The former CEO of Saint Vincent-based Loyal Bank pleaded guilty and was convicted on 11 September of conspiring to defraud the US by failing to comply with the Foreign Account Tax Compliance Act (FATCA). This is the first conviction obtained by the US Department of Justice (DOJ) since FATCA came into effect in 2014 and was the result of a sting operation. The FBI worked with the US Internal Revenue Service (IRS), the US Securities and Exchange Commission, the City of London Police, the UK Financial Conduct Authority and the Hungarian National Bureau of Investigation. The offender’s sentencing date is yet to be scheduled and he is facing a maximum of five years in prison.

This conviction, on the heels of a US governmental report critical of the IRS’s limited use of FATCA, could mark a more active enforcement environment going forward. Under FATCA, certain foreign financial institutions (FFI) must report US citizens' account information to the IRS and the US has intergovernmental agreements with Hong Kong and other Asian jurisdictions to facilitate this. The DOJ has indicated that financial institutions in Hong Kong and Singapore are on the US authorities' priority list in terms of FATCA enforcement. As such, both US citizens and financial institutions in the region should remain cognisant of FATCA’s requirements and ensure compliance.

Overview of FATCA

Enacted in 2010 and effective from 1 July 2014, FATCA is a federal law introduced to improve US taxpayer compliance with reporting foreign financial assets and offshore accounts (see our earlier article for further details on US offshore tax enforcement initiatives). Under FATCA, certain FFIs are required to register with and report to the IRS the identities of US citizens and certain account-related information, including the value of their assets held in their accounts. Individual taxpayers are also required to report specified foreign financial assets to the IRS if the aggregate value of their foreign financial assets exceed certain dollar thresholds.

Unless otherwise exempt, FFIs that do not comply with FATCA or fail to register with the IRS may not only be excluded from the US market, but may also be subject to a 30 percent withholding rate on US source payments made to them.

The DOJ established a successful self-reporting procedure for FFIs under its Swiss Bank Program. This resulted in numerous Non Prosecution Agreements with Swiss banks that voluntarily disclosed information about accounts held by US tax payers. The DOJ indicated in 2016 that, with the Swiss Bank Program largely complete, it would ‘follow the money’ to other offshore jurisdictions. It specifically named Singapore, Hong Kong, the Caribbean, India, Israel, Lichtenstein and Luxembourg.

The first-ever conviction under FATCA

The guilty plea was landed through an undercover operation conducted over the last year. An undercover agent contacted Loyal Bank’s former CEO (the offender) and identified himself as a US citizen involved in stock-manipulation schemes. He expressed an interest in opening corporate bank accounts. In June 2017, the undercover agent met with the offender and informed him 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. The offender responded that Loyal Bank could open such accounts and provide debit cards linked to them. The undercover agent again met with the offender and described how his stock manipulation scheme operated, including the need to circumvent the IRS’s reporting requirements under FATCA. During the meeting, the offender stated that Loyal Bank would not submit a FATCA declaration to regulators unless the paperwork indicated “obvious” US involvement.

In July and August 2017, Loyal Bank opened multiple bank accounts for the undercover agent. At no time did the offender or Loyal Bank request or collect FATCA Information from the undercover agent, despite Loyal Bank having registered in 2014 with the IRS as a FFI under FATCA.

The offender was charged in March 2018 and was extradited to the US from Hungary in July 2018.

TIGTA’s criticism on the enforcement of FATCA

The above win for the DOJ and IRS comes shortly after the release of a report from the Treasury Inspector General for Tax Administrator (TIGTA) critical of the IRS’s efforts to ensure compliance with FATCA. TIGTA initiated an audit to evaluate the IRS’s efforts. Its report dated 5 July 2018 stated that despite spending nearly US$380 million on IT and other costs for the FATCA program, the IRS had taken limited or no action. TIGTA also found that the IRS had delayed taking actions on a majority of the planned activities outlined in the FATCA Compliance Roadmap. The Roadmap is used for compliance planning involving FATCA data and provides a baseline for future compliance and implementation activities across the IRS. The IRS has reportedly disputed the TIGTA report, stating that it leaves the reader with the incorrect impression that FATCA is not being enforced.

International efforts facilitating financial account information exchange

To aid compliance with FATCA, the US has signed intergovernmental agreements with multiple jurisdictions for FFIs to report US-related account information to the IRS directly or through their host country tax authority.

In 2014, the Common Reporting Standard (CRS) was introduced by the OECD, which all member states are expected to join for the automatic exchange of information. CRS is largely based on FATCA, and provides guidance on reporting and due diligence to financial institutions. Over 100 jurisdictions have committed to exchange financial account information under CRS, allowing international tax authorities to better understand the financial assets held overseas and tax compliance by their residents. Many countries, including China, started exchanging tax-related information from 1 September 2018 under CRS.

Tax authorities in the UK, the US, Canada, Australia and the Netherlands have also joined forces to launch the J5 alliance against transnational tax crime and held the first meeting in June 2018, further reflecting the growing trend of international cooperation in this area (see our earlier bulletin here).


The level of international cooperation in this case, and the use of an undercover operation, indicate a stronger commitment by the US authorities to combat tax evasion. In light of TIGTA's recent criticism, we could see an uptick in the investigation and prosecution of those who promote and facilitate the use of offshore bank accounts to evade US tax. Previous statements by the DOJ indicate that it will look to funds in offshore jurisdictions including Hong Kong and Singapore. It is therefore possible that financial institutions operating in this region will come under scrutiny in relation to FATCA compliance.