S. Hrg. 111–953 

STATE BUSINESS INCORPORATION—2009 

HEARINGS 

BEFORE THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

OF THE

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JUNE 18, 2009 

EXAMINING STATE BUSINESS INCORPORATION PRACTICES: 

A DISCUSSION OF THE INCORPORATION TRANSPARENCY 

AND LAW ENFORCEMENT ASSISTANCE ACT 

NOVEMBER 5, 2009 

BUSINESS FORMATION AND FINANCIAL CRIME: FINDING A 

LEGISLATIVE SOLUTION 

Available via the World Wide Web: http://www.fdsys.gov 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 

STATE BUSINESS INCORPORATION—2009 

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

51–788 PDF 2011

S. Hrg. 111–953 

STATE BUSINESS INCORPORATION—2009 

HEARINGS 

BEFORE THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

OF THE

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JUNE 18, 2009 

EXAMINING STATE BUSINESS INCORPORATION PRACTICES: 

A DISCUSSION OF THE INCORPORATION TRANSPARENCY 

AND LAW ENFORCEMENT ASSISTANCE ACT 

NOVEMBER 5, 2009 

BUSINESS FORMATION AND FINANCIAL CRIME: FINDING A 

LEGISLATIVE SOLUTION 

Available via the World Wide Web: http://www.fdsys.gov 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 

(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

ROLAND W. BURRIS, Illinois 

MICHAEL F. BENNET, Colorado* 

*Replaced by Senator Kirk for Nov. 5 hearing 

PAUL G. KIRK, JR., Massachusetts* 

*Replaced Senator Bennet for Nov. 5 hearing 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

GEORGE V. VOINOVICH, Ohio 

JOHN ENSIGN, Nevada 

LINDSEY GRAHAM, South Carolina 

ROBERT F. BENNETT, Utah* 

*Added for November 5, 2009 hearing 

MICHAEL L. ALEXANDER, Staff Director 

DEBORAH P. PARKINSON, Professional Staff Member 

RACHEL R. SOTSKY, Legislative Assistant, Office of Sen. Lieberman 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

AMANDA WOOD, Minority Director of Governmental Affairs 

TRINA DRIESSNACK TYRER, Chief Clerk 

PATRICIA R. HOGAN, Publications Clerk and GPO Detailee 

LAURA W. KILBRIDE, Hearing Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Lieberman ........................................................................................... 1, 39 

Senator Levin .................................................................................................... 3, 42 

Senator Carper................................................................................................ 19, 44 

Senator Ensign ................................................................................................. 40 

Senator Bennett ................................................................................................ 57 

Senator McCaskill ............................................................................................ 62 

Senator Burris .................................................................................................. 64 

Prepared statements for June 18: 

Senator Lieberman ........................................................................................... 85 

Senator Levin with attachments ..................................................................... 90 

Senator Carper ................................................................................................. 146 

Prepared statements for November 5: 

Senator Lieberman ........................................................................................... 362 

Senator Levin with attachments ..................................................................... 364 

Senator Carper ................................................................................................. 369 

Senator Ensign ................................................................................................. 373 

Senator Burris .................................................................................................. 375 

Senator Kirk ..................................................................................................... 376 

WITNESSES 

THURSDAY, JUNE 18, 2009 

Janice Ayala, Deputy Assistant Director, Office of Investigations, U.S. Immigration and Customs Enforcement, U.S. Department of Homeland Security . 7 

Jennifer Shasky Calvery, Senior Counsel to the Deputy Attorney General, 

U.S. Department of Justice ................................................................................. 10 

Elaine F. Marshall, North Carolina Secretary of State, and Co-Chair, Company Formation Task Force, National Association of Secretaries of State 

(NASS) .................................................................................................................. 12 

Adam S. Kaufmann, Assistant District Attorney, Chief of Investigation Division Central, New York County District Attorney’s Office, on behalf of 

Robert M. Morgenthau, District Attorney for New York County, State of 

New York .............................................................................................................. 15 

Harry J. Haynsworth, Chair, Drafting Committee on the Uniform Law Enforcement Access to Entity Information Act, Uniform Law Commission ........ 17 

THURSDAY, NOVEMBER 5, 2009 

Hon. David S. Cohen, Assistant Secretary for Terrorist Financing, U.S. Department of the Treasury .................................................................................... 46 

Jennifer Shasky, Senior Counsel to the Deputy Attorney General, U.S. Department of Justice .............................................................................................. 49 

David H. Kellogg, President and Chief Executive Officer, Solers, Inc. ............... 67 

Kevin L. Shepherd, Member, Task Force on Gatekeeper Regulation and the 

Profession, American Bar Association ................................................................ 70 

John R. Ramsey, National Vice President, Federal Law Enforcement Officers 

Association ............................................................................................................ 72 

Jack A. Blum, Chairman, Tax Justice Network USA; and Member, Advisory 

Board, Global Financial Integrity ....................................................................... 75 

Page

IV 

ALPHABETICAL LIST OF WITNESSES

Ayala, Janice: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 148 

Blum, Jack A.: 

Testimony .......................................................................................................... 75 

Prepared statement with an attachment ....................................................... 418 

Cohen, Hon. David S.: 

Testimony .......................................................................................................... 46 

Prepared statement .......................................................................................... 377 

Haynsworth, Harry J.: 

Testimony .......................................................................................................... 17 

Prepared statement with attachments ........................................................... 200 

Kaufmann, Adam S.: 

Testimony .......................................................................................................... 15 

Prepared statement on behalf of Robert M. Morgenthau ............................. 192 

Kellogg, David H.: 

Testimony .......................................................................................................... 67 

Prepared statement .......................................................................................... 395 

Marshall, Elaine F.: 

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

Prepared statement with attachments ........................................................... 172 

Morgenthau, Robert M. delivered by Adam S. Kaufmann: 

Testimony .......................................................................................................... 15 

Prepared statement .......................................................................................... 192 

Ramsey, John R.: 

Testimony .......................................................................................................... 72 

Prepared statement .......................................................................................... 414 

Shasky, Jennifer: 

Testimony....................................................................................................... 10, 49 

Prepared statement................................................................................... 156, 388 

Shepherd, Kevin L.: 

Testimony .......................................................................................................... 70 

Prepared statement .......................................................................................... 402 

APPENDIX 

Letters of support for June 18 hearing submitted by Senator Levin .................. 271 

Copy of Mr. Geisenberger testimony, November 14, 2006, submitted by Senator Carper ........................................................................................................... 296 

Get back to Levin (letter and survey) from Ms. Marshall with attachments ..... 314 

Other letters of opposition/support for June 18 hearing ...................................... 317 

Article submitted by Senator Levin ....................................................................... 432 

Letter to Senator Dodd from Secretary Geithner, submitted by Senator Levin 433 

Letter of support/opposition submitted by Senator Ensign .................................. 435 

Other letters of support/opposition for Nov. 5 hearing ......................................... 439 

Questions and responses for the Record for June 18 hearing from: 

Ms. Ayala .......................................................................................................... 353 

Mr. Kaufmann .................................................................................................. 355 

Ms. Shasky Calvery .......................................................................................... 358 

Questions and responses for the Record for Nov. 5 hearing from: 

Mr. Cohen .......................................................................................................... 464 

Ms. Shasky ........................................................................................................ 472 

Mr. Kellogg ........................................................................................................ 476 

Mr. Shepherd .................................................................................................... 479 

Mr. Ramsey ....................................................................................................... 485 

(1) 

EXAMINING STATE BUSINESS 

INCORPORATION PRACTICES: A DISCUSSION 

OF THE INCORPORATION TRANSPARENCY 

AND LAW ENFORCEMENT ASSISTANCE ACT 

THURSDAY, JUNE 18, 2009 

U.S. SENATE,

COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Committee met, pursuant to notice, at 2:31 p.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Joseph I. Lieberman, Chairman of the Committee, presiding. 

Present: Senators Lieberman, Levin, and Carper. 

OPENING STATEMENT OF CHAIRMAN LIEBERMAN 

Chairman LIEBERMAN. The hearing will come to order. Good 

afternoon. I was waiting a moment. Senator Levin is on his way. 

Senator Carper will be here a bit later. Unfortunately, Senator Collins is involved in Appropriations Committee markup deliberations, 

so she cannot be with us. 

Welcome to our hearing on the Incorporation Transparency and 

Law Enforcement Assistance Act, S. 569, a bill that has been introduced by Senators Levin and McCaskill on this Committee and 

Senator Grassley of Iowa as well. The bill results from the persistent investigative work of the Permanent Subcommittee on Investigations (PSI) of this full Committee. 

I am about to thank Senator Levin before he is here. I was once 

told that if someone praises you in Washington when you are not 

in the room, they really mean it. So I am going to do that quickly 

before he gets here, because I mean it. I do want to thank my very 

good friend and colleague Senator Levin, who chairs the Permanent 

Subcommittee on Investigations, for introducing this legislation 

after an intensive investigative review of State incorporation procedures. The PSI staff has dedicated many hours to this matter, dating back years, and has identified numerous problems that have 

become law enforcement problem that are caused by the use of 

shell companies for illicit purposes. And I appreciate very much the 

work of the leadership of the Permanent Subcommittee on Investigations of this Committee and its bipartisan staff. 

Each year, nearly 2 million new corporations and limited liability 

companies are established in the 50 States and the District of Columbia. That is more than 5,000 new businesses per day, just what 

we want and are proud of. It is part of the American way, entrepreVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
2 

neurship at its best, generating revenue, creating jobs, and helping 

people realize their dreams. 

But, each year, some of the new businesses are incorporated for 

improper or illegal purposes—to try, for instance, to use the corporate status to defraud innocent people or to cheat tax authorities, 

or to hide the true nature of their transactions, or even, as we 

know, to launder ill-gotten funds. 

No one can put a figure on the number of corporations set up for 

illegitimate purposes, but some analysts have estimated that billions of dollars may flow through such U.S. corporations every 

year. 

Right now, a majority of States require some basic information 

from those seeking to establish a corporation. Most require the 

name and address of the company, the name of a registered agent 

who represents the company, and a list of officers or directors. This 

information is typically considered a matter of public record. 

It has long been customary, however, for States to allow the individuals with actual ownership interest—including the investors 

who control the corporation or partnership—to remain anonymous 

to State authorities and, therefore, to the public. This has often become a problem for law enforcement officials who have cause to investigate a company that has aroused their suspicions. The trail 

goes cold when they search public records and find no record of the 

people behind the incorporation—the people who may be using the 

business for illicit purposes. 

Senator Levin’s bill—and it is, as I said at the outset, Senator 

Levin, Senator Grassley, and Senator McCaskill particularly—is 

designed with these law enforcement investigations in mind. It 

would set a national minimum standard intended to require States 

to collect and maintain information about a corporation’s underlying owners to help law enforcement in its work. The bar is set 

higher yet for foreign owners, whose identities must be verified by 

the company’s registered agent before the State can process the 

forms and set up the corporation. This bill gives States the authority to decide whether to keep the beneficial ownership information 

private or to make it a matter of public record. 

So this is a classic transparency requiring laws which includes 

some new penalties for providing false or insufficient information. 

It is sunshine legislation in the best sense of the word. But we all 

know that such legislation has to be weighed against other factors 

as well, including the privacy rights of those making in this case 

personal investment decisions and, others would argue, the potential costs of administration and enforcement that would fall on 

State governments and companies. 

Senator Levin’s bill, for example, would not require States to 

verify the accuracy of information provided before granting a new 

entity its legal status. 

The Uniform Law Commission (ULC), which I am pleased to say 

is represented here today, has drafted an alternative proposal that 

would leave companies in charge of maintaining the required information. Forty-four out of the 50 States already ask corporations to 

keep lists of all members or shareholders of record, the real owners, at their principal offices. The ULC’s recommendation now 

seeks to strengthen that practice. 

3 

So today, in a matter that really matters, we are going to try to 

better identify both the problem and to discuss what the best solution to it is. We do have a panel of witnesses very experienced and 

informed on business incorporations and on corporate investigations. I look forward to their testimony of this full Committee, following the excellent investigation of our Permanent Subcommittee, 

on this legislation which aims to limit illegal operations, without 

damaging the smooth flow of commerce for legitimate corporate 

purposes. 

Senator Levin, I spoke in highly laudatory terms of you in your 

absence. I could repeat those now, but I will just say how much I 

appreciate your work on this and so much else, and I call on you 

now for an opening statement. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Mr. Chairman, thank you for those comments, 

and thanks so much for holding this hearing to focus on the fact 

that we are forming about 2 million U.S. corporations and limited 

liability companies each year without knowing who is behind them. 

My opening statement, Mr. Chairman, is a bit long, and if it gets 

too long, do not hesitate to let me know, and I will cut off whenever 

that moment comes. 

Chairman LIEBERMAN. It will be a pleasure if that moment 

comes. [Laughter.] 

Senator LEVIN. And I think we have a vote, actually, in a few 

minutes. 

Chairman LIEBERMAN. Go right ahead. 

Senator LEVIN. U.S. corporations with hidden owners have created a serious law enforcement and a national security problem. 

For instance, we are going to hear today from witnesses about U.S. 

corporations that, it turns out, were established by the military in 

Iran, a state sponsor of terrorism. We are going to hear about U.S. 

corporations involved with money laundering, about U.S. corporations that are used to commit tax evasion and more, and they all 

have one thing in common: Their real owners—the legal term is 

‘‘beneficial owners’’—are hidden from view. Here is one example of 

what is going on. 

In 2004, one of our key law enforcement agencies, Immigration 

and Customs Enforcement (ICE)—who is here today—uncovered a 

collection of U.S. companies that were secretly controlled by entities located in Panama. The investigation began when bank reports 

showed that a single company, formed in Utah, was participating 

in nearly $150 million in suspicious international wire transfers. 

Further investigation by ICE uncovered a network of nearly 800 

U.S. companies, dispersed among nearly all 50 States, controlled by 

the same Panamanian entities. These companies were transferring 

large amounts of money to each other and to high-risk jurisdictions 

overseas. 

The companies claimed they were paying for the import or export 

of goods, but it turned out no such goods were being shipped. In 

effect, the money transfers were part of a massive financial shell 

game in which U.S. companies were being used to disguise the 

movement of funds and to mask suspicious activity. 

4 

1The exhibits referenced by Senator Levin appear in the Appendix on page 107. 

When ICE obtained the incorporation records for the 800 U.S. 

companies, not one identified a company’s true owner. After analyzing the available information, ICE found that nearly 200 companies had been formed in Utah and used the same company formation agent in a small office in a Salt Lake City suburb. That company formation agent also served as the company’s registered agent 

within the State to accept service of process. When questioned by 

ICE, the Utah registered agent indicated that he had formed the 

companies at the request of another company formation agent located in Delaware, did not have any beneficial ownership information, and believed that all were ‘‘shell companies,’’ with no real 

business operations in the United States. 

The Delaware company formation agent was already well known 

to law enforcement. No less than eight previous investigations had 

led to its doors, each of which involved millions of dollars in suspected money laundering by U.S. shell companies associated with 

the same Panama entities. When questioned by ICE in the prior 

cases, the Delaware company formation agent freely admitted that 

he knew some of the corporations he formed or caused to be formed 

were intended to move money out of Russia and some former Soviet republics. He also said that he sometimes sold U.S. companies 

to the same overseas buyer at the rate of 40 companies per month. 

When asked about the actual owners of the 200 Utah companies, 

the company formation agent was unable to provide law enforcement with any names since that information was not required by 

law. 

The end result was that the ICE investigation, like the eight before it, hit a dead end, unable to proceed due to the lack of beneficial ownership information. A hearing exhibit that is in our books 

summarizes the case. 

Now, Michael Chertoff, former Secretary of the U.S. Department 

of Homeland Security (DHS), wrote the following: ‘‘In countless investigations where the criminal targets utilized shell corporations, 

the lack of law enforcement’s ability to gain access to true beneficial ownership information slows, confuses, or impedes the efforts 

by investigators to follow criminal proceeds. This is the case in financial fraud, terrorist financing, and money-laundering investigations. It is imperative that States maintain beneficial ownership information while the company is active and to have a set time frame 

for preserving those records.’’ 

Here is another aspect of the problem. A few weeks ago, members of my staff conducted an Internet search and found numerous 

company formation agents advertising the sale of U.S. companies 

and trumpeting the fact that U.S. companies can be formed without disclosing the names of any company owner. One of the most 

blatant was Corporations Today, Inc., which advertises its ability 

to form U.S. corporations in nearly every State with minimal cost 

and effort. Copies of some of its Internet ads are presented in the 

two hearing exhibits,1 and the chart which I am putting up here 

reproduces one of its advertisements offering the sale of aged corporations, meaning companies which Corporations Today formed 

5 

1The chart referred to by Senator Levin appears in the Appendix on page 95. 

years earlier.1 One of the companies on sale for $6,000 is advertised as coming with 4 years of tax returns and an existing employer identification number (EIN), issued by the IRS. 

Why buy an aged corporation? According to Corporations Today, 

‘‘Obtaining bank loans may be easier when you can show you have 

history.’’ So is ‘‘obtaining corporate credit cards and leases.’’ The 

quote goes on: ‘‘For example, Dell computers lease only to corporations 6 months old or more.’’ 

They are selling aged corporations for a price—corporations that 

have been in business, allegedly, for 6 months or more. So Dell is 

told, Hey, this corporation has been in business for years, so we are 

now eligible to lease your product. 

So the ad invites fraud. It enables hidden owners to pretend that 

they have had a corporation operating in the United States for 

years when they have not. Despite mounting evidence of misconduct by U.S. shell corporations, despite Internet advertisements 

selling U.S. corporations with promises of unanimity, despite the 

years of law enforcement complaints, many of our States are reluctant to admit that there is a problem in established U.S. corporations with hidden owners. Too many of our States are eager to explain how quick and easy it is to set up corporations within their 

borders without acknowledging that those same quick and easy 

procedures enable wrongdoers to utilize U.S. corporations in a variety of ways both here and abroad. 

In 2006, the leading international anti-money-laundering body in 

the world, the Financial Action Task Force (FATF) on Money Laundering, issued a report criticizing the United States for failing to 

comply with the FATF standard which requires countries to obtain 

beneficial ownership information for the corporations formed under 

their laws. FATF gave the United States 2 years, until July 2008, 

to make progress towards compliance with the FATF standard. 

Next week, FATF is scheduled to review U.S. actions on this matter. How can we possibly justify our failure to do what we have 

committed to do: Obtain beneficial ownership information for the 

corporations formed within the United States? 

Our bill, the Levin-Grassley-McCaskill bill, that is the subject of 

today’s hearing, would assist our law enforcement community instead of thwarting it and would enable the United States to meet 

its commitment to FATF. Our bill would require States to add a 

question to their incorporation forms asking for the names and addresses of the beneficial owners of a proposed corporation. States 

would not be required to verify the information, but penalties 

would apply to persons who submit false information. 

Prospective corporations with foreign owners would also be required to submit a certification from an in-state company formation 

agency that the agent had verified the owners’ identities and obtained photographs for them. 

This beneficial ownership information would have to be updated 

annually. If law enforcement issued a subpoena or a summons to 

obtain the ownership information, States would supply the data 

contained on its forms. And I want to emphasize that point because 

the Chairman made an important point here about privacy. This 

6 

1The chart referred to by Senator Levin appears in the Appendix on page 96. 

2The chart referred to by Senator Levin appears in the Appendix on page 97. 

beneficial ownership information would be available only when the 

law enforcement folks issued a summons or a subpoena. 

Funds that are already provided to States on an annual basis by 

the Department of Homeland Security could be used to pay for the 

minimal cost associated with adding a question to their incorporation forms. 

Now, chart 2 summarizes how the bill would work.1 It is a very 

simple step. You file a corporation with the Secretary of State. It 

has the beneficial ownership information. Law enforcement can request it with a subpoena or summons, and the Secretary of State 

can respond. 

Introducing this legislation, Mr. Chairman, was not our first 

choice. In fact, at the request of the States, we delayed introducing 

a bill for a year to provide the States with an opportunity to craft 

their own solution. But when it became clear that the States would 

not step up to the plate, we then introduced the bill, last time cosponsored by Senator Coleman and at that time, Senator Obama, 

in the last Congress—and that legislation which was introduced 

last Congress is identical to the bill which we have introduced in 

this Congress and which is before the Committee today. 

Now, today’s hearing is going to discuss not only our bill but an 

alternative proposal developed by the National Conference of Commissioners on Uniform State Laws (NCCUSL), at the request of the 

National Association of Secretaries of State. But the NCCUSL proposal fails to cure the problem and would create a host of new ones. 

Most significantly, the NCCUSL proposal would not require 

those seeking to form a U.S. corporation to provide the names of 

the beneficial owners to the State. In fact, the term ‘‘beneficial 

owner’’ never appears anywhere in their proposal. Instead, the proposal creates a complex and time-consuming procedure, summarized in the chart which we are putting up now,2 which requires 

law enforcement to get the name of a company’s so-called records 

contact person from the State, chase down that individual, ask that 

individual to ask the U.S. company under suspicion for certain 

ownership information. If the U.S. company responds, it is still not 

required to provide its beneficial owners, but what are essentially 

its owners of record, which could be shell companies here or overseas. In other words, to say that owners of record are going to be 

supplied after all that effort does not get to the people who really 

control the corporation because shell companies, either here or 

abroad, can be the owners of record. 

So if a company has been involved in a crime or has been dissolved, the records contact individual will likely come back emptyhanded. Instead of getting the beneficial ownership information it 

needs, law enforcement is going to be chasing its tail, and chasing 

its tail after the misconduct has occurred, and maybe after the suspect company shut down. And, to add to the futility of this convoluted process, it may not produce any useful information. 

Another problem involves timing, Mr. Chairman. Instead of collecting beneficial ownership information at the time that a new corporation is being formed in the United States, as our bill does, the 

7 

1The letters of support submitted by Senator Levin appears in the Appendix on page 271. 

2The prepared statement of Ms. Ayala appears in the Appendix on page 148. 

NCCUSL proposal would allow hidden persons to obtain a U.S. corporation, misuse it, and only after the fact does it set up a process 

for requesting ownership information. Worse, the proposal would 

require law enforcement to direct its information request not to a 

State on a confidential basis, but to the suspect company itself, 

which would then be alerted to the investigation. Informing suspects of active U.S. law enforcement investigations is not a good 

way to thwart or punish crime. 

There is a long list of endorsers of our legislation, including the 

Federal Law Enforcement Officers Association, the Fraternal Order 

of Police, the National Association of Assistant U.S. Attorneys, and 

more. It has been endorsed by groups combating financial and corporate abuses, including Tax Justice Network, Global Financial Integrity, Citizens for Tax Justice, Public Citizen, and more.1 There 

are letters of support we will offer for the record, Mr. Chairman, 

as well as the balance of my statement. And, again, I thank the 

Chairman. 

Chairman LIEBERMAN. Thank you, Senator Levin, for a very 

thoughtful statement, which shows the work that you and the staff 

of the PSI did. 

I think it is probably best that we recess now. We will go over 

and vote. We will come right back. Please do not go too far because 

we will start quickly. 

The hearing stands in recess. 

[Recess.] 

Chairman LIEBERMAN. Thank you very much for your patience. 

Senator Levin had urged me to reconvene. He has got a quick 

meeting of the Armed Services Committee that he is chairing. 

So we will go first to Janice Ayala, Deputy Assistant Director, 

Office of Investigations, U.S. Immigration and Customs Enforcement, U.S. Department of Homeland Security. It takes a while to 

introduce you these days. 

Ms. AYALA. It is a long title. 

Chairman LIEBERMAN. Anyway, we appreciate very much your 

coming, and obviously we want to hear your reaction to this proposed piece of legislation. 

TESTIMONY OF JANICE AYALA,2 DEPUTY ASSISTANT DIRECTOR, OFFICE OF INVESTIGATIONS, U.S. IMMIGRATION AND 

CUSTOMS ENFORCEMENT, U.S. DEPARTMENT OF HOMELAND 

SECURITY 

Ms. AYALA. Thank you. Chairman Lieberman, distinguished 

Members of the Committee, on behalf of Secretary Napolitano and 

Assistant Secretary John Morton, I would like to thank you for the 

opportunity to testify today on the efforts of ICE to protect the 

United States from the growing threat of international money laundering. ICE has expansive investigative authority and the largest 

force of investigators in DHS. We protect national security and uphold public safety by targeting transnational criminal networks 

and terrorist organizations that seek to exploit vulnerabilities at 

our borders. 

8 

ICE also investigates individuals and organizations that exploit 

vulnerabilities in the U.S. financial system to launder illicit proceeds. ICE’s financial investigative authorities and unique capabilities enable it to identify, dismantle, and disrupt the financial criminal enterprises that threaten our Nation’s economy and security. 

The combination of Bank Secrecy Act reporting requirements and 

Anti-Money-Laundering compliance efforts has, historically, forced 

criminal organizations to seek other means to launder their illicit 

funds across our borders. However, in the attempts to accomplish 

this mission, law enforcement is often hindered by the lack of information available as to the true ownership or control of the shell 

companies that criminals utilize. Further, this impediment limits 

our abilities to work jointly with our international law enforcement 

partners and our ability to take quick action where it may be required. 

ICE has long recognized the misuse of corporations and limited 

liability companies formed under State law as a serious threat to 

the ongoing effort to combat international criminal activities. The 

lack of corporate transparency has allowed criminal entities a gateway into the financial system and further veils their illicit activity. 

Investigations can be significantly hampered, or stalled completely, 

when criminals utilize shell companies. It also impedes our ability 

to follow criminal proceeds. 

Obtaining information on true beneficial corporation owners and 

limited liability companies and providing the information to law 

enforcement upon receipt of a summons or subpoena would assist 

DHS in its endeavor to protect the country. 

At this time, I would like to share with you examples of ICE investigations that demonstrate how shell corporations established in 

the United States have been utilized to commit crimes against individuals across the world. 

An investigation was initiated by the New York office against a 

criminal organization that defrauded investors out of millions of 

dollars and laundered the fraudulently obtained proceeds. The investigation revealed an enterprise of individuals offering fictitious 

instruments for investment programs described as ‘‘currency leasing trading programs,’’ leading to more than $14 million in fraudulent transactions. These funds were laundered through a network 

of domestic and foreign bank accounts utilizing shell corporations, 

many of which had been established in the United States. 

The perpetrators operated an Internet Web site which offered investors the opportunity to lease $1 million for a $35,000 fee. Victims were told these funds would be placed into a high-yield international trading program and that they could expect as much as 

25 percent biweekly return on their investment. 

A co-conspirator established shell corporations in Delaware, Nevada, California, and Massachusetts and companies in Denmark, 

Sweden, Luxembourg, and the Bahamas, which allowed them to 

create a complex web of bank and brokerage accounts. Another coconspirator opened cash management accounts at other brokerage 

firms to receive the investors’ $35,000 fee. Once in this account, the 

funds were then transferred to secondary accounts and further disbursed to various foreign and domestic accounts and liquidated 

through the use of checks and debit cards. 

9 

The investors never realized the profits they were promised nor 

received the requested refunds. But they did receive a litany of excuses for the delays and promises that the transactions would be 

completed. 

In the end six individuals were convicted of violating moneylaundering, wire fraud, and international transportation of stolen 

funds statutes. The defendant’s use of domestic and foreign shell 

companies to layer the funds prevented full recovery of the fraudulently obtained funds. 

In 2003, ICE established a Federal Foreign Corruption Task 

Force to conduct investigations into the laundering of proceeds 

emanating from foreign public corruption, bribery, or embezzlement. Investigations are conducted jointly with representatives of 

foreign governments to prevent laundered monies from entering 

the U.S. financial infrastructure, seize identified assets in the 

United States, and repatriate these funds to the victimized governments. 

The following Miami case is another example of how shell companies are utilized for criminal activity. In this investigation, the violators utilized shell corporations to defraud the Government of 

Trinidad and Tobago out of more than $100 million. The foreign 

and domestic shell companies enabled them to engage in a bid-rigging scheme and then launder the fraudulently obtained proceeds. 

The co-conspirators bribed members of a Trinidad and Tobago bid 

committee for the construction of the Piarco International Airport 

in order to win a competitive construction bid. The U.S. targets of 

the investigation operated a construction company and architectural firm in South Florida, which submitted a competitive bid for 

work in the construction of the airport. A Trinidadian Government 

assessor believed the bid was too high and requested that a second 

bid be conducted. Based on this, the targets of the investigation 

utilized a shell company to submit a second, much higher bid for 

the work. As a result of this much higher second bid, the contract 

was awarded to the targets of the investigation. 

Once they were paid by the Trinidadian Government, they 

laundered the proceeds by layering them through a series of shell 

companies in the Bahamas, Liechtenstein, and the United States. 

Only through reviews of handwritten notes kept by Bahamian 

bankers, ICE investigators were able to identify the true beneficiaries of the funds. Six of the eight indicted individuals were 

found guilty of violating money-laundering and wire fraud statutes; 

two are awaiting extradition. As part of the sentence, the court ordered approximately $22 million in restitution be paid, but the majority of that ordered restitution has not been realized. 

The use of shell companies to engage in illicit activities, including money laundering and financial fraud, presents a number of investigative challenges for law enforcement. Greater transparency in 

the corporation formation process and providing reasonable access 

to the information will greatly assist our efforts to combat this 

threat. 

I would like to thank the Committee members for this opportunity to testify and for your continued support of ICE, Customs 

and Border Protection (CBP), DHS, and our law enforcement misVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
10 

1The prepared statement of Ms. Shasky Calvery appears in the Appendix on page 156. 

sion, and I will be happy to answer any questions that you may 

have. Thank you. 

Chairman LIEBERMAN. Thanks very much, Ms. Ayala. That was 

interesting testimony, and I appreciate the case studies. 

Next we are going to hear from Jennifer Shasky, who is Senior 

Counsel to the Deputy Attorney General at the Department of Justice. Welcome. 

TESTIMONY OF JENNIFER SHASKY CALVERY,1 SENIOR COUNSEL TO THE DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE 

Ms. SHASKY. Thank you and good afternoon, Chairman 

Lieberman. I am honored to appear before the Homeland Security 

Committee to discuss the issue of shell companies. In the time I 

have this afternoon, I would like to briefly discuss the Department’s concerns about the abuse of shell companies and our views 

on measures designed to address the problem. In using the term 

‘‘shell company,’’ I am referring to those legal entities that have no 

significant operations and exist primarily on paper—with any U.S. 

presence typically consisting of a postal box or a mail drop. 

Nearly 3 years ago, the Department discussed the difficulties 

that U.S. shell companies consistently pose to law enforcement efforts and the critical need for greater transparency in corporate formation in this country. Unfortunately, since the Committee last examined this issue, the problem has not improved. 

Increasingly, professional money launderers use shell companies 

as necessary tools of their trade and schemes to launder money for 

international criminal organizations and to finance terrorism. Shell 

companies are intentionally selected for this purpose because they 

are very easily formed, they provide a level of anonymity in opening domestic and foreign bank accounts, and in the case of U.S. 

shells, they offer an air of legitimacy. Criminals trade on the good 

names of our States by sending illicit money through bank accounts fraudulently disguised as legitimate economic trade. 

The use of shell companies to facilitate criminal schemes has 

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

opened shell companies 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 companies. As 

banks began to scrutinize offshore shell companies more closely, 

criminals realized that they could obtain some of the same benefits 

from U.S. shell companies, with the added benefit that U.S. companies would not receive the same level of scrutiny. 

The use of domestic shell companies has continued to evolve. 

When Congress passed legislation enhancing customer identification requirements, U.S. banks began to require more information 

from domestic companies. This additional scrutiny resulted in the 

most recent trend where criminals, both domestic and foreign, are 

forming shell companies in the United States and then opening 

bank accounts in the names of those companies in foreign countries 

where U.S. shells have an aura of legitimacy. 

11 

Finally, the criminals use correspondent accounts at U.S. financial institutions to anonymously transfer money abroad to their 

U.S. shell company. Adding to the complexity, criminals will perpetrate their schemes using so-called shelf or aged companies that 

were created at some point in the past and are now a valuable 

commodity for resale because of their history of good standing, 

their good credit, and often their existing banking relationships. In 

such cases, the trail very often goes cold, with either the initial 

company formation agent or the middleman who is brokering a resale, neither of whom know, or often care, who has purchased the 

shelf company. 

U.S. shell companies present severe criminal and national security vulnerabilities for the United States, and all indications are 

that the scope of the problem is quite broad. So we are particularly 

heartened to see that, through the leadership of members of the 

Permanent Subcommittee on Investigations, the discussion among 

all of the stakeholders has moved beyond the stage of merely recognizing the severity of the problem to developing real and effective 

solutions. We are convinced that such a solution is possible and can 

be crafted in a manner that is workable for law enforcement, State 

governments, and the private sector. We are confident that there 

is a solution that will benefit everyone but the would-be criminals 

and the would-be terrorists. 

It bears emphasizing here that the Department also strongly believes that Federal legislation is an essential component of any 

such solution. Without Federal legislation, we cannot practically 

hope to achieve participation by all 50 States. And with anything 

short of full participation, the problem will merely shift and continue unabated in the non-participating States. 

Of course, the Department also recognizes the importance of refraining from placing undue burdens on the States or the vast majority of legitimate businesses that are trying to establish a legal 

presence in one or more of our States. 

It is with this delicate balance in mind that I would now like to 

focus my testimony on the four critical issues the Department believes must be addressed in any legislative solution. 

First, it is critical for law enforcement to be able to identify the 

beneficial owner of a legal entity, the living, breathing person who 

controls the company and its assets. Toward this end, the Department strongly recommends consistently defining ‘‘beneficial ownership’’ across all 50 States to ensure that criminals cannot exploit 

definitional gaps between differing State systems. 

In terms of identification, at formation, beneficial owners should 

be required to provide their name, their current address, and a legible photo ID to provide law enforcement with a name and a face 

to further their investigation when the information provided to the 

State was either false or misleading. 

It is important to note here that the Department believes that 

both U.S. and foreign persons should be required to furnish such 

information. To require less from U.S. persons would invite fraud 

as foreign individuals could falsely claim to be a U.S. person or use 

straw actors to evade the verification. 

To make collection of this beneficial ownership information 

meaningful, law enforcement must be able to obtain it an accurate 

12 

1The prepared statement of Ms. Marshall with attachments appears in the Appendix on page 

172. 

and timely manner—the second of our four critical needs. Specifically, law enforcement must be able to obtain through an appropriate legal process all beneficial ownership information for a legal 

entity in a timely fashion. This means that the information must 

already be maintained on-site in the state of formation and cannot 

be something that a corporate agent endeavors to collect from outside the State or even outside the country, only after a request is 

made by law enforcement. 

This leads us directly to our third critical need. Any meaningful 

legislative solution must also address the point of transfer. When 

beneficial ownership information is transferred from one person to 

the next to the next to the next, currently criminals can easily 

throw investigators off the trail by purchasing shelf companies and 

transferring the ownership. To combat this practice, the Department strongly recommends legislation that both requires all covered legal entities to provide updated beneficial ownership information anytime there is a change, and also to certify annually that 

their information is up to date. 

Finally, the fourth need: The Department believes it is critical to 

enact an enforcement regime. Federal criminal penalties in particular are an essential ingredient for law enforcement to target 

professional money launderers and their clients and the criminal in 

the extreme underworld. Specifically, the Department recommends 

crafting Federal criminal penalties targeting those who knowingly 

provide false information and those who knowingly fail to update 

that information. 

The Department of Justice looks forward to working with this 

Committee to address the issues identified in this hearing, and I 

would be happy to answer any questions. 

Chairman LIEBERMAN. Thanks very much, Ms. Shasky. I look 

forward to a few questions of my own that I have for you. 

We are honored on the Committee to have with us as our next 

witness the Secretary of State of North Carolina, Elaine Marshall. 

Thank you for taking the time to be here, and we welcome your 

testimony now. 

TESTIMONY OF ELAINE F. MARSHALL,1 NORTH CAROLINA 

SECRETARY OF STATE, AND CO-CHAIR, COMPANY FORMATION TASK FORCE, NATIONAL ASSOCIATION OF SECRETARIES OF STATE 

Ms. MARSHALL. Thank you, Chairman Lieberman, Senator Carper, and Committee Members. I want to thank you from my personal point but also on behalf of the National Association of Secretaries of State (NASS). I am wearing two hats here today: One as 

North Carolina’s Secretary of State since 1997, and also as the CoChair of the NASS task force on this issue since 2007. 

From the outset, let me say that I am currently opposed to enactment of S. 569 in its current form because of its questionable effectiveness and the huge burden it would place upon North Carolina. 

NASS has likewise voted twice against the contents of this bill. 

13 

The members of NASS and I support the goal of preventing 

money laundering; however, the terms of S. 569 to us do not appear to achieve that goal with the least amount of burden on legitimate business. The NASS response to this issue in 2007 committed 

us to a five-part course of action with great success. 

First, bearer shares have been eliminated by statute. 

Second, the 50-State survey of business formation laws has been 

completed. 

Third, the ULC has risen to the challenge to draft a uniform law 

with the American Bar Association (ABA) assistance and will be 

going to full vote in about 30 days. We thank Commissioner Harry 

Haynsworth and the other commissioners for this undertaking. 

Fourth and fifth, items relating to Trading With the Enemy Act 

and the Specially Designated National List remain incomplete, but 

not due to our part. 

My experience in and out of government is that compliance with 

the law is much easier to achieve when people understand the 

problem and can see the value of the proposed remedy. The efficacy 

of S. 569 is in doubt, especially when contrasted with the fact that 

the government has easier ways to deal with the problem—the burden on legitimate business, the burden on State government, and 

the turmoil that will be created. Even FATF acknowledges in its 

2005–06 report the lack of clarity or consensus over the beneficial 

owner concept is a problem. S. 569 will require tremendous additional recordkeeping and impose long-range costs on the States. We 

believe the ULC approach will be more effective, prudent, and easily managed. 

To the extent that much of the information sought by law enforcement already resides within institutions such as the IRS or 

can be tracked through financial institutions, we respectfully request that Congress redirect its attention to requiring those institutions to share it instead of having State agencies collect it. 

From the entity filing standpoint, S. 569 creates a number of 

practical problems. Will information collected be confidential or 

public? Some of my colleagues have advised that under their State 

Constitution they will have a difficult time in having the information be considered confidential. From my standpoint, I strongly desire that the information be designated confidential under our public records law, and I can explain my reasons later, if you desire. 

Another issue with the bill is that the formation agent definition 

may be overly broad, and we estimate that 60 percent of North 

Carolina’s 548,000 filers do not use a formation agent. What is the 

default activity when no formation agent is involved? Does the Secretary of State determine citizenship, legal permanent residency, or 

non-U.S. citizenship status? If no formation agent is used, who 

holds those passport photos? Is this REAL ID business class? Does 

this bill cover only entities going forward or apply to all existing 

entities? If it is the larger group, the education requirement then 

becomes a much more serious challenge, and to be meaningful, it 

would have to apply to all. 

In North Carolina, there is no annual report requirement for our 

94,000 nonprofits. Many nonprofits do not have shares or ownership interests at all, so absent ‘‘owners,’’ the concept of ‘‘control’’ 

comes into play for a nonprofit. We currently come into a cross-fire 

14 

of that issue far too often with homeowners associations and more. 

Requiring nonprofits to begin annual reports, or the evergreen requirement of S. 569 will be met with strong resistance by North 

Carolina churches in particular, who feel church and state separation trumps reporting to any government. 

Many of us question the accuracy of self-reported information in 

this context. Therefore, verification has always been a huge concern 

for NASS. If the intention is that we do not have to verify the information or compare it to any Federal list, clear language in that 

regard would be greatly appreciated. 

Technology changes for North Carolina would be a minor cost for 

this act as creating the additional databases and forms would be 

under $100,000 for us. But please note that in North Carolina I 

have my own technology staff that can do this in-house at a reduced cost. It would have taken another $150,000 or so to reprogram and re-engineer annual report functions as much of the collected data would be partly public and partly confidential. 

The educational training component of either of the two proposals will be significant. We have no ability to determine exceptions without a mailing. There may be a software matching program available to determine the Securities and Exchange Commission (SEC) governed entities as exceptions, but none has surfaced 

at this point. 

A single mailing to our entire existing database with a folded, 

letter-size, single sheet, perforated edges, mailed at bulk rate is 

$390,000. This one mailing is more than our entire Secretary of 

State total mailing budget for the entire agency in a year. We would seek $200,000 to $250,000 for education, for Web designs, public service announcements (PSAs), printing, Web announcements, and more. We estimate a minimum of a 40-percent 

staff increase in annual reports, for $170,000 annually, and a 50- 

percent staff increase in the customer service unit of $226,500 annually. Replacement of one server each year due to burnout adds 

$60,000 more, for an annual total cost of $450,500. 

These proposals represent a cultural change, not just to Secretaries of State but to every business in America. We will be ground 

zero for the fallout from this cultural change, and we are gravely 

concerned. Viewing the financial and human asset commitment 

contrasted with the efficacy of the proposal, it is hard to find significant added value and meaningfulness, and none of us relish or 

expect success in competing with home State first responders to 

fund this. 

Thank you for this opportunity. My deep thanks to the NASS 

staff and my colleague Secretaries of State. 

Chairman LIEBERMAN. Well, thank you, Madam Secretary. We 

have a pretty lively debate going here now. 

Ms. MARSHALL. We do. 

Chairman LIEBERMAN. And we will keep it up. 

Next, Adam Kaufmann. Originally, we had hoped, with great excitement, that Robert Morgenthau, the District Attorney—really 

the iconic, the great District Attorney—could be here. Unfortunately, I know he could not. We are very grateful, Mr. Kaufmann 

that you are representing him. I know in your own more youthful 

way—not to say that Mr. Morgenthau is not still youthful—you 

15 

1The prepared statement of Mr. Morgenthau delivered by Mr. Kaufmann appears in the Appendix on page 192. 

bring a lot of experience to the table, so we thank you for being 

here. 

TESTIMONY OF ADAM S. KAUFMANN,1 ASSISTANT DISTRICT 

ATTORNEY, CHIEF OF INVESTIGATION DIVISION CENTRAL, 

NEW YORK COUNTY DISTRICT ATTORNEY’S OFFICE, ON BEHALF OF ROBERT S. MORGENTHAU, DISTRICT ATTORNEY 

FOR NEW YORK COUNTY, STATE OF NEW YORK 

Mr. KAUFMANN. Thank you, Chairman Lieberman, Senator 

Levin, Senator Carper, and Committee staff. Thank you for the opportunity to be here. I note that I am the proverbial booby prize 

in my presence here, but I am delighted to be here all the same. 

I should also note that Mr. Morgenthau sends his regards to the 

Committee, his support of the bill, and, to Senator Lieberman and 

Senator Levin, his personal regards to you two gentlemen as well. 

For those of us in law enforcement, these issues with shell companies are not some abstract idea. This is what we do and deal 

with every day. We see these shell companies being used by criminal organizations, and the record is replete with examples of their 

use for money laundering, for their use in tax evasion, and for their 

use in securities fraud. You almost go so far as to say any of those 

crimes cannot function without the use of shell companies, either 

domestic or foreign. And, of course, today we are focusing on the 

problems presented specifically by domestic shell companies. 

As I was getting ready for my testimony here today, I reached 

out to a number of colleagues in law enforcement—prosecutors, 

cops, agents, detectives—and every one of them had the same response, which was that this is a no-brainer. This is a simple, clear 

issue for us. These shell companies have to come to an end. They 

are a problem, and they have to stop. In New York, the police and 

detectives added, ‘‘They got to do something about this.’’ That was 

the New York take on the problem. 

Mr. Morgenthau again and again boils it down to a very simple 

concept, and the concept is transparency. For 45 years, he has been 

the top State or Federal prosecutor for Manhattan, and again and 

again, he talks about transparency and the need for daylight on 

these systems that allow corruption and criminality to exist. And 

again and again, we go out and conduct investigations that prove 

him right. 

We see consistently that increasing transparency inures to the 

benefit of law enforcement and to the detriment of the criminals 

who use these systems to further their criminal activity. The written record that we submitted contains numerous examples of this. 

A colleague from Immigration and Customs Enforcement gave 

some great examples of the use of shell companies in securities 

fraud. And we just constantly see it. 

Where we have seen some changes recently is the use of domestic 

shell companies relating to terror finance, and I noted in my prepared statement some of the Federal cases. I looked at the 

Hezbollah, the cigarette smuggling cases where there were domestic shell companies used to channel funds, set up bank accounts, 

16 

and get the monies to entities and accounts controlled by 

Hezbollah. 

A case that we recently conducted at the Manhattan District Attorney’s office focused on the abilities and influence of Iran in moving money around the world. And one of those cases we completed 

with the assistance and cooperation of the Department of Justice 

was the Lloyds Bank matter. But when we were doing those investigations, we found domestic shell companies that had been set up 

by entities controlled by the Government of Iran for the simple purpose of owning U.S. assets in violation of U.S. sanctions and the 

International Emergency Economic Powers Act (IEEPA) laws, and 

we saw them setting up bank accounts and moving money offshore. 

These are ongoing matters, but I will tell you that specifically we 

looked at one New York corporation that was created and owned 

assets in New York, and we saw funds going from the New York 

corporation to what we would call an offshore bank secrecy jurisdiction. And we reached out to that bank secrecy jurisdiction to get 

information. The irony was that we were able to get more information from the bank secrecy jurisdiction located out of the country 

than we were from the State of New York. And I think that says 

a lot about where we are as a country in terms of our ability to 

conduct our affairs. 

That problem is one that we should not ignore. We do many investigations with foreign law enforcement, and there is a certain 

moral authority that I submit to the Committee that the United 

States should bring to these issues, and it is a moral authority that 

is now lacking. It is disturbing that the United States should be 

found noncompliant by the FATF. As disturbing as that may be, 3 

years without rectifying that becomes something of an embarrassment for our country. 

It is very hard for us to point a finger at Switzerland or Liechtenstein for their bank secrecy policies when they can point back 

to us—and they do point back to us—and say, ‘‘But you have bank 

secrecy corporations in all of your 50 States. Why are you lecturing 

to us?’’ 

And not to be glib about it, but I will say that I think that from 

a national pride perspective, our statement of our standard of 

transparency should be something more than, ‘‘financial transparency in the United States: better than Panama and trying to 

catch up with Liechtenstein.’’ It is a sad comment on where we are. 

Foreign criminals view a U.S. corporate entity as a passport to 

respectability and legitimacy. In our written record, there is a communication that we received from a Brazilian case where a Brazilian criminal discussed with a U.S. incorporating agent the benefits of getting a U.S. corporation. And they talked about the fact 

that it did not have to be public, that the owners do not have to 

be the registered individuals. And once the foreign criminal is able 

to obtain this U.S. corporate entity, it is an open door to opening 

bank accounts in the United States, abroad, and becomes the conduit by which they can continue to engage in their criminal conduct. It is a great source of revenue to the agents that are involved 

in these packages of incorporation, much like the Wyoming example that Senator Levin put up. 

17 

1The prepared statement of Mr. Haynsworth with attachments appears in the Appendix on 

page 200. 

I am just going to comment briefly on some of the proposed legislation. I am just about out of time, but I will note that I can say— 

I say without hesitation or reservation—that from a law enforcement perspective, the bill proposed by NCCUSL would be worse 

than no bill at all. And there are two very basic reasons for this. 

It eliminates the ability of law enforcement to get corporate information without alerting the target of the investigation that the 

investigation is ongoing. That is the primary reason. 

It also sets up a system that is time-consuming and complicated, 

and, of course, if the Committee wants to hear more, I am happy 

to go into that or any of the other matters. 

I thank you very much for this opportunity. 

Chairman LIEBERMAN. Thank you, Mr. Kaufmann. Excellent 

statement. 

Mr. Haynsworth, Chair of the Drafting Committee on the Uniform Law Enforcement Access to Entity Information Act of the 

Uniform Law Commission. Thanks for being here. Obviously, Mr. 

Kaufmann at the end posed a tough challenge to you, so we call 

on you now to respond. 

TESTIMONY OF HARRY J. HAYNSWORTH,1 CHAIR, DRAFTING 

COMMITTEE ON THE UNIFORM LAW ENFORCEMENT ACCESS 

TO ENTITY INFORMATION ACT, UNIFORM LAW COMMISSION 

Mr. HAYNSWORTH. Thank you, Chairman Lieberman, Senator 

Levin, and Senator Carper, and thank you for inviting us to be 

here. I am speaking on behalf of the Uniform Law Commission and 

the Uniform Act that we have developed over a 2-year period. 

This Act is one that has involved law enforcement officials, filing 

officers, Secretaries of State, practicing lawyers, every conceivable 

constituency that would have an interest in an Act like this has 

been involved in this drafting process. And we have had four 2- 

days drafting sessions and four conference calls that have lasted 

multiple hours in trying to put something together that we feel is 

something that can be adopted across the country in a very rapid 

format, assuming we can get agreement on the fact that this is 

what we need to do. 

Whatever is done, it will have to end up being State legislation. 

Everything to do with what gets filed in a Secretary of State’s office, the content of that access to records, and what records have 

to be kept by companies is something that is a matter of State law, 

always has been. So it is going to have to be State law to begin 

with, and the Uniform Law Commission, that is what we do. We 

draft statutes that are adopted across the country in a uniform 

fashion so that you have a uniform standard that applies everywhere. And for this to have any impact, whatever the ultimate outcome, it must be a uniform standard across the country. 

The Uniform Law Commission has produced numerous acts that 

have been adopted in this fashion. I will just mention one: The 

Uniform Commercial Code, which is one everybody, I think, would 

be familiar with. And so this would be another example of doing 

that. 

18 

The objectives that we sought were: First and foremost, recognizing this is a very important and difficult issue, that law enforcement officials do need to have more effective and more current accurate information about ownership and control of companies. 

Second, that you have to have some kind of a system that is 

workable and does not create more problems than it solves in 

terms of having unmanageable burdens on the Secretary of State’s 

office, which is what Secretary Marshall was referring to in her 

concerns about S. 569, and does not cause undue burdens on companies in terms of their operations and recordkeeping they have to 

keep up with. 

That is a really major concern about trying to balance those concerns, plus the privacy concerns that have been mentioned; and 

also the concerns about foreign investors in the United States and 

not creating barriers that would unduly restrict their ability to be 

able to form and operate businesses. And you have to put this in 

the context that well over 99.5 percent, at least, maybe 99.9 percent of all businesses are legitimate. And so when you put a burden 

on everybody, you have to be careful that you are not putting an 

undue burden that creates barriers to formation and operation of 

legitimate companies. That means 99.9 percent of them. 

We think we have accomplished these objectives in a way that 

our Act will provide more information, will provide it in a workable 

administrative system. And it will be less burdensome and certainly more cost-effective than S. 569. 

The differences between us and S. 569 are significant, but they 

are not perhaps as broad as a lot of people seem to think. One 

would have to do with coverage, and we believe that in order to 

have any kind of effective system, you have got to have it cover 

every single type of entity that files in the Secretary of State’s office for its existence. Otherwise, you have just created an escape 

hatch. And just corporations and limited liability companies (LLCs) 

is not going to do the trick. That in and of itself would only cover 

about 80 percent of the filing entities in this country. 

The other thing would be you are also going to skew, once you 

say one set of entities is going to be subject to a certain kind of 

regulation but another set is not, immediately you are going to 

have a migration to that other set. So, it is an escape hatch that 

has to be closed if you are going to have effective regulation. 

Second, it has to cover all existing as well as newly formed entities. Senator Levin talked about the sale of existing entities. Well, 

if you are going to have any kind of control or effective regulation 

of that, you have got to cover existing entities and not merely new 

ones that are formed going forward. 

The second difference is what types of records are required to be 

kept by companies, and currently the differences there would be 

right now companies only keep what is known as ‘‘record ownership.’’ You know who the record owner is, an individual—if it is a 

trust, you know that it is a trust and who the trustee is. If it is 

an estate, you know who the administrator of the estate is. If it is 

a corporation or an LLC, you know that it is a corporation or an 

LLC. You would know. You would have identification of that entity, 

etc. 

19 

So that is the system that exists here, and it is the system that 

basically exists throughout the world, this record ownership concept. So if you are going to change anything there, you are changing fundamentally what is the recordkeeping system that you have. 

Then the third thing is what gets filed in the office of the Secretary of State, and here what we have proposed, instead of filing 

all this so-called beneficial ownership information—and I will be 

glad to answer questions about that. That is an impossibility to 

come up with something that will work, and no country in the 

world has come up with something that is workable or is in compliance with what FATF 33 apparently says. That information filed 

in the Secretary of State’s office is just going to be a morass of 

problems and massive noncompliance would result because of the 

fact that people cannot even figure out what it is, and to have it 

filed and to keep it updated. And under S. 569, what would happen 

is that it would be current only as of day one, and then it is not 

current until a year later; whereas, what we are providing, it would 

be current as of the time it is requested. And it must be accurate 

and it must be current. So there are a lot of things where you actually get more information, more current information, more accurate 

information the way we have established the bill. 

What I would like to suggest is this, going forward, if it is possible: For the Uniform Law Commission (ULC), to be able to work 

with the Committee in trying to come up with a format that we can 

agree upon that accomplishes the objectives that are being sought, 

does provide an effective monitoring system, provides better access, 

and is one that then we can go out and get it approved by the 

States in a very reasonable fashion. Of necessity, you are going to 

have to have a Federal act that says that this Uniform Act is the 

one that needs to be adopted by the States so you get this uniformity across the country in a very short period of time, and that 

there needs to be some kind of mechanism for funding the up-front 

cost of getting this established. 

Incidentally, under our system, unlike the system as proposed 

under S. 569 in terms of what gets filed in the Secretary of State’s 

office and maintaining the records and everything, it would be far 

less expensive, and I do not think any new employees would have 

to be hired to be able to monitor the information. What we file is 

different, but in any case, maintaining it. 

Then there needs to be probably a penalty of some kind if States 

do not adopt it within a given period of time. So the sort of carrot 

and/or stick approach I think will be necessary. 

But I guess my final comment would be you need us, we need 

you, and let us try to work together. 

Chairman LIEBERMAN. Thanks, Mr. Haynsworth. 

We have had a really good discussion that the five of you have 

presented to the Committee, I think very beneficial for us. Before 

we proceed to the questions, Senator Carper, I know you could not 

be here when we started. Senator Levin and I made opening statements. Before I start questioning, would you like to make an opening statement? 

20 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. I would welcome that, and I appreciate that 

very much. I apologize for missing the first part of the hearing. I 

led a congressional delegation of four other Senators to Afghanistan and Pakistan last month, and we had an opportunity to sit 

down today with, among others, Ambassador Richard Holbrooke, 

and this was the one time that he could meet with our delegation, 

so I apologize for arriving late. And thank you very much, Mr. 

Chairman, for the chance to say a few words. 

I just want to start off by saying to Mr. Haynsworth we very 

much appreciate the spirit in which you made your offer there at 

the close of your testimony, and I hope that is an offer that we will 

seriously consider and, I hope, accept. 

I want to thank our Chairman, and I want to thank my colleague 

Senator Levin, and each of their staffs for working closely with my 

own staff as we studied this topic and as you all put this hearing 

together. 

The last time that we met on this issue—I think it was in November 2006—I emphasized the importance of this issue to my own 

State. As some of you know, business incorporations and related 

fees account for roughly 25 percent of Delaware’s general fund revenues. I continue to be proud that my State of Delaware is a leading home of incorporation for businesses in this country. Delaware 

continues to be a leader in entity corporations because our State 

has the expertise to ensure corporate success from annually updating our laws to meeting the changing needs of incorporated interests to a well-respected and a renowned judiciary, some of whom 

I actually had the privilege of appointing as governor of Delaware. 

Delaware has enacted a number of laws to deter the formation 

of illicit businesses and ensure that law enforcement has better access to the information that they need in order to prevent crimes 

and to solve those that occur. 

For example, Delaware was the first State, I believe, in the Nation to adopt legislation responding to the concerns expressed by 

law enforcement regarding illicit practices of registered agents. 

Delaware now regulates commercial registered agents and has successfully removed a number of registered agents from doing business in our State. 

Delaware requires every business entity to provide the name, the 

address, and the phone number of a designated communications 

contact person who is available to law enforcement. And Delaware 

has responded to international criticism that the U.S. company law 

permits companies to issue bearer shares—stock certificates whose 

record of ownership is not maintained by the issuing company— 

when we explicitly banned the practice in statute to be consistent 

with long-established Delaware case law. 

There are a number of reasons for us to encourage more transparency and disclosure with respect to ownership of legal entities. 

But whenever we undertake legislation, we have to find the right 

balance. In this case, we need to provide law enforcement with the 

tools that they need in order to prevent and to prosecute crime. 

Having said that, we must also ensure that we do not put additional burdens on our States or our State budgets, many of which 

are operating in a deficit. 

21 

1Senator Carper submitted a copy of Mr. Geisenberger’s Prepared Testimony from November 

14, 2006, which appears in the Appendix on page 296. 

As I think Mr. Haynsworth alluded to in his comments, I am told 

that some 99.9 percent of corporate entities in the United States 

are actually good citizens. We should not burden the vast majority 

of good citizens with expansive and burdensome paperwork while 

trying to find less than 0.1 percent of bad actors who are likely to 

try to evade such disclosures anyway. 

Whatever solutions we pursue, it is important that we be careful 

not to hinder legitimate business activities or invade the financial 

privacy rights of risk-taking entrepreneurs who have historically 

found the United States to be the freest economy in the world. 

At the last hearing that we held here in November 2006, our Assistant Secretary of State from Delaware, Rick Geisenberger, appeared before this Committee and discussed the issues related to 

disclosure of beneficial owners of incorporated entities, and, Mr. 

Chairman, I would just like to ask unanimous consent to offer Mr. 

Geisenberger’s testimony from that hearing into our record today.1

Chairman LIEBERMAN. Without objection, so ordered. 

Senator CARPER. Thank you. In his testimony, Mr. Geisenberger 

concluded—and he was not alone. He was joined by, I think, the 

National Association of Secretaries of State, represented here today 

by Secretary Marshall—requiring entities that incorporate in any 

State to disclose who the beneficial owners of a corporation are at 

a certain point in time would be difficult to implement. The act of 

defining ‘‘beneficial owner’’ is not easy and could be interpreted 

quite broadly, in some cases requiring the disclosure of hundreds, 

even thousands, of names. 

After that hearing in 2006, I charged Mr. Geisenberger and the 

Delaware Secretary of State’s office with the task of trying to find 

a compromise on this issue. As we heard today, the National Association of Secretaries of State represented by Secretary Marshall 

created a Company Task Force to examine this issue in February 

2007. The task force asked the Uniform Law Commission, represented today, as we know, by Mr. Haynsworth, to develop amendments to various uniform and model entity laws to help address 

these issues. The Uniform Law Commission committee included 

representatives from, among others, the American Bar Association 

and other stakeholders from around the Nation. 

My understanding—and I am sure the witnesses today can attest 

to this fact—is that this group has worked diligently, some would 

say ferociously, for 2 years, to find a compromise that would work, 

that would both assist law enforcement by providing information 

that they need without putting an onerous burden on States or on 

legitimate American businesses. 

I look forward to hearing further from our witnesses today and 

to the questioning that is about to take place so that we can get 

some further update and maybe even a path forward, maybe even 

along the lines that Mr. Haynsworth has suggested. 

Again, Mr. Chairman, as you know and my colleagues know, this 

is important to my State, and I think it is important to a lot of 

States. And my hope is that we can resolve this in a way that does 

what we need to in terms of enforcing our laws and going after the 

22 

bad guys, at the same time not adversely affecting the good guys, 

and particularly the States that have to administer whatever law 

we come up with. 

Thanks very much. 

Chairman LIEBERMAN. Thank you, Senator Carper. We will begin 

now with each Senator having 7 minutes of questioning. 

I take it, in listening to the panel, that everyone on the panel 

agrees that it ought to be easier for law enforcement to obtain information about who owns corporations, but that the question is 

how to achieve that purpose in the best and, I suppose, most effective and least burdensome way. That is true, Secretary Marshall? 

Ms. MARSHALL. Yes, sir. 

Chairman LIEBERMAN. And you, too, Mr. Haynsworth. 

Mr. HAYNSWORTH. Yes, sir. 

Chairman LIEBERMAN. I know the three others testified very 

strongly in favor of that, and obviously, they are in one form of law 

enforcement or another. 

Your testimony was very thorough, and you raised some very 

good questions, Secretary Marshall. But I wanted to see if I could 

draw you out a little bit more on just restating in summary fashion 

what you think the most significant burdens of this would be that 

essentially tipped the scale against S. 569 as drafted. Why don’t 

you begin with that first? 

Ms. MARSHALL. Well, my colleague Secretaries are incredibly 

worried that even though the conversation here today has been 

that there would be no verification, that would be the very next 

thing that would happen, and that would be a burden way beyond 

the abilities and staffing of my colleague Secretaries of State. 

Those States which have a stronger public record law believe that 

they will have a difficult time in developing a confidential database. 

The other is the confusion with the beneficial owner. Our frontline people, while well trained, are not lawyers. They are for the 

most part high school graduates who are good, hard-working State 

employees. Even the best of lawyers have difficulty in defining 

‘‘beneficial ownership’’ and ‘‘direct’’ benefit. And if that is not possible, the control, defining control of an entity, it would just be very 

difficult to convey that to the public. 

The other issue is that all of our State statutes, to the best of 

my knowledge, have an evergreen requirement to let folks know 

when addresses change, and that kind of information. And it really 

does not happen. Most Secretaries have no enforcement powers in 

the area of compliance. In my situation, I actually have a law enforcement staff because I am a quasi-Attorney General in some 

cases. But in corporations, I do not. 

So, therefore, to get compliance, the only tool that we really have 

is dissolution of a corporation, and we really are reluctant to do 

that because public policy of most States is that we encourage and 

support business. 

So the annual report function was created in a lot of States 10 

to 15 years ago to make sure that there is a point every year annually where you kind of force a corporation’s hand to give you correct, current information. But it is only as good as the day it was 

mailed. 

23 

Chairman LIEBERMAN. OK. So let me now ask Ms. Ayala, Ms. 

Shasky, and Mr. Kaufmann to respond, because I think Senator 

Levin’s investigation, the PSI investigation, and your testimony to 

me—I admit my bias having been a former Attorney General— 

makes a compelling case for providing you with easier access to the 

question of who owns corporations. 

How do you respond to some of the practical problems that Secretary Marshall has made on behalf of the Secretaries of State? 

Ms. AYALA. Well, we understand that there needs to be a balance 

between our efforts to protect our financial institutions and the 

homeland and our international reputation with preserving a flexible business environment and not having an undue burden on the 

States. But sometimes there are many agencies out there or many 

situations that have conflicting or competing missions. For example, the CBP and ICE, we are charged with ensuring and facilitating the timely movement of trade and people, merchandise, 

money, and things across our borders, while at the same time making sure that we prevent harmful things and harmful people from 

entering the border. 

Chairman LIEBERMAN. That is a good example. 

Ms. AYALA. So this is something that is really not insurmountable, and I am sure that at some point an equitable solution will 

be reached. But at the end of the day, while we are trying to obtain 

beneficial ownership information, in order to make sure that we 

are able to further an investigation, prevent further crime, disrupt 

and dismantle criminal organizations, and really to try to prevent 

an additional person from becoming a victim or minimizing the 

misery of victims that are already here domestically or abroad. And 

while some people view these—we talked a lot about financial 

fraud cases and other typical cases in that vein. Also, a lot of the 

money that is flowing through these businesses or these accounts 

is also the illegal proceeds of human misery, human trafficking, or 

potential terrorism funds. 

So we really do need to find a solution that while it does not 

place an undue burden on the States, also provides us with an ability to immediately access this information from an individual that 

is bound by privacy and confidential laws so that we can react in 

exigent circumstances. 

Chairman LIEBERMAN. Ms. Shasky, do you want to add anything 

to that? 

Ms. SHASKY. Yes, Senator Lieberman. Thank you. Like my colleague from the Department of Homeland Security, I echo the comments that it is very important and the Department recognizes 

that it is very important that we strike a delicate balance between 

overburdening the States and the legitimate business owners on 

the one hand, and addressing very serious criminal and national 

security vulnerabilities on the other. 

I would point out that we are not recommending at the Department that States be asked to verify beneficial ownership information. We do believe that defining beneficial owner is possible. In 

fact, in our written testimony, we provided references to some samples of both domestic and foreign definitions that are out there. I 

would point out that S. 569 also accomplishes this objective. And 

in terms of the characterization of giving easier access to law enVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
24 

forcement to this information, it is not just about giving us easier 

access to identifying the beneficial owner. It is giving us the ability 

to identify that owner at all. 

Chairman LIEBERMAN. Thank you. Mr. Kaufmann, do you have 

a quick response? 

Mr. KAUFMANN. I think they said it all, Senator. I will rest on 

our opening comments. 

Chairman LIEBERMAN. You are resting your case. 

Mr. KAUFMANN. Absolutely. 

Chairman LIEBERMAN. Co-counsel has made the point. Thank 

you. Senator Levin. 

Senator LEVIN. Thank you, Mr. Chairman, and thanks to all of 

our witnesses. 

Mr. Haynsworth, attached to your testimony is a memo which 

you wrote in which you say that collection and maintenance of accurate business entity beneficial ownership and control information 

is a key component of the anti-money-laundering business entity 

proposals that have been made by the FATF. So, from the FATF 

perspective, which is the international organization trying to get at 

money laundering, having access to beneficial ownership information is critically important. Would you agree with that? Your own 

memo says that. 

Mr. HAYNSWORTH. Yes, sir. Yes, that is written into FATF Recommendation 33. 

Senator LEVIN. Now, in terms of the definition of ‘‘beneficial 

owner,’’ I am not sure who said that there is a problem. I think, 

Madam Secretary, you did. The Treasury Department has defined 

‘‘beneficial owner.’’ It is in the regulations. It is in the law. 

Ms. MARSHALL. Yes, sir, but it was the FATF acknowledgment 

that it was a difficult concept. 

Senator LEVIN. All right. But Treasury itself has defined beneficial owner in 31 CFR Section 203, anti-money laundering programs definition, beneficial owner of an account means—and they 

define it. So it is in law. 

I am not sure which of you, because I missed, I am sorry, some 

of your testimony. I had to be on the floor. Unlike these other new 

concepts, which were put into the Uniform Law Commission proposal, there is a legal definition of ‘‘beneficial owner.’’ 

Ms. Marshall, you have given us an idea of the cost of what our 

bill would be. What would the NCCUSL approach cost? 

Ms. MARSHALL. Well, the NCCUSL cost for the technology would 

remain the same. The additional staffing would not be included in 

the NCCUSL cost. The mailings certainly, to segregate out exceptions and those kinds of things, would not be necessary. 

Senator LEVIN. I am saying what would the cost of the NCCUSL 

proposal be. 

Ms. MARSHALL. It would probably be around $500,000, my staff 

estimates. 

Senator LEVIN. Could you give us that estimate for the record? 

Ms. MARSHALL. Yes, sir. 

Senator LEVIN. And that is $500,000 for your State? 

Ms. MARSHALL. Yes, sir. 

Senator LEVIN. OK, and that is the NCCUSL? 

Ms. MARSHALL. Yes, sir. 

25 

1The chart referenced by Senator Levin appears in the Appendix on page 97. 

Senator LEVIN. OK. Mr. Haynsworth, our bill requires that filers 

provide beneficial owner information up front at the time of incorporation. Your proposal requires that States collect the names and 

contact information of two parties—one is the record contact, and 

the other is the responsible individual. But other than that, there 

is no real information collected about ownership and control at that 

point up front. Is that correct? 

Mr. HAYNSWORTH. No, sir, because—if you are talking about 

what gets filed in the Secretary of State’s office, it is a responsible 

individual. If you are talking about what the company is responsible for maintaining, no, sir, they would have information relating 

to ownership and control. 

Senator LEVIN. And if you want to try to get to that company’s 

beneficial information, under your proposal—if we could get our 

chart up here showing how many steps it would take to do it.1

Law enforcement now wants to find out who the beneficial owners are, so the first thing they have to do is to find a record contact 

and the responsible individual. These are folks who have never 

been defined before in law, unlike beneficial owner, but that is the 

first thing law enforcement has to do. 

Then, assuming you find that responsible individual, then law 

enforcement asks that individual to ask the entity for the names 

of whom? Under your proposal, it does not say beneficial owner. 

You make no reference to beneficial owner at any time in your proposal. Instead, you say that person is asked to ask the entity for 

who are the owners of record. 

Mr. HAYNSWORTH. Not only the owners of record, Senator Levin, 

but it is all the information relating to who the managers are, directors, etc. All the records, documents, anything that would pertain to voting rights, who votes on what. 

Senator LEVIN. Everything but the beneficial owner. 

Mr. HAYNSWORTH. Well, it depends on how you define beneficial 

owner. 

Senator LEVIN. No. You do not make a reference to beneficial 

owner in your proposal at all, do you? 

Mr. HAYNSWORTH. No, sir. 

Senator LEVIN. And yet we have the international organization 

that is trying to end money laundering in this world that says the 

most important information for law enforcement to know is the 

beneficial owner. You make no reference to it whatsoever. Instead, 

you have this wild chase that you, after the fact, set law enforcement on—find that person that you are creating for the first time, 

a record contact, ask that person to ask the entity to give you information, none of which has to be the key information of who is the 

beneficial owner. 

So, after that goose chase that you are sending people on, they 

still do not get the information that is the most important to law 

enforcement, who is the beneficial owner. 

Mr. HAYNSWORTH. They get a great deal of information. It depends on how you are defining beneficial owner. 

Senator LEVIN. I am not defining it. The Treasury Department 

is defining it. 

26 

Mr. HAYNSWORTH. Yes, sir. And when you try to apply that, you 

see that there are a lot of difficulties in trying to figure out who 

that is. 

Senator LEVIN. Well, there may be a lot of difficulties in trying 

to find out who all those other folks are, voting rights and owners 

and everything else. But it all may disappear by the time you get 

to it, anyway. 

Mr. HAYNSWORTH. Well, may I just say one thing, Senator? The 

only country that I know of that has some regulations that would 

comply with the FATF 33 recommendation with respect to beneficial ownership information is Great Britain. I think it is important to know that this is the FATF report, June 29, 2007, from 

FATF on the United Kingdom of Great Britain and Northern Ireland, paragraph 1132, ‘‘The UK authorities stated that they had 

considered the possibility of a system requiring up-front disclosure 

of beneficial ownership. Consultants were engaged in 2002 and a 

report produced. Public consultation on the report concluded that 

there were significant disadvantages and no clear benefits, particularly when taking into account the costs of introducing such measures. Reasons included: 

‘‘Disclosure of beneficial ownership would add no information of 

benefit to the register of members.’’ ‘‘Register’’ would be record 

ownership. ‘‘Those engaged in criminal activities would not provide 

true information about the beneficial owners. 

‘‘Two, disclosure would result in misleading information being included on the register. Because beneficial ownership is, as a matter 

of law, impossible to define precisely, any information requirement 

designed to require by law disclosure would have to be complex and 

detailed. Many ordinary, innocent shareholders would be unable to 

understand or comply with it.’’ 

Paragraph 1133: ‘‘In the light of these points, it was concluded 

by the UK authorities that the existing register of members already provides investigators with as much as any disclosure regime 

can. The view was taken that attempting to add details of beneficial ownership to the existing register would be harmful to investigations through the resulting misleading information provided by 

both criminal and innocent shareholders.’’ 

Senator LEVIN. OK. Now let us ask Mr. Kaufmann about that 

misleading information argument, not useful argument that Mr. 

Haynsworth said. 

Mr. KAUFMANN. That is something, Senator Levin, that we have 

discussed a lot in my office, and I think there are a couple of points 

about what happens when someone provides false information that 

are not readily apparent to those who do not prosecute crime for 

a living. And from the perspective of law enforcement, the very requirement of having someone state beneficial ownership is important because it brings an aspect of daylight onto the activities of 

these criminal corporate entities. Now, we are not talking about 

really worrying about the legitimate corporations out there. I am 

focused on the shell companies, the criminals, the money launders, 

and the tax cheats. 

And so what happens when we ask them to state up front who 

is the beneficial owner of the company? When someone gives false 

information in that regard, it is tremendously powerful and persuaVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
27 

sive evidence of what the criminal law calls ‘‘consciousness of 

guilt.’’ When we have a statement from a person that set up a shell 

company at the time of the incorporation that lists a nominee or 

a straw person, it does not matter that it was not verified by the 

States. None of us are asking for State verification. That would be 

a burden. 

What it does is it creates a record at that moment in time that 

that person who set up that shell company told a lie. So when we 

go to prosecute that person in these types of white-collar cases, it 

always comes down to proving intent. That is the whole ball game 

in a criminal trial for a white-collar, money-laundering, security 

fraud, or tax evasion-type of event. 

If we have a lie, we can say to a jury, ‘‘Let me ask you something. Why would an innocent person have listed a nominee or a 

straw man or put their grandmother down as the owner?’’ The answer is an innocent person would not have done that. So, from our 

perspective, it gives us a very powerful tool to prove the criminal 

intent of the person that set up the shell company. 

The other point, this focuses more on the dirty agent that is setting up shell company after shell company after shell company. 

And in this regard, we might be looking at, for example, an identity 

theft ring, and we may see that this identity theft ring went to the 

same incorporation agent again and again and again to set up shell 

company after shell company after shell company. 

If we have a tool that says to the incorporation agent, ‘‘You have 

to put down the beneficial owner when you create these shell companies,’’ well, if that incorporating agent is again and again and 

again filing false and misleading information with the State, that 

gives us from the State perspective a State charge that we can 

bring against that incorporating agent. And that is going to be a 

very powerful tool to clean up an industry where I think that there 

are bad actors out there, and the fact that we cannot necessarily 

tie them in to being part of the ring, to being an accomplice in the 

money laundering or the securities fraud. But if we can go after 

them for their independent conduct of setting up false companies 

by filing false statements with States, that gives us a tool to go 

after the bad actors and to encourage the good actors who are out 

there doing what they are supposed to do and setting up good corporations and making good business happen in this country. 

Senator LEVIN. My time is up, but I would just say that we ask 

banks all the time for who the beneficial owners of accounts are, 

and they provide that information to us. That is what the Treasury 

Department definition is for, and we ask for it all the time. 

Mr. KAUFMANN. It is the basic cornerstone of all the anti-money 

laundering (AML) programs for all the banks, not just in this country but around the world. 

Senator LEVIN. I wonder if the Justice Department could just 

quickly say, don’t we ask banks for beneficial owners? 

Ms. SHASKY. Senator, we do, and we get that information every 

day. We do believe it is absolutely possible and that there are provisions already defining beneficial owner. 

Senator LEVIN. Thank you. 

Chairman LIEBERMAN. Thanks, Senator Levin. Senator Carper. 

28 

Senator CARPER. I think there is probably one thing—I had not 

planned on asking this question, but it would seem to me the beneficial owner of an account at a bank might be fairly easy to identify. I think the beneficial owners of corporations change not just 

every year, not just every month, not just every week, but every 

day. The folks that own common stock and preferred stock in these 

companies change sometimes by the minute. So I am not going to 

pursue that, but I just want to kind of put that out there, if I could. 

Again, we appreciate the testimony of all of you here, taking your 

time and really trying to help us work with a difficult issue and 

try to come up with something that is, as they say at Fox News, 

‘‘fair and balanced,’’ and hopefully before we are done, we will do 

that. 

The first question I have would be for the Secretary of State. Ms. 

Marshall, where are you from in North Carolina, anyway? 

Ms. MARSHALL. I live in Raleigh. 

Senator CARPER. OK. My wife is from Boone, and I have a sisterin-law in Holly Springs and one—— 

Ms. MARSHALL. I am one of the elected Secretaries of State, so 

let them know. [Laughter.] 

Senator CARPER. I certainly will. That is great to know. You 

must be pretty good at it because you have been doing this for a 

while. 

If the States are required to obtain beneficial ownership on every 

corporation formed in their State, do you think that is enough for 

law enforcement? And going back to the question of verification, 

does somebody need to verify who all these people are to determine 

if they are engaged in legitimate or non-criminal activities? How do 

we do one step—that is, the disclosure—without at some point in 

time doing the second step—and that would be the verification. 

Ms. MARSHALL. Well, that is a problem for us. I know that it has 

been stated here that is not going to happen, but truly, as I said 

in my remarks, for people to believe a law is a good thing to be 

able to comply with it, they have to understand why. And if incorrect information is just as good as correct information, we are not 

being fair to ourselves about what we are all about as State office 

holders. 

I understand that when someone provides that information, if 

they are a third party who is providing incorrect information rather 

than the Mom-and-Pop’s that we deal with all the time, it is just 

a tremendous burden on all those people for something that they 

will not be able to see the light at the end of the tunnel as to why 

this information is being asked, except that government is just too 

intrusive. 

Senator CARPER. You may not know the answer to this question. 

If you do not, just feel free to say so. But if verification is required, 

any idea how much more this would require in terms of costs or 

expenditures or outlays by the States? 

Ms. MARSHALL. It is impossible to say. It depends upon what 

verification you would be doing. In one of our suggestions, we had 

talked about a notarization. We have a robust notary law in North 

Carolina, and that is to show that the person who is signing the 

document actually is that person. We encourage notaries to keep 

29 

that photo ID. That would be transferring the verification somewhere else. 

If we had to do that, there is no way—I have 50 people in my 

Corporations Division, 200 all together. I would probably need another 50 people just to be able to do verifications. 

Senator CARPER. OK. If I could, maybe a question for Mr. 

Haynsworth. Do you know your other 49 colleagues from the other 

49 States? 

Mr. HAYNSWORTH. You mean the Commissioners of Uniform 

State Laws? 

Senator CARPER. Yes. 

Mr. HAYNSWORTH. Yes, sir. 

Senator CARPER. Have you ever met one from Delaware? 

Mr. HAYNSWORTH. I have met several from Delaware, yes. 

Senator CARPER. How long have you been a commissioner? 

Mr. HAYNSWORTH. I have been a commissioner for 18 years now, 

but I have worked with Delaware lawyers who happened to be commissioners—— 

Senator CARPER. Michael Houghton is an attorney from Delaware. I do not know if you have ever—— 

Mr. HAYNSWORTH. I know Mr. Houghton very well. Yes, sir. 

Senator CARPER. I appreciate the time that you and others on 

your committee have spent on trying to find a workable compromise on this issue. We all appreciate that. I think we have a 

chance here to advance the ball and to help law enforcement while 

also not overburdening our States and our State systems. 

How is your proposal less of a burden on the State framework 

than what is being proposed by my colleague from Michigan? 

Mr. HAYNSWORTH. Well, one difference would be that what gets 

filed in the Secretary of State’s office is much less prolific, if I can 

use a word like that. You file the name of the responsible individual, which has to be somebody who is directly involved in the 

management of the company. So that is somebody law enforcement 

can go to directly and find out what is going on here, what is this 

company about, who is involved in it, and all that. And the other 

is the name of the record contact, and that is the person that has 

to be able to get all this information about the ownership, control, 

management, and all the records the company has with respect to 

that. So that is what gets filed in the Secretary of State’s office, not 

all this beneficial ownership information or any other kind of ownership information, because that has never been filed, in any substantial amount, in Secretaries of State offices. So in that sense, it 

is much less burdensome. 

In terms of the companies, they keep a lot of information that relates to the ownership, who the individuals are that own, who the 

trustees are, other corporations, entities, whether they are foreign 

or domestic, contact information for all those people. And you get 

all that information. And then law enforcement could take that information, and if it is a foreign entity, they know where to go to 

that entity, foreign state entity or even an in-state entity, that entity has to have a records contact person that would provide the information about who owns that entity. 

And companies do not keep that kind of information themselves. 

If you are a company, you have the information that it is a trust, 

30 

but you do not know who the beneficiaries are. You have the information about that it is a company, formed in Delaware or wherever 

it may be, but you do not know who the owners are. And you have 

really no way of getting that information. 

And then if it is going to be inaccurate—say it is an entity. That 

entity has a change of ownership. Well, immediately, unless they 

alert the company that is keeping this information, how are they 

going to know about it? They have no way of knowing about it. 

So you are just creating the possibility that there is just going 

to be all this misinformation out there and inaccurate information, 

and most of this will be totally unintentional. So law enforcement, 

instead of having a benefit, it is going to actually be more difficult 

for them to find out the information than if they could go directly 

to this record contact and responsible individual, get as much information as they can, and then trace back. And if they are worried, 

the ultimate individual beneficial owner, they will find out instantly, and in most situations there is not going to be a beneficial 

owner in control. 

I will give you one example. You have three individuals, and they 

own an equal amount of stock—we will make it simple—an equal 

amount of stock in a corporation. And they each elect one director, 

and that is it. 

Now, is there somebody in control? There is nobody that is in 

control because no one individual can control anything. You have 

10 owners of a company, and they have an agreement that it takes 

unanimous consent to do anything. Nobody has control. 

Ms. SHASKY. Senator, if I may, I would suggest to you that in a 

criminal organization— 

Senator CARPER. This is a place where we actually work under 

unanimous consent, and sometimes—I would agree—we do not 

know who is in control here either. [Laughter.] 

Chairman LIEBERMAN. Well, you remember what Alexander Haig 

said. 

Senator CARPER. I do remember. 

Chairman LIEBERMAN. He said, ‘‘I am in control here.’’ 

Senator CARPER. Go ahead, Ms. Shasky. 

Ms. SHASKY. Senator, I would submit to you that in a criminal 

organization everyone knows who is in control, and this will not be 

an issue of determining who is in control. What we are concerned 

about here from the law enforcement perspective are the criminals 

and the criminal organizations, and so what we are asking is that 

when criminals use shell companies, they provide the name of the 

beneficial owner. That is the person who is in control, the criminal 

in control, as opposed to the NCCUSL proposal where they are suggesting that instead two nominees are provided—two nominees between law enforcement and the criminal in control. 

Thank you. 

Senator CARPER. Ms. Marshall, I saw you shaking your head a 

little bit there when Ms. Shasky was speaking. I do not know if you 

wanted to say anything on that. If you do, fine. If you do not, that 

is all right. But in your testimony, you state that a number of 

States—Wyoming was one, I think Delaware is certainly another— 

have passed significant legislation that is designed to combat some 

of the problems that we have gathered here to talk about today. 

31 

And if you can help us with this, I would appreciate it. Are you in 

a position to give us an idea of some of the laws that the States 

have passed in the last several years? 

Ms. MARSHALL. Yes. You will find in your materials statements 

from both Nevada and Wyoming. Both of those States were held 

out as poster children back in the fall of 2006 regarding some of 

these activities of registered agents—— 

Senator CARPER. Held out in a good way? 

Ms. MARSHALL. In a bad way. And they took that message very 

seriously to heart, with both States doing a fairly major overhaul 

in their legislation during 2007. 

For example, Wyoming now requires each company must have a 

registered agent, human being, in the State at a physical location. 

No drop boxes are allowed. The registered agent must keep information about the key players of the company represented, must 

have information about a contact person for each company. They 

have greatly increased their law enforcement authority. They have 

provided a felony provision for filing false documents. 

The State of Nevada has eliminated the bearer shares. They 

have a strict prohibition on the bearer shares. The authority is 

given to the Secretary of State to investigate forged or fraudulent 

filing complaints and to correct documents when they are deemed 

forged or fraudulent. The Secretary now requires information on 

owners of record be provided upon demand, requires answers to interrogatories in the course of criminal investigation, and if information is not received in 3 days, then certain other things begin to 

happen. 

Those are just highlights of what these different States have 

done. And Delaware, of course, has done the Registered Agent Act 

requiring an in-state registered agent with materials, and they can 

go out and audit. They can revoke their ability to be a registered 

agent. They can do criminal prosecutions, as I understand it. 

Senator CARPER. Thank you. Mr. Chairman, my time has expired. Will there be another round? 

Chairman LIEBERMAN. Yes, indeed. 

Senator CARPER. OK. Thanks so much. 

Chairman LIEBERMAN. Thank you. 

Ms. Shasky, let me start with you. In your opening statement, 

you listed four principles or components that from the perspective 

of the Department of Justice you would like to see in legislation 

that improved corporate transparency practices as we have described them. I wanted to ask you to what extent you believe S. 

569, which is the subject of this hearing, fulfills those four objectives. 

Ms. SHASKY. Absolutely. First of all, the Department would like 

to thank Senator Levin for his leadership in this area in working 

with his fellow Committee members in developing this legislation. 

The Department strongly supports any Federal legislation that 

would bring transparency to this area. Nonetheless, we do feel the 

bill needs some amendments to align with the four principles outlined in my opening statement. 

We are most supportive of the fact that the bill does require beneficial ownership information. This is key. And the bill does have 

that requirement in it. We would add to that, requesting, in addiVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
32 

tion to the name of the beneficial owner and the current address, 

that the beneficial owner be asked to provide a photo ID. The bill 

allows for this with foreign beneficial owners but not domestic. So 

we would make that change so that both domestic and foreign beneficial owners provide a copy of the photo ID. We are afraid that 

to do otherwise would merely invite fraud. We would expect that 

foreign criminals would claim falsely to be U.S. persons or to use 

straw actors, if we had that difference there. 

In addition, S. 569 requires an annual certainly of who the beneficial owners of a company are, unless the State does not have that 

requirement, in which case it would require an update to the beneficial ownership every time there is a change. 

We would suggest and recommend from the Department perspective that both of these things be required, so anytime there is a 

change in beneficial ownership information, it should be updated, 

and then annually it should just be verified. 

Now, I would point out that we do recommend exempting companies that are already regulated by State or Federal regulatory bodies and need to provide beneficial ownership information as a result of that. So like the company that Senator Carper mentioned 

that is listed on the stock exchange with a securities commission, 

they would be exempted from this bill. 

Finally, we would recommend slightly strengthening the Federal 

penalties contained in S. 569 to target those who would act willfully blind in failing to update information. So we look forward to 

continuing to work with Senator Levin and the Committee and the 

staff to bring S. 569 on par with the four principles outlined in my 

opening statement. 

Chairman LIEBERMAN. So would it be fair for me to conclude that 

generally the Department of Justice is supportive of this legislation 

with the amendments or additions that you just described? 

Ms. SHASKY. I think it would be fair, Senator, to say the Department is supportive of all attempts to craft Federal legislation bringing transparency, but, unfortunately, the Administration has not 

yet taken a position on the bill. 

Chairman LIEBERMAN. Understood. 

Ms. Ayala, from the vantage point of Immigration and Customs 

Enforcement, again, your testimony is very forward-leaning about 

certainly the purpose of S. 569. Is there anything particular you 

would add or subtract from it? 

Ms. AYALA. Again, I also would like to thank you and I certainly 

appreciate your efforts in bringing so much attention to this problem and engaging all the stakeholders in looking for a solution, and 

we hope that at the end of the day any legislation that is passed 

will enable law enforcement to immediately obtain this information 

and to be able to obtain it from one central point at each State and 

that it is consistently obtained. That way we are not in a position 

of looking around and spending time, maybe weeks, exhausting so 

many individuals in our investigative efforts and, like you said, run 

around on a wild goose chase and waste our time in general. 

But we also would like to see that this information is updated 

because that is very important for us, not only to make sure that 

we are focusing in a correct time frame as to who owned the company, but to also not waste the time of a legitimate company or a 

33 

beneficial owner that might have owned the company beforehand 

and have to bother with that person or look at that person as a target of investigation. 

I know that the Secretary has received a letter from this Committee, and they are formulating a response as to their position. 

Chairman LIEBERMAN. Good. 

And, Mr. Kaufmann, I will finally give you the chance to help us 

write some good legislation. 

Mr. KAUFMANN. I think the concept of beneficial ownership is one 

that is well established in the law. I think that the Congress has 

made great strides in increasing transparency through the Bank 

Secrecy Act and the USA PATRIOT Act to make sure, for example, 

that banks know who their customers are. I see this bill as being 

a simple answer. 

I also think it would strengthen the bill to make parallel provisions for requiring identification from both domestic and foreign 

registrants of corporations. 

I guess I am a little bit confused as to the perception that I am 

hearing that this will be so unduly burdensome. As we have looked 

at this, it seems to be simply a question who is the owner of this 

company, and I do not see the tremendous volume or burden that 

that imposes. 

One fundamental disconnect from what I am hearing from my 

left and my right, and I do not say this facetiously at all, but some 

of the concepts that are being put forth—and we are trying to 

achieve a balance here—but they are not rooted in the reality that 

we see in how we investigate criminal organizations. And I think 

that Ms. Shasky said it well. In a criminal organization, there is 

no doubt who is in control. When we are investigating a criminal 

organization, we cannot go to the person designated by the company to contact them because it is akin to picking up the phone 

and telling the criminal that he or she is under investigation. So 

the fundamental flaw in the NCCUSL structure is that we have to 

go to the target of the investigation to obtain the information that 

we seek to further the investigation. 

What S. 569 does is it puts that information with the State so 

we can get it without going to the target and alerting the target 

to the fact that we are investigating them. 

Chairman LIEBERMAN. Very helpful answers. 

A vote has gone off. I am going to go over and vote. I, unfortunately, cannot return so I am going to leave it to my senior colleague to conduct the rest of the hearing and determine, together 

with Senator Carper, whether at any point you want to recess and 

come back. And I do want to assure the witnesses with the long 

knowledge of Senator Levin, I can assure you he believes not only 

in equal protection but in due process. So you will be all right. 

[Laughter.] 

Senator Levin, it is all yours. 

Senator LEVIN [presiding]. Thank you, Mr. Chairman. 

Ms. Ayala, when you said that it is important that law enforcement be able to obtain this information, you were referring, I believe, to the beneficial ownership. Is that correct? 

Ms. AYALA. Yes, Senator. 

34 

Senator LEVIN. So just to be real clear as to where the witnesses 

are, do you believe that it is important that beneficial ownership 

information be collected? Ms. Ayala, first. 

Ms. AYALA. Yes, Senator. 

Senator LEVIN. Ms. Shasky. 

Ms. SHASKY. Absolutely, sir. 

Senator LEVIN. We know where the other three witnesses are, 

and I want to just focus on you two. 

Where should the ownership be kept, in the United States or in 

a foreign jurisdiction? First, Ms. Ayala. 

Ms. AYALA. It should be kept in the United States where it is 

easily accessible. 

Senator LEVIN. OK. Ms. Shasky. 

Ms. SHASKY. Senator, that is not even a close question. It should 

be in the United States. 

Senator LEVIN. All right. And when should the ownership information be collected—when the company is formed or after it is 

being investigated for suspicious activity? First, Ms. Ayala. 

Ms. AYALA. When it is formed. 

Senator LEVIN. Ms. Shasky. 

Ms. SHASKY. When it is formed. 

Senator LEVIN. And is it important to be able to determine beneficial ownership and other basic corporate information without tipping off the corporation that an investigation is going on? 

Ms. AYALA. Yes, it is absolutely necessary in order to preserve 

evidence and make sure that illegal funds are not being moved or 

to convolute our investigative process. 

Senator LEVIN. OK. Ms. Shasky. 

Ms. SHASKY. Senator, our job would certainly be much easier if 

all we had to do is ask the criminal to provide us with the evidence. So it is imperative that not be the case here. 

Senator LEVIN. All right. Now, you both have testified in terms 

of your agency’s position in terms of this specific bill, and I think, 

Ms. Shasky, what you said is that there are four principles you laid 

out, which are fine with me. You have also indicated a number of 

ways which I would say would strengthen the bill, would make it 

a tougher bill: A photograph for domestic as well as foreign beneficial owners; a regular update when there is a change in the beneficial ownership, not just each year; and the other two, I think, 

qualified as toughening or strengthening, which would make the 

bill probably more objectionable, I would think, although I am not 

going to speak for the Secretary, but, Ms. Marshall, would you say 

those suggestions would make the bill more objectionable? 

Ms. MARSHALL. Yes, sir. 

Senator LEVIN. All right. 

Ms. MARSHALL. If it is a government-issued ID with a person’s 

name on it, that is one matter. If it is a photo, we have no idea 

if it would match up to the name. Would we be in a position of rejecting photos? Suppose it is a photo of someone with heavily 

draped head wear and all we see are eyes? Do we reject those, 

when that is what that person wears for religious reasons? On and 

on and on. 

35 

Senator LEVIN. Well, I doubt that the Justice Department would 

suggest you reject any photo. I think they just want you to file it. 

But I will let them speak for themselves. 

Let me also ask you, Mr. Kaufmann, specifically in terms of the 

bill, do you and does your office support the bill? 

Mr. KAUFMANN. Yes, sir, absolutely. 

Senator LEVIN. OK. As to the FATF question, the beneficial 

owner standard in FATF has been there for 20 years, by the way. 

It has been in U.S. law since the USA PATRIOT Act of 2001, and 

it is also in other securities, tax, and anti-money-laundering bills. 

So this is a concept which has been defined in a number of ways 

and a number of laws. 

Finally, in terms of FATF, we have 27 countries that now require 

the beneficial ownership information. We are not sure what the 

status of all their compliance is, but we know they have all committed to it. And that is the question, whether we are going to commit to it as a country, the way other countries have committed to 

it. 

When you said, Mr. Haynsworth, that this has to apply to all the 

States, I think that is clearly true. 

Mr. HAYNSWORTH. Yes, sir. 

Senator LEVIN. Uniform law does not have to be adopted by all 

the States. 

But the bill does not change State law. It adopts a Federal requirement that the States ask the question on the incorporation 

form about beneficial ownership. Are you suggesting that under the 

Commerce Clause of the U.S. Constitution, given what corporations 

do across boundaries of States, we do not have the jurisdiction in 

Congress to require States to ask the question on their incorporation forms? Is that what you are saying? 

Mr. HAYNSWORTH. No, I am not. What I am saying, Senator, is 

for the States to be able to do that, there would have to be enabling 

legislation in the State to make that occur. 

Senator LEVIN. Well, if there is a Federal law that requires them 

to do it, are you suggesting they are not all going to do it? 

Mr. HAYNSWORTH. Well, what I am suggesting is that you are 

likely to end up with very different interpretations of what that 

means, and you are going to end up with 53—because you have to 

include DC—— 

Senator LEVIN. We have a Treasury Department definition. We 

have one line. You must ask for the beneficial ownership as defined 

in 31 CFR. That is not complicated. Your proposal is a heck of a 

lot more complicated and convoluted than that. I do not see how 

50 States can come up with 50 definitions if we say the definition 

already in Federal law is the definition in our law, and we incorporate it by reference. 

Mr. HAYNSWORTH. Yes, sir, but there would still have to be State 

legislation that says that the States will—— 

Senator LEVIN. Comply with Federal law? Really? 

Mr. HAYNSWORTH. No. That what would be filed in the Secretary 

of State’s office and what would be required to be in those filings, 

that is a matter of State law. 

Senator LEVIN. Thank you. Senator Carper. 

36 

Senator CARPER. Thank you. Secretary Marshall, it is my understanding that the funding from the bill that Senator Levin has introduced will come from homeland security grants that States currently receive. Is that correct? 

Ms. MARSHALL. That is correct. 

Senator CARPER. If you had to prioritize the way that your State, 

North Carolina, homeland security grants would be spent, any idea 

where this bill’s requirements might rank? 

Ms. MARSHALL. I think very low. I mean, I think the anticipation 

on homeland security money is that it is already inadequate to do 

what all our first responders, all our medical folks, all our emergency preparedness folks would like for it to do. And it is not a 

very enticing place that we would like to be competing with them 

for bulletproof vests, respirators, and training, the types of things 

that they are using that money for. 

I cannot speak for that grantmaking entity, but this is certainly 

very different than the kind of things that they are entertaining 

grant requests for. 

Senator CARPER. OK. We have about 5 minutes to get over to 

vote on a big piece of legislation, so I am going to ask a couple of 

questions to be answered for the record. 

One of the questions I want to say—and I do not have time, unfortunately, to listen, to hear you out, but, Mr. Haynsworth, at the 

conclusion of your statement basically you said let us just keep 

working at this and see if there is not some way that we can meet 

the legitimate concerns of law enforcement and be respectful of the 

concerns of States. 

I think we have been working on this for a while, and I would 

like to—I am one who does not give up very easily on almost anything that I think is important. And I am not inclined to give up 

here either. But you made an offer, I think, in good faith that we 

should maybe redouble our efforts and see if we cannot come close 

to where we want and need to be. 

Do you think you are speaking for one person, or do you think 

you are speaking for all the commissioners? 

Mr. HAYNSWORTH. I am speaking for the Uniform Law Commission, and I am certainly speaking for my committee and what we 

are trying to do. And one thing, Senator, I might just mention is 

that we have one shot at this in order to get it right and to get 

it then adopted by the States in a way that makes sense. And one 

of the things I have been reading about a little bit is this PASS 

ID legislation that is aimed at trying to correct some problems with 

overburdensome regulations imposed by Congress under the REAL 

ID. 

Senator CARPER. Yes, we are familiar with it. 

Mr. HAYNSWORTH. All right, sir. Well, I think you were one of 

those. 

Senator LEVIN. We are really familiar with it. 

Mr. HAYNSWORTH. But, I mean, we have to avoid that at all costs 

because of the Federal-State relations and trying to make something that really does work and does achieve the purposes that we 

are all trying to achieve. 

Senator CARPER. All right. I think we are out of time. 

37 

Senator LEVIN. Thank you, Senator Carper. Thanks to all of our 

witnesses. 

Senator CARPER. And we will have some more questions to submit for the record, if we could. 

Senator LEVIN. I will just close with a quick comment, which is 

that we are going to have to end the misuse of U.S. corporations, 

and there is only one way to do it, and that is to require those corporations to disclose beneficial ownership. There is no other way to 

do it. Otherwise, it is a three-step wild goose chase after the horse 

is out of the barn, I guess, to mix metaphors. We have horses and 

geese, but the point I think is pretty clear. 

We very much appreciate the testimony, and we will stand adjourned, with Senators being able to file questions for the record. 

Again, we thank you all, and we will stand adjourned. 

[Whereupon, at 4:55 p.m., the hearing was adjourned.] 

(39) 

BUSINESS FORMATION AND FINANCIAL 

CRIME: FINDING A LEGISLATIVE SOLUTION 

THURSDAY, NOVEMBER 5, 2009 

U.S. SENATE, COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS

The Committee met, pursuant to notice, at 10:04 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Joseph I. Lieberman, Chairman of the Committee, presiding. 

Present: Senators Lieberman, Levin, Carper, McCaskill, Burris, 

Ensign, and Bennett. 

OPENING STATEMENT OF CHAIRMAN LIEBERMAN 

Chairman LIEBERMAN. Good morning. The hearing will come to 

order. This is our Committee’s second hearing on the Incorporation 

Transparency and Law Enforcement Assistance Act, S. 569, which 

was introduced by Senators Levin and McCaskill, who are Members of the Committee, and by Senator Grassley, who is, of course, 

the ranking member of the Finance Committee. 

This legislation, which is the result of work done by Senator Levin’s Permanent Subcommittee on Investigations (PSI), seeks to increase the transparency of business formation practices as a way 

to reduce what is estimated as billions of dollars in fraud that is 

perpetrated by shell corporations. 

Each year nearly two million new corporations and limited liability companies (LLCs) are established in the 50 States and the District of Columbia. That comes to more than 5,000 new businesses 

every day. This is really the American way, entrepreneurship at its 

best, generating revenue and creating jobs, people taking risks and 

building on innovations. 

But each year a relatively small number of those businesses—but 

nonetheless a significant number—are incorporated for improper or 

illegal purposes to try to use registered corporations to defraud innocent people, to cheat tax authorities, to hide true transactions or 

to launder ill-gotten funds. 

Right now a majority of States require basic information from 

those seeking to establish a corporation. Most require the name 

and address of the company, the name of a registered agent who 

represents the company, and a list of officers and/or directors. This 

information typically is considered a public record, but most States 

allow individuals with actual ownership interest, including the investors who control the corporation or partnership, to remain anonymous to State authorities and therefore to the public, and this is 

the problem. 

40 

This is a problem for law enforcement, of course. Senator Levin’s 

bill offers one solution to this problem, which is to set a national 

minimum standard for State incorporation practices that require 

States to collect, maintain and update so-called beneficial ownership information. But there are critics of this method who argue 

that this well-intended desire for more sunshine should be weighed 

against other factors, including the privacy rights of those making 

personal investment decisions and the cost of administration and 

enforcement that would fall on companies and State governments. 

Our goal today is to hear from witnesses who are expert in various aspects of this problem so that we can make a judgment now 

about how best to proceed to deal with what everyone acknowledges is a problem. On the first panel we will hear from the Treasury Department, which administers anti-money laundering laws 

and leads U.S. efforts to stop the flow of terrorist financing. Treasury has worked tirelessly on corporate transparency issues, engaging with stockholders to consider all the possible approaches to improving practices in this area. 

We’re also going to hear from the Department of Justice, which 

has first-hand experience, of course, in the challenges of law enforcement as they try to combat the use of corporations for nefarious purposes. 

Our second panel of witnesses represents the business and legal 

communities which have distinct concerns about obviously the 

smooth flow of commerce for legitimate corporate purposes. We are 

also going to hear from a representative of the Federal Law Enforcement Officers Association and an expert on tax havens, both 

of whom support the general approach taken by the bill. So this is 

an interesting and important matter on which we hope to shed 

some light this morning. 

Senator Ensign, it is a pleasure to have you sitting in for Senator 

Collins today. I know she is particularly happy you are sitting in 

for her and I welcome you and your opening statement at this time. 

OPENING STATEMENT OF SENATOR ENSIGN 

Senator ENSIGN. Thank you, Mr. Chairman. I think this is a very 

important piece of legislation because it affects a number of different issues, not the least of which is its impact on the small business community, which serves as the backbone of our economy. 

Corporate law has long been within the State’s domain. By forcing States to amend their individual laws on corporate formation, 

Congress is effectively imposing a Federal standard on business 

creation, ignoring the particularities of each State’s business culture. With such a new Federal standard, there is no incentive to 

choose one State over another when deciding where to form a business. 

I believe that this will hurt many business-friendly States like 

my home State of Nevada. Businesses choose Nevada as their State 

of incorporation because of our State’s regulatory climate, tax situation, and flexibility for companies to run their businesses how 

they see fit. This week I received comments from the Nevada SecVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00046 Fmt 6601 Sfmt 6601 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
41 

1The letter submitted by Senator Ensign appears in the Appendix on page 435. 

retary of State for this hearing and I would like at this time to submit his statement and letter to me for the record.1

Chairman LIEBERMAN. Without objection, so ordered. 

Senator ENSIGN. If enacted, S. 569 would require my State to 

add additional staff, undertake an extensive rewrite of the e-Secretary of State processing system and deploy a new system, maintain a separate, non-public database, and deal with other operational infrastructure needs. 

And this is a Democrat Secretary of State. According to their office, the estimated cost for initial implementation could reach as 

high as $10 million, with ongoing operating costs of $1 million annually. These are costs that my home State of Nevada simply cannot afford at this time. 

As a former small business owner, I know firsthand how difficult 

it is to start and to grow a business. It is certainly more difficult 

in today’s economic environment. Every dollar spent on the burdensome requirements under this bill is one less that can be reinvested 

in the business. Too often in Washington we see unintended consequences of bills that, while they have a valuable purpose, turn 

out to be overreaching in their application. I fear that this is the 

case with this bill. 

It will result in significant regulatory and compliance costs that 

may have a chilling effect on the creation of new businesses and 

new jobs at a time when our economy can least afford it. The term 

‘‘beneficial ownership’’ as defined in the bill is simply too broad. 

Rather than qualifying it by some clear cut standard, the language 

in the bill is borrowed from the Treasury Department’s use of the 

term to determine the proper taxpayer on a bank account. 

Because of the number of different entities involved, this is not 

a workable comparison for corporations and LLCs. It leaves open 

the possibility to interpret the definition differently. Rather than 

risk the harsh penalties associated with non-compliance, entrepreneurs will be encouraged to register their businesses only after 

consulting with certain professionals, such as attorneys and accountants. The expense associated with this new registration process will simply be too great for many smaller startup businesses to 

bear, resulting in less business activity and less job creation. 

Mr. Chairman, we are not the first economic power to consider 

the regulatory system proposed under this bill. In fact, efforts to 

enact a similar regulatory scheme have failed in other jurisdictions, 

most notably in the United Kingdom. I understand that one of the 

witnesses in the Committee’s last hearing on this topic mentioned 

this. The United Kingdom considered a system requiring upfront 

disclosure of beneficial ownership as defined in a manner consistent with the definition in the bill before us. The U.K. authorities rejected this approach, concluding that ‘‘there were significant 

disadvantages and no clear benefits, particularly when taken into 

account the cost of introducing such measures.’’ 

As a basis for their conclusion, these authorities noted ‘‘that 

those engaged in criminal activities would not provide true information about beneficial owners’’ and that ‘‘disclosure would result 

in misleading information being included in the register.’’ 

42 

1The chart submitted by Senator Levin appears in the Appendix on page 368. 

According to these authorities, requiring further details of beneficial ownership ‘‘would be harmful to investigations through the 

resulting misleading information provided by both criminal and innocent shareholders.’’ Mr. Chairman, it is my hope that we can 

continue to work together on this very important issue to ensure 

that the needs of law enforcement are adequately met while not 

overburdening our States or our business communities. I thank you 

for this hearing. 

Chairman LIEBERMAN. Thanks very much, Senator Ensign, for 

that thoughtful opening statement. Normally we would just have 

the Chairman and Ranking Member give opening statements, but 

two of our colleagues here, and very valued Members of the Committee, have been involved in this matter quite a bit and I think 

it would be helpful to the Committee, if they are so inclined, to ask 

Senator Levin and then Senator Carper also to deliver some opening comments. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Thank you, Mr. Chairman. Last hearing we went 

into a number of examples of how the hidden secret ownership of 

corporations in this country denies law enforcement critical tools 

and this hidden ownership is a significant security risk to our 

country because it frustrates law enforcement in this country. 

Just a number of examples. Viktor Bout, who is a Russian, one 

of the most notorious arms traffickers in the world, is featured in 

a book called ‘‘Merchant of Death.’’ Last year the United States indicted him for conspiracy to kill U.S. nationals, the acquisition and 

use of anti-aircraft missiles, and providing material support to terrorists. To carry out his activities, he is known to use a network 

of shell companies around the world, including companies formed 

in countries like Liberia, Moldova, as well as here. 

Now the first chart, which we have up in front of us here, lists 

the names of 10 Texas and Florida companies alleged to have been 

used by Viktor Bout over the years.1 It also includes two Delaware 

companies that were alleged in a 2002 Interpol notice, based on information from Belgium, to have been used by Viktor Bout to 

transfer $325 million to carry out his activities. The chart does not 

include another company, Garland Global Corporation, which Romania believes may also be related to Viktor Bout, but whose beneficial owners are unknown. 

In July 2009, Romania filed a formal request with the United 

States for the names of the company’s owners and other information, but it is unlikely the United States can supply the names 

since as this Committee has heard before, our 50 States are forming nearly two million companies each year and in virtually all 

cases, doing so without obtaining the names of people who will control or benefit from those companies. 

The end result is that a U.S. company may be associated with 

an alleged arms trafficker and supporter of terrorism, but we are 

stymied in finding out in part because our States allow corporations with hidden ownership. Here is another aspect of the problem. Last month my staff went on the Internet and typed in ‘‘shell 

43 

1The chart submitted by Senator Levin appears in the Appendix on page 367. 

company’’ as a search term. The first entry that came up was for 

aged shell companies and provided a link to the Web site of a company called Go Risk-Free, which offers corporations for sale in all 

50 States. 

Chart two, which is in front of us,1 shows how Go Risk-Free 

promises ‘‘if you need a company that is in a certain State or age, 

contact us and we will help you find it.’’ On the date that we 

checked, Go Risk-Free had over 200 companies available for sale. 

The price starts at $3,500. The first was a Nevada company incorporated in October 1928, 80 years ago. A secret buyer of this company can pretend to have had a U.S. business in operation for decades, could use that shell company to convince a bank to open an 

account or issue a credit card and go from there. 

These sales seemingly have no purpose other than to create a 

misleading impression. The potential for criminals to buy these 

types of companies without ever divulging their names or interest 

is a threat to our security and to our well being. 

At the Committee’s hearing in June, we were told about a New 

York corporation that was secretly owned by members of the Iranian military. Our government learned of that ownership interest 

not from New York State records, but because another country had 

the beneficial ownership information that we didn’t. We heard 

about a network of 800 U.S. companies across the country that had 

attracted law enforcement attention because they were transferring 

suspect funds to each other and in and out of high-risk jurisdictions. 

When the Department of Homeland Security, Immigration and 

Customs Enforcement (ICE), tried to find out the company’s owners, all they could learn was that they were associated with a 

group of shell companies in Panama. ICE eventually dropped its investigation, in part because not one of the 800 company formation 

documents had any information on the true owners. Now, these are 

only a few examples of U.S. companies being used to engage in a 

wide range of wrong doing from money laundering to tax evasion 

to drug trafficking and worse. 

Right now we require people to provide more information to obtain a driver’s license than to acquire a U.S. corporation. Most of 

our States allow hidden owners to buy companies online, within 24 

hours of a request in two States. For an extra $1,000, hidden owners can form a U.S. company within a single hour. 

In 2006, the leading international anti-money laundering body in 

the world, the Financial Action Task Force (FATF) on money laundering, issued a report criticizing the United States for failing to 

comply with the FATF standard requiring countries to obtain the 

true owners, the beneficial owners of the corporations formed in 

their countries. 

FATF set a goal of 2 years, until July 2008, for the United States 

to strengthen its compliance with the FATF standard. We are now 

more than a year past due with no progress to speak of. That is 

why we introduced the bill which is the subject of today’s hearing. 

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44 

ment presenting a subpoena or a summons. That information 

would be available to the public only if State law so provided. 

The minimal cost of adding a question to State incorporation 

forms could be paid for with funds already provided to the States 

on an annual basis by the Department of Homeland Security 

(DHS). Our bill does not require any State law to be passed. Nevada or other States will still have their business-friendly tax and 

regulatory laws in place. 

A host of law enforcement groups have endorsed our bill, including the Federal Law Enforcement Officers Association, which we 

will hear from today. It has also been endorsed by groups combating financial crime, corruption, and tax evasion, including the 

Tax Justice Network USA, Global Financial Integrity, Citizens for 

Tax Justice, and many more. By the way, an identical version of 

the bill was co-sponsored by President Obama last year when he 

was a senator. 

One final point, we have been fighting offshore secrecy laws for 

years. These laws enable wrongdoers to secretly control offshore 

corporations. Now we made a little progress on that front. More is 

hopefully coming. But one of the impediments that we run into in 

combating offshore secrecy is the point made by offshore jurisdictions that the United States, itself, promotes corporate secrecy. A 

report issued by Tax Justice Network earlier this week asserts that 

Delaware provides more corporate secrecy than Switzerland demonstrates that we have got to get our own house in order and comply with FATF’s international standards on beneficial ownership if 

we are going to continue to make progress on offshore tax havens 

whose secrecy is a real problem and a real deterrent to law enforcement. 

Corporations were intended to shield owners from personal liability for corporate acts, not to hide ownership. But today the corporate form is being corrupted and is serving those who use the 

corporate veil to hide their identities while committing crimes or 

dodging taxes and robbing our treasury and taxpayers of billions 

of dollars each year. It is past time to stop this misuse of the corporate form and if we want to end inappropriate corporate secrecy 

offshore, we have to stop it here at home when it comes to law enforcement and the needs of law enforcement. 

So I thank you again, Mr. Chairman, for this opportunity to give 

an opening statement. 

Chairman LIEBERMAN. Thanks very much, Senator Levin. Senator Carper, good morning. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Good morning and thanks very much for holding this hearing and giving us, Senator Levin and I, an opportunity 

to speak as well. 

I know not everyone was anxious to hold this second hearing. I 

am glad that we have. I am encouraged, having talked to a couple 

of our witnesses today, that it has actually helped provide an opportunity for us to find a path forward—I think maybe to a compromise that will actually address the concerns that Senator Levin 

has stated and I think all of us share about combating money laundering and tax evasion, but at the same time meets, I think, the 

45 

very legitimate concerns that Senator Ensign spoke to with respect 

to undue burdens that we would place on States, including our own 

State, and frankly all 49 other States as well. 

Let me just say that as currently drafted, the bill exempts publicly-traded corporations and businesses they form. Meanwhile, the 

bill applies to more than 10 million small businesses in the United 

States, placing them at a competitive disadvantage to their larger 

brethren. 

I just want to know, is this really the best possible way to address money laundering? Since the bill notably exempts partnerships and several other business forms, including sole proprietorships, won’t criminals just find another entity under which to conduct their criminal enterprises? 

I know that some of us are confused as to why we’re discussing 

this issue in this Committee and not before the Banking Committee, which has jurisdiction over money laundering policies. The 

reason is that the bill permits States to redirect their Federal 

homeland security dollars to comply with its provisions and we 

need to ensure that we have very good reasons to deprive police, 

firefighters, and first responders with very limited Federal funds 

before we move forward. 

Recent press articles and reports have unfairly singled out the 

United States, and notably my State, for its corporate laws. A report by the Tax Justice Network which is represented on our second panel today and notably funded by the Ford Foundation in 

Michigan, asserts that the United States and the subjurisdiction of 

Delaware are the most secretive jurisdictions in the world. 

The report actually rates the transparency of the United States 

above other jurisdictions, but because the report applies a 

weighting factor that is based on the size of the U.S. economy, the 

formula results in the United States receiving the highest secrecy 

index in the world. Without such a weighting, the United States 

would be tied with 16 other jurisdictions for 15th place. 

Let me be very clear that the report provides no evidence to support its assertions. In fact, Delaware State company formation laws 

are essentially identical to laws on the books in Michigan, Connecticut, Missouri, and many other States. Of the 12 criteria used 

by this report’s authors to establish the secrecy’s rankings, six are 

matters purely of Federal law or compliance and one of the criteria 

was based on whether the jurisdiction answered a survey which 

Delaware’s Secretary of State asserts it never received. 

Even more troubling, no other State in the United States was included in the survey. It appears even to the most casual observer 

that this report may have been contrived to achieve a particular result. In fact, Delaware is doing a number of things to deter criminal enterprises. It has enacted laws that provide law enforcement 

with better access to the information they need to prevent and 

solve crimes. 

Let me just give a couple examples. Delaware was the first State 

in our Nation to adopt legislation responding to the concerns expressed by law enforcement regarding elicit practices of registered 

agents. Delaware now regulates commercial registered agents and 

has successfully removed a number of registered agents from doing 

business in our State. 

46 

1The prepared statement of Mr. Cohen appears in the Appendix on page 377. 

Delaware requires every business entity to provide the name, address, and phone number of a designated communications contact 

person who is available to law enforcement. And Delaware responded to international criticism that U.S. company law permits 

companies to issue bearer shares, stock certificates whose records 

of ownership are not maintained by the issuing company, when we 

explicitly banned the practice in statute to be consistent with longestablished Delaware case law. 

We have heard from a number of diverse interests with respect 

to this bill, the National Association of Secretaries of State, the 

U.S. Chamber of Commerce, the National Association of Manufacturers, the National Conference of State Legislatures, and the 

American Bar Association. Others also have raised legitimate concerns with S. 569. 

We will hear from the Treasury Department in testimony today, 

even the international community has been unable to comply with 

FATF recommendations on beneficial ownership, and therefore, unable to find a suitable way to date to address these complex issues. 

We heard from the Uniformed Law Commission at the last hearing and they worked on an approach that is designed to balance 

all the interests, providing greater transparency, respecting State 

privacy and mitigating the negative impacts on the economy and 

on small businesses. There are a number of reasons for us to encourage more transparency and disclosure with respect to ownership of legal entities. However, I fear that S. 569 would impose 

undue burdens on State authorities and on legitimate businesses, 

especially our struggling small businesses, at a time when the U.S. 

financial system and our domestic economy are under severe stress. 

I believe that there is a balance that can be achieved by working 

together. We should start by respecting the job that our governors 

and secretaries of State are doing in their individual States and 

through the Uniform Law Commission. I also appreciate the work 

that has been done since our last hearing by the Department of 

Treasury and the Department of Justice. Together, I am confident 

we can achieve an approach that works for all stakeholders. 

And again, Mr. Chairman, I want to thank you for holding this 

hearing and I would just say, I want us to work hard to get this 

right. I think together we can find an approach that works for all 

of us and that is what my intent is to do. 

Chairman LIEBERMAN. I appreciate that very much, Senator Carper, and I share that goal as well. I thank the two witnesses, who 

I introduced, on the first panel. So we will go immediately to David 

Cohen, Assistant Secretary of Treasury for Terrorist Financing and 

Financial Crime. Thanks very much for being here. Thanks for 

your good work and we welcome your testimony now. 

TESTIMONY OF HON. DAVID S. COHEN,1 ASSISTANT SECRETARY FOR TERRORIST FINANCING, U.S. DEPARTMENT OF 

THE TREASURY 

Mr. COHEN. Thank you, Chairman Lieberman, distinguished 

Members of the Committee. Thank you for inviting me to testify 

today on finding a legislative solution to enhancing access to beneVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00052 Fmt 6601 Sfmt 6601 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
47 

ficial ownership information, a key step in combating the abuse of 

legal entities by those engaged in financial crime. 

I would like to begin by thanking Senator Levin for his leadership over the years on this important topic. I would also like to extend my appreciation to colleagues across the government, State 

and Federal, and in the private sector, with whom we have worked 

to understand the challenge of beneficial ownership and develop effective solutions. 

At the outset, it is important to recognize a number of key considerations. First, the ability of elicit actors to form corporations in 

the United States without disclosing their true identify presents a 

serious vulnerability and there is ample evidence that criminal organizations and others who threaten our national security exploit 

this vulnerability. 

Years of research and law enforcement investigations have conclusively demonstrated the link between the abuse of legal entities 

and weapons of mass destruction (WMD) proliferation, terrorist financing, sanctions evasion, tax evasion, corruption, and money 

laundering for virtually all forms of criminal activity. This abuse 

is particularly prevalent with respect to legal entities created in 

the United States. We know that elicit actors use the presumed legitimacy of U.S.-based entities to gain access to the international 

financial system and disguise the source of their funds or the purpose of their transactions. 

Second, information on the true beneficial ownership of a legal 

entity at the time of formation, as its ownership changes over time 

and when it opens accounts it is critical to stopping the exploitation 

of legal entities. Third, the challenge of enhancing access to beneficial ownership information is complex and requires a global solution. Treasury is working domestically and internationally to address this challenge. 

Fourth, we are keenly aware of the need to preserve an efficient 

entity formation process and not to create unnecessary impediments to accessing the financial system for legitimate businesses. 

And finally, we believe even incremental progress in this area to 

enhance access to beneficial ownership information is likely to yield 

substantial results. 

Taking account of these key considerations, Treasury has developed a comprehensive approach to the issue of beneficial ownership 

that includes the following elements. We favor legislation that requires a submission of beneficial ownership information at the time 

of company formation, the obligation to keep that information updated, and the availability of that information upon proper request 

by law enforcement. 

Treasury is also working with the Federal financial regulators to 

consider guidance and possibly new regulations for U.S. financial 

institutions that will clarify when and how financial institutions 

should identify and verify beneficial ownership while conducting 

customer due diligence. 

Internationally, we are working with our counterparts in the Financial Action Task Force to ensure that its standards evolve in a 

way in which compliance is both achievable and effective. The Administration believes that S. 569 provides a good platform on which 

48 

to construct the legislative solution we favor, provided that it is 

amended and modified to address certain key issues. 

We are fully committed to working with the Congress and our 

interagency partners to craft amendments that will strengthen S. 

569 in the following ways. First, we believe the definition of beneficial ownership should be modified. Under S. 569, the ambiguity 

and breadth of the definition, coupled with burdensome disclosure 

requirements, makes compliance uncertain, time consuming, and 

costly. We believe the definition of beneficial ownership should be 

straightforward and simple in application to work for the full range 

of covered legal entities. 

Second, we do not believe the bill should impose anti-money 

laundering (AML) obligations on company formation agents. As 

drafted, S. 569 would require Treasury to impose AML program requirements on a new class of financial institutions, so-called company formation agents, which raises substantial legal, policy, and 

practical challenges. 

We believe that the bill should not attempt to regulate company 

formation agents under the Bank Secrecy Act, but instead should 

establish clear and significant Federal, criminal, and civil liability 

for persons who fail to provide accurate beneficial ownership information as required by law. 

Third, the bill should establish robust documentation requirements. As currently drafted, S. 569 does not impose any documentation requirements for beneficial owners who are U.S. persons. In our view, S. 569 should require documentation for all beneficial owners, foreign and domestic, to be held within the State and 

made available upon proper demand by law enforcement. 

Fourth, we believe that further study of the vulnerabilities associated with the transfer of legal entities is required. S. 569 allows 

for businesses to update their beneficial ownership information in 

an annual filing with the State. This time gap introduces a significant vulnerability for abuse upon the transfer of a legal entity and 

requires further study. 

Fifth, we believe the bill should not draw on State homeland security grant funds to carry out the obligations imposed by the law. 

These funds are already relied upon by States to finance first responders in preparing for and responding to emergency situations. 

Treasury is committed to working in earnest and expeditiously 

with the Congress, our interagency partners, and other interested 

parties to address these concerns and develop legislation that will 

enhance the availability of beneficial ownership information in an 

effective and workable manner. 

I would like to thank the Committee for inviting me to testify 

today and I look forward to answering your questions. 

Chairman LIEBERMAN. Thanks very much, Mr. Cohen. That gets 

us off to a good discussion and I am sure we will have a lot of questions for you. 

Next is Jennifer Shasky, who is Senior Counsel to the Deputy Attorney General at the U.S. Department of Justice. Good morning. 

49 

1The prepared statement of Ms. Shasky appears in the Appendix on page 388. 

TESTIMONY OF OF JENNIFER SHASKY,1 SENIOR COUNSEL TO 

THE DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF 

JUSTICE 

Ms. SHASKY. Good morning. Thank you, Chairman Lieberman, 

distinguished Members of the Committee. I am honored to appear 

before the Homeland Security Committee to discuss S. 569, which 

addresses the need for greater transparency in corporate formation 

in the United States. 

While those of us in the law enforcement community understand 

that the topic of corporate transparency does not readily evoke images of the criminal and extremist underworld and can often seem 

quite esoteric, it is important to recognize that some of the worst 

actors seek to exploit the lack of corporate transparency in this 

country to harm our national and economic security. 

For example, as Senator Levin already pointed out, Viktor Bout, 

the infamous arms merchant and war profiteer designated by the 

U.S. Department of Treasury, Office of Foreign Assets Control, 

used U.S. shell companies to further his illegal arms trafficking activities. 

The Sinaloa Cartel, one of the major Mexican drug trafficking organizations that figures prominently in our discussions of transborder security. The Sinaloa Cartel is believed by U.S. law enforcement to use U.S. shell companies to launder its drug proceeds. 

Semion Mogilevich was recently named to the Federal Bureau of 

Investigation’s 10 most wanted fugitives list. Semion Mogilevich 

and his criminal organization are charged with using U.S. shell 

companies to hide their involvement in fraudulent investment activities and to launder money. 

Yet each of these examples involves the relatively rare instance 

in which law enforcement was able to identify the perpetrator misusing U.S. shell companies. Far too often, we are unable to do so. 

Take for example the instance in which a foreign partner notified 

U.S. law enforcement after uncovering a plot to send military cargo 

which had been mislabeled as farm equipment to Iran. 

Why contact us you might ask? Because in this instance, the seller listed in the shipping documentation was a U.S. shell company. 

Unfortunately, through this case and others, our foreign partners 

have learned that in most instances, U.S. law enforcement cannot 

identify the individuals who own and misuse U.S. legal entities, or 

in the alternative, the significant investigative delays associated 

with identifying the perpetrator result in criminal participants 

staying several steps ahead of law enforcement, the trail turning 

cold, or the case being terminated for statute of limitations or other 

delay-related reasons. 

The Administration believes that S. 569 is an important step in 

the right direction on this issue and provides a useful platform on 

which to construct an effective legislative solution. We have a number of recommendations that should strengthen S. 569 and are 

fully committed to working with the Congress and our inter-agency 

partners to craft legislative texts to amend the bill in order to address our concerns. 

50 

We also recognize, however, that no legislation can provide the 

perfect solution to this problem. Whatever legislation we enact will 

have some costs to legitimate business and will have some weaknesses that criminals can exploit. Despite this fact, the Administration is committed to taking what is has learned from studying this 

problem and working with Congress to craft a legislative solution 

that has maximum effectiveness with minimum burden on legitimate business. 

As noted in the department’s previous testimony, the first and 

most critical issue facing law enforcement is the ability to identify 

the living, breathing, beneficial owner of a legal entity: A natural 

person. As currently drafted, S. 569 takes a significant step forward on this point by including a definition of beneficial ownership 

that would apply across all 50 States and ensure that criminals 

cannot exploit definitional gaps between differing State systems. 

The Administration would like to work with Congress and this 

Committee to amend and further refine that definition to address 

concerns in the business community that compliance will be uncertain, time consuming, and costly. We believe the interests of law 

enforcement can be met while also ensuring that the definition is 

sufficiently straightforward and limited in application to work for 

the full range of covered legal entities. 

Once a more limited application is achieved, the Administration 

recommends that S. 569 also be strengthened to require a credible 

and legible photocopy of government-issued identification for each 

beneficial owner to be held within the State. The provision and retention of such information is critical to any meaningful effort to 

promote transparency by assuring that law enforcement will have 

a name and a face for all beneficial owners. Currently S. 569 requires beneficial owners to provide their names and addresses to 

the State, a requirement that should remain in place. However, the 

bill only requires foreign beneficial owners to take the additional 

step of providing legible photo identification. 

The Administration recommends this requirement be extended to 

all beneficial owners. Recognizing the challenges, both fiscal and 

technological, that come with this effort, we believe it would be sufficient for the photo identification to be maintained in the State 

and not necessarily with the State. 

Another issue encountered by law enforcement is the criminal 

misuse of so-called shelf or aged companies, also previously addressed by Senator Levin. We often see companies transfer through 

several middlemen before ultimately reaching the criminal perpetrator. In such cases, the investigation often leads to a formation 

agent who has long ago sold the company with no record of the 

purchaser and no obligation to note the ownership change. 

While S. 569 partially addresses this problem, the Administration recommends further study of the vulnerabilities associated 

with the transfer of legal entities, including identifying potential 

solutions for updating beneficial ownership information with every 

change. Additionally, the Administration recommends eliminating 

the expansion of anti-money laundering obligations to company formation agents, a significant administrative and regulatory burden 

in favor of broader civil and criminal Federal liability for non-compliance. 

51 

Specifically, we believe the Federal penalties in S. 569 should be 

amended to include criminal and civil liability for persons obligated 

to hold beneficial ownership information if they fail to meet their 

statutory obligations, including to maintain the confidentiality of 

subpoenas and other legal process, thereby eliminating the socalled tipoff problem. 

Finally, while the Administration does not have an affirmative 

position on which funding mechanism should be used to carry out 

the obligations imposed by the bill, we note with concern that S. 

569, as currently drafted, authorizes the use of State homeland security grant funds since these funds are already relied upon by the 

States to fund first responders. 

I would like to conclude by expressing the gratitude of the Department of Justice for the continuing support that this Committee 

has demonstrated in assisting law enforcement to protect our people, businesses and institutions from those who would do us harm. 

I would be happy to answer any questions you have. 

Chairman LIEBERMAN. Thanks very much for your testimony, 

Ms. Shasky. We will have 7-minute rounds of questioning. 

I take it, just to clarify the point, although you said it pretty 

clearly, that both of you have testified that the Administration supports S. 569, but with the amendments that you both have described; is that correct? 

Mr. COHEN. Mr. Chairman, I think the way we would phrase it 

is that with the amendments and modifications that Ms. Shasky 

has identified that we believe would strengthen the legislation, we 

would be in a position to support the bill. 

Chairman LIEBERMAN. OK, that is what I thought you had said. 

Let me ask you briefly, Mr. Cohen, because this is obviously the 

Homeland Security Committee, you are assistant secretary for, 

among other things, terrorist financing. If you can tell us to what 

extent this problem of shell corporations has frustrated investigations that you have done in regard to terrorist financing? 

Mr. COHEN. Yes, Mr. Chairman. It has frustrated investigations 

and I think Ms. Shasky’s testimony and other testimony that this 

Committee and Senator Levin’s Subcommittee have received have 

illustrated a number of instances where investigations have been 

frustrated. The difficulty, of course, is that if there is a lead on a 

business that may be involved in any matter of crime, including 

terrorist financing, that when you try to get behind that—and what 

we do at the Treasury Department is try to map out these networks, map out who is involved in raising the money and moving 

the money. If you then go and try and figure out who the actual 

people are who are involved and there is no access to the beneficial 

ownership information, that can, of course, stymie the investigation. 

It is also, I should add, a problem that some of our international 

partners have encountered as they try to undertake similar efforts. 

Chairman LIEBERMAN. In the United States or in their home 

countries? 

Mr. COHEN. It is particularly a problem with U.S. corporations. 

Chairman LIEBERMAN. Yes. But there have been specific cases 

where you have been pursuing, for instance, a terrorist financing 

52 

investigation and this shell corporation problem has frustrated 

what you have been trying to do. 

Mr. COHEN. It has. I do not want to overstate the problem. I 

think what we see is a significant vulnerability and we have seen 

some exploitation of that vulnerability. But it is a problem that we 

have identified. 

Chairman LIEBERMAN. In the testimony that you both offered, in 

different ways you said something really interesting to me, which 

is that the Administration’s position is that the law enforcement 

community particularly can get the information that you need even 

if a company’s beneficial ownership information, including particularly photo identification, is held by a third party in the State rather than in the State Secretary of State’s office. 

That is interesting and I wanted to ask you to just go into that 

in a little more detail. How would such a revised procedure work? 

In other words, who would hold the information, particularly the 

photographic documentation? 

Mr. COHEN. I think in our conception of a modified bill, that information would be held with the State either by someone who is 

in the corporation if the corporation is, in fact, operating in the 

State, or if the corporation is not operating in the State of its incorporation, then there would be a designated person in the State who 

would be holding that information. That person in the instance of 

an out-of-state corporation or foreign corporation would need to 

identify himself or herself to the Secretary of State’s office and certify that they have the credible and legible documentation information. 

So it differs on whether the corporation is operating in the State 

or is operating outside the State, but in either instance, there 

would be a person in the State who has that information. 

Chairman LIEBERMAN. And the law, if you were drafting it, 

would say that the individual holding the information would have 

an obligation to present it upon request? 

Mr. COHEN. Yes, sir. 

Chairman LIEBERMAN. Request of law enforcement? 

Mr. COHEN. Exactly. 

Chairman LIEBERMAN. Again, in your ideal version of a bill on 

this, what would States be required to ask on their incorporation 

forms and how would law enforcement access the necessary information without tipping off a subject of an investigation of a potential criminal? 

Mr. COHEN. The States would be required to obtain the name 

and address of the beneficial owner as defined—and we can talk 

about the definition of beneficial ownership. The concern about tipping off is a very serious one and the legislation that we have in 

mind would contain a very clear prohibition on tipping off, whether 

it is by someone in the State Secretary of State’s office or this third 

party who may be holding the documentation. They would be prohibited from notifying the subject of the investigation that a subpoena has been received. 

There are other places in the Federal criminal code where there 

are similar prohibitions on tipping off and I think we would model 

on those provisions. 

53 

Chairman LIEBERMAN. Ms. Shasky, do you want to add anything 

to that? 

Ms. SHASKY. No, I think he has covered it adequately, thank you. 

Chairman LIEBERMAN. From what you have said, I gather that 

the Administration does not favor making homeland security grant 

funds available to the States for the purposes of this legislation. 

Obviously, that provision, I presume, was put in the legislation because we did not want to create an unfunded mandate on the 

States. 

So it leaves naturally for me to ask, do you have any suggestions 

for how we can help the States pay for the changes in these procedures, or frankly whether we should help them pay for those 

changes? Ms. Shasky. 

Ms. SHASKY. Sure, we definitely do not support an unfunded 

mandate. 

Chairman LIEBERMAN. Yes. 

Ms. SHASKY. We believe it is important to provide both the capacity and the incentive to States that will enable them to carry out 

the legislation. However, we would just note our concern, quite 

frankly, in using the State homeland security funds as the mechanism since they are used by first responders. The States are already relying on those funds for the first responders. 

We look forward to exploring this issue further with the Committee in trying to identify, quite frankly, some appropriate sources 

of funding. 

Chairman LIEBERMAN. So in other words, you do not support the 

unfunded mandate, but you do not support the use of the homeland 

security grant funds because you believe there are more priority 

claims on them, namely from first responders, correct? 

Mr. COHEN. I think that is correct. 

Chairman LIEBERMAN. Thanks. My time is up. Senator Ensign. 

Senator ENSIGN. Thank you, Mr. Chairman. Does the Administration have a definition yet, or when can we expect a definition 

on beneficial ownership? 

Mr. COHEN. We do not have legislative language that we are prepared to present this morning. We are working with the Justice 

Department and others in the Administration to craft language on 

beneficial ownership. I think the principle that is guiding our work 

in this area is as you said, Senator Ensign, that the definition 

ought to be clear cut. It ought to be simple and straightforward and 

a definition that can be easily applied by the two million or so people a year who form corporations without needing to consult an attorney, consult an expert—that the entrepreneur sitting at their 

kitchen table can look at this definition and figure out who the 

beneficial owners are and submit the form. 

Senator ENSIGN. I just want to encourage you that when you are 

coming up with the suggestions for us that you do consult with 

some of those small businesses that are going to be forming, to ensure that we are not putting that kind of burden on them. These 

businesses will say that I have all my money invested in what I 

have been doing. I just cannot spend more money on accountants 

and lawyers to make sure that this thing is done right. And a lot 

of these people are just common sense, street smart people. They 

do not have a college degree. You have to take it down basically 

54 

1The prepared statement of Nevada Secretary of State Ross Miller submitted by Senator Ensign appears in the Appendix on page 435. 

to their educational level for a lot of these small businesses and 

make sure that we are not putting a burden on them. 

Because frankly, job creation is something I think that all Americans can agree we need right now. So I just want to make sure we 

are not placing undue burdens on these businesses and I look forward to seeing that definition when you get it. 

If law enforcement came in and said that they want this information, who is tasked with verifying that person is who they said they 

are? Is it law enforcement? Is it the Secretary of State’s office? Because I think that this is one of the concerns that the Nevada Secretary of State relayed to us. Who is going to be in charge of 

verifying? Because that would be additional costs from the one’s I 

mentioned earlier. 

Ms. SHASKY. In our conception, Senator, it would be law enforcement that would hold that responsibility. 

Senator ENSIGN. So you would just get the information from the 

Secretary of State’s office and then it would be up to you to determine whether that was right or not? 

Ms. SHASKY. That is right. We are merely asking the State to collect the information, not to verify it. 

Senator ENSIGN. I see. Have you all done cost studies at all, like 

what Secretary of State has submitted to us? 1 Because there is one 

thing to say that this thing is not an unfunded mandate, but as 

we have seen a lot of times, it turns out to be a lot more expensive 

than what the estimate are. 

Have you done extensive studies on how much it is going to cost 

each State? Because, for instance, Delaware and Nevada, we incorporate a lot more companies than other States do. How would you 

divvy up the money, which is always a problem up here? 

Mr. COHEN. I do not believe that we have conducted any detail 

analysis on the cost of implementation. I think what Ms. Shasky 

was testifying to on the question of unfunded mandate is not that 

we think this is a costless endeavor, but quite the contrary. We recognize that there are costs associated with the implementation of 

this legislation if it were to be enacted and we are committed to 

working with the Congress to find a way to resolve that issue for 

the States, not that we think that this is something that is free. 

Senator ENSIGN. Any comments, Ms. Shasky? 

Ms. SHASKY. I agree wholeheartedly with my colleague from the 

Treasury Department. Again, we are committed to working with 

Congress to identify appropriate funding mechanisms. 

Senator ENSIGN. Just to summarize, these are my major concerns. One is that we do not hurt small business. Two is that we 

do not have an unfunded mandate to the States, which we do a lot 

up here, especially in the past. We do less of it now, but we still 

do some up here. There are promises. 

And then third is the fairness of the distribution of the funds. 

Sometimes we will do a formula and we have to make sure that 

it is not just done on population, but it is actually done on the need 

for that State based on the numbers. Some of our States have tried 

to enact laws that were friendly and made it easier to get into busiVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00060 Fmt 6601 Sfmt 6601 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
55 

1The undated letter to Senator Dodd submitted for the Record by Senator Lieberman appears 

in the Appendix on page 433. 

ness. My State is one of those. We think that we have done a pretty good job of balancing that. 

I do think that law enforcement has legitimate concerns; there 

is no question about that. But we have to be very careful that the 

law of unintended consequences does not make things so burdensome in the future that when we correct one problem that we are 

making other problems much more severe. 

Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thanks very much, Senator Ensign. As is 

our custom in this Committee, we call Members in order of their 

arrival and for the information of my colleagues, that will be Senators Levin, Bennett, Carper, McCaskill, Burris. 

Senator Levin. 

Senator LEVIN. Thank you, Mr. Chairman. I thank both of our 

witnesses. Their testimony is very helpful, very supportive. 

I look forward to the definition on beneficial owners. We use the 

Treasury definition in our bill. We thought the Treasury would love 

that. It turns out Treasury does not particularly like its own definition and if you can simplify it, great. I think there could be some 

improvements in your definition, frankly. Make it clear that we are 

not going after single stockholders and those kind of straw man 

issues which have been raised by opponents. So we do look forward 

to your giving us the legislative language for whatever improvements and strengthening that you think is appropriate. 

One of the issues here in terms of beneficial owners however is 

that as Ms. Shasky pointed out, I think very powerfully, what we 

need are the living, breathing, natural persons. We are not looking 

for some shell corporation to be called the owner. Would you agree 

with that? 

Mr. COHEN. Yes, Senator. 

Senator LEVIN. Now the National Conference of Commissioners 

on Uniform State Law (NCCUSL), in their proposal just requires 

a records contact and that records contact could simply be an 

owner of record, which could be a shell corporation, putting us 

right back into a circle which leads absolutely nowhere in terms of 

finding the beneficial owners. 

Would you agree that the approach of NCCUSL in this regard is 

not acceptable, Ms. Shasky, first of all? 

Ms. SHASKY. Yes, Senator. To allow companies to provide anything less than the beneficial owner information merely provides 

criminals with an opportunity to evade responsibility and put 

nominees between themselves and the true perpetrator. 

Senator LEVIN. Do you agree with that? 

Mr. COHEN. I do, Senator. 

Senator LEVIN. The letter which we received, I should say Senator Dodd received an undated letter, but it came after the September 22 letter, because the Secretary of the Treasury refers to 

the Dodd letter of September 22.1 But that letter, which is a very 

helpful letter, in one place suggests that the legislative proposal 

would be built upon the NCCUSL approach. And I take it from conversations both with Secretary of the Treasury Timothy Geithner 

56 

and from what you have said here today that is not accurate, that 

it would not be built on that proposal. Can you clarify that? 

Mr. COHEN. Certainly, Senator. I think what Secretary Geithner 

was driving at in the letter is that the NCCUSL proposal has some 

ideas in it that we think are useful and worthy of developing, not 

that the Department of Treasury supported the NCCUSL legislation. 

I think the idea is that we will draw from the NCCUSL legislation. We will draw from other ideas that are out there, use that to 

inform our steps forward in terms of building on the platform of 

S. 569. 

Senator LEVIN. That their approach to the definition of beneficial 

ownership is not one of them. 

Mr. COHEN. I think that is right. There are other aspects of that 

bill that have some useful ideas, but not that. 

Senator LEVIN. You have also indicated, I believe, this morning, 

Mr. Cohen, that the documentation information, such as passports 

and photos, which you believe should be provided even for domestic 

corporations, which we do not require for domestic corporations in 

our bill, we made a big effort to keep this simple and not to have 

a big burden, and that was one of the ways in which we avoided 

a burden, by saying foreign corporations, of course, you’ve got to 

provide photo identification, passport, whatever, but not for domestic corporations. 

That was a compromise we made to try to accommodate the very 

concerns that had been raised about avoiding complexity. But when 

you testified earlier, because you support that documentation being 

provided for domestic corporations as well as foreign corporations, 

you indicated, I think, that your intent was that documentation information could be or should be kept in the hands of a third party 

in the State rather than kept by the State. 

But I also understand that your intent, and correct me if I am 

wrong, is that the actual information, the basic name of who the 

beneficial owner is, would be provided with the incorporation form 

and updated to the State itself and then that would be available 

from the State to law enforcement; is that correct? 

Mr. COHEN. I think you have it exactly right. 

Senator LEVIN. OK, because I think there was a little confusion 

on that point, which I wanted to clarify. If false information is provided on the form, would it be fair to say that even that information might be helpful? We do not require verification, again to 

avoid the very expense and complication which some of the opponents representing States that do a lot of incorporation have pointed out they want to avoid. 

So one of the ways we avoid it is to not require the State to 

verify the name of the beneficial owner. However, even false information, is it not accurate to say, would be helpful because it could 

help to prove the intent element that is a part of many crimes that 

somebody intentionally lied; is that fair, Ms. Shasky, first? 

Ms. SHASKY. That is exactly right, Senator, and it is within the 

jurisdiction of the United States at that point. 

Senator LEVIN. And Mr. Cohen? 

Mr. COHEN. I agree with that, Senator. 

57 

Senator LEVIN. In terms of the mandate issue, we want to avoid 

a mandate as well, so we provide a possible source of funds, but 

we do not require that the source be used and we are more than 

happy to have you folks provide additional sources. We look forward to it being in the Department of Justice budget perhaps or 

the Treasury budget. But one way or another, we are very happy 

to do that. 

But I would point out that the law enforcement community, very 

much supports this bill and wants to avoid an unfunded mandate 

as well so we do not sink the bill with that issue, those first responders, those law enforcement community folks favor this bill 

and I believe will point out that it will help them much more to 

be able to find the criminals than they would be losing by a fairly 

minor loss of any funds that go to the Department of Homeland Security. 

So I think we will find out later this morning that the law enforcement community does favor this approach as a possible source, 

not a required source. But in any event, we would welcome also 

your suggestions as to alternative sources for what I think will be 

fairly nominal funds, but important expenditures to go after criminals and so forth. 

Thank you, Mr. Chairman. 

Chairman LIEBERMAN. Thanks very much, Senator Levin. Senator Bennett. 

OPENING STATEMENT OF SENATOR BENNETT 

Senator BENNETT. Thank you, Mr. Chairman. I have never had 

anything to do with law enforcement, but I have run a small business, a number of businesses, so I come at this with a different 

kind of aspect. I do not want to get in the way of law enforcement 

under any circumstances, but I do not understand it, having not 

any personal experience. 

I do see the potential of getting in the way of small business, indeed medium business or even large business. If I may without 

being offensive, suggest that some people in law enforcement do 

not understand business any better than I understand law enforcement. And since it is business that is going to be affected by this, 

we have to be very careful how we do it. 

Let me give you some concerns. First question, who is going to 

have access to this information? Competitors? If I am a competitor 

and I want to know who the beneficial owner is of my competition, 

can I go to the State and ask for it and get the information? Or 

is it exclusively available to law enforcement? 

Ms. SHASKY. Senator, we are recommending that it be exclusively 

available to law enforcement upon the appropriate issuance of process. 

Senator BENNETT. So the information sits there, but nobody can 

get at it until somebody shows up with a subpoena? 

Ms. SHASKY. That is correct, Senator. 

Senator BENNETT. All right, that lowers my temperature a little 

bit. [Laughter.] 

Many times, not overwhelmingly—— 

Senator ENSIGN. If the Senator would yield? The one point to 

make about that is, though, the Secretaries of State will have to 

58 

have separate databases for that because right now they have one 

that is public and they will have to have one that is completely private, which is a big part of their expense is going to be raised. 

Senator LEVIN. Yes. Perhaps just on that point, we could ask 

Secretaries of State whether or not it is not true that already they 

keep certain information private in a separate database. If I could 

also, my next time, just to clarify one other point, we do allow in 

our bill the States, if they want to, could make information available, but we prohibit it in the bill. 

Senator BENNETT. You prohibit it, but you make it possible? 

Senator LEVIN. Only if the State—— 

Senator BENNETT. Help me understand that. 

Senator LEVIN. We prohibit it. We say only if a State decides 

that they want to make it available for whatever reason. 

Chairman LIEBERMAN. You might call it a State opt-out. [Laughter.] 

Senator LEVIN. We are trying to protect the rights of the States 

here. We are trying not to trample on the rights of the States. People say do not impose these requirements on the States, so all we 

are saying is just collect the name. It is only available to law enforcement, but we are not going to stop a State from making it 

available to someone else. 

Senator BENNETT. But you force the State to collect it in the first 

place. 

Senator LEVIN. We do. 

Senator BENNETT. That is the circumstance that gives me concern. If I form a company, and I think it is going to be marvelously 

successful over time, and I give shares to my grandchildren, does 

the State have to have pictures, baby pictures, of my grandchildren 

and as the grandchildren grow up, are those pictures now false because they do not look anything like the teenagers or whatever? 

This whole thing sounds wonderful, but in the reality of the way 

these small companies are often operated, is there a liability that 

somebody is going to be sued because the picture does not match 

what is in the file? 

Ms. SHASKY. Senator, we would not recommend a private right 

of action based on this bill and would instead support very limited 

and focused, targeted civil and criminal Federal penalties in appropriate circumstances. 

Senator BENNETT. Well, again, details come down to what Senator Ensign was talking about. These are definitions. We want to 

know who the beneficial owner is by definition and my grandchild 

becomes a beneficial owner by definition, is there a liability if at 

some point the company gets sold to this company, but there is still 

a stock certificate somewhere and the Federal Bureau of Investigation (FBI) shows up looking for my grandchildren as being involved 

in a criminal activity? 

You do not need to comment on that because you say it is probably not going to happen, but is one of the things I raise that people get concerned about. 

Now let me get to the one that I am most concerned about. A 

major source of job creation in this country, unique to this country 

that no other country understands, is the venture capital (VC) 

world. People in the venture capital world have a variety of aveVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00064 Fmt 6601 Sfmt 6601 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
59 

nues through which they can place their money to try to participate in the explosion of technology. 

I am not sure I would do this, but there are some VCs that say, 

we see X number of companies in this particular arena, we are 

going to invest in every one of them on the assumption that one 

of them will hit it and we do not know at this point which one it 

is. All right, somebody invests in that VC not knowing how the VC 

is going to make the bet among these 10 startups. 

One of the startups gets taken over by Mr. Bout. The fellow who 

invested in the VC is listed as a beneficial owner in that particular 

enterprise. He finds out that he has that kind of exposure and he 

says, I am not going to put in any money, I am not going to run 

that risk. 

Help me understand why he should not be concerned. 

Mr. COHEN. Senator, I think the answer to that question turns 

on how the term ‘‘beneficial ownership’’ will be defined in the legislation. I think our ideas, I tried to explain previously, is that it be 

a simple straightforward definition, and as well, a definition that 

does not require small holders of an interest in a corporation to be 

identified. But I think we are looking to set a threshold of ownership at a sufficiently high level that the beneficial owners, the need 

to be identified to the State, are those who have really a truly significant interest in the corporation. 

So I think in your hypothetical I am not sure that the person 

who invests in the VC firm, which then invests in a corporation in 

the first instance, would be identified as a beneficial owner and—— 

Senator BENNETT. Well now, if we go where Senator Levin was 

going, who is the beneficial owner, the real live breathing person? 

It is the ABC Venture Capital Company. We have to get behind 

that veil and find out who owns the company. We go behind the 

veil and we find several investors, one of which is Senator Ensign’s 

family foundation. Who are the beneficial owners of his family 

foundation? 

Now we get to his kids and his kids are tainted with an investigation that says somehow they are involved. These definitions 

have to be very important and I just echo what Senator Ensign has 

had to say about as you are putting them together, do not just talk 

to law enforcement. Do not talk to me from the law enforcement 

side because I do not know anything about that from personal experience. 

But do not just talk to law enforcement. Talk to people in the 

business world and have them walk you through scenarios like the 

ones I have raised because they are going to come up with a whole 

lot more than I have come up with that are going to say, there will 

be unintended consequences of enormous complexity down the road 

from here that will end up causing people to say, I will not invest 

in this venture capital company or that venture capital company 

will not invest in these kinds of startups because we are afraid. 

The average law enforcement person says, you do not need to be 

afraid. As long as you do not do anything illegal, we are not coming 

after you. Yes, well let me tell you how zealous the attorney general in my State is to embarrass me, and I will not go any farther 

with that one, but I think you all know who I am talking about. 

60 

Pay attention to the people who are going to be making this thing 

work in their real lives. 

Chairman LIEBERMAN. Thanks, Senator Bennett. You know, in 

terms of the practical implications that you are focused on, you 

mention a picture of your grandchildren. Just for the record, would 

you indicate how many grandchildren you have been blessed with? 

Senator BENNETT. Twenty, Mr. Chairman, and I am a far second 

with Senator Bunning. 

Chairman LIEBERMAN. But a strong second, I would say. Senator 

Carper. 

Senator CARPER. You just asked. My first question would be of 

Senator Bennett. Senator Bennett, would that be 20 and counting? 

Senator BENNETT. I believe we have shut down production at this 

point. [Laughter.] 

But you never can tell. 

Senator CARPER. I once asked Senator Bunning, how many 

grandchildren does he have? It was 30-something, maybe 39. I once 

asked him, how do you remember all their names? And he said, we 

use nametags. Whatever works. 

A question, if I could, for both of our witnesses. Again, thank you 

very much for being here and for your input today. I just want to 

clarify the Uniform Law Commission approach. 

My understanding of the Uniform Law Commission model law is 

that the records contact and the responsible individual must be a 

real live person. I think in Section 2 it says that the records contact 

and responsible person must be a live person, not another entity. 

I just wonder, is there some confusion about the language in the 

Uniform Law Commission approach? 

Mr. COHEN. Senator, I do not think there is any confusion in 

what the Uniform Law Commission has done with respect to the 

records contact and responsible individual. They do require a live 

person. I think one of the concerns that we had with the legislation 

is that, I think, there is not an obligation for that live person to 

not be a nominee. And what I think is important in the legislation 

is that we get at the true beneficial owner and not someone who 

may be a nominee. 

Senator CARPER. I am tempted to say that maybe we could tweak 

it a little bit and say really live person as opposed to real live person, but I think you get my point. We believe the language is actually pretty straightforward. We are talking about a real live person. 

Secretary Cohen, if I could follow up with you. Would it be difficult for law enforcement to identify the corporation formation 

agents in Delaware? 

Mr. CARPER. Senator, I think that law enforcement would have 

some difficulty in identifying all the corporation formation agents 

in Delaware. I think as was previously indicated, Delaware has required the registered agents to be known to the State and to have 

a place of business in the State, but I think that is distinct from 

the corporate formation agents. 

And one of the concerns that we have with the bill as currently 

drafted is that if the Treasury Department were required to regulate company formation agents, we would have some difficulty in 

identifying all of the corporate formation agents in Delaware and 

around the country. 

61 

Senator CARPER. As I said earlier, and I will say it again, I think 

Delaware might have been the first State in our country to adopt 

legislation responding to concerns expressed by law enforcement regarding illicit practices of registered agents and we now regulate 

our commercial registered agents. We are not the only State that 

does that. I think Nevada does that now and I believe Wyoming 

does it as well. 

Assistant Secretary Cohen, a lot of attention has been paid to the 

Treasury Department’s definition of beneficial owner. I think you 

alluded to this in your comments, but as it is defined in the Treasury Department’s anti-money laundering regulations. 

Was this definition as drafted intended to apply to corporations? 

Wasn’t the definition really meant to apply to bank accounts, not 

to corporations? And why are these terms not interchangeable? 

Mr. COHEN. I think that’s exactly right, Senator. The definition 

that is currently in the legislation is taken from a regulation that 

is designed to implement the requirements that when a foreign 

person is seeking to open a private banking account that the beneficial owner of that private bank account be identified. 

In that context, you have presumably a sophisticated person who 

is opening a private banking account that legislation requires that 

there is a $1 million minimum in that bank account. So you presumably have a sophisticated person dealing with a private banker 

and discussing who may be the beneficial owner of that bank account. 

The context that we are considering today, of course, is beneficial 

ownership of a corporation, which is obviously a different question 

than beneficial owner of a bank account and also one in which, as 

I indicated previously, we want to facilitate the entrepreneur who 

may not be the sophisticated foreign person opening a private bank 

account to be able to understand readily and easily who the beneficial owners are. 

So that is why although we like our definition very much, for the 

foreign private banking account context, we do not think that it can 

be transferred into this context. 

Senator CARPER. And I would agree. A follow-up, if I could. The 

Treasury Department, as head of the U.S. delegation to the Financial Action Task Force, plays a key role in developing guidelines 

that govern anti-money laundering efforts within the United States 

and I think leads the U.S. enforcement internationally through 

FATF. 

Deep concern was expressed at our last hearing, as you may recall, that the United States is not in compliance with the Financial 

Action Task Force Recommendation 33, which requires countries to 

obtain beneficial ownership information for the corporations formed 

under their laws. 

What countries are in compliance with FATF Recommendation 

33? 

Mr. COHEN. Senator, there are a few countries who have been assessed by FATF to be in compliance with Recommendation 33, although the vast—— 

Senator CARPER. Like 10 or 20? 

62 

Mr. COHEN. Something in that neighborhood. The vast majority 

of countries, both FATF members and non-FATF members, have 

been found not to be in compliance. 

Senator CARPER. Why are more countries not in compliance? 

Mr. COHEN. Well they are not in compliance frankly because this 

is a very difficult recommendation to comply with in the FATF recommendations to obtain beneficial ownership information and 

there has been efforts in a number of countries and in the European Union to come up with a mechanism to obtain beneficial ownership information at the time of company formation. Frankly, they 

have not solved this problem effectively. 

I think the one jurisdiction that seems to have done this well is 

Jersey, not New Jersey, but the Island of Jersey, which is obviously—— 

Senator CARPER. I was going to say, I find that hard to believe. 

[Laughter.] 

But, I will not say that. 

Mr. COHEN. But their economy and their business formation 

business is far different from what a major economy like the 

United States confronts. And so I think the reality is that most 

countries have not been in compliance and no country that is even 

remotely on par with the United States in terms of its economy has 

been able to solve this problem effectively. 

Senator CARPER. Thank you for your responses. Thank you, Mr. 

Chairman. 

Chairman LIEBERMAN. Thanks you, Senator Carper. Senator 

McCaskill. 

OPENING STATEMENT OF SENATOR MCCASKILL 

Senator MCCASKILL. Thank you, Mr. Chairman. I completely understand why this legislation is important and why we need to get 

it passed. Because of my experience in law enforcement and understanding that having a thread to pull is sometimes the difference 

between success and failure in a huge investigation where if you 

can’t find any threads to pull then you hit that wall. There is no 

feeling of helplessness that is more acute than when you know 

there is really bad stuff out there and you cannot find the thread 

to pull. 

I know this legislation, if we do it right, will provide lots of 

threads for you all to pull. The problem is we have to be careful 

that the benefits outweigh the cost of compliance, both directly to 

businesses and indirectly to our economy. And that is the tricky 

part and that is why this definition is so important and why I 

think you are really going to have to focus with maybe a broader 

view than you typically would have. 

Because of what you do, you focus laser-like on how you continue 

the path of investigation to get the evidence you need to bring 

someone to justice and sometimes—I mean, there is a hyper focus 

that leaves out some of the things that Senator Bennett and Senator Ensign have talked about. I do think it is important though, 

when we talk about this definition, that we are talking about someone who is exercising control. I mean, what we are trying to get 

here is not who benefits from the corporation in terms of its success, but rather who is it that is in control. 

63 

While there are many venture capitalist firms that invest in corporations, they generally are not exercising control. Do either one 

of you have a comment on that in terms of that exercising control 

that we are trying to get to in this quest for the right definition? 

Ms. SHASKY. Senator, I think you are exactly right. That is, at 

the end of the day, what we are concerned with, finding the natural person or persons who are in control of that company. I provided some examples of instances where we were able to identify 

the worst actors out there who used U.S. shell companies. But really what happens most of the time is we have a victim who comes 

to us and reports a very difficult crime. We are very sympathetic, 

obviously, to the victimization, but the victim does not know who 

it was that perpetrated the crime and nor do we. 

It is these U.S. shell companies that are used as the shield between law enforcement and the victim on one side, and on the 

other side of the shield the criminal perpetrator. If we cannot get 

behind that shield and identify who is ultimately exercising control 

over that company, we are not going to solve those crimes because 

we are unable to solve those crimes. 

Senator MCCASKILL. I think it is important for the record, I understand—I do not think that anyone has asked this directly yet— 

I could give an answer here, but I think it is more important for 

you all to give an answer. What is the argument when someone 

says well, someone who is a criminal is not going to really put 

down the right name? They are going to make up a name. How do 

you address that concern that people have that we may be putting 

a burden on legitimate businesses while the bad guys are merely 

going to give fictitious information? 

Ms. SHASKY. There are two answers to that. There are two results that come from having effective legislation in this area. We 

do have a thread on which to pull, as you mentioned earlier, and 

the trail does not go cold. So we have an avenue to go down. Or 

in the alternative, the criminal chooses not to use U.S. companies 

to perpetrate his crimes. We have successfully hardened ourselves 

as a target of criminal perpetrators. 

U.S. shell companies are particularly advantageous to criminals 

because they come with an air of legitimacy. Using a shell company 

from a small offshore haven, that highlights for law enforcement 

that there may be a problem and that we need to look there. The 

United States, as everyone has mentioned, is mostly engaged in legitimate commerce, and therefore, it is very easy for criminals to 

hide their activities, their criminal activities in the stream of our 

legitimate commerce. If we harden the target, they will no longer 

be able to do so. 

Senator MCCASKILL. I know you said, Ms. Shasky, that you guys 

do not keep statistics on the use of shell corporations, but can you 

talk about it as a trend? Are you confident that this is a growing 

trend? Are you confident that this is something that is much worse 

today than it was a decade ago? 

Ms. SHASKY. There is no question, Senator, and perhaps the best 

kind of anecdotal evidence of that is witnessed by myself and my 

colleagues every day as we train on this topic. We actually train 

law enforcement and prosecutors, both domestically and abroad, 

about the problem of U.S. shell companies, how you might invesVerDate Nov 24 2008 09:05 Apr 19, 2011 Jkt 051788 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 P:\DOCS\51788.TXT SAFFAIRS PsN: PAT
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tigate a case that involves this complex problem, what steps you 

can try to take. But we typically ask your question. 

And about a year ago, in fact, we had an audience of about 75 

investigators from nine different Federal agencies, as well as Federal prosecutors from around the country, and we asked them just 

by a show of hands to tell us how many of them have had cases 

halted because they came to a U.S. shell company and the trail 

turned cold. They were no longer able to proceed. 

And sitting in that audience, it sure seemed to me that every 

hand in the audience was raised. And, if it was not every hand, it 

was nearly every hand. This is not a singular experience. This happens time and again. Every time we go overseas to talk to our foreign colleagues, lecture on money laundering, and how to investigate it; after every one of those classes, we have some member 

of law enforcement approach us to discuss the problem of U.S. shell 

companies. They ask whether we can do anything to fix it. So it 

is extensive. 

Senator MCCASKILL. I heard both of you say that you are opposed to the method of funding that this bill embraces. I understand that is the company line at this point and I get that. I really 

would, though, urge you all to whatever extent you can, run it up 

the chain. 

You know, I audited the use of these homeland security monies 

in my State and it was not good how a lot of this money was used. 

Suits sitting around in boxes that had never been opened, units in 

rural areas that had never really been formed, but they were getting money for stuff that probably in the long run is not a highrisk area. 

You all know that terrorists cannot succeed unless they move 

money. If shell corporations are being used to help terrorists move 

money, then it seems to me that this would be a great use of homeland security monies to the States because money is the weapon of 

choice as it relates to terrorists activities because we are not talking about putting together armies. 

We are not talking about buying weapon systems. We are talking 

about moving money around the world in ways that are going to 

kill people. I hope you guys reconsider the position you are taking 

on the use of these homeland security monies. I think it would be 

important and I think we have to work on these definitions so we 

do not have unintended consequences. 

But I think this legislation is really important to national security, Mr. Chairman. 

Chairman LIEBERMAN. Thanks very much, Senator McCaskill. 

Senator Burris. 

OPENING STATEMENT OF SENATOR BURRIS 

Senator BURRIS. Thank you, Mr. Chairman, and to our two witnesses. This has been a very interesting hearing, and I am wearing 

several hats here. I am a former law enforcement person. I am also 

a former private business owner. I find this very interesting in 

terms of how we are going to deal with this. 

I am looking at several situations in terms of incorporation. I am 

talking primarily about the State of Illinois now. You can get the 

S Corp. You can do the C Corp. You can do the LLC. And those 

65 

are all registered with the Secretary of State. By the way, I am 

also a lawyer who did all these incorporations and I am going to 

deal with the other point in a few seconds here. 

Now if someone were to form a general partnership, you all have 

no access to any type of State records; is that correct? 

Mr. COHEN. That is correct, Senator. 

Senator BURRIS. I just want to make sure I get the legal basis 

clear. Because you are talking about documents that are just filed 

with some entity; is that correct? 

Mr. COHEN. [Nodding affirmatively.] 

Senator BURRIS. Now having served as a registered agent for several corporations and companies, and in your legislation you talk 

about the live person that Senator Carper was mentioning, I just 

wondered why all of that repository of information cannot be 

placed—I am sure you have all thought about this; I just maybe 

have not run across your notes—with that registered agent or require every entity to have a registered agent that the documents 

would be with, pictures, and any change in the corporation would 

have to be on that registered agent? 

That would be a source that law enforcement could go to and 

there would be penalties for that registered agent for not keeping 

up with the changes in the corporate structure. For example, Illinois just caught up with this notary requirement. We can notarize 

stuff. Your law partner would bring it in and you would notarize 

it. There turned out to be a lot of problems with that, because my 

church got involved with all these notary frauds with the transfer 

of real estate and using defunct corporations, corporations that 

failed to file their annual reports to find out who is now defunct 

and then reincorporate the corporations and then take over. 

As a matter of fact, he took over our church, owned our church 

and sold off some of our empty land. We were able to get it back 

because they had a smart lawyer called Roland Burris, but anyway. 

[Laughter.] 

I am just wondering whether or not the registered agent extension would be a solution to the problem that would cause whoever 

the players are in the corporate structure, that is who you go to 

if you—I served on a regulated investment company board and we 

created LLCs—LLCs to own LLCs, to own LLCs. Each one of those 

LLCs has to have a registered agent. 

Any entity that is filed should have an identifying person who 

then the Secretary of State could send law enforcement to and with 

a picture or whatever that registered agent would need to have on 

file, and if that registered agent is not keeping track of the corporate structure, then there would be certain liabilities on him. Is 

that within your thoughts? 

Mr. COHEN. Senator, we have been thinking about different 

methodologies for how the documentation should be held. I think 

our current approach is for corporations that are operating within 

the State, that it is sufficient for that corporation to have the documentation available to law enforcement. If the corporation is not 

operating in the State, then someone in the State needs to have 

that documentation. 

It could certainly be the registered agent who could serve the 

dual purpose of being the registered agent for service of process 

66 

and other reasons, as well as the person that the corporation has 

designated to hold the documentation. 

Senator BURRIS. Would we have to change State laws to some extent in this regard or would Federal laws be able to strongly suggest ways that they have gotten around the 10th Amendment for 

States to take certain actions? 

Mr. COHEN. I think there is a variety of ways to accomplish this 

and undoubtedly they will be required to have some changes in—— 

Senator BURRIS. Even if you had a corporation that was incorporated in Illinois, it still has to have a registered agent and you 

still look to the registered agent of that corporation, have the responsibility on that entity that is called the agent of that company 

and that agent should know every player, have a picture of every 

player, have a document of every change in that entity and therefore you have your strings, as Senator McCaskill was saying, to 

really pull on. 

Mr. COHEN. Senator, I think that is one possible approach. I 

think we are in the process of discussing with each other, and as 

many of your colleagues have suggested, reaching out to the business community to formulate of the best approach to these various 

questions. No, I think your suggestion is a useful one. 

Senator BURRIS. Having been a registered agent, having formed 

corporations—I mean that is what I did in my legal practice normally. And I even served as the registered agent for several companies. The responsibility has been on me to file those annual reports 

and get in touch with the principals and keep them advised. And 

even if you are a Delaware corporation, you still are going to have 

to have a registered agent in Senator Carper’s State, wherever you 

are, whether Nevada or wherever. 

The other thing I do not want to see—I am not going to agree 

with any unfunded mandates here. Let’s not put anymore burdens 

on these State governments, because I have been trying now, Mr. 

Chairman, to get my bill out of this Committee that deals with giving assistance to those State governments for their transparency on 

that stimulus money. 

Our State comptrollers, our State auditors—S. 1064 has not 

moved out of this Committee and those State governments are suffering right now with having to do all this accountability on this 

stimulus money that is coming in, but they have no money themselves and we are holding up a piece of legislation here now that 

is an unfunded mandate on State governments. They are now trying to keep up with what the transparency accountability is supposed to be in those States with all those billions of dollars coming 

in and they have no other resources to do it. 

So I am hoping, Mr. Chairman, that S. 1064 can get the hold off 

of it and we can get it out of the Committee, because this is what 

we are going to do if we pass this legislation; you are going to have 

something that the States are going to have to do. There is not 

going to be any money and we are then going to find ourselves with 

the States struggling and suffering again and having to tell them 

they have to raise taxes. 

So I am not going to be that supportive of any legislation that 

is going to be without some funds going into those States to carry 

67 

1The prepared statement of Mr. Kellogg appears in the Appendix on page 395. 

on this activity, even though with my law enforcement hat on, I 

think it is a good idea. 

Chairman LIEBERMAN. Thanks, Senator Burris. As you know, I 

support that legislation. Unfortunately, there have been holds on 

it. 

Senator BURRIS. Yes, and Mr. Chairman, it is now your bill. 

Chairman LIEBERMAN. We should reason together—— 

Senator BURRIS. You and the Ranking Member took over my bill 

with the—— [Laughter.] 

Chairman LIEBERMAN. It wasn’t an unfriendly takeover. 

Senator BURRIS. It was a great takeover. I loved it because that 

gave it impetus and I just knew it was going to sail right through. 

I am wondering what happened. 

Chairman LIEBERMAN. We will see, I hope. Mr. Cohen and Ms. 

Shasky, I thank you very much. I am afraid we have to go on to 

the second panel because there is a vote called in about 45 minutes 

and I want to give the four witnesses time to testify and Members 

time to question them. 

I am sure there will be questions that will be submitted to you 

for the record and I appreciate your testimony. It has been very 

thoughtful and very forthcoming. I look forward to working with 

you. Thank you very much. 

We will call the second panel now, David Kellogg, Kevin Shepherd, Jack Blum, and John Ramsey. Thank you all very much for 

being here. Thanks for your patience in sitting through the first 

panel. I thought it was an interesting, helpful panel and I hope you 

did too. 

This is a group of witnesses from outside the government who 

have practical experience and have different points of view that 

will be helpful to the Committee in reaching judgment on this legislation. We have reduced the time to 5 minutes. If you go over a 

little bit, we are not going to forcibly evict you, I assure you. 

The first witness is David Kellogg, President and Chief Executive 

Officer of Solers, a privately-held company that provides technology 

services to the U.S. Government, has more than 120 employee-owners—interesting—and involves multiple legal entities. 

Mr. Kellogg, we welcome you and invite your testimony now. 

TESTIMONY OF DAVID H. KELLOGG,1 PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, SOLERS, INC. 

Mr. KELLOGG. Thank you, Chairman Lieberman, and distinguished Members of the Committee on Homeland Security and 

Governmental Affairs, for the opportunity to testify today on the 

impact on business of S. 569, Incorporation Transparency and Law 

Enforcement Assistance Act. 

Solers believes strong corporate governance and capital formation are a vital part of any vibrant economy. We also agree with 

the priority of combating terrorism and money laundering. However, I must express my serious concerns with S. 569 because it 

does not appear to combat money laundering and places additional 

burdens on American businesses during the worst economic downturn in 75 years. 

68 

Founded in 1999, the Solers employee-owners are proud to be 

part of the effort to make our Nation safer through our primary 

lines of business, net-centric systems, and mission support services. 

We have a strong working relationship with the Department of Defense and the intelligence community and our mission at Solers is 

to find practical and innovative solutions to meet the challenges 

they face in fulfilling their vital missions. 

To achieve these critical missions, Solers relies on our principal 

asset, our talented staff, which is comprised primarily of engineers 

and scientists. An important component to attracting and retaining 

our team is that our employees have the opportunity to own a piece 

of Solers as shareholders. As a result, Solers is privately-held by 

its employees, former employees and directors, and is a Virginia C 

Corporation with about 140 stockholders. 

The majority of Solers’ staff are owners and we found that they 

greatly value this benefit. With our employees owning stock in the 

company, they satisfy the broad definition of beneficial owners 

under S. 569. Upon review of S. 569, I was struck by several issues 

that I believe would both impede the effectiveness of the legislation 

such that it would not be an effective deterrent to illegal activity 

and at the same time, penalize legitimate law-abiding businesses 

and their workers. 

First, I would like to speak to the difficulty of determining beneficial ownership under S. 569. The bill lacks a clear cut definition 

of beneficial owner that can be understood and applied by lawyers, 

let alone by the common business person like myself. For example, 

as the bill is now written, a beneficial owner could include any 

number of individuals, including a shareholder, family member of 

a shareholder, individual who has power of attorney for a shareholder, an accountant employed or retained by the business, a lien 

holder, a bondholder of the company, a credit card company or financial institution extending credit to the business, and any other 

individual who may have a legal interest in or entitlement to the 

company or its assets. 

Further, any change in the relationship between any of these entities and the business would require new documents to be compiled and filed with the appropriate legal authorities. With such an 

overly broad definition, the company would be required to track 

and file information that is beyond its control. The vagueness and 

lack of precision in a standard that requires an assessment of when 

as a practical matter a person exercises control is particularly troubling in a law that carries criminal penalties. 

Unquestionably, preventing money laundering, tax evasion and 

other illegal activities are laudable goals, but S. 569’s indiscernible 

requirement to disclose beneficial owners based on an uncommon 

and vague definition used in this bill fails to advance these goals. 

Criminals will simply ignore S. 569’s requirements and legitimate companies will be unable to understand or comply with them. 

Second, I would like to speak to the privacy rights of investors, 

business owners and in Solers’ case, our employee-owners. S. 569 

requires States to amend their incorporation law practices to comply with new federally-mandated standards. This includes providing and documenting the detailed personal information, including home addresses of all beneficial owners. 

69 

According to the National Association of Secretaries of State, at 

least 38 States require compliance with their own internal rightto-know laws and other regulations. Once States collect this data, 

it is immediately made public. Consequently, this private information is now in the public domain. 

I fear that the beneficial owner list of Solers’ employee-owners 

will be used by headhunters and competitors to recruit Solers’ staff. 

Like any other professional services firm, Solers’ staff is its most 

valuable asset and providing a list to professional recruiters and 

competitors puts Solers at a distinct disadvantage relative to the 

numerous public companies that have no such requirement. 

We urge you to consider a privacy provision for the beneficial 

ownership information to prevent its use by competitors, recruiters, 

other parties or activist groups who would use it for their own purposes. 

Third, operating in a competitive environment, businesses make 

decisions and seek to conceal them from their competitors. It is a 

well-established and legitimate business practice to protect trade 

secrets. These companies are not interested in breaking the law. 

They are interested in being a competitive, effective force in their 

industry. 

By passing S. 569, small companies will be placed at a competitive disadvantage in relation to the large public companies, partnerships, sole proprietorships, and even foreign competitors. Venture capital firms invest in new products and small companies. 

They form a vital cog in the formation of capital for small business. 

However, this financial backing is typically undisclosed so as to 

prevent market signaling. 

Under S. 569, these financing vehicles will now have to be publicly disclosed, potentially cutting off start-up financing for small 

businesses that account for 80 percent of the job growth in the 

United States. 

Fourth, S. 569 could also create other unintended consequences, 

including new and onerous recordkeeping requirements on States. 

While estimates vary by State, the National Association of Secretaries of State estimate the cost of implementing S. 569 in California could be as high as $17.5 million. 

Finally, it is unclear how S. 569, by targeting only private and 

limited liability corporations, would stem money laundering or terrorist financing. Criminals will not hesitate to exploit the large 

loopholes and simply form business entities not covered by S. 569, 

leaving legitimate businesses with an unreasonable burden and 

criminal penalties for non-compliance. In that regard, S. 569 punishes the whole class because of one student’s bad behavior. 

I appreciate the opportunity to speak to you regarding this important issue. Again, while we share the goals of protecting the 

country, we do have disagreement with the methods being employed. I seek to make sure that this legislation actually accomplishes the goal without hurting legitimate business in the process. 

Thank you and I look forward to your questions. 

Chairman LIEBERMAN. Thanks, Mr. Kellogg. Am I right that you 

are a Virginia business, Virginia-based? 

Mr. KELLOGG. Yes, we are a Virginia corporation. 

70 

1The prepared statement of Mr. Shepherd appears in the Appendix on page 402. 

Chairman LIEBERMAN. Right. Thank you. Next we are going to 

hear from Kevin Shepherd on behalf of the American Bar Association (ABA) Task Force on Gatekeeper Regulation and the Profession. If I am correct, you are a lawyer who is with the Venable law 

firm? 

Mr. SHEPHERD. Yes, sir. 

Chairman LIEBERMAN. Thank you for being here. 

Mr. SHEPHERD. Thank you. 

Chairman LIEBERMAN. Please proceed. 

TESTIMONY OF KEVIN L. SHEPHERD,1 MEMBER, TASK FORCE 

ON GATEKEEPER REGULATION AND THE PROFESSION, 

AMERICAN BAR ASSOCIATION 

Mr. SHEPHERD. Good morning, Mr. Chairman and distinguished 

Members of the Committee. My name is Kevin L. Shepherd. I am 

a member of the ABA Task Force on Gatekeeper Regulation and 

the Profession. I am also a former chair of the ABA Real Property, 

Trust, and Estate Law Section. 

I am a co-chair of the Real Estate Practice Group at Venable 

LLP in Baltimore and Washington and I am also the President of 

the American College of Real Estate Lawyers. I am here to present 

the views today of the ABA on S. 569, the Incorporation Transparency and Law Enforcement Assistance Act. 

I am very pleased to be here and I just want to say at the outset 

that the ABA supports all reasonable and necessary efforts to combat money laundering, tax evasion, and terrorist financing. Indeed, 

we have worked very closely with the Financial Action Task Force 

(FATF) and the U.S. Department of Treasury in developing riskbased guidance for the legal profession, not only domestically, but 

internationally. 

We are also in the process right now of implementing the FATF 

guidance for U.S. lawyers. These efforts underscore the ABA’s 

unwavering commitment to work with national and international 

authorities and constituents in combating money laundering, tax 

evasion and terrorist financing. The ABA, however, opposes the 

proposed regulatory approach set forth in S. 569 and any other legislation that would unnecessarily regulate State incorporation practices and impose government-mandated suspicious activity reports 

on the legal profession. 

The ABA’s opposition is grounded in three core principles. First, 

S. 569 would essentially federalize State incorporation practices, 

meaning the States would have to obtain, keep current, and make 

available to law enforcement authorities beneficial ownership information on corporations and limited liability companies. 

In our view, the imposition of a Federal regulatory regime focused on beneficial ownership information is not workable, would 

be extremely costly, would impose onerous burdens on State authorities and legitimate businesses, would run counter to formation 

practices in other countries, including Canada, Mexico, Japan, and 

China, and will not achieve the laudable goal of assisting Federal 

law enforcement authorities with pursuing and prosecuting criminal activity. 

71 

These impediments, coupled with a simply unwieldy definition of 

beneficial ownership and the bill’s focus only on a limited number 

of entities, would sow confusion into the formation process that 

would not enhance law enforcement’s goals. 

Second, S. 569 would create a new class of financial institutions 

known as formation agents that would be subject to enhanced antimoney laundering requirements. Because lawyers assist clients in 

forming corporations, partnerships, trusts, and limited liability 

companies, the designation of formation agents as financial institutions subject to the AML requirements threatens to sweep in U.S. 

lawyers and treat them as the functional equivalent of banks. 

Third, S. 569 could potentially impose suspicious activity reporting (SAR) requirements on the legal profession, meaning that lawyers would have to report to governmental authorities a suspicion 

that their clients are engaging in money laundering or terrorist financing activity, and at the same time, the lawyers would be prohibited from telling their clients that they are telling the government about this SAR. 

These requirements are in direct conflict with ethical obligations 

of confidentiality, the attorney-client privilege, and the core relationship of the attorney to the client. They could also undermine 

the rule of law by dissuading clients from seeking legal counsel 

from lawyers on proposed courses of conduct. 

The ABA believes that a more effective and workable solution 

would involve collective and collaborative action of State government representatives working with the U.S. Departments of Treasury and Justice. Although the ABA has not taken a position on any 

such proposal since we favor the State-based approach, we suggest 

that Congress give this solution an opportunity to be implemented 

and assessed for its effectiveness before imposing unprecedented 

Federal regulation of State incorporation practices. 

The ABA believes that the effort to designate formation agents 

as financial institutions is premature and does not take adequate 

account of the implications for the legal profession. In light of the 

other initiatives that the legal profession is undertaking on a voluntary basis, such as the development of the good practice guidance I just mentioned, the ABA believes that the imposition of 

AML requirements on the legal profession is unnecessary. 

I would like to speak a moment about the significant efforts of 

the ABA to respond to the concerns sought to be addressed by S. 

569. For the last 2 years, I have been working with my ABA task 

force colleagues, together with legal professionals from around the 

world and also with FATF and the Treasury Department, to develop risk-based guidance for the legal profession dealing with client due diligence. 

FATF has been working actively with specially designated nonfinancial businesses and professions, including lawyers, to produce 

voluntary risk-based guidance for the legal profession to ensure 

that adequate client due diligence is performed at the outset of the 

client relationship so as to minimize the risk that lawyers will be 

used by unscrupulous clients to launder illegally obtained money. 

We have been working with members of U.S. specialty bar associations, together with our counterparts from the United Kingdom, 

in this effort and we have attended numerous meetings with FATF 

72 

1The prepared statement of Mr. Ramsey appears in the Appendix on page 414. 

officials to prepare this guidance. This proposal for legal professionals was released by FATF last October. This was a major 

achievement for the FATF and resulted directly from the active 

and extensive participation of the U.S. legal profession in this effort. 

Education of U.S. lawyers regarding AML and counterterrorist financing compliance is an important cornerstone of an effective 

AML compliance program. The ABA, as well as members of other 

specialty bar associations, continue to be active in this educational 

area. Through the efforts of members of the ABA Gatekeeper Task 

Force, as well as others within the ABA, the American College of 

Real Estate Lawyers, the American College of Mortgage Attorneys, 

the American College of Trust and Estate Counsel, and other professional organizations in the United States, we have been developing additional voluntary client due diligence guidance in collaboration with members of the Treasury Department. 

On a personal note, I have written extensively on this topic in 

an effort to educate the U.S. legal profession on this important 

issue: Combating money laundering, tax evasion, and terrorist financing activity while minimizing the impact on our economy and 

State regulators are critical objectives. The ABA, together with 

other private and government sector groups, has expended a considerable amount of resources, but has made great headway in developing an effective solution to the identified problem. 

We continue to support collaborative State efforts and oppose 

premature Federal legislation. We look forward to working with 

you to develop a workable solution and a comprehensive solution 

that addresses the mutual objectives of all concerned. 

I want to thank you for giving us the opportunity to present the 

views of the ABA on S. 569 and I would be delighted to answer any 

questions you may have. 

Chairman LIEBERMAN. Thank you very much, Mr. Shepherd. 

Good testimony. Now we go to John Ramsey, National Vice President of the Federal Law Enforcement Officers Association. Welcome and please proceed. 

TESTIMONY OF JOHN R. RAMSEY,1 NATIONAL VICE PRESIDENT, FEDERAL LAW ENFORCEMENT OFFICERS ASSOCIATION 

Mr. RAMSEY. Thank you, Chairman Lieberman, and distinguished Members of the Committee. I would like to thank you for 

the opportunity to testify today. I appear before you today in my 

official capacity as the National Vice President for the Federal Law 

Enforcement Officers Association (FLEOA). 

On behalf of over 26,000 members of FLEOA, I am memorializing our support for S. 569. The proposed legislation is very important to the FBI, Immigration and Customs Enforcement, and 

the Internal Revenue Service members, as they are the lead agencies that investigate money laundering and terrorist financing 

cases, as well as other Federal law enforcement agencies. 

Incorporation transparency is an invaluable tool to combat national and international crime and terrorism, hinder the financing 

73 

thereof, and frustrate the ability of perpetrators to hide and benefit 

from the proceeds of these crimes. While criminals cower behind 

the anonymity of their corporate filings, they continue to exploit 

the system as a means to commit terrorist financing and money 

laundering. 

Using a registered agent or attorney as the front person for their 

company, these terrorists and criminals are able to circumvent law 

enforcement and accomplish the following five things, use shell 

company bank accounts to launder millions of dollars, use shell 

companies to attempt to acquire significant ownership interests in 

a financial institution, purchase real property through their shell 

companies to be used as stash houses for stockpiles of drugs or 

weapons, operate money remitter businesses to move their illegal 

proceeds to offshore accounts, and engage in cyber terrorism attacks by disseminating contaminated e-mails from ostensibly legitimate companies. 

By attacking and addressing the above five mentioned points 

would allow for greater protection of our vulnerabilities with regards to our own homeland security front. We are aware of some 

of these concerns that have been voiced by industry and at the 

State level with respect to this bill. Specifically, this bill does not 

require any State to enact any law with respect to corporations. It 

merely requires the States to add the relevant question to their existing incorporation forms and make the information available to 

law enforcement upon presentation of a legally authorized subpoena or summons. 

This information is beneficial to law enforcement and homeland 

security to prevent the misuse of U.S. corporations by criminals 

and other wrongdoers within or outside of the United States. With 

regards to cost, beneficial ownership information can be collected 

via existing electronic incorporation methods and stored in existing 

electronic databases. Alternatively, such information can be obtained by adding the relevant question and space for a response on 

existing paper incorporation forms. 

The lack of truthful disclosure is not necessarily an obstacle, but 

merely identifies the direction in which to proceed in order to identify the criminal enterprise and ultimately showing the criminal intent. 

Law enforcement’s ability to investigate and enforce the provisions of the Bank Secrecy Act has been impeded by terrorist and 

criminals who hide behind the corporate veil. This costs law enforcement agencies a substantial amount of time and money, for example, long-term surveillance and subpoena service on numerous 

third parties. It also allows the terrorists and criminals to remain 

about 10 steps ahead of law enforcement. FLEOA maintains the 

identity of the real beneficial owners should be made available to 

law enforcement officers who again make legally authorized requests pursuant to official investigations. 

I would like to share with you one example—I would be glad to 

share more later if you would like—regarding a case. The owner of 

La Bamba Check Cashing Company, Inc. was sentenced in connection with $132 million in false currency transaction reports. On 

June 23, 2009, in Miami, Florida, Juan Caro and the company he 

owned and operated, Maytemar Corporation, doing business as La 

74 

Bamba Check Cashing, was sentenced to one count of conspiracy 

and 15 substantive counts of failing to file currency transaction reports. 

He was sentenced to 216 months in prison and ordered to pay a $250,000 fine. The court also ordered the forfeiture of more than 

$11 million in cash and property. The Maytemar Corporation was 

also sentenced to probation, which is the only possible sentence for 

a corporation. 

According to the evidence presented at trial, the defendants executed a scheme to assist individuals and entities in South Florida 

to cash checks in anonymity in exchange for a commission based 

on the face value of the check. Other defendants working with Mr. 

Caro identified and recruited customers, mostly local construction 

companies and subcontractors who were interested in cashing 

checks at La Bamba through shell companies that the defendants 

owned or controlled. 

In this way, the construction companies participating in the 

scheme would cash checks payable to the shell companies and get 

back cash from La Bamba. Thereafter, the defendants would file 

currency transaction reports (CTRs) with the Treasury Department, falsely stating that the shell company and/or nominee owner 

had conducted the transaction, concealing the true parties involved 

in the transaction and the source of the funds. 

For this service, La Bamba Check Cashing, Mr. Caro and others 

earned substantial fees. Through the course of the conspiracy, the 

defendants in this case filed CTRs with the Treasury Department 

reflecting transactions in the name of the shell companies. These 

transactions totaled more than $132 million. 

While our membership respects the free spirit of enterprise in 

our country, we do not want to see the United States adopt the financial safe haven image of other countries around the world. If 

our country’s laws require individuals to register firearms and vehicles, the same should apply for a corporation. The consequences 

for allowing terrorists and criminals to exploit our corporate filing 

system are severe. 

In the spirit of homeland security and protecting our great nation, we cannot permit this to continue. The content of this bill 

does not disvalue the American dream, but it addresses the American deception. We should not continue to allow corporate secrecy 

to be used as a shield to hide corporate misconduct. 

We hope your Committee will embrace the importance of S. 569 

and work together to move it forward. I would like to thank the 

Committee Members for my time and would be glad to answer any 

questions. 

Chairman LIEBERMAN. Thank you very much, Mr. Ramsey. And 

last, Jack Blum is the Chairman of Tax Justice Network USA. I 

think I am correct that you previously were with Baker and 

Hostetler? 

Mr. BLUM. Yes, that is correct. 

Chairman LIEBERMAN. And may have also had service here in 

the U.S. Senate? 

Mr. BLUM. Fourteen years ago. 

Chairman LIEBERMAN. It is a pleasure to welcome you back and 

we look forward to your testimony now. 

75 

1The prepared statement of Mr. Blum appears in the Appendix on page 418. 

TESTIMONY OF JACK A. BLUM,1 CHAIRMAN, TAX JUSTICE NETWORK USA; AND MEMBER, ADVISORY BOARD, GLOBAL FINANCIAL INTEGRITY 

Mr. BLUM. Thank you, Mr. Chairman, Senator Ensign, and Members of the Committee. I have a prepared statement. I ask that it 

be made part of the record. 

Chairman LIEBERMAN. Without objection. 

Mr. BLUM. What I would like to do is simply focus on the problem and urge all of you not to let the details that we are talking 

about here prevent addressing the serious problem we have. 

The serious problem comes from the fact that incorporation is 

now available on the Internet to anybody with almost no checking 

as to who they are. They get the documents not a terribly long time 

after they fill out their Internet forms and then to try and figure 

out what is being done with that corporation is well nigh impossible. 

The worst part of it is you do not even have to be the individual 

who is setting it up. You can be another corporation from another 

jurisdiction which has equally weak controls over who sets up a 

corporation. So, for example, if I were trying to fund a terrorist operating, let’s say in the United States, what I would do would be 

set up a U.S. company, have that corporation be owned by some 

entity, for example, offshore, and then in turn have the U.S. corporation open the bank account. 

They would be able to do that by providing, let’s say officer and 

director information for the offshore company and the next thing 

wire money in from wherever and provide a card to whoever wants 

to use it inside the United States. 

At the very minimum, we should be checking under all of the 

various worldwide sanction lists the identity of individuals who 

want to open a corporation. We have focused on the problem of the 

individual small business owner and I am terribly sympathetic to 

that because in private practice, I have represented some small 

business owners. The difficulty that a small business owner has is 

not incorporation. I have had to take them through dealing with 

regulatory agencies at the State and local level. I challenge anyone 

who says the problem will be the added burden of incorporation to 

try to open a restaurant in Maryland. 

It turns out that there is a lot more that you have to do and 

many other hurdles to jump. So I am very focused on how we get 

at these people who are coming in to abuse the system and misuse 

the system. I am also terribly concerned about following the trail. 

Time and again, conmen have used anonymous corporations to 

block any ability on the part of anyone to figure out who they are. 

And it turns out that is both civil and criminal. And here I would 

say that I would like to see much more information available in 

discovery and private litigation. The reason is, if a con man moves 

money to a corporation and there is no information about who is 

behind it or what is going on, there is no way to pursue the recovery of that money through civil litigation. 

It is in the nature of all criminal activity that fraud is least 

policed and least enforced by the criminal justice system. The cases 

76 

are complicated. If you come in with a client who has been defrauded, they say to you that is a civil matter. Well that is fine, 

but there ought to be some trail of responsibility and that means 

being able to identify where the corporation is, who is behind it, 

not simply get a corporate name and a dead blank from there. 

So these are the core issues as far as I am concerned. I think we 

can get around the problem of identifying beneficial owners with 

some pretty easy things. Who is putting up the money? What kind 

of business are you going to be in and where is it located? And with 

basic information about the live person who is going to direct the 

money and the bank accounts, who that person is. With that kind 

of information, law enforcement can move forward and I cannot see 

that any legitimate business person would be inhibited by having 

that available. 

I will be happy to answer any questions you might have. Thank 

you for letting me speak. 

Chairman LIEBERMAN. Thank you very much, Mr. Blum. I am 

going to suggest that the Members reduce our time of questioning 

to 5 minutes as well, so we can get to the vote on the Senate floor. 

Mr. Shepherd, you have expressed some significant concerns 

about the requirements the legislation before us could place on attorneys who help clients complete the information process. You 

have offered some suggestions, certainly intentions to work together. 

I wonder if you would draw it out a little bit more and tell what 

steps you think should be taken. I am speaking out from the other 

side to make sure that lawyers and other formation agents are not 

wittingly—of course, we assume most times—aiding and abetting 

fraud, tax evasion, or money laundering, for instance, for the use 

of shell companies. 

Mr. SHEPHERD. Yes, Mr. Chairman, I would be happy to answer 

that question. 

First and foremost, we have been meeting with FATF, on behalf 

of the legal profession, for the last 5 or 6 years. We have asked at 

every meeting we have had with FATF to show us examples of 

typologies where lawyers have been used unwittingly in the facilitation of money laundering and terrorist financing. 

FATF has been unable to show us one typology globally where 

lawyers have been used unwittingly. We have asked that repeatedly of FATF. No answer forthcoming on that, so that suggests to 

us that the problem probably does not exist, otherwise FATF would 

have provided typologies on that. 

Second, we have been very active in developing risk-based guidance for the legal profession with FATF. We did not have to engage 

with FATF, but we did. We used the financial institution riskbased guidance as a template that was developed in June 2007 between FATF and the financial institution industry. Taking that as 

a template for the designated non-financial businesses and profession sectors, including lawyers, accountants, and others, we developed risk-based guidance for the legal profession over the course of 

a year and a half with direct engagement with FATF. 

We dealt with some very difficult issues, including beneficial 

ownership issues, with FATF during that process, but we worked 

through the issues. Suspicious transaction reporting requirements, 

77 

we worked through that very difficult issue for the legal profession. 

So I think that demonstrates that we are willing to engage with 

FATF and with governmental authorities both domestically and 

internationally to grapple and resolve some very difficult issues 

that face the legal profession. 

In fact, what we are doing now is that we have the FATF riskbased guidance for the legal profession in place. We have developed 

good practices guidance that is given out to various groups, especially bar associations, the ABA, and other constituents as a implementation tool for what the risk-based guidance is all about. 

Most lawyers are unfamiliar with the FATF risk-based guidance. 

What this does, the good practices guidance, is to get it out to all 

the U.S. lawyers so they can understand and appreciate what the 

risk-based approach means. It is a cost benefit analysis and I think 

it is good instruction to the U.S. legal community. 

Chairman LIEBERMAN. Thank you. Mr. Kellogg, a question for 

you. You spoke about the practical problems that this legislation 

could cause you and your business and I think you made your point 

and I heard it clearly. I assume that you also recognize that there 

can be a problem here in terms of the law enforcement and I wonder if you have thought about—and this is what the Committee is 

striving for—what is the appropriate balance between law enforcement’s need for useful information and the understandable concerns of the business community that you have expressed? 

Mr. KELLOGG. There has been a fair amount of discussion about 

law enforcement only having access of this information if they were 

to provide a subpoena or have some other review prior to going to 

a State for this information and I think that is a very sufficient 

and necessary condition to get the information. 

One of my concerns from a privacy standpoint is that at least 38 

States currently publish all of their incorporation filings, I guess, 

as a matter of public record and it would certainly be easy for those 

States to just go ahead and say, we are going to publish this beneficial ownership information along with the State incorporation information. 

This is really private information that I think needs to be protected. Now there have been a number of references to having to 

set up separate databases the States would have to do, and that 

certainly would be very welcome and I would balance that. 

So I think that if you can set up a separate database, that the 

State will protect the sensitive information and make it available 

to law enforcement under subpoena or other official requests, I 

think that would be sufficient. 

Chairman LIEBERMAN. Thanks for that answer. My time is up. 

Senator Ensign. 

Senator ENSIGN. Mr. Kellogg, I think it is very important that we 

had you here and heard your perspective and yours is just one of 

many perspectives from small businesses. You have one type of 

setup with employee-owners, but there are other perspectives, I am 

sure, that are out there as well and that is why I think that it is 

important to hear from folks like yourself about—we need to hear 

from many others. 

Mr. Blum talked about that it would be very easy to just provide 

the information on who provides the money. You made the point. 

78 

Could you reiterate your point on venture capital and how that 

could have a chilling effect on all businesses? 

Mr. KELLOGG. There has been a fair amount of discussion today 

about the difference between who exercises control and who actually provides the money and there is actually a difference in most 

businesses as to who provides the money and who exercises control. 

Most businesses have a general manager, an operator, some person 

that actually is in control of the day-to-day operations of the business and the investors and other folks are more passive in that 

sense. 

The problem that I see more than anything else is that there is 

a real complicating factor from the standpoint of wanting to be able 

to establish a new business that competes with say an existing 

business and you want to keep it quiet while you are still in the 

development phase. I mean, a lot of the times if you are developing 

a new product or you are developing a new service, you would like 

to enjoy some level of trade secrecy with that and so you want to 

bring it to market. And then when you bring it to market, you are 

going to tell everybody about it at that point, but you would like 

to have it ready to go and be ready to take on customers, and that 

is a very legitimate practice. Entrepreneurs and others drive efficiency in the economy by competing with larger businesses and 

finding new ways to do things. 

Some level of secrecy is helpful from the standpoint that if you 

have good financial backing, people are going to take you a little 

bit more seriously and potentially compete with you more rapidly. 

Senator ENSIGN. Have you or are you aware of any definition of 

this beneficial ownership that would strike the balance between 

small business and law enforcement? 

Mr. KELLOGG. I am going to beg that I am not a lawyer. I am 

a common businessman and I am not sure that I want to weigh 

into saying how are you going to define beneficial owner, so I am 

going to decline to say that I am an expert in that area. 

Senator ENSIGN. One of the reasons we do not necessarily want 

an expert, because you want the average small business person to 

be able to understand it. That is one of the reasons that the language needs to be that simple, is because you may not want to hire 

a lawyer to—no offense to the lawyers with the ABA at the table— 

but that is one of the things that actually the first panel testified. 

They want to make the definition simple enough to where you do 

not have to hire all these consultants and lawyers to be able to set 

up a simple business shell to be able to get into business. 

You want to have the proper entity set up that meets your needs, 

but you want to make it simple enough and those definitions need 

to be simple enough where just the average person can understand 

it without hiring a lawyer. So that is why we need regular people. 

Mr. KELLOGG. Well, I would concentrate on who controls it more 

than the beneficial ownership. I mean, that makes more sense to 

me in terms if you want to find this real live person. 

Senator ENSIGN. Is it a percentage of control? 

Mr. KELLOGG. I think that is a hard question to answer because 

any kind of little threshold, criminals are just going to read whatever it is that the threshold is and try and get around it. 

79 

Senator ENSIGN. Mr. Chairman, in the State of Nevada, the 

Gaming Commission requires certain people to be licensed. These 

are usually bigger businesses. These are not smaller businesses 

and they are very expensive to get licensed, by the way. 

But it goes to the fact of control. It used to be any key employees, 

but they have really defined it down now and even a small percentage of ownership does not necessarily mean that you have to be 

identified as one of the key employees. But it really, over the 

years—and we may want to even look at some of the definitions in 

that regard simply because that is going to be more of what Mr. 

Kellogg is talking about. 

As far as actual control of the company, I think that is really 

what we need to be looking at. 

Chairman LIEBERMAN. Thanks, Senator Ensign. It is a good idea. 

We should look at that. Senator Levin. 

Senator LEVIN. Thank you, Mr. Chairman. First let me agree, 

that is the effort here, is to get to the people who control the company and the definition of beneficial owner should focus on control. 

I think that is an important point. I think that is a common approach, as a matter of fact. 

The Treasury told us this morning, and the Justice Department, 

that they are going to work on a definition. I think it was fairly 

clear that the definition is going to focus on that aspect, beneficial 

ownership not the small shareholders, but who controls the entity. 

So I think your testimony is very helpful in that regard, Mr. Kellogg, and we thank you for it. 

Mr. Ramsey, there is authorization in this bill to allow DHS 

grant funds to be used for costs that are incurred by the States, 

adding a line to their forms in order to enable them to collect the 

beneficial ownership information. Now I am wondering what your 

reaction to that is in terms of you represent law enforcement personnel. Is that a useful expenditure of DHS grants? Do you view 

that as something which we should not even authorize? What is 

your reaction? 

Mr. RAMSEY. I do not know if FLEOA would actually take a position on that, but I would say that it appears that the monies would 

be going toward law enforcement in a matter of you are putting 

monies into a program that in the long run actually assist law enforcement in its investigations. 

Senator LEVIN. That is very helpful. Thank you. And that is, of 

course, the point of it, and one of the reasons why this bill has been 

referred to this Committee. But if your organization does have any 

further thoughts on that, would you just share them with this 

Committee? 

Mr. RAMSEY. Sure. 

Senator LEVIN. On that issue. Mr. Shepherd, are you familiar 

with the NCCUSL proposal? 

Mr. SHEPHERD. Yes, I am, Senator Levin. 

Senator LEVIN. Would you agree that the proposal does not require corporations to identify the natural persons who are the beneficial owners of a corporation and that instead, it simply requires 

corporations to identify their owners of record? 

Mr. SHEPHERD. The act, Senator—— 

Senator LEVIN. NCCUSL, their proposal. 

80 

Mr. SHEPHERD. The NCCUSL model legislation, yes. It contains 

two concepts of records contact and responsible individual, both of 

whom must be natural, breathing, warm people. 

Senator LEVIN. That is for the contact person. 

Mr. SHEPHERD. That is for the records contact. 

Senator LEVIN. But that person then is supposed to disclose who 

the owners of record are and that owner of record under NCCUSL 

could be, for instance, another corporation; is that correct? 

Mr. SHEPHERD. That is right. 

Senator LEVIN. Because there has been some confusion about 

that. The living, breathing person that we are looking for is the 

beneficial owner, the person that controls, and under the NCCUSL 

proposal, there has to be a person to whom you can go, but that 

person then is required to say who the owner of record is. That 

owner of record need not be a living, breathing person. It could be 

a corporation? 

Mr. SHEPHERD. Let me just elaborate on that. 

Senator LEVIN. But is that correct? 

Mr. SHEPHERD. Well I think that requires some clarification, 

Senator. On the NCCUSL model, legislation went through a series—in a evolutionary process and we introduced a concept of a responsible individual and the purpose of that was to make sure that 

law enforcement could contact the responsible individual because 

that person should be informed as to the control, management, and 

direction of the underlying entity. 

Senator LEVIN. Should be. 

Mr. SHEPHERD. That is right. 

Senator LEVIN. Can they be identified as the record owner of a 

corporation? 

Mr. SHEPHERD. Under the NCCUSL proposal, I think that was 

certainly the intent, Senator, to do that. 

Senator LEVIN. So they could identify a shell corporation in Panama or someplace as the record owner of that company? 

Mr. SHEPHERD. That is right, because in some of these situations, 

you are talking about tier entities. 

Senator LEVIN. I think we ought to ask FATF. By the way, there 

has been a reference to FATF this morning and as to the conversations which Mr. Shepherd had with FATF. I think it would be useful for us to ask FATF for their position on this proposal on the 

bill, but also give them a chance to comment on Mr. Shepherd’s 

testimony as well. 

Mr. Ramsey, there is a question of tipping off a corporation to 

law enforcement under the NCCUSL proposal. Would you agree 

that under their proposal there is that problem, that there would 

be a tip off to the real owner if they want to give it to us, of the 

law enforcement’s interest and that is a problem which we could 

avoid if we have a confidential disclosure just to the State and that 

disclosure could only be to law enforcement? 

Mr. RAMSEY. Yes sir, I believe that currently law enforcement 

has to go to the company to gather information, which could actually tip our hand in the investigation. This bill could actually provide a more discreet avenue of obtaining this information, possibly 

through the Secretary of State’s office, without tipping our hand 

and telling everybody we are in that investigative mode. 

81 

Senator LEVIN. Finally, because I’m over my time, Mr. Blum, do 

you have a comment on the tipoff issue? 

Mr. BLUM. I think the tipoff issue is very serious because if you 

go to the people who are in essence involved with the perpetrators 

and say, oh tell us who is really behind this, they are likely to 

move the money very quickly. Money moves with the speed of light 

and one of the objectives in these criminal cases is to freeze the 

money and apply it either for the benefit of the victims of a crime 

or to prevent further use of the money for terrorist or other purposes. 

Senator LEVIN. Thank you. My time is up. 

Chairman LIEBERMAN. Thanks, Senator Levin. Senator Carper. 

Senator CARPER. Thanks. Mr. Shepherd, in your testimony, I 

think you discussed the fact that the bill before us is prospective 

in nature and it only covers new corporations that form after the 

bill’s enactment. 

I think that leaves maybe 18 million corporations that have already been formed out of compliance with this bill. Could you discuss some problems with that? 

Mr. SHEPHERD. Well I think the way I read the bill is that the 

intent is to cover corporations and LLCs that are formed after the 

effective date of the bill. The concern is you have an estimated 18 

million corporations and LLCs currently in existence. What do we 

do with them? Are they covered? Are they not covered? 

So you are in effect creating a dual formation system or system 

that will be covered by this bill or not covered by this bill because 

you have 18 million entities not covered, not subject to these disclosure requirements, and then you have the new ones subject to it. 

So you are creating a duality that perhaps is unintentional, but I 

think that is a shortcoming of this legislation. 

Senator CARPER. Wouldn’t the Uniformed Law Commission approach capture more corporations and hopefully more criminals? 

Mr. SHEPHERD. That is right. The NCCUSL proposal covers not 

only LLCs and corporations, but also partnerships and trusts, plus 

it contains a transition provision that for a 2-year period the existing entities would be required to comply with the NCCUSL provisions. 

Senator CARPER. All right, thank you. Thanks to all of you for 

being here today and for your testimony. Mr. Kellogg, as a defense 

contractor, I can imagine that there are potential national security 

concerns if employee information is made public. 

Could you describe how this bill would impact companies in sensitive areas, defense, maybe technology, exports and the like? 

Mr. KELLOGG. Well Senator, that is actually one of my concerns. 

I will tell you that without going into detail, we certainly have been 

concerned about network vulnerability for a great period of time 

because we have for official use only, International Traffic in Arms 

Regulations ITAR-controlled and proprietary information on our 

computer networks, so there is substantial valuable information 

that needs to be protected just from a privacy standpoint. 

We would be concerned about a list of employees going out publicly from the standpoint that foreign intelligence service potentially would get a list of people in order to target, in order to say 

the typical routine would be to steal their laptop out of their car 

82 

and try and get a recording of their password or user name or some 

other mechanism in order to be able to get into the network. 

And then you would normally try and place a key logger event 

on a machine and that would start externally sending information 

out. That is a concern that we have, although I think it is somewhat unique to our industry and there are much larger implications relative to the competitive advantages of smaller private businesses and LLCs relative to their larger competitors of disclosing 

the ownership information. I think that is a bigger concern. 

Senator CARPER. I think those are good to point out. Back to you 

if I could, Mr. Shepherd, for my last question before time expires. 

As we discussed in the first panel with Assistant Secretary Cohen, 

a lot of attention has been paid to the Treasury Department’s definition of beneficial owner. It is defined in the Treasury Department’s anti-money laundering regulations. 

Could you help us better understand why this definition of beneficial owner is difficult to apply in the corporate context? 

Mr. SHEPHERD. Yes, Senator. I think there are a number of 

issues with that. One deals at the outset with the terms used in 

the definition of beneficial ownership. You have the word ‘‘control,’’ 

it is not defined. You have the definition ‘‘indirectly or directly’’ nowhere to be defined. 

The phrase ‘‘control, direct, or manage,’’ is nowhere to be defined. 

So you have these concepts in there and what is troubling about 

the definition is that you are dealing with corporations and LLCs, 

totally different vehicles, and when you talk about control in the 

general sense about voting control, voting power, it is different in 

a corporation than it is in a LLC. 

So I think the definition needs to respect the distinctions between these two legal entities. 

Senator CARPER. And one more quick question, if you can respond briefly. Mr. Shephard, you mentioned that the ABA is working with FATF. We discussed the issue on the last panel, but if you 

could talk a little bit more about FATF’s rating on the United 

States. 

Why is the recommendation so difficult for other countries, not 

just for the United States, to implement? 

Mr. SHEPHERD. Yes, Senator. In 2007, the mutual evaluation report prepared by FATF on the United Kingdom indicated that consultants had concluded that the definition of beneficial ownership 

is incapable from a law interpretation standpoint of precise definition as a matter of law. So even the FATF report included views 

from consultants that the definition of beneficial ownership was not 

very clear. 

The definition of beneficial ownership in this legislation differs 

from the FATF definition, but both suffer from some ambiguities. 

So I think that it is important that FATF recognized the difficulties 

in applying the definition of beneficial ownership to the various 

countries. And as you can see from the mutual evaluation reports 

that I have seen, most countries received a partially compliant 

grade. Other countries, such as the United States, received a noncompliant. 

But again, you receive four different grades under FATF, compliant, largely compliant, partially compliant and non-compliant. The 

83 

majority of the countries are partially compliant. That is just one 

notch above non-compliant. So I think that demonstrates the difficulty that FATF has had and the countries have had, frankly, in 

complying with Recommendation 33. 

Senator CARPER. All right, thanks. Mr. Chairman, I would just 

say not every committee hearing that we have provides, I think, a 

roadmap to a common sense compromise where there are legitimate concerns on all sides and a lot of stakeholders refuse to 

take—I think this has been very constructive. I really want to 

thank you for scheduling this hearing and for each of our witnesses 

for coming in and for testifying. 

Chairman LIEBERMAN. Well thank you, Senator Carper. I appreciate what you said and I appreciate the spirit of it. Senator Levin. 

Senator LEVIN. Just very quickly. Thank you, Mr. Chairman, for 

your holding again this hearing. Two quick things. One, if the ABA 

has any suggestions relative to a good definition of beneficial 

owner, we would welcome that. The Treasury and the Justice Departments are working on it and if you have problems, which I 

think you do, with the current Treasury one or its application in 

this circumstance, we would hope the ABA would offer, not just 

offer, but actually give us a definition that you think is a simple, 

workable one. 

And second, finally, Mr. Kellogg, on your comment about sometimes secrecy is needed in terms of the business needs of new business, there is a way to address that. We do in our bill, which is 

to say that the information must be kept private unless there is a 

subpoena. It is up to the State to decide whether or not to release 

that information and we could tighten that further, I think, following your suggestion, which is that we would say that information is only available by subpoena, but a State could specifically authorize. It would have to take a separate legislative action to do it. 

We are trying to protect the rights of States here. We are trying 

not to intrude on them more than is necessary for Federal law enforcement purposes. So we put this language in saying you cannot 

make this public without a subpoena, and only to law enforcement. 

But we had to put it in there to protect States’ rights. Hey, if the 

States want to release it, they can. We could tighten that further 

to make sure it was a conscious decision on the part of the State 

to release it, to take into consideration your concerns, to say this 

cannot be released by the State unless they specifically legislate to 

do that. 

I think you made a legitimate point which we could—— 

Chairman LIEBERMAN. Forgive me for doing this, but we are 

about to miss a vote. 

Senator LEVIN. I thank you again. 

Chairman LIEBERMAN. I would welcome a response for the 

record. I hope Senator Carper’s evocation and invocation is carried 

forward based on the very helpful testimony of all given. It will be 

great if we can come to a compromise on this, because we all have 

the same goal. 

The record will be kept open for 15 days to allow for further 

questions or statements. I thank you very much. I apologize for 

cutting you off. The hearing is adjourned. 

[Whereupon, at 12:33 p.m., the Committee was adjourned.] 

(85) 

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Æ 


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