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Statementoffice of the Deputy Attorney STATEMENT OF JENNIFER SHASKY CALVERY SENIOR COUNSEL TO THE DEPUTY ATTORNEY GENERAL UNITED STATES DEPARTMENT OF JUSTICE BEFORE THE UNITED STATES SENATE COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS HEARING ENTITLED “EXAMINING STATE BUSINESS INCORPORATION PRACTICES: A DISCUSSION OF THE INCORPORATION TRANSPARENCY AND LAW ENFORCEMENT ASSISTANCE ACT” PRESENTED JUNE 18, 2009 Good afternoon, Chairman Lieberman, Ranking Member Collins and distinguished Members of the Committee. I am honored to appear before the Homeland Security Committee to discuss the critical need for greater transparency in corporate formation in this country. Nearly three years ago the Department testified before the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs about the difficulties that U.S. shell companies often pose to law enforcement efforts—and the need for improved access to beneficial ownership information of these companies. In this context, we use the term “shell company” to refer to a legal entity, established under the laws of a State, that has no independent operations or assets of its own. Unfortunately, since the Committee last examined this issue, the problem has not improved. So I am pleased that the Department has another opportunity to speak with you about this important issue and that the conversation has now moved from framing the problem to developing possible legislative solutions. The term shell company often evokes images of exotic offshore financial centers and money laundering havens. Unfortunately, some of the worst offenders are not “exotic” locales at all, but rather some of our own States. In 2006, we spoke of an unscientific internet search that we conducted using the words “shell corporation”. This most basic search brought up dozens of websites touting the anonymity, speed, and ease of using their services to incorporate companies in various U.S. states. Unfortunately, the news is no better in 2009. A similar search continues to produce sites offering U.S. companies for sale, making advertising claims such as “When you set up with one of these shell corporations, your name is not listed on public records as the “incorporator” and First Director, which can be very key when it comes to privacy.”; and “Why wait months or years to establish business credit when you can own a turnkey Nevada shelf corporation with over 150k of bank credit”. Far from attempting to disguise the anonymity that comes with shell companies or the fact that “aged” shell companies lend credibility and credit where it would otherwise not exist—on most sites these are the primary selling points. In an era of rampant mortgage and internet fraud, few things are more appealing to those seeking to evade the law than a company that comes with over $150,000 of available credit, a public veneer of credibility, and complete anonymity. 1 We must find a solution that will meet core law enforcement needs by providing transparency to corporate ownership while not placing undue burdens in these turbulent economic times on the States or the vast majority of legitimate businesses who are rightly attracted to establishing a legal presence in one or more of our States. Four critical issues must be addressed in any legislative solution: (1) the need to identify the beneficial owner of a legal entity at the point of formation; (2) the need for law enforcement to obtain accurate and timely information about the owners of existing U.S. legal entities; (3) the appropriate means of addressing the challenge of the transfer of corporate ownership—especially from corporate formation agents to corporate brokers; and (4) the penalties necessary to discourage the misuse of U.S. companies -- all without burdening the States and private business with undue costs and regulation. Several important legislative solutions have been offered by members of this Committee and by the States, I will not address those proposals directly other than to say that the Department strongly supports all efforts to address the lack of transparency in U.S. legal entities, believes that federal legislation must be at least part of the solution, and believes that the current proposals contain many good ideas upon which to base our discussions. Background Shell companies can be loosely defined as legal entities that have no significant operations, have no significant “brick and mortar assets” and exist primarily on paper— with any U.S. presence typically consisting of a postal box or a mail drop at a company service provider office. One company formation website, in an unsuccessful effort to draw a distinction between its “shelf” corporations and shell companies, describes a shell as “an incorporated company that does not have any significant assets or operational structure, but merely serves as a clearing house for dissolving corporations, tax evasion, or for the handling of illicit funds.” This admission recognizes the reality of U.S. shell companies: Because of lax company formation laws criminals can form shell companies quickly and cheaply and obtain virtual anonymity. Even after the criminal activity is detected, so little information is currently collected during and after the formation process that the true ownership of the shell is just one more unanswered question in the overall financial investigation. This is the challenge that we face here today: how to arrive at a solution that will provide transparency to law enforcement and deprive the criminal of 2 this valuable tool while not imposing undue burdens on the States and on small businesses that rely on legal entities to operate. In our testimony three years ago, we discussed some of the difficulties domestic shell companies pose to criminal investigations. While corporations certainly have an important and legitimate commercial role to play in both the national and global economy, they may also be used for illicit purposes, including money laundering, bribery and corruption, fraud, tax evasion, immigration and visa fraud, and other forms of illegal activity. Increasingly, illicit money networks, or professional money launderers, if you will, use shell companies as a necessary tool of their trade in schemes to launder money for drug trafficking and other international criminal organizations, and to finance terrorism. Shell companies are specifically used for this purpose because they are very easily formed, can provide an essentially anonymous legal entity with which to open domestic and foreign bank accounts and, in the case of U.S. shells, carry an air of legitimacy. Criminals trade on this air of legitimacy and the good names of our States by sending illicit money through shell company bank accounts fraudulently disguised as legitimate economic trade. The criminal source, destination, and true ownership of the money is protected from law enforcement scrutiny by State laws which do not require the beneficial owners of companies to adequately identify themselves. Shell companies, or facially legitimate companies, have been used in visa fraud schemes to facilitate the issuance of business visas (B-1, L and H visa categories) to those who wish to migrate to the U.S. illegally. They have also been used to facilitate the issuance of visas and entry into the U.S. of members of organized crime groups. Companies are easily formed. To do so, a company principal or someone acting on the company’s behalf submits formation documents to the appropriate State office. Documents may be submitted in person, by mail, or online, and “the process can take anywhere from 5 minutes to 60 days.” Company Formations: Minimal Ownership Information is Collected and Available (GAO-06-376) (GAO Report). In addition, a “minimal amount of basic information generally is required to form a company.” (GAO Report, p.7) Typically, the documents must give the company’s name, an address where official notices can be sent to the company, share information for the company, and the 3 names and signatures of the persons handling the incorporation process. Few states require ownership information when a company is formed, nor do they require any updates. (GAO Report, p.13) Even the initial required information regarding shareholders is not always accurate or up to date. (GAO Report, p.43) States generally do not verify the identities of incorporators or company officials. (GAO Report, p.21) In sum, someone either within or outside of the United States, without any verification of identification, can form a corporation within as little as five minutes. The corporation is then a legal entity that can engage in business and open a bank account. Because shell companies effectively conceal the identities of the persons using the companies for illegal activity, the use of shell companies to facilitate criminal schemes continues to grow more sophisticated. Criminals want to use U.S. shell companies because those entities do not receive the same level of scrutiny as those established in foreign jurisdictions that share comparatively weak corporate regulation – jurisdictions that are often labeled “offshore havens.” Additionally, the U.S. companies have an air of legitimacy in the foreign countries where criminals may want to obtain bank accounts. Criminals are increasingly opening bank accounts for their shell companies in offshore jurisdictions where customer identification requirements may be less rigorous than in the United States. These companies then gain access to the U.S. financial system through correspondent banking relationships with U.S. financial institutions. The following scenario illustrates how this structure works. First, a corporate formation agent forms thousands of companies in a State that does not require the agent to collect or verify ownership information. The agent then markets these “shelf companies” around the world. A professional money launderer buys several and uses them to open bank accounts in a foreign country. The foreign bank has a correspondent account at a bank in New York. The criminals then make wire transfers using those accounts, which appear to be legitimate trade transactions from a U.S.
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