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GAO-06-376 Company Formations United States Government Accountability Office Report to the Permanent Subcommittee GAO on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate April 2006 COMPANY FORMATIONS Minimal Ownership Information Is Collected and Available a GAO-06-376 April 2006 COMPANY FORMATIONS Accountability Integrity Reliability Highlights Minimal Ownership Information Is Highlights of GAO-06-376, a report to the Collected and Available Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate Why GAO Did This Study What GAO Found Companies form the basis of most Most states do not require ownership information at the time a company is commercial and entrepreneurial formed, and while most states require corporations and limited liability activities in market-based companies (LLC) to file annual or biennial reports, few states require economies; however, “shell” ownership information on these reports. With respect to the formation of companies, which have no LLCs, four states require some information on members, who are owners of operations, can be used for illicit the LLC. Some states require companies to list the names and addresses of purposes such as laundering directors, officers or managers on filings, but these persons may not own the money. Some states have been company. Nearly all states screen company filings for statutorily required criticized for requiring minimal information, but none verify the identities of company officials. Third-party ownership information to form a agents may submit formation documents to the state on a company’s behalf, U.S. company, raising concerns usually collecting only billing and statutorily required information for about the ease with which companies may be used for illicit formations. These agents generally do not collect any information on owners purposes. In this report, GAO of the companies they represent, and instances where agents told us they describes (1) the kinds of verified some information were rare. information each of the 50 states and the District of Columbia and Federal law enforcement officials are concerned that criminals are third party agents collect on increasingly using U.S. shell companies to conceal their identity and illicit companies, (2) law enforcement activities. Though the magnitude of the problem is difficult to measure, concerns about the use of officials said U.S. shell companies are appearing in more investigations in companies to hide illicit activity the United States and other countries. Officials told us that the information and how company information states collect has been helpful in some cases because names on the from states and agents helps or documents, such as names of directors, generated additional leads. hinders investigations, and (3) implications of requiring states or However, some officials said that the information was limited and that cases agents to collect company had been closed because the owners could not be identified. ownership information. State officials and agents said that collecting company ownership What GAO Recommends information could be problematic. Some state officials and agents noted that collecting such information could increase the cost of company filings While not making and the time needed to approve them. Some officials said that if they had recommendations, GAO observes additional requirements, companies would go to other states or jurisdictions. that if a requirement to collect Finally, officials and agents expressed concerns about compromising company ownership information is individuals’ privacy because owner information disclosed on company filings considered, it would be useful for policymakers to consider (1) would be part of the public record, which has not historically been the case options that balance the conflicting for private companies. concerns among states, agents, and law enforcement agencies; and (2) Information Collected on Ownership and Management at Formation uniformly applying any such requirement to all states or agents. Number of states 15 13 11 12 9 LLCs only 6 6 6 44 www.gao.gov/cgi-bin/getrpt?GAO-06-376. 3 Corporations only 22 2 3 To view the full product, including the scope Both corporations and LLCs 0 and methodology, click on the link above. To NameAddress NameAddress Name Address view the results of GAO’s survey of state Officer Director/manager/ Owner/member officials responsible for company formations, managing member click: www.gao.gov/cgi-bin/getrpt?GAO-06- 377SP. For more information, contact Yvonne Source: GAO survey of state officials responsible for company formation. Jones at (202) 512-8678 or [email protected]. United States Government Accountability Office Contents Letter 1 Results in Brief 4 Background 6 Most States Collect Limited Information on Company Ownership and Management 13 Agents Facilitate Company Formation but Are Not Required to Collect Ownership Information or Verify Information on Clients 24 Law Enforcement Officials Can Obtain Some Company Information from States and Agents, but a Lack of Ownership Information Obstructs Some Investigations 30 More Company Ownership Information Could Be Useful to Law Enforcement, but Concerns Exist about Collecting It 36 Observations 50 Agency Comments and Our Evaluation 51 Appendixes Appendix I: Objectives, Scope, and Methodology 53 Appendix II: Company Formation and Reporting Documents Can Be Submitted in a Variety of Ways 57 Appendix III: Information on Company Formation Documents 61 Appendix IV: GAO Contact and Staff Acknowledgments 66 Glossary 67 Tables Table 1: Basic Types of U.S. Businesses 10 Table 2: Steps States Take to Review Articles of Incorporation/ Organization and Periodic Reports 23 Table 3: State Company Formation Fees as of November 2005 59 Figures Figure 1: How Companies Are Typically Formed 8 Figure 2: Domestic Corporations and LLCs Formed in States in 2004 12 Figure 3: Number of Domestic Corporations and LLCs Formed in the Top Five States in 2004 13 Figure 4: Ownership Information Required in Articles and Periodic Reports 16 Page i GAO-06-376 Company Formations Contents Figure 5: Management Information Required in Articles and Periodic Reports 18 Figure 6: Implications of All of the States Collecting Information on Company Ownership 38 Figure 7: States That Provide a Web Site for Filing Formation or Periodic Report Filings 58 Figure 8: Key Information Required on Articles of Incorporation/ Organization 62 Figure 9: Sample Articles of Incorporation Form for a Corporation 64 Figure 10: Sample Articles of Organization Form for an LLC 65 Page ii GAO-06-376 Company Formations Contents Abbreviations CIP Customer Identification Program DEA Drug Enforcement Agency DHS Department of Homeland Security EIN employer identification number EOUSA Executive Office of the U.S. Attorneys EPA Environmental Protection Agency FATF Financial Action Task Force on Money Laundering FBI Federal Bureau of Investigation FinCEN Financial Crimes Enforcement Network IACA International Association for Commercial Administrators ICE Immigration and Customs Enforcement ID identification IRS Internal Revenue Service IRS/CI Internal Revenue Service, Criminal Investigations LLC limited liability company LLLP limited liability limited partnership LLP limited liability partnership NAICS North American Industry Classification System NCCUSL National Conference of Commissioners on Uniform State Laws OECD Organization for Economic Cooperation and Development OFAC Office of Foreign Assets Control SAR suspicious activity report SDN Specially Designated Nationals SEC Security and Exchange Commission SSA Social Security Administration TIN taxpayer identification number This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Page iii GAO-06-376 Company Formations A United States Government Accountability Office Washington, D.C. 20548 April 7, 2006 Leter The Honorable Norm Coleman Chairman The Honorable Carl Levin Ranking Minority Member Permanent Subcommittee on Investigations Committee on Homeland Security and Governmental Affairs United States Senate Companies—business entities that conduct a variety of commercial activities and hold a variety of assets—form the basis of most commercial and entrepreneurial activities in market-based economies. Companies in the United States play an essential and legitimate role in the country’s economic system. They provide a wide variety of services that range from the provision of necessary utilities and investment services to retail sales of items such as clothing and furniture. Companies can also be set up that act as “shell” companies and conduct either no business or minimal business. Shell companies are used for legitimate purposes; for example, they may be formed to obtain financing prior to starting operations. However, government and international reports indicate that shell companies have become popular tools for facilitating criminal activity in the United States and internationally and can be involved in fraud and corruption or used for illicit purposes such as laundering money, financing terrorism, hiding and shielding assets from creditors, and engaging in questionable tax practices.1, 2 Such schemes can conceal
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