HB 405-ESTABLISHMENT OF TRUSTS HB 406-MORATORIUM ON TRUSTS/PROPERTY ACQUISITION  9:32:17 AM CO-CHAIR FIELDS 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." 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 [continued] invited testimony on HB 405 [and HB 406]. He said this additional invited testimony will address Representative Kaufman's question about identifying the problem statement that [HB 405 and HB 406] are trying to address. 9:32:48 AM KAISA DE BEL, Policy Analyst, Global Financial Integrity (GFI), provided invited testimony during the hearing on HB 405 and HB 406. She said she is a policy analyst affiliated with Global Financial Integrity (GFI), a Washington DC-based think tank focused on providing evidence-based research and solutions to counter ways in which criminal actors abuse the US economy to hide their illicit profits. She paraphrased from a document in the committee packet titled "Illicit Finance and Real Estate Opacity in Alaska," dated 4/22/22. Ms. de Bel spoke as follows: Sanctioned governments, kleptocrats, and drug traffickers have long used the US real estate sector as a vehicle to evade sanctions and hide their ill- gotten gains. Simply put, real estate is an attractive safe haven for illicit money because it retains value, while also creating the opportunity for long-term profits through rentals, property flips, and land development. Most significantly, the US real estate market permits the anonymous purchase of real estate through shell companies and trusts. This makes it easy for bad actors and criminals to hide their identity and, in turn, protects their wealth from asset recovery efforts as well, both in their home jurisdiction and in countries where they are sanctioned. Recent investigative efforts like the Pandora Papers are just one in a long line of reports exposing high- profile real estate money laundering cases that span the country. Last year, GFI published a report that found that more than $2.3 billion was laundered through US real estate in cases reported between 2015 and 2020. [Global Financial Integrity's] analysis of those cases shows two very clear trends. First, the most common money laundering technique in the real estate sector is the use of complex legal structures to purchase properties. The use of trusts and companies makes it easy for criminals to hide ownership of real estate, while at the same time being able to flaunt in plain sight the evidence of ill- gotten wealth. Sometimes these were companies and trusts registered domestically, but it also often featured companies registered abroad. The second trend found in GFI's analysis, is that the US real estate sector particularly attracts actors with political ties to foreign regimes, including foreign adversaries like North Korea, Iran, and Venezuela. In 82 percent of the analyzed cases, the illicit money invested in the real estate sector had foreign origins. And in more than half of the cases, the beneficial owner of the property was a foreign politician or their associate who obtained their wealth through corrupt activities. This high influx of foreign and corrupt money poses a serious threat to US national security and global democratic norms. Unfortunately, the Alaskan real estate market has not been excluded from this trend. For instance, between 2011 and 2014, an Alaskan resident helped the Iranian government transfer $1 billion to various businesses and individuals around the world, in violation of the US sanctions regime. This Alaskan resident received $10 million dollars for his role in the scheme and laundered this money through real estate purchases in Alaska. Through various shell companies, he held more than 20 condominiums and homes in Anchorage and Eagle River. And despite these known risks across the country, real estate transactions are subject to limited federal oversight. The only binding federal regulation focused on real estate risks are Geographic Targeting Orders or GTOs. These temporary orders require title insurance companies to report the beneficial owner of residential real estate purchases but they only apply in a select group of 22 counties across the country. This policy has several serious shortcomings and is inadequate to address real estate money laundering and sanctions evasion risks. First, the GTOs do not apply in Alaska. In fact, GFI's research found that the majority of real estate money laundering cases involved properties located outside of the GTO geographic scope, with Alaska proven to be one of the bigger real estate money laundering hubs as you can see on this map. Even if the GTOs would apply in Alaska, it would be very easy to get around them because title insurance is only mandatory when the buyer takes out a loan. Kleptocrats, oligarchs, and high net worth criminals have plenty of cash at their disposal to acquire real estate without a loan or title insurance, thereby evading the GTOs. And while the Corporate Transparency Act, which was passed by Congress last year, will address some of the opacity in the US real estate sector, it will not help in identifying the beneficial owner when a foreign company or trust buys real estate, which is just as common. Given the loopholes in the federal regulatory system, it is critical to seek solutions at the state level to address these gaps. [Global Financial Integrity] therefore supports House Bills 405 and 406 as an important step to address the opacity in the real estate sector in Alaska. To ensure that HB 406 brings greater transparency without loopholes for bad actors to exploit, GFI urges Alaska to incorporate the following policy recommendations: First, at a minimum, the basic goal of HB 406 should be to create a clear picture of the beneficial ownership of real estate in Alaska. The requirement of identifying the beneficial owner should apply to all legal entities buying real estate, including LLCs [limited liability companies], trusts and other legal entities formed and registered in the US, as well as abroad. Second, in addition to beneficial ownership, the source of funds and the identification of politically exposed persons should also be reported. These two additional key pieces of information are critical to spot red flags in a transaction and identify high-risk actors. Third, instead of putting the reporting burden on one gatekeeper, it should be placed on multiple real estate professionals in cascading order. This creates a shared responsibility among real estate professionals and prevents bad actors from evading the requirement by bypassing a title agent. Fourth and finally, the bill should apply to all real estate transactions that were not financed with a loan from US-based financial institutions, because those are currently the only actors who are required under federal law to conduct any type of anti-money laundering checks in a real estate transaction in the US. These reforms would make HB 406 more effective while at the same time ensure it has minimal costs on Alaskan real estate professionals. In conclusion, Alaska has the opportunity to counter the use real estate as an easy mechanism for bad actors to evade sanctions, gain access to the US dollar, and the US financial system. We encourage you to take this opportunity. 9:40:18 AM CO-CHAIR FIELDS encouraged Ms. de Bel to work with his staff on crafting amendments to tighten HB 406. He inquired whether preventing money laundering and hiding ill-gotten gains by sanctioned individuals requires both state and federal laws or whether it is sufficient to wait for the federal government. MS. DE BEL replied that there isn't any important federal legislation underway. But the federal Corporate Transparency Act [of 2021], she specified, was a very important step in addressing some of the issues of the past in the real estate sector and the illicit use of legal entities such as LLCs and trusts general. Some things remain unclear under the Corporate Transparency Act, she advised, and those are crucial issues. Under the Corporate Transparency Act, corporations, limited liability companies, and other similar entities formed and registered to do business in the US in any US state will be required to disclose their beneficial owner to a directly housed financial entity and that includes foreign companies but only when they are registering in the US to do business. Because of the qualification "to do business," she explained, it is unclear whether the use of foreign LLCs or trusts for the purchase of, for example, residential real estate would be covered by that because that might not qualify as doing business. That weakness means that if, for example, a Russian LLC or trust buys property in Alaska, that would not qualify as doing business and would therefore not necessarily be captured by federal legislation. Another loophole, Ms. de Bel explained, is that the application of the [contractual trust arrangement] (CTA) to trusts remains unclear to this day, so it is very important that states are proactive about addressing that loophole with state level legislation. 9:42:19 AM CO-CHAIR FIELDS thanked Ms. de Bel for her testimony. He said the Pandora Papers have provided a window into how criminals exploit trusts and launder money through real estate, yet the full extent to which criminals have exploited trusts within Alaska is unknown because the view of the Pandora Papers is limited. He inquired about what can be said to policymakers in states where a limited degree of leaks has suggested that the scope of this problem could be significant, but the full scope cannot be understood until there are greater transparency laws. MS. DE BEL remarked that that is an important question to look at. She said GFI's research was based on real estate money laundering cases that are in the public domain, which were cases reported by journalists such as the Pandora Papers or law enforcement and actions. It is unknown what else is out there, she continued, because it is unknown across the US who owns these properties or who owns these legal entities or trusts. It is very important to get into that, she advised, since the Pandora Papers and GFI research are just the tip of the iceberg. She noted that cases are being seen in places where real estate money laundering wasn't expected, such as Alaska, which points that it is likely a much bigger problem than is known. 9:44:35 AM CO-CHAIR FIELDS inquired about Kenneth Zong, an identified money launderer in Alaska. MS. DE BEL answered that he was indicted and his properties across Alaska and elsewhere in the US seized because it was proven they were purchased with money he received for helping the Iranian government evade sanctions. CO-CHAIR SPOHNHOLZ asked how Kenneth Zong's fraud and laundering were identified. MS. DE BEL replied that she doesn't know the specifics of how law enforcement detected this case. She pointed out that only after a lead is found can the threads be pulled to find all properties someone owns, and that is why it is very helpful to have more beneficial ownership information behind those entities. She offered to get back to the committee with more details on the Zong case. 9:46:17 AM ROBERT SCHMIDT, Director, Division of Banking and Securities, Department of Commerce, Community, and Economic Development (DCCED), related that his understanding of Mr. Zong's indictment comes from a 1/5/21 press release issued by the US Attorney's Office for the District of Alaska announcing the indictment. According to the press release, he said, Mr. Zong laundered money in Korea, then the laundered money came into Anchorage and other places, and Mr. Zong and his son invested it. At the time of the press release, he continued, Mr. Zong was serving time in Korea for violating Korea's money laundering laws, as well there was police action/law enforcement action being taken by the United Arab Emirates and the Republic of Georgia. 9:47:45 AM CO-CHAIR SPOHNHOLZ asked whether the US's ability to prosecute was driven by another government's prosecution or whether the US was able to document something that allowed it to prosecute. MR. SCHMIDT answered that the indictment happened when Mr. Zong was already in jail in Korea, which suggests that the Korean action significantly pre-dated any law enforcement action in the US. The press release, he continued, said the prosecution would not have been possible but for coordination with the law enforcement agencies of other countries. 9:48:35 AM CO-CHAIR FIELDS continued invited testimony on HB 405 and HB 406. 9:48:59 AM ANDRES KNOBEL, Lead Researcher on Beneficial Ownership, Tax Justice Network, during the hearing on HB 405 and HB 406, provided a PowerPoint presentation titled "Addressing the risks created by Trusts," dated 4/21/22. He paraphrased from the second slide which stated [original punctuation provided]: The Tax Justice Network believes our tax and financial  systems are our most powerful tools for creating a just society that gives equal weight to the needs of everyone. But under pressure from corporate giants  and the super-rich, our governments have programmed  these systems to prioritise the wealthiest over  everybody else wiring financial secrecy and tax havens into the core of our global economy. This fuels inequality, fosters corruption and undermines  democracy. We work to repair these injustices by inspiring and equipping people and governments to  reprogramme their tax and financial systems. MR. KNOBEL moved to the third slide titled "Risks created by Trusts." He paraphrased from the slide, which stated [original punctuation provided]: Although many trusts are used for legal and legitimate purposes, trusts' secrecy and asset protection properties can be exploited by anyone (e.g. criminals, money launderers, etc) Not even authorities know how many trusts exist, the assets they hold nor the people who benefit from them. MR. KNOBEL displayed slide 4 to provide an example of the risks created by trusts [as reported by The Guardian]. He paraphrased from the slide, which stated [original punctuation provided]: Alisher Usmanov's assets may be out of reach of  sanctions regime  Alisher Usmanov, the Russian oligarch once said to be the UK's richest person, claims to have placed hundreds of millions of pounds of his assets into an irrevocable trust, potentially leaving them outside the sanctions regime established by western governments. MR. KNOBEL showed slide 5 to provide another example of the risks created by trusts [as reported by The Washington Post]. He paraphrased from the slide, which stated [original punctuation provided]: A Texas billionaire evaded $2 billion in taxes, feds  say. Now he's charged in the 'largest-ever' tax fraud  case.  MR. KNOBEL proceeded to slide 6 and continued his discussion of risks created by trusts. He paraphrased from the slide, which stated [original punctuation provided]: World Bank & UNODC' "The puppet masters": Investigators interviewed as part of this study argued that the grand corruption investigations in our  database failed to capture the true extent to which  trusts are used. Investigators and prosecutors tend  not to bring charges against trusts, because of the  difficulty in proving their role in the crime. FATF & EGMONT Group "Concealment of Beneficial ownership" The interaction of the trust with other legal persons  adds an additional layer of complexity and helps  prostrate efforts to discover beneficial ownership it is also possible that the use of legal arrangements may increase the difficulty of investigating and identifying the beneficial owner, thereby explaining  their relatively low prevalence in the case study  sample. MR. KNOBEL spoke to slide 7 titled "Solutions," which stated [original punctuation provided]: Require Trust Registration: -To obtain legal validity (eg Puerto Rico, Czech Republic, France) -Whenever a trust: (i) is created according to local laws, (ii) has local assets or operations, or (iii) has local parties (eg any local settlor, trustee, protector, beneficiary) [eg Argentina] -To include information on beneficial owners (natural persons) for every party of the trust that is an entity, eg "corporate beneficiary" [eg the UK, EU] MR. KNOBEL addressed slide 8 titled "Implementation," regarding "FATF I 2022," "obtaining legal validity," trusts created according to local laws, local assets or operations, or local parties, and 12 EU countries that will also give public access. [Due to technical difficulties, slide 8 was only partially visible due to connectivity issues and the speaker was indiscernible]. 9:55:37 AM The committee took a brief at-ease. 9:55:57 AM MR. KNOBEL continued his PowerPoint presentation [but slides still were not visible due to connectivity issues]. 9:56:27 AM The committee took another brief at-ease. 9:56:34 AM CO-CHAIR FIELDS stated that the connectivity issues were continuing, so the committee would try to get the testimony on the record. He announced that the committee is working on amendments to HB 405 and HB 406. He clarified that the intent with HB 405 is not to provide public transparency of every trust beneficiary, but to provide oversight through DCCED so the department would be able to review who are trust beneficiaries, compare them against the sanctions lists, and as necessary make referrals to the US Department of the Treasury and the Office of Foreign Assets Control (OFAC), which does not mean publicly disclosing who is in a trust. [HB 405 was held over.] [HB 406 was held over.]