On October 27, 2017, the Government filed criminal charges against former Trump aides, Paul J. Manafort and Richard W. Gates, III. While these are only allegations and all defendants should be considered innocent until otherwise proven, the case provides some important lessons in offshore compliance cases. I expect that many with undisclosed offshore assets will be unnerved by this case, but hopefully by understanding the particular facts in this case, such individuals won’t jump to conclusions about the best way to proceed in their situation.
There are a number of federal charges in the case, so I will try to discuss only the facts as they relate to offshore tax non-compliance.
Here are some facts as stated in the complaint. A copy can be viewed here (source: DOJ website).
Defendants PAUL J. MANAFORT, JR., (MANAFORT) and RICHARD W. GATES III (GATES) served for years as political consultants and lobbyists…
Between at least 2006 and 2015, MANAFORT and GATES acted as unregistered agents of the Government of Ukraine, the Party ofRegions ( a Ukrainian political party whose leader Victor Yanukovych was President from 2010 to 2014), Yanukovych, and the Opposition Bloc (a successor to the Patty of Regions that formed in 2014 when Yanukovych fled to Russia). MANAFORT and GATES generated tens of millions of dollars in income as a result of their Ukraine work.
In order to hide Ukraine payments from United States authorities, from approximately 2006 through at least 2016, MANAFORT and GATES laundered the money through scores of United States and foreign corporations, partnerships, and bank accounts.
In furtherance of the scheme, MANAFORT and GATES funneled millions of dollars in payments into foreign nominee companies and bank accounts, opened by them and their accomplices in nominee names and in various foreign countries, including Cyprus, Saint Vincent & the Grenadines (Grenadines), and the Seychelles. In furtherance of the scheme, MANAFORT and GATES concealed from the United States their work as agents of, and millions of dollars in payments from, Ukraine and its political parties and leaders…[W]when the Department of Justice sent inquiries to MANAFORT and GATES in 2016 about their activities, MANAFORT and GATES responded with a series of false and misleading statements…
MANAFORT also used these offshore accounts to purchase multi-million dollar properties in the United States…In total, more than $75,000,000 flowed through the offshore accounts. MANAFORT laundered more than $18,000,000, which was used by him to buy property, goods, and services in the United States, income that he concealed from the United States Treasury, the Department of Justice, and others. GATES transferred more than $3,000,000 from the offshore accounts to other accounts that he controlled.
It’s important to note that Defendants controlled dozens of foreign entities in furtherance of the alleged scheme.
As part of the scheme, MANAFORT and GATES repeatedly provided false information to financial bookkeepers, tax accountants, and legal counsel, among others.
Here are the relevant facts as they relate to the FBAR:
For each year in or about and between 2008 through at least 2014, MANAFORT had authority over foreign accounts that required an FBAR report. Specifically, MANAFORT was required to report to the United States Treasury each foreign bank account held by the foreign MANAFORT-GATES entities noted above in paragraph 12 that bear the initials PM. No FBAR reports were made by MANAFORT for these accounts.
For each year in or about and between 2008 through at least 2013, GATES had authority over foreign accounts that required an FBAR report. Specifically, GATES was required to report to the United States Treasury each foreign bank account held by the foreign MANAFORT-GATES entities noted above in paragraph 12 that bear the initials RG, as well as three other accounts in the United Kingdom. No FBAR reports were made by GATES for these accounts.
Furthermore, in each of MANAFORT’s tax filings for 2008 through 2014, MANAFORT represented falsely that he did not have authority over any foreign bank accounts. MANAFORT and GATES had repeatedly and falsely represented in writing to MANAFORT’s tax preparer that MANAFORT had no authority over foreign bank accounts, knowing that such false representations would result in false MANAFORT tax filings.
A number of many important facts have been omitted here for the sake of simplicity.
Here are the charges as they relate directly to the offshore tax evasion.
(18 U.S.C. § 371) Conspiracy To Launder Money
PAUL J. MANAFORT, JR., and RICHARD W. GATES III, together with others, did knowingly and intentionally conspire to: a) transport, transmit, and transfer monetary instruments and funds from places outside the United States to and through places in the United States and from places in the United States to and through places outside the United States, with the intent to promote the carrying on of specified unlawful activity (emphasis added).
(18 u.s.c. § 1956(h)) Failure To File Reports Of Foreign Bank And Financial Accounts
On the filing due dates listed below, in the District of Columbia and elsewhere, the defendant PAUL J. MANAFORT, JR., unlawfully, willfully, and knowingly did fail to file with the Department of the Treasury an FBAR disclosing that he has a financial interest in, and signature and other authority over, a bank, securities, and other financial account in a foreign country, which had an aggregate value of more than $10,000, while violating another law of the United States and as part of pattern of illegal activity (emphasis added).
(31 U.S.C. §§ 5314 and 5322(b); 18 U.S.C. § 2) (Failure To File Reports Of Foreign Bank And Financial Accounts)
Defendant unlawfully, willfully, and knowingly did fail to file with the Department of the Treasury an FBAR disclosing that he has a financial interest in, and signature and other authority over, a bank, securities, and other financial account in a foreign country, which had an aggregate value of more than $10,000, while violating another law of the United States and as part of a pattern of illegal activity involving more than $100,000 in a 12-month period (emphasis added).
Upon conviction of the certain criminal offenses (specifically, Conspiracy to Launder Money, Unregistered Agent of a Foreign Principal, and False and Misleading FARA Statements), Defendants shall forfeit to the United States any property, real or personal, involved in such offense, and any property traceable to such property.
What Turns an Offshore Compliance Issue into a Criminal Case?
The Government has the burden of proof to prove the intent elements in any civil or criminal charge. Here is a discussion about civil willfulness.
A criminal investigation for offshore tax crimes typically expends vast Government resources. A criminal investigation by IRS-CI will last a year or longer, after which the case may be referred for prosecution to a United States Attorney in the Department of Justice.
In criminal cases such as these, the Government must prove intent beyond a reasonable doubt, which is a much more difficult standard than is applied in civil penalty cases. Additionally, the elements are heightened for criminal offshore cases. For example, a civil FBAR penalty requires a willful violation, whereas a criminal violation under 31 U.S.C. § 5322(b) requires the Government to establish a willful violation in addition to a violation of another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period. Another less commonly used charge is under 5322(a), 31 C.F.R. § 103.59(b), sometimes invoked for structuring crimes and carries a lesser sentence.
In this case, the gravamen against the Defendants for the criminal offshore non-compliance charges are the following facts:
- Illegal source income. Defendants allegedly violated a number of laws in obtaining the income that was held in various offshore entities.
- Use of nominees. Defendants allegedly used nominee accounts to hide the source of the illegally-obtained monies.
- Location of accounts in offshore tax havens. Defendants allegedly created entities in tax havens (Cyprus and Grenadines), to further disguise the illegally-obtained monies.
- Large amount of taxable income. More than $75,000,000 unreported income flowed through the undisclosed offshore accounts.
- False statements. Defendants allegedly made a number of false statements, orally and in writing, to the Department of Justice during the investigation.
Don’t be Quick to Jump into the OVDP Program
While OVDP may seem like the safest option, it may not always be the wisest option. If you are non-willful, you may be unnecessarily paying penalties that you can avoid under the streamlined program. You will be subject to a 27.5% penalty on the high value of your undisclosed foreign assets, in addition to a 20% accuracy-related penalty, and up to 25% in failure-to-pay and failure-to-file penalties. There are alternatives such as Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures that you may be better suited for.
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.