By Carrie Johnson
Washington Post Staff Writer
Wednesday, November 15, 2006; D02

Lax state standards allow millions of companies to incorporate every year without their owners being identified, a practice that lets tax evasion, money laundering and securities fraud go undetected, federal officials told a Senate panel yesterday.

Leaders of the Senate Government Affairs Committee's permanent subcommittee on investigations sounded alarms about lenient rules that apply to about 2 million new businesses that incorporate in the United States every year. In most cases, states fail to seek basic ownership information from companies and often do not check what little data is provided in follow-up reports against criminal justice databases.

Lack of transparency over who controls the companies amounts to "an unacceptable risk to our national security and our treasury," said Sen. Carl M. Levin (D-Mich.), whose staff initiated the investigation.

Justice Department and Internal Revenue Service officials who investigate financial wrongdoing testified that they are frequently stymied by the problem. "We have important investigations that are hitting brick walls because no one has the ownership information," said Stuart D. Nash, associate deputy attorney general.

Immigration and Customs Enforcement investigators pointed authorities to a Nevada company that received nearly 3,800 suspect wire transfers totaling $81 million over two years. But the case did not move forward because authorities could not identify who owned the business, lawmakers said.

The FBI has opened 103 investigations into stock market manipulation, most of them involving shell companies whose owners are unknown to authorities. The bureau said shell businesses have been used to launder as much as $36 billion from countries in the former Soviet Union. A previous report by the Justice Department disclosed that Russian officials used shell companies in Delaware and Pennsylvania to siphon $15 million that was supposed to pay for safety upgrades for former nuclear power plants.

In many cases, states do not have an incentive to seek detailed information about business owners because the lure of incorporation fees and related funds is too great. In Delaware alone, nearly one-quarter of the state's revenue comes from such fees, according to a Government Accountability Office report on the issue released in April.

Technology that allows companies to incorporate online without requiring the owners to appear in person in a state office is also raising concerns. In some states, including Delaware and Nevada, corporations can pay an extra fee to complete the incorporation process in an hour, lawmakers said.

"What is needed is a level playing field, a system that avoids a race to the bottom," said Sen. Norm Coleman (R-Minn.).

Fixing the problem could be difficult. States and the federal government have clashed over who has the authority to regulate business. At the hearing, senators asked law enforcement officials to look more closely at the problem and to recommend a solution.

Some state regulators argue that seeking more information could raise privacy considerations. And Yvonne Jones, director of the financial markets team at the GAO, said that state officials interviewed by her staff expressed concern that widespread change could require action by state legislatures and could increase fees.