Currently, nearly two million corporations and limited liability companies (LLCs) are formed within the United States each year. The States generally form these corporations without asking for the identity of the corporation’s beneficial owners, and numerous law enforcement problems have resulted when some of these corporations have become involved with money laundering, tax evasion, or other misconduct.
The potential problems are illustrated by a 2000 report, prepared at the Subcommittee’s request by the Government Accountability Office (GAO), which examined an individual who set up over 2,000 Delaware shell companies, opened bank accounts for those companies, and then moved $1.4 billion dollars through those bank accounts, all without revealing who was behind these transactions.
In 2006, GAO prepared another report at the Subcommittee’s request entitled, “Company Formations: Minimal Ownership Information Is Collected and Available.” This GAO report reviewed the legal requirements in all 50 states to set up corporations and LLCs, found that most states failed to request beneficial ownership information, and reported that the absence of this ownership information impeded law enforcement investigations of suspect corporations.
The Subcommittee has collected examples of the problems caused by U.S. shell companies with hidden owners, including the following:
The Manhattan District Attorney’s Office recently announced several cases which involved the movement of funds through New York banks by entities controlled by the Iranian military, and two related matters in which U.S. shell companies were established to hide secret Iranian interests.
The Immigration and Customs Enforcement (ICE) arm of the Department of Homeland Security (DHS) uncovered a network of nearly 800 U.S. companies in 2004, that were located in nearly all 50 states, were engaged in hundreds of millions of dollars in suspect money transfers, and were associated with shell entities in Panama, an offshore secrecy jurisdiction. None of the 800 incorporation forms identified a true company owner. Nearly 200 had been formed in Utah by the same Utah company formation agent, which told ICE it had formed them at the request of a Delaware company formation agent. Neither the Utah nor Delaware company formation agent could provide information on the true company owners, since that information is not required by law. The ICE investigation was unable to proceed due to the lack of ownership information.
A U.S. company formation agent called Corporations Today Inc. recently advertised on the Internet: “We have the largest inventory of aged shell corporations in the United States.” Among other corporations, Corporations Today offered for sale, for a price of nearly $6,000, a Wyoming shell company with 4 years of tax returns and an Employer Identification Number issued by the IRS, even though that company had never actually engaged in any business operations. Selling such corporations invites fraud by enabling hidden owners to pretend they’ve had a corporation operating in the United States for years when they haven’t.
- A 2005 analysis by FinCEN of suspicious activity reports indicated that as much as $18 billion in suspicious transactions occurred through international wire transfers utilizing U.S. shell companies.
Moreover, in recent years, the U.S. Department of Justice and DHS have received, but have been unable to answer, hundreds of requests from foreign law enforcement agencies for beneficial ownership information on U.S. companies suspected of criminal misconduct.
In July 2006, the Financial Action Task Force on Money Laundering (FATF), which is the leading international organization combating money laundering, issued a report criticizing the United States for failing to comply with a FATF standard requiring the collection of beneficial ownership information and urging the United States to correct this deficiency by July 2008. In response, the United States has repeatedly urged the States to strengthen their incorporation practices by obtaining beneficial ownership information for the corporations and LLCs formed under their laws. The States, however, have not changed their incorporation practices.
In 2008, Sen. Levin, then Sen. Norm Coleman, R-Minn., and then Sen. Barack Obama, D-Ill., introduced the Incorporation Transparency and Law Enforcement Assistance Act (S. 2956) to help law enforcement stop the misuse of U.S. corporations. The bill was reintroduced in March 2009, as S. 569, by Sen. Levin, Sen. Charles Grassley, R-Iowa, and Sen. Claire McCaskill, D-Mo. This bill has been endorsed by numerous law enforcement associations, including the Federal Law Enforcement Officers Association, the Fraternal Order of Police, and the National Association of Assistant United States Attorneys, as well as by organizations that support transparency and good governance, such as Citizens for Tax Justice, Global Financial Integrity Program, and Public Citizen.
On June 18, 2009, the Senate Homeland Security and Governmental Affairs Committee held a hearing to examine the state incorporation practices and discuss S. 569. The Honorable Robert M. Morgenthau, District Attorney for the County of New York, New York, offered his endorsement of S. 569 in written testimony:
“S. 569 provides a minimalist and direct answer to a difficult problem. It places almost no burdens on the states or on business, while simultaneously addressing our security needs. I urge the Committee to adopt it and recommend its passage.”
Witnesses from the Departments of Justice and Homeland Security emphasized the threat posed by a lack of transparency in corporate filings, and stated that their ability to obtain beneficial ownership information is key to their abilities to thwart money laundering and other criminal activity.
More Information on Shell Companies:
- Op-ed by Robert Morgenthau - A no-brainer bill to fight crime: Require corporations to disclose who runs them [PDF] - Published in N.Y. Daily News, June 29, 2009.
- Written testimony - The Honorable Robert M. Morgenthau, District Attorney for New York County, State of New York [PDF] - June 18, 2009.
- Committee statement - Levin Statement at Homeland Security and Governmental Affairs Committee Hearing on State Business Incorporation Practices: A Discussion of the Incorporation Transparency and Law Enforcement Act - June 18, 2009.
- Press release - Thursday: Hearing on Levin-Grassley-McCaskill Bill to Stop Misuse of U.S. Companies - June 17, 2009.
- Press release - Levin-Grassley-McCaskill Bill Introduced to Stop Misuse of U.S. Companies - March 11, 2009.
- Legislation - S. 569, Incorporation Transparency and Law Enforcement Assistance Act [PDF]
- GAO report - Company Formations: Minimal Ownership Information Is Collected and Available [PDF] - April 2006.
- Press release - GAO Report Finds Anonymous U.S. Companies Pose Risk - April 25, 2006.
Senator Levin’s Record on Shell Corporations
- Feb. 7, 2012 – Sens. Levin, Conrad introduce CUT Loopholes Act
Sen. Levin and Sen. Kent Conrad introduce the Cut Unjustified Tax Loopholes Act, which would close a number of tax loopholes that increase the deficit and the tax burden carried by middle-class Americans by allowing individuals and corporations to dodge the taxes they owe.
- Dec. 14, 2011 – Levin report shows ‘offshore’ corporate funds are in U.S.
Sen. Levin releases a Permanent Subcommittee on Investigations report showing that large multinational corporations who say they have funds “trapped” overseas because of U.S. tax laws already have large amounts in U.S. bank accounts and other U.S. investments. The report undercuts a major rationale of those lobbying for a “repatriation holiday” that would give corporations a huge tax break if they repatriate offshore funds.
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