Legislature(2021 - 2022)BARNES 124
04/27/2022 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB186 | |
| SB190 | |
| SB193 | |
| HB405|| HB406 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 382 | TELECONFERENCED | |
| + | SB 45 | TELECONFERENCED | |
| += | HB 405 | TELECONFERENCED | |
| += | HB 406 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | SB 186 | TELECONFERENCED | |
| + | SB 190 | TELECONFERENCED | |
| + | SB 193 | TELECONFERENCED | |
HB 405-ESTABLISHMENT OF TRUSTS
HB 406-MORATORIUM ON TRUSTS/PROPERTY ACQUISITION
4:23:24 PM
CO-CHAIR FIELDS announced that the final 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." and HOUSE BILL NO.
406, "An Act relating to the validity of trusts involving
persons sanctioned by the United States Department of the
Treasury; and relating to the recording of documents conveying
land to persons sanctioned by the United States Department of
the Treasury."
CO-CHAIR FIELDS opened public testimony on HB 405 and HB 406.
He said the committee has been reading the written testimony and
is working on amendments in response to that testimony. He
stated that the committee would listen to today's testimony and
potentially respond at the next hearing.
4:24:19 PM
CHRIS LAUER, Esq., expressed his concerns with HB 405. He noted
that before becoming an estate planning attorney he worked as an
anti-money laundering consultant where he assisted in the
development and implementation of anti-money laundering measures
for mid-size banks. That work, he said, directly and indirectly
led to the identification, prosecution, and imprisonment of
financial criminals. He advised that while he is profoundly
sympathetic to the aims of HB 405, the bill illustrates the
difficulty of drafting effective anti-money laundering
legislation that does not unduly burden the law-abiding public.
MR. LAUER stated that while HB 405 and the [2021] Corporate
Transparency Act (CTA) are related, their differences are very
important. He said the CTA is the most recent addition to anti-
money laundering measures that the US has in place, which
include the [1970] Bank Secrecy Act, the [2001] USA PATRIOT Act,
and several other landmark acts. The purpose of the CTA, he
advised, is to make laundering harder to do through shell
companies. Shell companies, he continued, have legitimate uses
for asset protection, legacy planning, and business management,
but bad actors can and do abuse them. The CTA, he explained, is
tailored to minimize the impact of the law on the law-abiding
public while making shell companies inhospitable for criminals.
Under that framework, he stated, the CTA deals with two primary
concepts: reporting companies and beneficial owners.
MR. LAUER explained that reporting companies file reports with
the [Department of the Treasury's] Financial Crimes Enforcement
Network (FinCEN), and these reports contain identifying
information on each company's beneficial owners. He said there
are 24 exceptions to what counts as a reporting company, most of
which is defined to include a corporation, limited liability
company (LLC), or similar entity that is created by the filing
of the document with the secretary of state or similar office;
in Alaska, that would be the Department of Commerce, Community,
and Economic Development (DCCED). Beneficial owners, Mr. Lauer
specified, are defined to be individuals who directly or
indirectly through any contract or arrangement, understanding of
relationship, or otherwise exercise substantial control over a
reporting company or owner control 25 percent or more of the
ownership in trust in that entity. That is a very broad
definition, he stated, and it probably doesn't line up with
[Alaskans'] assumptions about what "beneficial owner" means in
the wild.
4:26:52 PM
MR. LAUER advised that the CTA does not attempt to incorporate
trusts, which the Supreme Court has recognized as relationships,
not entities, into its definition of reporting companies.
Trusts may be a beneficial owner of a reporting company, he
said, someone acting through a trust relationship can exercise
substantial control over one. Final federal regulations are
being awaited to clarify who exactly counts as a beneficial
owner under a trust, he stated. The proposed regulations raise
more questions for trusts than they answer, they do not address
discretionary trusts with multiple beneficiaries, contingent
beneficiaries, powers of appointment unmeasurable in trusts, or
third parties who deal with authority over trusts. He
maintained that turning trusts into reporting companies would
amplify these ambiguities and create additional headaches for
Alaskans. He advised that so far, for trusts that hold a 25
percent or greater membership interest in a reporting company,
it would be suspected that at least the sole permissible
recipient of trust income and principle and anyone with power to
dispose of trust assets would be beneficial owners under the
CTA. Mr. Lauer said the reporting company would still file
beneficial ownership information with FinCEN but a trust that
holds a savings account or securities would not be a beneficial
owner of a reporting company under the federal rules. From an
enforcement perspective this makes a lot of sense, he continued,
it makes it so that bad actors cannot hide behind confidential
LLCs in places like Wyoming or Nevada, but the trustees who hold
title to property in their capacity as trustees would still need
to identify themselves to state banks to satisfy banks'
reporting requirements under the Bank Secrecy Act or the USA
PATRIOT Act.
MR. LAUER stated that HB 405 and the CTA differ significantly in
many respects. He said the CTA focuses on what a trust owns,
not on what a trust is. A revocable trust that only holds an
Edward Jones account is not going to report under the CTA, he
said, because it wouldn't be a reporting company. He stated
that HB 405 is far more expansive and as written he is concerned
that trusts created under a will, revocable trusts that are a
will substitute, charitable trusts, and others would create
risks for anyone who would create them for fines or for the risk
of invalidity of paperwork that is not appropriately filed. The
CTA sets a uniform standard that applies equally to all states,
he conveyed, and HB 405 would impose greater burdens on Alaskans
than those faced by trusts established in any other state. He
said the CTA ends gamesmanship between states and makes it so
that no state can compete against others by offering the most
secretive shell companies. In contrast, Mr. Lauer continued, HB
405 would encourage law abiding Alaskans to form trusts in other
states to avoid penalties for inadvertent reporting errors. As
federal legislation, the CTA can set national standards, he
continued, but he is concerned that a bad actor might form a
trust outside Alaska and use the trust to conduct business
inside Alaska, [and Alaska] would be limited in how it restricts
that type of activity.
4:29:52 PM
CO-CHAIR FIELDS said he would be interested in Mr. Lauer's
perspective on HB 408, the administration's bill that also seeks
to prevent money laundering.
4:30:05 PM
CO-CHAIR SPOHNHOLZ, regarding Mr. Lauer's statement that the CTA
doesn't yet have any guidance that relates to trusts, asked
whether it is going to.
MR. LAUER replied that the proposed regulations have identified
some of the circumstances that FinCEN thinks would be
appropriate for including people involved in trust relationships
as beneficial owners, but there are many open questions as to
who would fit under that. He deferred to the comments of the
American College of Trust and Estate Counsel (ACTEC) that were
submitted to FinCEN during the comment period for those
regulations. He related that for a trust that is fully
discretionary and able to make distributions to any of several
beneficiaries, ACTEC's comments identify that it is unclear
whether all those beneficiaries would need to have their
information disclosed, as well as whether a contingent
beneficiary's information would need to be reported. He said it
is anticipated that these questions will be addressed in the
final regulations that are expected before the end of 2022.
4:31:44 PM
MATTHEW BLATMACHR, President & CEO, Peak Trust Company,
expressed his concerns with HB 405 and HB 406. He noted that
Peak Trust Company has provided fiduciary services to Alaskan
families for over 25 years. He said his company understands the
intent of the bills and would like to work with the legislature
and others in the industry to identify the best path forward.
He maintained that as currently drafted the bills would not
achieve their intended result and would instead harm Alaskans
unintentionally. Mr. Blatmachr said he will discuss three
points: 1) There are existing statutes that make Alaska an
undesirable place for bad actors, and those statutes can be
strengthened; 2) There are some misconceptions regarding trusts;
and 3) There is an issue of privacy and data security related to
these bills.
MR. BLATMACHR spoke to his first point that existing statutes
make Alaska a bad place for bad people. He said the legislature
has worked diligently for over 25 years to build thoughtful and
deliberate statutes that allow for excellent planning while
protecting against abuse. For example, he related, Alaska is
one of the few states that require trusts to be registered.
Registration includes the name of the trust; name and address of
the trustee; and name of the person who created the trust, also
referred to as a settlor or grantor. Another example, he
continued, is that Alaska requires a person to fill out an
affidavit of solvency, an affidavit must be completed by a
person creating an irrevocable trust of which the person is a
potential beneficiary and certify that the transfers or deposits
to the trust are not fraudulent.
MR. BLATMACHR addressed his second point that misconceptions
about trusts are being carried forward. Regarding statements
that trusts are secretive and have no reporting requirements, he
stated that trusts are certainly confidential, but advised that
they do have reporting requirements: one is the registration
requirement, and another is that all US sourced income inside a
trust must be reported on a federal tax return. Depending on
the trust type, either the trust will file its own return, or
the income will be reported on the personal return of the
grantor, the person who created the trust, or the personal
return of a beneficiary, which is a tracking mechanism for that
income. Regarding previous comments about real estate money and
trusts, he continued, there seems to be a conflation between the
two because the issues referenced in the comments about what
occurred in Alaska do not involve trusts. He stated that based
on the information he is aware of, there was money laundering
activity and there were foreign individuals, but trusts were not
part of the nefarious activity. The uncovering of these issues,
he argued, proves that systems are in place that work. Also,
Mr. Blatmachr added, while the Pandora Papers are only a sample
set, the documents do not indicate that Alaska is a haven for
people with nefarious intent. He maintained that with these
bills Alaskans would be potentially punished due to the improper
actions of individuals in other states. Further, he said, the
legislation targets everyone rather than individuals who create
higher risks; it is hard to draft legislation that doesn't throw
everybody into the same pot.
4:35:35 PM
MR. BLATMACHR discussed his third point that there are data and
privacy issues related to the bills. Regarding statements that
the proposed disclosure of personally identifiable information
required in HB 405 would be held in confidence with DCCED and
would not be public information, he said that is understood.
However, he maintained, Alaskans are not going to find this
acceptable - every day a new security or data breach occurs,
including breaches with the Alaska government and other Alaska
institutions. Plus, he said, this dataset would likely be a
target since it would include personally identifiable
information of individuals and families with wealth and assets
in Alaska. He posited that rather than potentially expose this
information to a breach, Alaskans would likely choose to do
business outside of the state, thus continuing the punishment
when they have done nothing wrong.
MR. BLATMACHR stated that he and Peak Trust Company want to be
part of the solution like in years past. He noted that he is a
member of Alaska Trust & Estate Professionals (ATEP), which has
proposed alternatives that he and his company support. He said
he looks forward to further dialogue with the legislature and
other stakeholders.
4:36:41 PM
CO-CHAIR FIELDS stated that the committee has been working on
some of those proposals for HB 406.
4:36:46 PM
ABIGAIL O'CONNOR, Esq., testified in opposition to HB 405 and HB
406. She noted that she is an estate planning attorney but is
not testifying in any representative capacity. She further
noted that she is a member and vice president of ATEP, the state
chair-elect of the Alaska Chapter of the American College of
Trust and Estate Counsel, the president-elect of the Anchorage
Estate Planning Council, and an executive board member of the
Estate Planning Section of the Alaska Bar Association. She said
she agrees with the purpose of preventing bad actors from using
Alaska trusts and is sympathetic to the intent of the
legislation. However, she continued, her focus is on the
protection of everyday Alaskans who use trusts as part of their
regular estate planning for their families. She stated that any
legislation that affects trusts for everyday Alaskans must be
done in a thoughtful manner that does not create unintended and
harmful consequences and that does not act as a deterrent to law
abiding Alaskans from creating good estate planning for their
families.
MS. O'CONNOR provided an example of how a typical trust would be
done under current law for people who would not be considered
wealthy: Her clients, Mom and Dad, have come into her office to
do estate planning. They have a house, an investment account,
checking account, family cabin, and each has an individual
retirement account (IRA). One of their two adult children is in
a rocky marriage and the other does not know how to handle
money. Two of their five grandchildren are excelling in school
and want to go to graduate school and they want to help them.
The other grandchildren are all minors. Mom and Dad want to
ensure that their hard-earned nest egg is available to their
children after their deaths without dissipating the resources so
that the money ultimately will be available for the
grandchildren. If Mom and Dad leave the money to their children
outright, then the money will be spent quickly and there will be
nothing left for the grandchildren. Trusts are the answers to
Mom and Dad's problem. The assets can then be held in trust,
Mom and Dad can be the lifetime beneficiaries, they can use a
revocable trust. After Mom and Dad pass away the property can
be held in separate trusts for their children with restrictions
on distributions to ensure that the funds are not dissipated.
After each child dies, his or her separate trust is divided into
further trusts for his or her [children]. This protects the
assets and ultimately provides for Mom and Dad's grandchildren
while allowing the resources to be available in a limited way
for their children. Because Mom and Dad love this idea, Ms.
O'Connor drafts the trust agreement, which Mom and Dad then
sign. She drafts a deed for Mom and Dad's house and a deed for
their cabin; they are deeds from themselves to themselves as
trustees and they sign the deed. They also sign an assignment
of tangible properties from themselves to themselves as trustees
to assign their tangible property to the trust. Ms. O'Connor
helps Mom and Dad fill out paperwork to retitle their investment
account and checking account in the name of the trust. Their
IRAs stay in their own names, and they are payable to each
spouse on death but at the survivor's death they use a special
designation on a beneficiary form to pay the IRAs over to the
trust. All of this is done in Ms. O'Connor's office in one
meeting her clients now have a valid trust. Ms. O'Connor then
records the deeds and sends in Mom and Dad's trust registration
to the court - this is not required as a condition of formation,
but is required for jurisdictional purposes, and that
registration reports only Mom and Dad's names, the name of the
trust, their address, and the date of their trust.
4:41:06 PM
MS. O'CONNOR then explained how this same example would be done
under HB 405 and HB 406 as drafted: First, the trust would not
be enforceable until filing the trust establishment document.
What does that really mean? Mom and Dad already signed deeds,
assigned property to themselves as trustees, they declared that
they were holding property in trust, which is valid and
consistent with hundreds of years of trust law, and their trust
relationship has been established. What does it mean if it is
not enforceable? What happens if the client dies before filing
the trust establishment document? What happens to the property
if the trust is not valid because of HB 405? Second, Mom and
Dad must file the trust establishment apparently with the names
and addresses of all their children and grandchildren because
they are beneficiaries. Third, the requirement is that any time
there is an inaccuracy in the document, which could be caused by
a change, Mom and Dad must file an update. This means that
every time a grandchild changes a dorm room, or somebody moves,
or a grandchild or great-grandchild is born, Mom and Dad must
file an update with the Department of Commerce within 30 days or
face a $500 fine. Fourth, if one of the grandchildren "goes
rogue" and ends up on the [Specially Designated Nationals and
Blocked Persons List (SDN List)], then the entire trust is no
longer valid under HB 406. What does that mean? What happens
to the property? Who receives the property? What are the tax
consequences? What about all the other children and
grandchildren? What about Mom and Dad? What if the trust owns
a partnership interest and is subject to a partnership
agreement, what happens to those partners? What if the trustees
are borrowers on a loan, what happens to the creditor if the
trust is now invalid? There are no answers. Fifth, HB 405
somehow renders the trust a reporting company for purposes of
the Corporate Transparency Act. As Mr. Lauer testified, under
the CTA a trust is not a reporting a company, it is not required
to report to the Financial Crimes Enforcement Unit, but HB 405
now says that the trust is a reporting company. So, Mom and Dad
must file reports with FinCEN for their revocable trust and
follow the CTA rules? But FinCEN is not expecting those reports
because trusts are not reporting companies. What happens if Mom
and Dad don't comply? Well, under federal law they are not
required to report a trust. What is the implication of a state
law that fiddles with the federal law? How do they interact?
Who enforces it? Is the law even enforceable? Or is it
preempted by federal law? Ms. O'Connor said she doesn't know
the answers to these questions.
4:44:13 PM
MS. O'CONNOR continued her testimony. She said Mom and Dad
walked in the door to do relatively simple estate planning and
now these clients are up to their ears in the DCCED reporting
requirement, FinCEN, $500 penalties, and questions of trust
validity for things beyond their control. She said her clients
will tell her to forget about the trust, they do not want to
risk it or deal with these penalties. Or, she continued, Mom
and Dad will ask if there is an alternative and she will tell
them yes - another jurisdiction can be used. This means going
to another state, forming the trust there, and adhering to the
rules of that other state because Alaska will be the only state
that has this requirement. This also likely means that some or
all the assets in the trust need to move away from the Alaska
banks and into the banks in the state where the jurisdiction is.
Plus, she noted, her clients will have to get an attorney and
possibly other professionals involved in that other state to
help advise them. All of this for something that should be very
simple and is an everyday occurrence for estate planning clients
in Alaska. She said there is no question that HB 405 and HB 406
have very good intention. But, she advised, the impact on
everyday Alaskans for their estate planning will be so
significant it is going to turn them away from doing trusts.
4:45:52 PM
CO-CHAIR FIELDS stated that the committee has been working on
some changes based on Ms. O'Connor's recommendations.
REPRESENTATIVE KAUFMAN offered his thanks and appreciation for
Ms. O'Connor's testimony.
4:46:14 PM
LINDA HULBERT, testified in opposition to HB 405 and HB 406.
She noted that she has been in the insurance industry for the
last 33 years, has offices in Fairbanks and Anchorage, and has
clients statewide. She related that over the last six to twelve
months she has discussed wills and trusts with her clients about
40-50 times. She explained that when clients come into her
office she asks them if they have a will and what kind of
planning they have done. She said her job is to help them plan
for the future, look at how they are protecting their families,
how they are growing their income, how they are protecting their
business, and to help them make a plan that is going to last a
long time and protect their assets.
MS. HULBERT explained that many people start with a simple "I
love you will," but after children appear it suddenly is whether
they want secondary beneficiaries with their life insurance and
other assets. She said her clients must plan whether they want
their children to inherit cash or whether they want to direct
how and when their assets can be spent. She said she helps her
clients evolve their planning, starting a will and a trust, and
ultimately her clients will reach the level discussed by Ms.
O'Connor. Many people never get to the level of wealth where
they have a cabin and a house and a lot of discretionary assets,
she specified, but a trust is still very important to them
because they have children and then grandchildren who begin to
grow up. She said this is important to her because these are
Alaskans who are committed to living in the state and who want
to do their planning in the state.
4:49:32 PM
MS. HULBERT noted that she helps people in their planning
through the sale of insurance. She pointed out that, in Alaska,
2.7 percent of every dollar spent on every type of insurance
goes to the State of Alaska as revenue. For example, she
related, 2.7 percent of every annual life insurance premium goes
to the State of Alaska. If trusts and the assets were to move
outside the state, a significant amount of revenue to the State
of Alaska would subsequently be lost. Therefore, Ms. Hulbert
stressed, anything that is done must seriously consider the
long-term best interest of Alaska residents who are planning for
the basis of their family, not just people with significant
assets. As well, she continued, a look must be taken at the
revenue stream that comes into Alaska and how that revenue can
be used for the benefit of all Alaskans.
MS. HULBERT advised that privacy is critical to everyone she
works with. She further advised that many of her clients wish
to leave money in their wills and trusts to charity, and being
required to disclose that would not be in their best interest
either. Plus, she noted, if they changed from one charity to
another they would have to file paperwork for that. She urged
that a plan be found that will work for everybody, especially
Alaskans who prefer to do their planning here, because otherwise
she too will be forced to suggest to her clients that they move
their planning to another state in the interest of privacy.
4:52:28 PM
HARRY NEED, testified in opposition to HB 405. He clarified
that his testimony is his own and does not represent his
employer or the organizations he will be mentioning. He noted
he is Senior Director of Philanthropic Services at the
University of Alaska Foundation; president of the Anchorage
Estate Planning Council, an interdisciplinary association of
estate planning professionals; and a past president of the
Alaska Chapter of the Association of Fundraising Professionals.
MR. NEED explained that charitable trusts are structured for a
donor to either make gifts to charity for several years and
leave the remainder to their heirs or, more commonly, support
their heirs for several years or a lifetime and then give the
rest to charity. Charitable trusts, he related, are responsible
for the majority of the five and six figure deferred gifts that
he has witnessed over his 15-year career in philanthropy, and
they are nearly the exclusive domain of the seven and eight
figure deferred gifts from individuals that he has worked with.
He expressed his concern that if HB 405 creates a chilling
effect on the trust industry in Alaska it will have a
disproportional negative corollary impact on Alaska charity. In
the last several years in his current professional role, he
shared, he is typically working with about 20 of these trust
relationships at any given time and relationships is a crucial
word. Trusts are legal relationships between private entities,
Mr. Need advised, and private papers between private entities
are quintessentially private matters. Charitable trusts involve
such things as personal values of community, religious devotion,
family pride, altruism, and repayment, and Alaska's state
constitution enshrines the right to privacy in Article I,
Section 22. The aforementioned, he continued, are examples of
the unintended consequences that HB 405 may impose upon the
charitable sector first.
MR. NEED, regarding the reporting requirements within HB 405,
advised that many Alaskan nonprofit organizations already act as
trustees. These nonprofits may not employ sophisticated trust
companies or bank departments, he continued, they simply follow
the instructions and donative intent outlined in the trust
documentation. They are not equipped to track or research
dynamic lists of beneficial interests against dynamic lists of
sanctioned individuals, he specified. The new regulations and
proposed penalties, he said, could price out all but the most
well-funded nonprofits from serving their benefactors in a
trustee capacity. Second, he continued, ethical standards in
the fundraising sector hold donor confidentiality sacrosanct.
Registering a list of beneficial interests implies that one is
also not registering other potential beneficial interests. The
choices of benefactors regarding their legacies are immensely
personal and their charitable gifts come at the expense of a
gift to someone else. Mr. Need stated that charities need time
to reconcile HB 405 with their obligations to donor
confidentiality. Meanwhile, he added, he suspects that many
charitable donors may not follow through with the formation of a
charitable trust.
MR. NEED pointed out that many Alaskan nonprofits are the
beneficiaries of trusts. He noted that nonprofit organizations
rely upon volunteer boards that periodically cycle directors and
that nonprofits without brick-and-mortar locations often change
registered addresses, a burden that is placed on trustees.
Nonprofits, he advised, will need to understand how to comply
with the routine resubmissions of their ever-changing
fiduciaries to a regulator. While the bill's objectives come
from a good place, experts throughout the state are flagging a
multitude of unintended consequences. To that, he added, HB 405
will also likely impact the charitable sector negatively. He
urged the committee not to advance the legislation.
4:56:39 PM
CO-CHAIR FIELDS thanked Mr. Need for providing attention to the
charitable sector.
CO-CHAIR SPOHNHOLZ thanked Mr. Need for his service to the
Anchorage Estate Planning Council and to the Association of
Fundraising Professionals.
4:57:10 PM
STEPHEN GREER, Esq., testified in opposition to HB 405 and HB
406. He stated that he has devoted his law practice exclusively
to estate planning for the last 20 years. He noted he is chair
of the Estate Planning and Probate Section of the Alaska Bar
Association, a member of the American College of Trust and
Estate Counsel (ACTEC), and a director for the Alaska Trust and
Estate Professionals (ATEP), but that today he is speaking on
behalf of his clients.
MR. GREER related that when he explains this legislation to his
average client, the client's first response is, "What right does
the government have to intrude into my personal affairs in this
manner?" His clients then decide whether they are going to
further do estate planning. He said he believes his clients are
right estate planning is a personal affair that comes within
[an Alaskan's] right of privacy enumerated in Alaska's
constitution, which is even broader than the federal right. The
legislation must be carefully tailored to consider that
fundamental right, he stated, otherwise the legislation is
ineffective and void. His objection to the [proposed] statute,
he continued, is that it will impede, intrude, and burden this
right of privacy. The legislation is overbroad in its reach and
it's going to create many unintended consequences, he added.
MR. GREER suggested that this whole matter could be addressed to
the Uniform Law Commission, comprised of lawyers and law
professors who are conversant in this area of constitutional
law, to determine what if anything should be done to prevent bad
actors from using state trust laws to further their purposes.
He stated that this legislation should not be hastily passed and
urged the committee not to pass these bills.
5:01:04 PM
JAMIE DELMAN, Esq., testified in opposition to HB 405 and HB
406. He stated he is a past president of the Anchorage Estate
Planning Council and has practiced in estate planning for over
11 years. He said he does not want Alaska's beneficial trust
laws to be used by bad actors to steal wealth. Therefore, he
continued, he strongly supports a review of Alaska's existing
statutory framework in conjunction with members of the
legislature to identify and improve provisions to safeguard
Alaska's statutes against such potential bad actors.
MR. DELMAN said he is concerned that HB 405 and HB 406 could
cause substantial harm to Alaskans. He stated that in addition
to privacy concerns, he is concerned that [the bills] will
create significant open questions that would need substantial
review and study to resolve. He noted that HB 405 provides that
a trust does not become effective or enforceable until the trust
establishment document is filed. But, he cautioned, it is
unknown what it means for a trust to be ineffective or
enforceable. Is an ineffective or enforceable trust treated
like a limited liability company that has been dissolved, in
which case the managers still have an ability to wind up affairs
and transfer assets? If that were the case with an ineffective
trust, he argued, the trust still effectively exists even though
it is considered ineffective and unenforceable. Trusts are
relationships, he said, so to say that a trust is unenforceable
opens the question as to what right cannot be enforced by whom
and against whom.
MR. DELMAN noted that HB 406 provides that a trust is not valid
if an interested party is on the Specially Designated Nationals
and Blocked Persons List (SDN List). He said this similarly
creates a question of what it means for a trust to be invalid.
If a trust is in existence and has one of several beneficiaries
appearing on the list, what happens to the property in the trust
deed's possession? Section 2 of HB 406, he pointed out,
prohibits recording deeds to a person on the SDN List. However,
he advised, if real property is transferred and a deed is
delivered, that is considered an effective transfer regardless
of whether it is recorded. So, he warned, in a way this would
encourage bad actors to make transfers and not record them.
5:04:28 PM
CO-CHAIR FIELDS closed public testimony on HB 405 and HB 406.
He related that former governor Tony Knowles has submitted a
letter.
CO-CHAIR SPOHNHOLZ noted that the Division of Banking and
Securities is the primary regulator for Alaska trust companies.
She requested a description of how oversight is currently
managed for trusts in Alaska.
5:05:28 PM
ROBERT SCHMIDT, Director, Division of Banking and Securities,
Department of Commerce, Community, and Economic Development
(DCCED), replied that the division represents five trust
companies, which are companies whose business it is to
administer trusts. The division licenses those trust companies
and performs due diligence on licensing them, and once they are
licensed they are subject to periodic examination. During that
examination, he continued, the division is looking at their
operations for safety and soundness, for compliance with the
sanctions checklist of the Office of Foreign Assets Control
(OFAC), and for compliance with the Bank Secrecy Act to make
sure that the trust is looking out for what are called Specially
Designated Nationals, persons who are on the sanctions list.
5:07:10 PM
CO-CHAIR SPOHNHOLZ asked whether, in addition to the five trust
companies, other financial institutions are required in Alaska
to comply with the OFAC sanctions list.
MR. SCHMIDT responded that every financial institution in Alaska
is required to comply with OFAC lists and the Bank Secrecy Act,
and he understands that there are criminal penalties for failure
to comply. For example, he continued, a person opening a bank
account in the state of Alaska must provide identifying
information to the bank that establishes who the person is as
the bank must follow what are called "know your customers" laws.
He said the five trust companies, the four state-chartered
banks, and the one state-chartered credit union that the
division regulates are all required to perform due diligence
whenever they open any account with a new customer.
CO-CHAIR SPOHNHOLZ noted that because a trust is a relationship,
not a company, it has its own set of legal documents that must
be provided to the bank when creating a new bank account for the
trust. She asked whether the bank is then responsible for
comparing trustees and beneficiaries of an individual trust
against the OFAC sanctions list.
MR. SCHMIDT answered yes.
CO-CHAIR SPOHNHOLZ asked what a bank's responsibility would be
and what the routing would be to report something that the bank
identified.
MR. SCHMIDT replied that the banks are bound by the Bank Secrecy
Act and various federal laws relative to knowing their customers
and not making themselves safe havens. He explained that a
person might have a common name that shows up on the SDN List or
the OFAC list. There are then processes and procedures, he
continued, for clearing those false positives that would require
confidential information, such as date of birth, driver license
number, and Social Security number, that the bank would use to
determine whether it is dealing with a false or a true positive.
CO-CHAIR SPOHNHOLZ asked how many times in the past few years
the division has identified individuals on the sanctions list.
MR. SCHMIDT deferred to Ms. Tracy Reno to answer the question.
5:10:51 PM
TRACY RENO, Chief of Examinations, Division of Banking and
Securities, Department of Commerce, Community, and Economic
Development (DCCED), responded that she oversees examinations,
while the identifying factors for OFAC are on the licensing side
under a different section. She said she has been with the
division for 10 years and is not aware of any positive OFAC hits
from a license perspective that would have required enforcement.
5:11:18 PM
CO-CHAIR SPOHNHOLZ drew attention to the fiscal note for HB 405
and noted that there are thousands of trusts in Alaska. She
asked how - if a requirement were created that each of those
trusts be filed with the Division of Banking and Securities -
the division would be able to check against the sanctions list
on every trust for the initial filing plus every time a change
was made without additional staffing.
MR. SCHMIDT answered that this substantial undertaking would
require additional staffing of at least one position control
number (PCN). Also, he continued, a third-party vendor with an
automated checking process would need to be utilized for the
necessary additional technology because it is impossible to do
OFAC checks at scale manually. He further advised that because
the division would be housing sensitive information, the
division's systems would need to be adequately hardened so that
people's information is not compromised. He said it is
difficult to say what the cost of those efforts would be.
CO-CHAIR SPOHNHOLZ commented that it would be a significant
undertaking to set up this new structure given it has yet to be
undertaken in any other US state. She asked whether the
division is closely tracking the adoption of regulations related
to the Corporate Transparency Act.
MR. SCHMIDT confirmed that the division is tracking those.
[HB 405 and HB 406 were held over.]