Legislature(2021 - 2022)BARNES 124
04/15/2022 09:00 AM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| Board of Veterinary Examiners | |
| HB405 | |
| HB406 | |
| HB407 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | HB 405 | TELECONFERENCED | |
| *+ | HB 406 | TELECONFERENCED | |
| *+ | HB 407 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 174 | TELECONFERENCED | |
HB 405-ESTABLISHMENT OF TRUSTS
9:21:05 AM
CO-CHAIR SPOHNHOLZ announced that the next order of business
would be HOUSE BILL NO. 405, "An Act relating to the
establishment of trusts; requiring the filing of certain trust
information; and requiring compliance with a federal law."
CO-CHAIR SPOHNHOLZ noted that HB 405 is part of a package of
bills the committee is considering regarding Russian investment
in Alaska.
9:21:21 AM
CO-CHAIR FIELDS introduced HB 405 on behalf of the House Labor
and Commerce Standing Committee, sponsor. He stated that a
request was put in for this legislation shortly after Russia
invaded Ukraine, at which time people started asking themselves
about their roles as citizens in supporting the free people in
Ukraine and ensuring that Putin and his allies were not
inadvertently being given access to resources that they would
use to wage war on Ukraine. The idea of the bills before the
committee today, he explained, is to ensure that oligarchs
aligned with Putin or Putin's family are not able to shelter
wealth or generate wealth in Alaska. Two of the bills are on
trusts and property and one is on preventing offloading of
Russian imports at Alaska ports. He deferred to Mr. Evan
Anderson of his staff to provide details on the bill.
9:22:53 AM
EVAN ANDERSON, Staff, Representative Zack Fields, Alaska State
Legislature, provided a PowerPoint presentation titled "House
Bill 405" on behalf of the House Labor and Commerce Standing
Committee, sponsor. He displayed the second slide, "HB 405:
Establishment of trusts," and stated that the bill would update
Alaska law to ensure trusts in Alaska will not be used to shield
assets of Russian oligarchs or other enemies of the United
States. He said the bill would ensure state trust law is
consistent with federal transparency requirements and would
provide clarity for industry as well as state and federal
regulators moving forward.
MR. ANDERSON discussed the graphic on the third slide, "What is
a trust?" He explained that the graphic is visual depiction of
the complex web of relationships formalized by a legal trust.
He said a basic trust is a three-way arrangement. A settlor
puts assets into a trust which is managed by a trustee,
typically a lawyer, on behalf of beneficiaries. One of the many
types of trusts is a discretionary trust where the trustee has
discretion to decide who gets what, when. The beneficiaries can
argue that until they receive a distribution they aren't
entitled to any of the trust assets because it is all up to the
trustee; the assets have been given away by the settlor, but
nobody is entitled to them yet. So, Mr. Anderson continued,
they are in what's considered ownerless limbo, ringfenced from
tax, from creditors, or from the rule of law. He clarified that
most of the people with trusts in Alaska are law-abiding U.S.
citizens who deserve to plan their estates and set assets into
trusts for their family members.
MR. ANDERSON spoke from the fourth slide, "History of Trusts in
Alaska," which read as follows [original punctuation provided]:
• Prior to the Alaska State Constitution, trust law
traces back to England in the Middle Ages
• 1959 1998: trust in Alaska operated as they do in
the vast majority of states
• 1998: Alaska became the second state in the country to
enact super-trust laws
• 1998 2021: Alaska initially captured national
investment. However, other states joined South Dakota
& Alaska including Nevada, Delaware, and Wyoming
enacting new laws to expand the authority of trusts.
Increased competition led to many of the larger
accounts leaving the state
• In October 2021, a series of leaks revealed that
Alaska & five other U.S. states have attracted vast
sums of wealth and could be sheltering funds for the
globe's most violent and corrupt criminals
MR. ANDERSON compared Alaska's trust laws to others around the
U.S. and the globe. He showed the fifth slide, "Financial
Secrecy Index," and stated that the Financial Secrecy Index
(FSI), prepared by the Tax Justice Network, is a globally
recognized measure of how secrecy laws impact global financial
flows. He said the orange color indicates the locations of the
best measure of secrecy and thereby the most global financial
flow. In 2022, he related, the U.S. was second behind the
Cayman Islands, with South Dakota, Alaska, Nevada, [Delaware,
and Wyoming] being the main contributors to that placement.
MR. ANDERSON turned to the chart on the sixth slide, "Choosing
the Correct Jurisdiction: An Objective Comparison," and noted
that the chart is marketing by the Bridgeford Trust Company, a
private firm based in South Dakota that publishes this
comparison information on its website; Alaska is number four on
this list. He said Bridgeford Trust Company specializes in
marketing South Dakota and other U.S. states to some of the
wealthiest families in Latin America.
MR. ANDERSON proceeded to the seventh slide, "Pandora Papers
show foreign money secretly floods U.S. Tax havens. Some of it
is tainted." He stated that the 2021 Pandora Papers reveal a
small slice of the extent to which American companies are
involved in global tax evasion, money laundering, and
corruption. He said one example in the Pandora Papers is the
story of Federico Kong Vielman [eighth slide], a Guatemalan
businessperson] with $13.5 million in assets held in trust in
South Dakota, according to leaks. Mr. Kong Vielman's palm oil
company was cited by the U.S. government for hiring workers for
inadequate pay with inadequate safety protection and his company
was also named as a contributor to toxic pollutants in a local
river. While Guatemalan courts acted on the other companies
named in that citation as causing the pollution, he continued,
they did not act against the Kong Vielman family.
MR. ANDERSON moved to the nineth slide, "Global Reform Efforts."
He stated that despite the very real possibility that U.S.
trusts are being used to shelter funds for oligarchs and
dictators, there is some good news. The global community has
taken major steps, especially in the last 10 years, to enact
reforms, he continued. The Financial Action Task Force (FATF)
issued recommendations in 2012. Initially an intergovernmental
initiative of the G7 countries in 1989, this intergovernmental
organization has grown to now include 39 global members,
including the U.S. Its recommendations set up a framework that
gives Alaska something to follow, he advised. Alaska can also
look to the European Union which has issued five anti-money-
laundering directives over the past few decades, most recently
requiring public disclosure of beneficial ownership information
for trusts. In 2018 the Bahamas enacted reforms, he continued.
Showing up in the Pandora Papers multiple times, much of the
accounts that left the Bahamas when the Bahamas enacted reforms
have moved into U.S. states, many of them South Dakota. As of
2020, Mr. Anderson pointed out, 17 of the least restrictive
jurisdictions for trusts anywhere in the world are U.S. states.
That is where federal regulations start to come in, he stated.
In 2021, the Corporate Transparency Act was signed into law by
President Biden. Last month, the United Kingdom (UK), another
of the most permissive places in the world for trusts, passed
the Economic Crime (Transparency & Enforcement) Act following
the Russian invasion of Ukraine.
MR. ANDERSON displayed the tenth slide, "Which US states have
the most trusts in the Pandora Papers?" He said it is South
Dakota by far, and Alaska is not named on the list of the top
five. But this is not a complete picture of the problem, he
continued. It is just one leak and the full extent to which
Alaska is involved is unknown.
MR. ANDERSON concluded with the eleventh slide. Regarding what
these policies have to do with Russia and its oligarchs, he said
it is known that Russian President Vladimir Putin built his war
effort with the profits from oil and gas, seafood, and other
trade bids. He read from a quote by Ian Gary, Executive
Director of the Financial Accountability and Corporate
Transparency (FACT) Coalition, which states: "The secrecy
currently afforded by the U.S. and other Western legal and
financial systems contributed to President Putin's empowerment."
9:31:29 AM
CO-CHAIR FIELDS added that Alaska's trust laws are currently so
opaque that it wouldn't be known if oligarchs are sheltering
their assets in the state, and hence the need for legislation.
CO-CHAIR SPOHNHOLZ reiterated that trusts are used by many law-
abiding citizens and the intention of HB 405 [and HB 406 and HB
407] is to address those who are using Alaska as a way of
avoiding the law.
REPRESENTATIVE KAUFMAN said he would like to see more clarity
around the problem stated because the legislation seems to be
impugning trusts. One person's secrecy is another person's
privacy, he continued, and many of those people are citizens who
deserve privacy.
CO-CHAIR FIELDS agreed that most people who use trusts are law-
abiding citizens that are using trusts for appropriately
legitimate reasons. The goal, he explained, is to ensure that
the small percentage of law breakers don't exploit a system in
which many law-abiding people participate. He said HB 405 and
HB 406 are largely transparency requirements that would do no
harm to everyone who is a law-abiding family trust holder.
9:34:02 AM
MR. ANDERSON provided the sectional analysis of HB 405. He
paraphrased from the document in the committee packet titled
"Sectional Analysis House Bill 405 Version A," which read as
follows [original punction provided]:
* Section 1. AS 13.36.005(a) amends existing
documentation requirements to require an address,
either business or residential address, as part of the
initial court filing.
* Sec. 2. AS 13.36 is amended by adding a new section
that requires new trusts to file establishment
paperwork with the Department of Commerce, Community,
& Economic Development, including the names of the
trustee, the settlor, the beneficiary, and the person
or individual filing the documentation. DCCED will
establish a fee for establishment.
This section affirms the confidential nature of trust
information. Public disclosure of private information
contained within trusts is unlawful. DCCED has non-
disclosure agreements in place for staff in other
departments to retain confidentiality. Non-disclosure
provisions could be expanded to Division of Banking &
Securities staff handling confidential trust
information.
This section allows DCCED to release trust information
to the U.S. Department of the Treasury. This is a
logical next step for protecting Alaska's trust
industry in the 21st century all are welcome here,
except war criminals and terrorists.
* Sec. 3. This section provides for an effective date.
This bill will not impact trusts established prior to
its effective date.
MR. ANDERSON pointed out that a draft [proposed] committee
substitute (CS) has been received, so there may be some changes
to present to the committee at the bill's next hearing.
Regarding Section 1, he said there have been lengthy discussions
with the Division of Legislative Legal Services because, under
existing structures in Alaska statute, no address is required
for filing if a trust does not have a business address
associated with it. Family trusts might have nothing to do with
a business, he continued, so this seemed like a clear loophole
that was easy to close. Regarding Section 2, Mr. Anderson
pointed out that public disclosure of private information
contained within trusts is unlawful and would remain unlawful
with the passage of HB 405.
9:36:44 AM
CO-CHAIR SPOHNHOLZ asked Mr. Anderson to address Representative
Kaufman's question.
MR. ANDERSON referred to the nineth slide regarding global
reforms where some jurisdictions around the globe are requiring
public disclosure of beneficial ownership information. But, he
advised, this is not the intention in HB 405 as that would be
going further than the Corporate Transparency Act, federal law
which does not require public disclosure of that information.
Rather, he continued, it creates a central registry through the
U.S. Department of Treasury, so there is no risk to
confidentiality of that information.
CO-CHAIR SPOHNHOLZ began invited testimony on HB 405.
9:37:44 AM
RYAN GURULE, Policy Director, Financial Accountability and
Corporate Transparency (FACT) Coalition, provided invited
testimony in support of HB 405. He noted that the FACT
Coalition is a nonpartisan alliance of members dedicated to
standing up structural reforms to combat harms flowing from
financial secrecy and vulnerabilities in the U.S. financial
system that facilitate money laundering, sanctions evasion,
corruption, tax dodging, and illicit financial flows.
MR. GURULE said the Pandora Papers offer concrete evidence that
the U.S. is a singular financial jurisdiction, an undesirable
status that erodes the tax bases of the U.S. and its allies,
undermines U.S. national security, compromises U.S. financial
markets, and weakens democracy in the U.S. and abroad. He said
the effects of these harms manifest not as academic concerns but
as direct impacts to local U.S. communities. The financial
secrecy afforded by the U.S. and its allies, he continued, has
previously enriched and empowered potentially adversarial
regimes, including Russian President Putin, giving his inner
circle a backdoor to evade earlier sanctions and emboldening
their corrupt and criminal behavior.
MR. GURULE related that, given the risks posed by financial
secrecy, the Biden Administration and bipartisan efforts in
Congress have prioritized bringing greater transparency to U.S.
legal entities in the fight against corruption. Dismantling
secretive systems that enable corrupt actors and tax dodgers to
avoid accountability can also make well-coordinated sanctions
targeting the wealth of Putin and oligarchs more effective today
and make it less likely for needing similar retaliatory efforts
against kleptocrats in the future.
MR. GURULE specified that anonymous shell companies and
arrangements capable of being formed or otherwise investing or
doing business in the U.S., pose one of the biggest
vulnerabilities to the U.S. financial system. He related that
an analysis by Global Financial Integrity found that, until
recently in all 50 states, more personal information was needed
to obtain a library card than to establish a legal entity that
can be used to facilitate tax evasion, money laundering, fraud,
and corruption.
MR. GURULE stated that the Pandora Papers specifically implicate
U.S. trusts as one of the most significant gaps in the U.S.
anti-money laundering regulatory regime. Alaska, he continued,
has its own sordid history with commoditizing financial secrecy,
making the proposed reforms discussed today even more critical.
MR. GURULE related that in the 1990's, struggling with depressed
oil prices, Alaska was looking for new ways to attract outside
capital investment. From that position, he said, Alaska
considered and passed changes to its trust laws first suggested
by a New York lawyer that would push the state far outside
existing trust laws and soon would result in Delaware, Nevada,
and South Dakota following Alaska into the rabbit hole. The
result, he continued, is a competition for foreign capital
seeking effective anonymity, not just protection for future
claims against heirs.
MR. GURULE said the benefits of this anonymity for out-of-state
tax-dodgers, corrupt politicians, and others seeking to avoid
public accountability has been obvious since the start. Whether
equivocal and offsetting benefits have been realized by Alaska's
citizenry or that of other states that are victims of the race-
to-the bottom for attracting shadow capital is more
questionable. As international tax and financial transparency
measures have begun to peel back secrecy in traditional tax
havens, he continued, cross-border deposits in U.S. financial
institutions, often held in trust or via other legal anonymous
vehicles, have substantially increased.
MR. GURULE advised that it is known from the Pandora Papers that
U.S. trusts are being heavily abused. For example, the same
secrecy afforded by Alaska created the impetus for a known human
rights' violator to relocate his trust assets from the Bahamas
to the U.S. The Pandora Papers, he noted, are just one leak of
data and should not be viewed as indicative of the entire
universe of problematic anonymous U.S. investment by corrupt or
criminal actors. Rather, he said, the Pandora Papers serve as
an indictment on the financial secrecy afforded by U.S. laws,
including those in Alaska.
MR. GURULE related that on 1/1/21 Congress took steps to address
threats posed by anonymous legal entities and passed the
bipartisan Corporate Transparency Act (CTA). He said this
measure requires corporations, limited liability companies, and
other similar entities formed or registering to do business in a
state by a filing with a secretary of state or similar office,
to disclose their true, natural owner to a secure directory
housed and maintained at Treasury's Financial Crimes Enforcement
Network (FinCEN).
MR. GURULE conveyed that the FACT Coalition previously filed
comments on best practices for establishing the directory in
response to FinCEN's first proposed rulemaking, including
addressing who should file disclosures, when they should file,
what information they should provide, and how certain exemptions
should be handled. He said FinCEN has announced that it plans
to issue a second proposed rulemaking addressing access to the
directory, including by state, tribal and local law enforcement
agencies. He noted that the FACT Coalition has advocated for
uncomplicated and complete access for authorized users.
MR. GURULE pointed out that the application of the CTA to
certain trusts remains unclear. He explained that for those
trusts which file only with local courts, or that do not file at
all in connection with formation or other key events, such as
relocating to Alaska, the CTA may apply to varying degrees based
on final rules when promulgated.
MR. GURULE stated that HB 405 takes important steps to clarify
the application of the Corporate Transparency Act to trusts
administered in Alaska. He said HB 405 also makes clear that
Alaska will have ready access to the information necessary to
ensure that its trust industry is attracting the type of
investment that does not put Alaskan citizens at risk of greater
national security threats or rising prices contributed to by
global geopolitical conflicts.
MR. GURULE offered the FACT Coalition's support for HB 405 and
Alaska's efforts to pivot from the secrecy rat-race toward being
a singular leader in promoting greater financial transparency.
He urged that the bill incorporate five policy recommendations
to ensure that HB 405 brings greater transparency to the trust
industry in Alaska in a way that does not afford workarounds to
bad actors and helps to bring about an end to the American tax-
haven: 1. At a minimum, beneficial ownership reporting should
apply to any trust governed by Alaskan law, administered in
whole or in part in Alaska or by an Alaskan trustee, or that
otherwise has situs in Alaska. Legacy trusts should be timely
incorporated into the regime, as should any relocating trust.
2. All relevant actors should be covered. A strong definition
of beneficial owners should look to control of trust governance
and assets and rights to, or control over, distributions of
trust assets, including for protectors, trustees, settlors or
grantors, and certain beneficiaries. 3. The bill should create
a clear, affirmative obligation for Alaskan trusts to file under
the CTA. 4. The bill should require ongoing reporting,
monitoring, and verification. Changes in beneficial ownership
should be reported in a timely fashion, and data best practices
should apply to the collection, storage, and authorized
dissemination of information collected under the bill.
Reporting burdens would be minimal in all but the most
complicated structures, which are likely purposefully opaque.
Employing standardized, best data practices would further reduce
reporting costs. 5. Additional secrecy rights should not be
created by the bill, and appropriate penalties or distribution
prohibitions should be considered for any party that provides
false information, directly or indirectly, or that fails to
provide required information.
MR. GURULE concluded by stating that federalism is made better
when states innovate in ways that reinforce democracy, open and
transparent markets, and national security. The opposite is
true, he said, when states compete for investment through
financial secrecy to lure potentially corrupt, illicit, or
criminal capital. Like Congress, he continued, the Alaska State
Legislature has an important role to play in ensuring that the
Alaskan and U.S. financial systems are not vehicles for tax
dodging, corruption, human rights abuses, or other financial
harms.
9:47:19 AM
CO-CHAIR FIELDS requested that Mr. Robert Schmidt address the
potential problems that could be had with such opacity of trusts
and the risk for abuse.
CO-CHAIR SPOHNHOLZ requested that Mr. Schmidt also address the
fiscal note. She recalled Mr. Schmidt stating that the division
already has a system that could be used for handling the
transparency elements incorporated within HB 405.
9:47:58 AM
ROBERT SCHMIDT, Director, Division of Banking and Securities,
Department of Commerce, Community, and Economic Development
(DEED), answered questions related to HB 405. He specified that
under its current role the Division of Banking and Securities
regulates trust companies; but the division does not regulate
trusts. He said the division performs safety and soundness
examinations of trust companies under Title 6, the banking
statutes. If a trust has assets on deposit in a state chartered
financial institution, he continued, the division also performs
safety and soundness examinations of those financial
institutions under Title 6. He pointed out that the division
does not examine, register, license, approve, or otherwise
review individual trusts which are governed by Title 13. He
said the division appreciates the concern that Alaska trust laws
may be used inappropriately, and that he will be speaking with
the committee next week on HB 408 which addresses that concern.
He advised that the committee must also balance and consider how
trusts are being used as an estate planning tool by everyday
Alaskans.
9:49:28 AM
TRACY RENO, Chief Financial Examiner, Division of Banking and
Securities, Department of Commerce, Community, and Economic
Development (DEED), answered questions related to HB 405. She
explained that the division's database is a repository for
information under which electronic documents and contact
information can be saved. She said the division, in looking at
HB 405, may need to consider and research some other things.
Regarding the Office of Foreign Assets Control (OFAC)
requirements, she advised that it is not one-and-done because
onboarding must be performed, certain things must be identified
with individuals, and when trusts are changed or amended the
information must be updated. She further advised that if the
division is required to check this information against OFAC or a
sanction list it would probably necessitate bringing on
additional vendors to check those lists periodically because
they change daily if not hourly depending on who is being
sanctioned, countries or individuals. The division can have a
repository to hold the information, she continued, but more
research will be needed if [the legislature] wants more to be
done, such as reaching out to OFAC to find out what the division
would have to do, how it would be recorded, and the liabilities
for employees if there is failure to identify someone on the
sanction list and it isn't recorded. She said the bill deals
with a situation that [the division] should be concerned about,
but more work is needed to get into the details.
9:51:35 AM
CO-CHAIR FIELDS offered his understanding that if HB 405 and HB
406 were enacted and it was required for these trusts to
disclose to the department who their beneficiaries are, if an
oligarch on a sanctions list is identified, the department would
then report that to the Treasury Department, and it is the
Treasury Department that would take action to freeze the assets.
MS. RENO responded that that is her unconfirmed understanding.
She said she would need to speak with OFAC to determine what
steps would need to be taken and how and when. She explained
that [the department] does not currently hold that personal
private information and report it to OFAC, which is under the
U.S. Department of the Treasury, so she doesn't know all the
steps that would need to be in place for that to happen.
9:53:08 AM
CO-CHAIR SPOHNHOLZ surmised there would be some sort of risk-
based analysis for determining which trusts need to be checked
against the bad actors that are being looked for.
MS. RENO pointed out that HB 405 says that every trust that is
established will have to file the paperwork with the department,
and the department would be running the information against the
OFAC list. She said every trust coming in that the department
is holding information on would have to be run periodically
through the database and through the sanctions list because
those lists change daily, so she assumes it would be an
automated system through a vendor.
CO-CHAIR SPOHNHOLZ surmised it could be done on an annual basis.
MS. RENO answered that she doesn't know the specifics, but she
thinks an OFAC requirement is that it must be done every so
often to report it within a certain time period so as to not be
held liable for criminal penalty.
CO-CHAIR SPOHNHOLZ said the committee will ask the department to
follow up with answers to its questions.
9:55:01 AM
CO-CHAIR FIELDS stressed that there is a very important state
role because if Alaska doesn't identify potential oligarchs who
might be sheltering wealth in the state, then the federal law is
rendered ineffective.
CO-CHAIR SPOHNHOLZ concurred.
[HB 405 was held over.]