February 6, 2018

Senate Judiciary Committee “Beneficial Ownership: Fighting Illicit International Financial Networks Through Transparency”

Key Topics & Takeaways

  • S.1454, the True Incorporation Transparency for Law Enforcement Act (“TITLE” Act): This hearing covered a bipartisan bill that was introduced in the Senate last June by Senators Sheldon Whitehouse (D-R.I.), Chuck Grassley (R-Iowa) and Dianne Feinstein (D-Calif.). The bill would, among other things, require a large class of businesses to report on beneficial ownership to state-level regulators, and imposes civil and criminal penalties for misrepresentations in beneficial ownership disclosures. Proponents of the legislation argued the bill would help law enforcement investigations by requiring beneficial ownership reporting by a large class of businesses, and help stop money laundering. Opponents generally argued that the compliance costs for the bill outweighed the benefits, and argued that the bill raises numerous privacy concerns. Several witnesses also praised the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) for promulgating a new Customer Due Diligence (CDD) rule, which goes into effect in May 2018. Some witnesses argued this rule should form the basis for beneficial ownership legislation. 

First Panel

Second Panel

Opening Statements

Chairman Chuck Grassley (R-Iowa)

In his opening statement, Chairman Grassley discussed the flow of illicit money into the United States, whether from criminals, terrorist organizations, corrupt foreign governments and officials (“kleptocrats”), and other bad actors, and how critical financing is for these organizations. Grassley noted that property rights and a stable financial system attracts bad actors to the United States, and that the problem of money laundering has increased in years. Grassley noted that the Treasury estimates that approximately $300 billion in illegal proceeds is generated annually in the United States. Grassley also described the abuse of shell corporations in the United States and argued that a lack of transparency regarding corporate structure and beneficial ownership of corporations and assets creates investigative problems for law enforcement. Grassley specifically noted the use of shell corporations to purchase real estate as a form of money laundering.

Senator Sheldon Whitehouse (D-R.I.)

In his opening statement, Senator Whitehouse discussed the Panama and Paradise papers that shed light on the global misuse of shell corporations and corporate structures generally to facilitate the movement of funds outside legitimate financial channels. Whitehouse said the “solution is simple” and called for requiring private corporations to accurately report on a regular basis their beneficial ownership to law enforcement. Whitehouse said that incorporation transparency will close a critical “loophole” and “vulnerability” that drug traffickers, terrorist organizations, and other criminals use to move illicit money. Whitehouse also noted that recent changes to European Union (EU) and United Kingdom (UK) laws could lead to an increase in money laundering through the U.S.

First Panel

Kendall Day, U.S. Department of Justice

Kendall Day, who currently serves as the Acting Deputy Assistant Attorney General of the Department of Justice’s Criminal Division, used his testimony to discuss the misuse of corporate structures by criminals, terrorists, smugglers, kleptocrats, and cybercriminals, all of whom need to launder money. Day noted that U.S. financial markets are very healthy, which attracts both legitimate and criminal money. Day described the concealment of beneficial ownership of assets and businesses as a “major loophole” and a stumbling block to law enforcement investigations. Day said that in the absence of beneficial ownership information, law enforcement agents are required to take time-consuming steps to determine ownership of assets, including interviewing witnesses, coordinating with foreign law enforcement agencies, and taking evidence to grand juries. Day also noted that a lack of transparency in corporate ownership hurts the ability of financial institutions to determine which of their clients pose risks and undermines their anti-money laundering efforts.

Question and Answer

Grassley led off the Q&A by asking Day to provide specific examples of how a lack of transparency in beneficial ownership creates problems for law enforcement. Day discussed how criminals will purchase high-end real estate with cash, but law enforcement attempts to determine the actual owner of the property can hit many stumbling blocks, such as finding a business listed as the owner. Subsequent subpoenas are then needed to determine the owners of that business from state authorities, and subsequent subpoenas are then needed to parse that company’s owners. Day said that the process is time consuming and uses up law enforcement resources, including prosecutor resources.

Sen. Amy Klobuchar (D-Minn.) followed up later by asking if the Treasury Department should use its existing authority to require more transparency around those transactions, and Day agreed, noting that Treasury has focused more resources on this in recent months.

Grassley asked Day for his thoughts on FinCEN’s new Customer Due Diligence (CDD) rules, and whether the rules will help law enforcement. Day said the rule was a “step in the right direction” but will have limited benefits because it only applies to bank accounts.

Sen. Chris Coons (D-Del.) followed up on the CDD rule later by asking if legislation should adopt a beneficial ownership definition in line with FinCEN’s rule. Day noted that the effectiveness of the new rule (and its definition) will not be known until the rule goes in to effect in May.

Grassley closed by asking if requiring Secretaries of State to hold beneficial ownership information would assist law enforcement. Day said that easy access to information would allow law enforcement agencies to bring more, and more impactful, cases.

Whitehouse asked Day if beneficial ownership information should be public, or if access should be limited to law enforcement. Day declined to comment on publicizing info but stressed that it should be available to law enforcement.

Klobuchar later asked Day if beneficial ownership should be gathered at the state or federal level. Day punted, saying the DOJ is still assessing different approaches to storing data. Coons also asked if withholding federal funds would be an appropriate tool to compel state compliance with federal beneficial ownership requirements, and Day said he would have to discuss the issue more with DOJ.

Second Panel

Gary Kalman, FACT Coalition

In his testimony, Kalman discussed recent reports that identified ways that shell corporations and a lack of corporate structure transparency facilitate criminal activity. Kalman described the TITLE Act as a “necessary first step” to fixing the problems created by beneficial ownership anonymity, and noted reports that showed support in the business community for requiring this information to be disclosed to regulators.

Chip Poncy, Financial Integrity Network

Poncy argued that the TITLE Act provides a sound basis for important company formation reform. Poncy noted that several incorporation reform bills died in previous Congresses due to opposition groups “misrepresent[ing]” the reforms included in those bills, preventing sound beneficial ownership requirements from becoming law. Poncy also outlined a series of principles that the Financial Integrity Network believes should be included in any corporate transparency legislation (several of which are already included in the TITLE Act), including real-time access to law enforcement through a centralized database, and penalties for non-compliance.

Brian O’Shea, Senior Director, Center for Capital Markets Competitiveness, USCC

In his testimony, O’Shea said the U.S. Chamber of Commerce was committed to helping law enforcement catch criminals, but argued that any legislation touching corporate structure and beneficial ownership disclosure needs to balance privacy and the rights of law-abiding citizens with law enforcement objectives. O’Shea said it is critical that legislation be “properly targeted” to not deter lawful commerce, but that the TITLE Act fails to strike the appropriate balance and would impose “onerous and continuous” burdens on small business owners and threaten them with civil and potentially criminal penalties from compliance failures. O’Shea also criticized the retroactivity and scope of the TITLE Act in his testimony.

O’Shea described four problems with the TITLE Act, which were:

  1. The definition of “beneficial ownership” is vague, potentially expensive to navigate, and diverges from the definition included in FinCEN’s CDD rule;
  2. The “look-through” requirements of the TITLE Act imposes unnecessary costs on reporting businesses;
  3. The 60-day reporting window for changes in beneficial ownership starts from the date of a change, not awareness of a change, which would create liability problems for businesses; and
  4. By publicizing information held by Secretaries of State around the country, the private information of citizens would be thrust into the public domain, potentially helping bad actors.

Clay Fuller, American Enterprise Institute

In his testimony, Fuller discussed the use of shell corporations and anonymous corporate structures by criminal organizations, nation states, terrorist organizations, and drew attention to the impact on the real economy as well. Fuller described a registry of beneficial ownership as a “pragmatic” step but called on Congress to protect the private information of individuals in any legislation. Fuller said that restricting access to beneficial ownership information to law enforcement will preserve privacy while eliminating legal anonymity. Fuller also said that public information could be abused, including by dictatorships that would use public information to attack dissidents.

Question and Answer

TITLE Act

Much of the discussion after the second panel’s testimony concerned provisions of the TITLE Act. Grassley asked the panel for their thoughts on how the TITLE Act would help law enforcement. Kalman said that no state in the country collects the information that the bill would require them to collect, and argued that having this information accessible would help law enforcement. Kalman further argued that the bill would help small businesses instead of harming them.

Whitehouse also asked about possible burdens on businesses that the TITLE Act could create. Poncy argued that the information required by the TITLE Act is already needed by businesses to access financial markets. Poncy also noted that the banks spend hundreds of millions of dollars annually on anti-money laundering compliance, and said the TITLE Act’s reporting compliance would not harm small businesses.

Sen. Mike Lee (R-Utah) expressed skepticism that the bill would deter criminals, who he pointed could continue lying about beneficial ownership due to the bill not requiring state verification of reported information. O’Shea agreed that absent verification, legitimate businesses will pay for the costs of compliance while bad actors will continue avoiding compliance. Poncy countered by arguing that while bad actors would continue misrepresenting beneficial ownership, the bill would create legal penalties for those who lie on reported forms on behalf of criminals. Lee eventually closed out the hearing by saying that for this reason (and free speech concerns, see below) he could not support the bill in its current form.

Coons asked the panel if they believed that beneficial ownership legislation should use the definition of beneficial owner in FinCEN’s CDD rule. O’Shea agreed, and said that the TITLE Act as written could require an essentially “unlimited” number of individuals be listed in beneficial owner reporting. Coons also asked about the possible impact of the bill on venture capital, and O’Shea argued that the bill would impede the ability of venture capital firms to make critical investments and noted that several venture and angel capital trade associations have concerns with the bill.

Collection of Personal Information

Coons also asked the panel to describe the safeguards legislation should include to protect personal information, as well as for their thoughts on state-level data collection as compared to federal-level data collection. O’Shea noted that under a state-based approach, businesses will face 50 different reporting standards and inevitably, some of these will be weak.

In response to a subsequent question from Sen. John Kennedy (R-La.) O’Shea again noted that state’s will not verify reported beneficial ownership information. O’Shea also argued that the information the TITLE Act would require is already collected by the Internal Revenue Service.

Free Speech Concerns

There was also a discussion involving several Senators about the possible ramifications of the bill for free speech. Lee asked O’Shea if the bill would burden individuals who want to engage in anonymous speech, and O’Shea agreed that it would be. O’Shea also drew attention to the compliance costs the bill would impose on small businesses generally, particularly those with complex corporate structures.

Sen. Richard Blumenthal (D-Conn.) asked O’Shea to explain why someone would form an “anonymous corporation” for speech purposes. O’Shea noted that there is Supreme Court precedent allowing such activity, though Blumenthal rejoined that there are other ways to engage in anonymous speech. O’Shea closed by saying that businesses have legitimate concerns about privacy under the proposed TITLE Act.

For more information on this hearing, please click here.