Legal High Jinx With Compliance

Roll Call is reporting that the US Congress should review the “common bond” standard for Credit Union status. This comes on the heel of the National Football Association, the sports league, that has been operating under a tax-exempt status for trade and professional associations.
NFL (credit Regie’s Take)

The NFL was considering itself an association of professional football players and that the league managers were hired by the professionals to manage the league. Well, this is really rather far from the truth. The league is run by people who mostly represent the team owners, who are not the professionals. In order for the league to truly meet the standard, the team owners would also have to be hired by the players to manage them. What astonishes me is that Congress is not pursuing back-taxes from the NFL. I hope the IRS does. The US government could be looking at getting back close to $200 Million from back taxes over the past three or four decades. (I don’t know when the league organized as a professional association, so I don’t know if I can take this claim back to its origins.)

That was an aside to the main issue. CU’s were designed to be tax-exempt so that banking services can be provided to low- and moderate-income households while reducing risk by requiring a “common bond.” The common bonds used to be applied rather strictly. CU members had to be all employees of a sponsoring employer or all members of the same trade association. But the common bond definition has expanded. Expanded by how much? Well, New York City has one for anyone living within the city boundaries. That’s more than 8 Million people who qualify. The largest CU’s are much larger than community banks.

Not only is there an issue of tax revenue, but compliance issues. CU’s do not have to meet many of the banking compliance standards and rules. This is so because, supposedly, they are like community banks, small, local and limited in products and services. Some of this is true. CU’s take deposits and have loan products like credit cards, home and auto loans and student loans. But many have insurance and retirement plans. They are just one step away from providing brokerage services. Some provide near-brokerage service by providing financial advisors. Plus, less than a third of CU customers meet the definition of low- and moderate-income earners.

I don’t have a solution for any of this. I certainly have my opinions. But economically, this is a much more complex issue than the way it has been laid out by all sides. From a compliance perspective, I am generally of the opinion that standards should really be set by activity, not by size of an institution. But politics often makes it difficult to apply rules in this clear cut manner and often set arbitrary standards, like size of institutions.

Reverse Morris Trust Is A Tax-Free Merger Deal

In order to talk about Reverse Morris Trust, we need to discuss Morris Trust. And then we will talk about why this is relevant.

Morris Trust was a company that, in the 1960s, received a tax-bill for unpaid taxes for a $413.44. The trust was being held at American Trust Company. The tax bill was a result of ATC merging with a competitor. Mind you, nothing about the Trust had changed, it’s just that the merger created a transaction with tax consequences.

The tax liability is created for the target company because the target company, presumably, sells its shares at a premium to the buyer. The Reverse Morris Trust puts the tax liability to buyer instead, which it may be able to offset with other expenses. (Expenses reduce income, lowering the tax liability.)

Example of a Reverse Morris Trust from Tax Interpretations
Example of a Reverse Morris Trust from Tax Interpretations

The mechanics goes something like this. Buyer wants to buy Target and Target wants to sell to Buyer. Buyer divests a portion of itself into a newly created subsidiary. At this point Buyer own 100% of the subsidiary. Buy SELLS 49% of the shares of the subsidiary to Target for a price. The price costs Target its whole company. So, now, the subsidiary includes 100% of Target and a line of business from Buyer. Having sold 49% of the subsidiary, Buyer retains control. Target, having BOUGHT 49% of a company using itself as the price, it writes off the expense of purchasing those shares. The Target is allowed to merge with the subsidiary. See the trick here? Buyer SOLD while Target BOUGHT.

Executing an RMT is difficult. Buyers and Sellers must find each other for not just for the M&A and the right price, but then also willing to go through with this complicated transaction method. While tax compliance isn’t my area of expertise or interest, business is. M&A is an interesting area that creates many compliance issues, including tax compliance. Tax avoidance is legal, but tax evasion is illegal. RMT offers a way to avoid taxation when done right.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


SAR Means Suspicious Activity Report

SAR is a very important regulatory tool, and a financial institution that ignores it ignores it with great peril. The Report is filed with FinCEN, but nearly ever other regulatory body has a link to FinCEN regarding SAR’s. The OCC, the IRS, even the Department of Homeland Security has a link to FinCEN regarding SAR’s. Here’s an example of the form:
FinCEN Form 109

This form is three pages long and this attachment comes with three pages of instructions. The instructions are written so that even a lay-person without a legal or compliance background should be able to fill it out. A small financial institution may not have a dedicated compliance officer, so, it is very important to understand that there is a 30-day deadline from the moment of the suspicious activity.
The consequences could be detrimental to your business. Your business or you specifically could be charged with enabling, abetting or in any other way aiding terrorist or other money laundering activity.

Generally, this is not an issue that should require a legal counsel. FinCEN is out to enforce the law, not to prosecute it. Its goal is to catch bad guys and if you are helping them, they are likely to look at your favorably. However, should you run out of time before you can determine whether you need to file a report or not, or you are made aware of the activity after the deadline, filing the form late is better than not filing at all. Explaining the reasons for delay is acceptable.
Should you find that your business is starting to attract suspicious activities more frequently than desired, connecting with lawyers who specialize in compliance for counsel will be a very important investment in mitigating this particular risk.

Ultimately, it is in the interest of the business to file a SAR with FinCEN rather than not file.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.