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.]