What are Shell Banks?
The concept of shell banks is quite similar to that of shell companies. Shell banks are banks that do not have any physical presence in any country, including the country that they are registered in. They are also not affiliated with any regulated financial group, unlike other public and private sector banks. The US Government has banned the conception of shell banks and other banks from corresponding with them under the USA PATRIOT Act due to their suspicious nature. Due to no proper management or physical presence, shell banks are usually vessels for money laundering, similar to shell companies.
The Implementation of FATCA
The United States passed the Foreign Account Tax Compliance Act (FATCA) in 2010 in an effort to crack down on money laundering by US citizens through off-shore accounts. Many wealthy people began to open bank accounts in foreign countries to stash away excess earnings, due to which they were able to underreport their income and pay fewer taxes. Due to the IRS being unaware of these ‘hidden’ funds, the account holders could circumvent paying heavy taxes according to their tax bracket.
Under FATCA, foreign banks must report and monitor any accounts held by US citizens to the Internal Revenue Service so that they can collect tax on any assets held in their accounts. Many influential people were able to hide billions of dollars from the IRS in this manner before they finally caught wind of the evasion technique and put FATCA regulations into place.
The Brockman Scheme
However, even though FATCA requires off-shore banks to keep a tight leash on the accounts of American citizens, one American business executive, Robert Brockman, was able to uncover a loophole in the law, which enabled him to hide over $2 billion in income and millions of dollars from the IRS through a carefully designed web of offshore entities and secret bank accounts. This case is thought to be the largest instance of tax evasion by an individual in the United States till date. So, if the IRS keeps such a tight leash on off-shore accounts under FATCA, how was he able to pull this off?
The answer is quite simple. Under FATCA, banks only have to report the accounts of companies or individuals who are from the US. However, if the company holding the account itself is a financial institution, then it no longer remains under the jurisdiction of FATCA. The bank where the account is opened hence becomes free of all legal responsibility and is not required to report it to the US authorities. Brockman could move all of his earnings into the accounts of these shell companies, which he dressed up and passed off as financial institutions of his own- or shell banks. Shell banks are more accessible to set up than typical banks, as they are not managed by any supervisory body.
He allegedly rounded up all of the companies under his authority, as well as companies incorporated under other people’s names but under his control, and reported them to the IRS as financial institutions of their own. On registering, each company was assigned a Global Intermediary Identification Number (GIIN number). Using these GIINs, Brockman was able to open multiple off-shore accounts and hide his money without detection from the IRS.
Brockman opened his accounts in Belize, Bermuda, Cayman Islands, Malta, Nevis, Switzerland, Singapore, Guernsey, and the British Virgin Islands- all countries which have infamous tax haven jurisdictions, and used the money stashed in these accounts to buy himself luxuries like expensive properties, yachts, and even a private jet.
It seems that most of his funds were deposited at the Mirabaud and Syz Banks in Switzerland, which are required to disclose all US citizen-owned bank accounts to the IRS and the Treasury Department. However, due to the accounts holding a GIIN number, the banks were not compelled to report them due to a US-Switzerland IGA provision, which states that Swiss banks are not required to report or review any accounts held by non-US entities in FATCA partner jurisdictions once they are proven to hold a GIIN provided by the IRS.
However, in this case, it seems that the IRS shot itself in the foot after finding that it provided the GIINs to Brockman without much due diligence. The IRS themselves approved Brockman’s request without conducting in-depth background checks on the application, on which doing so, they would have realized that the financial institutions they provided the GIINs to were in fact shell banks with no significant operations.
Brockman isn’t the only one exploiting the IRS to create his own shell banks, as it was found that shell companies with GIINs of their own exist all over the world, with 84,000 alone existing in the Cayman Islands. Many of these ‘financial institutions’ were created to open concealed bank accounts and slowly hoard billions of dollars.
The role of the IRS in the creation of these Shell Banks
The irony of the IRS themselves helping criminals to commit tax fraud did not go unnoticed. The lack of proper due diligence and in-depth scrutiny on the IRS’s part is reportedly due to budget cuts, which saw a decrease in over a third of the total IRS staff over the past 12 years. Anyone could file a request online or fill a paper form online to request a GIIN, which the IRS almost always granted as there were not enough personnel to conduct thorough investigations on whether these financial institutions were legitimate or not. Hence by presenting their companies to the IRS in clever yet deceptive ways, many wealthy Americans were able to take advantage of the Shell Bank loophole.
Conclusion
The combination of an undetected loophole and budget cuts in the IRS contributed to one of the largest money-laundering scams by an individual in recent history. Due to lax monitoring, business executive Robert Brockman was able to register a number of shell banks with the IRS and use them to open offshore accounts and evade FATCA regulations. Over a decade-long period, Brockman was able to hide away almost $2.7 billion and avoid paying taxes on his excess earnings. Though Brockman was caught and subjected to stand on trial, he died before he was able to do so- with his estate currently under investigation to uncover more about the elaborate scheme.
