February 6, 2018 | Senate Judiciary Committee

Beneficial Ownership: Fighting Illicit International Financial Networks Through Transparency

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Chairman Grassley, Ranking Member Feinstein, and other distinguished members of the Senate Committee on the Judiciary, I am honored by your invitation to testify before you today.

I am particularly grateful for the opportunity to testify in support of company formation reform, and to urge this Committee and this Congress to end the routine practice of creating anonymous legal entities under laws in the United States.

For far too long, these and other such anonymous entities created abroad have masked and enabled terrorist organizations, human traffickers, drug smugglers, and proliferators of weapons of mass destruction to access and exploit the international financial system. The range of abuse does not end here. Money laundering, tax evasion, grand scale corruption, sanctions evasion, fraud, and organized crime at large are regularly perpetrated or enabled on a worldwide basis through the systematic creation and use of anonymous legal entities. Even as the United States continues to enhance and expand its financial tools and power to combat various national security threats, these efforts are increasingly undermined by such exploitation of anonymous legal entities.

The continual creation of such legal entities right here at home may represent the most dangerous systemic vulnerability that the United States presents today to the global counter-illicit financing mission.

Closing this vulnerability requires Congressional action to reform company formation processes in the United States. In accordance with global standards that our country has urged others to adopt, such reform efforts must generally require the collection, maintenance, and disclosure of accurate beneficial ownership information for certain legal entities created under laws in the United States. The True Incorporation Transparency for Law Enforcement Act (“TITLE Act”) provides a legal basis for doing so.

In considering the need for such action, it is important to recognize that we have been here before. For several years and through at least four consecutive administrations, various arms of the Executive Branch – including several law enforcement agencies and the Department of the Treasury – have called for meaningful action on this issue. For an even longer period, the Congress, beginning with the prior leadership of Senator Levin, has proposed legislation requiring the collection and disclosure of accurate beneficial ownership information on companies created under laws in the United States.

A generation of such previous company formation reform bills has died in various Congressional committees over the past several years due to a combination of factors. For some, the gravity of risk posed by anonymous legal entities may seem academic, episodic, or exaggerated. Others misconstrue what an anonymous legal entity is and what it is not, thereby distorting the scope, objective, costs, and benefits of company formation reform. For others still, the solution should lie elsewhere, whether in the form of greater due diligence requirements for financial institutions, stronger law enforcement authorities, or better cooperation from foreign jurisdictions. Finally, for many, effective solutions seem prohibitively costly or unworkable, or workable solutions appear ineffective. Policy disputes have prevented even those dedicated to company formation reform from forming a consensus around any meaningful action. For more than a decade, we have become paralyzed by such thinking.

Enacting effective and workable company formation reform is a complex challenge. But without it, we will continue to fight financial crime and the collective security threats we face with one hand tied behind our back. Without such reform, U.S. and other financial institutions around the world will be burdened with heightened risk and additional liability from anonymous companies continually created under laws in the United States. And without U.S. leadership, company formation reform in other countries will be absent, stillborn, or undercut.

My testimony today will focus on addressing the doubts that have prevented prior Congresses from adopting legislation to end the formation of anonymous legal entities in the United States:

  • First, I will explain the prohibitive risks presented by anonymous legal entities and clarify their relationship to other entities that pose substantial risk but which also serve legitimate interests.
  • Second, I will summarize and underscore the gravity of the threat that anonymous legal entities present to the integrity of the international financial system and to collective security.
  • Third, I will explain the need for company formation reform as a key outstanding element of a well-established, three-pronged strategy to address this risk.
  • Fourth, I will summarize key principles of company formation reform, assess the TITLE Act against such principles, and offer recommendations that this Committee may consider to further strengthen this proposed legislation.