Feds warn banks to look out for construction fraud

Dive Brief:

  • Feds are cracking down on financial fraud in the construction industry. The Financial Crimes Enforcement Network, part of the U.S. Treasury Department, issued a notice to financial institutions Wednesday, highlighting an increase in state and federal payroll tax evasion and workers’ compensation fraud by U.S. construction businesses. 
  • State and federal tax authorities lose hundreds of millions annually to these types of schemes, according to the announcement.
  • “FinCEN is committed to combating fraud by shedding light on how illicit actors within the construction industry are using shell companies and other tactics to commit workers’ compensation fraud and avoid payroll taxes,” Himamauli Das, acting FinCEN director said in the announcement. 

Dive Insight:

The notice provides information to bank officials about how bad actors carry out their schemes through the use of shell companies. The schemes impact the construction job market and negatively affect legitimate contractors and their workers by putting them at a competitive disadvantage, FinCEN said.

Fraudulent construction businesses conduct their schemes through two major categories, according to FinCEN. First, operators will establish a shell company, then take out a minimal workers’ compensation policy to rent or sell to contractors that employ more workers than the policy is designed to cover. That constitutes insurance fraud, FinCEN said.

Second, the shell company’s operators commit tax fraud, as contractors use the shell company to pay workers “off the books,” therefore not paying state and federal government payroll taxes.

FinCEN highlighted the case of Melesio Gomez-Rivera, a Portland, Oregon, area contractor recently sentenced to federal prison for his role in a scheme to evade payroll and income taxes on the wages of workers. 

“From January 2014 until December 2017, Gomez-Rivera and several other construction company owners conspired with each other and David A. Katz, the operator of Check Cash Pacific Inc., a check cashing business with locations in the Portland area and Vancouver, Washington, to defraud the United States by facilitating under-the-table cash wage payments to construction workers,” the notice reads.

The group cashed about $192 million in payroll checks, which resulted in $68 million in income tax loss, the notice says. In December 2021, a federal grand jury indicted Gomez-Rivera, Katz and four others with conspiring to defraud the U.S. Gomez-River pleaded guilty on March 1, receiving a 30-month federal prison sentence as well as orders to pay $29.9 million to the Internal Revenue Service. The other charged parties await trial in December. 

What to look for

The notice is part of a continued effort from FinCEN to combat the use of shell companies for illicit activity. Last year, the agency issued a final rule establishing a beneficial ownership information reporting requirement, which requires most corporations, limited liability companies or other businesses in the U.S. to report information on who ultimately owns or controls the company. 

To help financial institutions know when they should report such activity, FinCEN provided red flags to watch out for, including:

  • A small construction company newer than two years old specializes in one specific construction trade with little online presence.
  • The company operating the account has no prior involvement with the construction industry, and the individual opening the account provides a non-U.S. passport as identification.
  • The company recently acquired a workers’ compensation policy for a small number of workers, yet has a high volume of transactions in its bank accounts, not commensurate with a company of that size. 
  • The customer receives weekly deposits that exceed normal account activity from several contractors from multiple construction trades.
  • The company draws a high number of checks under $1,000 made payable to separate individuals.

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