S. Hrg. 109–845

FAILURE TO IDENTIFY COMPANY OWNERS

IMPEDES LAW ENFORCEMENT

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

NOVEMBER 14, 2006

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

FAILURE TO IDENTIFY COMPANY OWNERS IMPEDES LAW ENFORCEMENT

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32–353 PDF 2007

S. Hrg. 109–845

FAILURE TO IDENTIFY COMPANY OWNERS

IMPEDES LAW ENFORCEMENT

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

NOVEMBER 14, 2006

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

MICHAEL L. ALEXANDER, Minority Staff Director 

TRINA DRIESSNACK TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

NORM COLEMAN, Minnesota, Chairman 

TED STEVENS, Alaska 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

RAYMOND V. SHEPHERD, III, Staff Director and Chief Counsel 

MARK D. NELSON, Senior Counsel 

ELISE J. BEAN, Staff Director and Chief Counsel to the Minority 

ROBERT L. ROACH, Counsel and Chief Investigator to the Minority 

LAURA E. STUBER, Counsel to the Minority 

ZACHARY I. SCHRAM, Professional Staff Member to the Minority 

MARY D. ROBERTSON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coleman .............................................................................................. 1

Senator Levin .................................................................................................... 4

Senator Carper ................................................................................................. 10

WITNESSES 

TUESDAY, NOVEMBER 14, 2006

Stuart G. Nash, Associate Attorney General and Director, Organized Crime 

Drug Enforcement Task Force, U.S. Department of Justice ............................ 12

K. Steven Burgess, Director of Examinations, Small Business/Self Employed 

Division, Internal Revenue Services, accompanied by Robert Northcutt, Acting Director, Abusive Transactions Office, Small Business/Self Employed 

Division, Internal Revenue Service .................................................................... 14

Yvonne D. Jones, Director, Financial Markets and Community Investment 

Team, U.S. Government Accountability Office .................................................. 16

Jamal El-Hindi, Associate Director for Regulatory Policy and Programs, Financial Crimes Enforcement Network ............................................................... 18

Richard J. Geisenberger, Assistant Secretary of State of Delaware, Delaware . 32

Scott W. Anderson, Deputy Secretary for Commercial Recordings, Office of 

the Secretary of State, State of Nevada, Carson City, Nevada ........................ 33

Laurie Flynn, Chief Legal Counsel, Office of the Secretary of the Commonwealth of Massachusetts, Boston, Massachusetts ............................................. 35

ALPHABETICAL LIST OF WITNESSES

Anderson, Scott W.: 

Testimony .......................................................................................................... 33

Prepared statement with an attachment ....................................................... 133

Burgess, K. Steven: 

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 75

El-Hindi, Jamal: 

Testimony .......................................................................................................... 18

Prepared statement .......................................................................................... 107

Flynn, Laurie: 

Testimony .......................................................................................................... 35

Prepared statement .......................................................................................... 140

Geisenberger, Richard J.: 

Testimony .......................................................................................................... 32

Prepared statement .......................................................................................... 115

Jones, Yvonne D.: 

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 83

Nash, Stuart G.: 

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 49

Northuctt, Robert: 

Testimony .......................................................................................................... 27

Page

IV

EXHIBITS 

1. Charts ................................................................................................................ 144

2. U.S. Government Accountability Office (GAO) Report to the Permanent 

Subcommittee on Investigations, Committee on Homeland Security and 

Governmental Affairs, U.S. Senate, COMPANY FORMATIONS—Minimal 

Ownership Information Is Collected and Available, April 2006, GAO–

06–376 ................................................................................................................ 149

3. Excerpts from the June 2006 Third Mutual Evaluation Report on AntiMoney Laundering and Combating the Financing of Terrorism, United 

States of America, prepared by the Financial Action Task Force (FATF): 

Section 5—Legal Persons and Arrangements & Non-Profit Organizations; 

Table 1: Ratings of Compliance with FATF Recommendations; and Table 

2: Recommended Action Plan to Improve the AML/CFT System ................. 225

4. Chapter 8—Shell Companies and Trusts, U.S. Money Laundering Threat 

Assessment, December 2005 ............................................................................. 251

5. Report of the Financial Crimes Enforcement Network (FinCEN), The 

Role of Domestic Shell Companies in Financial Crime and Money Laundering: Limited Liability Companies, November 2006 .................................. 259

6. Financial Crimes Enforcement Network (FinCEN) Guidance, Subject: Potential Money Laundering Risks Related to Shell Companies, issued November 9, 2006 .................................................................................................. 285

7. wyomingcompany.com—Excerpts from website of a Nevada based Company Formation Firm ....................................................................................... 290

8. nevadafirst.com—Excerpts from website of a Nevada based Company Formation Firm ...................................................................................................... 322

9. Offshore Inc. Country Comparison Chart ....................................................... 352

10. Responses to supplemental questions for the record submitted to Stuart 

G. Nash, Associate Deputy Attorney General and Director, Organized 

Crime Drug Enforcement Task Force, U.S. Department of Justice ............. 355

11. Responses to supplemental questions for the record submitted to K. Steven Burgess, Director of Examinations, Small Business/Self Employed 

Division, Internal Revenue Service ................................................................. 357

16. Responses to supplemental questions for the record submitted to Jamal 

El-Hindi, Associate Director for Regulatory Policy and Programs, Financial Crimes Enforcement Network .................................................................. 360

13. Responses to supplemental questions for the record submitted to Richard 

J. Geisenberger, Assistant Secretary of State, State of Delaware ................ 363

14. Responses to supplemental questions for the record submitted to Scott 

W. Anderson, Deputy Secretary of State for Commercial Recordings, Office of the Secretary of State, State of Nevada .............................................. 366

15. Responses to supplemental questions for the record submitted to Laurie 

Flynn, Chief Legal Counsel, Office of the Secretary of the Commonwealth 

of Massachusetts ............................................................................................... 368

16. Responses to supplemental questions for the record submitted to Alain 

Damais, Executive Secretary, Financial Action Task Force (FATF) ............ 372

(1)

FAILURE TO IDENTIFY COMPANY OWNERS 

IMPEDES LAW ENFORCEMENT 

TUESDAY, NOVEMBER 14, 2006

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:32 p.m., in room 

342, Dirksen Senate Office Building, Hon. Norm Coleman, Chairman of the Subcommittee, presiding. 

Present: Senators Coleman, Levin, and Carper. 

Staff Present: Raymond V. Shepherd, III, Staff Director and 

Chief Counsel; Mary D. Robertson, Chief Clerk; Mark D. Nelson, 

Senior Counsel; Elise J. Bean, Staff Director and Chief Counsel to 

the Minority; Robert L. Roach, Counsel and Chief Investigator to 

the Minority; Laura Stuber, Counsel to the Minority; Zachary 

Schram, Professional Staff to the Minority; Steven Groves, Senior 

Counsel; John McDougal (Detailee, IRS); Kate Bittinger (Detailee, 

GAO); JoAnna I. Durie (Detailee, ICE); Cindy Barnes (Detailee, 

GAO); Emily Germain, Intern; Jennifer Boone (Senator Collins); 

Robin Landauer (Senator Coburn); Teresa Meoni, Intern; Mark 

LeBron, Intern; and John Kilvington (Senator Carper). 

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. This hearing of the Permanent Subcommittee 

on Investigations is called to order. 

Good afternoon, and thank you for attending today’s hearing. I 

informed Senator Levin that I have to be on the floor of the Senate 

at 2:50, so I will give my opening statement and turn the gavel 

over to Senator Levin. He will do the introduction of the first panel 

and then I will come back. 

I said I was kind of easing myself into passing the gavel over, 

so it is not like cold turkey in January. 

I also want to personally thank the Senator and to say very publicly that this investigation—Senator Levin has really been driving 

this. He has been driving this issue about transparency, both internationally and if we are dealing with it internationally, we have to 

deal with it at home. So I want to commend him for his continued 

efforts in addressing the abuses of shell companies, both here and 

abroad. 

The purpose of today’s hearing is to examine the lack of information collected by various States regarding the ownership of nonpublicly traded companies, and the extent to which U.S. shell comVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
2

1See Exhibit 2 which appears in the Appendix on page 149. 

panies are being used to conceal the identities of those engaged in 

illicit activity. 

In the United States, State governments authorize the formation 

of nearly 2 million new domestic companies each year. Although 

the vast majority of these companies are formed to serve legitimate 

commercial purposes, the potential for abuse is great. The absence 

of ownership disclosure requirements and lax regulatory regimes in 

many of our States make U.S. shell companies attractive vehicles 

for those seeking to launder money, evade taxes, finance terrorism, 

or conduct other illicit activity anonymously. 

In fact, we generally have no idea who owns the millions of U.S. 

companies formed each year because most States do not ask for 

this information. In a recent report prepared at the request of this 

Subcommittee, the Government Accountability Office found that 

none of the 50 States requires applicants to disclose who will own 

a new corporation and only a few States require this information 

for a new limited liability company (LLC).1

Moreover, although most States require corporations and LLCs 

to file periodic reports, only three States require corporations to report ownership information in these filings, and only five States require the same of LLCs. 

Perhaps most troubling, the GAO found that none of the States 

screens company information against criminal watch lists or 

verifies the identity of company officials. This lack of transparency 

not only creates obvious vulnerabilities in our financial system, but 

it also threatens our homeland security. 

GAO reports that the FBI has 103 open investigations involving 

financial market manipulation. Most of these cases involve U.S. 

shell companies. A Department of Justice report revealed that Russian officials used shell companies in Pennsylvania and Delaware 

to unlawfully divert $15 million in international aid intended to 

upgrade the safety of former Soviet nuclear power plants. 

Schemes like these are not uncommon. But without sufficient 

company ownership information, it is often difficult for law enforcement to identify and prosecute the criminals behind them. For example, Immigration and Customs Enforcement (ICE) officials reported that over a 2-year period one Nevada-based corporation received more than 3,700 suspicious wire transfers totaling $81 million. This case has not been prosecuted, however, because ICE was 

unable to identify the corporation’s owners. 

Clearly, our failure to identify the owners of U.S. shell companies 

is a significant deficiency in our anti-money laundering and terrorist financing efforts. I am concerned that the competition among 

States to attract company filing revenue and franchise taxes has, 

in some instances, resulted in a race to the bottom. 

Internet searches reveal that in the race to provide faster, cheaper company formation processes, States that collect company ownership information are at a competitive disadvantage. Numerous 

websites laud the advantages of incorporating in States that protect privacy and limit information reporting requirements. 

Company formation and service of process agents in these States 

advertise packages that include nominee shareholders, nominee diVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
3

rectors, local telephone listings, live receptionists, and other devices 

designed to provide the veneer of legitimacy to shell companies 

that employ no one and have no physical presence other than a 

mailing address. That these formation and support services rival 

those offered in some of the most notorious offshore tax and financial secrecy havens is simply unacceptable. 

This is an issue again that this Subcommittee has explored, and 

Senator Levin has been really passionate about rooting out that 

level of corruption. 

The United States should never be the situs of choice for international crime, but that is exactly what the lax regulatory regimes 

in some of our States are inviting. U.S. shell companies have been 

used to obscure the ownership and purpose of billions of dollars in 

international wire transfers and to facilitate criminal activity 

throughout the world. The FBI believes that U.S. shell companies 

have been used to launder as much as $36 billion from the former 

Soviet Union. The U.S. Treasury’s Financial Crime Enforcement 

Network—FinCEN—found that between April 1966 and January 

2004, U.S. financial institutions filed 397 suspicious activity reports concerning a total of almost $4 billion that involve U.S. shell 

companies and Eastern European companies. 

It is embarrassing that foreign law enforcement agencies report 

being frustrated by the lack of ownership information available on 

U.S. companies and that the Department of Justice is often unable 

to respond to requests for company ownership information from our 

treaty partners. In our fight to win the war on terrorism, opportunities to assist law enforcement efforts of our allies are too precious 

to sacrifice. International criminal activities that exploit the lack of 

transparency in our company registrations serve to tarnish our 

country’s reputation internationally and are more costly than ever. 

At the same time, there are obvious costs and inefficiencies associated with the collection and verification of ownership information. 

Many States recognize Federal law enforcement’s need for more 

company ownership information, but the States do not need an unfunded mandate from Congress. The States raise legitimate concerns that collecting ownership information could delay or derail legitimate business deals and drain limited State resources from 

other, more pressing, needs. Moreover, it is likely that when more 

stringent disclosure requirements are passed in one State, companies will simply move to those States or countries with less stringent requirements. 

It appears to me that what is needed is a level playing field, a 

system that avoids a race to the bottom. It would be nonsensical 

for someone to lock the front door but leave the back door wide 

open and then go to sleep believing that their home is secured. Yet, 

in our efforts to secure this Nation, we seem to have done exactly 

that. We have enhanced our security and identification requirements at ports, airports and along the borders, but we have ignored 

the obvious vulnerabilities created by anonymously-owned U.S. 

companies. We must find a common sense solution that balances 

our need to protect our financial system, our homeland, and our 

international reputation with our need to preserve an efficient, 

flexible business environment. 

4

I look forward to the testimony we will hear during today’s hearing. It is important that we understand the specific nature of the 

vulnerabilities created by anonymously-owned U.S. shell companies 

and to hear proposals for steps that we can take to reduce the potential for abuse while preserving a system that does not derail or 

necessarily delay legitimate business. 

After today’s hearing and assessing the testimony, I intend to 

discuss with Senator Levin what follow up action we need to take 

in order to further address the problems exposed by this investigation. 

Again, I want to thank my colleague, the Ranking Member, for 

his leadership on this issue. I will turn the gavel over to him and 

will return after I deal with issues on the floor. 

Senator LEVIN [presiding]. Mr. Chairman, before you leave, let 

me just take a moment to thank you. As true of all investigations 

and inquiries of this Subcommittee, these are partnerships. These 

are working relationships which are established which are critically important to the success of this Subcommittee. 

You have carried on that tradition as Chairman, of working on 

a bipartisan basis, working together with ranking members and 

other members of our Subcommittee to try to make progress in 

areas we look at. But nothing that has happened or could happen 

without the support of you and your staff and the full partnership 

of both of you and we thank you for that. 

Senator COLEMAN. Thank you, Senator Levin. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. In 2004 the United States was home to 12 million 

companies, including about 9 million corporations and 3.8 million 

limited liability corporations, or LLCs. In that year alone, our 50 

States incorporated more than 1.9 million new corporations and 

LLCs. The vast majority of these companies operate legitimately, 

but a small percentage do not, functioning instead as conduits for 

organized crime, money laundering, securities fraud, tax evasion 

and other misconduct. 

In most cases, our States have no idea who is behind the companies that they have incorporated. A person who wants to set up a 

U.S. company typically provides less information than is required 

to open a bank account or get a drivers license. In most cases, they 

do not have to provide the name, address or proof of identification 

of a single owner of the new company. That is because our States 

have been competing with each other to set up new companies not 

only faster than ever, at less cost than ever, but with greater anonymity for the company’s owners. 

Most U.S. States offer electronic services that incorporate a new 

company and many will set up a new company in less than 24 

hours. The median fee is less than $100. In Delaware and Nevada, 

for an extra $1,000, an applicant can set up a company in less than 

an hour. Colorado, which incorporates about 5,000 companies each 

month, told the Subcommittee that it now sets up 99 percent of its 

companies by computer without any human intervention or review 

of the information provided. Incorporating all of these new companies generates annual revenues totaling hundreds of millions of 

dollars for our States. 

5

1See Exhibit 1 which appears in the Appendix on page 144. 

The problem with incorporating nearly 2 million new U.S. companies each year without knowing anything about who is behind 

them is that it becomes an open invitation for criminal abuse. Take 

a look at a few websites from firms in the business of incorporating 

companies around the world.1

This website, which is hard to read so I will quote from it, from 

an international incorporation company promotes setting up companies in Delaware by saying ‘‘Delaware, an offshore tax haven for 

non-U.S. residents.’’ One of the cited advantages is that ‘‘owners’ 

names are not disclosed to the State.’’ 

Another website from a United Kingdom firm called formacompanyoffshore.com lists a number of advantages to incorporating 

in Nevada. The cited advantages include ‘‘no IRS information sharing agreement’’ and ‘‘stockholders are not on public record, allowing 

complete anonymity.’’

These are just two of the dozens of websites that portray our 

States as welcoming those who want to operate U.S. companies 

with anonymity. 

That anonymity is exactly what this Subcommittee has been 

criticizing offshore tax havens for offering to their clients. In fact, 

our last Subcommittee hearing lambasted offshore jurisdictions for 

setting up offshore corporations with secret U.S. owners engaged in 

transactions designed to evade U.S. taxes, leaving honest taxpayers 

to pick up the slack. Some U.S. company formation firms advertise 

the same type of anonymity and take the same type of actions that 

this Subcommittee has been criticizing in the offshore jurisdictions 

for years. 

Take a look, for instance, at a Nevada firm called Nevada First 

Holdings.1 Nevada First advertises on the Internet, offering for 

sale an aged or a shelf company or companies that were set up in 

Nevada years earlier, pointing out that an older company can lend 

credibility to an operation. 

It sells these companies that are no longer functioning to companies, to anyone, who can pay the price without obtaining any information on the true owners of the companies since there is no obligation to do so. 

Nevada First offers a host of services to further hide the identity 

of a company’s owners. For example, Nevada First employees can 

serve as a company’s nominee director or officer to enable the true 

owners to ‘‘retain a higher level of anonymity.’’ A Nevada First employee, acting as a company officer or director, can provide his own 

name and Social Security number to open a company bank account 

or obtain an Employer Identification Number from the IRS. So the 

true owners do not have to use their name. That is why that employee of Nevada First uses his name, in order to keep the real 

owners anonymous. 

Nevada First will also allow a company to use Nevada First’s 

own business address and provide a company with mail forwarding 

and telephone services, all the bells and whistles needed to make 

a phony operation look like it is actually operating in Nevada. 

Nevada First told the Subcommittee it has already assigned 

1,850 addresses for so-called ‘‘suites’’ within its offices to the comVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
6

panies it has formed and at least 850 of those shell companies are 

still in operation. 

Now there is a picture here of that building where 850 companies 

have their offices. And you can see, just by the relationship to the 

automobiles in front of that building, that is truly a facade. There 

is no room in that building for 850 companies’ offices. It reminds 

me very much of that building in the Caymans where thousands 

of addresses were linked to a building that nobody ever went to or 

saw. 

The potential for abuse in this situation, where the companies do 

not actually operate out of these offices, is obvious. It is compounded by the fact that Nevada First is far from unique in offering these services, none of which by the way is illegal on its face. 

The key to this entire charade is the lack of any U.S. requirement 

to get the names of the true owners of the U.S. companies that are 

being formed. 

Law-enforcement officials testifying today are expected to describe how U.S. companies are being used for money laundering, 

drug sales, securities fraud, and other misconduct and how, in too 

many cases, when law-enforcement agents try to find out who the 

company owners are they run smack into a blank wall. In most 

cases, the States that set up the companies ask no questions about 

the true owners and therefore have no ownership information for 

law enforcement to investigate. 

Here are just a few examples of the problems that have resulted. 

Immigrations and Customs Enforcement officials reported that a 

Nevada-based corporation received more than 3,700 suspicious wire 

transfers totaling $81 million over 2 years but the case was not 

pursued because the Agency was unable to identify the corporation’s owners. The FBI told the GAO that anonymously held U.S. 

shell companies are being used to launder as much as $36 billion 

from the former Soviet Union. 

The FBI reported that they have 103 open cases investigating 

stock market manipulation, most of which involve anonymouslyheld U.S. shell companies. 

U.S. Treasury’s Financial Crimes Enforcement Network reported 

that between April 1996 and January 2004 financial institutions 

filed 397 suspicious activity reports involving a total of almost $4 

billion deposited in or wired through U.S. financial institutions by 

anonymously held U.S. shell companies. 

A Department of Justice report revealed that Russian officials 

used anonymously held shell companies in Pennsylvania and Delaware to unlawfully divert $15 million in international aid intended 

to upgrade the safety of former Soviet nuclear power plants. 

For decades, the leading international body fighting money laundering, called the Financial Action Task Force on Money Laundering has warned countries not to set up companies without first 

finding out who was really behind them. In a set of 40 recommendations that have become international benchmarks for 

strong and effective anti-money laundering laws, the Financial Action Task Force has urged countries to identify the beneficial owners of the companies that they establish. 

FATF recommendation number 33: Countries should ensure that 

there is adequate, accurate, and timely information on the beneVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
7

ficial ownership and control of legal persons—which includes companies—that can be obtained or accessed in a timely fashion by 

competent authorities. 

The United States is a leading member of that Financial Action 

Task Force. It has worked with that organization to convince countries around the world to comply with those 40 recommendations 

of that task force. 

Today even a number of offshore secrecy jurisdictions, such as 

the Caymans, Bahamas, Jersey, and the Isle of Man, at least obtain the information that is part of those recommendations. They 

comply with the recommendation to identify the owners of companies that they establish. But the United States does not comply 

and we were just formally cited for that failure in the year 2006 

in that task force review of U.S. anti-money laundering laws. 

So now we have 2 years to comply with recommendations that 

we supported in a task force that we helped create or else we risk 

expulsion from that task force. 

We should not need the threat of expulsion from that task force, 

which is aimed at ending the abuses of money laundering, to force 

us to address this problem. We ought to correct this problem for 

our own sake, to eliminate a gaping vulnerability to criminal misconduct. 

Criminals are using U.S. companies inside our borders to commit 

crimes. They are also using U.S. companies to commit crimes outside of our borders, which will not only give us a bad name but also 

means that U.S. companies are being used to facilitate crimes related to drug trafficking, financial fraud, corruption and other 

wrongdoing that harm our national interest. 

Four reports issued in the past year describe the law enforcement problems caused by U.S. companies with unknown owners, 

and these reports are described in my statement, which I will insert in the record in full. 

It is difficult to judge the scope of this law-enforcement threat 

since we do not know how many companies are involved in wrongdoing, but if just one-tenth of 1 percent of the 12 million existing 

U.S. companies are engaged in misconduct, that would mean that 

12,000 suspect companies are loose in this country and the world 

with no record of their beneficial ownership. That is an unacceptable risk to our national security and our treasury. 

Our lax standards have created real problems for our country in 

the international arena. The United States has been a leading advocate for transparency and openness. We have criticized offshore 

tax havens for their secrecy and lack of transparency. We have 

pressed them to change their ways. But look what is going on in 

our own backyard. The irony is that we do not suffer from a lack 

of transparency, there is just no information to disclose. And when 

other countries ask us for company owners, we have to stand redfaced and empty-handed. It undermines our credibility and our 

ability to go after offshore tax havens that help rob honest U.S. 

taxpayers. 

It also places us in the position of being in noncompliance with 

the guidelines of the very international organization promoting our 

message of openness and transparency. 

8

There are a number of possible solutions to this problem and we 

can perhaps explore them at the end of this hearing so that we can 

get on with the hearing. But we must address this problem for the 

sake of our law enforcement, for the sake of our security, and for 

the sake of our international reputation in trying to enforce laws 

which will promote transparency and attack money laundering and 

other crimes. 

Again, I want to thank our Chairman for the strong position that 

he has taken, for the support that he and his staff have provided 

for the partnership that they have always provided, and for maintaining a strong bipartisan reputation of this Subcommittee, which 

will continue in the years ahead. 

[The prepared statement of Senator Levin follows:]

PREPARED STATEMENT BY SENATOR CARL LEVIN 

In 2004, the United States was home to 12 million companies, including about 9 

million corporations and 3.8 million limited liability corporations or LLCs. In that 

year alone, our 50 states incorporated more than 1.9 million new corporations and 

LLCs. The vast majority of those companies operate legitimately. But a small percentage do not, functioning instead as conduits for organized crime, money laundering, securities fraud, tax evasion, and other misconduct. 

In most cases, our states have no idea who is behind the companies they have 

incorporated. A person who wants to set up a U.S. company typically provides less 

information than is required to open a bank account or get a driver’s license. In 

most cases, they don’t have to provide the name, address, or proof of identification 

of a single owner of the new company. That’s because our states have been competing with each other to set up new companies faster than ever, at less cost, and 

with greater anonymity for the company owners. 

Most U.S. states offer electronic services that incorporate a new company, and 

many will set up a new company in less than 24 hours. The median fee is less than 

$100. In Delaware and Nevada, for an extra $1,000, an applicant can set up a company in less than an hour. Colorado, which incorporates about 5,000 new companies 

each month, told the Subcommittee that it now sets up 99% of its companies by 

computer, without any human intervention or review of the information provided. 

Incorporating all these new companies generates annual revenues totaling hundreds 

of millions of dollars for the states. 

The problem with incorporating nearly two million new U.S. companies each 

year—without knowing anything about who is behind them—is that it becomes an 

open invitation for criminal abuse. Take a look at a few websites from firms in the 

business of incorporating companies around the world. [Show chart.] This website 

from an international incorporation company promotes setting up companies in 

Delaware by saying: ‘‘DELAWARE—An Offshore Tax Haven for Non US Residents.’’ 

One of the cited advantages is that ‘‘Owners’ names are not disclosed to the state.’’ 

Another website from a United Kingdom firm called ‘‘formacompany-offshore.com’’ 

lists a number of advantages to incorporating in Nevada. [Show chart.] The cited 

advantages include: ‘‘No I.R.S. Information Sharing Agreement’’ and ‘‘Stockholders 

are not on Public Record allowing complete anonymity.’’ These are just two of dozens of websites that portray our states as welcoming those who want to operate U.S. 

companies with anonymity. 

That type of anonymity is exactly what we’ve been criticizing offshore tax havens 

for offering to their clients. In fact, our last Subcommittee hearing lambasted offshore jurisdictions for setting up offshore corporations with secret U.S. owners engaged in transactions designed to evade U.S. taxes, leaving honest taxpayers to pick 

up the slack. 

Some U.S. company formation firms advertise the same type of anonymity and 

take the same type of actions that this Subcommittee has been criticizing in the offshore community for years. Take a look, for example, at a Nevada firm called Nevada First Holdings. Nevada First advertises on the Internet, offering for sale 

‘‘aged′′ or ‘‘shelf′′ companies that were set up in Nevada years earlier, pointing out 

that an older company can lend credibility to an operation. It sells these companies 

to anyone who can pay the price, without obtaining any information on the true 

owners of the companies, since it has no legal obligation to do so. 

Nevada First offers a host of services to further shield the identity of a company’s 

owners. For example, Nevada First employees can serve as a company’s nominee diVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
9

rectors or officers to enable the true owners to ‘‘retain a higher level of anonymity.’’ 

A Nevada First employee, acting as a company officer or director, can provide his 

own name and social security number to open a company bank account or obtain 

an Employer Identification Number from the IRS, so the true owners don’t have to. 

Nevada First will also allow a company to use Nevada First’s own business address, 

and provide the company with mail forwarding and telephone services—all the bells 

and whistles needed to make a phony operation look like it is actually operating in 

Nevada. Nevada First told the Subcommittee that it has already assigned 1,850 addresses for ‘‘suites′′ within its offices to the companies it has formed, at least 850 

of which are still in operation. None of those companies, of course, actually operates 

out of those offices. The potential for abuse in this situation is obvious, and is compounded by the fact that Nevada First is far from unique in offering these services—

none of which, by the way, is illegal on its face. Key to this entire charade is the 

lack of any U.S. requirement to get the names of the true owners of the U.S. companies being formed. 

Law enforcement officials testifying today are expected to describe how U.S. companies are being used for money laundering, drug sales, securities fraud, and other 

misconduct, and how, in too many cases, when law enforcement agents try to find 

out the company owners, they run smack into a blank wall. In most cases, the states 

that set up the companies asked no questions about the true owners and therefore 

have no ownership information for law enforcement to investigate. Here are a few 

examples of the problems that have resulted:

• Immigration and Customs Enforcement officials reported that a Nevada-based 

corporation received more than 3,700 suspicious wire transfers totaling 

$81million over 2 years, but the case was not pursued, because the agency 

was unable to identify the corporation’s owners. • The FBI told GAO that anonymously-held U.S. shell companies are being 

used to launder as much as $36 billion from the former Soviet Union. The 

FBI also reported that they have 103 open cases investigating stock market 

manipulation,most of which involve anonymously-held U.S. shell companies. • The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) reported that, between April 1996 and January 2004, financial institutions filed 

397suspicious activity reports involving a total of almost $4 billion deposited 

in or wired through U.S. financial institutions by anonymously-held U.S. shell 

companies. • A Department of Justice report revealed that Russian officials used anonymously-held shell companies in Pennsylvania and Delaware to unlawfully divert $15million in international aid intended to upgrade the safety of former 

Soviet nuclear power plants.

For decades, the leading international body fighting money laundering, called the 

Financial Action Task Force on Money Laundering or FATF, has warned countries 

not to set up companies without first finding who is really behind them. In a set 

of 40 recommendations that have become international benchmarks for strong and 

effective anti-money laundering laws, FATF has urged countries to identify the beneficial owners of the companies they establish. Recommendation 33 states: ‘‘Countries should ensure that there is adequate, accurate and timely information on beneficial ownership and control of legal persons’’—that includes companies—‘‘that can 

be obtained or accessed in a timely fashion by competent authorities.’’

The United States is a leading member of FATF and has worked with that organization to convince countries around the world to comply with FATF’s 40 recommendations. Today, even a number of offshore secrecy jurisdictions such as the 

Cayman Islands, Bahamas, Jersey, and Isle of Man comply with the recommendation to identify the owners of the companies they establish. But the United States 

doesn’t comply, and we just got formally cited for that failure in a 2006 FATF review of U.S. anti-money laundering laws. We now have two years to comply, or we 

risk expulsion from FATF which, by the way, the United States was instrumental 

in forming. 

We shouldn’t need the threat of expulsion from FATF to force us to address this 

problem. We should correct it for our own sake, to eliminate a gaping vulnerability 

to criminal misconduct. Criminals are using U.S. companies inside our borders to 

commit crimes. They are also using U.S. companies to commit crimes outside of our 

borders, which not only gives us a bad name but also means U.S. companies are 

being used to facilitate crimes related to drug trafficking, financial fraud, corruption, and other wrongdoing that harm our national interest. 

Four reports issued in the past year describe the law enforcement problems posed 

by U.S. companies with unknown owners. The first is the U.S. Money Laundering 

Threat Assessment, a joint report issued in December 2005 by the Departments of 

10

Justice, Treasury, Homeland Security, and others, to identify the most significant 

money laundering problems we face. It devotes an entire chapter to law enforcement 

problems caused by anonymously-held U.S. shell companies and trusts. Next was 

the April 2006 report prepared by the Government Accountability Office (GAO) at 

the request of the Subcommittee, entitled Company Formations: Minimal Ownership 

Information Is Collected and Available, which reviewed the laws of all 50 states, determined that most states have no information on the true owners of the companies 

being set up within their borders, and described a variety of related law enforcement concerns. A third report, issued in June 2006 by FATF, entitled the Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of 

Terrorism: United States of America, criticizes the United States for failing to obtain 

beneficial ownership information for U.S. companies and flatly states that the U.S. 

is not in compliance with this FATF standard. Most recent is a report released last 

week by the Department of Treasury’s Financial Crimes Enforcement Network 

which focuses squarely on the problem of LLCs with unknown owners. 

Together, these four reports paint a picture of rogue U.S. companies breaking 

laws inside and outside of U.S. borders, operating with inadequate government 

records that make it hard for law enforcement to find the companies’ true owners, 

conduct investigations, and cooperate with international requests. It is difficult to 

judge the scope of this law enforcement threat, since we don’t know how many companies are involved in wrongdoing. But if just one-tenth of one percent of the 12 

million existing U.S. companies are engaged in misconduct, that means about 

12,000 suspect companies are loose in this country and the world with no record 

of their beneficial ownership. That’s an unacceptable risk to our national security 

and our treasury. 

Our lax standards have also created problems for our country in the international 

arena. The United States has been a leading advocate for transparency and openness. We have criticized offshore tax havens for their secrecy and lack of transparency, and pressed them to change their ways. But look what’s going on in our 

own backyard. The irony is that we don’t suffer from lack of transparency—there 

is just no information to disclose. And when other countries ask us for company 

owners and we have to stand red-faced and empty-handed, it undermines our credibility and our ability to go after offshore tax havens that help rob honest U.S. taxpayers. It also places us in the position of being in non-compliance with the guidelines of the very international organization promoting our message of openness and 

transparency. 

There are many possible solutions to this problem if we have the will to act. 

FinCEN is considering issuing new regulations requiring company formation agents 

to establish risk-based anti-money laundering programs which would require careful 

evaluations of requests for new companies made by high-risk persons. Another approach would be for Congress to set minimum standards, so that no state would be 

placed at a competitive disadvantage when asking for the name of a company’s true 

owners. This nationwide approach would also ensure U.S. compliance with international anti-money laundering standards. Still another approach would be to expand on the work of a few states which already identify some ownership information, and ask the National Conference Committee on Uniform State Laws to 

strengthen existing model state incorporation laws by including requirements for 

beneficial ownership information, monetary penalties for false information, and annual information updates. 

These and other solutions become possible only if we are first willing to admit 

there is a problem. I thank our Chairman, Senator Coleman, for his and his staff’s 

strong support of this effort and for their ongoing work to help find solutions to the 

law enforcement problems created by anonymously-held U.S. companies.

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Thank you, Mr. Chairman. 

Senator LEVIN. Almost. 

Senator CARPER. The once and future king. 

Thank you, Mr. Chairman, and to Chairman Coleman as well, 

first of all for your diligence on your issue. 

I want to welcome our witnesses today. Thank you for joining us 

and for your input. 

I want to thank both Senator Levin and his staff and the Chairman of the Subcommittee for working closely with my staff, with 

11

our Secretary of State’s office in Dover, Delaware as you studied 

this topic and put this hearing together. 

As some of you may know, this is an important issue in my 

State. Business in corporations and related fees account for roughly 

25 percent of Delaware’s general fund revenues. We have been successful, as Delaware Assistant Secretary of State Rick Geisenberger is going to put out later today, I think for a number of reasons. We have a very highly regarded judicial system and a commitment to excellence on the part of our elected leaders and Mr. 

Geisenberger and his staff, on the part of their predecessors as 

well. I continue to be proud that Delaware is the leading home of 

incorporations for businesses in this country. 

I am also proud that Delaware has also been a leader in addressing some of the issues and the concerns that we are going to be 

discussing here today. In fact, our General Assembly passed legislation earlier this year that strengthens qualification standards for 

the firms that help businesses to organize or register under Delaware State law. 

I hope we can come away from this hearing later today with a 

number of constructive ideas from Delaware and elsewhere on how 

we can prevent the varying State laws on business formation from 

being abused. Whatever solutions that we do pursue, it is important that we are careful though not to hinder legitimate business 

activity. 

There are a number of reasons for us to encourage more transparency with respect to who is really in control of a business that 

might form in Delaware or might form in Michigan or might form 

in Minnesota. At the same time, we need to recognize that the vast 

majority of businesses set up in most States are created with absolutely no intention whatsoever of breaking the law. We do not want 

to do anything that would put so many burdens on legitimate business and the people in State Governments across the country who 

work with them that we see less economic activity and less job creation as a result. 

So to my friend, Senator Levin, and to our Chairman, Chairman 

Coleman, I just want to say thanks again. Thank you for your commitment to getting to the bottom of this problem and for working 

constructively to find the right solutions or maybe the right set of 

solutions as we attempt to address them today and in the months 

ahead. 

Thanks very much. 

Senator LEVIN. Thank you very much, Senator. 

We will now proceed to swear in our first panel. 

I want to welcome the four witnesses, Stuart Nash, the Department of Justice’s Associate Deputy Attorney General and Director 

of the Organized Crime Drug Enforcement Task Force; Steven Burgess, the Director of Examination of the Small Business/Self-Employed Division of the IRS; Yvonne Jones, Director of the Government Accountability Office’s Financial Markets and Community Investment Team; and finally, Jamal El-Hindi, the Associate Director 

for Regulatory Policy and Programs of the Financial Crimes Enforcement Network, FinCEN. 

I welcome each of you here today. We look forward to your testimony. 

12

1The prepared statement of Mr. Nash appears in the Appendix on page 49. 

Pursuant to Rule 6 of the Subcommittee, all witnesses who testify before the Subcommittee are required to be sworn. At this 

time, I would ask each of you to please stand and raise your right 

hand. 

Do you swear the testimony you will give before this Subcommittee will be the truth, the whole truth, and nothing but the 

truth, so help you God. 

Mr. NASH. I do. 

Mr. BURGESS. I do. 

Ms. JONES. I do. 

Mr. EL-HINDI. I do. 

Senator LEVIN. Thank you all. 

We will be using a timing system today. Approximately one 

minute before the red light comes on you will see the light change 

from green to yellow, which would give you an opportunity to conclude your remarks. We ask that each if you limit your testimony 

to not more than 5 minutes to give us a chance to ask questions 

and to have time for the second panel. Your written testimony will 

be printed in the record in its entirety. 

Mr. Nash, we will have you go first, followed by Mr. Burgess, 

then Ms. Jones, then Mr. El-Hindi. Thank you, Mr. Nash. 

TESTIMONY OF STUART G. NASH,1 ASSOCIATE DEPUTY ATTORNEY GENERAL AND DIRECTOR, ORGANIZED CRIME DRUG 

ENFORCEMENT TASK FORCE, U.S. DEPARTMENT OF JUSTICE 

Mr. NASH. Thank you. My thanks to Chairman Coleman, to Senator Levin, and to all the Members of the Subcommittee. I am 

pleased and honored to appear before you today to discuss an important topic, the abuse of the company formation process in this 

country, especially in the context of the highly informative report 

that this Subcommittee commissioned from GAO earlier this year. 

In the time that I have this afternoon, I would like to address 

how the abuse of the corporate formation process in this country 

has had a negative impact on our law enforcement efforts here and 

abroad. Corporate vehicles play an important and legitimate role in 

the global economy. Nevertheless, they may be used for illicit purposes, including money laundering, corruption, financing of terrorism, insider dealing, tax fraud, and other illegal activities. 

The use of shell corporations to facilitate criminal schemes has 

evolved over time. Initially, in the 1970s and 1980s, criminals 

opened shell corporations and trusts in offshore jurisdictions to conceal their ownership of assets. They would then open bank accounts in the United States and abroad in the names of these corporations or trusts. 

As banks and law enforcement began to scrutinize off-shore shell 

corporations more closely, criminals realized that they could obtain 

some of the same benefits of offshore corporations from U.S. domestic shell corporations with the added benefit that the U.S. corporations would not receive the same level of scrutiny. 

The recent prosecution of Garri Grigorian illustrates this development. In the Grigorian case, a 43-year-old Russian national 

laundered $130 million on behalf of the Moscow-based Intellect 

13

Bank and its customers through bank accounts located in the small 

town of Sandy, Utah. As part of the scheme, Grigorian and his associates established three U.S. shell companies and then opened 

bank accounts in Utah in the names of these companies. The shell 

companies never did any actual business. They existed merely to 

provide a veil of legitimacy to explain the huge amount of money 

flowing through the U.S. accounts. 

When Federal investigators tried to identify the beneficial owners behind these shell corporations, they learned that records from 

the pertinent Utah State agency provided only limited details. Public documents for two of the companies provided no information 

about the beneficial owners of the companies. While the records of 

the third company did identify an owner, no address other than 

Moscow, Russia was listed for that owner. 

Subsequent investigation revealed that this so-called owner was 

nothing more than a straw owner in any case. State law imposed 

no obligation on anyone to verify in any way the information provided during the company formation process. 

It was only because the true owners established bank accounts 

in the names of the shell companies, and the fact that the bank 

maintained information that was not maintained by the State 

agency, that the true perpetrators of this scheme were eventually 

identified. 

The use of domestic shell corporations has continued to evolve. 

After the implementation of enhanced customer identification requirements that resulted from the USA PATRIOT Act, U.S. banks 

began to require more information about domestic corporations 

that opened accounts at their institutions. This additional scrutiny 

resulted in the most recent phenomenon, whereby criminals, domestic and foreign, are opening shell corporations in the United 

States and then opening bank accounts on behalf of these shell corporations in foreign countries where U.S.-based corporations have 

an aura of legitimacy and where U.S. anti-money laundering regulations do not apply. 

Not only has the use of U.S. shell corporations hampered our 

ability to conduct our own criminal investigations, it has also frustrated our ability to assist foreign law enforcement agents. In cases 

where criminals use U.S.-based shell corporations to open foreign 

bank accounts, a foreign law enforcement agency investigating a 

crime within its jurisdiction may obtain information about the foreign bank that identifies a U.S. corporation as the account holder. 

Having identified a U.S. corporation, the foreign agency will seek 

assistance from the United States, most commonly through a Mutual Legal Assistance Treaty request to identify the beneficial owners of a U.S. shell corporation. 

Our Office of International Affairs (OIA) has received an increasing number of incoming requests for assistance involving U.S. shell 

corporations. In 2004, for example, OIA received 198 legal assistance requests from Eastern European countries, of which 122 involved requests related to U.S. shell corporations. In 2005, these 

figures increased to 281 requests, of which 143 involved U.S. shell 

corporations. In most of these cases OIA, has had to respond by 

saying that the information about the beneficial owners of these 

U.S. shell corporations was simply unavailable. 

14

1The prepared statement of Mr. Burgess appears in the Appendix on page 75. 

Finally, I would like to address the impact of our corporate formation policies on our standing and reputation in the global community. In June 2006, the Financial Action Task Force (FATF), the 

preeminent multilateral group that addresses worldwide money 

laundering issues, presented its evaluation of the U.S.’s anti-money 

laundering regime. 

Its evaluation confirmed that the United States had strong and 

effective money laundering laws, some of the strongest in the 

world. Nonetheless, FATF found that the U.S. anti-money laundering regime was noncompliant in areas implicated by today’s 

hearing, including the States’ collection and maintenance of information related to the beneficial ownership of companies formed in 

the United States. 

Many foreign jurisdictions, including several that have in the 

past developed reputations as money-laundering havens, have 

taken steps in recent years to bring themselves into compliance 

with FATF recommendations in this area. 

I conclude by expressing the gratitude of the Department of Justice for the continuing support that this Subcommittee has demonstrated to anti-money laundering enforcement. The Department 

believes that both the Federal Government and the States must 

continue to strengthen and adapt our anti-money laundering laws 

to confront new challenges in drug trafficking, terrorist financing, 

white-collar crime, and all other forms of criminal activity that generate or utilize illegal proceeds. 

We look forward to working alongside our Treasury and Homeland Security colleagues, with this Subcommittee, and with Congress as a whole to address the issues identified at this hearing. 

Thank you and I would welcome any questions you might have. 

Senator COLEMAN [presiding]. Thank you, Mr. Nash. Mr. Burgess. 

TESTIMONY OF K. STEVEN BURGESS,1 DIRECTOR OF EXAMINATIONS, SMALL BUSINESS/SELF EMPLOYED DIVISION, INTERNAL REVENUE SERVICE, ACCOMPANIED BY ROBERT 

NORTHCUTT, ACTING DIRECTOR, ABUSIVE TRANSACTIONS 

OFFICE, SMALL BUSINESS/SELF EMPLOYED DIVISION, INTERNAL REVENUE SERVICE 

Mr. BURGESS. Good afternoon, Chairman Coleman, Ranking 

Member Levin, and other Members of the Subcommittee. I am accompanied this afternoon by Robert Northcutt, the Acting Director 

of Small Business/Self Employed Abusive Transactions Office. He 

has first-hand knowledge of some of the issues that will be discussed this afternoon and will also be available for questions. 

This Subcommittee has a long and distinguished history of investigating abuses of the tax code. Last August we held an important 

hearing regarding offshore tax shelters. But as you are already well 

aware, it is not just the secrecy laws in these foreign tax havens 

that can be exploited by persons to evade taxes or conceal transactions. Within our own borders, the laws of some States regarding 

the formation of legal entities have significant transparency gaps 

15

which may even rival the ownership secrecy afforded in the most 

attractive offshore tax havens. 

This domestic transparency gap is an impediment to both U.S. 

law enforcement and the enforcement of the tax laws in other countries. The lack of transparency inherent in shell companies, whether in the form of corporations, trusts, limited liability companies or 

other entities, enables countless numbers of taxpayers to hide their 

noncompliance behind a legal entity. This noncompliance would include such things as the non-filing of proper returns and the concealment of taxable income. 

State laws govern the legal formation of business entities within 

respective State boundaries as well as the informational and reporting requirements imposed on such entities. While requirements 

vary from State to State, in each instance a minimal amount of information is required in order to form the new entity. Generally, 

information concerning the beneficial ownership of the entity is not 

required. 

The money-laundering threat assessment, issued jointly by several government law-enforcement agencies late last year, cited 

three States as being the most accommodating jurisdictions for the 

organization of these legal entities: Delaware, Nevada, and Wyoming. 

From an IRS perspective, we see two major problems arise as we 

investigate companies registered in these States. First, Nevada and 

Wyoming are the only two States that permit bearer shares, which 

are very effective in hiding corporate ownership. Bearer shares are 

issued by the corporation upon formation and actually deem ownership of the corporation to the holder of the shares. To determine 

ownership, one must actually find who has physical possession of 

these shares. 

Second, the use of nominee officers in Nevada and Wyoming also 

make it easy for noncompliant taxpayers to establish a corporation 

and remain completely anonymous. While most States require that 

corporate officers have some meaningful relationship to the corporation, that is not required in Nevada and Wyoming. 

We have authorized several investigations into promoters of Nevada corporations and resident agents. These investigations have 

revealed widespread abuse as well as problems in curtailing it. For 

example, our office has obtained client lists. They are being used 

as a source for potential non-filer audits. An initial sampling of the 

client list reflected a range of 50 to 90 percent of those listed were 

currently or have been previously noncompliant with Federal tax 

laws. 

We have also seen instances where a promoter advises its clients 

to place their stock ledger and bearer shares in an offshore entity, 

thereby further ensuring that the identity of the beneficial owners 

remains anonymous, thus thwarting a Nevada requirement that 

the resident agents know the location of the stock ledger. If asked 

who owns a particular entity, the resident agent can say that all 

he or she knows is that it is owned by an entity in an offshore 

country. 

There is also a problem for our tax treaty partners. Most of the 

tax treaty requests for exchange of information involving U.S. shell 

companies are received from Eastern European countries and the 

16

1The prepared statement of Ms. Jones appears in the Appendix on page 83. 

Russian Federation. These U.S. shell companies, organized mainly 

in Delaware, Nevada, Arkansas, Oklahoma, and Oregon, are used 

extensively in Eastern Europe and the Russian Federation to commit value-added tax or VAT fraud. While assisting as much as we 

can, we are generally unable to determine the beneficial owner of 

these U.S. shell companies. 

Moving forward, we are looking at a number of strategies to target the widespread tax noncompliance by many of the shell companies represented by resident agents and promoters. One of the key 

elements is the establishment of an issue management team (IMT), 

similar to teams we have formed in other significant areas of potential noncompliance. We also expect to continue audits of both 

promoters and their clients. We may also consider utilization of 

John Doe summonses to promoters similar to what we did with the 

credit card issuers that issued cards to offshore customers. 

We will continue coordinating our efforts with those of other Federal agencies. The lack of corporate transparency is a problem for 

many governmental agencies, including the FBI, FinCEN, and the 

Department of Homeland Security. 

In summary, Mr. Chairman, the issue of disguised corporate 

ownership is a serious one for the IRS in terms of its ability to enforce the tax laws and our efforts to reduce the tax gap. Our experience has shown us that the clearer the transaction and the identity 

and the role of the parties to that transaction, the higher the rate 

of compliance with the tax laws and the anti-money-laundering 

statutes. 

I appreciate the opportunity to be here this afternoon, and Robert and I will be happy to respond to any questions you may have. 

Senator COLEMAN. Thank you very much, Mr. Burgess. Ms. 

Jones. 

Senator LEVIN. I wonder if I could just interrupt Ms. Jones for 

one minute? I know that I am speaking for all of us in thanking 

the GAO for this report, which really lays out the problems in very 

clear detail. The Government Accountability Office, as always, has 

performed an absolutely essential function for the Senate and we 

are grateful to you. 

TESTIMONY OF YVONNE D. JONES,1 DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT TEAM, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. JONES. Thank you very much, Senator. 

Mr. Chairman and Members of the Subcommittee, we are here 

today to talk about the information that is available on the ownership and management of non-public companies, corporations, and 

limited liability companies, LLCs. The majority of companies in the 

United States are legitimate businesses that carry out an array of 

vital activities. But companies can be used for illicit purposes like 

money-laundering or shielding assets from creditors. Government 

and international reports have said that shell companies have become popular tools for criminal activity because people owning or 

managing the company cannot easily be identified. 

17

1The chart referred to appears in the prepared statement of Ms. Jones in the Appendix on 

page 84. 1Figure 2 referred to appears in the prepared statement of Ms. Jones in the Appendix on page 

91. 

In my statement today, I will talk about three main points. First, 

I will describe the ownership information that States collect and 

their efforts to review and verify it. Next, I will address the concerns of law enforcement agencies about how those companies are 

used to hide illicit activities. I will also discuss how information on 

those companies or the lack of it can affect investigations. Finally, 

I will discuss the implications requiring that States and others collect information on the owners of companies formed in each State. 

Please look at the chart to your left on ownership information 

that States collect.1 As you can see in figure one, in the map on 

the left, all States that are colored white did not require ownership 

information in the articles of incorporation. For periodic reports 

like annual reports, please look at the map on the right. None of 

the States that are colored white ask for ownership information in 

the reports. 

Now please look at our next figure, which is Figure 2.1 Figure 

2 is the management information that States require on articles 

and periodic reports. In the map on the left more than half of all 

States, the white ones, do not ask for management information in 

the articles of incorporation. Roughly 25 percent of the States, the 

gray ones, require this information for LLCs only. For periodic reports, the map on the right shows that 28 States, the black ones, 

require management information for corporations and LLCs. 

Roughly a third of the States, the gray ones, require management 

information for corporations only. 

Besides States, third-party agents collect information on companies for billing and for sending legal and tax documents. Most 

agents told us that they rarely collect information because the 

States do not require them to, and the States do not ask them to 

verify the information they collect. 

A few agents said that they verify identities by asking for passports or checking against the OFAC lists. 

States themselves do not review filings to verify identities. They 

review findings for accuracy of the information they request on applications. 

Besides States and agents, a few other places might have information on company ownership and company management. Financial institutions have some information but they said that they already have significant reporting requirements to their regulators. 

The IRS is also a potential source but it does not have information 

on all companies. Also, statutes prevent sharing of some IRS information with law enforcement agencies. 

Law enforcement agencies, we learned, feel some sense of frustration because they are unable to collect information that they 

need from the States and from third-party agents for many of the 

reasons that have been mentioned earlier. 

Occasionally law-enforcement agencies can collect relevant information from State websites or articles of incorporation and sometimes they may find information about agent clients. Occasionally, 

some of the owners of these companies actually put their names 

18

1The prepared statement of Mr. El-Hindi appears in the Appendix on page 107. 

and addresses on their incorporation documents or in their periodic 

reports. 

To summarize, any requirement that States, agents, or both collect more ownership information would need to balance these conflicting concerns between law-enforcement officials, States, and 

agents. Those conflicting concerns include potentially increased 

costs that the States or the agents might incur if they had to collect 

more information. It might also require, in some States, that State 

statutes be changed. It may also require that data collection systems be changed in some States. 

What would need to happen is that the conflicting concerns between law-enforcement officials and States and agents would need 

to be balanced and any changes would need to be uniformly applied 

in all U.S. jurisdictions. Otherwise, people wanting to set up shell 

companies for illicit activities could simply move to the jurisdiction 

with the fewest obstacles. This would undermine the intent of the 

requirements. 

Mr. Chairman, this concludes my prepared statement. I would be 

happy to respond to any questions that you or other Members of 

the Subcommittee may have at this time. 

Senator COLEMAN. Thank you, Ms. Jones. Mr. El-Hindi. 

TESTIMONY OF JAMAL EL-HINDI,1 ASSOCIATE DIRECTOR FOR 

REGULATORY POLICY AND PROGRAMS, FINANCIAL CRIMES 

ENFORCEMENT NETWORK, VIENNA, VIRGINIA 

Mr. EL-HINDI. Thank you. Chairman Coleman, Senator Levin 

and distinguished Members of the Subcommittee, thank you for the 

opportunity to appear before you today to discuss the Financial 

Crimes Enforcement Network’s (FinCEN) ongoing efforts to address money laundering and terrorist financing concerns associated 

with the lack of transparency in the ownership of certain legal entities. 

We appreciate the Subcommittee’s interest in this important 

issue and your continued support of our efforts to help prevent illicit financial activity. 

I am also pleased to be testifying with my colleagues from the 

Department of Justice and Internal Revenue Service. Each of these 

agencies plays an important role in the global fight against money 

laundering and terrorist financing, and our collaboration on these 

issues has greatly improve the effectiveness of our efforts. 

FinCEN’s mission is to safeguard the financial system from the 

abuses of financial crime, including terrorist financing, money 

laundering, and other illicit activity. Key to our mission is the promotion of transparency in the U.S. financial system so that moneylaundering, terrorist financing, and other economic crime can be 

deterred, detected, investigated, prosecuted, and ultimately prevented. Our ability to work closely with our regulatory, law-enforcement and international partners assists us to achieve consistency across our regulatory regime and consequently to better protect the U.S. financial system. 

As mentioned in my written testimony, FinCEN has been evaluating the vulnerabilities to the financial system by the misuse of 

19

legal entities. While a lack of detailed reporting or disclosure requirements under most State laws allows for expeditious formation 

of legal entities, this practice poses potential risks for money laundering and other financial crime. 

In response to concerns raised by law-enforcement regulators and 

financial institutions regarding the lack of transparency associated 

with the formation of shell companies, FinCEN prepared an internal report in 2005 on the role of domestic shell companies, and particularly LLCs, in financial crime and money laundering. An updated version of this report was publicly released last week. 

The study concludes that the lack of transparency in the formation process of shell companies, the absence of owner disclosure requirements, and the ease of formation of these legal entities make 

these corporate vehicles attractive to financial criminals to launder 

money or conduct illicit financial activity. This, in turn, poses 

vulnerabilities to the financial system both domestically and internationally. 

That is why finding a way to address the misuse of legal entities 

in the context of the Bank Secrecy Act has been and continues to 

be a priority for FinCEN. 

FinCEN is undertaking three key initiatives to deal with and 

mitigate the risks associated with misuse of legal entities. Concurrent with the findings of our report, FinCEN issued an advisory to 

financial institutions highlighting indicators of money laundering 

and other financial crime involving shell companies. The advisory 

emphasizes the importance of identifying, assessing, and managing 

the potential risks associated with providing financial services to 

such entities. 

FinCEN is continuing its outreach efforts and communication 

with State governments and trade groups for corporate service providers to explore solutions that would address vulnerabilities in the 

State incorporation process, particularly the lack of public disclosure and transparency regarding beneficial ownership of shell companies and similar entities. 

Finally, FinCEN is continuing to collect information and studying how best to address the role of certain businesses specializing 

in the formation of business entities and what role they might play 

in addressing the vulnerabilities that are the subject of this hearing. 

In conclusion, Mr. Chairman, we are grateful for your leadership 

and that of the other Members of this Subcommittee on this issue, 

and we stand ready to assist in continuing efforts to ensure the 

safety and soundness of our financial system. 

Thank you for the opportunity to appear before you today. I look 

forward to any questions you have regarding my testimony. 

Senator COLEMAN. Thank you very much, Mr. El-Hindi. 

You indicated that money-laundering and terrorist financing are 

the concerns, I just want to reiterate that. These are national security issues that are raised by the lack of transparency; is that correct? 

Mr. EL-HINDI. That is correct. 

Senator COLEMAN. Ms. Jones, you indicate that a majority of 

companies are certainly legitimate. This is not casting an aspersion. But the challenge then becomes, and the challenge of the SubVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
20

committee is how do we deal with the potential for abuse out there 

because of the lack of information? Mr. Burgess talks about the 

connection between transparency and accountability. If we had 

more transparency, we would get compliance. 

I would presume on the next panel we are going to hear from 

folks who are going to talk about the importance of speed in these 

transactions and the fact that most companies are legitimate. 

Help me figure out a way, I am trying to figure out a way that 

we work through this. Are there specific changes in Federal law 

that could be made. If you were in a position to simply change an 

existing statute, what would be the change that you would make 

to increase the measure of transparency, accountability, and compliance without undermining some of the business concerns that 

have been raised? Whoever wants to respond to that. To me, that 

is the $64,000 question. 

Mr. NASH. Mr. Chairman, I think you are right, that is the 

$64,000 question. And we are not yet in a position to propose specific statutory fixes. I think, as you pointed out in your opening 

statement, there are a number of interests that need to be balanced 

here. And I do not want to minimize for a second the problem. The 

problem, from a law enforcement perspective, is a hugely significant problem and we are having investigations, and important investigations, that are hitting brick walls because there is no one 

out there that has the information regarding beneficial ownership 

that we need to pursue those investigations. 

But certainly balanced against the magnitude of the problem are 

issues related to both federalism concerns with respect to the 

States, this has been traditionally an area that States have regulated at that level. And so I think a Federal response should be 

viewed as the last alternative, and we are not quite there yet to 

say that we are ready for the last alternative. 

And then the third group of concerns is, of course, the fact that 

the vast majority of these corporate institutions are legitimate 

business institutions, and we would not want to be doing anything 

to disrupt the formation of legitimate businesses for legitimate 

commercial activities. 

Senator COLEMAN. I want to just, if I can though, push back a 

little bit. And by the way, it is not just hitting a brick wall in our 

investigations, but it is impacting our relationships with other 

countries. Other folks are coming in and saying hey, can you give 

us information? Our answer is no, because we do not have it. 

Mr. NASH. That is absolutely right. 

Senator COLEMAN. I am still going to ask you to respond to my 

question for specific changes, but I will throw one additional question on the table. I understand the sensitivity about a Federal response, but it seems from what we have been looking at, reading 

the various reports, that one of the problems you have, absent a 

Federal uniform standard, is that the States who step forward to 

be accountable put themselves at a financial disadvantage. Is there 

a need for minimal Federal standards? 

Are there some things that we can do at the Federal level that 

would provide a level playing field, would help us in our ability to 

get greater transparency, but would not undermine legitimate business activity? Mr. Burgess, would you want to offer anything here? 

21

Mr. BURGESS. I echo the comments of my colleague. I think the 

sensitivity is while we have been discussing a number of issues, 

there are not any one thing that I can propose. I would venture to 

say it is probably going to be a combination of a lot of factors. I 

heard one of my other colleagues from FinCEN talk about outreach. I know that there is efforts by the States in terms of understanding the problems it presents. 

So I would venture to say there is probably no one solution. But 

I can say, not being in the policy arm of the IRS, I am not able 

today to offer you a recommendation. 

Senator COLEMAN. Thank you. Ms. Jones. 

Ms. JONES. Mr. Chairman, as you and the other Members of the 

Subcommittee are aware, our work actually focused on how companies are formed in each State and identifying the information 

which is currently collected. Given the State/Federal issue, it was 

actually outside the scope of our work to look at other possible options or changing existing laws. 

Senator COLEMAN. And I understand the hesitancy. I am asking 

you to rely upon your own good common sense, without putting you 

at risk in terms of policy for department or anything. You have 

looked at the problem. You have studied the problem. I am just trying to get a little guidance here of a couple of things that we can 

put on the table and then we will ultimately sort it out ourselves. 

Mr. El-Hindi, do you want to be a little bolder here? 

Mr. EL-HINDI. I think what we are focusing on are the things 

that we can actually do within the existing statutory framework. 

And we have identified some things that we can do. Outreach and 

changing the culture of what is going on in the United States is 

key, and making sure that people are aware how these vehicles can 

be misused. 

We also will be considering a regulatory approach in terms of 

trying to work with the Bank Secrecy Act and identifying ways in 

which its promotion of transparency and the entities covered under 

that could be used, as well. 

You mentioned the issue of change in laws. One of the things 

that we point out in our study, in our preliminary study, is our preliminary assessment of the laws in place right now. Our study indicates that the States changing those laws to increase transparency 

does not necessarily lead to a flight away from those jurisdictions. 

Senator COLEMAN. Thank you, Mr. El-Hindi. Senator Levin. 

Senator LEVIN. I would like to ask you to be a lot bolder, frankly. 

This has been a problem for how long, Mr. Nash? 

Mr. NASH. Well, there has never been a regime in place where 

beneficial ownership——

Senator LEVIN. I am talking about law-enforcement’s problem in 

getting information it needs. How long has that been a problem? 

Mr. NASH. I think it has been a problem since at least the late 

1970s and probably before. 

Senator LEVIN. With the IRS, Mr. Burgess, how long has this 

been a problem? 

Mr. BURGESS. I think the first State to pass that statute was in 

1977. So I would say starting from that point forward. 

Senator LEVIN. When can we expect some recommendations from 

the Executive Branch to get at this problem, which is we cannot 

22

determine who the real owners are of corporations. Therefore, they 

not only escape tax liability but it opens up the misuse of corporations to abuse, to money laundering and so forth. When can we expect some specific recommendations from your agencies? 

Mr. NASH. There has been a multi-agency task force that was set 

up right in the wake of the FATF finding that found us non-compliant with respect to Recommendation 33. They are in the midst of 

putting together their thoughts on this and coming up with a recommendation. I cannot give you a time frame as to when their 

work will be completed, but I do not want you to come away from 

this with the impression that this is a matter that the Administration is throwing up their hands and identifying the problem and 

not going to be in a position to come forward with recommendations. I fully expect we will have recommendations. I just do not 

have them for you today. 

Senator LEVIN. Could you give us some kind of an idea as to 

when those recommendations would be forthcoming? 

Mr. NASH. Other then to tell you that the time frame that FATF 

has given us to come within compliance is—they are going to look 

again at us in 2 years. And so clearly we want to be in a position 

to present any recommendations to Congress well in advance of 

that 2-year time frame. I would expect you could expect something 

within the next calendar year. 

Senator LEVIN. Mr. Burgess, when is the IRS going to give us 

some recommendations to address this law-enforcement problem 

which you and Mr. Nash have very appropriately described as a 

very significant law-enforcement problem? 

Mr. BURGESS. Senator, one of the things we have underway, as 

I mentioned in my testimony, is an issue management team. And 

that is a collection of issue specialists from every realm. And what 

we are doing is looking into the scope of this, trying to basically 

size the problem up from every angle. 

One of the outcomes of that team would be recommendations 

going forward through our legislative channels through Treasury. 

As to an exact time frame when they will work their way to this 

Subcommittee, I cannot give you an exact time. Hopefully, it would 

be some time during the next year, in terms of those being obviously shared with Treasury. There is a lot of discussion. 

One thing I might share with you—I know there was some preliminary discussion in preparation, and we have given a lot of 

thought to this—about things that we could currently do? One of 

the suggestions was requiring when someone requests an Employee 

Identification Number to also reveal who the beneficial owner is. 

There is a lot of merit to that, but when you look at it, it is not 

quite so simple. First of all, all of these entities did not have to 

have an Employer Identification Number. The second thing is ownership of these entities changes. We have no way of tracking ownership. Some of the things that I described in my testimony, like 

the bearer shares and some of the other things, are frequent by 

changing. 

The third problem, as Ms. Jones discussed in her testimony, is 

that the information would become part of tax-related information. 

Certainly under Section 6103, it could not be freely disclosed. So 

what I am saying is sometimes under the surface of things, it is 

23

not quite so simple. But we are definitely pursuing the issue and 

there is much discussion going on in terms of ideas we can hopefully advance to you. 

Senator LEVIN. There is always complexity to issues. There is not 

an issue that I know of that we deal with that is not complex. But 

you have been dealing with this problem for two decades or more. 

I think the people who pay taxes in this country and who are 

abused by money laundering and who are less secure because of 

the abuses of money laundering and other problems have a right 

to our agencies and to us acting. And it is not good enough, frankly, to simply say you are studying it and it is complex. Been there, 

done that. 

I think we ought to expect from your agencies some kind of an 

estimate as to when we could expect proposals to address problems 

which you acknowledge. I mean, we have a GAO report which is 

one of a series of reports. Your agencies have come up with reports. 

We all know it is a major problem. Your testimony is clear about 

the problem. And it seems to me that we have a right to expect 

from your agencies an estimate as to when you will be proposing 

corrections for what are acknowledged to be significant threats to 

our financial security and to our national security. 

Can we expect that you would tell us for the record, after going 

back and consulting with your agencies, approximately when we 

could expect recommendations? Is that a request, Mr. Nash? 

Mr. NASH. That is a fair request. 

Let me just say, Senator Levin, that one reason you have not got 

requests before now is that it is only recently that this has become 

the largest problem that we face in the realm of trying to get information related to money laundering investigations, in large part 

because of the good work of this Subcommittee and Congress, in 

general. Up until now or up until very recently the significant 

problem was getting information out of financial institutions. And 

a number of the measures that were passed in the PATRIOT Act 

and in response to law-enforcement concerns in this realm that 

have come up in recent years have taken some of the more significant issues off the table that have left this as a very significant 

issue that is yet to be addressed. 

I just throw that out in defense of our agencies and that this has 

gotten to the top of the to do list only because some of the more 

significant issues that were above it have gotten crossed off. 

Senator LEVIN. My time is up. Thank you. 

Senator COLEMAN. Thank you, Senator Levin. Senator Carper. 

Senator CARPER. Thanks, Mr. Chairman. 

Ms. Jones, thank you for your testimony and for the submission 

and the work that GAO has done. 

On page 12 of your testimony, I read in bold print on the lefthand margin of that page. It says more company ownership information could be useful to law-enforcement but concerns exist about 

collecting it. And then you have four bullet points along the side 

of the second half of that page. 

Just run through those again for me. And what I am really interested in are what are those costs? What are the benefits if those 

costs are incurred by States and others? And are the benefits worth 

the costs? 

24

Ms. JONES. Senator Carper, I can speak about the costs. We actually did not try to do a cost-benefit analysis but I can give you 

a little bit more detail about the costs that the States could incur. 

First of all, a number of States told us that it could require more 

time, therefore more staff effort. That is where the cost comes in. 

It could increase the workloads for State offices and agents if they 

were required to collect more information. 

Because a lot of companies place a lot of emphasis today on creating corporations in a short amount of time, the States were concerned that requiring more information could mean that some companies would feel that the amount of time required to create the 

corporation might not be worth the effort to do so. 

Some of the State officials felt that they could lose State revenue, 

particularly if all 50 States information requirements were not uniform. They felt that the States with more stringent requirements 

could lose business to other States or to other countries. 

And they also mentioned that there might be a loss of business 

for agents because individuals can form their own companies. They 

might choose that option. And agents also thought that it could be 

difficult to collect and verify more company information if they 

were required to do so. 

Senator CARPER. This is sort of an observation. We are reluctant 

in Congress, on the part of the Federal Government, to impose unfunded mandates on States, ask them to do certain things and to 

incur certain costs, unless we know what those costs are somehow 

made up for. 

I agree with you that there are costs, and I think you have summarized them pretty well. It would be interesting to know what the 

benefits are and how we could quantify those relative to the costs. 

I do not know who to direct that to but I would just raise that 

as an issue. 

I would like to ask, and this can be for anyone on the panel, are 

you all aware of any States that have taken action on their own 

to address some of the problems in their laws on business formation, on incorporation and registration of new businesses, that can 

lead to things like money laundering and to tax evasion? 

Mr. EL-HINDI. With respect to Delaware, for example, we have 

completed our initial assessment in 2005. And part of the update 

of our study for the public release enabled us to assess changes 

that had occurred in Delaware. It is referenced in our report where, 

for example, standards of conduct with respect to corporate agents 

or corporate service providers were bolstered. That is one step, we 

would say, in the right direction. And we use that as an example 

of pointing out how outreach to the States and discussing with 

them this problem can lead to some developments. 

Senator CARPER. Are there other States that you picked up as 

you updated your study? 

Mr. EL-HINDI. I could get back to you. 

Senator CARPER. Would you do that for the record, please? 

Thanks. Anybody else? 

I think, Mr. Burgess, it was in your testimony that you singled 

out several States—I think Nevada, Wyoming, and Delaware—as 

three States that are—I think your term was most accommoVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
25

dating—for those businesses that might want to hide their ownership information for one reason or another. 

Is there some reason why these three States or maybe some others should be singled out? Is there any legitimate reason for some 

of the features these States and others might have in common? 

Mr. BURGESS. Let me speak first to Wyoming and Nevada. They 

are two States that have a number of registered agents that can 

also serve as nominees, nominee officers, as well as the registered 

agents, which is unique to that particular State. 

There are also, as I mentioned in my testimony, two States that 

also allow the issuance of bearer shares, meaning that anyone who 

physically is in possession of those is in ownership of the corporation. 

In reference to Delaware, the reference there was primarily due 

to the requests we receive from our tax treaty countries. Delaware 

is prominent in that. And one of the reasons it might be, and I will 

offer this, is because Delaware obviously has a status in terms of 

being recognized in terms of a U.S. corporation. I think that might 

be one of the reasons. But there is a prominence. And I was really 

speaking, when I spoke of Delaware in the testimony, in that regard. It tends to be one of the States that tends to be favored as 

shell companies are actually sold and resold to others outside of 

this country, in Eastern Europe and the Russian Federation. It is 

one of the States that tends to be one of the largest recognized in 

those requests that we receive. 

Senator CARPER. Anyone else want to comment on that? 

Would you repeat your answer, Mr. Burgess? [Laughter.] 

Mr. BURGESS. That is like asking me to reach over and hit that 

third rail. 

Senator CARPER. I did not count the number of times I heard the 

term beneficial owner mentioned, but I heard it a lot. And there 

are obviously beneficial owners and then there are other owners. 

Can somebody give us a primer on the difference between beneficial owners and some of the other categories of ownership? Why 

do we focus so much on beneficial ownership? 

Mr. BURGESS. Just quite simply, I would say a beneficial owner 

is actually the person in control—that actually possesses the control over the operations of the corporation. It directs its activities. 

In many cases, that may not be what appears on the surface. You 

have a president, for instance, that may be a nominee officer. But 

it is the person that truly exercises control. 

Senator CARPER. My time has expired. 

There is a second half to my question. Mr. Chairman, could I just 

ask them to answer the second half? 

Senator COLEMAN. Absolutely. 

Senator CARPER. Just mention, other than beneficial ownership, 

what are some of the other categories of ownership that we should 

be mindful of? 

Ms. JONES. There are directors and managers of corporations and 

limited liability companies and they can also exercise a high degree 

of control. So it is important to know who those people are, too. 

Senator CARPER. OK, thank you very much. 

Senator COLEMAN. Ms. Jones, I think it is very fair to say that 

your report, particularly the conclusion, is very balanced in the 

26

end. You lay out that on the one hand there are legitimate concerns that are raised by the States. On the other hand, we have 

a situation here where there are deep concerns, legitimate concerns 

that law enforcement has. 

Let me ask you, in your conversations—I want to get back to solutions if we can. In your conversations with the States, did any 

of the State officials offer up any ways in which the system could 

be improved? Did they offer some solutions? I recognize the concerns they have, as I do, about unfunded mandates. But did they 

come up and say here are some things I think we could do that we 

are not doing today? 

Ms. JONES. Senator Coleman, we spoke to a number of States in 

the course of doing our work. And at the moment I do not actually 

recall that any particular State offered solutions. But I would be 

happy to get back to you on that. 

Senator COLEMAN. I would appreciate it if you would. Again, as 

I said, the report does a very good job of laying out this balance.

INFORMATION PROVIDED FOR THE RECORD FOLLOWS: 

Question from Senator Coleman: In your conversations with the States, 

did any of the State officials offer up any ways in which the system could 

be improved? Did they offer some solutions? 

Response of Ms. Yvonne Jones for the record: In our interviews with State 

officials, we heard of potential changes to the system from one State, Delaware. We learned in our interview with Delaware officials that the Corporations Division of Delaware’s Department of State was discussing with the 

State legislature various approaches to enhancing the State’s authority to 

oversee registered agents. One approach they were discussing would be to 

require the Secretary of State to verify the ability of a registered agent to 

serve process. If the State found that the agent did not have the ability to 

serve process, then the State would refuse to certify the individual or entity 

to be a registered agent. Another approach would define specific information about Delaware business entities that registered agents must maintain. They also were discussing the idea of requiring registered agents to 

know beneficial owners and maintain the ownership information but the 

economic impact on Delaware was a concern. An official said there was 

some consensus, however, that registered agents should at least know who 

seeks their services. An official said another idea discussed with the registered agent community was to have the State license registered agents in 

Delaware, but the State had not explored what the cost implications of this 

option would be. The official noted that another idea might be to turn the 

licensing of agents over to the industry. The official said that both options 

could pose problems for the small registered agents.

Senator COLEMAN. The problem is the status quo does not reflect 

the balance. The status quo reflects the concerns. And certainly, as 

the report indicates, they are very legitimate concerns. But it does 

not then say is how we are going to address those concerns, here 

is what we are going to do to deal with the potential we have for 

money laundering, the potential we have for hiding assets. The 

problems with nominees, of not knowing who the beneficial owner 

is. In Nevada, as I think you indicated, Mr. Burgess, there is no 

requirement that the person listed in the company registration 

have any connection with the corporation. So you have a sham, a 

shell owner. That is the problem. You can have shell ownership 

and no way for law-enforcement to understand where the money is 

coming from? 

So how do we close this information gap—we load up our banks 

with a whole range of reporting requirements to combat money 

27

laundering. It seems to me we have a big hole here. We have a big 

hole. And I am looking for some way to fill it, being sensitive to 

the concerns that are raised. 

So please, I would ask you to go back, and if there have been 

specific recommendations, give them to us because we need that. 

Mr. Burgess, there has been, I think, a number of individuals. 

Mr. El-Hindi talked about outreach at least as one of the things 

that can be done. 

Does the IRS has some responsibility? Who is going to do the 

outreach? If you are going to talk to States and the private sector 

about some of the concerns and the danger here, who has the responsibility of doing that? 

Mr. BURGESS. Within the IRS, we have a stakeholder group, and 

we do have a working relationship with the States. And let me say, 

I have not found the States to be uncooperative. I do not think that 

is the issue that we are saying from that standpoint. But certainly, 

we do have an arm that can do outreach. 

I think one of the other things that the issue management team 

that I explained to you would also explore is whether there is a role 

for outreach to the registered agents here? One of the things that 

I highlighted in my testimony was dealing with registered agents, 

who also serve as nominees and nominee officers and others. Is 

there a role there in terms of outreach that we can do with their 

organization regarding potential guidelines they can mandate for 

themselves within their own industries. 

Senator COLEMAN. I would urge then that we go back and look 

at this issue of outreach and figure out who has some responsibility 

and then be prepared to move forward on that. Senator Levin. 

Senator LEVIN. Thank you, Mr. Chairman. 

We have to get some more examples of these problems that you 

have summarized in your testimony. And I think there are some 

folks with you today who can describe to us some specific incidents, 

examples, cases. Mr. Burgess, are there one or more people with 

you, for instance, that could tell us what IRS is up against? And 

then I will turn to you, Mr. Nash. 

Mr. BURGESS. Yes, Senator. I have Robert Northcutt accompanying me today. Robert has first-hand experience in dealing with 

some of these transactions. Robert is our Director of our Abusive 

Transactions Office. I would be happy to have him answer. 

Senator LEVIN. I wonder if you could give us your name. Do we 

need to swear him in? I am not sure. 

Senator COLEMAN. I think we need to. 

Do you promise that the testimony you are about to give before 

the Subcommittee is the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. NORTHCUTT. I do. 

Senator COLEMAN. You may proceed. 

ROBERT NORTHCUTT, ACTING DIRECTOR, ABUSIVE TRANSACTIONS OFFICE, SMALL BUSINESS/SELF EMPLOYED DIVISION, INTERNAL REVENUE SERVICE 

Mr. NORTHCUTT. Yes, sir, you asked my name. It is Robert 

Northcutt. Currently I am the Acting Director of Abusive Transactions with the Small Business/Self Employed Division. 

28

Senator LEVIN. Of the IRS? 

Mr. NORTHCUTT. Yes, sir, with the Internal Revenue Service. 

In addition, I am a program manager who is overseeing this particular issue management team that was discussed by Mr. Burgess. 

It is something that originated approximately 4 or 5 months ago, 

and essentially what has occurred is, under Code Section 6700 of 

the Internal Revenue Code, we are allowed to go ahead and pursue 

promoter investigations. 

We have pursued a couple of these investigations with respect to 

some of these registered agent or nominee incorporating service 

businesses. We have, at present, a cooperative promoter and an uncooperative promoter. With respect to the cooperative one, we have 

managed to secure a list of its clientele for every other letter of the 

alphabet. In fact, we did a non-statistical sample of one letter of 

the alphabet. And in checking the records of corporate filings and 

other information, we discovered that roughly 50 percent of the entities that have been formed under the letter O, in fact, had compliance problems, some of them rather extensive. 

In one particular case, there were even Federal contracts that 

had been entered into with various Federal agencies. And this corporation, in fact, was not filing tax returns, and the 100 percent 

shareholder was not filing tax returns, to the extent of several million dollars. 

With respect to the uncooperative registered agent promoter, the 

difficulty we have is we are not getting access to its clientele. And 

so we are actually having to go in and trace the money as far as 

the funds this registered agent received for setting up these corporate entities, and then go backwards from where the money 

originated, identifying the entities that are actually involved. In 

that particular case, we are seeing an even higher incidence of noncompliance with the Federal tax laws. 

We have recently canvassed our revenue agents and collection officers in the field with respect to obstacles that they have encountered and some of the issues that they have observed. With respect 

to our collection activities, it is extensive in the sense that any time 

we have a nominee or shell corporation, it presents an obstacle in 

trying to levy or lien assets upon which we can collect tax deficiencies. Some of these have recently involved listed transactions, 

specifically an intermediary transaction, that falls out under Notice 

2001–16. 

But in addition to that, we have seen these nominee and shell 

corporations set up to facilitate employee stock option plans, Roth 

IRA schemes, corporation sole, obviously offshore credit cards and 

debit cards, LLCs that do not file returns because they, in fact, 

have a separate filing requirement. 

With a limited liability corporation you have what is called a 

‘‘check the box.’’ You can operate as a sole proprietorship, a partnership, or a corporation. And depending on how the box is 

checked, it will have a different filing requirement. 

Senator LEVIN. The transactions that you made reference to, you 

are talking there about tax shelters? 

Mr. NORTHCUTT. Yes, sir. I am sorry. 

Senator LEVIN. But all of these items that you just rattled off, 

each of those could have some real tax compliance problems? 

29

Mr. NORTHCUTT. That is correct, Senator. And there are other 

items, as well, and it is not just with respect to Federal taxes. We 

have also observed situations in which parallel corporations will be 

established, one with an operating business in one State and then 

a shell corporation in another State that perhaps has some of the 

difficulties we have described. And what will occur is the shell corporation will act as a management company for the operating business, and funds will then be transferred from the operating business to the shell corporation. 

As I am sure you are aware, there is not a requirement for a 

1099 reporting or anything like that between corporations. So the 

only thing we observe is a canceled check or wire transfer to a separate corporation. In the event that we are looking at the operating 

company, to conduct an examination, to prove the expenses we 

would obviously ask for a receipt, an invoice, those kinds of things. 

In this environment, those documents are easy to prepare and 

appear legitimate for our examiners who are looking at the operating company. Very rarely would we have that same examiner 

cross State lines to examine the company that received the funds 

or even, for that matter, pursuing whether or not it had, in fact, 

filed a tax return. 

Those are some of the additional things. We have also warehouse 

banking arrangements, offshore brokerage accounts. And in fact, as 

I was pointing out, the State schemes are not just defeating our 

purposes. They also defeat the State income tax and sales tax activities. 

Senator LEVIN. The lack of the ownership information here is one 

of the key problems that you face in tracking and tracing these 

transactions; is that accurate? 

Mr. NORTHCUTT. Yes, sir, it is. That is very accurate, Senator. 

Senator LEVIN. So what you need is to know who the beneficial 

owners, who the real owners are of these entities, and that is not 

available to you? 

Mr. NORTHCUTT. That is correct, Senator. 

Senator LEVIN. You can do the tracking if you can find out who 

the beneficial owners are; is that correct? In other words, the key 

issue—and this is where, Ms. Jones, it seems to me we have to 

come back to you. You talk about listing and verifying. I think they 

probably, for starters at least, would be happy just to have a list 

of the beneficial owners so they can track these folks down. But if 

they are using nominees or agents that are registered agents that 

have no ownership interest or they are using lawyers who say that 

is a privileged transaction or a privileged matter as to who the 

owners are, they run into blank walls. 

So when you look into cost benefit, which is obviously relevant, 

you should look not just at the cost of listing, which seems to me 

to be nominal, but the look at the benefit to knowing who the beneficial owners are. A number of States do it and we insist that other 

countries do it. And a lot of the tax haven countries do it. They tell 

us at least they have the information. They will not tell us, but 

they have the information as to who the beneficial owners are. 

We cannot get the States to list the beneficial owners, not even 

getting to the verification issue, which involves a cost because 

there is transfer involved and so forth. 

30

So when you go back and look at this on cost benefit, I hope you 

will look not just at cost of listing and verifying, but just the cost 

of listing to give at least a leg up to our law-enforcement people 

so they can start tracking. And of course, if they list fraudulently, 

or if they do not list the real owners, then you have a fraud issue. 

You have a false information issue with the local government. 

Your testimony, Mr. Burgess, is extreme helpful. 

I am way over. Senator Carper, I am holding you up, too. 

Mr. Nash, do you have someone here with you who can do the 

same thing here and give us specific examples? 

Mr. NASH. I am afraid I do not have anyone to take my place, 

but there is one category of cases that I do not think has received 

quite enough attention in this discussion that I would like to just 

discuss briefly, which is the terrorist financing cases. I am not sure 

anyone has quite outlined for the Subcommittee yet why it is that 

this poses a particular issue in the area of terrorist financing. 

That is, as you know, Senator Levin, the way our statutory regime is set up with respect to terrorist financing, it relies on a designation process. And through the State Department and through 

OFAC, certain entities are named and designated as entities that 

our government believes are terrorist organizations. And financial 

transactions with those entities, those designated entities, are 

therefore prohibited. It is prohibited to give material support to 

those organizations. And if they appear on the OFAC list, it is a 

crime to engage in any financial transactions with them. 

When you focus on that, it is very easy to see how this particular 

problem that we are talking about today becomes such a problem 

in the area of terrorist financing, because obviously a terrorist organization that finds themselves on the State Department list or 

on the OFAC list, the first thing they are going to want to do is 

establish an alter ego that is not designated and that to the world 

is a clean face that can engage in financial transactions and the 

world can engage in financial transactions with that entity without 

the stigma of dealing with a designated terrorist organization. 

And so in that realm, it is very important for us to be able to 

track beneficial ownership with respect to company formations so 

that we can track that back to a designated terrorist organization. 

Senator LEVIN. To whom the real owners are, which will be the 

terrorist organization in your example; is that correct? 

Mr. NASH. That is right. 

Senator LEVIN. And if they just, for instance, buy an old shell 

corporation or have it formed by some company that forms corporations for $100 over the Internet, then they appear to have a clean 

company. It is not on the list. But the real owner, the beneficial 

owner, is the terrorist organization. 

Mr. NASH. That is right. 

Senator LEVIN. And unless the beneficial owner, that terrorist organization, is listed, law enforcement is frustrated. Is that correct? 

Mr. NASH. That is correct. 

Senator LEVIN. Thank you. Thank you, Mr. Chairman. 

Senator COLEMAN. Thank you very much, Senator Levin. 

I will excuse this panel. I want to thank you for your testimony. 

If I could paraphrase a movie, ‘‘Houston, we have a problem.’’ I 

am not sure that we have arrived at the solutions today but clearVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00036 Fmt 6633 Sfmt 6601 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
31

ly, particularly given the last line of questioning, Senator Levin, we 

clearly have a problem that needs to be better addressed. 

I want to thank the panel. 

Senator LEVIN. And if our witnesses could let us know when 

those recommendations would be forthcoming, we would very much 

appreciate it. 

And Mr. El-Hindi, if you would let us know whether or not your 

organization is going to be issuing a regulation next year. Do we 

expect that? 

Mr. EL-HINDI. I will follow-up with you on that. Something like 

that is certainly a possibility but it is one of many possibilities in 

terms of how we approach this. 

Senator LEVIN. Can you fill us in for the record as to whether 

that is going to be forthcoming? 

Mr. EL-HINDI. Yes, sir. 

Senator LEVIN. Thank you, Mr. Chairman. 

Senator COLEMAN. Thank you. 

I would now like to welcome our second and final panel of witnesses to today’s hearing. Richard J. Geisenberger, the Assistant 

Secretary of State for Delaware; Scott Anderson, Deputy Secretary 

of State for Commercial Recordings of the office of the Secretary of 

State for the State of Nevada; and finally Laurie Flynn, the Chief 

Legal Counsel for the Office of the Secretary of the Commonwealth 

for the Commonwealth of Massachusetts. 

I would welcome each of you to today’s hearing and look forward 

to your testimony. 

As you are aware, pursuant to Rule 6, all witnesses who testify 

before this Subcommittee are required to be sworn. At this time I 

would ask you to all stand and raise your right hand. 

Do you swear the testimony you are about to give before this 

Subcommittee is the truth, the whole truth, and nothing but the 

truth, so help you, God? 

Mr. ANDERSON. I do. 

Mr. GEISENBERGER. I do. 

Ms. FLYNN. I do. 

Senator COLEMAN. We have a timing system. I think we have the 

new boxes there, by the way. 

Senator LEVIN. What are they, Mr. Chairman? 

Senator COLEMAN. I do not think you have to press a button for 

the sound to go on now. I think it is perhaps a little more automated there. High tech. We are getting very high tech, Senator 

Levin. 

I believe that one minute before the red light comes on you will 

see the light change from green to yellow. So at that point please 

summarize your, testimony. Your written testimony will be printed 

into the record in its entirety. 

We will start with you, Mr. Geisenberger, then go to you, Mr. 

Anderson. And finally we will conclude with you, Ms. Flynn, and 

then we will proceed with our questions. 

Mr. Geisenberger, you may proceed. 

32

1The prepared statement of Mr. Geisenberger appears in the Appendix on page 115. 

TESTIMONY OF RICHARD J. GEISENBERGER,1 ASSISTANT SECRETARY OF STATE, STATE OF DELAWARE, DOVER, DELAWARE 

Mr. GEISENBERGER. Mr. Chairman, Members of the Subcommittee, thank you for this opportunity to testify on this important subject. 

Delaware is the legal home to more than half of all publicly traded companies in the United States and 61 percent of the Fortune 

500 companies. The reasons to incorporate in Delaware are compelling, as mentioned by Senator Carper, modern and flexible corporate laws, a highly regarded judiciary to name just a few. 

More than 750,000 business entities representing every sector of 

our Nation’s economy are registered in Delaware, from small momand-pop businesses, private investment vehicles, religious and 

charitable organizations, to large well-capitalized companies, from 

publicly held General Motors to privately held Cargill. Many Delaware legal entities are affiliated with such large firms and are created to facilitate the financings, alliances and investment vehicles 

in which those large businesses engage. 

We commend the GAO for a generally balanced and factually accurate report highlighting the challenges involved in collecting beneficial ownership information and the role of third parties in the 

company formation process. 

Unfortunately, it is our view that the money-laundering threat 

assessment and the FATF reports present a far less-balanced view. 

We take strong exception to the FATF’s conclusion that Delaware 

encourages secrecy and its State policies are driven by ‘‘a powerful 

lobby’’ of company formation agents. Indeed, as shown in the GAO 

reports, no State does verification and no States collected true beneficial ownership information reaching down to the actual individuals that own equity and exert control. 

To the contrary, Delaware’s laws promote the efficient flow of 

capital by allowing businesses to order their affairs in ways that 

meet ever changing business conditions. Our laws reflect the input 

of corporate attorneys across the United States and are driven by 

a balancing of interests among companies, investors, law-enforcement, and others. 

With respect to the role of company formation agencies and registered agents, for over a decade Delaware has applied standards 

of conduct to its online agents. The State has also led the Nation, 

enacting a new statute this year that sets enhanced qualifications 

for Commercial Registered Agents and creates procedures to put 

rogue registered agents out of business. 

As for beneficial ownership disclosure, it is the view of Delaware 

that: One, a reporting system that includes public companies would 

be a logistical and costly nightmare for corporate America; two, 

that even a self-reporting system that exempted public companies 

and their affiliates would have immense verification costs and several definitional problems; and three, such a system would impose 

costs on legitimate private businesses that seem vast in relation to 

the benefits that are, at best, uncertain. 

33

1The prepared statement of Mr. Anderson with an attachment appears in the Appendix on 

page 133. 

Indeed, FinCEN’s recent report acknowledges that a system of 

self-disclosure of managers and members is easily thwarted because money-launderers will falsify identities and most U.S. investment strategies rely extensively on the use of other business entities as equity holders. 

But perhaps the single greatest concern we have is the likelihood 

that the role of Delaware, and indeed the United States, would 

shift from that of providing an attractive investment environment 

for domestic and international capital, one that values privacy, efficiency and the ease of capital formation, to being replaced by one 

of having regulatory and investigative oversight of the equity holders of the millions of legitimate enterprises in the United States. 

Indeed, we believe that reforms are best focused on enhancing 

the ability of government officials to follow the money through the 

financial services system and providing resources needed to investigate and deter illicit activities. Delaware’s recent amendments 

are a step in the right direction and deserve consideration in other 

jurisdictions. We also recommend that the Federal Government 

study whether existing Federal laws should be augmented. 

For example, to create the level playing field mentioned by Senator Coleman, the Federal Government could study the costs and 

benefits of gathering additional beneficial ownership information 

through the Federal Tax ID application process. 

Delaware is merely one stakeholder in this issue. We recommend 

that any discussion of these issues have input from the countless 

large and small companies and investors that would be most affected by a beneficial ownership disclosure requirement. It is critically important to hear their voices on the relative costs and benefits of such a system. 

On behalf of the State of Delaware, I thank you for this opportunity to share these oral comments and our written testimony and 

look forward to answering any questions. 

Senator COLEMAN. Thank you, Mr. Geisenberger. Mr. Anderson. 

TESTIMONY OF SCOTT W. ANDERSON,1 DEPUTY SECRETARY 

OF STATE FOR COMMERCIAL RECORDINGS, OFFICE OF THE 

SECRETARY OF STATE, STATE OF NEVADA, CARSON CITY, 

NEVADA 

Mr. ANDERSON. Thank you, Mr. Chairman. 

Good afternoon, Mr. Chairman, Mr. Levin, and Subcommittee 

Members. My name is Scott W. Anderson. I am Deputy Secretary 

of State for Commercial Recordings for Nevada Secretary of State, 

Dean Heller. 

It is an honor to be here before you today and I thank you very 

much for the opportunity to participate in this hearing. 

My comments today will be a brief summary of the information 

included in my written presentation that was submitted earlier to 

the Subcommittee. To begin, I would like to qualify my written 

statement, included in your materials, regarding the GAO report 

‘‘The U.S. Money-Laundering Threat Assessment and the FATF 

Report.’’ My comments were strictly from a Nevada filing officer’s 

34

standpoint and do not reflect the standpoint of others on issues 

outside the processes of the filing office. 

The Commercial Recordings Division of the Nevada Secretary of 

State’s Office is responsible for the processing and filing of the organizational and amendatory documents of entities organized pursuant to Title 7 of the Nevada Revised Statutes. Nevada’s business 

friendly statutes, tax structure, liability protections, and commitment to service, and an active resident agent and service provider 

industry have all helped make Nevada a leader in the business entity formation. 

Historically, the Commercial Recordings Division of the Secretary of State has been strictly a filing office with no regulatory 

authority over the entities on file. Documents are reviewed for statutory requirements for filing and if those requirements are present, 

the documents must be filed. Minimal filing requirements allow for 

ease of filing. No beneficial ownership information is or has been 

required for entities filing in our office. 

Additionally, the information contained in the filings submitted 

is not verified. 

In fiscal year 2006, the Commercial Recordings Division processed over 85,000 new entities and over 300,000 initial, amended 

and annual lists. Over 40,000 each of corporations and limited liability companies were formed last year. 

The Secretary of State’s Office provides electronic services for the 

e-filing of initial and amended annual lists which is available on 

our website. There are plans to develop online services for the filing of articles of incorporation and other filing processes. 

The Secretary of State does not actively promote the advantages 

of organizing in the State of Nevada. The resident agents and service companies actively promote the State of Nevada. It is estimated 

that 60 percent of the filings received in our offices are submitted 

through use of a resident agent. The Secretary of State does not 

regulate the resident agents that do business with our office. It is 

my understanding that portions of the Model Resident Agents Act, 

as proposed by the National Conference Committee on Uniform 

State Laws, will be introduced during the 2007 session of the Nevada Legislature. 

In regards to beneficial ownership, beneficial ownership information is not required for filing in the Office of the Secretary of State 

and therefore is not maintained by the State or by resident agents. 

Resident agents are required to maintain a copy of the stock ledger 

or a statement as to the location of the ledger and our Nevada Department of Taxation may have some beneficial ownership information from the annual business license filings it receives. 

As noted in the reports, some beneficial ownership information 

may be present on the public record from the information required 

for filing and that is provided by those filing in our office. We have 

received no specific requests for beneficial ownership information 

from law enforcement agencies, and additionally we have received 

no complaints from law enforcement other than what was stated in 

the reports and the meetings preliminary to the report, such as the 

GAO report, that a lack of beneficial ownership information has 

impeded any investigation. 

35

1The prepared statement of Ms. Flynn appears in the Appendix on page 140. 

Nevada has been working on several of the issues that have been 

brought forth in the different reports. Proposed legislation for the 

prohibition of bearer shares and a limitation on the use of nominee 

officers, as well as the provisions of the Model Resident Agents Act, 

are expected to be introduced during the 2007 Nevada legislature. 

Additionally, in the 2005 legislative session, provisions making it 

a Category C felony to knowingly offer fraudulent documents in the 

Office of the Secretary of State, and requiring beneficial ownership 

information on certain transactions were passed. 

Currently the Secretary of State is attempting to facilitate a 

meeting with the Resident Agent Association in the State of Nevada, the State Bar Association and State legislators to fully discuss the collection of beneficial ownership information. 

The entire issue is of great interest to our office and we recognize 

the importance of being involved in assisting this Subcommittee in 

its work. 

Thank you again for this opportunity to participate today and I 

would be happy to answer any of your questions. 

Senator COLEMAN. Thank you, Mr. Anderson. Ms. Flynn. 

TESTIMONY OF LAURIE FLYNN,1 CHIEF LEGAL COUNSEL, 

OFFICE OF THE SECRETARY OF THE COMMONWEALTH OF 

MASSACHUSETTS, BOSTON, MASSACHUSETTS 

Ms. FLYNN. Good afternoon. Thank you, Mr. Chairman, Senator 

Levin, and Subcommittee Members. My name is Laurie Flynn. I 

am Chief Legal Counsel to the Secretary of the Commonwealth. 

I applaud the Subcommittee’s efforts for providing a national 

forum to discuss the adequacy of public disclosure in the business 

entity formation process. I hope that Massachusetts’ recent deliberations and resulting resolutions in this area will assist the Subcommittee in its effort to balance the need for beneficial ownership 

information with the privacy concerns of legitimate business interests. 

By way of background, Massachusetts recently adopted a new 

corporation law, Chapter 156D of the General Laws. The act was 

the first comprehensive revision of the corporate laws in Massachusetts in over 100 years and was prepared by a joint task force of 

the Boston Bar Association and the Massachusetts Bar Association, 

aptly named the Task Force on the Revision of the Massachusetts 

Business Corporation Law. 

The task force consisted of over 50 experienced corporate practitioners, members of the legislature and representatives of the Office of the State Secretary. The task force chose the American Bar 

Association’s Model Business Corporation Act as the basis for its 

corporate statute because the act had been adopted in a substantial 

majority of States. 

However, Massachusetts deviated from the Model Act in a number of relevant areas, including the role of the Secretary of State 

in the entity formation process and the type of information disclosed in business organization documents. Such differences reflect 

a carefully crafted balance between public interest in adequate disclosure and the privacy concerns of the business community. 

36

With regard to the role of the Secretary of State, Massachusetts 

retained the authority of the Secretary of State to review documents for compliance with law. Such provision is the basis for the 

Secretary’s ability to hold administrative hearings if information 

provided in organizing documents is inaccurate or otherwise fails 

to comply with law. The Model Business Corporation Act relegates 

State authority in this area to a ministerial function. So essentially, if anything is provided, you have to take it. 

Second, the new act authorizes the Secretary to require more information in the formation process than is collected in a Model Act 

State. In Massachusetts, the articles of organization contain a supplemental information that includes a description of the business 

activity, the name and address of the president, treasurer, secretary, and each of the directors, the name and address of the registered agent, the location of the corporation’s principal office, and 

the location of the office in the Commonwealth where certain 

records required to be maintained by the act will be kept. One of 

the required records is indeed a list of the names and addresses of 

all shareholders, in alphabetical order, by class of shares, showing 

the number and class of shares held by each. 

The new act does not authorize the issuance of bearer shares nor 

does it permit the use of nominee directors and/or officers. With regard to nominee shareholders, though, Massachusetts corporate 

law recognizes registered and beneficial holders. Nevertheless, the 

statute contemplates that standard bylaws will contain explicit 

statements to the effect that the corporation will only recognize the 

registered holder for purposes of voting, dividend distribution and 

other shareholder actions and entitlements. The exception that 

proves the rule are the appraisal provisions of 156D, under which 

beneficial holders may assert statutory appraisal rights only if the 

registered holder has filed a nominee certificate with the corporation. 

The Massachusetts Limited Liability Company Act, Chapter 

156C, and the Massachusetts Revised Uniform Limited Partnership Act, contain similar provisions. Each requires the Secretary to 

review documents for compliance with law and requires the disclosure of managers or authorized principals and general partners. 

Each also requires the entity keep a list of members or limited 

partners in the State at the statutorily required office. 

Furthermore, the limited partnership statute requires that such 

lists be made available to the State Secretary within five business 

days of receipt of a written request by the Secretary stating that 

said information is required in connection with an investigation or 

an enforcement proceeding. 

These provisions, the ability to review for compliance with law, 

the identification on the public record of officers, directors, managers or principals—and not nominees—and the requirement that 

shareholder, member, or partnership lists be maintained in the 

Commonwealth accessible to the State Secretary, reflect Massachusetts’ attempt to balance public interest in disclosure with the anonymity demanded by the institutional and individual investors in 

today’s capital markets. 

37

As I have not yet received any complaints from law-enforcement 

or from the business community and very few complaints from the 

public, I assume we have been successful. 

I will just highlight, in response to your questions, a number of 

provisions that I think are helpful. Massachusetts has about 

232,169 non-publicly traded corporations and 67,493 limited liability companies. The process for each of those in forming them would 

be for a document to be submitted with the appropriate information. That information would then be reviewed. If it was found to 

comply with law it would be filed. Once it is filed, it is scanned into 

our system, summary information is data entered, and it is available on the web, immediately by 7 o’clock that night. 

The fees for forming a corporation are $275 if submitted in person or by mail and $250 if filed online. All documents are reviewed 

by both a clerk and an attorney. The fees for forming a limited liability company are somewhat higher, they are $500. 

Again, Massachusetts does not collect beneficial ownership information during or subsequent to the incorporation process. That has 

been since 1951. Prior to 1951, we did collect that information. 

We do, however, require that that information be maintained in 

the Commonwealth and accessible to law enforcement and the Secretary. 

Massachusetts does not provide for third-party agents. We have 

only registered agents whose only role is to accept service of process on behalf of corporations. 

We do not permit the use of nominee officers or directors. We do 

allow for nominee shareholders. We do not allow for bearer shares. 

Massachusetts has not received any requests from law enforcement for beneficial ownership information in the last 5 years, and 

that may be because they can get that information directly. 

One of the things that we have been determined to do as a result 

of these ongoing discussions with the Subcommittee and with the 

GAO is that the Secretary will file legislation in this upcoming session that will require limited liability companies and corporations 

to disclose members and shareholders to the State Secretary if, in 

his judgment, the public interest requires such disclosure. And we 

will require that disclosure must be made within 48 hours. Failure 

to provide such information will result in involuntary dissolution of 

the entity and the imposition of fines and penalties. 

Last, I would like to say Massachusetts, after September 11, was 

notified that there were two nonprofit corporations that were suspected of funneling money to terrorist organizations and we 

promptly revoked their charters. We gave them notice, opportunity 

to be heard, and revoked their charters. So we have been somewhat 

more proactive in this area. Thank you. 

Chairman COLEMAN. Thank you, Ms. Flynn. 

I think it is fair to say that some of the things you are talking 

about are certainly movement in the right direction and we appreciate it. 

Is it fair to say, by the way, across the board, Mr. Geisenberger, 

in Delaware you do not have bearer shares? That is not something 

that you allow in Delaware. 

38

Mr. GEISENBERGER. Delaware law has never permitted bearer 

shares. We made it explicit in our statute in 2002, in response to 

the FATF report. 

Senator COLEMAN. In Nevada, you are moving in that direction. 

Mr. ANDERSON. We are moving in that direction. 

Senator COLEMAN. Is there any question that bearer shares are 

problematic and should be prohibited? 

Mr. ANDERSON. According to the Bar Association, in my discussions with the Bar Association, there has not been a large problem 

with bearer shares. However, because there is no prohibition of 

bearer shares in State law, there is this belief that there is wide 

use of bearer shares. So with that, they are proposing changes to 

legislation to prohibit the use of bearer shares in the State of Nevada. 

Senator COLEMAN. I would question the accuracy of your statement that it has not been a problem. And I think everything that 

we have seen and we have heard confirms that the potential for 

abuse is great. But, again, I understand you are moving in that direction. 

I am trying to find some common ground that everyone says we 

know this is a problem. Limitations of use of nominee officers, how 

is that handled in Delaware, Mr. Geisenberger? 

Mr. GEISENBERGER. With respect to corporations, officers have to 

be natural persons and directors have to be natural persons. Shareholders can be nominees, and obviously in publicly traded companies they are almost exclusively nominees. With respect to limited 

liability companies, the managers and the members can be other 

business entities. And that is really the issue we are talking about 

here. Most investment vehicles in the United States, that is how 

they are structured. It is a business owning a business owning a 

business before you get to the actual human being that has the 

beneficial interest in the asset. And reaching down to that level 

raises lots of issues about costs and certainly questions about privacy and the legitimate anonymity of being able to—for everyone 

not to know exactly what you are invested in. 

Senator COLEMAN. Ms. Flynn, in the Commonwealth of Massachusetts, do you have any limitations on the use of nominee officers? 

Ms. FLYNN. Massachusetts does not permit the use of nominee 

officers or directors. 

Senator COLEMAN. Mr. Anderson. 

Mr. ANDERSON. It is common practice in the State of Nevada that 

there be nominee officers. However, the Nevada Resident Agents 

Association is looking at legislation in the 2007 session of the Nevada legislature to limit that use, and I do not know what that limitation would be? However, we are moving away from that. 

Senator COLEMAN. Mr. Geisenberger, you indicated it would be 

important as we move forward, to bring in a broad array of stakeholders in this discussion. I agree with you on that. I do think we 

have to strive for the balance, but again understand that there is 

a problem today and one that exposes us, as we heard from the 

other panel, to risks—that you could have terrorist organizations 

and our ability to deal with those is an ID system. We know that 

this is a terrorist organization. And they literally can move in and 

39

take over existing corporations without any risk of exposure. And 

I think that is problematic. To me it just seems like we have a big 

gaping loophole there. 

A question, if I can, about Delaware law. You did mention that 

Delaware is doing some things dealing with registered agents. My 

question on that, and just from my information, please correct me 

if I am wrong, that the Delaware law dealing with registered 

agents which would require more stringent qualifications applies 

to—I have information that it applies to 237 out of 32,000 registered agents. Is my information incorrect? 

Mr. GEISENBERGER. That is correct. There are 32,000 registered 

agents in Delaware. I would imagine they have very large numbers 

in other States, as well, because a company can form itself. Most 

registered agents in the State of Delaware, indeed the vast majority, represent three or fewer entities. Ninety-six percent of our 

32,000 agents maybe just represent a civic association or a not-forprofit. They could be the company themselves, a small mom-andpop business. 

Senator COLEMAN. Your testimony indicated the new statute for 

registered agents would put rogue registered agents out of business. My only question is does this new statute apply to more than 

237 out of the 32,000 registered agents? 

Mr. GEISENBERGER. The new statute establishing additional 

qualifications, like having a business license, applies only to the 

237. However, the statute allowing the Court of Chancery to enjoin 

a registered agent from doing business for not meeting certain 

qualifications about having an address, not meeting certain qualifications about retaining customer information, applies to all 

32,000 registered agents in the State. 

Senator COLEMAN. My time is up. I am going to come back to one 

other line of questioning but I will turn to my colleague, Senator 

Levin. 

Senator LEVIN. Thank you. 

Ms. Flynn, you said near the end of your testimony that the reason that there is not a request from law enforcement to your agency for the list of beneficial owners is that they can get that information directly? 

Ms. FLYNN. That is correct. Massachusetts entities are required 

to maintain lists of shareholders, lists of limited partners in an 

LLC’s instance, list of members at their principal office or statutorily required office in the Commonwealth. 

Senator LEVIN. Is that true in Delaware? 

Mr. GEISENBERGER. No, there is no requirement to maintain that 

list in the State of Delaware. 

Senator LEVIN. So in one State law enforcement has access, in 

another State it does not have access to the beneficial owners. Why 

is that such a huge burden in Massachusetts? Obviously, it is not 

a huge burden, they are able to do it. So why do you think it is 

such a huge burden in Delaware? 

Mr. GEISENBERGER. Massachusetts, to put it in perspective, I believe you form 25,000 new entities a year. We form about 135,000 

new entities a year. The types of entities that we are forming in 

Delaware tend to be everything from large publicly traded companies to their affiliates. As I mentioned earlier, it may be possible 

40

to create a requirement for director and officer, or even manager 

and member information. 

I think it is important to recognize the distinction between manager and member information, director and officer information, and 

true beneficial ownership—an actual natural person who owns the 

business. So were you to go down that path and require that in 

Delaware, which is something that certainly could be examined, 

you would still end up with a list of other business entities being 

the beneficial owners or being the registered holders of these other 

businesses. 

Senator LEVIN. Of course, but that allows law enforcement to 

track those other business owners. 

Mr. GEISENBERGER. That is correct. 

Senator LEVIN. It is important that we have that capability. And 

you do not seem to recognize the importance of that. You talk 

about the cost of it but you have another State and that did not 

turn out to be a very burdensome cost. 

Mr. GEISENBERGER. I think it needs to be, as I mentioned in my 

testimony, balanced against the interests of privacy and efficiency. 

Senator LEVIN. Don’t they have those interests in Massachusetts? 

Mr. GEISENBERGER. I do not have. 

Senator LEVIN. Let me tell you they do. They care just as much 

about their privacy and efficiency as people in Delaware or all over 

the world that use Delaware or Nevada or anyone else. There is no 

difference in terms of human beings wanting anonymity or privacy, 

but they just do not allow it in Massachusetts. They say you can 

get to those owners by going to the companies that have registered 

agents. 

So I do not know why you say that your privacy interest is any 

greater than any other States’ concern for privacy. 

Mr. GEISENBERGER. Our concern, and this is not unique to Delaware, I think it is a concern that we have generally from a national 

perspective, which is that if we create a requirement that says that 

the beneficial ownership of every business entity in the United 

States is a matter of public record or is easily accessible, that it 

creates a number of issues ranging from identity theft to not the 

technical publicly-traded securities definition of insider trading, but 

the possible use that information by the people who are collecting 

it, the resident agent community and others. 

Senator LEVIN. That is not what anybody is proposing, it is a 

straw man. Just go to what Massachusetts does, try that. You say 

that could be done. That is helpful. Law enforcement finds that 

helpful. Why doesn’t Delaware do it? 

Mr. GEISENBERGER. Delaware does not do it because we have a 

concern—the reason the Secretary of State does not do it is because 

it is not part of our statute. 

Senator LEVIN. Why do you resist? 

Mr. GEISENBERGER. The reason we do not advocate it is a concern——

Senator LEVIN. Why do you resist it? 

Mr. GEISENBERGER. We have resisted because we believe that 

there are legitimate business transactions and that the vast—as 

you mentioned, I believe, earlier in your discussion, there are 15 

41

1See Exhibit 1 which appears in the Appendix on page 144. 

2See Exhibit 9 which appears in the Appendix on page 352. 

million business entities in the United States. If 0.1 percent of 

them are engaged in illegitimate practices and the other 99.9 are 

in legitimate enterprises, we have concerns about how that information put on the public record could be misused. 

Senator LEVIN. Thank you. 

Mr. Anderson, if you could take a look at Exhibit 1,1 this is 

formacompanyoffshore.com that talks about Nevada company formations. It is one of those first four pages. I am not sure which of 

the first four it is but it is—we are going to put the board up there. 

I think you may be able to read it there. 

It talks about Nevada. No IRS information sharing. Stockholders 

are not on public record, allowing complete anonymity. Do you see 

that that could create a problem for law-enforcement? That is advertised as why go to Nevada. 

Mr. ANDERSON. The reason Nevada does not have an IRS sharing 

agreement is because Nevada does not have a personal or corporate 

income tax, and therefore we do not have information to share with 

the Internal Revenue Service. 

Now all the information that we do require for filing is available 

to the Internal Revenue Service, just as it is available to any other 

person wishing to look at the public record. 

Senator LEVIN. In terms of the ownership, stockholders are not 

on public record, allowing complete anonymity. That is one of the 

selling points for Nevada, as it is for Delaware and other States. 

Mr. ANDERSON. I could see this as being a potential problem. 

However, resident agents are required to hold the stock ledger or 

a statement of where the stock ledger is located, so that law enforcement officers should be able to get that information. 

Senator LEVIN. The actual owners? 

Mr. ANDERSON. It is a list of the stockholders, the stock ledger 

that is part of Nevada revised statutes. 

Senator LEVIN. Which could be nominees and other corporations; 

is that correct? 

Mr. ANDERSON. Potentially, yes. 

Senator LEVIN. If you would take a look at Exhibit 9,2 perhaps 

both of you, representing both Delaware here and Nevada. This is 

a country comparison chart. This is people who are telling folks all 

over the world, ‘‘Hey, incorporate in these States and you will have 

no taxes and you will have anonymity.’’ 

Take a look at what it says here. Incorporate in Delaware and 

Nevada for top-notch privacy. 

Can you see the problem for law-enforcement when that is peddled as the reason to incorporate in your States? 

Mr. GEISENBERGER. I can tell you, Senator, that when we put together our statute this year, looking at the question of what should 

be the reasons that would allow our Court of Chancery to enjoin 

a registered agent from doing business, we looked at this issue because obviously it is this kind of—we certainly do not advocate this 

sort of promotion of Delaware. It is not how we promote Delaware. 

Senator LEVIN. Are you troubled when Delaware is promoted this 

way? 

42

Mr. GEISENBERGER. I am very troubled that Delaware is promoted this way. Unfortunately, we could not come to consensus on 

a statutory remedy that would limit the free speech of these types 

of businesses. They are not prohibited. 

Senator LEVIN [presiding].7 Try the Massachusetts approach. 

My time is up. Senator Carper. 

Senator CARPER. Thanks, Mr. Chairman. 

Let me just say, by way of introduction, let me ask Mr. 

Geisenberger a question. Have you always worked in the Division 

of Corporations, Department of State? 

Mr. GEISENBERGER. No, I have not. 

Senator CARPER. Did you ever have a previous stint in State government? 

Mr. GEISENBERGER. Yes, I had a wonderful stint in State government as the economic policy advisor for Governor Thomas Carper. 

Senator CARPER. I knew I had seen you before. [Laughter.] 

Senator LEVIN. I was distracted. Is there some kind of a conflict 

that I missed here? 

Senator CARPER. I hope not. 

It is great to see you. Thank you very much for your service to 

the people of Delaware. And thanks very much for being here today 

and joined by your colleagues, Mr. Anderson and Ms. Flynn. 

Go back again and just take another minute and explain to us 

the changes that were made in Delaware law earlier this year. 

Why the State made those, why you think that is a good thing, and 

whether or not other States might want to consider doing something similar to that. 

Mr. GEISENBERGER. I think to the points that were made earlier 

that outreach is important, and we have been doing a lot of work 

over the last 6 years, and we have had FinCEN and OFAC come 

to Delaware, meet with our registered agent community, educate 

them on what their responsibilities are. We have had discussions 

with the FATF, with the U.S. Department of Treasury and others 

about what kinds of things we could and should be doing. 

In response to that, we decided to look at our existing registered 

agent statute and see what we could do. One of our biggest concerns, and we think it was a legitimate concern, was when law-enforcement said what happens if you have a bad registered agent? 

How do you get rid of them? And the answer was we had no mechanism within which to do that. 

So we adopted a statute that said there are these qualifications. 

If you are in the business of being a registered agent there is certain information you need to provide the Secretary of State so that 

we know exactly who you are, so that we know who the people are 

who are doing business in Delaware. Again, those companies representing 50 or more entities. 

We established a requirement that they have a Delaware business license which means they have to fill out certain tax forms in 

Delaware which give us more information about who they are. We 

established a requirement that every Delaware registered agent or 

that every company and every LLC and the State is required to 

keep with their registered agent the name of a natural person who 

is the communications contact for that business entity. So that 

when a law enforcement agency goes to a registered agent, the regVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00048 Fmt 6633 Sfmt 6601 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
43

istered agent is not a dead end in the investigatory process. The 

registered agent has to have on file the name of the communications contact for that business entity so that law enforcement can 

continue down that trail. 

And then we said if an agent is failing to do that, failing to retain this information, failing to have a business license, failing to 

have an office open for business during normal business hours, the 

Secretary of State can go to the Court of Chancery and get them 

enjoined from doing business in the State or their officers and directors. 

This act takes effect January 1, 2007 and we look forward to enforcing it. There may be some registered agents in Delaware that 

may not be in Delaware anymore after we take certain actions. 

Senator CARPER. Are there other changes? Delaware corporate 

law is dynamic and it changes from time to time and updated by 

the legislature and governor. Are there other changes that you 

foresee that might be considered along these lines? 

Mr. GEISENBERGER. I think the question of whether Delaware 

would eventually require that a manager be part of the public filing is something that the State may consider, taking the input of 

corporate attorneys and others in the law-enforcement community. 

I think our biggest concern is requiring that every business entity 

in Delaware and in the United States then track that ownership 

down to the level of a natural person because in so many legitimate 

business transactions the managers and members are other business entities. 

Senator CARPER. As Ms. Flynn reviewed the law in the Commonwealth, one of the questions I had, and I again direct it to Mr. Anderson and Mr. Geisenberger, did you hear anything there that she 

described and said that might make sense for us? 

Mr. ANDERSON. Yes, Senator Carper. While it may make sense, 

it is something that I would definitely take back and discuss with 

our resident agents and with our business law section of the State 

Bar Association. The Secretary of State generally does not make 

the substantive changes to the commercial law and I would definitely have to defer to the business law section of the State Bar 

and the resident agents in regards to this. 

However, in hearing some of the ideas brought forth from the 

State of Massachusetts and from Delaware, this is information that 

I can take back to them as part of our discussion. 

Senator CARPER. Mr. Geisenberger, before you respond, Ms. 

Flynn as you heard your fellow witnesses from Nevada and Delaware testify with respect to what we do in our State and what they 

do in Nevada, does anything pop up for you that says they may 

want to do that differently and we have some ideas that might 

apply? 

Ms. FLYNN. There are two things that I think I would suggest 

they do differently, and the first would be to change the way in 

which they review documents. I think presently both Nevada and 

Delaware, the review of documents submitted is a ministerial review, which does not give them room to determine that documents 

comply with law. So if there is something that appears unlawful on 

their face, they have no ability to take action. So I would suggest 

44

that is the more appropriate standard for a corporate formation 

agency. 

And second, I think that there are a number of things that they 

can do with regard to beneficial ownership. I understand the concerns that maybe investors do not want beneficial ownership on the 

public record, because everything in our office is immediately accessible online and there are some very strong privacy concerns. But 

I think that those concerns can be—— 

Senator CARPER. Could you give an example or two of one of 

those privacy concerns? 

Ms. FLYNN. I will give you an example. Jerry Lewis was an officer and director of the Jerry Lewis Telethon. And at one point, 

under Massachusetts law he had to provide his residential address 

on filings with our office. That was fine when those documents 

were just microfilmed. But when those documents were now 

scanned and put out on the web for anyone to see, his home address became accessible to anyone who had the ability to do a little 

bit of searching and therefore his security was jeopardized. 

Senator CARPER. Where does he live? 

Ms. FLYNN. He has since moved. 

And there are concerns of others, law-enforcement personnel and 

that type of thing, those types of people who necessarily do not 

want their home address on the public record, people who have 

been involved in peacekeeping in other countries who now return 

home where they do not want their addresses on the public record. 

So one of the things that we did was to change from residential 

addresses to business addresses. 

And with regard to beneficial owners, that list is not maintained 

in the Secretary of State’s office where it would be public record 

but it is maintained in the Commonwealth and is accessible to law 

enforcement upon request and to the Secretary. 

Senator CARPER. Mr. Chairman, if I could just bounce it back to 

Mr. Geisenberger, and if you have any response to the points that 

Ms. Flynn made and some areas that we might want to take under 

advisement in Delaware. 

Mr. GEISENBERGER. First, I need to say that the review that 

Delaware officials take of documents is not a ministerial function. 

Senator CARPER. How would you describe it? 

Mr. GEISENBERGER. If there is something that does not follow the 

law, we reject the document or suspend the document until such 

time as the document comes into compliance with the law. 

We get dozens of requests every single day in Delaware for beneficial ownership information. The typical phone call that I get is 

from somebody with a small-town newspaper in wherever it might 

be, North Dakota, saying we want to know who owns ABC LLC, 

a Delaware corporation. We will frequently ask why because we are 

kind of interested. And they will say well, they are trying to build 

a development and people want to oppose that development and we 

need to know who really owns it. 

My concern about making this kind of information on the public 

record is that if that is the kind of thing—I think that could have 

tremendous economic impact on the United States. If we put information on the public record that will actually prevent legitimate 

businesses from assembling parcels of real estate, investing in varVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
45

ious investment vehicles, if it creates situations where an investor 

wishes to invest in multiple funds that maybe compete with each 

other, and then everybody knows oh, that guy is invested in my 

competitor, which creates a lot of issues for the types of businesses 

that form in Delaware. 

Keeping the record with the registered office is certainly something, as you know we have a Corporation Law Council, it is really 

something they can be reviewed by that Corporation Law Council. 

I think it raises a lot of issues because, as we said, one of the 

things we want to make sure of is that we are not inhibiting the 

free flow of capital and the ease of capital formation. 

Frequently shares of corporations, certainly publicly traded companies, but even privately held companies, those shares freely flow 

to different owners every single day of the year. Even on an 

intraday basis. So the lists you are likely to have at the time that 

law enforcement makes a request, I think it would be very difficult 

for those types of business entities that have thousands of beneficial owners, or in some cases millions of beneficial owners, to be 

able to keep track of that in their registered office on a daily basis 

or an intraday basis. 

Senator CARPER. My thanks to each of you and we appreciate 

your testimony and we appreciate your responses to our questions. 

Thanks so much. 

Senator LEVIN. In Delaware now there is a communication contact. Is that what is required by law? 

Mr. GEISENBERGER. That is correct. Every business entity must 

provide a communications contact to their registered agent. 

Senator LEVIN. Does that person have knowledge of the beneficial owners? 

Mr. GEISENBERGER. They may or they may not. 

Senator LEVIN. They are not required to? 

Mr. GEISENBERGER. They are not required to. 

Senator LEVIN. Is there any reason not to require them to have 

the beneficial owners? 

Mr. GEISENBERGER. I think it raises the same question I just 

mentioned to Senator Carper, which is that the beneficial owners 

frequently are changing on a regular basis, on a daily basis, and 

even an intraday basis for both corporations and for LLCs. 

Senator LEVIN. Is that not true in Massachusetts? 

Mr. GEISENBERGER. I believe it is. I do not know how many public traded or large companies——

Senator LEVIN. We are not talking publicly traded. 

Mr. GEISENBERGER. Even large privately held companies. 

Senator LEVIN. It is true in all the States, I assume? We all incorporate. Delaware may have more than others, but we all incorporate. 

Mr. GEISENBERGER. It may well be true that the same situation 

exists in those other States. 

Senator LEVIN. But if they are able to keep track of it, why cannot your communications person keep track of it in a non-public 

corporation? 

Mr. GEISENBERGER. I will use an example. I mentioned Cargill, 

which is one of the largest privately held companies in the country. 

They have 2.7 billion authorized shares. They are not publicly tradVerDate 0ct 09 2002 08:44 Apr 03, 2007 Jkt 032353 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 C:\DOCS\32353.TXT SAFFAIRS PsN: PAT
46

ed. Those 2.7 billion shares are owned by thousands of individuals. 

I do not know how those shares trade on a daily basis or do not 

trade on a daily basis or get transferred to other individuals on a 

daily basis. 

I think it would be difficult to keep that in the State of Delaware 

and to say to a resident agent ‘‘from now on you are the recorder 

of who are the owners of this entity at any given moment.’’ 

Senator LEVIN. Does anybody keep track of the beneficial owner? 

Mr. GEISENBERGER. I would assume that Cargill keeps a shareholder registry of their own. 

Senator LEVIN. Could not the communications person say go to 

Cargill? 

Mr. GEISENBERGER. That would be the holder of record, not necessarily the actual beneficial owner. 

Senator LEVIN. Does anybody keep a record of all of those beneficial owners, do you think? 

Mr. GEISENBERGER. Certainly these large companies do not know 

the actual beneficial holders of trusts, LLCs and others that are 

the beneficial holders of shares in privately held institutions. 

Senator LEVIN. Do most States require annual reports? 

Mr. GEISENBERGER. Most States require an annual report of directors and some officers for corporations. Many States do not require an annual report for limited liability companies. 

Senator LEVIN. So what you are saying is that when it comes to 

beneficial ownership in non-publicly traded corporations that there 

is no central place where those lists are kept inside the company? 

That is what you are saying? 

Mr. GEISENBERGER. I am saying that the actual natural person 

that is the beneficial owner, no, there is no requirement. 

Senator LEVIN. I am not saying requirement. There is no place 

inside that company where those owners are named and listed? 

That is the ordinary course of business, that inside a non-publicly 

traded company——

Mr. GEISENBERGER. There is no requirement to do so. 

Senator LEVIN. I am not saying a requirement. I am saying that 

when a company is formed, a corporation is formed, that is not a 

publicly traded corporation, you are saying as a matter of common 

practice that there is no place where the owners of that company 

are listed? 

Mr. GEISENBERGER. Typically an LLC, certainly one with one or 

two members, would have, in their own office, a record of who are 

the owners of that entity. 

Senator LEVIN. Who would ordinarily keep the list of the owners 

of a non-publicly traded company? Would they not almost ordinarily have a—— 

Mr. GEISENBERGER. With respect to an LLC, it would probably 

be the manager of the LLC, which could be another business entity. 

Senator LEVIN. Would the manager of a non-publicly owned company ordinarily keep a list of the owners of that company? 

Mr. GEISENBERGER. They would keep a list of the owners or business entities that are the owners, yes. 

47

Senator LEVIN. So is there any reason why your communications 

person could not let the law enforcement person know who the 

manager is that keeps that list? 

Mr. GEISENBERGER. You mean require that the communications 

contact be the person that maintains that list? 

Senator LEVIN. No, that they cooperate with law enforcement to 

identify who that owner is, who that manager is? 

Mr. GEISENBERGER. It is certainly something to consider. I think 

it could be a requirement, that the communications contact is 

aware of the—is able to communicate with the manager that is 

tracking the holders of record. It is worthy of consideration, sir. 

Senator LEVIN. That would be very helpful. Somehow or another 

we are going to have to crack this nut. It is not acceptable that we 

just simply say that we are not going to be able to identify the 

owners of companies and we are going to allow them to be anonymous and therefore do whatever nefarious action they might be engaged in. We are going to have to find ways and if the States cannot do it, it seems to me the Federal Government is going to have 

to have some kind of a minimal requirement to do it. 

That is not a particularly onerous requirement, to say since there 

is a communications connection to a corporation that that person 

be able to identify the manager who keeps a list of the beneficial 

owners. There is no great problem in terms of an unfunded mandate in that regard. 

Hopefully the States are going to do this on their own and recognize the importance to all of our security and all of our well-being 

that we know who these folks are who own these companies. 

I do not think the purpose of a corporation ever was to provide 

anonymity. I used to study corporation law about 50 years ago, so 

maybe my memory is a little off. But we have checked with more 

current—with people who teach corporation law and that is not the 

purpose of a corporation, to provide anonymity to shareholders. It 

is to provide limited liability, it is to provide easy ability to transfer 

stocks, but it is not to provide anonymity. 

We have people who file assumed name certificates who form 

companies, who form partnerships. Those are listed in our Secretary of State’s offices and in our local clerks’ offices. It is done 

all the time and should be done. 

I agree and I understand the sensitivity about home addresses. 

I am 100 percent with Jerry Lewis, both in his telethon and in protecting his home address. Those addresses should be and are protected. 

But in terms of the identity as to who the owners are of companies, I just do not think that we can argue that the owners of companies can incorporate, thereby protecting themselves from being 

identified from law-enforcement. The stakes are too high, it seems 

to me, in terms of law enforcement for us to accept that as the rule. 

I would hope that all of the States, I include Delaware, I include 

Nevada, all of the States would really be concerned when they see 

the way incorporating in their States are being peddled around the 

world. When you look at these websites, it is not that you have a 

great judiciary or wonderful corporation law that is selling Delaware on these websites. It is that owners’ names are not disclosed. 

It is that we have top notch privacy restrictions. It is that you can 

48

1The prepared statement from Financial Action Task Force appears in the Appendix as Exhibit 3 on page 225. 

use a lawyer, I think in the case of Wyoming, they claim that you 

can have a lawyer to be your incorporator. And that lawyer can assert a lawyer-client privilege to stop law enforcement from getting 

access to information, which I do not believe is right. But nonetheless, that is what they claim. 

I think there is a shared responsibility that we all have. Corporations serve obviously a very important function. We all acknowledge that. We also have to bring those disclosures into the real 

world that we have to deal with, which is a world where there is 

money laundering, where there is fraud, where there is misuse of 

the corporate entity, where now globally you are able to incorporate 

in some island in the Caribbean or some guy in some country can 

incorporate in one of our States on a computer in 10 minutes and 

thereby gain the kind of anonymity which then allows that corporation to be the person or entity that is shipping and laundering 

money coming into the United States. 

Everyone talks about globalization. We need our corporate citizens—and you are citizens—to meet these needs. 

In the meantime, the problem has existed apparently since 1977, 

we were told earlier today, more immediately and with greater immediacy, with the recent changes in our laws, including the PATRIOT Act. And so we are going to have to ask our States to seriously consider what law enforcement needs are. But in the meantime we have to do what we did earlier today, I believe, which is 

to ask law enforcement to tell Congress what it is they need to 

know and how are we going to require access to that information, 

hoping that it will not be necessary to pass Federal requirements. 

But if it is, hopefully they will be minimal, non-obtrusive, non-expensive, but at least require information to be maintained which 

would be accessible. If not verified, at least maintained so that our 

law enforcement people would have an opportunity then to track 

the names that are needed. 

We extended an invitation to the Financial Action Task Force’s 

Executive Secretary to appear at today’s hearing. Due to prior commitments he was unable to attend. He did submit a written statement. This statement will be included in the printed hearing record 

as an exhibit.1

Senator CARPER. I am all done. 

Senator LEVIN. I want to thank you, as always, for your contributions. I will not interject too partisan a note here, but I think every 

Member of this body, Democratic or Republican, is thrilled with the 

decision of the people of Delaware to return our dear colleague, 

Tom Carper, to the Senate. And I do not think if there were Republicans sitting over here, there would be any disagreement on that. 

Thank you for your coming here today to this panel and we will 

stand adjourned. 

[Whereupon, at 5:02 p.m., the Subcommittee was adjourned.] 

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Æ


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