Sunday, June 28, 2009

Former FINCEN agent says : US shell companies - It's time to end the hypocrisy

John Cassara is an expert in anti-money laundering and former FINCEN agent. In his blog he points out that finding beneficial owners of U.S. companies can be as difficult as in more famous offshore jurisdictions.

Bill S. 659 Incorporation Transparency and Law Enforcement Assistance Act is meant to improve record keeping of beneficial owners by State Divisions of Corporations, even though forming corporations is a state - not federal - power. Secretaries of State of Wyoming and other states have pointed out that they already complied with federal wishes to eliminate bearer shares and now they and small businesses are being asked to spend even more money in compliance.

Over the last few years, I have worked in approximately one dozen developing countries helping police, customs, and security services recognize and investigate money laundering and terror finance. During discussion periods, I am inevitably asked the following question. "Mr. John, my agency has a financial crimes investigation and the money trail leads to the American state of Delaware. We can't get any further information and don't know what to do. Can you help us?" As a former criminal investigator representing the United States, this question is, frankly, embarrassing.

From a money laundering and tax evasion standpoint, Delaware is not the only American state that has troubling incorporation and limited liability company (LLC) structures. In 2006, the US General Accountability Office (GAO) issued a report, "Company Formations: Minimal Ownership Information Is Collected and Available." (pdf) The report reviewed the legal requirements in all 50 states to set up corporations and LLCs, and found that most states failed to request beneficial ownership information. The GAO found that the absence of ownership information impeded law enforcement investigations of suspect corporations.

Some states seemingly compete against each other to see which can offer less accountability, less transparency, the most secrecy and, as a result, attract the most business and fees. Websites that offer incorporation services worldwide are touting US corporate secrecy. In transactions that can be completed over the internet in a few hours and for a few hundred dollars, corporations and LLCs can be formed in the US that provide many of the same secrecy provisions featured in traditional international tax and offshore havens.

US Senator Carl Levin (D-Michigan) has followed the issue closely. According to Senator Levin, "States allow persons to form nearly two million corporations and LLCs each year in this country without knowing – or even asking – who the beneficial owners are behind those corporations. Right now, a person forming a US corporation or LLC provides less information to the state than is required to open a bank account or obtain a driver's license."

The United States routinely points to other countries' anti-money laundering/counter-terrorist finance (AML/CFT) shortcomings. It has played a major role over the years in identifying "uncooperative" countries and jurisdictions and placing these countries on formal and informal "blacklists." Yet the proliferation of defacto shell corporations on American soil spotlights hypocrisy and undermines US policy.

For example, as noted in the recently released 2009 State Department International Narcotics Control Strategy Report (INCSR) Volume II on Money Laundering, the British Virgin Islands and Hong Kong each have nearly 500,000 international business companies (IBCs) registered in their jurisdictions. The INCSR states the Dominican Republic, Grenada, Jamaica, Trinidad and Tobago plan to open "international financial centers," most of which offer the same services as offshore financial centers. In Panama, approximately 46,178 IBCs were registered in Panama in 2007. The INCSR continues that, "Panama has no requirement to disclose the beneficial owners of any corporation or trust; bearer shares are permitted for corporations; and nominee directors and trustees are allowed. The result is that illicit funds can be laundered and taxes evaded with little fear of detection and prosecution."

I am not an attorney skilled in the intricacies of international law, taxes, or finance. I don't understand the differences between LLCs, IBCs, IFCs, off shores, shell companies, and taxhavens. Maybe I am missing something. However, I know as a criminal investigator that following a dirty money trail to Delaware is about as difficult as following it to those jurisdictions criticized above by the US State Department.

When I was assigned to Treasury's Financial Crimes Enforcement Network (FinCEN), I witnessed many requests for assistance from Egmont Group partner international Financial Intelligence Units (FIUs) that had investigations focusing on Delaware. There was not much we could do.

Domestic law enforcement agencies are equally stymied. For example, according to 2006 Congressional testimony, Immigration and Customs Enforcement (ICE) reported that a Nevada-based corporation received more than 3,700 suspicious wire transfers totaling $81m over two years. However, the case was not prosecuted because investigators could not identify the corporation's owners.

In 2008, Department of Homeland Security Secretary Michael Chertoff wrote to a Senate Subcommittee, "In countless investigations, where criminal targets utilize 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."

The Financial Action Task Force (FATF) has repeatedly criticized the United States for failing to comply with a FATF standard requiring beneficial ownership information.

Undoubtedly because company formations can be lucrative, nothing has been done. Perhaps things are about to change.

In March 2009, Sen. Carl Levin, D-Mich., Sen. Chuck Grassley, R.-Iowa, and Sen. Claire McCaskill, D-Mo., introduced the Incorporation Transparency and Law Enforcement Assistance Act to help law enforcement stop the misuse of U.S. corporations. Among its provisions, the bi-partisan Act (S.569) would require states to obtain a list of the beneficial owners of each corporation or LLC formed under their laws, ensure this information is updated annually, and provide the information to civil or criminal law enforcement upon receipt of a subpoena or summons. The Act would also require corporations and LLCs with non-US beneficial owners to provide a certification from an in-state formation agent that the agent has verified the identity of those owners.

As the Group of 20 prepares for a meeting in early April to try to improve global financial rules, there are reports that financial and tax havens of all sorts may receive scrutiny. As part of the process, I hope the United States is called to lift the veil of states' secrecy when it comes to corporate beneficial owners.

The current financial meltdown and a dangerous laxity in financial crimes enforcement should have taught us that we can no longer afford business as usual.

I suggest the American delegation at the Group of 20 headed by President Barack Obama should be guided by the following quote from then Senator Obama; "It's time for the United States to meet its international anti-money laundering commitments, and that means getting beneficial ownership information for US corporations."

Published in Complinet

S. 569, The Incorporation Transparency and Law Enforcement Assistance Act
S. 569 would ensure that persons who form corporations in the United States disclose the beneficial owners of those corporations, in order to prevent wrongdoers from exploiting United States corporations for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations.

National Association of Secretaries of State Congressional Activity: News Release: North Carolina Secretary Elaine Marshall Testifies Before U.S. Senate on State Business Incorporation Practices (06/18/09) * Testimony * More Testimony: Kansas Nevada Wyoming * NASS Company Formation Task Force

Concerns About 5.569 by Max Maxfield Wyoming Secretary of State: While we understand the premise of S.569; and while we applaud Senator Levin for his desire to better protect our country, we have serious concerns that the passage of S.569 will set Wyoming back in our efforts to fight fraud. We have the following serious concerns.
1. Our greatest concern is that if the federal law passes, there will be serious attempts to rescind Wyoming's laws. The argument will be that as long as a company meets the federal law that should be enough.
2. IfWyoming's laws were to be rescinded, we would lose the key component of requiring a human being in our State TO BE RESPONSIBLE FOR REPRESENTING THE COMPANIES THEY SERVE. We would be back to registered agents just being there for service of process, taking an otherwise hands off approach to the responsibility which they should shoulder.
3. If Wyoming's laws were to be rescinded, we would also lose the requirement that the registered agent have a contact person for each company they represent. We FIRMLY BELIEVE that a person leading you to another person is infinitely better than having paper on file. Fraudulent people file fraudulent paper; but a person face to face being held responsible generally knows of another person who can be contacted.
4. Whatever information is determined to be kept, it should be kept by the registered agent, not by government. This is a responsibility issue. States should not be taking the responsibility to know the players for each company; states are not forming these companies or using them for potential ill. Formation agents and the registered agents who are forming and making money off these companies (or the individuals themselves if the owner acts as his own registered agent) should be responsible for retaining and providing all required information. Without personal responsibility for the paper, the paper has very little value, except to make it APPEAR AS IF government is trying to locate the bad actors.

See also Levin - Obama Bill seeks to end confidentiality of US corporations


To form your own Delaware company click here

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