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Justice and Senate Investigations Expose Billion Dollar FATCA “Shell Bank Loophole”

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Investigations by the Department of Justice and Senate Finance Committee into a $2 billion tax evasion scheme by Robert Brockman, former CEO of a major software company, have led to the discovery of a serious loophole in the Foreign Account Tax Compliance Act (FATCA). It allows U.S. accountholders to send considerable sums to foreign banks without those banks reporting the funds to the Internal Revenue Service (IRS). Brockman’s indictment is said to be “the largest tax evasion case brought against an individual in U.S. history.” 

According to allegations, Brockman illegally purchased debt securities from his own company and used shell companies and secret offshore bank accounts to conceal his profits and avoid being taxed. The Swiss banks used by Brockman did not report the activity even though they received multiple single wire transfers worth hundreds of millions.

Consequences of the Loophole

How could someone like Brockman make use of this loophole? According to the Senate Finance Committee, it involves setting up a shell company in a tax haven and registering it with the IRS using form 8957. This constitutes an application under FATCA to become a foreign financial institution with a legal GIIN number. According to the Senate investigation, because the IRS has limited resources, such applications are typically approved automatically without further review. 

Once the shell company is registered with the IRS, it becomes a foreign institution. If a bank account is opened offshore in the shell company’s name (for example, in Switzerland), the law does not require the foreign bank to report money transfers to the IRS – even large ones. This is because the accountholder is not American under U.S. law.

Typically, the Finance Committee states, the IRS only discovers this kind of activity during an investigation or audit, so it’s very likely to go undetected unless someone blows the whistle. Indeed, in the Brockman case, the fraud was only discovered thanks to a whistleblower – the former director of a private equity firm Brockman had used as part of his scheme.

Recommended Changes

The Senate Finance Committee has recommended Congress and the Treasury take decisive action to tackle the gaps this case revealed. The recommendations include:

    • Improved due diligence on Foreign Financial Institutions (FFIs). When an FFI (such as Brockman’s shell company) receives large money transfers, it should be subject to higher due diligence requirements.
    • The GIIN application process needs to be more rigorous. Specifically, screening should be stricter for entities located in popular tax havens. 
  • Incentivize whistleblowers. Although protections for whistleblowers are crucial, rewards could encourage cooperation. Whistleblowers are vital to an understaffed IRS, which needs all the resources it can get to fight tax fraud, argues the Committee.
  • Use recent funding to equip the IRS. The Inflation Reduction Act (IRA) allocated $80 billion in funding to the IRS. That money could be used to equip the agency to enforce tax law effectively, allow adequate partnership audits, and improve inter-jurisdictional information sharing.

The Role of Financial Institutions

Although it appears that the Swiss banks holding Brockman’s offshore accounts were off the hook for reporting his activity, the reality is more complicated. In this case, Mirabaud (one of the involved Swiss banks) is facing questions as to whether it should have reasonably known the account information was misleading. As the Senate Finance Committee report reasons, given the amount of money transferred from the shell companies, an argument might be made that adequate due diligence should have uncovered the problem. Although it is still unclear whether the bank could reasonably have known of Brockman’s involvement, the report highlights that the sheer quantity of funds he contributed may raise questions about conflicts of interest.

Regardless of the outcome for Mirabaud, it is hard to over-stress the importance of adequate account due diligence on the part of financial institutions. In particular, knowing who an account’s beneficial owners are can go a long way in preventing illegal account activity and liability. When institutions understand who is behind the entity on an account, they can more accurately judge the associated risks – and their legal reporting obligations. 

The Brockman report’s recommendations carry considerable weight, as the report was released by the chair of the Senate Finance Committee, Senator Wyman. It is possible there will be regulatory changes in response, so firms should continue to watch for new legislative announcements that could affect their compliance and due diligence obligations.

 

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Investigations by the Department of Justice and Senate Finance Committee into a $2 billion tax evasion scheme by Robert Brockman, former CEO of a major software company, have led to the discovery of a serious loophole in the Foreign Account Tax Compliance Act (FATCA). It allows U.S. accountholders to send considerable sums to foreign banks without those banks reporting the funds to the Internal Revenue Service (IRS). Brockman’s indictment is said to be “the largest tax evasion case brought against an individual in U.S. history.”  According to allegations, Brockman illegally purchased debt securities from his own company and used shell companies and secret offshore bank accounts to conceal his profits and avoid being taxed. The Swiss banks used by Brockman did not report the activity even though they received multiple single wire transfers worth hundreds of millions.

Consequences of the Loophole

How could someone like Brockman make use of this loophole? According to the Senate Finance Committee, it involves setting up a shell company in a tax haven and registering it with the IRS using form 8957. This constitutes an application under FATCA to become a foreign financial institution with a legal GIIN number. According to the Senate investigation, because the IRS has limited resources, such applications are typically approved automatically without further review.  Once the shell company is registered with the IRS, it becomes a foreign institution. If a bank account is opened offshore in the shell company’s name (for example, in Switzerland), the law does not require the foreign bank to report money transfers to the IRS – even large ones. This is because the accountholder is not American under U.S. law. Typically, the Finance Committee states, the IRS only discovers this kind of activity during an investigation or audit, so it’s very likely to go undetected unless someone blows the whistle. Indeed, in the Brockman case, the fraud was only discovered thanks to a whistleblower – the former director of a private equity firm Brockman had used as part of his scheme.

Recommended Changes

The Senate Finance Committee has recommended Congress and the Treasury take decisive action to tackle the gaps this case revealed. The recommendations include:
    • Improved due diligence on Foreign Financial Institutions (FFIs). When an FFI (such as Brockman’s shell company) receives large money transfers, it should be subject to higher due diligence requirements.
    • The GIIN application process needs to be more rigorous. Specifically, screening should be stricter for entities located in popular tax havens. 
  • Incentivize whistleblowers. Although protections for whistleblowers are crucial, rewards could encourage cooperation. Whistleblowers are vital to an understaffed IRS, which needs all the resources it can get to fight tax fraud, argues the Committee.
  • Use recent funding to equip the IRS. The Inflation Reduction Act (IRA) allocated $80 billion in funding to the IRS. That money could be used to equip the agency to enforce tax law effectively, allow adequate partnership audits, and improve inter-jurisdictional information sharing.

The Role of Financial Institutions

Although it appears that the Swiss banks holding Brockman’s offshore accounts were off the hook for reporting his activity, the reality is more complicated. In this case, Mirabaud (one of the involved Swiss banks) is facing questions as to whether it should have reasonably known the account information was misleading. As the Senate Finance Committee report reasons, given the amount of money transferred from the shell companies, an argument might be made that adequate due diligence should have uncovered the problem. Although it is still unclear whether the bank could reasonably have known of Brockman’s involvement, the report highlights that the sheer quantity of funds he contributed may raise questions about conflicts of interest. Regardless of the outcome for Mirabaud, it is hard to over-stress the importance of adequate account due diligence on the part of financial institutions. In particular, knowing who an account's beneficial owners are can go a long way in preventing illegal account activity and liability. When institutions understand who is behind the entity on an account, they can more accurately judge the associated risks – and their legal reporting obligations.  The Brockman report’s recommendations carry considerable weight, as the report was released by the chair of the Senate Finance Committee, Senator Wyman. It is possible there will be regulatory changes in response, so firms should continue to watch for new legislative announcements that could affect their compliance and due diligence obligations.   [cta_card title="A Guide to the US Anti-Money Laundering Act (AMLA)" cta_img="" category="" bodytext="Review the most significant AML legislation to pass the US Congress in decades with our free-to-access guide " cta_text="Download now" cta_url="https://complyadvantage.com/insights/a-guide-to-the-us-anti-money-laundering-act-amla/"]

Originally published September 2, 2022, updated September 2, 2022

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