April 27, 2016

Following Panama Papers Release, Whitehouse Urges Action on the Incorporation Transparency and Law Enforcement Assistance Act

Senator’s Bill Would Help Reveal True Owners of Shell Corporations Used to Launder Money, Finance Fraud, and Fund Terrorism

Washington, DC – With the Panama Papers showing the United States to be an increasingly attractive place to form shell corporations, Senator Sheldon Whitehouse delivered remarks on the Senate floor today calling on his colleagues to support and pass the Incorporation Transparency and Law Enforcement Assistance Act—Whitehouse’s legislation to track the true owners of American shell corporations, which can be used for money laundering, financial fraud, and terrorist financing.

A transcript of the Senator’s as-prepared remarks is below.

I rise today to highlight legislation that would help law enforcement crack down on human trafficking, terrorism financing, money laundering, Medicare fraud, the narcotics trade, tax evasion, public corruption, and a litany of other crimes in the United States and around the world.  You see, these crimes all involve money, and the United States has become a favorite destination for those looking to hide it.

Earlier this month, the International Consortium of Investigative Journalists published the first of the so-called “Panama Papers”—a leak of 11.5 million confidential documents from a Panama-based law firm that sets up shell corporations and tax shelters for wealthy clients.  The documents we’ve seen so far show that along with the Caribbean islands you might expect several American states are popular places to form shell corporations.

[Picture of Ugland House]  

Senator Kent Conrad was fond of using this floor chart showing the Ugland House building in the Cayman Islands, legal home to an astounding 18,000 companies.  As unimaginable as it is to have over 18,000 companies under one roof, I’m sorry to say that there’s a building just a two hour drive from the Capitol that serves as the official address for a quarter of a million companies, many of them shell corporations.      

Shell corporations are companies that serve no economic purpose and don’t conduct any real business.  Rather, they exist primarily to hold legal title to bank accounts, real estate, or other assets, often obscuring the true human owners.  While people can form shell corporations in just about any country, many American states make it especially easy to do so, perhaps even easier than getting a library card.  You might need to go down to the library to sign up for a library card, but you can form a shell corporation with a few clicks of the mouse and payment of a small fee.

There’s another reason the United States has become so popular for shell corporations.  Currently, none of the fifty states requires the disclosure of the “beneficial owners,” the real human beings who own the companies.  Instead, corporate records can identify the “owner” as another faceless corporation or a professional agent paid to sign the needed forms and never speak of them again.  Behind this easy-to-establish veil of secrecy, criminals can—and do—use these corporations to open bank accounts, transfer funds, and even to hide the ownership of expensive assets.

[Picture of 650 Fifth Avenue]

And it’s not only Americans who form shell companies here.  In New York City, the Iranian government used a string of generic businesses to obscure its ownership of this Fifth Avenue skyscraper.  Profits from this enterprise helped fund Iran-backed terrorism for decades, until a United State government investigation finally uncovered the scheme in 2008.

[Iran Shell Company Chart]  

How could a state sponsor of terrorism own a piece of the New York City skyline for so long without anyone knowing?  Let’s look at how Iran used anonymous shell corporations to hide its involvement.  650 Fifth Avenue was owned on paper by a partnership of the Alavi Foundation, a New York-based charity, and the Assa Corporation, a New York shell company.  Assa Corporation was in turn owed by yet another shell company formed in the Isle of Jersey, a banking center and tax shelter.  The Jersey company, in turn, was owned by individuals representing Bank Melli, the Iranian government’s financial arm.

So to the public, this building, worth about half a billion dollars, was owned by a charity and a faceless shell company.  Because there’s no requirement in the United States that states keep track of the real owners of companies formed under state law, New York State only knew that the Assa Corporation was owned by another shell company.  Ultimately, investigators were able to connect Iran to this structure from a clue in the corporate records kept on the Isle of Jersey.  How’s that for irony?  A notorious tax shelter had better ownership records than we have in the United States.

Once Iran’s involvement was uncovered, the Department of Justice moved to seize and sell the building and to distribute the proceeds to American victims of terror.  After years of legal appeals, the victims look to be getting close to receiving this compensation. 

Of course, Iran isn’t the only criminal enterprise hiding behind American shell companies.  Other recently uncovered examples include a Mexican drug cartel using an Oklahoma corporation to launder money through a horse farm; a crime syndicate setting up a web of corporations in eight states as part of a $100 million Medicare fraud scheme; and human traffickers based in Moldova hiding their crimes behind anonymous corporations in Kansas, Missouri, and Ohio.

According to the Rhode Island State Police, corporate secrecy in my own state has complicated investigations involving real estate fraud, illegal prescription drug distribution, and sales tax evasion.

In January, months before the Panama Papers hit the headlines, 60 Minutes aired a segment showing just how easy it can be for criminals to hide money in the United States.  The program featured an investigator with the anti-corruption organization Global Witness who pretended to represent a corrupt African leader.  60 Minutes brought a hidden camera into his meetings with lawyers in New York. 

The investigator made clear that his client wanted help using suspicious funds to buy a mansion, jet, and yacht in the United States and to hide his ownership of these items.  Of the sixteen lawyers who met with him, only one turned him away.  It seems the others were comfortable helping corrupt foreign official to hide money in opaque American corporations.  

While the underlying criminal schemes may be colorful and complex, the answer to this problem is simple and straightforward.  The Incorporation Transparency and Law Enforcement Assistance Act would direct states to require applicants forming corporations and limited liability companies to include basic information about the actual human beings who own the companies.  The states would maintain and periodically update this information and make it available to law enforcement officers who present court-ordered subpoenas or search warrants.  It’s simple: have each state keep track of who actually owns the companies chartered there and ensure the information is available for federal, state, and local law enforcement agencies. 

[List of countries committed to tracking beneficial ownership] 

Transparency in business ownership is not a new idea.  Every member of the European Union will be transparent by 2017.  The United Kingdom and the Netherlands have even announced plans to make their corporate ownership registries available to the public.  With the light of transparency about to shine on criminal assets hidden in Europe, America should take swift action to make sure that these assets don’t find a new hidden home in opaque American shell corporations.      

The Incorporation Transparency and Law Enforcement Assistance Act enjoys broad support from the national law enforcement community, including the Federal Law Enforcement Officers Association, the Fraternal Order of Police, the Society of Former Special Agents of the FBI, and the United States Marshalls Service Association, as well as the Rhode Island State Police. 

Chuck Canterbury, President of the National Fraternal Order of Police, explains, “When we are able to expose the link between shell companies and drug trafficking, corruption, organized crime and terrorist finance, the law enforcement community is better able to keep America safe from these illegal activities and keep the proceeds of these crimes out of the U.S. financial system.”

Of all places, the United States shouldn’t be a safe haven for criminals—foreign or domestic—to hide their illegal assets.  We could take a major step in fighting money laundering, financial fraud, and terrorist financing by passing this bill.  I urge my colleagues on both sides of the aisle to cosponsor this bill and to help pass it.  I thank the chair and I yield the floor. 

[Note: Images of charts referenced are available upon request.]


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