On Sept. 11, the Department of Justice secured its first ever criminal conviction under the Foreign Account Tax Compliance Act (FATCA), through the guilty plea of Adrian Baron, former chief executive officer of Loyal Bank, an off-shore bank with offices in Budapest, Hungary, and Saint Vincent and the Grenadines. The guilty plea was entered before U.S. District Judge Kiyo Matsumoto of the Eastern District of New York. When sentenced, Baron faces a maximum of five years in prison.

Enacted in 2010 and implemented in July 2014, FATCA requires foreign financial institutions to report information to the IRS on funds held by U.S. taxpayers in accounts at banks outside the United States, including accounts of certain foreign entities with substantial U.S. owners. FATCA’s primary aim is to prevent tax evasion by U.S. residents through offshore accounts.

According to court documents, an undercover agent in June 2017 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. 

Securities fraud and money laundering

Loyal Bank’s participation in the scheme tells just part of the story. A second part of the scheme shows how FATCA non-compliance can overlap with securities fraud and money laundering.  

In 2016, an undercover agent had contacted Peter Kyriacou, an investment manager at London brokerage firm Beaufort Securities, and stated that he wanted to open brokerage accounts at Beaufort from which he could execute trades in several multimillion-dollar stock manipulation deals involving stocks traded on U.S. over-the-counter markets. 

The undercover agent advised Kyriacou that he was a U.S. citizen and that the purpose of opening multiple accounts atBeaufort was, in part, “to conceal his ownership interest in the companies’ stock from the SEC,” according to the indictment. 

Kyriacou later introduced the undercover agent to “a senior member of the compliance team,” who “did not object to opening brokerage accounts at Beaufort Securities for the undercover agent,” the indictment states. 

By January 2017, Beaufort Securities set up six accounts for the undercover agent, without requesting any FATCA information. Between March 2014 and February 2018, Beaufort facilitated at least 10 “pump and dump” schemes involving U.S. publicly traded stocks, generating over $50 million in proceeds for its clients, according to the indictment.

Just months before the sting operation began, Beaufort had affirmed to the U.K. Financial Conduct Authority that it “had taken remedial measures to correct deficiencies in the firm’s financial crime controls and anti-money laundering processes,” the Justice Department noted.

To facilitate this scheme, Beaufort transferred funds to corporate bank accounts that Loyal Bank opened in the names of off-shore shell companies that were controlled by the bank’s clients.  That’s when Loyal Bank provided debit cards to its clients to withdraw funds from those accounts “in an untraceable manner to hide the source of the money and facilitate ongoing securities fraud,” according to the Justice Department.

In announcing the indictment, U.S. Attorney Richard Donoghue said the charges show that the Justice Department, together with its law enforcement partners, are “committed to holding accountable those who defraud investors, regardless of the complex schemes they use to hide their ill-gotten gains.” 

Lessons and warnings 

For the wider compliance and legal community, the clear lessons and warnings to draw from the Loyal Bank and Beaufort Securities schemes and resulting charges are as follows:

You can run, you can’t hide. According to the superseding indictment, Baron is a citizen of the United Kingdom and Saint Vincent and the Grenadines. He primarily worked at Loyal Bank’s office in Budapest Hungary. In July 2018, Baron was extradited to the United States from Hungary. The enforcement warning here: Employees of foreign financial institutions who violate FATCA and engage in tax evasion practices cannot hide in a foreign country to avoid extradition. 

In Baron’s case, the United States and Hungary have a bilateral extradition treaty, an agreement between sovereign states that, upon request, provides for the surrender of an individual accused of a crime under the laws of the requesting state. Compliance officers and in-house counsel can find a complete list of countries with which the United States has extradition treaties here.

FATCA has a global presence. More than 100 jurisdictionsaround the world have either signed intergovernmental agreements or have agreed to them in substance, making it easier for countries to implement FATCA. Under FATCA, non-compliant foreign financial institutions will incur a 30 percent withholding tax on certain U.S.-source payments made to them.

Baron’s criminal conviction also draws attention to the level of cross-agency cooperation and assistance that takes place during a FATCA investigation. In this case, the Justice Department cited the U.S. Securities and Exchange Commission; the City of London Police; the U.K.’s Financial Conduct Authority; and the Hungarian National Bureau of Investigation for their “significant cooperation and assistance during the investigation.”

AML efforts complement (not satisfy) FATCA compliance.Although the Beaufort defendants in this case knowingly and willfully violated FATCA, the case nonetheless highlights the overlap between “know-your-customer” (KYC) requirements and FATCA compliance, despite their fundamental differences in purpose (KYC to reduce money laundering risk, FATCA to reduce tax evasion). 

Compliance officers, thus, should take care to determine where FATCA and AML compliance processes can be aligned or harmonized.  One example may be to have the tax operations functions review customer data that is collected during the AML/KYC process. Another example may be to include making KYC information available to the tax operations function for individuals validating tax documentation.

Social media poses a money-laundering risk.  In the Beaufort scheme, Kyriacou suggested to the undercover agent that he communicate with him through WhatsApp, an instant-messaging platform that allows for the sending and receiving of messages and attachments secured by end-to-end encryption, limiting the ability of third parties—including law enforcement—to read them. This case brings to the spotlight just one example of how social media activity can play a role in facilitating illegal practices and why it should play a role in compliance teams’ due diligence practices, using advanced technologies like artificial intelligence.

FATCA enforcement is just warming up.Overall, all compliance professionals and in-house counsel should heed the warning of William Sweeney, assistant director-in-charge of the FBI: “Bringing to justice securities fraudsters and money laundering facilitators who engage in these types of schemes is and will remain a priority for the FBI and our law enforcement partners worldwide.”

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