October, 2013 South Florida Legal Guide

Three weapons currently in the arsenal of our law enforcement authorities form a three-legged stool. They are The Foreign Corrupt Practices Act, the Financial Action Task Force and the Foreign Account Tax Compliance Act. Together, they close previously existing legal “loopholes” that protected corrupt and illegal behavior.

The three-legged stool components

The Foreign Corrupt Practices Act of 1977 (FCPA)

This act makes it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Its anti-bribery provisions prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.

These provisions of the FCPA apply to all U.S. persons and certain foreign issuers of securities. The anti-bribery provisions of the FCPA also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.

Its accounting provisions, which were designed to operate in tandem with the anti-bribery provisions of the FCPA, require corporations covered by the provisions to:

1. Make and keep books and records that accurately and fairly reflect the transactions of the corporation and
2. Devise and maintain an adequate system of internal accounting controls.

Corruption and money laundering are intrinsically linked and generally committed for the purpose of obtaining private gain. Money laundering is the process of concealing illicit gains generated from criminal activity. By successfully laundering the proceeds of a corruption offense, illicit gains may be enjoyed without fear of confiscation.

The corrupt payments are not tax deductible. When concealed in the books and records of offenders, the books and records are inaccurate making business tax returns inaccurate.

The Financial Action Task Force (FATF)

This is the international standard setter for developing and promoting of national and international anti-money laundering (ALM) and anti-terrorist policies. Its recommendations, when effectively implemented, also help combat corruption by:

1. Safeguarding the integrity of the public sector,
2. Protecting designated private sector institutions from abuse,
3. Increasing transparency of the financial system, and
4. Facilitating the detection, investigation and prosecution of corruption and money laundering, and the recovery of stolen assets.

The FATF is an inter-governmental body established in 1989 by the ministers of its member jurisdictions with the objectives of setting standards and promoting effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. It is therefore a “policymaking body” working to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

FATF collaborates with other international stakeholders to identify national-level vulnerabilities and protect the international financial system from misuse. It has developed a series of recommendations that are recognized as the international standard for combating money laundering, and terrorist financing and proliferation of weapons of mass destruction. They are the basis for a coordinated response to these threats to the integrity of the financial system. First issued in 1990, the FATF recommendations were revised in 1996, 2001, 2003. They were revised again most recently in 2012 and are intended to be of universal application.

On July 12, 2012 FATF President Bjorn S. Aamo at the Asia Pacific Group (APG) on Money Laundering 15th Annual Meeting in Brisbane, Australia, said, “In the new standards, tax crimes are included among the predicate offences for anti-money laundering measures. This will provide a better foundation for international cooperation against tax crimes and tax evasion. More efficient tax collection is a necessary part of international efforts to strengthen public finances, which in particular is required in many European nations.”

Financial Account Tax Compliance Act (FATCA)

Signed into law in March 2010, FATCA is the most far-reaching law of its kind ever enacted by the U.S. government. It effectively deputizes foreign financial institutions (FFI) as reporting and withholding agents for the U.S. Treasury. By June 1, 2014, participating FFIs must be registered with the IRS and have a Global Intermediary Identification Number (GIIN) that will be used to identify them as registered with the IRS and participating in the FATCA program. Those FFIs without GIINs face a 30 percent withholding on their flows of withholdable payments from the U.S. and its territories.

Beginning March 2015, and every March 15th thereafter, FFIs will be required to report to the IRS about the accounts owned and controlled by U.S. taxpayers. They will provide the name of the beneficial owner, the U.S. taxpayer identification number (TIN) of the beneficial owner, the number of the account in the FFI, the balance in the account on the previous December 30th and the earnings of the account.

In the past, the U.S. Department of Justice has maintained a policy of omitting U.S. income tax crimes from the list of specified money laundering offenses. This is not statutory. This is a policy decision that could be changed.

The Three-Legged Stool

So, what we have is the FCPA, the FATF, and FATCA – the “three-legged stool.”

In virtually every prosecuted FCPA case involving bribery paid by defendants to or on behalf of foreign government officials, the bribery was hidden within accounts in the defendants’ books as deductible expenses and not disclosed. These payments were not tax deductible. In some cases they were paid from accounts with U.S. beneficial owners. FCPA violations are specified money laundering offenses.

The FATF has added tax crimes to its list of specified money laundering offenses. The U.S. is a full member of the FATF.
FATCA will expose non-compliant U.S. taxpayers using foreign jurisdictions to obscure tax and Bank Secrecy Act violations to the scrutiny of the IRS and the Financial Crimes Center (FinCEn). Violations of the Bank Secrecy Act are specified money laundering offenses. When coupled with willful U.S. Internal Revenue Code violations through the use of foreign jurisdictions, it is easy to see how quickly the ongoing U.S. Department of Justice policy of not prosecuting U.S. income tax crimes could be eroded in the case of cross-border transactions.

All of the above encompasses the three-legged stool!

Stanley I. Foodman is CEO of Foodman CPAs & Advisors and a recognized forensic accountant and litigation support practitioner. Specializing in complex domestic and international tax matters, Foodman has served as an expert witness and forensic accountant for some of the nation’s most challenging, high-profile economic crime cases. Foodman can be reached at 1201 Brickell Ave., Suite 610, Miami, FL 33131 (305) 365-1111

South Florida Legal Guide 2013 Financial Edition