FATCA: First Prosecution for Failing to Comply.

(Out-Law) -- A former bank executive has been convicted in the US for failing to comply with the Foreign Account Tax Compliance Act (FATCA) as a result of a 'sting' operation conducted by an undercover agent.

FATCA is a US law designed to prevent tax evasion by US citizens using offshore banking facilities. It requires non-US financial institutions to provide information to the tax authorities about their US account holders in relation to accounts in existence on or after 30 June 2014.

"FATCA and other forms of automatic exchange of information like the Common Reporting Standard (CRS) were brought in to make it harder to hide money in a bank offshore. This conviction goes to show that governments will clamp down hard on those who flout these rules," said Jason Collins, a tax disputes expert at Pinsent Masons LLP, the law firm behind Out-law.com.

In response to FATCA, the Organisation for Economic Cooperation and Development (OECD) developed CRS which applies internationally. CRS is a mechanism for countries to automatically exchange information about non-residents holding bank accounts and other financial accounts offshore.  This month should see over 100 jurisdictions making annual exchanges of information under CRS.

Adrian Baron, the former chief business officer and former chief executive officer of Loyal Bank Ltd, an offshore bank with offices in Hungary and Saint Vincent and the Grenadines, pleaded guilty to conspiring to defraud the US by failing to comply with FATCA. Baron was extradited to the US from Hungary in July 2018.

According to court documents, an undercover agent had a meeting with Baron and explained that he was a US 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 a later meeting with Baron, the undercover agent described how his stock manipulation scheme operated, including the need to circumvent the 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’ US involvement. Loyal Bank opened multiple bank accounts for the undercover agent and at no time did Baron or Loyal Bank request or collect FATCA information from the undercover agent.

"The US is quite unique in using 'sting' techniques to catch wrongdoers. It is not in the UK tax authority’s arsenal to do that – yet,” Collins said.

Baron’s guilty plea represents the first ever conviction for failing to comply with FATCA.  When sentenced, Baron faces a maximum of five years in prison.

"We expect to see more of these types of cases come to court.  Within the CRS, countries are being urged to introduce a Model Mandatory Disclosure Regime to make sure that organisations have to report where people are trying to get around CRS – even where doing so lawfully – so that they can make sure the system works perfectly.   This will throw up information of deliberate wrongdoing," Collins said.

On 25 June 2018 an EU Directive known as 'DAC 6' entered into force. When implemented throughout the EU, it will require automatic exchange of information between EU member states about cross-border tax arrangements, including arrangements which may have the effect of undermining CRS reporting. It has to be transposed into law by EU member states by 31 December 2019, but could catch arrangements where the first step has taken place on or after 25 June 2018.

A cross-border arrangement will be reportable under the new rules if it bears one of a number of listed hallmarks, which include arrangements which may undermine CRS reporting. Some of the hallmarks are only triggered where the main benefit or one of the main benefits which a person may reasonably expect to derive from the arrangements is the obtaining of a tax advantage. However, the hallmark for arrangements which may have the effect of undermining CRS reporting is not subject to the main benefit test.