On Monday, October 27, 2017, the United States District Court for the District of Columbia handed down a 12-count indictment against Paul Manafort, the former Trump campaign manager, as follows:
Count 1, conspiracy against the United States; count 2, conspiracy to launder money; counts 3- 6, failure to file report of foreign bank and financial accounts for calendar years 2010-2014; counts 7-9, failure to file report of foreign bank and financial accounts for calendar years 2011-2013.
What is interesting about the 12 counts is that more than 50 per cent of the counts referred to failure to file report of foreign bank and financial accounts, commonly known as ‘FBAR’.
The law has been around since 1973, but was not aggressively enforced against US citizens and Green Card holders with accounts outside the United States. The law stipulates that US citizens and Green Card holders with authority over foreign accounts, whether the accounts are set up in their names or in the names of nominees as their principals, are mandated to report.
Since 1973 the Bank Secrecy Act (BSA) requires US citizens and Green Card holders to report to the United States Treasury any financial interest in or signatory authority over any bank account or other financial accounts held in foreign countries, for every calendar year in which the aggregate balance of all such foreign accounts exceed US$10,000.
The BSA requires the FBARs to do this because of the high degree of usefulness to law-enforcement agencies such as the Federal Bureau of Investigation and tax authorities.
FBAR also helps immensely in regulatory and investigative proceedings. The United States Financial Crimes Enforcement Network (FINCEN) is the custodian of FBAR filings. The FBAR reports filed by individuals and businesses are used by law enforcement to identify, detect, and deter money laundering, criminal enterprise activities, racketeering, tax evasion, and other unlawful activities. The maximum FBAR penalty can be as much as half the balance in the foreign account for civil violation and 10 years’ imprisonment for criminal violation.
The Manafort indictment alluded to FATCA in paragraph 29 of the indictment, but did not specifically identify it, saying only that US citizens and Green Card holders are required to report information to the IRS regarding foreign bank accounts.
This is usually done on the tax returns that are filed each year and the threshold requirements are between US$50,000 and US$600,000, depending on whether you reside in or outside the United States, and your filing status. FATCA has been around since 2010, but it may not be as useful to law enforcement as FBAR is, as it is reports directly to the IRS while FBAR reports directly to FINCEN, a crime-enforcement unit.
Note that nothing had been said directly about Form 5471, which is required to be filed by US Citizens and Green Card holders who are directors, officers, or shareholders in a foreign corporation. The penalty for failure to file Form 5471 is just as deadly as failure to file FBAR, but it must be filed directly to the IRS.
The Manafort indictment alleges that he owns or controls corporations in Cyprus, United Kingdom, and The Grenadines, making him liable to the IRS if he fails to file the forms.
One may wonder why the charge of tax evasion is not included in the indictment, but it may come as a superseding indictment or the IRS Criminal Investigation Division is waiting to do its own criminal prosecution.
United States citizens and Green Card holders should follow Manafort’s case closely, because with respect to FBAR, there may be no defence once the returns are not filed. The indictment alleges that he unlawfully, wilfully and knowingly failed to file FBAR by falsely representing to his tax preparer, in writing, that he had no authority over bank accounts, knowing that such false representation would result in false tax filing which is a criminal offence. Taxpayers, tell tax preparers the truth because one doesn’t know what the future holds.
Manafort, who was probably one of the most powerful persons in US, arising from political and business associations and his financial assets, is likely to lose all his assets because the government wants forfeiture of all his properties, both real and personal. While nothing is said about the forfeiture of the vast financial assets, with IRS civil and criminal penalties, interest and surcharges, funds will be depleted and Manafort could go to prison and be a pauper after serving time.
The bottom line is that Manafort will bring a lot of attention to the compliance of international taxation. The IRS chairman, Koskinen, has said that he was going to put more resources and effort on international taxation, therefore, after this case, we should see more indictments on the failure to file FBAR, FATCA and Form 5471 returns. In order to stay ahead of the authorities, persons should do the right thing by complying with the laws and regulations.
Finally, with the recent revelation of the Paradise Papers, it couldn’t come at a worse time as rumours have it that over 31,000 Americans have accounts associated with the Papers, giving the US Treasury Department and the IRS a treasure trove of information to criminally indict US citizens and Green Card holders.