The recent conviction of Paul Manafort on eight charges of bank and tax fraud are a reminder that financial institutions need to take strong measures to prevent and detect fraud. Putting aside the politics, this case is about bank fraud, failure to register foreign bank accounts, and filing false tax documents.
Politico reports Manafort was accused of hiding much of the $60 million he earned consulting for Ukraine's president and other political leaders between 2010 and 2014 and failing to report the amount to the U.S. government. He also allegedly transferred more than $15 million to the U.S. without paying taxes on it.
To uncover and prevent bank fraud, vigilance by financial institutions and their officials is essential, backed up by strong policies and procedures. Measures to take include:
- Establishing a clear bank fraud/anti-money laundering policy and appointing an anti-money laundering officer responsible for handling legal obligations to report suspicious activities to authorities.
- Undertaking a fraud risk assessment, paying particular attention to high-risk clients such as those with significant international connections and types of financial transactions. As part of that assessment, organizations should thoroughly check the identity and background of clients, trading partners, or anyone else involved in moving money into, out of, or around the institution.
- Assigning sufficient numbers of senior experienced staff to scrutinize the source of funding for accounts, deals, or investments. Moreover, these staff members should devise and enforce a procedure for third parties to disclose their funding sources.
In this story, bank officials eventually assembled a massive number of documents such as emails, bank records, and invoices. These documents enabled them to testify that Manafort provided inaccurate information about his income and debts, and whether properties were being used by family members or as rental units. Officials also uncovered unusual payment methods such as wire transfers from oddly named foreign bank accounts. Data analytics can help pinpoint areas of concern.
- Introducing accounting and cash-handling procedures that make it hard for bank fraud to happen. That includes enforcing a no-cash policy on transactions that are more than a specified amount.
Regarding the failure to register or report a foreign bank account, financial institutions and the U.S. Internal Revenue Service (IRS) could use several methods to uncover such activities, including:
- Foreign income or financial accounts must be reported to the IRS as part of an information-sharing treaty enacted by the U.S. Foreign Account Tax Compliance Act. Suspicious activity forms may be submitted to the IRS by banks, auto dealers, and other institutions that suspect tax evasion and other activities. Authorities can receive this kind of information from other sources. For example, adult children who apply to U.S. universities may inadvertently provide information about foreign income and payments.
- The movements of individuals attempting to hide foreign bank accounts can be used to detect fraud. For example, an individual who seeks to renew a passport may provide a Social Security number, which is then sent to the IRS. Other examples include entering the U.S. using a foreign passport indicating that the individual was born in the U.S., or when the individual's name appears on stolen information on foreign financial accounts, which are passed on to the IRS.
- Business documents can reveal potential fraud. For example, an individual may be listed on another's U.S. citizen's tax return or foreign business documents, which have been shared with the IRS. Forming a corporation or partnership in a foreign country may require the individual to identify the owner as a U.S. citizen.
- Whistleblower reports are an effective source of fraud tips. The IRS offers finder fees for individuals who report other individuals for not paying their income taxes.
- If the individual was thinking he or she could take advantage of an Offshore Voluntary Disclosure Initiative to avoid enforcement action, the federal government ended this program this year.