The U.S. Attorney’s Office for the Eastern District of New York has charged four individuals with securities fraud conspiracy for their involvement in fraudulently manipulating the stock of a U.S. company using a traditional “pump and dump” stock fraud technique. See United States v. Chris Messalas et al., No. 17-MJ-321 (E.D.N.Y.). Prosecutors also allege that the defendants conspired to launder millions in illegal proceeds using offshore bank and brokerage accounts in order to evade disclosure obligations imposed by the Foreign Account Tax Compliance Act (FATCA), a relatively new U.S. anti-tax evasion law. This case represents the second time that federal prosecutors have premised money laundering charges upon a scheme to evade FATCA, and demonstrates that the Justice Department is taking an aggressive stance with respect to FATCA enforcement and using that law not just for tax cases.
According to a criminal complaint filed in federal court, the four defendants engaged in a “pump and dump” scheme to defraud investors and potential investors of BioCube, Inc., a publicly-traded company, by concealing their beneficial ownership and control of BioCube shares, so that they could exercise control over the price and trading of BioCube’s stock. The defendants are (1) a former securities broker previously barred by the SEC; (2) the former CEO of BioCube; (3) an attorney; and (4) an anti-money laundering (AML) consultant.
The complaint further alleges that two of the defendants engaged in a related conspiracy to launder approximately $2 million in proceeds of the “pump and dump” scheme by depositing BioCube shares into offshore accounts in the names of nominees in locations including Cyprus and the Bahamas. The scheme was designed to launder a portion of the fraudulent proceeds from the stock manipulation scheme from the United States through offshore accounts, and to circumvent reporting requirements under the Foreign Account Tax Compliance Act (FATCA). The defendant who is an AML consultant is alleged to have boasted of his AML abilities during conversations with an individual posing as a co-conspirator in the money laundering scheme who in fact was working with the FBI. If convicted, the lead defendant faces a maximum sentence of 25 years in prison, with the remaining defendants facing maximum prison sentences ranging from 5 to 20 years.
FATCA is a sweeping anti-tax evasion law passed by Congress in 2010 that became fully effective on July 1, 2014. FATCA requires foreign banks and financial institutions to annually disclose to the Internal Revenue Service the identities of their U.S. customers and their account information, in order to ensure that offshore assets and investments maintained by U.S. citizens and residents are subject to U.S. tax. To combat a commonly used technique used by tax evaders and money launderers who place assets and investments in the names of entities to obscure the identity of the ultimate beneficial owners, FATCA also requires the disclosure of the identities of U.S. persons who own offshore companies.
In September 2014, barely three months into FATCA’s existence, the Justice Department charged six individuals and six companies in a remarkably similar securities fraud, tax fraud, and money laundering case. See United States v. Robert Bandfield et al., No. 14-CR-476 (E.D.N.Y.). There, prosecutors alleged that the defendants engaged in three interrelated schemes to (1) to induce U.S. investors to purchase stock in various thinly-traded U.S. public companies through fraudulent promotion of the stock, concealment of their ownership interests in the companies, and fraudulent manipulation of artificial price movements and trading volume in the stocks of those companies; (2) to circumvent the payment of capital gains taxes and reporting requirements under FATCA; and (3) to launder the fraudulent proceeds from the stock manipulation schemes to and from the United States through debit cards and attorney escrow accounts. Using these schemes, the defendants laundered approximately $500 million for the corrupt clients who included more than 100 U.S. citizens and residents.
To facilitate these interrelated schemes, the defendants created shell companies in Belize and Nevis, West Indies, for the corrupt clients and installed nominee owners at each company. This scheme enabled the U.S. corrupt 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. During the investigation, one of the defendants boasted to an undercover law enforcement agent that he had specifically designed this “slick” corporate structure to counter the newly-enacted FATCA legislation.
The Bandfield case represented the first time that federal prosecutors had ever brought criminal charges premised upon a scheme to evade FATCA’s requirements. At the time these charges were announced, the IRS warned that “[t]he investigation of offshore tax evasion and money laundering are top priorities for IRS-Criminal Investigation, and we are committed to using all of our enforcement tools to stop this abuse. The enactment of the Foreign Account Tax Compliance Act (FATCA) is yet another example of how it is becoming more and more risky for U.S. taxpayers to hide their money globally.” The lead defendant in the case – referred to by prosecutors as the “architect of offshore fraud haven” – subsequently pleaded guilty and was sentenced to six years in prison.
With the FATCA law not even three years old, the filing of two criminal cases alleging schemes to evade FATCA signals that the Justice Department is taking a hard line on FATCA compliance and will continue to investigate and prosecute those who seek to skirt the law’s requirements. While offshore tax compliance has been a top DOJ and IRS priority since 2009, the criminal cases that have been filed as part of that initiative have focused for the most part on the tax and FBAR reporting obligations associated with individuals who maintain foreign bank accounts. The Bandfield and Messalas cases described above reflect a different approach, with a primary focus on money laundering (not tax) schemes designed to conceal the proceeds of criminal activity and avoid detection under FATCA. As fraudsters seek new ways to conceal illicit funds offshore, we fully expect to see additional money laundering prosecutions premised upon schemes to evade FATCA obligations.