FinCEN Notice Highlights Concerning Increase in Payroll Tax Evasion, Workers’ Compensation Fraud in the Construction Sector

The Financial Crimes Enforcement Network (FinCEN) has issued a notice to alert financial institutions of activities that may be related to payroll tax evasion or to workers‘ compensation fraud in both the U.S. residential and the commercial real estate construction sector. Specifically, the notice provides institutions with essential information to enhance their monitoring, detection, and reporting of suspicious activities associated with such fraud schemes.
In detail, the notice outlines how such fraud schemes typically operate involving the creation of a shell company:
1. Key participants in the scheme establish a shell company with the sole purpose of enabling specific construction contractors to evade payment of workers‘ compensation premiums and both state and federal payroll taxes.
2. Upon establishment of the company, its operators then secure a minimal workers‘ compensation policy which they then lease or sell to construction contractors who employ a significantly larger workforce than the policy is intended to cover (resulting in insurance fraud).
3. Additionally, the operators of the shell company receive „official“ payments from contractors so as to indicate „legal operation“ of the firm, and then in turn compensate contractors via cash payments (minus an „adequate“ fee. Contractors in turn then pay their employees „off the books“, thereby evading the mandatory state and federal government payroll taxes.
The notice further provides some red flags that shall serve institutions as possible indicators for such fraud, including among others:
– the (legal) person seeking a transaction account is a small construction firm with little online presence;
– the shell company’s beneficial owners are not known to have any previous connections with the construction industry;
– the company’s bank accounts show a significant volume of transactions which appears inconsistent with the size and operations of a typical construction company;
– despite a considerable volume of deposits from clients into the company’s bank account, there is a noticeable absence of tax or payroll-related payments to the Internal Revenue Service, state and local tax authorities, or even a third-party payroll service provider; or
– the Internet Protocol (IP) address linked to the account holder’s online banking activity may also be connected to another customer engaged in similar construction-related activity.
Finally, the notice provides further information on reporting suspicious activity in this context, including the provision of supportive documentation such as transaction spreadsheets. FinCEN also urges institutions to share relevant information with other banks and payment service providers so as to prevent similar issues elsewhere in the banking sector.