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July 9, 2009

Incorporation Transparency and Law Enforcement Assistance Act (S. 569.IS)

Who owns America?  American business entities?  That's what Senator Carl Levin (MI) wants to know.   In 2008, Senator Levin (and co-sponsors, including then Senator Obama) introduced the Incorporation Transparency and Law Enforcement Act (S. 2956).   Earlier this year, Senator Levin (and co-sponsors) reintroduced the Act as S.569.IS.  on June 18, 2009, the Senate Homeland Security and Governmental Affairs Committee held a hearing on Examining State Business Incorporation Practices: A Discussion of the Incorporation Transparency and Law Enforcement Assistance Act.  Leslie Reynolds of the National Association of Secretaries of State (NASS) gave this summary of the hearing:

* * *  Sec. Elaine Marshall, NC Secretary of State and NASS Company Formation Task Force Co-Chair was one of the witnesses invited by Chair Lieberman (I-CT).

There were a total of five witnesses (all of their prepared testimony can be found on the [Senate Homeland Security and Governmental Affairs (HSGAC)] hearing page,along with the webcast of the hearing.) Witnesses representing the state perspective were Secretary Marshall and Harry Haynsworth, ULC drafting committee chair for the Uniform Law Enforcement Access to Entity Information Act (ULEAEIA). The Justice Department (DOJ), Immigration & Customs Department (ICE) and the ADA's office in New York City had witnesses testifying from the perspective of law enforcement.

Three Senators were present for the hearing - Chair Lieberman (I-CT), Sen. Levin (D-MI) and Sen. Carper (D-DE). Chair Lieberman stayed for the first round of questions, but left and asked Sen. Levin to chair the second round of questions. The hearing lasted two and a half hours, with a 20 minute break for a floor vote.

The full opening statements of the Senators present can be found on the HSGAC hearing page.  Chair Lieberman commended the work of the Permanent Subcommittee staff and the commitment of Sen. Levin on this issue. He said there should be a way to draft balanced "sunshine" legislation which would provide the information that law enforcement needs and protect investor privacy without burdensome administrative costs to implement. Sen. Levin said that states were forming 2 million businesses each year without knowing who is behind them. He also said that states were reluctant to admit there was a problem. Sen. Carper (D-DE) said that he hoped that the committee seriously considered the offer of Haynsworth and the ULC to move forward working together and that the solution will be a balance of interests between privacy and transparency.

Janice Ayala of ICE said that her agency has recognized for quite some time that the state incorporation process poses a serious threat . She cited several examples of investigations that have taken place over the past few years and said that shell companies (those that exist only on
paper - her definition) are being formed by criminals in the US and then they are opening bank accounts overseas. She also said that criminals are purchasing "shelf companies - aged companies" that are being promoted on the Internet and used to conduct criminal activities. She
said that the solution is federal legislation but does not credit S.569 as the solution.

Jennifer Shasky of DOJ said that federal legislation must include four components:

   (1) law enforcement must have access to the names and contact information for those who have control over a company and the company's assets;

   (2) define "beneficial owner" the same across all 50 states and collect name, address and photo ID from ALL recognized as beneficial owner,

   (3) obtain beneficial ownership information in an accurate and timely fashion which means it must be maintained on site in the state of formation, and it must be updated any time info changes and it must be certified annually, and

   (4) there must be a federal enforcement component.

Secretary Marshall outlined the work of the NASS task force, our request of the Uniform Law Commissioners and the ABA on drafting Uniform Law and the impact that S. 569 would have on NC specifically from a filing office standpoint. She explained, in detail, the challenges that state offices would face implementing S.569 - that you would be the front lines when it came to implementing- and the public education challenges you would face both in staffing and in costs.

Mr. Kaufman of the NY City ADA's office said his office supports S.569 because they deal with the fallout of "shell companies" everyday. He called the issue a "no-brainer" and said that "these shell companies ust come to an end." He said that as a country we have a "moral obligation" to lead on this issue and it is embarrassing when conducting an investigation with international authorities. He said that from a law enforcement perspective, the Uniform Law Commissioners draft is "worse than nothing" because it alerts an entity directly when they are being investigated. Often the law enforcement officials represented appeared to believe that those engaged in criminal activity would file truthful information. When Sec. Marshall pointed out that it was unlikely that criminal enterprises would file truthful information, Mr. Kaufman of the ADA's office said false information was still helpful because once caught, prosecutors could show criminal intent with the filing of false information - this still wouldn't aid in the investigation.

Harry Haynsworth of the Uniform Law Commissioners said that the solution has to be state legislation with a uniform standard because corporate law has been a matter for states. He is concerned that S.569 would result in massive unintentional non-compliance and that information would be frequently be outdated. He made an offer to move forward, working with the committee, to work on federal legislation that would require states to implement ULC version or they would be subject to federal legislation (S.569). The federal legislation would also include funding and federal penalties for non-compliance.

Sen. Levin asked Ms. Shasky if DOJ supported his bill. She said that DOJ thinks the bill needs to be amended to include photo ID for all beneficial owners not just international owners. DOJ also wants the beneficial ownership information updated anytime there is a change, not just updated annually. DOJ also wants to add an annual certification of the information. She did clarify that the Administration does not have an official position on S.569. ICE reported that Homeland Security is working on a position. Kaufman of the ADA's office again said he thinks that the issue is a no-brainer and he doesn't understand the state and business community perspective that the requirements will impose a burden. Law enforcement witnesses made it clear that they wanted the referenced provisions in place to address what they acknowledged were [0.1%] of the businesses out there conducting illegal activity.  Secretary Marshall and Harry Haynsworth referenced the fact that they were working on behalf of the 99.9% of the businesses conducting legitimate activities. Levin said that his approach to collecting the information was much simpler than the ULC approach.

Marshall and Haynsworth argued that the definition of beneficial ownership was extremely difficult to implement from a business filing perspective. Sen. Levin and law enforcement did not agree and said that the U.S. Treasury, Financial Action Task Force and S.569 all defined "beneficial ownership." To support his point, Mr. Haynsworth read from the July 5, 2007 Financial Action Task Force Third Mutual Evaluation Report of the United Kingdom, page 234 Sec. 1132 and 1133.

(list spacing and hot-links added).

The NASS has established a Company Formation Task Force on this issue.  Its website has a veritable history on this issue, with links to more information.

posted by Gary Rosin

July 9, 2009 in Legislative Developments | Permalink


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