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. 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). Some states have additional  information requirements for company formations. Also, managers may or may not be owners of the LLC. An Alaska state  official said that this information was originally required to identify  offshore fisheries and their owners. 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. 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. 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. 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. 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. Therefore, minimal information is collected on  the owners of these companies. Further, such a requirement would need to be  uniformly applied in all U.S. jurisdictions. 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.
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.