FBAR – It Gets You in the End, Presidential Pardon Notwithstanding

Can a presidential pardon forgive FBAR penalties?  Maybe Paul Manafort Jr. thinks so! Despite notice and demand for payment, he is not paying US$2.9 million in “willful” FBAR penalties assessed against him.  The US government just brought an action in the southern district court (West Palm Beach division 4/28/2022), to collect the outstanding civil penalties for the years 2013 and 2014.  The filed complaint is here: action to collect.

In case readers need a refresher: Manafort was one of the highest-profile defendants in criminal cases involving Russian interference in the 2016 election and possible collusion by the Trump campaign.  In 2019, he was sentenced to a 7½ year prison term after being convicted of financial crimes to which he had pled guilty. The financial crimes related to his consulting work in Ukraine (and were unrelated to the allegations of Russian interference in the election).  As part of his plea, the Statement of the Offenses and Other Acts, detailed Manafort’s willful failure to comply with the FBAR filing requirements for several years, including 2013 and 2014. Judgments were entered finding Manafort guilty and he was sentenced to prison. Manafort was released from prison in 2020 based on health concerns. President Trump pardoned him months later after losing the election to President Biden.

Manafort’s Foreign Accounts

Manafort was engaged in consulting work in Ukraine; income from that work was deposited into over 20 accounts that he directed be opened in Cyprus, St. Vincent and the Grenadines, and the United Kingdom. In some instances, Manafort was listed as an authorized signer or beneficial owner of the account. However, many of the accounts were held without the use of Manafort’s name at all. Rather, the accounts were held in the name of nominee shell corporations opened or operated by other individuals on Manafort’s behalf.

Regardless, of the fact that others technically owned and operated some of the accounts, Manafort still exercised control over, and had access to, each of the accounts.  This means he had a “financial interest” in the accounts for purposes of the Bank Secrecy Act, and relevant regulations which includes in the definition of “financial interest” the case when “[t]he owner of record or holder of legal title is a person acting as an agent, nominee, attorney, or a person acting on behalf of the United States person with respect to the account.”

Since Manafort had a “financial interest” in them, the accounts (which aggregated well over US$10K in each of the years in issue) should have been reported on his FBAR.  Not only did Manafort fail to file an FBAR, he did not reveal the existence of the 20+ foreign accounts to his return preparer.  He checked the infamous “NO” box on Schedule B of his personal income tax return for each of the years in question. The Schedule B contained the following question: “At any time during [2013/2014], did you have a financial interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account?” Given the bad facts here (using nominees, creating shell entities and having so many foreign accounts yet not mentioning them to his tax advisor), it is no surprise that Manafort’s failure to file FBARs was found to be “willful.”

Although the Bank Secrecy Act and relevant Regulations governing the FBAR do not define the term “willful”, the trend in the cases examining “willfulness” in the FBAR context cover not only “knowing” violations, but violations caused by “willful blindness”, and “reckless” disregard. In a nutshell, “willfulness” in the context of a FBAR violation does not require actual knowledge of the duty to report an interest in a foreign account.  The IRS has been taking aggressive positions in saying a taxpayer willfully violated the FBAR rules by merely signing his tax return with Schedule B being a part of the return.

The Pardon

This is not my area of expertise, but I thought it would be helpful to give a bit of information gleaned from some brief online research. Article II, Section 2 of the U.S. Constitution gives the President the power to grant pardons and reprieves for federal crimes.  The “willful” FBAR violations of which Manafort had been accused and to which he pled guilty, were civil in nature, and not criminal. As such, the pardon would not even apply to the FBAR violations.   In addition, a Presidential pardon has no impact on any civil consequences that might flow from the crime for which the individual has been pardoned. So, just in case Manafort believes the Presidential pardon wiped away his civil FBAR penalties, it did not.  Let’s see if he pays up!

Want more information about FBAR?  Check the FBAR category on my US international tax blog.  Need help with FBAR matters?  Send an email to arrange a consultation vljeker@us-taxes.org

A podcast with attorney John Richardson on this post is available here.

A special word of thanks to Melissa Perry, Esq., who brought this development to my attention.

 

Posted May 19, 2022

 

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