Offshore Bankers Beware: Justice Department Secures First-Ever Criminal Conviction For Violating FATCA

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In a move sure to send shock waves through the offshore banking community, the Justice Department yesterday announced its first criminal conviction for violating the Foreign Account Tax Compliance Act (FATCA). Adrian Baron, the former Chief Business Officer and Chief Executive Officer of Loyal Bank Ltd, an offshore bank with offices in Budapest, Hungary and Saint Vincent and the Grenadines, pleaded guilty in Brooklyn federal court to conspiring to defraud the United States by failing to comply with FATCA.  A resident of Hungary, Baron was extradited to the United States in July 2018.

Enacted by Congress in 2010, FATCA is a federal law that requires foreign financial institutions to identify their U.S. customers and to annually report information about financial accounts held by U.S. taxpayers either directly or through a foreign entity.  FATCA’s primary aim is to prevent U.S. taxpayers from using foreign accounts to facilitate offshore tax evasion.

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 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 criminal conviction for FATCA violations obtained by U.S. authorities, and represents an extraordinary development in the relatively short life-span of the FATCA statute. When it was enacted by Congress eight years ago, FATCA was viewed primarily as an information-gathering mechanism, designed to provide the Internal Revenue Service with an annual tranche of data regarding the offshore banking activities of U.S. taxpayers. While foreign financial institutions have provided the IRS with millions of pieces of data regarding foreign banking activity by U.S. taxpayers, it has so far been unclear exactly how the IRS and Justice Department will make use of that data. With the guilty plea of Adrian Baron announced yesterday, it is clear that the U.S. government views FATCA not simply as a vehicle to gather information but also as a predicate upon which criminal charges may rest under appropriate circumstances. FATCA is not simply a “paper tiger,” and the offshore banking community should heed carefully this significant development when doing business with U.S. clients.

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