Criminal liability for violations of FATCA – bankers and others beware


Financier Worldwide Magazine

November 2018 Issue

The Department of Justice (DOJ) has been aggressively targeting offshore tax evasion by US taxpayers since its February 2009 prosecution of Zurich-based UBS AG – the largest Swiss bank – culminated in an agreement to defer prosecution on a charge of conspiracy to defraud the US by helping 17,000 Americans hide accounts from the Internal Revenue Service (IRS). As part of that agreement, it was disclosed that UBS paid $780m, agreed to hand over account data on more than 250 US clients and admitted to fostering tax evasion from 2000 to 2007.

Following the successful prosecution of UBS, there have been numerous prosecutions directed at US accountholders, foreign banks and those various professionals whom the DOJ identifies as facilitating schemes directed at the concealment of offshore bank accounts by US accountholders. Additionally, in these efforts to detect and deter the non-disclosure of foreign bank accounts, the DOJ has requested, and obtained authorisation to issue, John Doe Summonses for foreign bank records and implemented the Swiss Bank Program. All these actions delivered previously unknown bank information on US accountholders into the hands of the IRS and DOJ, not only as a direct result of these proceedings and programmes, but perhaps of equal import, through an increased awareness and the non-criminal options afforded US accountholders to file disclosures under the various Offshore Voluntary Disclosure Programs (OVDP).

The US government’s offshore bank account enforcement efforts for the better part of the past decade have almost entirely focused on violations connected to Title 31 sections 5311, 5322 and 31 C.F.R. section 1010.350(b), and the filing, or perhaps more accurately, the wilful lack thereof, of the Report of Foreign Bank and Financial Accounts (FBAR). However, as recent criminal indictments have shown, the government is putting the world on notice that it has much more in its tool box than the four-letter word FBAR when it comes to investigating and prosecuting facilitators of offshore tax evasion. It also has a five-letter word: FATCA.

FATCA – conviction and prosecutions

On 11 September 2018, the DOJ announced the first ever conviction under the Foreign Account Tax Compliance Act (FATCA). This conviction came by way of a plea agreement entered into between Adrian Baron, a citizen of the UK and a former executive of Loyal Bank Ltd., a bank with offices in Budapest, Hungary and Saint Vincent and the Grenadines, and the US Attorney’s Office for the Eastern District of New York (EDNY), in which Mr Baron pled guilty to conspiring to defraud the US by impairing and impeding the lawful functions of the IRS by failing to comply with FATCA.

Based upon information set forth in a superseding indictment, Mr Baron, who was extradited from Hungary in July 2018, conspired with an undercover federal agent, identified to Baron as a US citizen, in the opening of foreign bank accounts in a manner specifically intended to disguise the true owner of the accounts with a stated goal of circumventing the obligations to report such accounts to the IRS under FATCA.

In furtherance of that conspiracy, it is alleged that Mr Baron aided in the opening of nominee bank accounts at Loyal Bank as well as aided in providing the undercover agent with debit cards which were linked to such accounts to enable the undercover agent’s use of the approximately $95,000 which was deposited in the newly created foreign nominee bank accounts. As further set forth in the superseding indictment, Mr Baron fully understood that a US citizen was the true beneficial owner of the foreign accounts which Mr Baron was helping to set up and that Mr Baron was also fully aware that this US accountholder’s goal was to open and maintain such foreign accounts in a manner so as to circumvent the IRS’s reporting requirements under FATCA.

Nonetheless, as set forth by the government, at no time did Mr Baron or Loyal Bank request or collect FATCA information from the US accountholder. As a result of his agreement to conspire with the undercover agent – aka US accountholder and others – and his acts in furtherance of such conspiracy, almost all of which appears to have been recorded during the undercover sting operation, Mr Baron was charged with, and, as noted above, plead guilty to conspiring to defraud the US based upon his intended failure to comply with FATCA, in violation of Section 371.

While Mr Baron is reportedly the first defendant to be convicted of a violation of federal law in connection with FATCA, he is not the first defendant to be charged in connection with a violation of FATCA.

On 9 September 2014, Robert Bandfield, along with five other individuals and six corporations, was charged in three interrelated schemes. One of the schemes charged in the indictment alleged a conspiracy to aid US clients in the circumvention of the IRS’s reporting requirements under FATCA. This criminal case, similar to the case filed against Mr Baron, was filed in the EDNY.

On 31 July 2015, a superseding indictment was returned by the grand jury adding two more defendants, including Gregg Mulholland, a client of Bandfield. As set forth in the Bandfield superseding indictment, the defendants enabled US clients to evade reporting requirements to the IRS by concealing the proceeds generated by the manipulated stock transactions through the shell companies and their nominees. The superseding indictment also revealed, again similar to the investigation involving Mr Baron, the government’s use of undercover agents and wiretaps to record numerous conversations involving the defendants.

As alleged in the superseding indictment, in one recorded meeting, also similar to a noted recorded conversation between an undercover agent and Mr Baron, Mr Bandfield bragged about their strategy to enable clients to specifically evade FATCA’s requirements, describing it as a “slick” structure specifically designed to counter US president Barack Obama’s new laws, a reference to FATCA.

In May 2016, Mr Bandfield pleaded guilty to money laundering conspiracy with respect to his role as the architect of the offshore fraud haven scheme, and Mr Mullholland pleaded guilty to money laundering conspiracy with respect to his role as the orchestrator of more than 40 pump and dump schemes. On 6 February 2017, Mr Bandfield and Mr Mulholland were sentenced to six and 12 years in prison, respectively, in connection with their criminal conduct, which included facts presented to the court as to the defendants’ schemes to circumvent the payment of capital gains taxes and the IRS’s reporting requirements under FATCA.

So, what exactly is FATCA?

FATCA – foreign bank filing requirements

FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act, which was signed into law on 18 March 2010. This law, which was not implemented until 1 July 2014, created a new withholding regime specifically aimed at expanding reporting on foreign accounts owned by certain US persons and disclosure of US owners of certain foreign entities. Specifically, FATCA requires individuals and certain domestic entities to report ownership of financial accounts, foreign interests, foreign stocks and securities, contracts held for investment and financial instruments with non-US issuers or counterparties.

Unlike the FBAR requirements, which are found under Title 31, Congress in enacting FATCA placed the reporting obligations, and thus the responsibility for enforcement, directly in the hands of the IRS under Title 26. As noted herein, FATCA has two information reporting requirements – those for US persons and those for what are referred to as Foreign Financial Institutions (FFIs).

FATCA – reporting requirements for US persons

US citizens, US residents for any portion of the year, certain domestic entities formed or used for the purpose of holding specific foreign assets and residents of US territories that file returns with the US, with any interest in a specified foreign financial asset, must file a Form 8938, Statement of Foreign Financial Assets if the value of the assets exceeds $50,000, unless such persons or entities are not required to file an income tax return for the taxable year in issue. Further, if a domestic entity is formed or used, directly or indirectly, to hold specified foreign financial assets on behalf of an individual, the entity is treated as an individual and is required to file Form 8938.

A specified foreign financial asset includes assets held in a trust where the individual is the owner of the trust under 26 U.S.C. sections 671 to 679 and assets held by disregarded entities owned by the individual or certain domestic entities, as well as stock or securities issued by a non-US person, financial instruments or contracts held for investment with a non-US issuer or counterparty, and any interest in a foreign entity.

Form 8938 requires that any distributions, income or gross proceeds attributable to holding or disposing of the asset be reported by the individual on an income tax return, assets must be reported even if no income or distributions are made during the tax year.

The specific information required to be reported on Form 8938 includes: (i) the name and address of financial institution and foreign account number; (ii) the name and address of issuer and identifying information regarding class or issue; (iii) the names and addresses of issuers and counterparties; (iv) the maximum value of assets in US dollars, using the Treasury Department’s Foreign Currency Exchange rate on last day of taxable year and based upon fair market value; and (v) whether foreign financial assets are acquired or disposed of or otherwise transferred during the taxable year.

The penalty for failure to furnish Form 8938 is $10,000, subject to a reasonable cause exception where the taxpayer is able to prove reasonable cause existed. The $10,000 penalty applies where the Form 8938 is not filed within 90 days after the IRS mails notice of the failure to file the form. There is an additional $10,000 penalty imposed for such failure for each 30-day period the failure continues, up to a maximum penalty of $50,000. There is no statute of limitations to issue such notice if the Form 8938 has not been filed.

FATCA – reporting requirements for foreign financial institutions

FATCA also contains withholding requirements which are placed on the FFIs that hold accounts on behalf of US accountholders. The withholding agents for the FFI must deduct and withhold 30 percent of withholdable payments on behalf of its US accountholders unless the FFI agrees to apply verification and due diligence procedures to identify US accountholders, annually reports to the Treasury the name, address, account number and account balance or value, withholds 30 percent tax on payments or the IRSD from uncooperative accountholders or non-participants FFIs and, under its broad regulatory authority, excludes certain FFIs from entering agreements or withholding.

FATCA – future criminal tax charging implications

Since the FBAR statute has been around since 1970, one might argue that it took the DOJ, working with the IRS, a fair amount of time to consider bringing FBAR criminal violations in the context of tax fraud and secret offshore bank accounts. Clearly, the same cannot be said to hold true with respect to the government’s consideration of FATCA violations as can be seen by the two criminal matters arising out of the EDNY.

In addition to expecting that we will see more FATCA violations being brought under Title 31 section 371, it is also likely that we will see the government pursue such violations in the context of Title 26, in connection with a US accountholder’s filing, or lack thereof, of Form 8938, including but not limited to: (i) Section 7203: Failure to File; (ii) Section 7201: Spies Evasion – Failure to file plus affirmative acts; (iii) Section 7206 – False Form 8938; or (iv) Section 7207: Submission of False Documents.

It is also fair to note that in addition to the government pursuing US persons criminally in connection with their FATCA reporting requirements, when it comes to the FFI obligations under FATCA, foreign bankers, architects or orchestrators of offshore fraud schemes and others, as seen in Baron and Bandfield, should beware.


Sandra R. Brown and Steven Toscher are principals at Hochman Salkin Rettig Toscher and Perez, P.C. Ms Brown can be contacted on +1 (310) 281 3200 or by email: Mr Toscher can be contacted on +1 (310) 281 3200 or by email:

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