Skip to main content Skip to navigation

Launching AI-driven Fraud Detection

FinCEN Seeks Data from Financial Institutions to Curb Construction Sector Fraud & Tax Evasion

Fraud Payments Latest News

In conjunction with Internal Revenue Service Criminal Investigation (IRS CI), the US Financial Crimes Enforcement Network (FinCEN) has released a notice asking financial institutions to report signs of workers’ compensation fraud and payroll tax evasion in the construction industry. The regulator expects the information received in response to uncover multiple schemes in the sector, which it says are responsible for hundreds of millions of dollars lost to tax authorities each year. The schemes also put legitimate contractors at an unfair disadvantage, using fraudulent tactics to underbid them.

“[I]llicit actors within the construction industry are using shell companies and other tactics to commit workers’ compensation fraud and avoid payroll taxes,” explained FinCEN Acting Director Himamauli Das. “Today’s Notice provides information that financial institutions can use to remain vigilant in monitoring, detecting, and reporting suspicious activity.”

The Fight Against Shell Companies and Organized Fraud

According to FinCEN, the notice aligns with its ongoing efforts to curb the use of shell companies to conceal illicit activity, as well as with the Anti-Money Laundering/Countering the Financing of Terrorism National Priorities.

In line with the Corporate Transparency Act, in 2022 FinCEN issued a final rule requiring most corporations, limited liability companies, and entities created or registered for business in the US to report their beneficial owners to the regulator. FinCEN expects this rule – effective January 2024 – to support the current notice’s objectives by discouraging the use of shell companies to conceal illegal activity by actors including:

  • Oligarchs
  • Kleptocrats
  • Drug traffickers
  • Human traffickers
  • Illicit individuals in the construction sector

Notice Details: Typologies, Red Flags, and Reporting

Although the notice addresses all financial institutions, FinCEN notes that the type of fraud and tax evasion it deals with primarily affects banks and check cashers. The scheme is typically a two-part process involving workers’ compensation fraud followed by tax evasion. 

A criminal entity typically creates a shell company posing as a legitimate subcontracting business with just a few employees. It takes out a workers’ compensation policy for those employees. Meanwhile, the shell company contacts real subcontractors with a much larger number of employees. The subcontractors can give their employees discounted (and fraudulent) access to the shell company’s policy for a fee. 

It also helps the subcontractors avoid paying payroll tax. The subcontractors write checks to the shell company instead of their employees, thus concealing that they’re for payroll. The shell company then either obtains cash at a check casher or deposits the money into its company account before withdrawing it in bulk. It returns this money to the subcontractors, minus a small fee, so they can pay their employees under the table and avoid taxes.

The notice outlines several red flags for this typology, including:

  • Construction company customers that are younger than a year, have little to no online presence, and specialize in one type of construction trade.
  • A non-US citizen without prior construction history who opens an account in the name of a construction company.
  • Despite receiving large volumes of client payments, the customer account shows no evidence of paying payroll taxes.
  • The customer receives deposits outside the expected amount for their account type, all from other construction companies and in multiple states.

The notice also reminds firms of their reporting requirements and information-sharing protections under the Bank Secrecy Act (BSA) and the USA Patriot Act section 314(b). Instructions on pages 7-9 of the notice include:

  • An overview of suspicious activity reporting (SAR) requirements.
  • Other BSA reporting requirements, such as currency transaction reports (CTR) and Form 8300 filing.
  • A reminder of the information-sharing safe harbor under the Patriot Act.

Next Steps for Firms

Firms – especially banks and check-cashing institutions – may want to study the notice in greater detail to familiarize themselves with red flags for construction industry tax evasion and workers’ compensation fraud. 

To ensure they remain abreast of FinCEN’s most current guidance and requirements, firms can sign up for updates from the regulator.

The notice asks firms to report current information on payroll fraud-related activity to their local tax authorities or the closest IRS CI field office. For reports of information related to workers’ compensation fraud, wire fraud, or labor exploitation, contact Homeland Security Investigations at 1-866-347-2423.

Detect, Deter & Defend: The Importance of AI for Effective Fraud Detection

Consult with experts on how AI algorithms can adapt, update and evolve to keep up with fraudsters, uncovering hidden activity and patterns.

Register for the Webinar

Originally published 24 August 2023, updated 25 August 2023

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

Copyright © 2023 IVXS UK Limited (trading as ComplyAdvantage).