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The U.S. Senate Committee on Homeland Security and Governmental Affairs on Thursday tackled the problems posed by shell companies, or companies with hidden ownership. The panel heard the problem of the companies causing losses of billions of dollars to government and consumers and threatening national security.
Senator Carl Levin says companies with hidden ownership pose a significant security risk to the United States. He says they frustrate law enforcement and take part in any number of illegal activities, including money laundering, drug trafficking and fraud.
The Michigan Democrat says the problem is that U.S. states allow individuals who control or benefit from corporations to remain anonymous. "The end result is that a U.S. company may be associated with an alleged arms trafficker, and supporter of terrorism but we are stymied in finding out, in part because our states allow corporations with hidden ownership," he said.
He says forming a company in the United States is easy, with most states allowing hidden owners to buy companies online within 24 hours of a request.
David Cohen, the Treasury Department's assistant secretary for terrorist financing, says the ability of criminal elements to form corporations in the U.S. without disclosing their true identity is a serious problem. "There is ample evidence that criminal organizations and others who threaten our national security exploit this vulnerability. Years of research and law enforcement investigations have conclusively demonstrated the link between the abuse of legal entities and WMD [weapons of mass destruction] proliferation, terrorist financing, sanctions evasion, tax evasion, corruption and money laundering for virtually all forms of criminal activity," he said.
Committee Chairman Joseph Lieberman, an Independent Democrat from Connecticut, says each year nearly two million corporations are established in the United States. "But each year, a small number of those businesses, but none the less significant, are incorporated for improper or illegal purposes to try to use registered corporations to defraud innocent people, to cheat tax authorities, to hide true transactions or to launder ill-gotten funds," he said.
Lieberman noted that legislation has been introduced to increase the transparency of business formation in an effort to reduce the estimated billions of dollars in fraud perpetrated by shell companies.
But Republican Senator John Ensign of Nevada told the panel he is against legislation that would change state law. "By forcing states to amend their individual laws on corporate formation, Congress is effectively imposing a federal standard on business creation, ignoring the peculiar particularities of each state's business culture," he said.
He says that with a federal standard, there is no incentive to pick one state over another when deciding where to form a business. He says he believes that would harm many states that are attractive to businesses, including his home state of Nevada.