On May 9, 2016, the Justice Department announced that Gregg R. Mulholland, a dual U.S. and Canadian citizen and owner of an offshore broker-dealer and investment management company based in Panama and Belize, pleaded guilty to money laundering conspiracy for fraudulently manipulating the stocks of more than 40 U.S. publicly-traded companies and then laundering more than $250 million in profits through at least five offshore law firms. This prosecution is notable in that it represents the first time the Justice Department has brought criminal charges against individuals for conspiring to violate reporting requirements under the Foreign Account Tax Compliance Act (FATCA).
Mulholland and several other defendants were indicted in 2014 by a grand jury in the Eastern District of New York. The indictment alleges that between 2010 and 2014, Mulholland controlled a group of individuals (the Mulholland Group) who together devised three interrelated schemes to: (1) induce U.S. investors to purchase stock in various thinly-traded U.S. public companies through fraudulent promotion of the stock, concealment of their ownership interests in the companies, and fraudulent manipulation of artificial price movements and trading volume in the stocks of those companies; (2) circumvent the IRS’s reporting requirements under FATCA; and (3) launder the fraudulent proceeds from the stock manipulation schemes to and from the United States through five offshore law firms.
According to the indictment, the defendants’ scheme also enabled U.S. clients to evade reporting requirements to the IRS by concealing the proceeds generated by the manipulated stock transactions through the shell companies and their nominees. For example, in response to a request received by a U.S. corrupt client from a U.S. transfer agent who had to determine whether the proceeds from manipulative stock trading transaction were taxable under U.S. law, one of the defendants forwarded an IRS Form signed by a co-defendant as the nominee for the shell company which had been set up at the request of the client.
The indictment further alleges that in order to carry out these interrelated schemes, the Mulholland Group used shell companies in Belize and Nevis, West Indies, which had nominees at the helm. This structure was designed to conceal the Mulholland Group’s ownership interest in the stock of U.S. public companies, in violation of U.S. securities laws, and enabled the Mulholland Group to engage in more than 40 “pump and dump” schemes.
With respect to FATCA, the indictment alleges as follows:
13. The Foreign Account Tax Compliance Act (“FATCA”) was a federal law enacted in March 2010 that targeted tax non-compliance by U.S. taxpayers with foreign accounts. Although enforcement did not commence until July 2014, FATCA required U.S. persons to report their foreign financial accounts and offshore assets. Additionally, FATCA required foreign financial institutions to report to the Internal Revenue Service (“IRS”) certain financial information about accounts held by US. taxpayers or foreign entities in which U.S. taxpayers held a substantial ownership interest. FATCA also targeted the non-reporting and the non-withholding (30% on certain U.S. source payments made to foreign entities) by U.S. financial institutions based on material misrepresentations about the beneficial owners of the foreign accounts.
The indictment reveals that law enforcement authorities employed undercover agents and wiretaps to record numerous conversations involving the defendants. In one recorded meeting, two of the defendants bragged that their strategy enabled clients to evade FATCA’s requirements:
During this meeting, BANDFIELD and GODFREY touted, inter alia, IPC CORP’s success in establishing fraudulent corporate structures, including six IBCs and two LLCs for the Undercover Agent in order to conceal the Undercover Agent’s true beneficial ownership of the brokerage accounts at LEGACY, TITAN, UNICORN and two additional broker-dealers. BANDFIELD explained that this “slick” structure was specifically designed to counter U.S. President Barack Obama’s new laws, a reference to FATCA.
On a recorded telephone call, one of the defendants told a client that the use of offshore nominee companies was specifically intended to evade FATCA’s reporting requirements:
On or about May 19, 2014, GODFREY called Corrupt Client 6, an individual whose identity is known to the Grand Jury, and stated that IPC CORP’s fraudulent scheme using sham IBC and LLC structures was created to evade the IRS, specifically FATCA.
Although the Justice Department has been aggressively targeting offshore tax evasion by U.S. taxpayers since 2009, this case represents the first time that the government has brought criminal charges based upon alleged violations of FATCA. With FATCA’s provisions only becoming effective on July 1, 2014, and with the Justice Department’s offshore crackdown showing no signs of slowing down, we expect to see more criminal prosecutions in the future alleging violations of FATCA’s provisions.