Painting a Bridge to Nowhere

Tax Evasion and Money Laundering in Maryland


By Colin May, M.S., CFE;Mark F. Zimbelman, Ph.D., CPA

 

colin-may-50x50.jpg  mark-50x50.jpg   Starting Out  

 

 

Athanasios Reglas built a successful bridge painting company in Maryland, but his penchant for the finer things in life created pressure that led him to forgo paying federal income taxes. In this column, Colin May examines the Reglas case and discusses lessons for those who might review the financials of closely held family businesses like Reglas’ company. Also, this case is a primer for budding fraud examiners, accountants and auditors who want to find red flags for cases involving shell companies and tax evasion. 

On Aug. 30, 2007, Athanasios Reglas waited in a Baltimore courtroom for U.S. District Court Judge Frederick Motz to pass sentence on crimes of tax evasion and intentionally structuring a financial transaction to avoid federal tax reporting requirements.  

Just a few months earlier, on March 23, 2007, Reglas pleaded guilty to these federal crimes. According to court filings, Reglas, a successful painting contractor with both the State of Maryland for its highway projects and the U.S. Department of Transportation, orchestrated an elaborate scheme beginning in 1999 to defraud the U.S. tax system. He created two fictitious companies, C&T Containment Company and Harbor Contracting and opened bank accounts at the First National Bank of Maryland, among others. Reglas opened the accounts using checks drawn from his Reglas Painting Company business account.  

In one instance, he deposited money into the C&T account with the notation “Sub-Contract P-29A-98” for $226,500. According to the court’s statement of facts, “C&T Containment Company was a ‘shell company’ that never applied for an employer identification number from the IRS, never filed a tax return, nor operated as an on-going business, especially not as a subcontractor for the defendant’s company.” 

Reglas would write checks drawn on the C&T account and deposit them into his personal account. He did this 14 times in three years totaling more than $150,000. The prosecution showed that Reglas used his knowledge of the banking system to ensure that many of the checks were less than $9,000 to avoid the currency transaction reporting requirements, which are mandated by the Bank Secrecy Act. Often he would exchange these checks for cash.  

Special Agent Jeffrey Hostelley, a former IRS Revenue Agent, wrote in his affidavit in support of a search warrant that “money remaining in the account (approximately $69,500) was used by Reglas to have work done on his [primary] residence.” Hostelley cites an example from July 1999 in which Reglas wrote check number 1004 to “Bay Pile” for “pier work.” Apparently, this check was written for work on Reglas’ Baltimore County, Md., residence, which is located against the beautiful Back River and has a pier into the river. He also wrote checks for nearly $16,000 for stone work at the house. 

Hostelley also wrote, “it is also very probable … that the payment to C&T Containment (was) deducted as Cost of Goods Sold” from Reglas Painting Company’s gross receipts, in violation of the Internal Revenue Code. It’s illegal to falsify deductions to make them appear as legitimate business deductions when they are for personal consumption or benefit. 

Reglas also funneled funds through another straw company, Harbor Contracting, to pay for a lavish vacation house in Ocean City, Md., without paying taxes for it. He had purchased the house, situated on 7,500 square feet of ocean inlet property, in 2002 for $400,000. But Reglas had used $300,000 from a money market account owned by his company at Wachovia Bank and another $110,000 from “Harbor Contracting” to purchase the house, which he promptly expanded and remodeled. 

 

 

 

 

 


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