Thursday, June 18, 2009

Trail of Panama companies vanishes in Delaware

Title: Hearing Of The Senate Committee On Homeland Security And Governmental Affairs - Examining State Business Incorporation Practices: A Discussion Of The Incorporation Transparency And Law Enforcement Assistance Act
Date: 06/18/2009
Location: Washington, DC
Show All Statements Hearing Of The Senate Committee On Homeland Security And Governmental Affairs - Examining State Business Incorporation Practices: A Discussion Of The Incorporation Transparency And Law Enforcement Assistance Act
SEN. LEVIN: U.S. corporations with hidden owners have created a serious law enforcement and a national security problem. For instance, we're 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're 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. The real owners -- the legal term is beneficial owners. Their real owners are hidden from view.

Here's one example of what's going on. In 2004, one of our key law enforcement agencies, the Immigration and Customs Enforcement, or ICE, who's here today, uncovered a collection of U.S. companies that were secretly controlled from 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 claim they were paying for the importer-exported 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. 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, quote, "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 had 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 -- and it's in our books -- summarizes the case.

Now, Michael Chertoff, former secretary of U.S. Department of Homeland Security, wrote the following: "In countless investigations where the 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. 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 timeframe for preserving those records.

Here's 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. A copy of some of its Internet ads is presented in the two hearing exhibits, and the chart which I'm putting up here reproduces one of its advertisements, offering the sale of aged corporations, meaning companies which corporations today formed years earlier. One of the companies on sale for $6,000 is advertised as coming with four years of tax returns and an existing employer identification number, an EIN issued by the IRS.

Why buy an aged corporation? According to Corporations Today, quote, "obtaining bank loans may be easier when you can show you have history," close quote. So is, quote, "obtaining corporate credit cards and leases." The quote goes on. For example, "Dell Computers lease only to corporations six months old or more," close quote. They're selling aged corporations for a price, been in business allegedly for six months or more. So Dell is told, hey, this corporation's been in business for years, so we're now eligible to lease your product.

So the ad invites fraud. It enables hidden owners to pretend that they've had a corporation operating in the United States for years when they haven't. Despite mounting evidence of misconduct by U.S. shell corporations, despite Internet advertisements selling U.S. corporations with promises of anonymity, despite the years of law enforcement complaints, many of our states are reluctant to admit that there's a problem in establishing 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 on Money Laundering, known as FATF, 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 two years until July of 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 to the corporations formed within the United States?
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