Superseding Indictment Alleges an International Web of Tax and Money Laundering Schemes, Facilitated by Professionals and Pierced by an Undercover Agent

The Department of Justice (“DOJ”) has secured its first conviction ever under the Foreign Account Tax Compliance Act, or FATCA, through the guilty plea of Adrian Baron, a former executive of Loyal Bank Ltd., a bank with offices in Budapest, Hungary and Saint Vincent and the Grenadines.

FATCA, passed in 2010, generally requires that foreign financial institutions identify their U.S. customers and report information on the foreign assets held by their U.S. account holders, either directly or through a foreign entity, or be subject to withholding payments.  FATCA has become an important tool in the government’s ability to collect information and pursue its enforcement campaign against U.S. taxpayers with undeclared offshore assets.  Now, FATCA has demonstrated its utility in enforcing U.S. law against foreign bankers who allegedly may be complicit in attempting to assist U.S. taxpayers hide their assets.

Baron, a citizen of the U.K. and Saint Vincent and the Grenadines who was extradited from Hungary, had been charged in a very detailed Superseding Indictment with assisting an undercover law enforcement agent with attempting to hide the supposed proceeds of fraudulent stock schemes in foreign corporate bank accounts which the undercover agent could control but which could not be traced to him, and which he could use to pay future kickbacks to U.S. brokers involved in other supposed schemes.  The Superseding Indictment also charges Loyal Bank itself; a now-insolvent broker-dealer and investment management company located in London, U.K., Beaufort Securities Ltd.; and six individuals, including Baron.

Because the primary goal of FATCA, which we describe in more detail herein, is to deter the direct or indirect use of foreign accounts to facilitate the commission of U.S. tax offenses, it also has a potentially strong and related role in deterring potential money laundering offenses, given the role of foreign shell companies in masking beneficial ownership. Indeed, Baron’s co-defendant, Arvinsingh Canaye, who previously worked as the general manager of Beaufort Management Services Ltd., an entity related to Beaufort Securities but located in Ebene, Mauritius, pleaded guilty on July 26, 2018 to a related charge of conspiring to launder money.  This case also highlights once again the potentially pernicious role which professionals can play in facilitating criminal schemes.

An Overview of FATCA

FATCA was enacted in an effort to combat tax evasion by U.S. persons holding accounts and other financial assets offshore. FATCA requires certain foreign financial institutions (“FFIs”) to report directly to the Internal Revenue Service (“IRS”) information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions include not only banks, but also other financial institutions, such as investment entities (e.g., hedge funds or private equity funds), custodial institutions (e.g. mutual funds), and certain insurance companies. Payments to FFIs that fail to comply with FATCA are subject to 30 percent withholding.

To avoid being withheld upon, FFIs may enter into an agreement with the U.S. Department of the Treasury under which the FFI agrees to determine whether accounts in the institution are held by U.S. persons, or entities in which U.S. persons hold a beneficial interest, and to report information concerning U.S. accounts to the IRS. Unless otherwise exempt, FFIs that do not both register and agree to report face a 30% withholding tax on certain U.S.-source payments made to them. Exempt categories of FFIs include most governmental entities, most non-profit organizations, certain small, local financial institutions, and certain retirement entities.

FATCA also requires certain U.S. taxpayers who hold specified foreign financial assets with an aggregate value of more than the reporting threshold to report information about those assets on Form 8938, which must be attached to the taxpayer’s annual income tax return. Specified foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities. The reporting threshold for a single individual living in the U.S. is $50,000 but increases to $200,000 for a single individual living outside of the U.S. The reporting thresholds increase to $100,000 and $400,000, respectively, for married couples filing jointly.

The Charged Scheme

Baron worked as the Chief Business Officer, and previously as the Chief Executive Officer, of Loyal Bank, primary in Budapest, Hungary. During the alleged scheme, his co-defendant, Linda Bullock, had worked as the Chief Executive Officer of the bank, working primarily at its office in Saint Vincent and the Grenadines. Loyal Bank registered in 2014 with the IRS as a FFI under FATCA, and listed Baron as the bank’s “responsible officer.”

Although the complicated and detailed Superseding Indictment charges each defendant with different activities, and although some of the alleged schemes involved some defendants but not others, Baron, Bullock and Loyal Bank are charged in part with scheming together with Canaye – the former general manager of Beaufort Management Services Ltd. who has pleaded guilty to money laundering conspiracy – as well as Beaufort Securities and Panayiotis Kyriacou, a former investment manager in London for Beaufort Securities. Both Beaufort entities also had registered as FFIs with the IRS. The scheme alleged against this collection of defendants was an agreement to “launder money by facilitating financial transactions to and from the United States, which transactions involved securities fraud proceeds and property represented to be proceeds of fraud in the sale of securities.” The key phrase in that sentence is “represented to be,” because it denotes a sting operation involving an undercover law enforcement agent.

The Superseding Indictment also charges two other individuals, an art dealer and a real estate developer, both located in London. Although the allegations against them are interesting, and involve in part an effort to launder proceeds through the purchase of a Pablo Picasso painting, they do not directly bear on the allegations against Baron.

The allegations against Baron, Bullock and Loyal Bank are repeated below. The passages from the Superseding Indictment are set forth in full because:

• They tell a persuasive story and reflect how powerful the use of an undercover agent and recorded conversations can be, and how the alleged misconduct involving securities fraud, money laundering and FATCA violations all weave together.  Despite the evidence of money laundering, Baron’s conviction ultimately rested on a failure to file a required disclosure form.
• They reflect the overlap between the FATCA duties and the general focus in current AML enforcement on the issue of beneficial ownership.
• They reflect how debit cards continue to serve as potential instruments for tax fraud and money laundering.
• They reflect how the government takes pains to establish contacts between the scheme and the U.S., so as to ensure jurisdiction over the foreign defendants.

As context, the Superseding Indictment explains that the Undercover Agent was led to Baron and Loyal Bank as a result of an earlier undercover investigation involving the Beaufort entities and Belize shell companies, which had pointed to Loyal Bank making itself available to launder the proceeds of various stock frauds.

57.  On or about May 5, 2017, the Undercover Agent, while located in the Eastern District of New York, placed a consensually recorded call to the defendant ADRIAN BARON. During this call, the Undercover Agent expressed interest in opening corporate bank accounts in the names of his Belizean IBCs [International Business Corporations]. BARON and the Undercover Agent agreed to meet at LOYAL BANK’S office in Budapest, Hungary in June 2017 to further discuss the Undercover Agent’s request.

58.  On or about June 14, 2017, the Undercover Agent met with the defendant ADRIAN BARON at LOYAL BANK’S office in Budapest. The meeting was consensually recorded. During the meeting, the Undercover Agent explained that he was a U.S. citizen, and that he was a stock promoter involved in stock manipulation schemes. The Undercover Agent further explained to BARON that he was interested in opening multiple corporate bank accounts at LOYAL BANK. The Undercover Agent informed BARON that these accounts would be opened in the names of Belizean IBCs controlled by the Undercover Agent and that no U.S. citizens would appear on any of the account opening documents, despite the Undercover Agent being the true beneficial owner of the accounts. BARON responded that LOYAL BANK could open these accounts and provide debit cards linked to them. After this meeting, the Undercover Agent applied for a corporate bank account at LOYAL BANK in the name of one of his Belizean IBCs and with CS-1 [Confidential Source #1] acting as the nominee for the account. A “Loyal Bank Limited Foreign Account Tax Compliance Act (FATCA) Declaration Form” completed as part of the account opening application contained no reference to the Undercover Agent.

59.  On or about July 7, 2017, the Undercover Agent met with the defendants ADRIAN BARON and LINDA BULLOCK in Miami, Florida to further discuss the Undercover Agent’s relationship with LOYAL BANK. The meeting was consensually recorded. During the meeting, the Undercover Agent described how his stock manipulation deals operated, including (1) the need to conceal from the SBC his true beneficial ownership of more than five percent of a company’s stock through nominee brokerage accounts, and (2) the need to circumvent the IRS’s reporting requirements under FATCA. Following BULLOCK’s departure from the meeting, BARON joked that the corporate bank account at LOYAL BANK for which the Undercover Agent had applied had “no U.S. involvement that [he] could see,” despite the Undercover Agent’s representations to the contrary. The Undercover Agent also emphasized that he required LOYAL BANK’S debit card service to provide kickbacks to U.S.-based brokers as part of his stock manipulation deals. BARON described the stock manipulation deals as “pump and dump” or “share ramping” schemes in which “stocks are pumped up by a lot of fake news and everyone sells out and the owners of those stocks are left with nothing.”

60.  Following this meeting, the Undercover Agent requested that LOYAL BANK open five additional bank accounts in the name of five more Belizean IBCs controlled by the Undercover Agent. Again, the Undercover Agent’s IBCs utilized Belizeans nominees. All six account applications contained identical business plans for each of the six IBCs. On or about and between July 14, 2017 and August 8, 2017, LOYAL BANK opened five of the six bank accounts requested by the Undercover Agent. Notwithstanding the Undercover Agent’s statement that he would be the true beneficial owner of the accounts, at no time did LOYAL BANK request FATCA Information from the Undercover Agent.

61.  On or about July 21, 2017, the Undercover Agent emailed representatives of LOYAL AGENCY, including the defendant LINDA BULLOCK. In that email, the Undercover Agent inquired about the possibility of purchasing six IBCs incorporated in Saint Vincent and the Grenadines. On or about August 18, 2017, the Undercover Agent emailed representatives of LOYAL AGENCY, including the defendants ADRIAN BARON and LINDA BULLOCK and advised them that he was purchasing the IBCs for the purpose of opening brokerage accounts in the name of the IBCs at BEAUFORT SECURITIES or a brokerage firm affiliated with LOYAL BANK. The Undercover Agent subsequently purchased six IBCs from LOYAL AGENCY, and LOYAL BANK then opened a corporate bank account for each IBC. At no time did LOYAL BANK request FATCA Information from the Undercover Agent for these accounts.

62.  On or about July 26, 2017, the Undercover Agent directed BEAUFORT SECURITIES to transfer approximately $95,000 from a brokerage account at BEAUFORT SECURITIES to a bank account he controlled at LOYAL BANK. These funds represented the proceeds of the sale of FTSE STOCK A by BEAUFORT SECURITIES on behalf of the Undercover Agent. BEAUFORT SECURITIES subsequently transferred the funds after receiving a letter from the defendant LINDA BULLOCK confirming the wire transfer details of the Undercover Agent’s account at LOYAL BANK. The Undercover Agent separately transferred approximately $95,000 to bank accounts he controlled at LOYAL BANK.

63.  In or about and between October 2017 and December 2017, LOYAL BANK shipped 11 debit cards to CS-1 in Belize at the direction of the Undercover Agent. Each of these debit cards was linked to the 11 corporate bank accounts opened by the Undercover Agent at LOYAL BANK.

64.  On or about December 8, 2017, the Undercover Agent placed a consensually recorded call to the defendant LINDA BULLOCK. During the call, the Undercover Agent described his stock manipulation deals and again informed BULLOCK that he was the true beneficial owner of the bank accounts at LOYAL BANK. BULLOCK stated, in part, that she was aware that the accounts had a “nominee” and that the Undercover Agent was not listed as the true beneficial owner: The Undercover Agent also described to BULLOCK how LOYAL BANK’S debit card service allowed him to provide kickbacks to corrupt stock brokers in the United States. Notwithstanding this conversation, LOYAL BANK continued to maintain the 11 bank accounts controlled by the Undercover Agent and, on or about January 30, 2018, LOYAL AGENCY renewed the six IBCs purchased by the Undercover Agent.

65.  On or about and between November 9, 2017 and February 22, 2018, the debit cards sent by LOYAL BANK to CS-1 at the direction of the Undercover Agent were used to withdraw approximately $130,000 from automated teller machines located in the Eastern District of New York.