First Ever FATCA Conviction with Bank Executive Enabler’s Plea

The DOJ has recently secured it’s first conviction under the relatively new FATCA law.

Earlier today in federal court in Brooklyn, Adrian Baron, the former Chief Business Officer and former Chief Executive Officer of Loyal Bank Ltd, an off-shore bank with offices in Budapest, Hungary and Saint Vincent and the Grenadines, pleaded guilty to conspiring to defraud the United States by failing to comply with the Foreign Account Tax Compliance Act (FATCA).  Baron was extradited to the United States from Hungary in July 2018.  The guilty plea was entered before United States District Judge Kiyo A. Matsumoto.

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According to court documents, in June 2017, an undercover agent met with Baron and explained that he was a U.S. citizen involved in stock manipulation schemes and was interested in opening multiple corporate bank accounts at Loyal Bank.  The undercover agent informed Baron that he did not want to appear on any of the account opening documents for his bank accounts at Loyal Bank, even though he would be the true owner of the accounts.  Baron responded that Loyal Bank could open such accounts and provide debit cards linked to them.

In July 2017, the undercover agent again met with Baron and described how his stock manipulation scheme operated, including the need to circumvent the IRS’s reporting requirements under FATCA.  During the meeting, Baron stated that Loyal Bank would not submit a FATCA declaration to regulators unless the paperwork indicated “obvious” U.S. involvement.  Subsequently, in July and August 2017, Loyal Bank opened multiple bank accounts for the undercover agent.  At no time did Baron or Loyal Bank request or collect FATCA Information from the undercover agent.

Baron’s guilty plea represents the first-ever conviction for failing to comply with FATCA.  When sentenced, Baron faces a maximum of five years in prison.

Baron is the second defendant to plead guilty in this case.  On July 26, 2018, Arvinsingh Canaye, formerly the General Manager of Beaufort Management Services Ltd. in Mauritius, pleaded guilty to conspiracy to commit money laundering.

Foreign Account Tax Compliance Act (FATCA)

The Foreign Account Tax Compliance Act (FATCA) is a law passed in 2010 requiring all non-U.S. financial institutions (FFIs) to report the identities of U.S. persons to the U.S. Department of Treasury. In addition, it includes an information reporting requirement for individuals on Form 8938. The purpose of these dual reporting requirements is for the IRS to identify individuals that have not disclosed their foreign financial assets on Form 8938 based on information received from FFIs.

Foreign financial institutions

FATCA requires financial institutions to report certain information about certain financial accounts held by United States taxpayers, or by foreign entities in which United States taxpayers hold a substantial ownership interest.

Intergovernmental Agreements (IGAs)

Foreign banks that are located in jurisdictions with which the U.S. has intergovernmental agreements (IGAs) are required to provide information as required under I.R.C. § 1471(c). A list of IGAs can be found on the Treasury website. Foreign financial institutions (FFIs) that are not located in jurisdictions with IGAs must comply with FATCA or be subject to harsh withholding rules under I.R.C. § 1471. And since most foreign financial institutions do business with the U.S. or with other financial institutions that conduct business with the U.S., a large number of FFIs not located in jurisdictions with IGAs choose to comply with FATCA. A list of FFIs can be found on the IRS website.

Information Provided by Foreign Financial Accounts under FATCA

I.R.C. § 1471(c) requires a foreign financial institution to report the following with respect to each United States account maintained by such institution:

(A) The name, address, and TIN of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity.
(B) The account number.
(C) The account balance or value (determined at such time and in such manner as the Secretary may provide).
(D) Except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide)

Individuals

The FATCA reporting requirement for individuals is codified in IRC 6038D. Individuals with specified foreign financial assets exceeding the thresholds identified in Treas. Reg. 1.6038D-2 must provide this form annual with their U.S. income tax return.

Exchange of Information Pursuant to Income Tax Treaties and Tax Information Exchange Agreements

In addition to automatic exchange of information under FATCA, specific and spontaneous exchanges of information may occur pursuant to tax treaties and tax information exchange agreements (TIEAs). In matters involving criminal tax evasion, the DOJ may request cooperation through mutual legal assistance treaties (MLATs).

Specific requests may arise from collection matters, criminal investigations, or other tax administrative or court procedures. Information must be first sought domestically, such as by issuance of an Information Document Request or a summons on a 3rd party possessing relevant records.

Spontaneous exchange of information, which operates through the exchange of information provisions of tax treaties and TIEAs, involves the transmission of information that has not been specifically requested by a Competent Authority, but which in the judgment of the providing authority may be of interest to a foreign partner for tax purposes. The exchange typically involves information discovered during a tax examination, investigation, or other administrative procedure that suggests or establishes noncompliance with the tax laws of a foreign partner, or that is otherwise determined to be potentially useful to a foreign partner for tax purposes. The information may pertain to nonresident aliens, United States citizens, domestic or foreign corporations, or other taxpayers.

Simultaneous examinations involve the United States and one or more of its foreign partners conducting separate independent examinations of selected taxpayer(s) within their respective jurisdictions in which the partners have a common or related interest

Tax treaty EOI – Article 26 of the U.S. Model Income Tax Convention

This following is an excerpt from the Exchange of Information Article (Article 26) of the U.S. Model Income Tax Convention (2006).

EXCHANGE OF INFORMATION AND ADMINISTRATIVE ASSISTANCE

1. The competent authorities of the Contracting States shall exchange such information as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes of every kind imposed by a Contracting State to the extent that the taxation thereunder is not contrary to the Convention, including information relating to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, such taxes. The exchange of information is not restricted by paragraph 1 of Article 1 (General Scope) or Article 2 (Taxes Covered).
2. Any information received under this Article by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes referred to above, or the oversight of such functions. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

Deferred Prosecution Agreements

In addition to the above sources of information, certain FFIs, namely Swiss, are required to provide information pursuant to deferred prosecution agreements with the USDOJ. For example. The Swiss Bank Program, which was announced on August 29, 2013, provides a path for Swiss banks to resolve potential criminal liabilities in the United States.  Swiss banks eligible to enter the program were required to advise the department by Dec. 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.

Under the program, banks were required to:

• Make a complete disclosure of their cross-border activities;
• Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
• Cooperate in treaty requests for account information;
• Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
• Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
• Pay appropriate penalties.

Once the IRS is in possession of the information relating to undisclosed accounts, whether by an automatic exchange, specific request, or through a deferred prosecution agreement, any non-compliance by a U.S. account holder will subject that person to civil and criminal penalties, and in rare situations a risk of prosecution.

What should non-compliant taxpayers do?

Despite all the fear-mongering online, the vast majority of individuals with undisclosed offshore accounts will not be subject to criminal prosecution. A small percentage of  individuals with offshore accounts have ever been contacted by the IRS regarding undisclosed accounts.  A recent TIGTA audit found that the IRS is not prepared to enforce FATCA and has recommended some changes.

FBAR non-filer examinations have occurred, although not common. Most FBAR penalties have been assessed through examinations of opt-outs and information obtained through John Doe summonses and deferred prosecution agreements. The difficulty with FBAR examinations outside this context is that the IRS must show that the FBAR non-compliance was in furtherance of an apparent Title 26 violation before commencing an FBAR examination. When the IRS begins acting on information received through FATCA, Form 8938 non-compliance would be a direct Title 26 violation, allowing the IRS to investigate without requiring a related statute determination.

While it is clear that the IRS is sitting on a treasure trove of information received through FATCA, it’s not known when it will act on it or how heavy-handed it would be in assessing penalties when conducting taxpayer examinations for FATCA noncompliance. IRC 6038D authorizes substantial penalties for non-compliance, in addition to even more substantial 31 USC 5321 FBAR penalties. All non-compliant taxpayers should minimize their risks by filing original or amended tax returns under one of IRS’ voluntary disclosure programs:

• Offshore voluntary disclosure program
• Streamlined domestic offshore program
• Streamlined foreign offshore program
• Delinquent international information return submission procedures

We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.

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