Can a Lender Get in Trouble for Giving Money to a Business with IRS Tax Debt? Published August 8, 2017
Last week, the US Department of Justice issued a press release announcing that a former bank vice president pleaded guilty to conspiring to defraud the United States (tax evasion). As a result, there were various news and industry articles discussing the ramifications for commercial lenders.
One blog post in particular, “Loans to a Business Not Paying Their Payroll Taxes Results in the Banker Being Convicted,” was brought to my attention. Several of our lender customers were concerned that simply making a loan to a business that, in turn, accrued liability with the IRS could get a lender into trouble.
Because of the widespread concern, I hope that by reviewing some additional, pertinent facts of the case in question, you can better understand the specifics and how they impact you as a lender.
Facts of the Case
Initially, there’s nothing inherently incorrect about the blog post – unpaid taxes were an issue. Additionally, the blog post provides a link to the indictment, which is 47 pages long and includes 32 separate counts.
However, because the blog post focuses mostly on the tax issues, especially in the title of the post, it may be a bit misleading in that the taxes were not the only issue (or even the main issue). Specifically, per the superseding indictment filed on June 27, 2017, the banker allegedly,
- Engaged in a conspiracy.
- Falsified loan records.
- Circumvented FDIC regulations limiting the amount of money that can be loaned to a single individual or entity (and extended banker’s client (hereafter “Client”) a personal loan of more than $1 million).
- Knowingly factored receivables for several “Nominee Companies” actually controlled by Client and his staffing companies (hereafter “Staffing Companies”) that “had no real staffing business and the receivables to be factored actually belonged to [Staffing Companies].” This is important because Staffing Companies owed a considerable sum of money to the IRS. Based on the indictment, it appears the Nominee Companies were created to circumvent the FDIC’s legal lending limits as well as the IRS’s collection efforts.
- The banker met with the straw owners of the Nominee Companies at Client’s residence and presented factoring agreements to each for execution,
- The owners of the Nominee Companies included the pilot of Client’s personal plane, a local DJ, and a friend from Client’s soccer team Client employed as an assistant (allegedly, none of the straw owners were involved in the operations of the business),
- The banker sent instructions to the customers of Staffing Companies advising them to send payment to Staffing Companies in care of the bank (as opposed to the Nominee Companies in care of the bank), and
- Upon receipt of the payments, the banker “caused each check to be applied to the factoring accounts of the Nominee Companies for the purpose of falsely making it appear on the books and records…that [the bank] was factoring the invoices of the Nominee Companies.”
- “Continue[d] to advance monies from [the bank] on the invoices of the Staffing Companies through the nominee lending scheme despite knowing that [Client] was converting funds advanced by [the bank] to [Client] without paying taxes due to the IRS from [Client] and the Staffing Companies.”
- Knowingly “collect[ed] high interest rates and fees on loan advances made to staffing companies that dodged what the DOJ said was more than $40 million in unpaid federal taxes” (Law360 article, see link below).
Below is a link to a helpful article that includes some additional relevant information (subscription may be required):
https://www.law360.com/articles/947504/former-bank-exec-could-face-5-years-over-tax-conspiracy
Ramifications for Commercial Lenders
The main issues appear to be fraud and conspiracy, not the unpaid taxes. Without the fraud and conspiracy, this is likely limited to a civil suit for tortious conversion of assets (it appears the IRS filed a federal tax lien and was in first position on the Staffing Companies’ receivables). If you don’t falsify documents, actively participate/engage in fraud, knowingly fund “made up” companies, and convert funds (fund inventory/receivables and/or extend lines of credit in second position behind the IRS), you should be okay.
In short, the example cited was an egregious situation and does not reflect common behaviors within the lending industry. The banker faced several issues, but rather than confront those issues (including the tax liability) head on, the banker allegedly acted in a nefarious manner, which included tax evasion.
In contrast, Tax Guard’s lender clients could not be any further removed from this example. They utilize our reporting service to identify issues with the IRS. Armed with better information, they can act to protect themselves as well as their clients by asking their clients to address these issues and/or referring their clients to Tax Guard for assistance with resolution, when appropriate.
The banker could have avoided this mess by simply doing the right thing, which our lender clients already know.
