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  • 1. TERRORIST FINANCING: FOLLOW THE MONEY LSU FRAUD AND FORENSIC ACCOUNTING CONFERENCE--JULY 2005 Presenter: Carl Pacini, Ph.D., J.D., CPA, CFSA Associate Professor Florida Gulf Coast University Ft. Myers, FL
  • 2.
    • Introduction
    • Forensic accountants have fought money laundering for years. Now all accountants have a responsibility to be alert for signs of money laundering.
    • Why do all accountants now have a responsibility?
    • Simple – 9/11/01. Fighting money laundering now entails combating terrorist financing in addition to criminal activity.
    • Passage of the Patriot Act in October 2001 had the effect of integrating U.S. policy on money laundering with that of interdicting terrorist financing.
    • Our purposes today are to help build awareness of how terrorists and their associates may use the financial system, describe some general characteristics of terrorist financing, outline U.S. laws applicable to money laundering, and identify factors which may be signs of money laundering and/or terrorist financing.
  • 3.
    • Accountants may be unable to detect terrorist financing per se.
    • Accountants are in a position, however, to detect suspicious transactions.
    • Sources of Terrorist Financing
      • Two main sources:
      • 1. states or organizations
      • 2. revenue from both legal and illegal sources
      • Criminal organizations obtain funds from
      • unlawful activities. Terrorists secure funds from both legal and
      • Illegal sources.
  • 4.
      • Illegal activities used by terrorists to raise money:
    • 1. Drug trafficking
    • 2. Extortion
    • 3. Robbery
    • 4. Fraud schemes
    • - Islamic terrorist groups have been using credit card fraud since the late 1990s to finance their activities. In many cases, credit card fraud is facilitated by identity theft.
    • - Identity theft is the criminal act of assuming the identity of another person with the expectation of gain.
    • - It is estimated that identity theft resulted in the loss of $221 billion worldwide in 2003, with $73.8 billion lost in the U.S. alone.
  • 5.
    • A recent FTC telephone survey involving a sample of more than 4,000 individuals projected that as many as 27 million Americans were victims of identity theft in the last five years. The average loss to businesses was $4800 per incident. The average loss for individuals was $500.
    • - The greatest losses resulted from thieves using a victim’s personal information to open new accounts. In addition to out-of-pocket losses there is the cost of fighting the problems associated with identity theft.
    • - Law enforcement agencies spend about $15,000 on each case and each victim spends about 175 man- hours on dealing with the paperwork restoring order to their financial lives.
    • - Identity theft occurs in numerous ways:
    • • steal wallets, purses, and backpacks to procure personal information;
  • 6. • pilfer mailboxes to obtain bank, credit card, and other statements; • rummage through trash to identify personal documents (dumpster diving); • engage in “shoulder surfing” as he or she enters a credit card #, ATM PIN, or calling card #; • intercept personal information shared on the Internet; • steal files or bribe employees to gain access to employee or customer files; • obtain credit reports by posing as a landlord or employer; • engage in “pretexting” where a credit bureau or financial institution is contacted by the identity thief who falsely claims to be another person having a right to access identity information;
  • 7.
    • • hack into corporate databases to steal personal information;
    • • record customers’ credit or debit card information from card readers; and
    • • install and use software that mirrors keystrokes on a computer or website.
    • - Let us consider a case example
    • 5. Gambling
    • 6. Smuggling and trafficking in counterfeit goods
    • 7. Prostitution
    • 8. Human slavery
    • Example – global trade in women.
      • Legal sources of funds:
      • 1. Community solicitation
      • 2. Internet solicitation
  • 8.
      • 3. Charitable fundraising
      • - Numerous instances have come to light in which charitable organizations have been used to provide a cover for financing terrorist activities.
      • - Donor corporations or individuals could be held liable under the Patriot Act.
      • • Charities with links or alleged links to terrorism:
      • - Kach and Kahane Chai
      • - In February 2003, Cisco Systems, Oracle and Sun Microsystems suspended matching charitable grants to the India Development and Relief Fund.
      • - In December 2001, federal officials raided the offices of the Global Relief Foundation in Chicago and froze its assets.
  • 9. - Investigators claim that the charity served as a front organization for terrorist groups.   - In December 2001, the FBI also raided the Illinois offices of the Benevolence International Foundation, a Muslim charity now shut down. When technicians retrieved information from computer disks seized in a raid in Bosnia, they found communications between Benevolence’s director and Osama Bin Laden dating to the 1980s.   - The Al Rashid Trust (ART) is another charity linked to terrorist activities. The U.S. government froze the U.S. assets of ART in late September 2001.   - The banned charity has ability to resurface under another name. In October 2003, the U.S. Treasury Dept. designated Al Akhtar Trust Int’l as a terrorist organization that finances Al Qaeda and other terrorists. It is a successor to the Al Rashid Trust.  
  • 10.
      • - In December 2001, the assets of the Holy Land Foundation for Relief and Development (HLF) were frozen by the U.S. Treasury. HLF is the charity most responsible for raising millions of dollars for Hamas in the U.S. and Canada.
      •   - In 2002, HLF filed a lawsuit challenging the freeze of its assets. The U.S. Court of Appeals for D.C. upheld the freeze.
      •   - Despite denials from Saudi Arabia, a December 2002 report to the President of the UN Security Council claims that the Saudis contributed between $300 and $500 million over a decade to Al Qaeda. Much of this revenue comes from zakat (alms giving by Muslims).
      • - In some Muslim countries, the government controls charities and makes contributions to them.
  • 11.
      • - The four major Saudi charities that have been accused as being fronts for supporting Al Qaeda and other terrorists are the International Islamic Relief Organization (IIRO), the World Assembly of Muslim Youth (WAMY), the Al Haramain Foundation, and the parent umbrella entity, the Muslim World League.
      •   - Other Saudi charities that allegedly support terrorism include the Rabita Trust, SAAR Network or Safa Trust, Taibah International Aid Association, Islamic African Relief Charity, Saudi High Commission, Muwafaq Foundation, Mercy International Relief Organization and the Saudi Joint Relief Committee.
  • 12.
      • - The IIRO has used more than 70 percent of its funds to purchase weapons and donated more than $60 million to the Taliban. The charity has been identified as a co-conspirator in the 1993 World Trade Center Combing, plots to destroy bridges and tunnels in NYC, and other terrorist activities.
      •   - In March 2002, federal law enforcement officials raided IIRO’s northern Virginia offices. Despite the raid, the IIRO continues to operate but under a new name, the Success Foundation.
      •   - The SAAR Foundation, another branch of the Muslim World League, did not hold fundraisers; yet for 1998 alone, it reported revenues of more than $1.8 billion (later retracted). The SAAR Foundation officially dissolved in 2000 but many of its functions were taken over by the Safa Group.
  • 13.
      • - Federal law enforcement officials suspect the Safa Group of supporting Hamas and the Palestinian Islamic Jihad.
      •   - In March 2002, the Safa Group and related entities were raided by the U.S. joint terrorism task force.
      • • Detecting and tracing funds from legal sources is very difficult.
  • 14.
    • Money Transfer Networks (MTNs)
    • MTN’s are both formal and informal
    • Formal MTN’s, such as correspondent banking, play a significant intermediary role in the global financial system.
    • Correspondent banking is the provision of banking services by one bank to another bank (e.g., a U.S. bank to a foreign bank).
    • Three common correspondent banking services are vulnerable to money laundering:
      • 1. Payable-through-accounts (PTAs) – a foreign bank provides its customers with checks that enable them to draw on the foreign bank’s account at a U.S. bank.
      • 2. Pouch/cash letter activity – involves the use of a courier to transport currency, negotiable instruments (e.g., checks, drafts, money orders, etc) or other documents to a U.S. bank.
  • 15.
    • Money laundering risk is higher for the processing of negotiable instruments that have one or more of these attributes:
      • Purchased on the same or consecutive days from different locations;
      • Numbered consecutively in amounts just under $3,000 or $10,000;
      • Payee lines are left blank or are made out to the same person; or
      • Bought in round denominations or repetitive amounts.
  • 16.
    • 3. Private banking services – various services, including trust & investment advisory services, private investment companies, wire transfers, and letter of credit financing, provided to wealthy individuals and their businesses.
    • Informal MTN’s are found in a variety of forms:
    • Chinese chit or chop system, black market peso exchange system, and the hawala system
    • Avoidance of regulation is achieved by the emphasis placed by all parties on trust.
    • Given the centrality of trust in hawala networks, both the records kept and the processes of ultimate client identification are minimal.
    • Hawala is rarely an independent or separate business.
    • Other variations may mix hawala with travel businesses, wire transfer services, grocery stores, antiquity trade, farm exports, jewelry shops, etc.
  • 17.
    • Proving criminal offenses and intent is more difficult when commingling takes place.
    • A related challenge is how to target illegal acts perpetrated through hawala without affecting innocent customers who send funds back home to family.
    • It is important for bank officials, credit card companies, brokerages, money exchanges, transmitters, CPAs, and others to be familiar with illicit patterns, recognize them, and report them as suspicious.
  • 18.
    • Hawala indicators are as follows:
    • 1. Checks, money orders, and cash deposited in a bank account.
    • 2. High turnover in a bank account of a low-income earner
    • 3. Wire activity out of a bank account
    • 4. Money sent by a hawala or trader to companies not dealing with the same kind of business
    • 5. Cash shipments and courier activity
    • 6. Suspicious Activity Reports (SARs)
    • A second set of red flags or indicators is aimed at flagging criminal abuse of hawala. It is emphasized that these signs do not prove criminality, but constitute indications that something about a given business or set of transactions is not right.
  • 19.
    • None of the indicators alone provides a “smoking gun” but, in combination, necessitates additional investigation:
    • 1. Different recording methods for some clients
    • 2. No recording of certain large transactions
    • 3. Large daily sums transferred
    • 4. Large sums from a single customer
    • 5. Different collection methods
    • 6. Transactions diverge from a usual pattern
    • 7. Transfers to traders or companies engaged in a very different kind of business
    • 8. Transfers to accounts of companies or individuals involved in illegal activities
    • 9. Practices that do not make common sense
    • 10.Different fees charged to ordinary clients
  • 20.
    • Basics of Money Laundering
    • Terrorists use the same laundering methods as criminals, regardless of the source of funds
    • Amount of money laundered globally – from $590 billion to $1.5 trillion (2% to 5% of global GDP)
    • Two types of money laundering processes are used by terrorist groups:
    • 1. Illegally obtained funds or funds aimed at an illegal purpose are exchanged for a negotiable instrument or valuable asset (e.g., gold or diamonds)
    • 2. Putting funds through a series of steps:
    • 1. Placement – involves the transfer of cash proceeds into legitimate financial systems
            • Deposit cash in an offshore bank
            • Smurfing
  • 21.
    • 2. Layering – the process of generating a series of transactions to distance proceeds from their source and cloud the audit trail.
    • Wire transfers into bank secrecy havens such as the Cayman Islands, Costa Rica, Bahamas, Bermuda, Hong Kong, the Netherlands, Panama, Switzerland, Russia, Philippines, Nauru, Liechtenstein, Cook Islands, Dominica, Lebanon, Israel, St. Kitts, St. Vincent, the Grenadines, and the Marshall Islands
    • These bank secrecy havens often offer one or more of these services:
    • --bank secrecy
    • --offshore banks offering anonymous accounts
    • --anonymous ownership of international business companies
    • --non-residents are allowed to own and operate offshore banks
    • Withdrawal of existing deposits in the form of money orders, travelers checks, etc.
      • 3. Integration – bringing the asset back into the economy to create the appearance of a legitimate business transaction.
  • 22.
    • Overview of Money Laundering and Terrorist Financing Laws
    • Bank Secrecy Act
    • Title I contains provisions which require financial institutions, nonbank financial institutions, casinos, securities dealers and currency exchangers to maintain extensive records of their customers’ accounts
    • Covered entities are also required to keep records of any transaction over $10K
    • Financial institutions must keep a copy of documents such as signature cards, bank statements, both sides of checks, drafts, money orders and cashier’s checks over $100
    • Financial institutions must retain identity data on purchasers of monetary instruments in amounts of $3,000 or more or transfers of $3,000 or more
  • 23.
    • Financial institutions must file a Currency Transaction Report (CTR) for deposits, withdrawals, currency exchanges or other payment or transfer by or through the financial institution which involves more than $10K
    • The BSA also requires financial institutions to report any suspicious transaction relevant to a possible violation of the law. A suspicious activity report (SAR) must be filed when there is:
      • Any known or suspected violation (involving the financial institution) committed by one of its directors, officers, employees or agents
      • Any known or suspected criminal violation involving the financial institution and totaling $5K or more
      • Any transaction conducted through the financial institution where the funds were derived from illegal activities
  • 24.
    • Another important reporting requirement is imposed by the IRC. Any business person who receives more than $10K in cash in one or more related transactions must file IRS Form 8300.
    • Money Laundering Control Act of 1986 (MLCA)
    • This law imposes criminal liability on any person who conducts a monetary transaction knowing that the funds were derived from unlawful activity. This law targets the essence of money laundering: the conversion of funds derived from illegal activities into liquid form.
    • Section 1956 prohibits four types of domestic money laundering transactions:
      • Those done with the intent to promote certain unlawful activities such as narcotics trafficking, racketeering, copyright infringement, espionage, trading with the enemy, kidnapping, hostage taking, mail theft, and aviation smuggling;
  • 25.
    • 2. Those done to evade taxes;
    • 3. Those designed to conceal or disguise the nature, location, source, ownership or control of the proceeds of unlawful activities; and
    • 4. Those aimed at avoiding a state or federal reporting requirement
    • Section 1957 is aimed at prohibiting all monetary transactions in criminally derived property over $10K. A person need not actually exchange or launder funds nor have any intent to further or conceal unlawful activity to be covered by the statute. The law requires that one must “knowingly” engage in a transaction involving illegally derived property.
  • 26.
    • Title III – Patriot Act
    • This law contains sweeping provisions that expand the predicate offense for money laundering to include acts of terrorism and any act that provides material support for individuals, groups, or entities involved in terrorism. The law also expands U.S. supervisory control over the global activities of foreign banks that maintain correspondent accounts with U.S. banks.
    • Title III amends various sections of the BSA and MCLA. The term “financial institution” now covers banks, S&Ls, trust companies, credit unions, securities brokers & dealers, loan or finance companies, money transmitters, futures commission merchants, credit card system operators, precious metal dealers, jewelers, insurers, telegraph firms, companies involved in the sale of vehicles, aircraft, or boats, those involved in real estate closings, pawnbrokers and travel agents.
  • 27.
    • Numerous industries defined as financial institutions were required to have anti-money laundering programs in place by April 24, 2002.
    • An anti-money laundering program must contain 4 elements:
      • Internal policies, procedures, and controls to verify customer Ids, create and retain records, and file reports with law enforcement agencies;
      • A compliance officer;
      • Ongoing employee training in detection of suspicious transactions; and
      • Have an independent audit test the program’s effectiveness.
  • 28.
    • Section 312 of the Patriot Act requires U.S. financial institutions that enter into correspondent relationships with foreign banks to implement new due diligence standards. U.S. financial institutions must take steps to determine the owners of and sources of funds deposited into private bank accounts for non-U.S. persons.
    • Section 313 prohibits banks, S&Ls, trust companies, foreign bank branches, credit unions, and broker-dealers from establishing, maintaining, administering or managing correspondent accounts for “shell banks.”
    • Section 326 requires banks, S&Ls, trust companies, credit unions, securities brokers and dealers, mutual funds and others to establish minimum procedures for identifying and verifying the identity of customers seeking to open new financial accounts.
  • 29.
    • What Can Accountants Do To Address Money Laundering and Terrorist Financing?
    • Be Aware of Red Flags or Signs of Money Laundering/Terrorist Financing
    • The existence of one or more of the factors below may warrant increased scrutiny of the transaction involved:
    • Financial transactions involving non-profit or charitable entities that have no logical economic purpose;
    • Funds generated by a business owned by persons of the same origin from countries of specific concern;
    • The type of business is not commensurate with the level of activity in that business (e.g., a taxi cab business that receives or sends large numbers of wire transfers);
    • A business whose owners consist of a series of foreign “shell” entities;
    • A safe deposit box is opened on behalf of a commercial or charitable entity when the client’s activities do not justify it;
  • 30.
    • A business or charity owner opens several bank accounts in the names of family members and deposits small sums regularly;
    • The client exhibits unusual concern or secrecy with regard to business dealings;
    • The client has difficulty describing his or her business and lacks general knowledge of his or her industry;
    • The client has account activity showing numerous currency, cashier’s check, money order, or traveler’s check transactions totaling large sums;
    • Repeated use of a bank account as a temporary resting place for funds from multiple sources without a clear business purpose;
    • Repeated purchase of highly valuable assets such as precious stones and gems, precious metals, and collectibles without a clear business purpose;
    • The client appears to act for an undisclosed principal and refuses to identify that person or entity;
  • 31.
    • The client buys a big-ticket item and uses currency to pay down a loan at an accelerated rate. This avoids filing a CTR or SAR;
    • The client buys monetary instruments in amounts below $3,000 or $10,000 to avoid an SAR or CTR;
    • The client bulk ships currency to a jurisdiction with secrecy laws;
    • The client opens a bank account for which several persons have signature authority yet those persons appear to have no ties to each other;
    • The client opens an account in the name of a new business or entity and in which a higher than expected level of deposits are made in comparison to the entity’s revenues;
    • The client opens a new account for a legal entity that has the same address as other legal entities for which the same person or persons have signature authority without legal or business justification;
    • The client has travel expenses to a country with which he or she has no business or family ties or is not a vacation destination;
  • 32.
    • The client engages in transactions involving foreign currency exchanges that are followed within a short time by wire transfers to locations of concern;
    • The client uses multiple accounts to collect and channel funds to a small number of foreign beneficiaries in locations of concern;
    • The client opens an account in a location of concern without a business justification;
    • The client has a dormant account holding a minimal sum that suddenly receives a deposit followed by daily cash withdrawals that continue until the deposited sum is withdrawn;
    • The client makes unusual or frequent use of trusts. Such devices have enormous potential for money laundering because beneficiaries are anonymous and they are unregistered;
    • The client purchases a single-premium life insurance policy and then immediately borrows against the cash surrender value;
  • 33.
    • The client carries out multiple transactions on the same day at the same branch of a financial institution with an attempt to use different tellers;
    • The deposit or withdrawal of cash in amounts which consistently fall just below a reporting threshold;
    • Wire transfers made in small amounts in an apparent attempt to avoid triggering identification or report filing;
    • Foreign exchange transactions that are performed on behalf of a customer by a third party followed by wire transfers of the funds to locations having no apparent business connection with the customer or to nations of concern;
    • Use of multiple personal and business accounts or the accounts of a nonprofit entity or charity to collect and then channel funds immediately or after a short period to a small number of foreign beneficiaries;
  • 34.
    • Existence of accounts in, or has wire transfers to or from a bank secrecy haven or nation identified as a money laundering risk;
    • Funds are wired to or through a U.S. financial institution from a foreign source and then the money is withdrawn in a third country using ATMs;
    • Receipt of a large wire transfer that is immediately withdrawn by a check or debit card; and
    • The client attempts to cancel a transaction after learning of currency transaction reporting, information verification or recordkeeping requirements related to the transaction.
  • 35.
    • Follow Best Practices for Charities and Donors
    • Numerous proactive steps can be taken to minimize the likelihood that monetary contributions will be donated to an entity that supports terrorism. Such steps are contained in “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities” issued by the U.S. Treasury and “Combating the Abuse of Non-Profit Organizations: International Best Practices” published by the FATF.
    •   Below is a list of best practices:
    • 1. Governance
    • - The charity should operate in accordance with a charter, articles of incorporation, or by-laws.
  • 36. - The charity should be governed by a board consisting of at least three members that meets at least three times per year. The board should maintain records of all decisions and those records should be available for public inspection.   - The board should ensure that there are appropriate financial controls over program spending.   - The board should ensure that procedures are put in place to prevent the use of the entity’s facilities or assets to support terrorism 2. Transparency - The charity should make publicly available a list of board members and key employees and salaries they are paid. - The charity should identify any subsidiary and/or affiliate that receives funds.  
  • 37. - Annual audited financial statements should be provided upon request to interested parties.   - The charity should clearly state its goals and purposes in its literature so anyone can determine whether its funds disbursements adhere to those goals.   - Donation solicitations should accurately tell donors how and where their donations are going to be used.   - All aid recipients should be screened for legitimacy. 3. Financial Practices - The charity should have a budget that is overseen by the board.   - The board should appoint one person to serve as the chief financial officer of the charity.
  • 38. - An annual audit should be done on any charity with annual gross revenues over $250K. - Direct field audits may be necessary sometimes to protect against the abuse of a charity. - The charity should account for all funds received and disbursed in accordance with GAAP and the IRC. - The charity should maintain a bank account at a trustworthy financial institution. - The charity should have the name of each recipient and the amount disbursed in its records. - The charity should promptly deposit all monies in its bank account. - No disbursements should be made in cash.    
  • 39.
    • 4. Distribution of Funds to Foreign Recipient Organizations
      • The following data about foreign recipient organizations should be collected:
    • - The organization’s name in English and language of origin.
    •   - The jurisdictions in which the foreign recipient maintains a physical presence.
    •   - The jurisdiction in which the foreign recipient is incorporated or formed.
    •   - The address and phone # of any place of business of the foreign recipient organization.
    •   - The principal purpose of the foreign recipient organization and a written statement of its goals.
    • - The names and addresses of organizations to which the foreign recipient currently provides funding or material support.
  • 40. - The names and addresses of any subcontracting organization(s) used by the foreign recipients.   - Copies of any public filings or releases made by the foreign recipient organization.   - The foreign recipient’s existing source(s) of income   The charity should conduct basic screening of potential foreign recipients as follows: - The charity should be able to demonstrate that it conducted a reasonable search of public information to determine whether a foreign recipient organization has been implicated in any questionable activity. -The charity should consult databases such as , which provides 990 Forms and other data on hundreds of charities.   - Another worthwhile database is,,id=96136,00.html . It lists charities eligible to receive tax-deductible contributions.
  • 41.
      • - The charity should be able to show that it verified whether a foreign recipient organization does not appear on any list of the U.S., UN, or EU identifying it as having links to terrorism.
    • - The charity should obtain the full name in English and language of origin, as well as nationality, citizenship, current country of residence, place and date of birth for key staff of any foreign recipient organization.
    •   - The charity should require foreign recipient organizations to certify that they do not employ or deal with any entities or individual on lists of terrorists or money launderers of the U.S., UN or EU.
  • 42. The charity should also review the financial operations of the foreign recipient organization as follows:   - The charity should determine the identity of the financial institutions with which the foreign recipient organization maintains accounts. The charity should ascertain whether the financial institution is a shell bank, operating under an offshore license, or licensed in a tax haven or bank secrecy haven.   - The charity should require periodic reports from the foreign recipient organization on its use of disbursed funds.   - The charity should require the foreign recipient organization to undertake reasonable steps to ensure that funds disbursed are not distributed to terrorist organizations.  
  • 43.
    • Continuing Problem Areas
    • For money launderers or terrorist groups, there are plenty of ways to slip through the barriers put in place by financial institutions since 9/11/01. A criminal can enter the financial system behind a corporate mask. All he needs to do is set up a company in a place that does not require the owner’s identity to be revealed.
    • Many big money laundering operations in the U.S. and Europe involve “shell” companies.
    • The Financial Action Task Force (FATF) has published a paper containing new suggested rules on corporate entities and trusts to be discussed and adopted by member nations of the OECD.
    • The most far–reaching proposal is that countries change their corporate law so that firms whose shares are not publicly traded must identify their beneficial owners.
  • 44.
    • Another controversial proposal is the elimination of bearer shares, that is, paper certificates that give anonymous ownership of a company to the person in possession of them. Austria, Belgium, Germany, and Switzerland will fight for their bearer shares.
    • Another suggestion, already meeting resistance, is that trusts should register the names of their trustees, settlers, and beneficiaries. Certain groups in the U.S. and U.K. are already saying that trust registration is out of the question.
    • Tax and secrecy haven jurisdictions are not the only locations at the root of the problem. According to the law in Delaware, not even company formation agents have to know who the beneficial owners of an LLC are.