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.]