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Report to the Permanent Subcommittee on Investigations, Committee on 
Homeland Security and Governmental Affairs, U.S. Senate:

April 2006:

Company Formations:

Minimal Ownership Information Is Collected and Available:

GAO-06-376:

GAO Highlights:

Highlights of GAO-06-376, a report to the Permanent Subcommittee on 
Investigations, Committee on Homeland Security and Governmental 
Affairs, U.S. Senate.

Why GAO Did This Study:

Companies form the basis of most commercial and entrepreneurial 
activities in market-based economies; however, “shell” companies, which 
have no operations, can be used for illicit purposes such as laundering 
money. Some states have been criticized for requiring minimal ownership 
information to form a U.S. company, raising concerns about the ease 
with which companies may be used for illicit purposes. In this report, 
GAO describes (1) the kinds of information each of the 50 states and 
the District of Columbia and third party agents collect on companies, 
(2) law enforcement concerns about the use of companies to hide illicit 
activity and how company information from states and agents helps or 
hinders investigations, and (3) implications of requiring states or 
agents to collect company ownership information.

What GAO Found:

Most states do not require ownership information at the time a company 
is formed, and while most states require corporations and limited 
liability companies (LLC) to file annual or biennial reports, few 
states require ownership information on these reports. With respect to 
the formation of LLCs, four states require some information on members, 
who are owners of the LLC. Some states require companies to list the 
names and addresses of directors, officers or managers on filings, but 
these persons may not own the company. Nearly all states screen company 
filings for statutorily required information, but none verify the 
identities of company officials. Third-party agents may submit 
formation documents to the state on a company’s behalf, usually 
collecting only billing and statutorily required information for 
formations. These agents generally do not collect any information on 
owners of the companies they represent, and instances where agents told 
us they verified some information were rare. 

Federal law enforcement officials are concerned that criminals are 
increasingly using U.S. shell companies to conceal their identity and 
illicit activities. Though the magnitude of the problem is difficult to 
measure, officials said U.S. shell companies are appearing in more 
investigations in the United States and other countries. Officials told 
us that the information states collect has been helpful in some cases 
because names on the documents, such as names of directors, generated 
additional leads. However, some officials said that the information was 
limited and that cases had been closed because the owners could not be 
identified. 

State officials and agents said that collecting company ownership 
information could be problematic. Some state officials and agents noted 
that collecting such information could increase the cost of company 
filings and the time needed to approve them. Some officials said that 
if they had additional requirements, companies would go to other states 
or jurisdictions. Finally, officials and agents expressed concerns 
about compromising individuals’ privacy because owner information 
disclosed on company filings would be part of the public record, which 
has not historically been the case for private companies. 

Figure: Information Collected on Ownership and Management at Formation:

[See PDF for Figure]

Source: GAO survey of state officials responsible for company formation.

[End of Figure]

What GAO Recommends:

While not making recommendations, GAO observes that if a requirement to 
collect company ownership information is considered, it would be useful 
for policymakers to consider (1) options that balance the conflicting 
concerns among states, agents, and law enforcement agencies; and (2) 
uniformly applying any such requirement to all states or agents.

To view the full product, including the scope and methodology, click on 
the link above. To view the results of GAO’s survey of state officials 
responsible for company formations, click: [Hyperlink, 
https://www.gao.gov/cgi-bin/getrpt?GAO-06-377SP]. For more information, 
contact Yvonne Jones at (202) 512-8678 or jonesy@gao.gov.

Contents:

Letter:

Results in Brief:

Background:

Most States Collect Limited Information on Company Ownership and 
Management:

Agents Facilitate Company Formation but Are Not Required to Collect 
Ownership Information or Verify Information on Clients:

Law Enforcement Officials Can Obtain Some Company Information from 
States and Agents, but a Lack of Ownership Information Obstructs Some 
Investigations:

More Company Ownership Information Could Be Useful to Law Enforcement, 
but Concerns Exist about Collecting It:

Observations:

Agency Comments and Our Evaluation:

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Company Formation and Reporting Documents Can Be Submitted 
in a Variety of Ways:

Appendix III: Information on Company Formation Documents:

Appendix IV: GAO Contact and Staff Acknowledgments:

Glossary:

Tables:

Table 1: Basic Types of U.S. Businesses:

Table 2: Steps States Take to Review Articles of Incorporation/ 
Organization and Periodic Reports:

Table 3: State Company Formation Fees as of November 2005:

Figures:

Figure 1: How Companies Are Typically Formed:

Figure 2: Domestic Corporations and LLCs Formed in States in 2004:

Figure 3: Number of Domestic Corporations and LLCs Formed in the Top 
Five States in 2004:

Figure 4: Ownership Information Required in Articles and Periodic 
Reports:

Figure 5: Management Information Required in Articles and Periodic 
Reports:

Figure 6: Implications of All of the States Collecting Information on 
Company Ownership:

Figure 7: States That Provide a Web Site for Filing Formation or 
Periodic Report Filings:

Figure 8: Key Information Required on Articles of Incorporation/ 
Organization:

Figure 9: Sample Articles of Incorporation Form for a Corporation:

Figure 10: Sample Articles of Organization Form for an LLC:

Abbreviations: 

CIP: Customer Identification Program:

DEA: Drug Enforcement Agency:

DHS: Department of Homeland Security:

EIN: employer identification number:

EOUSA: Executive Office of the U.S. Attorneys:

EPA: Environmental Protection Agency:

FATF: Financial Action Task Force on Money Laundering:

FBI: Federal Bureau of Investigation:

FinCEN: Financial Crimes Enforcement Network:

IACA: International Association for Commercial Administrators:

ICE: Immigration and Customs Enforcement:

ID: identification:

IRS: Internal Revenue Service:

IRS/CI: Internal Revenue Service, Criminal Investigations:

LLC: limited liability company:

LLLP: limited liability limited partnership:

LLP: limited liability partnership:

NAICS: North American Industry Classification System:

NCCUSL: National Conference of Commissioners on Uniform State Laws:

OECD: Organization for Economic Cooperation and Development:

OFAC: Office of Foreign Assets Control:

SAR: suspicious activity report:

SDN: Specially Designated Nationals:

SEC: Security and Exchange Commission:

SSA: Social Security Administration:

TIN: taxpayer identification number:

United States Government Accountability Office: 

Washington, DC 20548

Letter April 7, 2006:

The Honorable Norm Coleman: 
Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate:

Companies--business entities that conduct a variety of commercial 
activities and hold a variety of assets--form the basis of most 
commercial and entrepreneurial activities in market-based economies. 
Companies in the United States play an essential and legitimate role in 
the country's economic system. They provide a wide variety of services 
that range from the provision of necessary utilities and investment 
services to retail sales of items such as clothing and furniture. 
Companies can also be set up that act as "shell" companies and conduct 
either no business or minimal business. Shell companies are used for 
legitimate purposes; for example, they may be formed to obtain 
financing prior to starting operations. However, government and 
international reports indicate that shell companies have become popular 
tools for facilitating criminal activity in the United States and 
internationally and can be involved in fraud and corruption or used for 
illicit purposes such as laundering money, financing terrorism, hiding 
and shielding assets from creditors, and engaging in questionable tax 
practices.[Footnote 1],[Footnote 2] Such schemes can conceal money 
movements that range from a few thousand to many millions of dollars.

Using U.S. shell companies for such activities can be appealing because 
of the perceived legitimacy of U.S. companies in international commerce 
and the potential for concealing the identity of the beneficial owners 
behind the legal entity. The beneficial owners are the persons who 
ultimately own and control a company.[Footnote 3] For example, a 
shareholder of a corporation could be a beneficial owner. State 
statutes have traditionally provided for the privacy of the identities 
of company owners and limited liability, which protects them against 
lawsuits and protects their personal assets. However, shell companies 
can provide beneficial owners with the means to conduct illegal 
activities while hiding the owners' identity and involvement. Also, 
company formation agents who help individuals form companies may 
facilitate the formation of these shell companies, further shielding 
the identity of the individuals controlling the company. Law 
enforcement agencies investigating cases in which such companies may 
have been used for illicit purposes often need to know who the owners 
are in order to determine responsibility for criminal actions.

In a previous investigation of foreign individuals laundering money 
through U.S. corporations formed in Delaware, we found that the state 
required very limited information when a company is formed.[Footnote 4] 
The potential paucity of the information required when forming a 
company in the United States has raised concerns about the ease with 
which companies may be used for illicit purposes, particularly since 
the September 11, 2001, terrorist attacks. Given these concerns, you 
asked us to determine what types of information are routinely obtained 
and made available regarding the ownership of nonpublicly traded 
companies formed in each state.[Footnote 5] Specifically, this report 
will describe:

1. the kinds of information--including ownership information--that the 
50 states and the District of Columbia collect during company formation 
and the states' efforts to review and verify the information;

2. the roles of third-party agents, such as company formation agents, 
and the kinds of information they collect on company ownership;

3. the role of shell companies in facilitating criminal activity, the 
availability of company ownership information to law enforcement, and 
the usefulness of such information in investigating shell companies; 
and:

4. the potential effects of requiring states, agents, or both to 
collect company ownership information.

Individuals can choose a variety of business structures when forming a 
company. The scope of this report covers corporations and limited 
liability companies (LLC) because corporations have historically been 
the dominant business form and LLCs have recently grown in popularity. 
We refer to corporations and LLCs collectively as "companies" unless 
otherwise specified.

To address the objectives, we conducted a survey of officials from all 
of the states and the District of Columbia on their company formation 
and periodic reporting practices and cross-checked the responses 
against our review of state statutes, company formation forms, and 
state Web sites. Each of the 50 states and the District of Columbia 
responded to our survey. We also called and visited selected states to 
obtain further information about certain practices. In addition, we 
interviewed academics who have done research in the area, companies 
that provide filing and related services for businesses, law firms, 
financial institutions, state and industry associations, and state law 
enforcement agencies. Furthermore, we talked with officials from two 
jurisdictions outside of the United States that have recently 
implemented regulations for company formation agents.[Footnote 6] We 
also spoke with officials from federal agencies in the Department of 
Homeland Security (DHS), including Immigration and Customs Enforcement 
(ICE); Department of Justice (Justice), including the Criminal 
Division, Drug Enforcement Agency (DEA), Federal Bureau of 
Investigation (FBI), and a U.S. Attorneys office and the Executive 
Office of the U.S. Attorneys (EOUSA); and Department of the Treasury 
(Treasury), including the Financial Crimes Enforcement Network 
(FinCEN), Internal Revenue Service (IRS), and Office of Foreign Assets 
Control (OFAC).

We conducted our work from May 2005 through March 2006 in Arizona, 
Delaware, Florida, Maryland, Nevada, New York, Oregon, Virginia, and 
Washington, D.C., in accordance with generally accepted government 
auditing standards. A more extensive discussion of our scope and 
methodology appears in appendix I. The report also includes a glossary 
of terms. The survey and a more complete tabulation of state-by-state 
and aggregated results can be viewed at 
[Hyperlink, http://www.gao.gov/cgi-bin/fetrpt?GAO-06-377SP]. We 
provided a draft of this report to DHS, Justice, and Treasury. Justice 
and Treasury provided technical comments on the report that were 
incorporated, as appropriate.

Results in Brief:

Most states do not require companies to provide ownership information 
at formation or in periodic reports. Similarly, states usually do not 
require information on other individuals who manage a company, 
including corporate officers and directors and LLC managers, on company 
formation documents, but most states require this information on 
periodic reports. However, these individuals may not be the owners of 
the company. States typically require basic information on company 
formation documents, such as the name of the company and the name and 
address of a contact where tax and other legal notices for the company 
should be sent. However, some may require other types of information, 
such as the company's principal office address or a statement of 
purpose. Almost all state officials reported that they screen filings 
for the presence of statutorily required information, but none reported 
screening names against criminal watch lists or verifying the 
identities of company officials provided in company formation or 
periodic report filings. Some officials said they do not take these 
steps because they do not have the legal authority or means to perform 
them.

Third-party agents may submit formation and other documents on behalf 
of a company, but the agents seldom collect ownership information or 
verify the information they collect. Individuals may also submit their 
own company filing documents. Company formation agents file required 
documents with a state for individuals or their representatives, while 
agents for service of process receive legal and tax documents on behalf 
of a company.[Footnote 7] Although these agents provide different 
services, one company may serve in both capacities. Some state statutes 
have basic requirements regulating agents for service of process, such 
as state residency, but otherwise there is little oversight of either 
type of agent and no verification of the information they provide. For 
example, some states may require the agent for service of process to 
have a local address but do not check to see whether the address is 
valid. Wyoming is the one state we found that requires agents for 
service of process to register yearly to discourage agents from 
providing false information and to have the information available if 
the agent is under investigation. Agents generally collect billing 
information and the information required by state statute for company 
formation but generally do not collect any additional information on 
ownership or management of the companies they represent. Agents are 
generally not required to verify information from clients, although 
some agents we spoke with may request additional information or verify 
the identity of international clients by requiring copies of passports. 
In some circumstances, a legal firm may be the contact for a company, 
and the agent may not interact with anyone affiliated with the company 
being formed.

Law enforcement officials are concerned about the use of shell 
companies in the United States that enable individuals to conceal their 
identities and conduct criminal activity and have encountered 
difficulties in investigating these shell companies because they cannot 
determine the owners of the companies. Quantifying the magnitude of the 
use of shell companies used in crimes is difficult because creating a 
shell company is not a crime but rather can be a method for hiding 
criminal activity. However, law enforcement officials told us they are 
seeing many investigations within the United States and in other 
countries where individuals have used U.S. shell companies to 
facilitate illicit activity involving billions of dollars. Most of the 
law enforcement officials we interviewed said that when they need 
company information, they obtain some information from state Web sites 
and company filings, and some said they also requested information from 
agents. Some law enforcement officials noted that the information 
available from states had proven helpful because names on the documents 
generated additional leads. However, some officials said that the 
information states collected was limited in revealing who owned and 
controlled the company and that cases had been closed because of 
insufficient information. For example, an Immigration and Customs 
Enforcement (ICE) official provided an example of a Nevada-based 
corporation that received 3,774 suspicious wire transfers totaling $81 
million over a period of approximately 2 years. However, the case was 
not prosecuted because ICE could not identify the beneficial owner of 
the corporation.

Although law enforcement officials noted that information on owners was 
useful in some cases, state officials, agents, and others we 
interviewed said that collecting company ownership information could be 
problematic. For instance, if states or agents collected such 
information, the cost of filings and the time needed to approve them 
could increase, potentially slowing down business dealings or even 
derailing them. A few states and some agents also said they might lose 
business to other states, countries, or agents that had less stringent 
requirements, a consequence two foreign jurisdictions experienced after 
regulating agents and requiring collection of ownership information. 
Further, state officials and agents pointed out the difficulties of 
collecting information when companies are being formed or on periodic 
reports since ownership can change frequently. In addition, state 
officials and agents expressed concerns about maintaining privacy when 
making public information about legitimate businesses that historically 
has been protected. State officials, agents, and other experts in the 
field suggested internal company records, financial institutions, and 
the IRS as alternative sources of ownership information for law 
enforcement investigations. However, collecting information from these 
sources could present many of the same difficulties.

Background:

States historically have had jurisdiction over the way business 
entities within their boundaries are formed and over reporting 
requirements for these entities. Statutes and requirements vary from 
state to state. In general, however, forming a company involves certain 
steps. Initially, a company principal or someone acting on the 
company's behalf submits formation documents to the appropriate state 
office--usually a division of the secretary of state's office--but in 
some cases to a different state agency.[Footnote 8] All formation 
documents filed with the state are matters of public record and are 
available to anyone. Documents may be submitted in person, by mail or, 
increasingly, online. A minimal amount of basic information generally 
is required to form a company, although these requirements also vary 
from state to state. Generally, the documents must give the company's 
name, an address where official notices can be sent to the company, 
share information for corporations, and the names and signatures of the 
persons incorporating (see fig. 1). State officials generally check to 
see that the documents supply the information required by statute. Fees 
vary by state from $25 to $1,000, and the process can take anywhere 
from 5 minutes to 60 days.[Footnote 9] See appendix II for more 
information on how formation documents are submitted and on the company 
formation fees in each state. Expedited services, available in some 
states, decrease processing times but may require an additional fee. 
Most states also require companies to file annual or biennial reports 
in order to stay in good standing, for a fee ranging from $5 to 
$500.[Footnote 10]

Figure 1: How Companies Are Typically Formed:

[See PDF for image]

Source: GAO, Art Explosion(images)

[A] Share information applies only to corporations.

[B] In two states, New Mexico and Nebraska, the filing fee for 
corporations was a range. The median was calculated using the lowest 
fee in the range.

[End of figure]

Types of Companies:

Businesses may be incorporated or unincorporated. A corporation is a 
legal entity that exists independently of its shareholders--that is, 
its owners or investors--and that limits their liability for business 
debts and obligations and protects their personal assets. For example, 
the owners of a small store may desire limited liability protection in 
case a customer is accidentally injured inside the store and decides to 
sue. In this hypothetical case, the owners' personal assets, such as 
their home and retirement savings, generally would not be subject to 
any award if the customer won the lawsuit. Limited liability means that 
owners or shareholders in a business entity are personally responsible 
only for the amount they have invested in the business, while the 
corporation itself is responsible for the debts and other obligations 
it incurs. The exception occurs when a court "pierces the corporate 
veil," or disregards the legal entity that is the corporation, and 
holds the owners, shareholders, and sometimes the officers and 
directors responsible for the corporation's acts and 
obligations.[Footnote 11] In contrast, the owners of unincorporated 
businesses, such as partnerships and sole proprietorships, are 
generally liable for all debts and liabilities incurred by their 
businesses. However, these types of businesses also offer tax 
advantages that corporations do not.[Footnote 12]

The limited liability company (LLC) is a fairly new business form that 
is a hybrid of the corporation and the partnership. Wyoming passed the 
first law permitting formation of LLCs in 1977, and Florida followed 
suit in 1982. By the mid-1990s, all states had enacted LLC statutes. 
Like a corporation, an LLC protects its owners, which are referred to 
as members, from some debts and obligations; like partnerships and sole 
proprietorships, however, it may confer certain tax 
advantages.[Footnote 13] In addition, LLCs can choose a more flexible 
management structure than corporations. Table 1 shows the key 
characteristics of the different types of U.S. businesses.

Table 1: Basic Types of U.S. Businesses:

Business form: Corporation;
Key characteristics: An artificial construct (usually a business 
entity) created by law that 
acts as a separate and distinct legal entity apart from its owners and 
that has other legal rights, such as the ability to issue stock.

Business form: C corporation (for tax purposes); 
Key characteristics: Generally, any corporation that is not an S 
corporation.

Business form: S corporation (for tax purposes); 
Key characteristics: A small business corporation that elects to be 
taxed as an S corporation under the federal tax code. The taxable 
income of an S corporation is passed through to the shareholders and 
taxed at the shareholder level.

Business form: Limited liability company (LLC); 
Key characteristics: A company that offers its owners (members) some 
protection from responsibility for the company's debts and obligations. 
An LLC may have only one member and may be managed by its members or 
managers.

Business form: Partnership; 
Key characteristics: An association of two or more persons who jointly 
own and conduct a business and agree to share the profits and losses of 
the business.

Business form: Limited partnership; 
Key characteristics: A partnership consisting of one or more limited 
partners who contribute capital to and share in the profits of the 
partnership but who are responsible for the company's debts only up to 
the amount of their contribution and one or more general partners who 
control the business and are personally liable for its debts.

Business form: Limited liability partnership; 
Key characteristics: A partnership in which the participants are not 
responsible for negligent acts committed by other partners or by 
employees not under the partner's supervision. Certain businesses 
(typically law firms or accounting firms) are allowed to register under 
state statutes as this type of partnership.

Business form: Limited liability limited partnership; 
Key characteristics: A partnership in which general and limited 
partners are not responsible for the partnership's debts and 
obligations.

Business form: Sole proprietorship; 
Key characteristics: A business operated by one person who owns all 
assets and is responsible for all of the liabilities.

Sources: Black's Law Dictionary (8TH ed. 2004); Uniform Limited 
Liability Company Act, § 202(a) (1996); 26 U.S.C. §§ 1361, 1363 and 
1366; Uniform Limited Partnership Act 2001 Refs; and Annos., Prefatory 
Note (Main Vol. 2003).

[End of table]

Corporations and LLCs:

Historically, the corporation has been the dominant business form, but 
recently the LLC has become increasingly popular. According to our 
survey, 8,908,519 corporations and 3,781,875 LLCs were on file 
nationwide in 2004. That same year, a total of 869,693 corporations and 
1,068,989 LLCs were formed. Figure 2 shows the number of corporations 
and LLCs formed in each state in 2004. Five states--California, 
Delaware, Florida, New York, and Texas--were responsible for 415,011 
(47.7 percent) of the corporations and 310,904 (29.1 percent) of the 
LLCs. As shown in figure 3, Florida was the top formation state for 
both corporations (170,207 formed) and LLCs (100,070) in 2004. New York 
had the largest number of corporations on file in 2004 (862,647) and 
Delaware the largest number of LLCs (273,252). Data from the 
International Association of Commercial Administrators (IACA) shows 
that from 2001 to 2004, the number of LLCs formed increased rapidly--by 
92.3 percent--although the number of corporations formed increased only 
3.6 percent.[Footnote 14]

Figure 2: Domestic Corporations and LLCs Formed in States in 2004:

[See PDF for image]

Sources: GAO survey of state officials responsible for company 
formation (data); Art Explosion(map).

[End of figure]

Figure 3: Number of Domestic Corporations and LLCs Formed in the Top 
Five States in 2004:

[See PDF for image]

Source: GAO survey of state officials responsible for company formation.

[End of figure]

Most States Collect Limited Information on Company Ownership and 
Management:

Most states do not require ownership information at the time a company 
is formed, and while most states require corporations and LLCs to file 
annual or biennial reports, few states require ownership information on 
these reports. Similarly, only a handful of states mandate that 
companies list the names of company managers on formation documents, 
although many require managers' information on periodic reports. States 
may require other types of information on company formation documents, 
but typically they do not ask for more than the name of the company and 
the name and address of the agent for service of process (where legal 
notices for the company should be sent). Most states conduct a cursory 
review of the information submitted on these filings, but none of the 
states verify the identities of company officials or screen names 
against federal criminal records or watch lists.

Information States Collect on Company Ownership:

The owners of a company are, in the case of a corporation, the 
shareholders of that corporation and in the case of an LLC, the members 
of that LLC.[Footnote 15] According to our survey results, none of the 
states collect ownership information in the formation documents-- 
articles of incorporation--for corporations (see fig. 4). State 
statutes generally do, however, require corporations to prepare and 
maintain lists of shareholders that, unlike formation documents, are 
not filed with the state or part of the public record.[Footnote 16]

With respect to LLCs, states generally require a manager-managed LLC to 
name the designated manager instead of a member on the formation 
document--articles of organization. However, the manager is not 
necessarily an owner of the LLC.[Footnote 17] LLCs usually prepare and 
maintain operating agreements that name the owners, members, and their 
financial interests in the company, but these operating agreements are 
not filed with the state or part of the public record. According to our 
survey results, four states--Alabama, Arizona, Connecticut, and New 
Hampshire--request some ownership information when an LLC is 
formed.[Footnote 18] For example, in Alabama, the formation documents 
must list the names and mailing addresses of the initial members of an 
LLC. A Connecticut official said that either a member's or a manager's 
name was required on the articles of organization. In New Hampshire, a 
member or manager is required to sign the articles of organization. 
Arizona statutes mandate that manager managed LLCs must list on 
formation documents the name and address of each member owning more 
than a 20 percent interest and that member-managed LLCs must list all 
members' names and addresses. Depending on the management structure of 
an LLC, ownership information may be included on the formation 
documents in more states. If an LLC is managed by its members, some 
states require the LLC to provide the name and address of at least one 
member on the formation document.

Most states require corporations and LLCs to file periodic--annual or 
biennial--reports, but not many states require ownership information on 
these reports (see fig. 4).[Footnote 19]With respect to corporations, 
three states (Alaska, Arizona, and Maine) indicated on our survey that 
the name of at least one owner was required on corporations' periodic 
reports. In Alaska, any person owning more than a 5 percent interest in 
a corporation must be listed on the periodic report, according to a 
state official. An official from Arizona said the state requires that 
corporate periodic reports list the names and addresses of shareholders 
owning more than 20 percent of company stock. In Maine, statutes 
require that periodic reports include the names and addresses of 
shareholders of a corporation only if there are no directors.

With respect to LLCs, our survey showed that five states require LLCs 
to list at least one member on their periodic reports.[Footnote 20] As 
with corporations, Alaska requires the name and address of any person 
owning more than a 5 percent interest in an LLC to be listed on the 
company's periodic report. A state official told us that LLCs in Kansas 
are required to list on their periodic reports the names and post 
office addresses of members owning at least 5 percent of the capital in 
the company.[Footnote 21] Connecticut and New Hampshire require either 
a manager or at least one member name on their periodic reports. Maine 
requires the name and business or residential address of each manager, 
or if there are no managers, each member with a street address on the 
periodic report. Finally, in states that require a manager's or 
managing member's name on periodic reports, the reports for member- 
managed LLCs might include a member's name.

Figure 4: Ownership Information Required in Articles and Periodic 
Reports:

[See PDF for image]

Source: GAO survey of state officials responsible for company formation.

[A]New Mexico and Arkansas did not respond to some of our survey 
questions. Arkansas responded on our survey that a member's address is 
not required for LLC articles or reports. However, the state did not 
respond to the question asking whether the address of an owner of a 
corporation is required on articles or reports. We found from our legal 
review that Arkansas does not require the address of an owner on 
articles or periodic reports. New Mexico did not respond to our survey 
questions on the information required about owners or members. Our 
legal review found that New Mexico does not require corporations to 
list the name or address of an owner on articles or periodic reports. 
For LLCs, we found that New Mexico does not require member names and 
addresses on formation documents or periodic reports.

[End of figure]

Information States Require on Company Management:

Less than half of the states require the names and addresses of company 
management or directors on company formation documents. Management may 
include officers--chief executive officers, secretaries, and 
treasurers--who help direct a corporation's day-to-day operations, as 
well as managers or managing members of LLCs.[Footnote 22] Directors 
serve on the governing board of a corporation and are responsible for 
making important business decisions, especially those that legally bind 
the corporation. Two states require officers' names and addresses on 
company formation documents, 10 states require the names of directors, 
and 9 states require the addresses of directors (see fig. 5). Some 
states have additional information requirements for company formations. 
For instance, our review of state statutes found that Louisiana does 
not require information on directors on the incorporation documents, 
but does require directors' names and addresses on an initial report 
that must be filed with the incorporation documents. We also found that 
Oklahoma requires the names and addresses of the directors only if the 
persons incorporating the company are not responsible for its 
operations after the incorporation documents are filed. More states 
require management information on LLCs. Nineteen states require the 
names of managers or managing members on formation documents, and 18 
states require their addresses.[Footnote 23]

Most states require the names and addresses of corporate officers and 
directors and of managers of LLCs on periodic reports (see fig. 5). For 
corporations, 47 states require the names of officers on periodic 
reports, and 46 states require officers' addresses. Thirty-eight states 
require directors' names and 37 require directors' addresses. For LLCs, 
28 states require the manager's or managing member's name, and 27 
states require their addresses. However, even if states require 
disclosure of directors' names, those listed may not be the individuals 
who are truly directing the company because in some cases, the 
individuals could be nominee directors that act only as instructed by 
the beneficial owner of the company.[Footnote 24] Also, managers may or 
may not be owners of the LLC.

Figure 5: Management Information Required in Articles and Periodic 
Reports:

[See PDF for image] - graphic text:

Source: GAO survey of state officials responsible for company formation.

[A]Information on officers applies only to corporations.

[B] New Mexico did not respond to some of our survey questions. New 
Mexico did respond that corporate directors' names and addresses are 
required for both articles and reports, but did not respond to the 
questions about the names and addresses of LLC managers/managing 
members. However, we found in our review of state statutes that New 
Mexico does not require LLC manager names and addresses on formation 
documents or periodic reports.

[C] New Jersey responded on the survey that the names and addresses of 
corporate directors are required for reports only and that the names 
and addresses of LLC managers/managing members are not required for 
articles or reports. However, our review of state statutes found that 
the names and addresses of corporate directors are also required on 
articles and that the names and addresses of LLC managers/managing 
members are required on reports. We were unable to clarify this 
discrepancy with New Jersey state officials. Utah responded to the 
survey that the names and addresses of corporate officers and directors 
are required on articles; however, our review of state forms found that 
this information is optional.

[End of figure] - graphic text:

States May Also Collect Other Information:

States may also ask for other general information about a company, 
including its name; the name and address of the agent for service of 
process (where legal notices for the company should be sent); and for 
corporations, information about the number and types of shares the 
company will issue. Appendix III shows the type of information that 
each state collects on formation documents. Many states specify that 
the agent's address must be a physical street address and not a post 
office box. In addition, a majority of the states include on their 
formation documents space for an individual to sign as the incorporator 
(in the case of a corporation) or organizer (in the case of an LLC) of 
the company.[Footnote 25] The incorporator or organizer may be the 
agent who is forming the company on behalf of the owners or it may be 
an individual affiliated with the company being formed. Most states 
permit an individual or entity to serve as incorporator without regard 
to state residency or later participation in the company, but at least 
two states require that the incorporator be associated with the company 
in some way. For example, the articles of incorporation for Arkansas 
and California state that if a newly incorporated company has chosen 
initial officers or directors, one or more of them must sign as the 
incorporator. Otherwise, an unaffiliated individual can sign as the 
incorporator.

Many states require a brief statement of purpose or a principal office 
address in order to form a corporation or LLC.[Footnote 26] In 
reviewing state statutes and state forms, we found that 20 states 
require a statement on the purpose of a corporation and 16 require a 
statement of purpose for LLCs on formation documents. In some states 
that ask for a statement of purpose, a general statement such as "the 
purpose of the corporation is to engage in any lawful act or activity…" 
is sufficient. Alaska requires an additional form that discloses the 
North American Industry Classification System (NAICS) number that most 
closely describes the activities of a corporation.[Footnote 27] 
Fourteen states require a principal office address to form a 
corporation, and 23 states require a principal office address to form 
an LLC. The principal office generally means either the address of the 
company's place of business or its mailing address. Therefore, even in 
states where a principal office address is required, this address may 
not indicate the company's actual place of business. For example, 
Arizona's form asks for a known place of business in Arizona, but the 
instructions for the form state that this address may be in care of the 
address of the company's agent.

Some states have unique requirements for information on newly forming 
companies. For example, the articles of incorporation forms for 
Louisiana, Rhode Island, and South Dakota must be notarized. Similarly, 
an attorney licensed to practice in South Carolina must sign company 
formation documents in that state. Private sector officials told us 
that more states used to require a notary's signature on company 
formation documents, but that most had repealed this provision. A 
Louisiana state official said that requiring a notary's signature was a 
"historical" decision and, despite an effort to change the law, was 
likely to remain a requirement.

A few states (Louisiana, Massachusetts, Mississippi, and Pennsylvania) 
also require a federal taxpayer identification number (TIN) on some 
company formation documents.[Footnote 28] Kansas requests a TIN on 
formation documents, but it is not required by statute. Louisiana and 
Massachusetts state officials told us that even though a TIN is 
required, company formation documents are not rejected if it is not 
included. These states originally used the TIN as a tracking number for 
filings. For instance, the Kansas Department of Revenue uses the 
information to match companies in its database. A Massachusetts 
official said that the state was moving away from using TINs in all 
cases and now assigns a private unique identification number to each 
company for tracking purposes. While the requirement to include a TIN 
is still in place for LLCs in Massachusetts, it was recently deleted 
from the corporation statute because the Secretary of State's office 
received many complaints about this number being publicly available on 
filing documents.

Forty-two states reported on our survey that their information 
requirements for persons or entities from outside the United States 
forming a U.S. company were the same as for U.S. citizens. Those states 
that say there was a difference also said that the difference was 
simply that proof of the company's existence had to be included and 
that documents had to be translated into English. For example, 
Minnesota and North Carolina commented that if an entity from another 
country was applying to conduct business in those states, the entity 
must provide proof of good standing or a document certifying that the 
company existed in the original country.[Footnote 29] Alaska is the 
only state that requires the name and address of each alien affiliate 
or a statement on the articles of incorporation that there are no alien 
affiliates. An "alien affiliate" is an individual from another country 
who has some ownership or control of a company or an entity controlled 
by an individual or a corporation from another country.[Footnote 30] An 
Alaska state official said that this information was originally 
required to identify offshore fisheries and their owners.

State Officials Reported That They Generally Reviewed Documents for 
Basic Information but Did Not Verify the Information:

Nearly all of the states reported that they reviewed filings for the 
required information and fees and checked to see if the proposed name 
was available (see table 2). In Arizona, for example, state officials 
said that the main reasons filings were rejected were that required 
information, such as the agent's address or signature or the type of 
management structure of an LLC, was missing and that the company name 
was not distinguishable from an existing entity's name. Other state 
officials said they also rejected filings because they were missing key 
information, the company name was not available, or the fee was not 
included. Many states also reported that they reviewed filings to 
ensure compliance with state laws.[Footnote 31] In Virginia, for 
instance, filings are reviewed for more than just the required 
information. An attorney in the state office reviews all formation 
filings for substantive issues. For example, Virginia law requires that 
shareholders elect directors, and state officials said that they would 
reject a filing if the articles stated that the company's directors 
would be chosen by a different method.

None of the states reported verifying the identities of incorporators 
or company officials or using federal criminal records or watch lists 
to screen names. State officials gave several reasons for not taking 
this step when reviewing formation documents. In interviews and on the 
survey, many state officials emphasized that their role was authorized 
by statute as only administrative, not investigative. In fact, 45 
states reported that they did not have investigative authority to take 
action if they identified information that could indicate criminal 
activity, although some state officials said they can refer suspicious 
activity to law enforcement. Only two states--Colorado and North 
Carolina--reported that they did have investigative authority.[Footnote 
32] Further, two states noted that their state statutes required them 
to file formation documents as long as the documents contained the 
required information. In addition, one state official said that states 
did not have the resources to verify the information submitted on 
formation documents and other officials commented on the survey that 
verification would significantly increase the costs and workloads of 
their offices. Another stated that the staff would not know how to 
determine the validity of information individuals provided to verify 
their identity.

While states do not verify the identities of individuals listed on 
company formation documents, an individual may be charged with perjury 
in some states if law enforcement officials find in the course of an 
investigation that an individual submitted false information on a 
company filing. We found in our review of state forms that 10 states 
note the penalties for providing false information on their company 
formation documents. One state official provided an example of a case 
in which state law enforcement officials charged two individuals with, 
among other things, perjury for providing false information about an 
agent on articles of incorporation.

Table 2: Steps States Take to Review Articles of Incorporation/ 
Organization and Periodic Reports:

Processing steps: Review for availability of company names; 
Corporations: Articles only: 47; 
Corporations: Reports only: 0; 
Corporations: Both: 3; 
Corporations: Not performed or no: response: 1; 
LLCs: Articles only: 45; 
LLCs: Reports only: 0; 
LLCs: Both: 2; 
LLCs: Not performed: or no response: 4.

Processing steps: Review for presence of information and fees; 

Corporations: Articles only: 11; 
Corporations: Reports only: 39; 
Corporations: Both: 0; 
Corporations: Not performed or no: response: 1; 
LLCs: Articles only: 16; 
LLCs: Reports only: 2; 
LLCs: Both: 31; 
LLCs: Not performed: or no response: 2.

Processing steps: Determine whether submitted information is in 
compliance with state law; 
Corporations: Articles only: 10; 
Corporations: Reports only: 1; 
Corporations: Both: 35; 
Corporations: Not performed or no: response: 5;  
LLCs: Articles only: 16; 
LLCs: Reports only: 2; 
LLCs: Both: 28; 
LLCs: Not performed: or no response: 5.

Processing steps: Verify with picture IDs the identities of 
incorporators, directors, or 
officers; 
Corporations: Articles only: 0; 
Corporations: Reports only: 0; 
Corporations: Both: 0; 
Corporations: Not performed or no: response: 51; 
LLCs: Articles only: 0; 
LLCs: Reports only: 0; 
LLCs: Both: 0; 
LLCs: Not performed: or no response: 51.

Processing steps: Use federal criminal records or watch lists to screen 
names of 
incorporators, directors, or officers; 
Corporations: Articles only: 0; 
Corporations: Reports only: 0; 
Corporations: Both: 0; 
Corporations: Not performed or no: response: 51; 
LLCs: Articles only: 0; 
LLCs: Reports only: 0; 
LLCs: Both: 0; 
LLCs: Not performed: or no response: 51.

Processing steps: Direct staff to look for suspicious activity or fraud 
in filings: 
Corporations: Articles only: 2; 
Corporations: Reports only: 0; 
Corporations: Both: 4; 
Corporations: Not performed or no: response: 45; 
LLCs: Articles only: 3; 
LLCs: Reports only: 0; 
LLCs: Both: 3; 
LLCs: Not performed: or no response: 45.

Source: GAO survey of state officials responsible for company formation.

[End of table]

A few states reported that they directed staff to look for suspicious 
activity or fraud in company filings. For example, an official in 
Alabama told us that staff who reviewed filings looked for anything out 
of the ordinary, such as a bank from another country that wanted to 
form a company in Alabama but would not provide the required 
information. An official in Missouri said that despite not having a 
formal procedure or policy for reviewing filings for suspicious 
activity, staff were trained to look for things that were out of the 
ordinary. Such things might include discrepancies like two signatures 
of the same name with different handwriting. However, most states 
reported that they did not direct staff to look for suspicious 
information. According to an official in Alaska, the state has no 
formal mechanism for identifying or reporting suspicious information. 
The official said that staff would notice unusual fictitious names on 
filings, but with a filing fee of $250 in Alaska, this type of activity 
was rare. Two state officials told us that when staff noticed something 
unusual, they typically contacted the applicant for an explanation but 
still usually filed the documents. If something appeared especially 
unusual, they referred the issue to state or local law enforcement or 
the Department of Homeland Security. One official said his office had
never received a response from law enforcement about issues that had 
been forwarded.

Agents Facilitate Company Formation but Are Not Required to Collect 
Ownership Information or Verify Information on Clients:

The roles of company formation agents and agents for service of process 
differ, as do the state statutes that govern them.[Footnote 33] Company 
formation agents submit documents on a company's behalf, and agents for 
service of process receive legal and tax documents for clients. Most 
states do little to oversee these agents and do not verify information 
about them. Further, states generally do not require agents to collect 
information on company ownership or management or to verify the 
information they collect. The agents we interviewed generally collect 
only contact information and any information required by the states and 
do not verify the information. In some circumstances--primarily with 
international clients and clients requesting special services--some 
agents may verify a client's identity.

Company Formation Agents and Agents for Service of Process Play 
Different Roles:

Company formation agents are firms that help individuals form companies 
by filing required formation documents and other paperwork with the 
appropriate state agencies. Although individuals may file their own 
formation documents directly, a company formation agent can facilitate 
the process. Agents for service of process can be either persons or 
entities that are designated to receive important tax and legal 
documents on behalf of businesses. For example, if a company is being 
sued, the agents for service of process will accept the legal paperwork 
and forward it to their company contacts. Historically, the role of 
agents was to ensure companies had a presence in each state they 
operated in and were able to be reached. Our review of state statutes 
showed that almost all states require companies to designate an agent 
for service of process on company formation documents.[Footnote 
34]These agents may provide other services, such as filing amendments 
and periodic reports, assisting with mergers and acquisitions, 
obtaining certificates of good standing, and conducting other public 
record searches. Agents may also provide assistance in setting up bank 
accounts or providing directors, although only a couple of the 12 
agents we contacted said that they would provide these services, and 
then only in special situations.[Footnote 35] According to a few agents 
we interviewed, large companies are more likely to hire agents, 
especially large companies that need an agent for service of process in 
multiple states.

Most states have basic requirements for agents for service of process. 
Forty-six states indicated on our survey that they required agents for 
service of process to have a physical address in the state (not a post 
office box) where documents could be received, while seven states 
required agents to keep specific office hours. Individuals serving as 
agents for service of process generally must be state residents or have 
a state address, but firms acting as agents generally must be 
authorized to do business in the state and must have filed company 
formation documents. A few states have additional requirements for 
agents. For example, in Maine, an agent must be a natural person, while 
in Louisiana, a professional law corporation or partnership may serve 
as the agent.[Footnote 36] In Virginia, agents for service of process 
must be individuals who are both a resident and an officer of the 
company being formed, members of the state bar, or companies authorized 
to do business in the state, and must specify their qualification on 
the company formation documents.

Few States Verify Information from or Otherwise Oversee Agents:

We found limited incidences of state oversight of agents. A few state 
officials we spoke with reported checking company formation documents 
to ensure that agents had a local address, but in general they did not 
check to see whether the address was valid. One state official said the 
office verified addresses only in special cases. Delaware reviews its 
agents' addresses if several hundred transactions occur from the same 
address to ensure it is an actual address and not a post office box. In 
addition, Delaware is unique in allowing approximately 40 agents to 
have direct access to the state's database to enter or access company 
information. The state contracts with these agents, and in return they 
must meet certain guidelines and pay access fees. The state reserves 
the right to terminate these contracts at any time but thus far has not 
done so because of nefarious behavior. State officials in Florida and 
Wyoming told us that they checked their records to ensure that 
companies acting as agents for service of process were authorized to 
conduct business in the state.

Thirty-nine states said they did not track the number of agents for 
service of process operating in the state and 36 did not have an 
official listing of agents. However, a couple of states have 
registration requirements for operating within their boundaries.Wyoming 
requires agents serving more than five corporations to register with 
the state annually, under a law that was enacted after some agents gave 
false addresses for their offices, according to a state official. To 
register, agents must pay a $25 annual fee and complete a form each 
January giving contact information, including a physical and mailing 
address, and indicating whether the applicant or any company principal 
has ever been convicted of a felony. The state official said that the 
office kept the information on file in case an agent was investigated. 
California law requires any corporation serving as an agent for service 
of process to file a certificate with the Secretary of State's office 
and to list the California address where process can be served and the 
name of each employee authorized to accept process. Seventeen states 
indicated on the survey that they provide the names of all or some 
agents on a Web site, and 6 states reported having some requirements 
for agents wanting to be listed on the Web site.[Footnote 37] For 
example, Delaware requires a business to have been operating for at 
least 1 year, to be in good standing, and to serve more than 50 clients.

Although the notion is controversial, some state officials and agents 
said that some level of uniform registration or certification in the 
industry might be desirable, for several reasons. One agent told us 
that the few agents who do not follow the current rules give the 
industry a bad name and that regulation would eliminate some of these 
agents. Another agent felt that registration would create some 
standards in the industry and provide some legitimacy for firms 
conducting business in international jurisdictions that require 
registration. However, some agents felt that regulation would be 
difficult if not detrimental to the industry. One agent felt that if 
the industry were regulated, individuals would avoid using agents and 
form their companies themselves. Another agent believed that the costs 
associated with meeting standards could be high enough to drive smaller 
firms out of business. In either case, both agents that supported and 
opposed regulation said that the industry should be involved in efforts 
to develop some type of registration or regulation that would affect 
their business.

Agents We Talked with Said They Generally Do Not Collect Ownership and 
Management Information on Companies Because States Do Not Require Them 
to Collect It:

Agents we spoke with generally collected only contact information and 
the information required by a state for company formation documents or 
periodic reports. This information may include contact names for 
billing and for forwarding service of process, annual reports, or tax 
notifications. These agents said they may have only one contact name 
for a company. According to several agents, they rarely collect 
information on ownership since states do not require it. In general, 
agents said they collect the names and addresses of officers and 
managers, if required, and when serving as an incorporator, agents may 
collect information on the company directors or shareholders, even if 
it is not required. This information allows agents to resign as 
incorporators and pass on the authority to conduct business to the new 
company principals. Depending on the size of the company, the directors 
and the officers may also be the owners, but one agent told us that he 
did not try to determine if they were. Several agents also told us that 
they do not always work directly with the principals of the company 
because the agents interact directly with law firms or transact a large 
part of their business online, and therefore may not have access to 
additional information not required by the state. One agent also noted 
that collecting ownership information was not necessary to doing his 
job.

Even if agents collect information such as the names of officers and 
directors, a few agents said that they might not keep records of the 
information. For example, two agents told us that their firms did not 
keep a database of company information, in part because company 
documents filed with the state are part of the public record. Because 
the information is public, one agent felt it was not necessary to bear 
the additional cost of storing it internally. According to our review 
of state statutes, some states have record retention requirements that 
oblige corporations to make shareholder lists or the stock ledger 
available at the registered office within the state (which may be the 
agent's office), although the requirements vary by state. For example, 
in Nevada, the registered office is required to keep the stock ledger 
or a file listing the location of the ledger, and in New Mexico, a list 
of shareholders must be available at a company's registered office 10 
days prior to a shareholders' meeting.

Agents Are Not Required to Verify Information in Company Filings, but a 
Few Do:

States generally do not require agents to verify the information 
collected from clients, and few agents we interviewed do. In general, 
agents told us they do not verify the validity of names or addresses 
provided, screen names against watch lists, or require picture 
identification of company officials. The extent of agents' verification 
might include checking that the minimum statutory requirements have 
been met, researching an address if a client's mail is returned, or 
comparing a credit card address to a company's address. One agent said 
that his firm generally relied on the information that it received and 
that in general did not feel a need to question the information, 
although another agent said that his firm might request additional 
information to assess risk if something about a potential client seemed 
suspicious.

Two agents with whom we spoke indicated that they collected additional 
information that could be used to verify the identity of clients, often 
when working with international clients, although the choice to verify 
information did not appear to be based on a formal risk assessment. 
These agents said they might check names against caller identification 
systems on their telephones or against the Office of Foreign Assets 
Control (OFAC) list of Specially Designated Nationals and Blocked 
Persons.[Footnote 38] One agent said that her firm created a document 
to collect additional information from clients from unfamiliar 
countries. This agent's document was based in part on federal standards 
for financial institutions from the USA PATRIOT ACT.[Footnote 39] On 
the document, the agent asks for a federal tax identification number 
(TIN); company ownership information; information from the company Web 
site; e-mail addresses; and, for individuals, identification, proof of 
occupation, and citizenship status.

Another agent we interviewed in Delaware asked for identification and 
used a specific agreement with certain international clients. In some 
cases, international agents contact the Delaware agent for assistance 
in forming U.S. companies for their clients in other countries. 
According to this agreement, international agents must verify the 
identity of an individual wishing to form a company through the 
Delaware agent by requiring their client to provide the principals' 
names, addresses, dates and places of birth, nationalities, and 
occupations, as well as certified copies of their passports, proof of 
address, and a reference letter from a bank.[Footnote 40] This agent 
also required a client requesting mail forwarding services to provide 
additional information, such as a Social Security number, in addition 
to the information required by the U.S. Postal Service on its mail 
forwarding form. The agent said the firm collected this information to 
screen potential clients and protect the firm and that it would stop 
representing a client if the client generated a significant amount of 
service of process, complaints, or visits from investigative agents. In 
general, the agent felt the additional requirements were not 
burdensome. Another agent noted that any extra time added to the 
process was a result of the time required for the client to provide the 
information.

In addition, a few other agents said that they used the OFAC list to 
screen names on formation documents or on other documents required for 
other services provided by their company, although several agents told 
us they were not aware of the OFAC list.A few agents we interviewed in 
Delaware used commercially available software to screen client names 
against the OFAC list, a step strongly encouraged by the Secretary of 
State. However, one agent told us that his staff had never gotten a 
match on the list. One agent felt that running checks on the names 
listed on company documents could add time to the process but would 
likely not be a burden. Other agents found the list difficult to use 
and saw using it as a potentially costly endeavor. OFAC officials 
reported that they had also heard from agents that screening names 
against the OFAC list would result in increases in the time and cost of 
the process, which could lead to a loss in business.

Law Enforcement Officials Can Obtain Some Company Information from 
States and Agents, but a Lack of Ownership Information Obstructs Some 
Investigations:

Law enforcement officials are concerned about the use of U.S. shell 
companies to facilitate or hide criminal activity. Law enforcement 
officials we interviewed noted that they often used the information 
available from states in investigating shell companies that were 
suspected of criminal activities and said that, in some cases, the 
names of officers and directors on company filings had generated 
additional leads. However, officials also said that the information 
states collected was limited, noting that it could provide a place to 
start but that some cases had been closed because of insufficient 
information on beneficial owners.

Law Enforcement Officials Are Concerned about the Use of U.S. Shell 
Companies to Facilitate Criminal Activity:

Law enforcement officials and other reports indicate that shell 
companies have become popular tools for facilitating criminal activity, 
particularly laundering money.[Footnote 41] In December 2005, several 
agencies of the federal government, including the Departments of the 
Treasury, Justice and Homeland Security, issued the first 
governmentwide analysis of money laundering in the United States, which 
described, among other things, how shell companies can be used to 
launder money. Shell companies can aid criminals in conducting illegal 
activities by providing an appearance of legitimacy--for example, an 
artificial source of income or proof of the type of transactions 
legitimate companies conduct. Shell companies can also provide access 
to the U.S. financial system through U.S. bank accounts or offshore 
accounts in banks that have a correspondent relationship with a U.S. 
bank.[Footnote 42] For example, in a Financial Crimes Enforcement 
Network (FinCEN) December 2005 enforcement action, FinCEN determined, 
among other things, that the New York branch of ABM AMRO, a banking 
institution, did not have an adequate anti-money-laundering program and 
had failed to monitor approximately 20,000 funds transfers--with an 
aggregate value of approximately $3.2 billion--involving the accounts 
of U.S. shell companies and institutions in Russia or other former 
republics of the Soviet Union.[Footnote 43]

Determining a precise number of criminal cases involving the use of 
shell companies to hide illicit activity is difficult because forming 
such companies is not a crime but rather is sometimes used as a method 
for moving money that may be associated with a crime. Therefore, the 
use of shell companies for illicit activities is not tracked by law 
enforcement or government agencies.[Footnote 44] However, law 
enforcement officials told us they are seeing a wide range of 
indicators that suggest the increased use of U.S. shell companies for 
illicit activities.

* FinCEN officials told us they see many suspicious activity reports 
(SAR) filed by financial institutions that potentially implicated shell 
companies in the United States. For example, FinCEN reported in the 
U.S. Money Laundering Threat Assessment that financial institutions 
filed 397 SARs between April 1996 and January 2004 involving shell 
companies, East European countries, and correspondent bank accounts. 
The aggregate amount of activity reported in these SARs totaled almost 
$4 billion.

* Justice officials said that law enforcement officials from other 
countries have asked the United States to help them track down the 
individuals that had formed U.S. shell companies to hide illicit 
activity, but the lack of ownership information is obstructing their 
investigations. For example, a review by Justice of requests for legal 
assistance in 2005 from Russia and Ukraine found 30 requests for 
assistance from Russian authorities and 75 requests from Ukraine 
authorities involving U.S. shell companies. These requests typically 
ask for assistance in identifying individuals associated with the U.S. 
companies. However, Justice's attempts to gather information in 
response to these requests on the companies are obstructed by the lack 
of information maintained by states and agents. These requests often 
involve serious crimes occurring in other countries but implicate a 
U.S. company. For example, in early 2006, one request was seeking 
information on a U.S. corporation allegedly used to smuggle a toxic 
controlled substance between two Eurasian countries because the name of 
the U.S. corporation was on the foreign customs papers.

* OFAC expressed concerns that shell companies can be used to 
facilitate transactions with targets (individuals, entities, or 
countries) of U.S. economic sanctions. In one example, during the 
period when the United States maintained sanctions against Yugoslavia 
(Serbia and Montenegro), a U.S. company formation agent filed 
incorporation papers for a Serbian entity, which then opened bank 
accounts in the United States as a U.S. company to transfer money 
through the United States.

* The FBI told us they currently have over 100 ongoing cases 
investigating market manipulation and that the majority of these cases 
involve the use of shell companies. One closed case, for example, 
involved the sale of fraudulent private placement offerings to the 
investing public. The convicted individuals used U.S. shell companies 
to give investors the impression that they were investing in legitimate 
companies, but instead the individuals stole the investors' proceeds. 
In some cases, individuals have used shell companies to pump up the 
price of a stock and then sell their entire position in the stock while 
legitimate investors are left with worthless stock.

* The FBI has also expressed concern about the use of third-party 
agents to form thousands of shell companies in the United States for 
criminals operating in other countries; the criminals then use the 
shell companies to open U.S. bank accounts. The FBI believes that U.S. 
shell companies are being used to launder as much as $36 billion from 
the former Soviet Union. An FBI analysis of the use of these third- 
party agents found that they often register the shell company using 
nominee officers to keep the foreign beneficial owner anonymous and use 
companies created at an earlier date--"aged shelf companies"--to give 
banks and regulatory authorities the impression the company has 
longevity.

Law enforcement officials provided us with examples of cases involving 
the use of U.S. shell companies. According to a Department of Justice 
report on Russian money movements, many of the investigations involving 
shell companies use common schemes to launder money and conceal money 
movements. In a "fictitious services" scheme, the criminals enter into 
a contract with a company purportedly offering an intangible service, 
such as consulting. The consulting company is actually a shell company 
owned by the criminals, so that payments for consulting services are 
actually payments into a bank account under their control. In one case 
involving a fictitious services scheme, a former public official from 
the Russian Federation allegedly helped to unlawfully divert 
international nuclear assistance funds that were intended to upgrade 
the safety of nuclear power plants operating in Russia and several 
former republics of the Soviet Union. The indictment stated that the 
suspects formed shell companies in Pennsylvania and Delaware that 
received the nuclear assistance payments and then diverted over $15 
million of this money to corporate bank accounts. Ultimately the money 
was allegedly transferred to other personal bank accounts in the United 
States and other countries and the transfers concealed behind 
fictitious business contracts. The subjects of the indictment allegedly 
used at least $9 million to fund business investments and loans for 
their personal enrichment.

IRS investigations have also uncovered the use of U.S. shell companies 
in tax evasion schemes. In one tax evasion case, two co-conspirators 
used nominee names to open bank accounts and form U.S. corporations in 
Florida to hide their assets and income to avoid tax liabilities. One 
co-conspirator was sentenced to 10 years in prison and ordered to pay 
$1.6 million in restitution. The other co-conspirator was sentenced to 
25 years imprisonment for his involvement in the tax evasion scheme, as 
well as a related investment fraud scheme.

ICE officials also told us they have encountered the use of U.S. shell 
companies in their investigations. ICE officials interviewed a third- 
party agent who had registered approximately 2,000 companies for 
international clients. The registrations took place mostly in Oregon, 
but also in Arkansas, Colorado, Idaho, Iowa, Kentucky, Montana, South 
Dakota, Washington, and West Virginia. The investigation was prompted 
by a bank that had reported suspicious transactions in an account of 
one of the companies registered by this agent. This case was 
subsequently closed because the agent moved from the area and could not 
be found.

Information from Company Filings and Agents Is Available and Useful to 
Law Enforcement, but Is Often Too Limited to Solve Cases:

Law enforcement officials obtain some company information from states 
and agents through a variety of methods. Our review of states' Web 
sites found that 46 states provide some company information online for 
free, but that states post different amounts of company information on 
their Web sites.[Footnote 45] For instance, Virginia officials told us 
that while the name of the incorporator is on the articles of 
incorporation, it is not added to the on line database. In addition, 
Delaware lists only the company name and the name and address of the 
agent online, while Florida makes copies of all documents available 
with all of the information they contain, including names of directors 
and managers. Given the variations in what is available online, law 
enforcement officials may request paper copies of filings that could 
provide more information. Law enforcement officials may also obtain 
company information from agents, although some law enforcement 
officials said they do not usually request information from agents 
because too little would be available, and one state law enforcement 
official said the agents might tell their clients about the 
investigation. Some agents told us they usually collect the same 
information as the state, but other agents and law enforcement 
officials indicated that agents might have additional information that 
could be useful in investigations, such as contact addresses and 
methods of payment.

While ownership information is typically not available from states or 
agents, some law enforcement officials said the names of officers and 
directors and other information on forms could be helpful in some 
investigations. If ownership information is not available, law 
enforcement officials said that the names of officers and directors-- 
even false names--could provide productive leads. In addition, law 
enforcement officials said that other information, such as addresses, 
could be investigated and also might provide productive leads.

In other cases, though ownership information is not required, the 
actual owners may include personal information on the state's 
documents. For example, IRS investigated four people in Michigan who 
formed 15 shell corporations in Michigan and Indiana. Using these shell 
companies, the co-conspirators established 37 lines of credit at a bank 
and charged a number of large purchases, including real property, 
several luxury cars, jewelry, boats, and a motor home. The bank 
incurred losses of approximately $9.6 million. The IRS investigators 
found key pieces of evidence, including the identity of the co- 
conspirators, on the articles of incorporation and annual reports 
maintained by the states where the corporations were formed. Two of the 
co-conspirators were sentenced to 45 months and 51 months in prison and 
ordered to pay $327,500 and $2.8 million in restitution, respectively. 
In another IRS case, a man in Texas used numerous identities and 
corporations formed in Delaware, Nevada, and Texas to sell or license a 
new software program to investment groups. He received about $12.5 
million from investors but never delivered the product to any of the 
groups. The man used the corporations to hide his identity and to 
provide a legitimate face to his fraudulent activities. He also used 
the companies to open bank accounts to launder the money obtained from 
investors. IRS investigators found from state documents that he had 
incorporated the companies himself and often included his co- 
conspirators as officers or directors. The man was sentenced to 40 
years in prison.

In some cases, law enforcement officials have evidence of a crime but 
cannot connect an individual to the criminal action without ownership 
information. For example, an Arizona law enforcement official charged 
with helping investigate an environmental spill that caused $800,000 in 
damage said that the investigators could not prove who was responsible 
for the damage because the suspect had created a complicated corporate 
structure involving multiple company formations.[Footnote 46] ICE 
officials described a subject who allegedly used an agent to establish 
a Nevada-based corporation that in almost 2 years received 3,774 wire 
transfers totaling $81 million from locations such as the Bahamas, 
British Virgin Islands, Latvia, and Russia. However, ICE could not 
identify the suspect as the beneficial owner of the corporation because 
other people had handled the transactions. These cases were not 
prosecuted because investigators could not identify critical ownership 
information. Most of the law enforcement officials we interviewed said 
they had also worked on cases that reached dead ends because of the 
lack of U.S. company ownership information.

More Company Ownership Information Could Be Useful to Law Enforcement, 
but Concerns Exist about Collecting It:

State officials, agents, and others we interviewed said that collecting 
company ownership information could be useful to law enforcement and 
other interested parties. As we have discussed, investigations can be 
closed because of a lack of information, such as the names of the 
beneficial owners of a company. But if states or agents collected 
additional information on companies, filing times could increase, and a 
few states worried that costs could increase and company start-ups 
could be deterred. Further, information collected when companies were 
being formed might not be complete or up to date, as officers and 
directors might not have been chosen and the ownership could change 
after the company was formed. In addition, including such information 
in public records could cause concerns about privacy and related 
issues. State officials, agents, and other experts in the field 
suggested internal company records, financial institutions, and the IRS 
as alternative sources that might already be collecting this 
information. However, obtaining information from these sources also has 
limitations because the information may not be up to date or available.

States and Agents Acknowledged Benefits of Having Additional 
Information on Company Ownership but Raised Concerns about Collecting 
It:

Collecting ownership information when companies are formed could have 
some positive impacts for law enforcement as well as members of the 
public searching for this information. As shown in figure 6, 21 states 
in our survey said that if more ownership information were collected at 
company formation, that additional information would be available to 
law enforcement and the public. And as we have discussed, law 
enforcement investigations can benefit from knowing who owns and 
controls a company. A couple of state officials said that collecting 
such information would also allow them to be more responsive to 
consumer demands they have received for this information. For example, 
officials in Arizona and the District of Columbia told us that they 
often received phone calls from the public asking for ownership 
information they could not provide. In addition, one agent suggested 
that requiring agents to collect more ownership information could 
discourage dishonest individuals from using agents and could reduce the 
number of unscrupulous individuals in the industry.

State officials and agents noted that collecting additional information 
could increase filing times, and a few were concerned about other 
negative effects. Our survey showed that 29 states reported that the 
time needed to review and approve formations would increase if 
information on ownership was collected, since more data would need to 
be recorded in their databases (see fig. 6). A few states calculated 
that they would incur additional costs in modifying their forms, 
databases, and online filing systems to accommodate the new 
requirements. One state official said the extra time that would be 
required to review filings would reduce the benefits of electronic 
filing. Agents we interviewed also said that collecting and storing 
ownership information would increase the time necessary to provide 
their services and raise costs for both themselves and their clients. 
Other agents said that collecting and verifying ownership information 
would be difficult because they may have contact only with law firms 
and not company officials when a company is formed. State officials and 
others also noted that individuals could easily provide false names if 
ownership information were required without being verified.

Figure 6: Implications of All of the States Collecting Information on 
Company Ownership:

[See PDF for image]

Source: GAO survey of state officials responsible for company formation.

[End of figure]

Our survey results showed that in nearly half the states (23), 
officials thought the number of companies formed in their jurisdictions 
would stay about the same if all of the states collected this 
additional information (see fig. 6). But some state officials and 
others we interviewed said that if the requirements were not uniform, 
states with the most stringent requirements could lose business to 
other states or even countries, potentially losing state revenue. Some 
state officials noted the importance of the fees generated from company 
formations to state general revenue funds. For example, a Delaware 
official said that 22 percent of the state's revenue comes from the 
company formation business. Also, Nevada and Oregon officials stated 
that their offices were revenue-generating offices for the state. State 
officials, agents, and industry experts commented that states would be 
unlikely to pass comparable laws because state officials have such 
different opinions about the amount of information that should be 
disclosed.[Footnote 47] As a result, individuals could form companies 
in states where the requirements were easiest to follow. Agents also 
expressed concern that they could lose business if they collected 
ownership information, because individuals might be more likely to form 
their own companies and serve as their own agents.

Individuals forming businesses could also be affected by new 
requirements for collecting company information. Some officials noted 
that the additional time required to review filings could slow down and 
might derail business dealings. One state official commented that such 
requirements would create a burden for honest business people who would 
have provided accurate information in the first place but would not 
deter criminals, who would provide false information in any case. 
According to a report on the use of companies for illicit purposes, 
requiring companies to disclose up front and to update ownership 
information may impose significant costs, particularly on small 
businesses.[Footnote 48] A few state and some private sector officials 
noted that an increase in the time and costs involved in forming a 
company might reduce the number of companies formed, because 
entrepreneurs and investors might be less likely to take the risks 
involved in forming or investing in new companies.

Some state officials also noted that to change the information 
requirements, state legislatures would have to pass new legislation and 
grant company formation offices new authority. A few states indicated 
that collecting additional information would require higher fees that 
would also need to be set by their state legislatures. State officials 
also noted that since they are administrative agencies, they generally 
do not have the authority to question or verify the information 
provided on the forms and would need additional authority from state 
legislatures to do so.

State and private sector officials pointed out that ownership 
information collected at formation or on periodic reports might not be 
complete or up to date. Information collected at formation, for 
instance, might not be useful because ownership information can change 
frequently throughout the year. For example, an official from Delaware 
commented that many privately held LLCs and corporations in Delaware 
and other states may have thousands of shareholders and LLC members 
that buy and sell shares and memberships on a daily basis. Another 
state official commented that collecting this information at formation 
would not be useful without requiring that it be updated frequently. In 
addition, since LLCs can be owned by individuals or other businesses, 
even if states required LLCs to list a member name, the name provided 
may not be that of an individual but another company. Disclosing 
ownership information on periodic reports, however, could mean that a 
year or more would pass before it was collected--too long to be of use 
in many investigations. In addition, we found that some states do not 
require these reports.[Footnote 49] Further, once it is formed, a shell 
company being used for illicit purposes in the United States or other 
countries may not file required periodic reports. Law enforcement 
officials told us that many companies under investigation for suspected 
criminal activities had been dissolved by the states in which they were 
formed for failing to submit periodic reports.

State Officials and Others Were Concerned about Privacy Issues:

State officials, agents, and other industry experts said the need for 
access to information on companies must be weighed against privacy 
issues. Company owners may want to maintain their privacy in part 
because state statutes have traditionally provided this privacy and in 
part to avoid lawsuits against them in their personal capacity. Some 
business owners may also seek to protect personal assets through 
corporations and LLCs. One state law enforcement official also noted 
that if more information were easily available, criminals and con 
artists could take advantage of it. He noted that information available 
on official Web sites was sometimes used to target companies for scams. 
For example, the official described a case in which an individual sent 
letters that appeared to be from a secretary of state's office to 
companies listed on the state Web site, telling the recipients that 
they were to file their annual meeting minutes with the state, although 
no such requirement existed. The individual offered to provide filing 
services for a fee, and collected the fees from companies, but did not 
forward any minutes to the state. Providing more easily accessible 
information to the public could result in more such activities.

Business owners might be more willing to provide ownership information 
if it were not disclosed in the public record. Some state officials we 
interviewed said that since all information filed with their office is 
a matter of public record, keeping some information private would 
require new legislative authority. The officials added that storing new 
information would be a challenge because their data systems are not set 
up to maintain confidential information. However, one official from 
Maryland said that keeping some information private would not be a 
problem since the office that accepted company formation and periodic 
report filings also handled tax filings and already had procedures for 
keeping information such as taxpayer identification numbers 
confidential. An official in Oregon also told us that the Corporations 
Division office had recently enacted procedures to keep some 
information private in cases such as domestic abuse. Individuals can 
petition the state to have information removed from databases available 
online and redacted in the paper file, but it is still available to law 
enforcement. The Arizona Corporation Commission also tries to remove 
Social Security numbers from its Web site if applicants include them on 
their paper forms, but maintains the information on paper 
forms.[Footnote 50]

Two Foreign Jurisdictions Have Had Mixed Experiences with Requiring the 
Collection of Company Ownership Information:

Because states do not typically collect and verify ownership 
information and because state and private sector officials could not 
quantify the extent of the possible costs of taking these steps, we 
reviewed the experiences of Jersey and Isle of Man in implementing the 
regulation of firms that provide services such as company formation 
(company service providers).[Footnote 51] Fewer companies are formed in 
both jurisdictions, especially by local residents, than in the United 
States, and the number of company service providers is much 
smaller.[Footnote 52] However, some of the concerns states and agents 
expressed about increased regulation also have been born out in Jersey 
and the Isle of Man, although officials also pointed to certain 
benefits of collecting ownership information and the new regulatory 
regime. Company service providers in both jurisdictions must be 
licensed, and are subject to periodic monitoring and inspections by 
government agencies. In both of these jurisdictions, company service 
providers are required to conduct due diligence to verify the identity 
of their clients and obtain company ownership information to form a new 
company. The ownership information is not maintained in the public 
record, but is kept at the registry in Jersey and with company service 
providers in Isle of Man and is available only to law enforcement.

Figure: Jersey and Isle of Man.

[See PDF for Image]

Source: Art Explosion.

[End of Figure]

Despite strong initial resistance, the company service provider 
industry in these two jurisdictions is now perceived as successful 
because licensed companies have continued to remain profitable. In 
addition, one company service provider told us that the regulations 
have instilled a degree of professionalism in the company service 
provider industry. Further, law enforcement officials can obtain 
information about company ownership when they need it.

However, government and private sector officials told us that 
implementing these regulations was a significant challenge. Both 
jurisdictions experienced consolidation in the company service provider 
industry. Some companies merged, and others moved to locations with 
fewer requirements or went out of business because they either did not 
want to comply with the new regulations or could not charge fees high 
enough to cover due diligence costs. One company service provider said 
the time required to form a company increased, as the due diligence 
requirements company service providers must follow can take weeks to 
complete depending on the client, though once documents are submitted 
to the Jersey or Isle of Man registry offices, formations are finished 
in 48 hours or less. The workload of company service providers has also 
increased. One company service provider told us that the company had 
increased its staff by 25 percent to 30 percent because of the 
requirement that the company verify customer information. Fewer 
companies are formed in Isle of Man, according to an Isle of Man 
official. Before the regulations, Isle of Man had 40,000 incorporated 
entities, but it now has 35,000. Finally, because ownership is fluid, 
it is a challenge to keep the information up to date. In Isle of Man, 
the responsibility for keeping information up to date lies with the 
company service providers. In Jersey, ownership information is updated 
on annual reports.

Other Potential Sources of Company Information May Be Available, but 
Obtaining Information from These Sources May Also Be Challenging:

State officials, agents, and others told us that some other sources of 
company ownership information that law enforcement officials could 
access existed, including internal company documents, financial 
institutions, and the IRS.

Internal Company Documents:

Our review of state statutes found that all states require corporations 
to prepare a list of shareholders, typically before the mandatory 
annual shareholder meeting, and that almost all states require that 
this list be maintained at the corporation's principal or registered 
office.[Footnote 53] Industry experts told us that LLCs also usually 
prepare and maintain operating agreements that generally name the 
members and outline their financial interests.[Footnote 54] These 
documents are generally not public record, but law enforcement 
officials can subpoena them to obtain ownership information, and ICE 
officials in one field office said they always looked at LLC operating 
agreements during an investigation. However, accessing these lists may 
be problematic, and the documents themselves might not be accurate or 
even exist. For example, law enforcement officials said that shell 
companies may not prepare these documents and that U.S. officials may 
not have access to them if the company is located in another country. 
In addition, law enforcement officials may not want to request these 
documents in order to avoid tipping off a company about an 
investigation.

Industry experts also cautioned that even these internal documents may 
not reveal the true beneficial owners of a company. For example, the 
list could include nominee shareholders, which would reduce the 
usefulness of the shareholder list because the shareholder on record 
may not be the beneficial owner.[Footnote 55] In addition, shareholders 
could sell their stock and not register the sale with the company; in 
such cases, the new owners would not be known. Shareholders could also 
sell their stock before the filing date and then buy it back after the 
filing date to avoid being listed. Further, in states that allow bearer 
shares, the owners' names are anonymous because bearer share 
certificates do not contain the names of the shareholders.[Footnote 56] 
Therefore, while law enforcement authorities could obtain lists of 
shareholders from companies by subpoena, further investigation might 
still be needed to find the true beneficial owners.

Financial Institutions:

Financial institutions may also have ownership information on some 
companies. Customer Identification Program (CIP) requirements 
implemented by the USA PATRIOT ACT in 2001 establish minimum standards 
for financial institutions to follow when verifying the identity of 
their customers in connection with the opening of an account.[Footnote 
57] Under these standards, financial institutions must collect the name 
of the company, its physical address (for instance, its principal place 
of business), and an ID number, such as the tax identification number. 
The regulations also mandate that financial institutions develop risk- 
based procedures for verifying the identity of each customer to the 
extent that doing so is reasonable. For example, representatives from 
financial institutions told us that they typically requested a 
company's articles of incorporation when a new account was opened to 
verify that the entity existed. One representative said that his 
institution also checked names against the OFAC list and requested 
photo identification from all signers on the account. Industry 
representatives noted that institutions may also compare the customer 
information with information obtained from a consumer reporting agency, 
public database, or other sources. Finally, based on a risk assessment, 
the institution may obtain information about individuals with authority 
or control over the account in order to verify their 
identities.[Footnote 58]

Representatives of financial institutions told us that although they 
are not required to obtain ownership information in all cases, they may 
investigate high-risk applicants to uncover the ultimate beneficial 
owners. These applicants may include casinos, companies that are not 
listed on world stock exchanges, companies with complex structures, or 
companies from certain high-risk countries.[Footnote 59] For such 
applicants, financial institutions may ask about information such as 
beneficial owners and officers of the company. Financial industry 
representatives said that conducting the necessary due diligence on a 
company absorbs time and resources, because institutions must sometimes 
peel back layers of corporations or hire private investigators to find 
the actual beneficial owner or owners of a company.

One financial institution we interviewed collects the name, date of 
birth, and tax identification number of all individuals with ownership 
and control of a corporation or LLC. However, officials from some 
institutions told us that obtaining such information on all applicants 
would be an added burden to an industry that is already subject to 
numerous regulations. Some industry officials also said that financial 
institutions may not want to request ownership information in all cases 
for fear of losing a customer. In addition, industry representatives 
noted that collecting ownership information at financial institutions 
might not always be useful or available, because ownership might change 
after the account was opened and not all companies opened bank or 
brokerage accounts. Furthermore, Department of Justice officials noted 
that, in some instances, the financial activity of a shell company 
under investigation does not involve U.S. financial institutions. 
Finally, correspondent accounts create opportunities to hide the 
identities of the account holders from the banks themselves. A foreign 
bank can open a correspondent account with a U.S. bank to avoid bearing 
the costs of licensing, staffing, and operating its own offices in the 
United States. Many of the largest international banks serve as 
correspondents for thousands of other banks. The USA PATRIOT ACT 
requires financial institutions that provide correspondent accounts to 
foreign banks to maintain records of the foreign bank's owners and of 
the name and address of an agent in the United States designated to 
accept service of process for the foreign bank for records regarding 
the correspondent account.[Footnote 60] However, law enforcement and 
industry representatives told us that the foreign banks may commingle 
funds from many different customers into one correspondent account, 
making it difficult for U.S. banks to identify the individuals with 
access to the account.[Footnote 61]

IRS:

IRS was mentioned as another potential source of company ownership 
information for law enforcement, but IRS officials pointed to several 
limitations with this data. First, IRS may not have information on all 
companies formed. The agency collects company ownership information on 
certain forms, such as the application for an employer identification 
number (EIN) (SS-4).[Footnote 62] Form SS-4 requires the name and tax 
identification number (such as the Social Security number) of the 
principal officer if the business is a corporation, or general partner 
if it is a partnership, or owner if it is an entity that is disregarded 
as separate from its owner (disregarded entity), such as a single 
member LLC.[Footnote 63] Disregarded entities owned by a corporation 
enter the corporation's name and EIN. However, not all LLCs are 
required to have EINs.[Footnote 64] In addition, the name of an owner 
may be on the form LLCs file to select how they will be taxed. IRS also 
currently collects some general ownership information, including an 
identifying number, name, and address, on certain LLCs on separate 
schedules that the company files with the IRS.[Footnote 65] For LLCs 
that are taxed as partnerships, this form specifies whether members are 
member-managers or another type of member of an LLC and reports the 
member's share of the company profits, losses, and capital. But if an 
LLC has only one member, the individual reports income on an individual 
tax return.[Footnote 66] In addition, IRS classifies certain LLCs as 
corporations for tax purposes, and others may choose to be classified 
as corporations.[Footnote 67] Ownership information is available for 
LLCs that are classified as corporations and file as S corporations, 
but generally not for those that are taxed as C corporations.[Footnote 
68]

Second, IRS officials reported that the ownership information the 
agency collected may not be complete or up to date. As we have 
discussed, the agency does not have information on every company, 
because some companies do not request or need EINs. In addition, some 
EINs become inactive after a certain period, dropping off the IRS 
database. For example, Department of Justice officials told us that 
U.S. shell companies being used in foreign criminal activity are 
sometimes inactive in the United States. In addition, ownership 
information on LLCs owned by foreign individuals or entities would only 
be available if the LLC obtained an EIN for income that was subject to 
tax in the United States. Further, data gathered on IRS forms may not 
always be accurate. In a recent report, we found that data 
transcription errors made by IRS staff entering data into a database 
and invalid taxpayer identification numbers submitted by companies 
lowered the accuracy of these data.[Footnote 69] IRS officials also 
noted that the information collected might not always be useful in 
finding the ultimate beneficial owner of a company, because another 
entity could be listed as the owner, requiring further investigation to 
identify the true owner. Finally, IRS officials said that the 
information in the agency's records might not be up to date because IRS 
was not always notified when ownership changed.

Third, law enforcement officials could have difficulty accessing IRS 
taxpayer information. As part of the administration of federal tax 
laws, IRS investigators can use IRS data in their investigations of tax 
and related statutes, but access by other federal and state law 
enforcement is restricted by 26 U.S.C. § 6103.[Footnote 70] IRS 
officials said that federal law enforcement officials can access IRS 
information provided by taxpayers (or their representatives) when a 
federal court issues an ex parte order.[Footnote 71] Under 26 U.S.C. § 
6103(i)(1), the federal law enforcement agency requesting the 
information through an ex parte order must show that it is engaged in 
preparation for a judicial, administrative or grand jury proceeding to 
enforce a federal criminal statute or that the investigation may result 
in such a proceeding.[Footnote 72] Information IRS receives from a 
source other than taxpayers (or their representatives), such as 
taxpayers' employers or banks, can be obtained without a court 
order.[Footnote 73] Moreover, in certain limited situations, there are 
additional provisions currently in the tax code providing for 
disclosure of such information relating to criminal or terrorist 
activities or emergency circumstances.[Footnote 74] State law 
enforcement officials can access IRS information for enforcement of 
state tax laws when IRS has sharing agreements with state taxing 
authorities.[Footnote 75] Law enforcement officials can also obtain IRS 
information with the taxpayer's consent.[Footnote 76] Officials in one 
ICE field office told us that they have obtained IRS information; 
however, officials in another ICE field office said that obtaining this 
information was difficult. IRS officials commented that collecting 
additional ownership and control information on IRS documents would 
provide IRS investigators with more detail when conducting 
investigations but that the agency's ability to collect and verify such 
information would depend on the availability of resources.

Observations:

States and agents collect a variety of information when individuals 
form companies, but most state statutes do not require that they 
collect or verify information on ownership. Therefore, minimal 
information is collected on the owners of these companies. During our 
review, we encountered a variety of legitimate concerns about the 
merits of collecting ownership information on companies formed in the 
United States. Many of these concerns reflected conflicting interests. 
On the one hand, federal law enforcement agencies were concerned about 
the lack of information, because criminals can easily use U.S. shell 
companies to mask the identities of those engaged in illegal 
activities. From a law enforcement perspective, having more information 
would make using U.S. shell companies for illicit activities harder and 
give investigators more information to use in pursuing the actual 
owners. In addition, since U.S. shell companies are used in criminal 
activity abroad because of their perceived legitimacy, collecting more 
information when a company is formed could improve the integrity of the 
company formation process in the United States. On the other hand, 
states and agents were concerned about increased costs, potential 
revenue losses, and privacy protection. Collecting more information 
would require more time and resources and could reduce the number of 
start-ups. Approving applications could take longer, potentially 
creating obstacles for those forming companies for legitimate business 
purposes. And importantly, because information on companies is 
currently part of the public record, requiring certain information on 
ownership could be considered a threat to the current system, which 
values the protection of privacy and individuals' personal assets.

Any requirement that states, agents, or both collect more ownership 
information on certain types of companies would need to balance these 
conflicting concerns. Further, such a requirement would need to be 
uniformly applied in all U.S. jurisdictions. If it were not, those 
wanting to set up shell companies for illicit activities would simply 
move to the jurisdiction that presented the fewest obstacles, 
undermining the intent of the requirement.

Agency Comments and Our Evaluation:

We provided a draft of this report to the Departments of Justice, 
Homeland Security, and the Treasury. Justice and Treasury provided 
technical comments that were incorporated into the report, where 
appropriate.

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from the report date. At that time, we will send copies to the 
Departments of Justice, Homeland Security, and the Treasury; and 
interested congressional committees. We will also make copies available 
to others on request. In addition, the report will be available at no 
charge on GAO's Web site at [Hyperlink, http://www.gao.gov]. The survey 
and a more complete tabulation of state-by-state and aggregated results 
can be viewed at [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06- 
377SP].

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-8678 or jonesy@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions to 
this report are listed in appendix IV.

Signed By:

Yvonne D. Jones: 
Director, Financial Markets:
and Community Investment:

[End of section]

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

This report describes states' company formation and reporting 
requirements and the information that is routinely obtained and made 
available to the public and law enforcement officials regarding 
ownership of nonpublicly traded corporations and limited liability 
companies (LLC) formed in each state given concerns about the potential 
for using companies for illicit purposes. Specifically, this report 
discusses:

1. the kinds of information--including ownership information--that the 
50 states and the District of Columbia collect during company formation 
and the states' efforts to review and verify it;

2. the roles of third-party agents, such as company formation agents, 
and the kinds of information they collect on company ownership;

3. the role of shell companies in facilitating criminal activity, the 
availability of company ownership information to law enforcement, and 
the usefulness of such information in investigating shell companies; 
and:

4. the potential effects of requiring states, agents, or both to 
collect company ownership information.

To respond to the first objective and describe the ways company 
formation and periodic reporting documents can be filed, we conducted a 
Web-based survey of the 50 states and the District of Columbia on 
formation and reporting practices. We worked to develop the 
questionnaire with social science survey specialists. Because these 
were not sample surveys, there are no sampling errors. However, the 
practical difficulties of conducting any survey may introduce errors, 
commonly referred to as nonsampling errors. For example, differences in 
how a particular question is interpreted, in the sources of information 
that are available to respondents, or in how the data are entered into 
a database can introduce unwanted variability into the survey results. 
We took steps in the development of the questionnaires, the data 
collection, and data analysis to minimize these nonsampling errors. For 
example, prior to administering the survey, we pretested the content 
and format of the questionnaires with state officials in Florida, 
Maine, Maryland, Virginia, and Washington, D.C., to determine whether 
(1) the survey questions were clear, (2) the terms used were precise, 
(3) respondents were able to provide the information we were seeking, 
and (4) the questions were unbiased. An official from the International 
Association of Commercial Administrators (IACA) also reviewed a draft 
of the survey. We made changes to the content and format of the final 
questionnaires based on pretest results. We sent the finalized survey 
to contacts responsible for company filings in secretary of state 
offices (or their equivalents) in all 50 states and the District of 
Columbia. See Survey of State Officials Responsible for Company 
Formation, GAO-06-377SP, for the final version of the survey and state-
by- state results. We received survey responses from each of the 50 
states and the District of Columbia. In that these were Web-based 
surveys whereby respondents entered their responses directly into our 
database, the possibility of data entry error was minimized. We also 
performed computer analyses to identify inconsistencies in responses 
and other indications of error. We contacted survey respondents as 
needed to correct errors and verify responses. In addition, a second 
independent analyst verified that the computer programs used to analyze 
the data were written correctly.

To test the reliability of survey data, we compared state responses on 
our survey with data states provided to IACA in its 2005 annual report 
of jurisdictions for four key variables--the number of LLCs and 
corporations filed in 2004 and the total number on file. The data were 
markedly the same, with very high correlations and no significant 
differences in mean values. Based on this testing, we believe our 
reporting of the trends based on the number of corporations and LLCs to 
be reliable. We also corroborated the survey results with information 
we collected from a systematic review of state Web sites and state 
statutes. Where we found a discrepancy on key variables, we contacted 
the relevant state official for clarification of the state's 
requirement. Our review of the state corporation statutes included 
analysis of provisions regarding company formation, registered agents, 
shareholder identification, requirements for record keeping, and 
periodic reporting. In addition, we reviewed provisions in state LLC 
statutes relating to company formation, periodic reporting, and 
registered agents. We also reviewed the content of company formation 
forms and other information available on state Web sites. The data 
collected from our review of state statutes and Web sites is as of 
October 2005. We also visited Arizona, Delaware, Florida, Nevada, and 
Oregon to conduct in-depth interviews with state officials about 
practices in these states. We selected these states because of the 
number of companies formed there or unique practices we identified from 
the statutes, forms, or survey responses.

To respond to the second objective and describe the roles of third- 
party agents, we interviewed academics with expertise in corporate and 
LLC law, selected professional agents, and state officials. In 
selecting agents to interview, we interviewed only companies that act 
as agents for service of process for more than one client. We chose a 
range of large national companies (three) as well as midsize or small 
companies (nine). We interviewed selected agents about the information 
they collect on companies and analyzed survey results on states' 
requirements regarding oversight of these agents. We also interviewed 
officials from the National Public Records Research Association, an 
association that represents companies providing corporate services and 
public records research, and the Nevada Resident Agent Association, 
which represents a number of resident agents in Nevada. In addition, we 
reviewed state statutes for requirements regarding becoming an agent 
for service of process.

To respond to the third objective and determine what information states 
and agents make available to law enforcement and the public, we 
reviewed company formation and periodic reporting forms on state Web 
sites and reviewed state Web sites for the type of information made 
available online and other methods individuals may use to obtain 
information. In addition, we interviewed selected state officials and 
agents about the methods they use to provide information. We also 
interviewed selected state and federal law enforcement officials about 
their experiences in obtaining company information from states to aid 
their investigations, including officials from the following state and 
federal agencies: the Arizona Attorney General, Drug Enforcement 
Agency, Federal Bureau of Investigation, the Florida Attorney General, 
Immigration and Customs Enforcement, Internal Revenue Service/Criminal 
Investigations, Financial Crimes Enforcement Network, U.S. Attorneys 
Office, and Office of Foreign Assets Control.

To respond to the fourth objective and determine the implications of 
requiring states or agents to collect company ownership information, we 
analyzed survey results and interviewed selected state officials and a 
range of professional agents. To determine how other jurisdictions have 
implemented regimes requiring collection of ownership information, we 
interviewed officials from Jersey and Isle of Man, which require the 
collection of this information, about the implications of implementing 
these requirements. Jersey and Isle of Man are two of a small number of 
jurisdictions that require disclosure of beneficial ownership 
information when a company is formed. We also reviewed an Organization 
for Economic Co-operation and Development report describing 
requirements in one of the jurisdictions. To determine other potential 
sources of company information, we asked academics, agents, state 
officials, law enforcement officials, and representatives of 
professional associations their perspectives on where this information 
could be obtained. We also reviewed state statutes on requirements for 
company record keeping. In addition, we interviewed representatives of 
selected financial institutions and the IRS about the company 
information they typically collect.

We conducted our work from May 2005 through March 2006 in Arizona, 
Delaware, Florida, Maryland, Nevada, New York, Oregon, Virginia, and 
Washington, D.C. We performed our work in accordance with generally 
accepted government auditing standards.

[End of section]

Appendix II: Company Formation and Reporting Documents Can Be Submitted 
in a Variety of Ways:

Company formation and reporting documents can be submitted in person or 
by mail, and many states also accept filings by fax. Review and 
approval times can depend on how documents are submitted. For example, 
a District of Columbia official told us that a formation document 
submitted in person could be approved in 15 minutes, but a document 
that was mailed might not be approved for 10 to 15 days. Most states 
reported that documents submitted in person or by mail were approved 
within 1 to 5 business days, although a few reported that the process 
took more than 10 days. Officials in Arizona, for example, told us that 
it typically took the office 60 days to approve formation documents 
because of the volume of filings the office received.

In 36 states, company formation documents, reporting documents, or both 
can be submitted through electronic filing (fig. 7 shows the states 
that provide a Web site for filing formation documents or periodic 
reports).[Footnote 77] In addition, some officials indicated that they 
would like or were planning to offer electronic filing in the future. 
Of the 36 states that allow electronic filing, 23 or more reported a 
moderate or greater benefit in the following areas as a result of 
electronic filing:

* less paperwork;

* reduced staff time for recording and processing filings;

* less need to store paper records;

* electronic transfer of filing fees; and:

* built-in edit and data reliability checks.

State officials also commented that they had seen their error or 
rejection rates fall, and had been able to improve their customer 
service with electronic filing. States said that there were some or 
moderate costs associated with electronic filing, such as increased 
expenses for technology (hardware and software) and staff training. 
Overall, according to our survey, 28 of the 36 states that offer 
electronic filing reported that the benefits exceeded the costs.

Figure 7: States That Provide a Web Site for Filing Formation or 
Periodic Report Filings:

[See PDF for image]

Sources: GAO survey of state officials responsible for company 
formation(data); Art Explosion(map) 

[End of figure] 

Company Formation Fees:

As shown in table 3, in many cases states charge the same or nearly the 
same fee for forming a corporation or an LLC. In others, such as 
Illinois, the fee is substantially different for the two business 
forms. We found that in two states, Nebraska and New Mexico, the fee 
for forming a corporation may fall into a range. In these cases, the 
actual fee charged depends on the number of shares the new corporation 
will have. As stated earlier, the median company formation fee is $95, 
and fees for filing periodic reports range from $5 to $500.

Table 3: State Company Formation Fees as of November 2005:

State: Alabama; 
LLCs: $75; 
Corporations: $40.

State: Alaska; 
LLCs: $250; 
Corporations: $250.

State: Arizona; 
LLCs: $50; 
Corporations: $60.

State: Arkansas; 
LLCs: $50; 
Corporations: $50.

State: California; 
LLCs: $70; 
Corporations: $100.

State: Colorado; 
LLCs: $125; 
Corporations: $125.

State: Connecticut; 
LLCs: $60; 
Corporations: $150.

State: Delaware; 
LLCs: $90; 
Corporations: $50.

State: District of Columbia; 
LLCs: $150; 
Corporations: $89.

State: Florida; 
LLCs: $125; 
Corporations: $79.

State: Georgia; 
LLCs: $100; 
Corporations: $100.

State: Hawaii; 
LLCs: $50; 
Corporations: $50.

State: Idaho; 
LLCs: $100; 
Corporations: $100.

State: Illinois; 
LLCs: $500; 
Corporations: $150.

State: Indiana; 
LLCs: $90; 
Corporations: $90.

State: Iowa; 
LLCs: $50; 
Corporations: $50.

State: Kansas; 
LLCs: $165; 
Corporations: $90.

State: Kentucky; 
LLCs: $40; 
Corporations: $40.

State: Louisiana; 
LLCs: $75; 
Corporations: $60.

State: Maine; 
LLCs: $175; 
Corporations: $145.

State: Maryland; 
LLCs: $100; 
Corporations: $100.

State: Massachusetts; 
LLCs: $500; 
Corporations: $275.

State: Michigan; 
LLCs: $50; 
Corporations: $60.

State: Minnesota; 
LLCs: $135; 
Corporations: $135.

State: Mississippi; 
LLCs: $50; 
Corporations: $50.

State: Missouri; 
LLCs: $105; 
Corporations: $58.

State: Montana; 
LLCs: $70; 
Corporations: $70.

State: Nebraska; 
LLCs: $100; 
Corporations: $60-300.

State: Nevada; 
LLCs: $75; 
Corporations: $75.

State: New Hampshire; 
LLCs: $100; 
Corporations: $50.

State: New Jersey; 
LLCs: $125; 
Corporations: $125.

State: New Mexico; 
LLCs: $50; 
Corporations: $100-1,000.

State: New York; 
LLCs: $200; 
Corporations: $125.

State: North Carolina; 
LLCs: $125; 
Corporations: $125.

State: North Dakota; 
LLCs: $125; 
Corporations: $80.

State: Ohio; 
LLCs: $125; 
Corporations: $125.

State: Oklahoma; 
LLCs: $100; 
Corporations: $50.

State: Oregon; 
LLCs: $50; 
Corporations: $50.

State: Pennsylvania; 
LLCs: $125; 
Corporations: $125.

State: Rhode Island; 
LLCs: $150; 
Corporations: $230.

State: South Carolina; 
LLCs: $110; 
Corporations: $135.

State: South Dakota; 
LLCs: $125; 
Corporations: $125.

State: Tennessee; 
LLCs: $300; 
Corporations: $100.

State: Texas; 
LLCs: $200; 
Corporations: $300.

State: Utah; 
LLCs: $52; 
Corporations: $52.

State: Vermont; 
LLCs: $75; 
Corporations: $75.

State: Virginia; 
LLCs: $100; 
Corporations: $25.

State: Washington; 
LLCs: $175; 
Corporations: $175.

State: West Virginia; 
LLCs: $100; 
Corporations: $50.

State: Wisconsin; 
LLCs: $170; 
Corporations: $100.

State: Wyoming; 
LLCs: $100; 
Corporations: $100.

Source: GAO analysis of state Web sites.

[End of table]

Thirty states reported offering expedited service for an additional 
fee. Of those, most responded that with expedited service, filings were 
approved either the same day or the day after an application was filed. 
Two states reported having several expedited service options. Nevada 
offers 24-hour expedited service for an additional $125 above the 
normal filing fees, 2-hour service for an extra $500, and 1-hour, or 
"while you wait," service for an extra $1,000. Delaware offers same day 
service for $100, next day service for $50, 2-hour service for $500, 
and 1-hour service for $1,000.

[End of section]

Appendix III: Information on Company Formation Documents:

This appendix includes a table of the information states require in 
their company formation documents for corporations and LLCs. As shown 
in figure 8, states collect different information on their company 
formation documents. Most states require the company name, agent name 
and address, and the name and signature of the incorporator or 
organizer, and for corporations, information about the number and types 
of shares the corporation will issue. The requirements for the 
company's purpose, principal address, and names and addresses of owners 
and management are not as consistent across the states.

Figures 9 and 10 are examples of company formation documents from two 
states that have different information requirements.

Figure 8: Key Information Required on Articles of Incorporation/ 
Organization:

[See PDF for image]

[A] Although state statutes may not require this information, some 
states request or require this information be included on the company 
formation documents.

[B] Information on number and type of shares and officer names and 
addresses applies only to corporations.

[C] New Mexico and Arkansas did not respond to some of our survey 
questions. However, we found from our legal review that Arkansas does 
not require the address of a beneficial owner on articles or periodic 
reports. Our legal review also found that New Mexico does require 
corporations to list the names and addresses of directors, but not 
officers or beneficial owners on articles of incorporation. For LLCs, 
we found that New Mexico does not require the names and addresses of 
members or managers on formation documents.

Sources: GAO survey of state statutes and company formation documents; 
GAO survey of state officials responsible for company formation.

[End of figure]

Figure 9: Sample Articles of Incorporation Form for a Corporation:

[See PDF for image]

Source: Delaware Division of Corporations.

[End of figure]

Figure 10: Sample Articles of Organization Form for an LLC:

[See PDF for image]

Source: Arizona Corporation Commission.

[End of figure] 

[End of section]

Appendix IV: GAO Contact and Staff Acknowledgments:

GAO Contact:

Yvonne D. Jones, (202) 512-8678 or jonesy@gao.gov.

Staff Acknowledgments:

In addition to the contact named above, Kay Kuhlman (Assistant 
Director), LaKeshia Allen, Todd M. Anderson, Carolyn Boyce, Emily 
Chalmers, William R. Chatlos, Jennifer DuBord, Marc Molino, Jill M. 
Naamane, and Linda Rego made key contributions to this report.

[End of section]

Glossary:

Agent for service of process:

A person or entity authorized to accept service of process or other 
important tax and legal documents on behalf of a business. Agents for 
service of process may be known as registered agents, resident agents, 
statutory agents, or clerks in different states.

Articles of incorporation:

A corporate formation document setting forth basic terms governing the 
corporation's existence. The articles are filed in most states with the 
secretary of state during the formation process. This document is 
called a "certificate of incorporation" for corporations formed in 
Connecticut, Delaware, New Jersey, New York and Oklahoma; "articles of 
organization" for corporations formed in Massachusetts; and a "charter" 
for corporations formed in Tennessee.

Articles of association or articles of organization:

A governing document legally creating a nonstock organization, similar 
to "articles of incorporation" described above for incorporated 
entities. This document is called a "certificate of formation" for 
limited liability companies formed in Mississippi, New Hampshire, New 
Jersey, and Washington, and a "certificate of organization" for limited 
liability companies formed in Pennsylvania.

Bearer security:

An unregistered security payable to the holder. For instance, a bearer 
stock certificate is owned by the person legally holding (in possession 
of) the certificate even when no one else knows who holds the 
certificate. Bearer shares may be bought, sold, or exchanged in 
complete privacy.

Beneficial owner:

Shareholders with the power to buy or sell their shares in the company, 
but who are not registered or reflected in the company's records as the 
owners. A beneficial owner is the natural person who ultimately owns or 
exercises effective control over a legal entity, transaction, or 
arrangement.

Certificate of existence:

A certificate issued by a state official as conclusive evidence that a 
corporation is in existence or authorized to transact business in that 
state. The certificate generally sets forth the corporation's name, and 
that it is duly incorporated under the law of that state or authorized 
to transact business in that state; that all fees, taxes and penalties 
owed to that state have been paid; and that the corporation's most 
recent annual report has been filed, and articles of dissolution have 
not been filed. Also may be known as a certificate of good standing or 
certificate of authorization.

Company formation agent:

A person or business that acts as an agent for others by filing 
documents with officials of the selected jurisdiction for the formation 
of legal business entities. Such agents may also act, or arrange for 
another person to act, as a director or secretary of a company, a 
partner of a partnership, or a nominee shareholder for another person. 
Other business services may also be provided, such as providing a 
registered office, or a business, correspondence, or administrative 
address for a company.

Corporate veil:

The legal doctrine of separating the acts of a corporation from the 
acts of its shareholders, which prevents the shareholders from being 
held personally liable for the acts of the corporation.

Piercing the corporate veil:

An equitable doctrine where the separate existence of a corporation is 
disregarded by the law and the shareholders are held responsible for 
the acts and obligations of the corporation. This doctrine has also 
been used in certain circumstances to impose liability on corporate 
officers and directors. Piercing the corporate veil is justified only 
in extraordinary circumstances where a court finds that a unity of 
interest and ownership between an individual and a corporation exists 
to such an extent that recognizing a separate existence between the two 
would result in an injustice. In such cases, a court may disregard the 
corporate entity and impose personal liability on the individual.

Corporation:

An artificial being (usually a business entity) created by law that 
provides authority for the entity to act as a separate and distinct 
legal person apart from its owners and provides other legal rights, 
such as the right to exist indefinitely and to issue stock.

Federal law classifies corporations created by state law into S 
corporations and C corporations for purposes of federal income taxes as 
follows:

S corporation:

A small business corporation that elects to be taxed as an S 
corporation under the federal tax code.[Footnote 78] The taxable income 
of an S corporation is passed through to the shareholders and taxed at 
the shareholder level.

C corporation:

A corporation that is not an S corporation.

Director:

A person elected or appointed to serve as a member of the board of 
directors for a corporation, which generally manages the corporation 
and its officers.

Dummy (or nominee) director:

A member of a corporation's board of directors who is a mere figurehead 
and who has no true control over the corporation. Typically, a nominee 
director may have no knowledge of the business affairs or accounts, may 
not exercise independent control of or influence over the business, and 
may not act unless instructed to act by the beneficial owner.

Limited liability:

Liability restricted by law or contract, such as the liability of the 
owners of a business entity for only the capital invested in the 
business.

Limited liability company (LLC):

A company whose owners (members) have limited liability (see "limited 
liability") and that is managed either by managers or its members. An 
LLC consists of one or more members (see "member").

Manager-managed company:

A limited liability company that designates in its articles of 
organization that it is a manager-managed company. In this type of LLC, 
each member is not generally an agent of the LLC solely because of 
being a member of the LLC. Rather, each manager is such an agent.

Member (LLC):

An owner of an LLC interest; similar to a shareholder in a corporation.

Member-managed company:

A limited liability company that does not designate in its articles of 
organization that it is a manager-managed company. In this type of LLC, 
each member is an agent of the LLC and may generally act on behalf of 
the LLC for the purpose of the LLC's business.

Nominee:

An individual or entity designated to act on behalf of another, such as 
a nominee director acting on behalf of a beneficial owner (see 
"beneficial owner"). Most often in offshore tax avoidance schemes, the 
nominee may pretend to be the owner of an entity, asset, or transaction 
to provide a veil of secrecy as to the beneficial owner's involvement.

Officer:

A person elected or appointed by a corporation's board of directors to 
manage and oversee the day-to-day operations of the organization, such 
as a chief executive officer, chief financial officer, chief 
administrative officer, and secretary.

Partnership:

An association of two or more persons jointly owning and conducting a 
business together where the individuals agree to share the profits and 
losses of the business.

Limited partnership:

A partnership consisting of one or more limited partners who contribute 
capital to and share in the profits of the partnership, but whose 
liability for partnership debts is limited to the amount of their 
contribution and one or more general partners who control the business 
and are personally liable for the debts of the partnership.

Limited liability partnership (LLP):

A partnership where a partner is not liable for the negligent acts 
committed by other partners or by employees not under the partner's 
supervision. Certain businesses (typically law firms or accounting 
firms) are allowed to register under state statutes as this type of 
partnership.

Limited liability limited partnership (LLLP):

A partnership where general and limited partners are not liable for the 
partnership's debts and obligations because of their status as a 
partner.

Service of process:

The delivery of legal process or other legal notice, such as a writ, 
citation, summons, or a complaint or other pleading filed in a civil 
court matter.

Sole proprietorship:

A business where one person owns all of the business assets, operates 
the business, and is responsible for all of the liabilities of the 
business in a personal capacity.

(250242):

FOOTNOTES:

[1] See U.S. Departments of the Treasury, Justice, Homeland Security, 
et al, U.S. Money Laundering Threat Assessment Working Group, U.S. 
Money Laundering Threat Assessment (Washington, D.C., December 2005); 
and Organization for Economic Co-operation and Development (OECD), 
Behind the Corporate Veil: Using Corporate Entities for Illicit 
Purposes (Paris, 2001). 

[2] Companies used to hide or facilitate illegal activity are sometimes 
also referred to as "front" companies and can sometimes conduct 
legitimate activity in addition to illegal activity. When we refer to 
"shell companies" in this report, we mean U.S. companies that do not 
conduct any legitimate activity.

[3] While definitions of beneficial ownership vary, this is the 
definition we developed for the purposes of this report. 

[4] See GAO, Suspicious Banking Activities: Possible Money Laundering 
by U.S. Corporations Formed for Russian Entities, GAO-01-120 
(Washington, D.C.: Oct. 31, 2000).

[5] Our focus is on the collection and availability of ownership 
information of nonpublicly traded companies whose securities are not 
registered with the Securities and Exchange Commission (SEC) pursuant 
to Section 12 of the Securities Exchange Act of 1934 (SEC Act) 
(codified at 15 U.S.C. § 78l), because significant shareholders of 
publicly traded companies are subject to certain federal regulatory 
requirements. For instance, every beneficial owner of more than 10 
percent of any class of security registered with the SEC under Section 
12 must file certain disclosure statements under Section 16(a) of the 
SEC Act (codified at 15 U.S.C. § 78p(a)) regarding the nature of such 
ownership.

[6] We chose to interview officials from Jersey and Isle of Man, two 
United Kingdom crown dependencies, because these jurisdictions have 
implemented regulations for companies that provide filing and related 
services to businesses.

[7] Agents for service of process may be known as registered agents, 
resident agents, statutory agents, or clerks in different states. 
Agents can be individuals or companies operating in one state or 
nationally with only a few clients to thousands of clients. 

[8] Formation documents may be called articles of incorporation, 
certificates of incorporation (for corporations), or articles of 
organization or certificates of formation (for LLCs) in different 
states. In Alabama, formation documents are submitted to the probate 
judges at the county level. After a judge reviews and approves the 
documents, they are forwarded to the Secretary of State's office for 
review and filing.

[9] In Nebraska, the fees for filing articles of incorporation are 
based on the value of capital stock and can range from $60 to over 
$300. In New Mexico, the fees can range from $100 to $1,000, depending 
on the total amount of the authorized shares for the corporation.

[10] A certificate of existence or good standing shows that a company 
is in existence or authorized to transact business; that all fees, 
taxes, and penalties owed the state have been paid; that its most 
recent annual report has been filed; and that articles of dissolution 
have not been filed. States, cities, or counties may impose taxes or 
requirements for obtaining licenses or permits on businesses. We did 
not review the application or reporting requirements that businesses 
may have to submit to other state or local agencies in order to conduct 
business. 

[11] Piercing the corporate veil is justified only in extraordinary 
circumstances where a court finds that a unity of interest and 
ownership between an individual and a corporation exists to such an 
extent that recognizing a separate existence between the two would 
result in an injustice. In such cases, a court may disregard the 
corporate entity and impose personal liability on the individual. See 1 
Fletcher Cyclopedia of Private Corp. §41 and 45 Am. Jur. Proof of Facts 
3d 1.

[12] Corporations are generally subject to income taxes on the 
corporation's taxable income. 26 U.S.C. § 11. Shareholders are 
generally subject to income taxes on dividends they receive from 
corporations with respect to its stock. 26 U.S.C. § 61(a)(1)(7). 
Certain small business corporations on the other hand may elect under 
the federal tax code to be taxed as an S corporation, which generally 
allows corporate income to pass through to the shareholder level before 
it is subject to federal income taxation. 26 U.S.C. §§ 1361(a)(1), 1363 
and 1366. Partners in business are generally liable for income tax in 
their separate, individual capacity rather than the partnership being 
liable for income tax. 26 U.S.C. § 701.

[13] In late 1996, the IRS issued regulations that generally allowed 
LLCs to elect how they will be treated for federal tax purposes--that 
is, as sole proprietorships (disregarded entities), partnerships, or 
corporations, depending on the number of members. 26 C.F.R. §§ 301.7701-
2 & 301.7701-3.

[14] IACA is a professional association for government administrators 
of business organization and secured transaction record systems at the 
state, provincial, and national level in any jurisdiction. The IACA 
data include domestic, foreign, and professional companies. Domestic 
companies are those doing business in the same state in which they are 
incorporated or formed. Foreign companies do business in a state, but 
they are incorporated or formed in another jurisdiction, either in 
another U.S. state or a foreign country. Professional corporations may 
include professional services, such as those performed by doctors, 
dentists and attorneys. Combining figures for these different types of 
companies overestimates the number of companies formed under the state 
statutes examined in this report, which covers only domestic companies. 
Some states did not report data to IACA. 

[15] Companies may have complex structures with multiple organizational 
layers--beyond the two-tier parent/subsidiary construct--of different 
types of business entities, and the shareholders of a corporation and 
members of an LLC could be individuals or other businesses. Therefore, 
identifying the individual who is the beneficial owner directing the 
company and receiving the proceeds or other advantages of the company 
may involve uncovering the ownership of various layers of entities.

[16] Unless otherwise specified, data are from our survey of state 
officials responsible for company formations.

[17] An LLC can be member managed, with the owners collectively running 
the business, or manager managed, with one or more persons or entities-
-either designated members or an outside party--taking the managerial 
role.

[18] One state did not respond to the survey question on providing 
names of owners of corporations, and two states did not respond to the 
question on the addresses of owners.

[19] Forty-eight states require an annual or biennial report for 
corporations, and 37 states require an annual or biennial report for 
LLCs. In some states, such as Alabama, New Jersey, and Oklahoma, the 
annual report may be submitted to a different office, such as the 
department of revenue, rather than the office that handles formation 
filings. In addition, an Iowa official told us that as of January 1, 
2006, LLCs are required to submit biennial reports.

[20] The five states are Alaska, Connecticut, Kansas, Maine, and New 
Hampshire. One state did not respond to this survey question.

[21] In 2004, Kansas removed a requirement that corporations list the 
names and post office addresses of shareholders owning at least 5 
percent of capital stock in order to limit the reporting requirements 
for corporations.

[22] Management of LLCs is in the hands of either managers or managing 
members, depending on the structure of the LLC. In a manager-managed 
LLC, one or more owners or an outsider is assigned to take 
responsibility for managing the LLC. These managers make decisions and 
act as agents of the LLC. A managing member is an owner that 
participates in the management of the business.

[23] One state did not respond to this survey question.

[24] A nominee director may be an individual who is located where the 
business was formed and may sign for the business on behalf of the 
beneficial owner. Typically, the nominee director will have no 
knowledge of the business affairs or accounts, cannot control or 
influence the business, and will not act unless instructed to by the 
beneficial owner. We did not review state statutes on the use of 
nominee directors. While this mechanism may serve legitimate purposes, 
it can also be used to conceal identities and evade scrutiny. See 
Organization for Economic Co-operation and Development (OECD), Behind 
the Corporate Veil, Using Corporate Entities For Illicit Purposes 
(Paris, 2001); and U.S. Money Laundering Threat Assessment (Washington, 
D.C., December 2005).

[25] Many states also ask for this individual's address more often for 
corporations than for LLCs. The primary role of the incorporator is to 
execute and deliver the formation document to the state company 
formation office. Although state statutes may not require this 
information, states may request or require this information be included 
on the company formation documents.

[26] Some states may require this information for corporations or LLCs, 
but not both. Appendix II has information on each state's information 
requirements for company formation documents.

[27] The North American Industry Classification System is a system for 
classifying businesses that was developed jointly by the United States, 
Canada, and Mexico for the collection, analysis, and publication of 
statistical data related to the business economy across North America.

[28] A taxpayer identification number is an identification number used 
by the Internal Revenue Service in the administration of tax laws. It 
can be either a Social Security number issued by the Social Security 
Administration (SSA) or another number, such as an employer 
identification number (EIN), issued by the IRS. 

[29] Minnesota also commented that an agent is required for persons or 
entities from other countries forming a Minnesota company.

[30] An "alien affiliate" could also be an entity that was either 
created or organized in another country or whose principal place of 
business is located outside of the United States. 

[31] We do not have information on the extent of this legal review in 
all of the states that responded that they conduct such a review.

[32] Four other states responded either "no response" or "do not know" 
to this question.

[33] We interviewed a total of 12 third-party agent companies that 
provide company formation and service of process services. The 
companies ranged from large national companies to small companies. In 
this report, we refer to company formation agents and agents for 
service of process as simply "agents" unless otherwise specified. Some 
agents and state officials told us that most companies are formed by 
individuals who also designate themselves as the agent for service of 
process. Anecdotally, agents told us that they may work with up to 30 
percent of the total companies formed.

[34] In New York, the Secretary of State serves as the designated agent 
but another agent may be designated. Minnesota and Pennsylvania require 
a registered office but the name of an agent is not required. Louisiana 
does not require an agent on the formation documents, but does require 
an agent to be listed on the initial report that is filed with the 
formation document.

[35] Typically, the nominee or dummy director is a mere figurehead and 
will have no knowledge of the business affairs or accounts, cannot 
control or influence the business, and will not act unless instructed 
to by the beneficial owner. Special circumstances could arise, for 
example, if a bank required someone independent of a corporation to 
serve as director for purposes of granting a loan.

[36] A natural person is a legal term and means a "human being." 

[37] Seventeen states indicated on our survey that they provided the 
names of all or some agents. However, we were unable to verify the 
listing of agents for all of these states.

[38] OFAC is an office within the U.S. Department of the Treasury that 
administers and enforces economic and trade sanctions based on U.S. 
foreign policy and national security goals, as well as a master list of 
"Specially Designated Nationals and Blocked Persons" (SDN) that 
includes numerous foreign agents and front organizations, terrorists, 
terrorist organizations, and narcotics traffickers. See the U.S. 
Department of Treasury's Web 
site:[Hyperlink=http://www.treas.gov/offices/] enforcement/ofac/. All 
U.S. persons, both individuals and entities, are responsible for 
ensuring they do not do business with a person or entity listed on the 
SDN list. Undertaking any type of business or financial transaction 
with a person or entity on this list is illegal under federal law.

[39] Title III of the USA PATRIOT ACT of 2001, passed after the 
September 11, 2001, terrorist attacks, amended U.S. anti-money- 
laundering laws and imposed new requirements on financial institutions. 
Section 326 of Title III required the Secretary of the Treasury to 
develop regulations establishing minimum standards for financial 
institutions to follow when verifying the identity of its customers in 
connection with the opening of an account. These regulations require 
financial institutions to establish a written customer identification 
program (CIP) that includes procedures for obtaining minimum 
identification information from customers that open an account with the 
financial institution, such as a person's date of birth, a government 
identification number, and physical address. The regulations stipulated 
that the CIP must include risk-based procedures for verifying the 
identification of a customer that enable the financial institution to 
form a reasonable belief that it knows the true identity of the 
customer. See Uniting and Strengthening America by Providing 
Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA 
PATRIOT Act) of 2001, Pub. L. No. 107-56, 115 Stat. 272 (2001).

[40] Proof of address can be satisfied by providing a utility bill, an 
original bank statement, or a letter from an employer.

[41] Our review focuses on state information requirements when 
companies are formed and when they submit periodic reports. Other 
reports cite additional state practices that may also facilitate 
criminals hiding their identity such as allowing bearer shares, nominee 
directors, and nominee shareholders. See U.S. Departments of the 
Treasury, Justice, Homeland Security, et al, U.S. Money Laundering 
Threat Assessment Working Group, U.S. Money Laundering Threat 
Assessment (Washington, D.C., December 2005); and Organization for 
Economic Co-operation and Development (OECD), Behind the Corporate 
Veil: Using Corporate Entities for Illicit Purposes (Paris, 2001). 

[42] A correspondent account is an account that a foreign bank opens at 
a U.S. bank to gain access to the U.S. financial system and to avoid 
bearing the costs of licensing, staffing, and operating its own offices 
in the United States. Many of the largest international banks serve as 
correspondents for thousands of other banks.

[43] Without admitting or denying the allegations, ABN AMRO Bank N.Y. 
agreed on December 19, 2005, to enter into a consent agreement to the 
assessment of civil money penalty.

[44] The 2005 U.S Money Laundering Threat Assessment reported that the 
U.S. government currently does not have a systematic way of collecting 
data on the total amount of money laundering activity being apprehended 
by federal law enforcement agencies or the methods used to launder 
money.

[45] The states that do not provide information online for free are 
Arkansas, Hawaii, Maine, New Jersey, and Texas. In these states, we 
found that some information is available online for a fee.

[46] Dispersing assets among as many different types of entities and 
jurisdictions as possible is also a way to protect assets. The goal of 
this approach is to create complex structures that, in effect, provide 
multiple protective trenches around assets, making it challenging and 
burdensome to pursue. See GAO, Environmental Liabilities: EPA Should Do 
More to Ensure That Liable Parties Meet Their Cleanup Obligations, GAO- 
05-658 (Washington, D.C.: Aug. 17, 2005).

[47] The National Conference of Commissioners on Uniform State Laws 
approved the Uniform Limited Liability Company Act and the American Bar 
Association, Committee on Corporate Laws approved the Model Business 
Corporation Act to serve as uniform legislation for states to consider. 
Various states have used these legislative proposals when adopting 
their state statutes for business corporations and LLCs. 

[48] See OECD, Behind the Corporate Veil. This report examined the 
misuse of different types of companies in both onshore and offshore 
jurisdictions, including corporations, trusts, foundations, and 
partnerships with limited liability features. The report excluded 
companies engaged in financial services activities and those whose 
shares are publicly traded or listed on a stock exchange.

[49] Our review of state statutes indicated that 14 states did not 
require periodic reports for LLCs and that 3 did not require them for 
corporations. In at least 3 states (Alabama, New Jersey, and Oklahoma), 
the annual report is submitted to a different office, such as the 
department of revenue, than the office that handles formation filings. 
In addition, biennial reports were required to be filed by corporations 
in 7 states and by LLCs in 5 states. 

[50] Arizona requires companies to include a Certificate of Disclosure 
with their articles of incorporation and annual reports that includes 
information about certain types of felonies and bankruptcies. Persons 
who have been convicted of specific types of felonies must include 
their Social Security numbers and other personal information, and 
according to Arizona officials, this information may be publicly 
available.

[51] Jersey and Isle of Man use the term trust companies or company 
service providers to refer to firms that provide company formation and 
registered agent services. We refer to these types of firms in the 
United States as agents. We chose to speak with officials from Jersey 
and the Isle of Man because they are two of a small number of 
jurisdictions that require disclosure of beneficial ownership when a 
company is formed.

[52] Jersey has about 30,000 incorporated entities and 183 company 
service providers, and the Isle of Man has about 35,000 incorporated 
entities and 180 company service providers.

[53] Delaware, Kansas, and Oklahoma statutes do not expressly state 
that a corporation is required to maintain a list of shareholders, but 
shareholders must be able to extract information on shareholders from 
corporate documents maintained by the corporation.

[54] Some states may not require written operating agreements. If there 
is no operating agreement, the LLC follows default provisions of the 
LLC act of the state where the company was formed.

[55] With publicly traded shares, nominees (e.g., shares registered in 
the names of stockbrokers) are commonly and legitimately used to 
facilitate the clearance and settlement of trades. Nominee shareholders 
can also be used in privately held companies to shield beneficial 
ownership information. 

[56] According to the U.S. Money Laundering Threat Assessment, Nevada 
and Wyoming allow the use of bearer shares, which accord ownership of a 
company to the person who possesses the share certificate. 

[57] Section 326 of the USA PATRIOT ACT directs Treasury and the 
federal financial regulators to adopt CIP requirements for all 
"financial institutions," which is defined broadly to encompass a 
variety of entities, including, among others, (1) banks that are 
subject to regulation by one of the federal banking regulators, as well 
as credit unions that are not federally insured, private banks, and 
trust companies; (2) securities broker dealers; (3) futures commission 
merchants and introducing brokers; and (4) mutual funds. See 31 U.S.C. 
§ 5312; 31 C.F.R. part 103.

[58] See GAO, USA PATRIOT ACT: Additional Guidance Could Improve 
Implementation of Regulations Related to Customer Identification and 
Information Sharing Procedures, GAO-05-412 (Washington, D.C.: May 6, 
2005).

[59] Industry representatives told us that high-risk countries include 
those that are listed on the OFAC list of countries that U.S. entities 
are prohibited from doing business with and countries that are 
identified by the Financial Action Task Force on Money Laundering 
(FATF) as "non-cooperative countries and territories."

[60] 31 U.S.C. § 5318(k)(3)(B)(i).

[61] In January 2006, FinCEN issued a final rule to implement the 
requirements in section 312 of the USA PATRIOT ACT that requires U.S. 
financial institutions to establish policies, procedures, and controls 
to detect and report money laundering through correspondent accounts. 
See 71 Fed Reg. 496 (Jan. 4, 2006). According to the rule, financial 
institutions must assess the money-laundering risk of correspondent 
accounts based on the nature of the foreign financial institution's 
business, the type of account, the institution's relationship with the 
foreign financial institution, the anti-money-laundering regime of the 
jurisdiction that issued the charter or license of the foreign 
financial institution, and information about the foreign financial 
institution's anti-money-laundering record. In addition, U.S. financial 
institutions must apply risk-based procedures and controls to each 
correspondent account, including a periodic review of account activity 
to determine consistency with anticipated activity. 31 C.F.R § 103.176.

[62] The Internal Revenue Code authorizes IRS to collect such 
information as may be necessary to assign an identifying number to any 
person. 26 U.S.C. § 6109(c).

[63] IRS regulation, 26 C.F.R. § 301.7701-2, classifies the following 
entities as corporations, among others, for tax purposes: an business 
entity organized under a federal or state statute when the statute 
indicates that the entity is incorporated or is a corporation; an 
association; a state joint-stock company or joint-stock association; an 
insurance company; a state-chartered depository company whose deposits 
are federally insured; and certain foreign entities. Nevertheless, 
certain LLCs may elect how they will be treated for tax purposes. See 
26 C.F.R. §§ 301.7701-3 and 301.7701-2. Specifically, single owner LLCs 
may elect to be treated for tax purposes either as a sole 
proprietorship (referred to as an entity to be disregarded as separate 
from its owner) or as a corporation, and LLCs with two or more owners 
may elect to be treated for tax purposes either as a partnership or as 
a corporation. Moreover, there are certain defaults under the tax 
rules. Single owner LLCs are treated by default as an entity to be 
disregarded as separate from its owner, and LLCs with more than two 
owners are treated by default as partnerships unless an election is 
filed with IRS.

[64] For example, a single member LLC with no employees is not required 
to have a separate EIN.

[65] S corporations and LLCs that are taxed as a partnership do not pay 
taxes on their income but instead allocate the income to shareholders 
or members, who are required to report it annually to IRS with their 
individual tax returns. Allocated income is reported to IRS by the 
company with the company's tax return on a corresponding Schedule K-1. 
Copies of the Schedule K-1 are provided to shareholders and members for 
use when filing their respective annual returns (examples of the 
appropriate forms include Schedule K-1 (Form 1065) for LLCs filing as 
partnerships and Schedule K-1 (Form 1120S) for S corporations. 

[66] The owner of a single member LLC reports the business activities 
of the LLC on the individual's tax return. See, for example, Schedule C 
(Form 1040), which requests the name of the business. However, this 
information is not required, and the field asking for the information 
states that it may be left blank. If left blank, there is no way for 
the IRS to determine that the individual is the owner of an LLC.

[67] Federal tax laws automatically classify and tax the following LLCs 
as corporations: a business formed under a federal or state statute or 
a federally recognized Indian tribe if the statute describes or refers 
to the entity as incorporated or as a corporation, body corporate, or 
body politic; an association or joint stock association; a state- 
chartered business conducting banking activities if any of its deposits 
are insured by the Federal Deposit Insurance Corporation; a business 
wholly owned by a state or foreign government; certain foreign 
entities; and insurance companies.

[68] C corporations file Form 1120, which asks if a controlling 
shareholder (or group of related persons) owns 50 percent of a stock. 
Therefore, in some limited instances, IRS may be able to identify the 
owners of an LLC that files as a C corporation. 

[69] The most frequent transcription errors dealt with names and 
addresses. IRS also found transcription errors in dollar amounts and 
taxpayer identification numbers. See GAO, Tax Administration: IRS 
Should Take Steps to Improve the Accuracy of Schedule K-1 Data, GAO-04- 
1040 (Washington, D.C.: Sept. 30, 2004).

[70] Tax administration is defined at 26 U.S.C. § 6103(b)(4) to mean 
"(A)(i) the administration, management, conduct, direction and 
supervision of the execution and application of the internal revenue 
laws or related statutes (or equivalent laws and statutes of a State) 
and tax conventions to which the United States is a party, and (ii) the 
development and formulation of Federal tax policy relating to existing 
or proposed internal revenue laws, related statutes, and tax 
conventions, and (B) includes assessment, collection, enforcement, 
litigation, publication, and statistical gathering functions under such 
laws, statutes, or conventions." Whether a particular statute is 
"related" to the internal revenue laws depends on the nature and 
purpose of the statute and the facts and circumstances in which the 
statute is being enforced or administered. Typically, according to IRS, 
where violation of another statute is committed in contravention of the 
internal revenue laws, then the former may be considered a "related 
statute" and IRS's investigation is considered tax administration. 26 
U.S.C. § 6103(a) sets up the general rule that returns and return 
information for use in federal criminal investigations shall be 
confidential and may not be disclosed except as authorized under the 
Internal Revenue Code.

[71] 26 U.S.C. § 6103(i)(1) permits the disclosure of returns and 
return information upon the grant of an ex parte court order by a 
federal district court judge or magistrate upon application by certain 
high level Department of Justice officials. Because the proceeding is 
ex parte, the taxpayer will not know that the government has applied 
for an ex parte court order or that its application has been granted. 

[72] To grant an ex parte order, the court must determine that there is 
reasonable cause to believe, based upon information believed to be 
reliable, that a specific criminal act has been committed, there is 
reasonable cause to believe that the return or return information is or 
may be relevant to a matter relating to the commission of such act, and 
the return or return information is sought exclusively for use in a 
federal criminal investigation or proceeding concerning such act, and 
the information sought to be disclosed cannot reasonably be obtained, 
under the circumstances, from another source. 26 U.S.C. § 6103 
(i)(1)(B).

[73] See e.g., 26 U.S.C. § 6103(i)(2).

[74] 26 U.S.C. § 6103((i)(3) and (7). The authority for disclosures to 
combat terrorism expires on December 31, 2006. 

[75] 26 U.S.C. § 6103(d).

[76] 26 U.S.C. § 6103(c).

[77] Electronic filing includes the ability to file a document through 
a Web site, e-mail, or fax. Five states reported that they offer e-mail 
filing for company formation documents, and four states reported that 
they offer e-mail filing for periodic reports. In addition, 27 states 
reported that they accept formation or periodic report filings by fax.

[78] A small business corporation may have no more than one class of 
stock and may not have more than 100 shareholders, all of whom must be 
individuals, estates, certain trusts, or certain exempt organizations 
and may not be nonresident aliens. 

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