsky? Why do they care? And yet, 
they've been able to divert increasing sums to their military. 
The same has been true in a lot of other countries.
    Mr. Whitehouse. So in some cases it might actually keep the 
oligarchs more secure. Presumably in other cases the wholesale 
looting of the country creates resentments that eventually 
create instability. Would that also not be a scenario?
    Mr. Davidson. Yes, it would be nice if we had more evidence 
of that.
    Mr. Whitehouse. Last question for Mr. O'Carroll. We've been 
talking about this at the national and international level. 
When I announced this bill, I announced it in Rhode Island. And 
among the folks present were Steve O'Donnell, who was then the 
superintendent of the Rhode Island State Police, and Hugh 
Clements, who was then the chief of police--still is the chief 
of police of our capitol city, the city of Providence. And they 
were there not because they were concerned about these 
international issues.
    They were concerned because they kept bumping up, in local 
criminal investigations, against shell corporations that were 
really hard for them to penetrate. So whether they were chasing 
assets to try to restore stolen money to people or trying to 
figure out who was behind a drug trafficking network, they were 
constantly bumping up--right in Rhode Island--against these 
schemes. And I'm wondering what your view is, from the Federal 
Law Enforcement Officers Association, about how prevalent this 
is as a local problem for local police officers trying to deal 
with local crimes.
    Mr. O'Carroll. It's a very good question, Senator, because, 
as you're finding out now, we're finding it works best with our 
federal law enforcement in cooperation with local and state law 
enforcement. So we've been trying to increase our resources by 
partnering with the states and locals. As an example, when I 
was the inspector general of Social Security we worked very 
closely with the two gentlemen that you spoke about in Rhode 
Island in terms of disability fraud, because the locals know 
what's going on in that community. They know who the bad 
players are. And what we try to do by bringing in the federal 
law enforcement is, we've got a little bit more of the global 
issue on it. We've also got more resources that we can put 
towards it, using the FinCEN and those types of information.
    Mr. Whitehouse. But you see local law enforcement bumping 
into this problem all the time and needing your help.
    Mr. O'Carroll. Oh, absolutely. And what you're finding--and 
I think what we've talked about here--is that it's so 
insidious, in that every major crime now is somehow being tied 
in with the money laundering. You know, be it drugs, be it 
financial crimes, be it any of the other issues, all on local 
levels that just seem to be multiplying and getting bigger. So, 
yes, it's at a local level and the Federal Government's job is 
to help.
    Mr. Whitehouse. Mr. Kalman, I've called on everybody but 
you. Do you have anything you'd care to add that I haven't 
asked, or that has been provoked by the hearing? I don't want 
to leave you silenced here.
    Mr. Kalman. To follow up on that last point, one of the 
things that we want to thank you for and encourage you on your 
bill is that you do make the information available to local law 
enforcement. There's two, in our minds, critical pieces that 
are common in both bills that--whichever one passes--we want to 
make sure stands strong. One is the definition. You have a very 
strong definition in your bill, that you cannot use, or put in 
a manager or nominee, or any stand-in. That definition----
    Mr. Whitehouse. Kind of defeats the purpose, doesn't it?
    Mr. Kalman. Exactly. You know, garbage in, garbage out. So 
that is critical. And the other is access to the information. 
And you give access to law enforcement up and down. So 
international cooperation all the way down to the local level 
with law enforcement. And you give it to the financial 
institutions that we ask to help us with anti-money laundering. 
Those are critical, critical pieces. And we urge you, as this 
process moves forward, please hang tough and keep those 
provisions strong.
    Mr. Whitehouse. Yes, we will. And I appreciate it. It was 
significant to me. I've been the U.S. attorney and the attorney 
general of my state. And attorney general in a state where all 
the criminal jurisdiction resides in the attorney general. We 
don't have DAs. So I've got a really good relationship with our 
law enforcement community. And they were deadly serious about, 
look, this is not international crime. This is local crime. 
This is affecting our cases day in and day out right here at 
home. So I appreciate that.
    Senator Shaheen, any closing questions or remarks?
    Mrs. Shaheen. I have one more question that I'd like to 
direct to Ms. Vicini, because in your testimony you talked 
about the major reforms in Georgia and Ukraine that you've 
seen. And the western Balkans, which have been challenged with 
corruption issues, and that your policy is one of fundamentals 
first. Can you explain what you mean by fundamentals first?
    Ms. Vicini. Well, for countries that aspire to become 
members of the European Union, we have a very thorough process 
of negotiation where they must, first of all, foremost adhere 
to what we call the Copenhagen criteria on human rights and 
good governance and democracy, et cetera. But then also, they 
have to live up to that key of the European Union, and that is 
the collective European Union legislation. So, to say, they 
must be, the day they enter, be able to meet all those 
criteria. And that is, of course, a big leap for many 
countries. What we do is, there is a process of negotiation, 
but there is also a process of support to try to help, to build 
that capacity. And it's a very thorough and sort of built-up 
process where we support the justice system, where we support 
good governance practice, in different ways. That's what I 
mean.
    Mrs. Shaheen. I appreciate that, especially the support 
piece. I noticed a piece this week in one of the news reports 
about Serbia, and that the support for joining the EU has 
decreased in Serbia pretty significantly, as has their 
favorability towards the United States. And support for Russia 
has increased pretty dramatically. Certainly, I think that 
support piece is really critical as we look at trying to keep 
the western Balkans moving towards EU integration.
    Ms. Vicini. That is, of course, the other part in the 
middle, is that it's a very long and difficult and laborsome 
process. And it requires a lot from the politicians to be able 
to see this through. And it's easy to lose the population on 
the way. But, yes, Serbia, there are also other reasons.
    Mrs. Shaheen. Thank you. Thank you, Mr. Chairman.
    Mr. Whitehouse. Well, let me thank all of the panel for 
testifying, and thank the Helsinki Commission for giving us 
this forum. Whether you're a cop on the beat in a local 
neighborhood concerned about the ability of the criminals 
you're going after to obscure their activity from you, or 
whether you are an American concerned that the reputation of 
our great country is being smeared by our participation in 
enabling the world's kleptocrats, drug dealers, thieves, and 
other global miscreants through our own system, one thing that 
we do know is that if you're coming up in a corrupt country you 
always have to worry.
    You can steal as much as you can from everybody around you, 
but you've always got to worry about the bigger fish that's 
coming to steal everything that you stole. So at some point--
why the Magnitsky Act was so infuriating to the Russians--at 
some point if you're going to play out your kleptocratic role, 
you're going to have to jump the fence and move your ill-gotten 
gains into a country that honors the rule of law. And that way, 
you can hang onto what you stole against that next big fish 
coming to steal it back from you. And in that way, the 
countries that enjoy and espouse rule of law are now 
inexcusably and constantly facilitating the worst of our 
enemies by providing them shelter and providing them, to some 
degree, respectability. And we have got to put an end to it.
    And the testimony was terrific today. We look forward to 
working with you to drive this process forward. Thank you all 
very much. The hearing is concluded.
    [Whereupon, at 4:02 p.m., the hearing ended.]

                          A P P E N D I C E S

=======================================================================

                          Prepared Statements

                              ----------                              

             Prepared Statement of Hon. Sheldon Whitehouse

    This hearing will come to order. Good afternoon and thank 
you all for being here. I'd like to especially thank Chairman 
Wicker for working with me to hold this important hearing on 
combatting crime and corruption through increased transparency.
    From 2012 to 2015 the Azerbaijani government reportedly 
funneled =2.5 billion from four UK-based shell companies 
through an Estonian branch of a Danish bank to bribe European 
politicians and Azerbaijani elites, in a scheme dubbed the 
``Azerbaijani Laundromat.'' According to a report from the 
Organized Crime and Corruption Project, ``the money bought 
silence'' during a time when the Azerbaijani government ``threw 
more than 90 human rights activists, opposition politicians, 
and journalists into prison on politically motivated charges.''
    The Azerbaijani Laundromat is not a unique scheme. In 2015, 
the ``Panama Papers'' exposed what many in the law enforcement 
and anticorruption world already knew: that corrupt officials, 
tax cheats, drug traffickers, terrorists, and criminals from 
around the world routinely use shell companies to hide assets 
and obscure illegal activities. American's lax incorporation 
laws have made the United States a favorite destination for 
money laundering. Make no mistake, we are a facilitator, as 
well as a target, in this racket.
    With every passing day, we learn more about how Russia and 
Russian kleptocrats exploit opaque business laws to hide ill-
gotten riches, bribe corrupt officials, and undermine the world 
economy and democratic institutions. Heather Conley at the 
Center for Strategic and International Studies wrote in her 
report, ``The Kremlin Playbook,'' that corruption is ``the 
lubricant'' with which the Russians operate. CSIS warns that to 
fight the corruption that gives Russia this channel of 
influence, ``enhancing transparency and the effectiveness of 
the Western democratic tools, instruments, and institutions is 
critical.''
    Russian kleptocrats, foreign drug dealers, and 
international tax cheats all use the same tool to launder their 
ill-gotten gains and evade law enforcement: the shell 
corporation. A shell corporation serves no economic purpose and 
conducts no real business. Instead, these entities exist to 
hold legal title to bank accounts, real estate, or other 
assets, hiding the true owners.
    America is a haven for those doing mischief through shell 
corporations. In fact, starting a shell corporation in this 
country can be easier than getting a library card. Currently, 
no state requires the disclosure of beneficial owners--the real 
human beings who own the companies. Instead, corporate records 
can identify the owner as just another shell corporation or a 
professional agent who was paid to sign the needed forms and 
never speak of them again. Or a lawyer who refuses to disclose 
her client, citing attorney-client privilege.
    We have seen over and over how foreign governments and 
criminal organizations have abused our lax incorporation laws.

     LThe Iranian Government used a string of generic 
businesses to obscure its ownership of a Fifth Avenue 
skyscraper.
     LA Mexican drug cartel used an Oklahoma 
corporation to launder money through a horse farm.
     LA crime syndicate set up a web of corporations in 
eight states as part of a $100 million Medicare fraud scheme.
     LA human trafficking ring based in Moldova hid its 
crimes behind anonymous corporations in Kansas, Missouri, and 
Ohio.

    Then there are the Panama Papers--over 11 million documents 
leaked from a Panamanian law firm. They revealed mischief 
conducted through shell companies, like the 2011 purchase of a 
$3 million oceanfront condo in Miami by a Brazilian politician 
facing corruption charges. And in 2015, after a lengthy 
investigation, the New York Times uncovered that a Russian 
banker suspected of ties to organized crime purchased a nearly 
$16 million condo in Manhattan's Time Warner Center.
    The Financial Crimes Enforcement Network, a division of the 
U.S. Treasury Department, found that 30 percent of the cash 
purchases of high-end real estate by shell companies in six 
major cities involved a suspicious buyer. With so many 
properties serving as lavish safe-deposit boxes, the housing 
supply tightens, raising costs for American families.
    The crimes being hidden may be complex and the assets they 
conceal may be elaborate, but the answer to the problem of 
shell corporations is simple: require private corporations to 
report and update their beneficial ownership information. In 
fact, I have introduced legislation with Senators Grassley and 
Feinstein that does just that. Senators Rubio and Wyden have 
also teamed up on related legislation.
    Transparency into shell corporations is not a novel idea. 
As we will hear from our panel, every member of the European 
Union has committed to ensuring such transparency. The United 
Kingdom has already implemented its own transparency law. The 
light of transparency is about to shine on criminal assets 
hidden in European shell companies, which means that lots of 
money will be looking for new, dark homes.
    We cannot let America become that new dark home for 
corruption and crime.
    In the year 1630, John Winthrop told his fellow early 
American settlers that, ``We must always consider that we shall 
be as a city upon a hill--the eyes of all people are upon us.'' 
If we become the new, dark home, I fear we will risk losing our 
place as that city on a hill and beacon of justice. In the 
global battle of ideas, chaining our reputation to 
international crime and corruption is a self-inflicted stain we 
don't need.
    I am glad we are holding this hearing today, and I look 
forward to hearing from our distinguished witnesses.

                 Prepared Statement of Charles Davidson

Combating Kleptocracy with Incorporation Transparency
    Acting Chairman Whitehouse, Co-Chairman Smith, and Members 
of the Helsinki Commission, thank you for inviting me to 
testify today. I would also like to thank Paul Massaro, staff 
of the Commission, for helping to arrange this important 
discussion. My name is Charles Davidson and I am the Executive 
Director of the Hudson Institute's Kleptocracy Initiative, 
which researches how authoritarian regimes and globalized 
corruption threaten democracy, capitalism, and security.

1--Kleptocracy: The Business Model of 21st Century 
Authoritarianism

    Today, the most dangerous threat to our national security 
is the aggression of authoritarian regimes that actively seek 
to undermine our freedom and democracy, and to export 
authoritarianism into the OSCE region and around the globe. And 
let us not be mistaken: What is at stake is the survival of our 
civilization.
    These regimes have already upended the post World War II 
international order via invasion and violation of treaties, 
perverted a rules-based global system of relatively fair 
economic exchange via intellectual property theft and corrosive 
business practices, and attacked our government's computer 
systems. And these regimes are sharing best practices and 
increasingly behaving like an axis of evil.
    The most important thing I want to bring to our attention 
today: It is essential to understand that these authoritarian 
regimes have ALL adopted the business model of 21st century 
authoritarianism, a model whereby those who govern, usually a 
very small group, family, or even individual, loot their own 
country, and store the proceeds in free and democratic nations 
such as ours, whose rule of law and reliable institutions serve 
to protect their ill-gotten gains. That business model = 
kleptocracy.
    21st century authoritarianism cannot be dissociated from 
kleptocracy. They have tied the knot. Where we find one, we 
find the other. And the situation is serious. Authoritarian 
kleptocracy has been growing, while freedom and democracy has 
been in recession.
    But the authoritarian/kleptocratic model has an obvious 
vulnerability. Given that kleptocratic loot is stored within 
our shores, we have huge leverage over this business model.
    The problem is, we often don't know where they've stored 
their loot, due to the ease with which one can establish 
anonymity of ownership.
    And we, the United States of America, are the easiest and 
safest place to establish anonymity of ownership. For a superb 
summary of this disgraceful situation, I recommend Kara 
Scannell & Vanessa Houlder's piece in the Financial Times 
published May 8th, 2016, ``US tax havens: The new 
Switzerland.'' As a general proposition, as an overarching 
challenge our society faces, as a fundamental existential issue 
for our civilization as we know it, it should be obvious that 
we cannot push back and reverse the authoritarian surge while 
being the bankers, lawyers, yacht builders, luxury lifestyle 
purveyors, to those who seek the destruction of freedom and 
democracy.

2--Kleptocracy: A Vector of Political Decay 

    How is kleptocracy undermining our freedom and democracy, 
promoting political decay?
    When the kleptocrats come here, they bring along their 
values, which are not ours. We were naive. We thought their 
offspring would go to school here and become freedom and 
democracy lovers. That hasn't happened.
    Instead, the kleptocratic life-juice of only valuing money 
and power has perverted our system. Kleptocratic regimes have 
become increasingly adept at purchasing many of the less 
morally vigilant members of our ``elites.'' [In Europe this is 
often referred to as ``schroederization.''] And this pimping is 
often done surreptitiously, via obscure ownership structures 
where beneficial ownership is not known, providing among other 
things plausible deniability.

3--Kleptocracy: We Incentivize it 

    As I said in testimony last December to the House's 
Subcommittee on Europe, Eurasia, and Emerging Threats: 
``Providing a safe haven for the proceeds of corruption 
establishes an incentive for corrupt practices. In my view this 
question of incentivization has been neglected, and is key to 
understanding the overall political challenge faced in terms of 
reform.''
    Anonymous companies, the asset protection they provide 
assured by our rule of law and reliable institutions, 
incentivizes kleptocracy. We must take away the punch bowl.
    And we must be aware of the struggles of those trying to 
escape a kleptocratic past, and the role played by our European 
allies.
    Ben Judah, in ``How Offshore Finance Sank Western Soft 
Power'' that appeared in The American Interest May 8th 2014, 
quotes Daria Kaleniuk, head of Kiev's Anti-Corruption Action 
Centre: ``What we found was that the money stolen in Ukraine 
was heading into British and European tax havens and hidden 
using shell companies inside the European Union. This was very 
uncomfortable to find out. What we felt is the Western elites 
were being hypocritical to us--preaching anti-corruption but 
allowing this.''
    Judah quotes Mustafa Nayem, one of the leaders of the 
Maidan revolution: ``Why do they only now investigate the 
hidden fortunes that were stolen and hidden in Austria and in 
Switzerland? We told the Europeans and we told their embassies 
a hundred times this money was stolen and hidden in their 
countries. And nothing happened. Now that the regime has 
fallen, they suddenly--in a matter of days--can reveal the 
stolen money. But why did they not do this before? They are 
guilty--guilty of leaving us alone with these thieves. They are 
guilty of allowing them to plunder us.''
    As per my above referenced Congressional testimony, ``As 
Western diplomats struggled to impress on Kyiv's politicians 
the value of the rule of law, Ukrainian elites were stashing 
wealth in the West. This happens across Eurasia, where 
authoritarian elites now treat London, New York, and other 
Western jurisdictions as corruption services centers.''
    And what of the demand for better government and democracy 
in such a situation? As Francis Fukuyama said introducing 
Senator Carl Levin at a conference organized by Global 
Financial Integrity in 2008: ``There can be no demand for 
democracy if all the rich people, if all the elites in the 
country, can manage to protect their own private fortunes, they 
have no reason to work with other people to resist the 
government, to demand democracy, to demand accountable 
government. There's no demand for less corrupt government 
because everybody has taken care of themselves as an individual 
and it delegitimizes democracy . . . anything that can be done 
to reduce the ability of people to transfer assets and to avoid 
the sovereignty of the state, it seems to me, is very 
important.''
    As we know from the difficulties of asset recovery efforts, 
including our Department of Justice's Kleptocracy Asset 
Recovery Initiative, it is often very difficult to find assets 
hidden via anonymous companies.
    We must stop incentivizing corrupt and kleptocratic 
practices.

4--Kleptocracy: Reform, or Submit to Tyranny

    As described, the anonymous ownership of assets is a dirty 
secret behind the rise of authoritarianism.
    We must Dramatically Curtail Secrecy in the Ownership of 
Assets:
        --Abolish the Anonymous Ownership of Assets in the 
        United States of America
        --Pressure Other Jurisdictions to do The Same

               Prepared Statement of Patrick P. O'Carroll

    Good morning Chairman Wicker, Co-Chairman Smith and members 
of the Commission.
    I am the Executive Director of the Federal Law Enforcement 
Officers Association, or FLEOA, which is a not-for-profit, non-
partisan, professional association which represents more than 
26,000 Federal Law Enforcement officers and agents from 65 
federal agencies.
    FLEOA applauds your Commission's focus on incorporation 
transparency, the prevention of money laundering, the financing 
of criminal enterprises, and terrorism.
    FLEOA agrees with the report of the Financial Fraud Task 
Force and its findings that the United States has many laudable 
anti-money laundering efforts--but also has serious gaps in law 
enforcement's ability to identify the owners of companies, 
leaving our financial system vulnerable to dirty money.
    Recently, one of our New York Secret Service agent members 
began a routine check forgery investigation into a stolen check 
being deposited into a bank account.
    The agent examined the available bank information and found 
that the account was for a Florida business with a single 
owner, NO business plan filed and NO apparent product or 
service.
    Further investigation utilizing court orders and subpoenas 
revealed multi-national wires and transfers involving millions 
of dollars passing through this account.
    The agent enlisted the assistance of the Treasury 
Department and identified 80 sub-companies and accounts 
transferring about $1 billion dollars between them.
    This is a classic example of money laundering with ties to 
financial crime, narcotics trafficking and terrorism. Yet 
because of the insidious protections afforded by shell 
corporations, only one person was arrested and the proceeds of 
one account seized.
    The Financial Crimes Enforcement Network or FINCEN is a US 
Treasury Bureau whose mission is to safeguard the financial 
system from illicit use, combat money laundering, and promote 
national security.
    FINCEN has found that shell companies--which are business 
entities without active business or significant assets--are an 
attractive vehicle for those seeking to launder money or 
conduct illicit activities, both domestically and 
internationally.
    FINCEN also believes that these shell companies have been 
used domestically as vehicles for financial crimes with credit 
cards, purchasing fraud and fraudulent loans.
    In addition, FINCEN cautions that international wire 
transfers allow for the movement of billions of dollars by 
unknown owners, which can facilitate money laundering and 
terrorist activities.
    New York Representatives Carolyn Maloney and Peter King, 
along with 9 co-sponsors, have introduced House Bill 3089, 
``The Corporate Transparency Act of 2017.'' In introducing the 
bill, Congresswoman Maloney stated, ``Anonymous and shell 
companies have become the preferred vehicle for money 
launderers, criminal organizations, and terrorist groups, 
because they can't be traced back to their real owners and the 
U.S. Is one of the easiest places in the world to set up 
anonymous shell companies.''
    Congressman King also said, ``The Act targets this problem 
by requiring a company that has the characteristics of a shell 
corporation to disclose who benefits from the company's 
operations and makes that information available to law 
enforcement.'' The Corporate Transparency Act of 2017 has 
subsequently been introduced in the Senate by Senators Wyden 
and Rubio. FLEOA strongly endorses this bill. We are also 
supportive of the TITLE Act, introduced by Senators Whitehouse, 
Grassley, and Feinstein. FLEOA strongly believes that 
legislation requiring companies to disclose their purpose, 
actual ownership, and appropriate contact information would 
assist law enforcement in identifying the criminal and 
terrorist organizations that are exploiting this weakness.
    Only with full transparency can we prevent the scourge of 
illicit funding provided by the anonymity of shell 
corporations.
    Thank you for this opportunity to testify today and I will 
be happy to answer any of your questions.

                 Prepared Statement of Caroline Vicini

                    Acknowledgement and Introduction

    Chairman Wicker, Co-Chairman Smith, Ranking Members Cardin 
and Hastings, Commissioners, it is my privilege to have this 
opportunity to present to you today. I'm here to exchange views 
and to provide an overview of the European Union's response to 
money laundering--in particular, in terms of transparency of 
beneficial ownership information.
    We live in a world where terrorist groups and organised 
crime organisations expand the scope and complexity of their 
illicit activities. Their corruption exploits the freedoms and 
benefits offered by globalisation and the huge number of 
financial transactions processed every day by a diverse number 
of financial actors.
    Across the globe, open and serviced shell companies, 
trusts, private foundations, and other entities serve as 
vehicles through which money flows. These complex structures 
are composed of companies with unknown owners and 
beneficiaries, serviced by multiple bank accounts housed in 
numerous banks situated in banks in jurisdictions with strong 
bank secrecy legislation that are unlikely to cooperate with 
foreign authorities.
    The European Union is at the forefront of global efforts to 
make corporate transparency effective to combat global 
financial crime, including corruption. We are seeing success.
    Europe's response is centred around three key elements:

        I. the current EU rules in force;

        II. proposals to reinforce these rules; and

        III. international cooperation.

   Current EU Rules in Force--the 4th Anti-money Laundering Directive

    The EU has accomplished much in terms of the traceability 
of financial transactions through a series of money laundering 
Directives.
    The landmark ``Fourth Anti-Money Laundering Directive'' 
entered into force in June this year, some 20 years after the 
first such directive.
    Banks should, of course, possess information about a 
customer--Mr. or Mrs. Smith--before they open a bank account. 
However, this situation is much more difficult when the bank 
does not deal with the customer directly, rather with Company A 
or Trust B.
    In these cases, if the bank is not able to identify who is 
behind a company or trust, the ability to collect relevant 
information such as the source of funds or the reason why the 
account is opened, is severely compromised. The bank needs to 
be sure that the company or the trust is not a shell for 
disguising illicit activities.
    This is why the Fourth Directive foresees identifying the 
beneficial owners of a company or a trust mandatory at the 
start of every new business relationship.
    But that is not all. The directive requires this 
information to be recorded centrally on a register or data 
retrieval system in the EU Member States.
    The purpose is fundamental: to allow swift and efficient 
access to important information by banks--that also allows them 
to fulfil their legal obligations--but also access by all 
national competent authorities that play a role in preventing 
money laundering and terrorist financing. This includes 
Financial Intelligence Units [equivalent to the US FinCEN], for 
instance. The EU Member States are currently setting up their 
registers.

                   Proposals to Reinforce these Rules

    The EU has faced heinous terrorist attacks in recent years. 
While less dramatic, but equally telling, there was a strong 
public reaction to the ``Panama papers'' scandal.
    In these circumstances, the European Commission took 
further steps in July 2016 with new proposal to present 
targeted measures to strengthen the Fourth directive. The 
European Commission proposed:

        I. the interconnection of the central registers of 
        beneficial ownership information: Given the increasing 
        number of cross-border financial transactions, 
        authorities would be able to consult registers and 
        access information across the Member States much more 
        easily; and

        II. public access to beneficial ownership information 
        for `for-profit' companies and trusts: Corporate 
        structures would be incentivised to prove that they run 
        a clean business. We are not talking about unfettered 
        access to information, rather granted in full respect 
        of the right to privacy. Sensitive information such as 
        family trust structures would be excluded from public 
        access.

                       The international context

    The promotion of reforms--good governance, democracy, the 
rule of law and human rights, and public administration 
reform--is integral to the European Union's approach to both 
the Western Balkans and the Eastern Partnership countries. 
Countering corruption and organised crime are significant 
elements in our approach. Considerable direct assistance is 
provided at the national and the regional level.
    We have seen major reforms in Georgia and Ukraine on the 
back of EU support. And in the Western Balkans--as potential 
members of the European Union--our policy is one of 
fundamentals first.
    But the European Union is not alone. We share 
responsibility with the United States, complementing each other 
as key players in this joint fight. We recognise the commitment 
of the United States underpinned by its strong enforcement 
capabilities.
    Furthermore, the European Commission, some EU Member States 
and the United States are vocal members of the Financial Action 
Task Force [FATF].

                               Conclusion

    Honourable members, to conclude, I would like to reiterate 
that the success of a policy to fight against money laundering 
and terrorist financing is based on complementary policies, 
both preventative and enforcement.
    Strong beneficial ownership requirements are not the 
panacea, but a key element if we want to address both money 
laundering and terrorist financing risks.
    The United States and the European Union must continue to 
support the successes we have achieved together on the 
international stage, driving up standards. We must continue to 
speak with the same voice to convince our partners that there 
is still room of improvement.

                   Prepared Statement of Gary Kalman

    Chairman Wicker, Co-Chairman Smith, Ranking Members Cardin 
and Hastings, and Commissioners of the Helsinki Commission, 
thank you for holding this important hearing.
    On behalf of the Financial Accountability and Corporate 
Transparency [FACT] Coalition and our member organizations, I 
appreciate the opportunity to talk about a foundational reform 
in the global anti-corruption movement and the nexus between 
secrecy jurisdictions, corruption, human rights, and national 
security.
    The FACT Coalition is a non-partisan alliance of more than 
100 state, national, and international organizations working to 
combat the harmful impacts of corrupt financial practices. \1\
---------------------------------------------------------------------------
    \1\  The FACT Coalition website: https://thefactcoalition.org/
---------------------------------------------------------------------------
    The Coalition first formed in 2011, but I came aboard just 
last year on April 11. I remember the date because it was 
roughly one week after the release of the Panama Papers. It was 
an interesting start.
    The Panama Papers shed light on the corruption facilitated 
by anonymous companies. The details of how these entities were 
established and some of the particular individuals involved 
made headlines around the world. But, to me, it was the sheer 
magnitude of the disclosures that proved the most shocking and 
enlightening. Eleven million documents, 214,000 companies, 140 
politicians from 50 countries--all from just one law firm in 
one country. \2\
---------------------------------------------------------------------------
    \2\  Independent Consortium of Investigative Journalists, https://
panamapapers.icij.org/20160403-panama-papers-global-overview.html
---------------------------------------------------------------------------
    The fallout was widespread. The revelations led to the 
resignation of Iceland's prime minister, and the exploits of 
Russian President Vladimir Putin's associates were well 
documented in the media.
    The Panama Papers exposed the direct connection between 
corrupt and criminal practices and the secrecy that affords 
kleptocrats and others a vehicle to hide the money, fund 
illicit activity, and move it around the globe with impunity. 
This hearing is an important opportunity to further explore 
that link.

                     What Is an Anonymous Company?

    When people create companies, they aren't required to 
disclose who really profits from their existence or controls 
their activities--the actual ``beneficial owners'' of the 
business. Instead, individuals who benefit can conceal their 
identity by using front people, or ``nominees,'' to represent 
the company. For instance, the real owner's attorney can file 
paperwork under his or her own name even though the attorney 
has no control or economic stake in the company. Finding 
nominees is not terribly difficult--there are corporations 
whose entire business is to file paperwork and stand in for 
company owners.

                   The Dangers of Anonymous Companies

    Anonymous companies are the vehicle of choice for 
kleptocrats and others who need to launder money. These 
individuals are then able to use the funds to stay in power and 
engage in a host of harmful actions--including undermining 
emerging democratic movements, upsetting global commerce, 
engaging in human rights abuses, and threatening our national 
security.
Undermining Democratic Movements
    Former soviet military officer and notorious arms dealer, 
Viktor Bout, created twelve anonymous U.S. companies in 
Delaware, Florida, and Texas. Before he was finally brought to 
justice, he reportedly supplied weapons to the Taliban, 
Liberia's Charles Taylor, Libya's Muammar Gaddafi, and the 
FARC, among others. \3\
---------------------------------------------------------------------------
    \3\  Global Witness, ``The Great Rip-Off,'' September 25, 2014, 
https://www.globalwitness.org/documents/11789/
the%20great%20rip%20off.pdf.
---------------------------------------------------------------------------
Upsetting Global Commerce
    Kleptocrats are often engaged in transnational crime, 
taking money from their own countries and hiding it in others. 
Researchers at Global Financial Integrity, a Coalition member, 
in a March 2017 report, estimated the direct financial cost of 
transnational crime.

        `` . . . globally the business of transnational crime 
        is valued at an average of $1.6 trillion to $2.2 
        trillion annually. The study evaluates the overall size 
        of criminal markets in 11 categories: the trafficking 
        of drugs, arms, humans, human organs, and cultural 
        property; counterfeiting, illegal wildlife crime, 
        illegal fishing, illegal logging, illegal mining, and 
        crude oil theft.'' \4\
---------------------------------------------------------------------------
    \4\  Transnational Crime and the Developing World, Global Financial 
Integrity, 2017, http://www.gfintegrity.org/report/transnational-crime-
and-the-developing-world/

    Recent studies have estimated the scale of money laundering 
to be in the range of 3 to 5 % of global GDP. \5\
---------------------------------------------------------------------------
    \5\  Cassara, John A. Countering International Money Laundering. 
FACT Coalition, 2017, Countering International Money Laundering, 
thefactcoalition.org/wp-content/uploads/2017/08/Countering-
International-Money-Laundering-Report-August-2017-FINAL.pdf.
---------------------------------------------------------------------------
    Traffickers in counterfeit and other illicit goods and 
services hide behind secret corporate entities and make it more 
costly and difficult for legitimate businesses to engage in 
global commerce.
    This cost is why several multinational corporations have 
written in support of bills in Congress to address the issue 
and provide world leadership. In a recent letter signed by the 
Chief Executive Officers of Allianz, The Dow Chemical Group, 
Kering Group, Salesforce, Unilever, and Virgin Group, they 
wrote:

        ``When the true owners of companies put their own name 
        on corporate formation papers, it increases integrity 
        in the system and provides a higher level of confidence 
        when managing risk, developing supply chains and 
        allocating capital. If ownership information is on 
        record, we can have greater reputational and legal 
        certainty in our dealings with third parties, 
        protecting our ability to enforce contracts and 
        safeguard our investments.'' \6\
---------------------------------------------------------------------------
    \6\  Letter dated July 11, 2017, http://bteam.org/announcements/u-
s-government-action-crucial-to-fighting-corruption/

    These CEOs are not alone. In fact, according to Ernst & 
Young's Fiscal Year 2016 Global Fraud Survey, 91 percent of 
senior executives believe it is important to know the ultimate 
owner of the entities with which you do business. \7\
---------------------------------------------------------------------------
    \7\  Ernst & Young, ``EY--Global Fraud Survey 2016,'' April 18, 
2016, https://go.ey.com/2vGBTLN.
---------------------------------------------------------------------------
Disrupting U.S. Markets
    Increasingly there are stories of secret owners bidding up 
prices on properties and then using them as ``banks'' rather 
than homes. Not only is our real estate market a magnet for 
kleptocrats but the secrecy potentially fuels a loss of 
affordable housing in growing numbers of communities due to 
skyrocketing real estate prices and vastly inflated markets.

     LIn Manhattan, eight blocks between Lenox Hill and 
Central Park are nearly 40 percent unoccupied, and on the Upper 
East Side, more than a quarter of the properties are owned-but-
vacant. Middle-income families are being priced out by those 
looking to hide assets. \8\
---------------------------------------------------------------------------
    \8\  Joseph Lawler. ``Money Laundering is Shaping US Cities,'' 
Washington Examiner, March 27, 2017, http://washex.am/2mVy5BJ.
---------------------------------------------------------------------------
     LIn San Francisco, the South Beach neighborhood is 
one-fifth unoccupied, and, in the competitive California 
housing market, the rent crisis is affecting middle-income 
families. \9\
---------------------------------------------------------------------------
    \9\  Ibid
---------------------------------------------------------------------------
     LA 2016 story in The Miami Herald about the impact 
of offshore money on the local housing market found that, `` . 
. . the boom also sent home prices soaring beyond the reach of 
many working- and middle-class families. Locals trying to buy 
homes with mortgages can't compete with foreign buyers flush 
with cash and willing to pay the list price or more.'' \10\
---------------------------------------------------------------------------
    \10\  Nicholas Nehamas. ``How secret offshore money helps fuel 
Miami's luxury real-estate boom.'' The Miami Herald. April 3, 2016. 
http://www.miamiherald.com/news/business/real-estate-news/
article69248462.html.
---------------------------------------------------------------------------
Abusing Human Rights
    Anonymous companies regularly serve as fronts for those 
engaged in crimes that involve human rights abuses. According 
to Global Witness, also a Coalition member, ``A Moldovan gang 
used anonymous companies from Kansas, Missouri and Ohio to 
trick victims from overseas in a $6 million human trafficking 
scheme.'' \11\
---------------------------------------------------------------------------
    \11\  Global Witness, ``The Great Rip-Off'', September 25, 2014, 
https://www.globalwitness.org/documents/11789/
the%20great%20rip%20off.pdf.
---------------------------------------------------------------------------
    Stories like that convinced Polaris, one of the leading 
U.S.-based organizations fighting human trafficking, to join 
the call to crack down on anonymous companies. Recognizing the 
role of anonymous companies in trafficking and the difficulty 
of combatting trafficking schemes if law enforcement cannot 
``follow the money'' to specific individuals profiting from the 
wrongdoing, Polaris wrote the following:

        ``In 2016, [we] analyzed public information to identify 
        human trafficking occurring in businesses fronting as 
        massage parlors in Tampa, Honolulu, Houston, San 
        Francisco, Albany, Columbus, Oklahoma City, and Fairfax 
        County, VA. The inability to identify beneficial 
        ownership was a recurring challenge in every location . 
        . . In order to ensure accountability for human 
        trafficking, Congress must pass legislation that 
        requires corporations and LLCs to disclose their 
        beneficial owners, thereby guaranteeing that law 
        enforcement has access to this information. Until 
        police and prosecutors can identify the individuals 
        operating illicit massage businesses, criminals engaged 
        in human trafficking will continue acting with impunity 
        across the United States.'' \12\
---------------------------------------------------------------------------
    \12\  Fact sheet, Polaris, 2017 https://thefactcoalition.org/wp-
content/uploads/2017/08/Polaris-Anonymous-Companies-Fact-Sheet-10-17-
2016-FINAL.pdf

    Companies with hidden owners currently play a powerful role 
in fueling international crimes--posing huge costs for law 
enforcement and civil society.
Threatening our National Security
    The threats go beyond the commercial and criminal spheres; 
they also threaten our national security. The stories of 
anonymous companies obtaining contracts with the Department of 
Defense are numerous and disturbing. I submit for the record a 
Global Witness report called Hidden Menace, which identifies, 
in unsettling detail, the role of secrecy in endangering our 
troops and undermining U.S. security. One example details how 
an Afghan company that was contracted to supply our troops was 
secretly owned by the Taliban, which used the profits to fund 
weapons to attack our soldiers. A second troubling report, 
authored by the U.S. Government Accountability Office, details 
how corporations with hidden owners are leasing office space to 
sensitive U.S. military and law enforcement agencies, a 
situation rife with risks that shouldn't be allowed to 
continue. \13\
---------------------------------------------------------------------------
    \13\  U.S. Government Accountability Office. Federal Real Property: 
GSA Should Inform Tenant Agencies When Leasing High-Security Space from 
Foreign Owners GAO-17-195: Published: Jan 3, 2017. Publicly Released: 
Jan 30, 2017. http://www.gao.gov/assets/690/681883.pdf
---------------------------------------------------------------------------
    As Congress considers new economic sanctions to counter 
North Korean threats, the Commissioners should take note of a 
U.S. Department of Justice case closed earlier this year which 
confirmed that Iran evaded economic sanctions in part by 
reaping millions of dollars annually from a New York-based 
anonymous company with investments in Manhattan real estate. 
\14\
---------------------------------------------------------------------------
    \14\  Press Release, U.S. Attorney's Office, Southern District of 
New York, 2017, https://www.justice.gov/usao-sdny/pr/acting-manhattan-
us-attorney-announces-historic-jury-verdict-finding-forfeiture-midtown
---------------------------------------------------------------------------

               Current Lack of Incorporation Transparency

    To the extent that these examples illustrate the depth of 
the problem, it is important to acknowledge that we've often 
been able to pierce the veil of corporate secrecy through luck 
or leaks. That must not continue to be a substitute for 
critical information on criminal enterprises.
    In a report written by former U.S. Treasury Special Agent 
John Casarra for the FACT Coalition, he noted that in efforts 
to reclaim laundered money, we are currently ``a decimal point 
away from total failure.'' \15\ His analysis is based on 
estimates that globally we catch only about 0.1 percent of 
laundered money. While kleptocrats and other criminal 
enterprises have updated their tools for the 21st century by 
utilizing anonymous companies, we have not updated our laws to 
catch them.
---------------------------------------------------------------------------
    \15\  John Cassara, ``Countering International Money Laundering,'' 
The FACT Coalition, August 2017, https://thefactcoalition.org/
countering-international-money-laundering?utm_medium=policy-analysis/
reports
---------------------------------------------------------------------------
    In its 2016 mutual evaluation, the Financial Action Task 
Force [FATF] found that the U.S. anti-money laundering 
framework has ``significant regulatory gaps'' and that the 
``lack of timely access to accurate and current beneficial 
ownership information [BO] remains one of the fundamental gaps 
in the U.S. context.'' \16\
---------------------------------------------------------------------------
    \16\  Mutual Evaluation Report, Financial Action Task Force, 2016, 
http://www.fatf-gafi.org/media/fatf/documents/reports/mer4/MER-United-
States-2016.pdf
---------------------------------------------------------------------------
    A 2014 report, by academics from the University of Texas-
Austin, Brigham Young University, and Griffiths University, 
found that the United States is the easiest place in the world 
to establish an anonymous company. \17\
---------------------------------------------------------------------------
    \17\  Findley, Michael et al. ``Global Shell Games: Experiments in 
Transnational Relations, Crime, and Terrorism.'' Cambridge University 
Press [March 24, 2014], Page 74. http://bit.ly/2uTLptQ.
---------------------------------------------------------------------------

                 Progress on Incorporation Transparency

    There is some meaningful progress being made to end the 
abuse of anonymous companies. As you have heard, there is 
progress in the European Union.
    In the Ukraine, a nation whose democracy has been 
compromised by kleptocracy, a generation of corrupt leadership 
has utilized anonymous companies to hide money and undermine 
economic and social progress. A new generation of public 
officials has identified incorporation transparency as a 
critical first step for lifting the veil of secrecy. The 
country has begun collecting beneficial ownership information 
and posting it online. The old guard is pushing back, but there 
is some hope today in a country that has been something of a 
poster child for corruption fueled by secrecy for decades.
    The global trend is toward transparency.
    Here in the United States, multiple bills have been 
introduced in this Congress to clamp down on corporate secrecy. 
I want to thank members of this Commission who have sponsored 
that legislation, including Senators Whitehouse and Rubio and 
Representatives Smith and Moore. The True Incorporation 
Transparency for Law Enforcement Act, or TITLE Act, S. 1454, 
and the Corporate Transparency Act of 2017, S. 1717 and H.R. 
3068, would each directly address the problem we are discussing 
today.
    The bills use different mechanisms to collect information, 
but each includes the critical provisions needed to identify 
corporate owners and provide access to that information to all 
law enforcement and financial institutions engaged in anti-
money laundering activities. All of the bills define a 
beneficial owner as ``a natural person who, directly or 
indirectly exercises substantial control over a corporation or 
limited liability company or has a substantial interest in or 
receives substantial economic benefits from the assets of a 
corporation or limited liability company.''
    That definition, with its focus on natural persons, is 
important to prevent the shell games in which one company owns 
another which, in turn, owns another and so on--all to 
obfuscate the name of the individuals who exercise ultimate 
control. The bills would also prevent naming managers or 
nominee directors in lieu of the true owners. Mossack Fonseca, 
the now infamous Panamanian law firm, employed a woman who was 
named as the director for approximately 20,000 companies. \18\ 
And on YouTube, a video shows a journalist establishing a 
company in Delaware for her cat, Suki. \19\ While Delaware has 
become notorious as a U.S. secrecy jurisdiction, it should be 
noted that not one of our states currently collects beneficial 
ownership information.
---------------------------------------------------------------------------
    \18\  ``Dirty Little Secrets.'' Dirty Little Secrets, Fusion, 
fusion.net/story/292198/dirty-little-secrets-panama-papers-
documentary/.
    \19\  Video: Watch how easy it is to start an anonymous shell 
company for your cat, Fusion TV, 2016, http://fusion.net/story/287187/
delaware-cats-shell-company/
---------------------------------------------------------------------------
    The value in collecting this information is one of the 
reasons that those asked to assist in U.S. anti-money 
laundering efforts are calling for legislation. The Clearing 
House, which represents the largest banks in the country, has 
sent a letter urging enactment of the legislation, stating:

        ``Our member institutions take their obligations under 
        the Bank Secrecy Act, USA PATRIOT Act and other 
        applicable Federal and state laws and regulations very 
        seriously and are committed to combating money 
        laundering and terrorist financing and other criminal 
        activities. Your legislation would assist them in these 
        efforts, as it would serve as a source of beneficial 
        ownership information when conducting due diligence on 
        their customers.'' \20\
---------------------------------------------------------------------------
    \20\  Letter dated August 3, 2017, https://thefactcoalition.org/wp-
content/uploads/2017/08/TCH-BAFT-IIB-IIF-2017-Support-Letter-HR3089.pdf

    In addition, the Independent Community Bankers Association, 
National Association of Federally-Insured Credit Unions, and 
Credit Union National Association have all indicated support 
for the legislation to require the collection of beneficial 
ownership information.
    In a separate but related effort to combat anonymous 
corporations active in U.S. real estate markets, the U.S. 
Department of Treasury's Financial Crime Enforcement Network 
[FinCEN] recently extended and expanded an initiative known as 
Geographic Targeting Orders [GTOs]. The GTOs require the 
collection of beneficial ownership information for certain 
cash-financed, high-end real estate transactions. The GTOs now 
apply to the following metropolitan areas including: Bexar 
County, Texas; Miami-Dade, Broward, and Palm Beach Counties in 
Florida; Brooklyn, Queens, Staten Island, Manhattan, and the 
Bronx in New York City; the counties of San Diego, Los Angeles, 
San Francisco, San Mateo, and Santa Clara in California; and 
the latest addition, the city and county of Honolulu, Hawaii. 
\21\
---------------------------------------------------------------------------
    \21\  ``FinCEN Targets Shell Companies Purchasing Luxury Properties 
in Seven Major Metropolitan Areas.'' 22 Aug. 2017, www.fincen.gov/news/
news-releases/fincen-targets-shell-companies-purchasing-luxury-
properties-seven-major.
---------------------------------------------------------------------------
    In renewing the GTOs in August, FinCEN noted that, in 30 
percent of the real estate transactions covered by the rule, 
the purchaser was someone who had a suspicious activity report 
filed on them. Prior to the GTOs, we would have had no idea who 
was behind the purchases.
    The early results of the GTOs suggest that the collection 
of beneficial ownership information is a necessary reform that 
opens the door to additional changes to crackdown on 
kleptocrats and others engaged in illicit financing.
    We are seeing progress globally, in congress, in the 
administration, in the private sector, and continued support 
from a wide range of anti-corruption, human rights, and other 
organizations.

                               Conclusion

    Kleptocrats and other criminals use anonymous shell 
companies to hide the money they steal and maintain the power 
they hold. The total amounts of money are impossible to know 
but what we can estimate runs into the trillions. The harm 
caused is widespread--impacting national security, human 
rights, and economic and political stability.
    There are many reforms we need to make, such as better 
coordination and information sharing among law enforcement 
agencies, among others. Congress recently took a critically 
important step when they adopted the Global Magnitsky Act to 
more effectively target individuals engaged in human rights 
abuses and grand corruption. But we must lift the veil of 
secrecy. We must end the use and abuse of anonymous companies. 
If we are unable to identify the true owners of the front 
companies used to launder money, it will undermine our ability 
to identify those responsible for the underlying crimes and our 
ability to enforce any additional laws we adopt or strengthen.

                                 [all]
                                 
                                 
                                 
                                 

  
This is an official publication of the
Commission on Security and
Cooperation in Europe.

          * * * 
          
This publication is intended to document
developments and trends in participating
States of the Organization for Security
and Cooperation in Europe [OSCE].

          * * * 

All Commission publications may be freely
reproduced, in any form, with appropriate
credit. The Commission encourages
the widest possible dissemination
of its publications.

          * * * 
 

http://www.csce.gov     @HelsinkiComm

The Commission's Web site provides
access to the latest press releases
and reports, as well as hearings and
briefings. Using the Commission's electronic
subscription service, readers are able
to receive press releases, articles,
and other materials by topic or countries
of particular interest.

Please subscribe today.
```