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( FTI ROUNDTABLE )

April 2013

Allen Applbaum Allen D. ApplbaumSenior Managing DirectorForensic & Litigation ConsultingGlobal Leader, Global Risk & Investigations Practice

Sharon Cohen Levin Assistant U.S. AttorneyChief of the Asset Forfeiture Unit,U.S. Attorney’s Office, SouthernDistrict of New York

Kevin Shepherd Partner Venable LLPChairman, American Bar Association Task Force on Gatekeeper Regulationand the Profession

Maria Patterson Partner, Patterson & Aschheim LLPFormer in-house counsel, Bank of New York

Tom Fedorek Managing DirectorForensic & Litigation ConsultingGlobal Risk & Investigations PracticeFTI Consulting

Who really owns that business? The pros and cons of concealed

company ownership.

C O R P O R A T E A N O N Y M I T Y

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Before the 2012 U.S. presidential election, comedian Stephen Colbert sent an attorney to Delaware to incorporate his new company, which

he called the Anonymous Shell Corporation. Colbert was making a point: to show that super PACs (political action committees) and

special interests can hide behind the façade of a legitimate-sounding organization that can be set up easily.

A N O V E R V I E W . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A N O N Y M I T Y: I T ’ S P R O B L E M S A N D B E N E F I T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

T H E D I L E M M A O F B E N E F I C I A L O W N E R S H I P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

N E W C H A L L E N G E S F O R A T T O R N E Y S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I S R E F O R M R E A L LY N E E D E D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

L E V I N V S . F I N C E N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A B O U T T H E PA N E L I S T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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While everybody soon knew that Colbert was behind Anonymous Shell, the ownership of many companies is a mystery. The laws of all 50 U.S. states and numerous foreign countries make it easy to set up a business with untraceable ownership. But law enforcement and regulatory agencies are increasingly expressing concern that criminals are using shell companies to finance terrorism, launder money, evade

taxes and commit other crimes. Thus, governmental organizations are calling for changes that make it easier to trace a business’ human owners.

Two initiatives in the United States aim to make it easier for officials and the public to see who actually owns a company. But would that be good for business and for society?

To get different perspectives on the pros and cons of corporate anonymity — and the benefits and pitfalls of the proposed changes — FTI Consulting assembled a panel of experts on the topic. Excerpts from the discussion follow. All the panelists noted that the opinions expressed are their own and do not necessarily reflect those of their respective organizations.

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ALLEN APPLBAUM: In just about any one of the 50 states, it is possible, for a modest fee, to form a company that lets its owners transact business anonymously. Few state agencies that grant corporate charters require that the corporation disclose its shareholders’ names, and only a handful mandate that the names of members of limited liability corporations (LLC) be disclosed. Thus, one does not need to go to a so-called secrecy jurisdiction like the Cayman Islands to form a company whose ownership is concealed.Two ongoing initiatives aim to make the invisibility cloak more transparent. The first is legislation called the Incorporation Transparency and Law Enforcement Assistance Act. It has been introduced in the past three sessions of Congress by Sen. Carl Levin

of Michigan, who has complained that “it takes more information to get a driver’s license or open a bank account than to form a U.S. corporation.” The Levin bill requires state agencies and company formation agents to obtain

the names of the beneficial owners — the flesh-and-blood titleholders — of any company formed under state law. The second initiative, proposed by the U.S. Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, essentially gives banks, brokers, broker-dealers and mutual funds this responsibility when a newly established company opens an account.

To be sure, there are many legitimate reasons why someone might want to form a company without disclosing its ownership. But we’ve seen numerous cases where anonymity benefits terrorists and crooks who hide behind a business. What do you think of anonymous ownership and of the two proposed laws?

A N O V E R V I E W

SHARON COHEN LEVIN: Shell companies with untraceable ownership play a big role in many of the money laundering, terrorism and fraud cases that my office handles. These companies can be used to move or to mask illicit proceeds. And once a shell company is formed, it essentially becomes an entryway into the U.S. financial system. Such an entity can be used to open a bank account and can move money throughout the world. The United States Attorney’s Office prosecuted a Russian arms dealer, Viktor Bout, who was convicted of terrorism charges. He used at least 12 separate shell companies to engage in his criminal activity: Selling weapons to terrorists Scott Rothstein, an attorney who

engaged in a $1.2 billion fraud in Florida, used at least 85 different U.S.-formed LLCs to launder the proceeds of his fraud. Shell companies can impede law

enforcement’s ability to investigate these cases. Unless law enforcement obtains the records, it’s impossible to know who the owner is. So, often, cases are stopped or delayed while law enforcement tries to obtain that information.

Corporate anonymity also affects the Government’s ability to deal with foreign law enforcement. Normally, the United States is at the forefront of anti-fraud legislation and enforcement. But in my talks around the world about asset forfeiture and money laundering laws, I find this is one area where we lag behind. Every country in the European Union has laws that address beneficial ownership of corporations.

A N O N Y M I T Y: I T S P R O B L E M SA N D B E N E F I T S

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KEVIN SHEPHERD:It’s true that some businesses have legitimate reasons for anonymity. A classic case is when Disney wanted to develop a theme park outside Washington, D.C., a few years ago. The company had to acquire a lot of land to do that. If landowners had known that Disney was the purchaser, it would have inflated the price. And so there were appropriate reasons to keep Disney anonymous in that particular situation.

Another example: If you compel beneficial ownership information from trusts, wealthy individuals may have to reveal the trust’s beneficiaries, putting them at risk of kidnapping or other crimes. So we must be aware that there are sound reasons why corporate anonymity is desirable for business reasons and for non-business reasons as well.

MARIA PATTERSON:I question whether anonymity has any real value. Kevin makes a good point about Disney, but you can look at that situation another way: The sellers of those land parcels might have a different

view about whether the identity of the potential buyer should have been public or not. This information asymmetry benefited one party — Disney — over the other — the sellers.

TOM FEDOREK:While our main focus today is the United States, I’d point out that corporate anonymity is an international issue. There are numerous offshore locations, the so-called secrecy jurisdictions, where providing corporate anonymity is a mainstay of the local economy. Increasingly, one sees places like Delaware turning up on lists of secrecy jurisdictions. I’ve even heard Delaware referred to as an “onshore offshore.”

Corporate anonymity facilitates a phenomenon in the world economy known as capital flight, which essentially is removing wealth from one nation and transferring that wealth to another. The countries that lose the most capital tend to be the less developed ones that have an undiversified economy based on agriculture, an extractive industry or the exploitation of natural resources.

The destinations of capital flight tend to be the big financial centers like London and Switzerland; Hong Kong; Singapore; Dubai; and the United States, especially Miami and, of course, New York. Some people would say this is just the Highest and Best Use Principle at work. But there are advocates for the less developed countries who argue that the easy availability of corporate anonymity makes the United States complicit in capital flight from the poor nations to the rich.

ALLEN APPLBAUM: The Levin bill would require that states check drivers’ licenses and passports to verify owners’ identities and make states responsible for keeping the information current and for prosecuting violators. FinCEN would require financial institutions to obtain the names of the beneficial owners of corporate accounts and to verify the owners’ identities. What kinds of problems do you foresee with either proposal? What do you think of anonymous ownership and of the two proposed laws?

KEVIN SHEPHERD:The American Bar Association (ABA) has concerns with the Levin bill because

its beneficial ownership requirements are unworkable. The bill would leave it to the regulatory agencies to come up with a definition of beneficial ownership that, it is hoped, would satisfy everyone — Treasury, Justice and Homeland Security. To date, these agencies have not been able to agree upon an acceptable definition of beneficial ownership. There’s another problem with the Levin bill. Imagine I have a pension fund that owns an office tower in San Francisco. A German investment fund invests in it. That German fund has investors. Those investors have investors. Where do you stop looking for all the owners? Do you keep following the trail until you get to a warm body? Will it be

worth the inordinate amount of time and resources to do so? A risk-based approach is far more practical. What’s the risk that an investment of this nature, given what you already know, would create some type of criminal exposure?

TOM FEDOREK:I see some practical difficulties with the Levin bill. One is that it applies only to the types of entities that obtain state charters, mainly corporations and limited liability companies, but not to other kinds of entities that may be used for illicit purposes such as the various forms of trusts. The proposed FinCEN regulations are more comprehensive in that they apply to any and all entities

T H E D I L E M M A O F B E N E F I C I A LO W N E R S H I P

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that open bank and brokerage accounts. A second difficulty with the Levin bill is that it leaves up to each state the question of whether the beneficial owner information should be disclosed on the public record. A state that chooses not to disclose this information would have to engage in the costly business of keeping two sets of records for each company domiciled in the state: one public, the other private.

MARIA PATTERSON:Coming from a banking background, I have a philosophical problem with FinCEN deputizing financial institutions to identify the beneficial owners and to verify them in riskier situations. Financial institutions might struggle with the definition of beneficial owner — is it somebody who has more than a 25 percent stake or someone who has actual control? All this could create a “checklist mentality” and prevent a bank from looking at what’s really going onand getting the bigger picture.

That is a burden on the people who would be helping new shell corporations open bank accounts. We tend to think of banks as large money centers such as the headquarters of JPMorgan Chase. But if I am a narcotics or arms trafficker, I probably wouldn’t go to such a place to open a million-dollar account for my shell company. I’d open one account at a branch of some bank in New Jersey; an account, say, in Queens; and a third account in another state. With FinCEN, these relatively low-level, unsophisticated bank employees would have the immense burden of figuring out what’s going on.

SHARON COHEN LEVIN: It’s true that the definition of beneficial ownership still has to be worked out. But the Department of Treasury, the Department of Justice and the Department of Homeland Security are behind this cause, and I’m confident they will come up with a workable definition.

KEVIN SHEPHERD:One aspect of the Levin bill that concerns the ABA is that it would create an additional type of financial role under the Bank Secrecy Act known as a formation agent. A formation agent is someone who actually forms entities, which sounds innocuous enough. But, generally, lawyers are the ones who form entities today. If the new

law makes attorneys subject to the anti-money laundering requirements under the Bank Secrecy Act, this could impose suspicious activity-reporting requirements on the legal profession. We don’t want to go there. We cannot be in a position to give governmental authorities information or to tell them we suspect our client is engaging in some illegal activity. On top of that, we cannot be prohibited from informing our client what we’ve told the federal regulators — the no tipping off rule.

SHARON COHEN LEVIN:I can understand attorneys’ concerns. But this proposal isn’t really addressed to the average lawyer who’s incorporating a company on behalf of a client. Go on the Internet and search “shell corporation.” You will see dozens of websites that will easily let you incorporate, for a fee, and ask for practically no information. This is a big business, and I think the lawyers are the ones who stand to lose the most.

T H E N E W C H A L L E N G E S F O RA T T O R N E Y S

I S R E F O R M R E A L LYN E E D E D ?

KEVIN SHEPHERDIt’s important to recognize that millions of LLCs and corporations are formed every year in the United States. We should not be creating a federal framework that would criminalize innocent behavior — for example, if you failed to file a specific form or update beneficial ownership information. It would trap a lot of people who have no

criminal intent whatsoever, and states would bear the heavy cost of enforcing the new law.

Who’s going to pay for the expense of implementing the software and hardware changes in all 50 states, plus D.C., in order to collect this information? Which beneficial ownership information would be publicly available; which

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would be non-public? Would states be able to handle the recordkeeping? Where would they get the money? We need to be mindful of the costs that that requirement would impose on society.There are other ways to get this information that would be less intrusive and more workable. Around late 2006, the Uniform Law Commission proposed a plan to address law enforcement’s concerns. It included a provision whereby each company would identify

a specific warm body — a breathing person — who could provide beneficial ownership and other information to law enforcement agencies. This would eliminate the need to file with the state and would decrease the risks of disclosing beneficial ownership information to the world at large.

The ABA worked closely with legal professionals around the world to develop a risk-based approach to

identifying money laundering. Different factors that make the risks higher were pinpointed; anonymity was one. There are finite resources in both government and the private sector, and we should deploy these resources to address areas where the risk is high. It makes no sense to do so where the risk is low.

TOM FEDOREK:I think the FinCEN rules are more likely to make a difference simply because they are aimed at financial institutions rather than at the states that register companies, like the Levin bill proposes. I think FinCEN gets to the heart of the matter. If a shell company is going to launder money, if it’s going to finance terrorism, if it’s going to perpetrate a fraud or if it’s going to shelter taxable income from the Internal Revenue Service, the shell company really can’t do any damage until it has a bank account or an account with some other financial institution. So it seems to me that the logical time to put a company under scrutiny is not when it’s formed but, rather, when it applies to open an account.

I see political problems with the Levin bill. There’s been some resentment expressed by the National Association of Secretaries of State over federal intervention in what historically has been a function of state government. And there’s some ambiguity about who in the federal government actually would be responsible for getting all 50 states to gather company formation data in a uniform manner. It sounds like herding cats to me.

MARIA PATTERSON:We have allowed people to form businesses, corporations and other structures very easily and have given them limited liability — a really big advantage. And it’s not too much to ask people receiving those advantages to reveal who they are to the appropriate authorities.

I think if there is going to be reform, the Levin bill is a much better solution than imposing additional requirements on the financial industry. I would note that under the Levin bill, the individual states apparently would have the ability to keep the information private unless a subpoena or other process is served. If we’re going to require that this

information be collected — because it’s important to enforcing the law and to combating terrorism and narcotics trafficking — then it seems to me that the best time to collect the information is when the company is being formed. It’s open and aboveboard.

SHARON COHEN LEVIN:No piece of legislation is going to be perfect. But I think it’s time to pass one or the other of these two bills. The only requirement would be to answer one simple question — who is the beneficial owner of the company, the LLC or another entity?

Answering that question will save the states the cost of investigating and prosecuting abuses. This additional requirement need not be burdensome on the state or the banks. The Levin bill provides for $30 million from the Asset Forfeiture Program fund to help implement the new system. Beyond that, the person who is seeking to incorporate should bear any increased burden through fees.

The FinCEN regulations would not require that banks do much more than they already do now. Because of the Bank Secrecy Act obligations and the anti-money laundering programs currently in force, banks are required to

L E V I N V S . F i nC E N

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know who their customers are. Banks must file suspicious activity reports with the Department of Treasury if something doesn’t look right. You would be amazed at how well even small regional banks can identify the owner of a company. By clarifying that this now is a requirement

for all new business accounts, I think FinCEN could make it easier for financial institutions than the Levin bill would.

By reducing the time it takes to identify a company’s real owners, either proposal will make it much easier for

law enforcement to track down criminal activity and would save a tremendous amount of cost as well.

A B O U T T H E PA N E L I S T S

Moderator Allen Applbaum is a Senior Managing Director and Global Leader, Global Risk & Investigations practice, in the Forensic and Litigation Consulting practice at FTI Consulting. His career has included many high-profile investigations and business intelligence assignments. His specialties encompass investigating internal practices and fraud, due diligence, Foreign Corrupt Practices Act investigations, compliance and monitoring, anti-money laundering and other areas.

Kevin Shepherd is a Partner in the Real Estate Practice Group of the Washington, D.C.-based law firm of Venable LLP and is Chairman of the American Bar Association’s Task Force on Gatekeeper Regulation and the Profession. He is a past Chair of the ABA Section of Real Property, Trust and Estate Law and past President of the American College of Real Estate Lawyers, the country’s most prestigious honorary organization for practicing real estate lawyers.

Sharon Cohen Levin, an Assistant U.S. Attorney in New York and Head of the Asset Forfeiture Unit, has helped prosecute narcotics trafficking, art theft and Ponzi scheme cases. In the past six years, her office has collected more than $2.5 billion in proceeds of corporate and securities fraud, economic crime, cybercrime, healthcare fraud, international narcotics trafficking, terrorism, money laundering and public corruption. 

Maria Patterson is Partner in the law firm of Patterson & Aschheim, LLP and is Special Counsel to Reavis Parent Lehrer LLP. She teaches courses in law and business ethics at New York University’s Stern School of Business. Her more than 25 years in the legal profession include over 15 years at The Bank of New York, where she counseled and represented the restructuring divisions and other groups and coordinated the response to a major money laundering investigation.

“The views expressed in this article are those of the authors and not necessarily those of FTI Consulting, Inc., the American Bar Association, Patterson & Aschheim, LLP, the U.S. Attorney’s Office Of

New York, Venable LLP, or their other professionals.”

©2013 FTI Consulting, Inc. All rights reserved.

Tom Fedorek is a Managing Director with the Global Risk & Investigations practice in the Forensic and Litigation Consulting practice at FTI Consulting and has investigated shell companies for more than three decades. His experience includes more than 1,000 investigations at law firms, corporations and financial institutions. He and his team have played an integral role in high-profile projects with which FTI Consulting has been involved, including the investigations of the Bernard Madoff fraud and Stanford International Bank.