A bipartisan group of senators have introduced legislation to combat acts of tax evasion, money laundering, terrorism and other wrongdoing facilitated by U.S. corporations with hidden owners.
Sen. Carl Levin, D-Mich., chairman of the Permanent Subcommittee on Investigations, and Sen. Chuck Grassley, R-Iowa, ranking member of the Senate Judiciary Committee, together with Senators Dianne Feinstein, D-Calif., and Tom Harkin, D-Iowa, introduced the Incorporation Transparency and Law Enforcement Assistance Act on Thursday. The bill would prohibit all 50 states from allowing corporations to be formed by unidentified persons, and instead require states to obtain the identities of the people behind the corporations formed under their laws.
“Today, it takes more information to obtain a driver’s license or open a U.S. bank account than it does to form a U.S. corporation,” Levin said in a statement. “Our states don’t require anyone to name the owners of the corporations being formed under their laws, and the United States is currently one of the world’s biggest offenders in terms of creating corporations with hidden owners. In June, President Obama stood with other international leaders at a G8 summit to condemn corporations with hidden owners who commit crimes, tax evasion, and other wrongdoing. The G8 leaders made a joint commitment to combat that problem. If the United States wants to maintain its leadership and credibility on ending tax avoidance and corporate secrecy in tax havens, we need to get our own house in order. We also need to listen to the law enforcement community that supports this legislation and has been urging us for years to put an end to corporate secrecy used to hide criminal conduct.”
The United States forms almost 2 million corporations and limited liability companies each year—more than the rest of the world combined—and does so without asking for the identity of the owners. The Levin-Grassley-Feinstein-Harkin bill would require the states to add a single question to their existing incorporation forms requesting the names of the natural persons—the beneficial owners—behind the corporations being formed.
States would not be required to verify the information, but penalties would apply to persons who submit false information. Law enforcement would be given access to the information upon presentation of a subpoena or summons. Corporations bidding on federal contracts would have to provide the same beneficial ownership information to the federal government to ensure the United States knows with whom it is doing business. Regulated corporations whose ownership is already known, including publicly traded corporations, banks and securities firms, would be exempt from the disclosure requirement. A summary of the bill is available here.
“Prosecutors of financial crimes follow the money,” said Grassley. “It’s hard for them to do that when the owners of shell corporations are able to hide their identities so easily. Setting consequences for submitting false ownership information would help law enforcement by imposing a hardship on the Ponzi schemers, money launderers and tax cheats who use shell corporations to conceal their fraud.”
The bill is supported by law enforcement groups including the Federal Law Enforcement Officers Association, Fraternal Order of Police, Society of Former Special Agents of the Federal Bureau of Investigation, and National Association of Assistant United States Attorneys, as well as by Manhattan District Attorney Cyrus Vance.
“It is far too easy for criminals and drug traffickers to hide behind anonymous shell corporations,” said Feinstein. “To make a real dent in combating money laundering, it is essential that law enforcement know the identity of the actual owners of corporations. This bill is an important tool in starving criminal organizations of illicit profits.”
In addition, the legislation has been endorsed by business and public interest groups, including the Main Street Alliance, American Sustainable Business Council, National Money Transmitters Association, AFL-CIO, SEIU, Global Financial Integrity, Global Witness, U.S. Public Interest Research Group, Transparency International, Public Citizen, Project on Government Oversight, Jubilee USA Network, Tax Justice Network USA, Human Rights Watch, Friends of the Earth, Open Society Policy Center, Revenue Watch Institute, the FACT Coalition and more.
“This long-overdue requirement will shine the light on who actually owns corporations incorporated in the United States,” said Harkin. “This simple, common-sense legislation will bring much needed transparency into the system so that law enforcement can better prevent tax evasion, money laundering, terrorist financing, and other criminal activities conducted through currently untraceable businesses and bring perpetrators of these activities to justice.”
This is the fourth Congress in which the bill has been introduced. When the bill was introduced the first time in 2008, and President Obama was a member of the U.S. Senate, he was an original cosponsor. The passage of the bill has gained new urgency since the June G8 summit when the G8 leaders made this issue a top priority, and President Obama issued an action plan committing to tackle the problem this year.
The lawmakers cited several examples of how U.S. corporations have been misused, including the following.
• Viktor Bout, an arms trafficker found guilty in 2011 for conspiring to kill U.S. nationals and selling weapons to a terrorist organization, used shell companies around the world in his work, including a dozen formed in Texas, Delaware and Florida.
• Victor Kaganov, a former Russian military officer who ran an illegal money transmitter business from his home in Oregon, pled guilty in 2011 to using Oregon shell companies to wire more than $150 million to other countries on behalf of Russian clients.
• In June 2011, over 2,000 U.S. shell corporations formed for unidentified persons by Wyoming Corporate Services shared the same address at a small house in Cheyenne, Wyoming, including a corporation controlled by a former Ukrainian Prime Minister convicted of money laundering and extortion; a corporation indicted for helping online-poker operators evade a U.S. ban on Internet gambling; and two corporations barred from U.S. federal contracting for selling counterfeit truck parts to the Pentagon. The Wyoming Corporate Services website stated, “A corporation is a legal person created by state statute that can be used as a fall guy, a servant, a good friend or a decoy. A person you control ... yet cannot be held accountable for its actions. Imagine the possibilities!”
• In 2010, Michael Huarte was convicted of health care fraud and received a sentence of 22 years for forming 29 shell companies in such as states as Florida, Georgia, and Louisiana and using them to bilk Medicare out of more than $50 million.
• In 2010, Florida attorney Scott Rothstein pled guilty to fraud and money laundering in a $1.2 billion Ponzi investment scheme, in which he used 85 U.S. limited liability companies to conceal his participation or ownership stake in various business ventures.
• In 2005, the Immigration and Customs Enforcement division of the Department of Homeland Security closed an investigation into 800 U.S. shell corporations in Utah and most of the other 50 states, all of which were associated with a group of companies in Panama and raised concerns about tax fraud and other wrongdoing, due to ICE’s inability to identify any natural person who owned any of the shell corporations.
The bill would not only help law enforcement combat wrongdoing, it would bring the United States into compliance with international standards issued by the Financial Action Task Force on Money Laundering requiring countries to obtain beneficial ownership information for the corporations they form. It would also make U.S. domestic practices consistent with U.S. foreign policy.
“The fact that we have corporate secrecy right here in our backyard contradicts U.S. efforts to end corporate secrecy offshore,” said Levin. “All over the world, people are standing up and speaking out against shell corporations with hidden owners being used to commit wrongdoing. It is time Congress acted to ensure transparency, rather than secrecy, in the formation of U.S. corporations.”
The Financial Accountability and Corporate Transparency (FACT) Coalition, an alliance of civil society organizations, small business groups, investors, and labor unions urged lawmakers, applauded the introduction of the bipartisan legislation Thursday.
“The tide is turning against corporate secrecy,” said Stefanie Ostfeld, senior policy advisor for Global Witness. “Swift passage of this bill would enable the U.S. to implement its G8 commitment to enhance transparency of the real people who own and control companies, making it harder for the corrupt and other criminals to hide behind American shell companies to move dirty money.”
“The Department of Justice has made it clear that anonymous shell companies are the most-widely used method for laundering the proceeds of crime, corruption, and tax evasion,” said Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity. “They are used to facilitate sex slavery, arms trafficking, and drug dealing. Ending the anonymity behind these phantom firms is just common sense. The Obama administration has endorsed the need for this legislation, and now it's time for Congress to do its part.”
Brandon Rees, acting director of the AFL-CIO Office of Investment, stated, “Criminals should not be permitted to hide from authorities using artificial legal structures. This legislation will shine a light on anonymous shell companies, revealing the human beings that stand to benefit from their operations.”
Nicole Tichon, executive director of Tax Justice Network USA, added, “The United States is currently a very attractive destination for corrupt officials and tax evaders to hide the proceeds of their crimes, and anonymous shell companies provide a prime vehicle to do so. These entities have been implicated in trafficking of drugs, arms, and humans; terrorist financing; government corruption; fraud; tax evasion; and many other illicit activities.”
Many U.S. states rank among the easiest jurisdictions in the world to form a company without revealing the identity of who ultimately owns or controls it, the FACT Coalition pointed out. The increased accountability made possible by the bill would make it much harder for criminals to hide behind American shell companies to perpetrate schemes to defraud investors and other innocent Americans or to steal millions of dollars from Medicare. It would also provide important benefits to small businesses.
“Most real American business owners are proud to have their names on their incorporation papers, if not on the door,” Scott Klinger, tax policy director for the American Sustainable Business Council, said. “Having hundreds of thousands of anonymous shell corporations lurking in the shadow economy creates unnecessary risks and added costs for legitimate businesses and for the economy.”
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