Treasury Directs Banks to Report Payroll Schemes Tied to Undocumented Labor

WASHINGTON — The U.S. Department of the Treasury issued a formal advisory on June 5, 2026, directing banks and other financial institutions to increase their vigilance and reporting of transactions linked to payroll fraud schemes that employ undocumented workers. The directive, released by the Financial Crimes Enforcement Network (FinCEN), is part of a broader Trump administration effort to crack down on illegal immigration by targeting the financial mechanisms that support it. The advisory outlines 18 specific “red flags” for institutions to monitor and urges them to file Suspicious Activity Reports (SARs) with FinCEN when such patterns are detected. The guidance, which follows a May 19 executive order signed by President Trump, also encourages banks to submit tips directly to U.S. Immigration and Customs Enforcement (ICE), effectively deputizing the financial sector as a front line in identifying employers who exploit unauthorized labor and evade payroll taxes. For small and mid-sized business owners, this advisory signals a significant shift in compliance risk, extending well beyond their own payroll practices. Many legitimate companies in sectors like construction, hospitality, and logistics rely on third-party labor brokers or staffing agencies to manage their workforce. In our experience, these arrangements can create a dangerous blind spot. A business might pay a subcontractor for labor, believing everything is above board, while that subcontractor is actually a shell company designed to launder money and pay workers off the books. The Treasury’s new focus means that payments from a legitimate business to one of these fraudulent brokers could trigger a bank investigation that ensnares the primary contractor, leading to frozen accounts, audits, and potential legal liability. This is precisely the kind of complex exposure that requires diligent oversight. The perceived convenience of using an outside labor provider cannot come at the expense of rigorous due diligence. This is where robust tax preparation and compliance services are essential, not just for a company’s own filings but for vetting the legitimacy of its vendors and subcontractors. Ensuring every entity you pay has a valid operational history and proper tax standing is no longer just good practice; it is a critical defense against being implicated in a federal investigation. For business owners concerned about their potential exposure, C&S Finance Group LLC provides the expertise to navigate these requirements at csfinancegroup.com. According to the FinCEN advisory, these schemes typically begin when a labor broker establishes a shell company with a generic name like “XYZ Logistics” or “ABC Construction.” The broker then opens a business bank account, often using a foreign passport or an Individual Taxpayer Identification Number (ITIN), which is available to non-residents for tax filing purposes. Legitimate businesses then write checks to this shell company for purported services. The broker deposits these checks and quickly withdraws the funds as cash or issues dozens of small checks to pay workers under the table, bypassing payroll taxes, unemployment insurance, and workers' compensation obligations. Among the 18 red flags detailed in the advisory are several key indicators for banks to watch. These include a construction or staffing firm that receives substantial revenue but reports little to no payroll expenses; a company under two years old with no discernible online or physical presence; or an account associated with a self-described “laborer” using an ITIN that receives a high volume of checks from multiple companies, followed by rapid cash withdrawals or numerous small-value checks. The Treasury Department emphasized that these schemes create an unfair competitive advantage over legitimate U.S. businesses that comply with the law. “President Trump has done more than anyone in history to secure our nation’s borders. Part of that effort includes securing our financial system,” said Treasury Secretary Scott Bessent in a statement. “This Administration will not allow illegal aliens to abuse financial institutions to steal billions of dollars from hardworking American taxpayers.” The scale of the problem is substantial. According to FinCEN, financial institutions reported more than $2.5 billion in suspicious activity connected to payroll tax fraud schemes in 2025 alone. To illustrate the impact, the advisory cited a recent federal case where two Honduran nationals, Iris Villafranca and Osman Donaldo Zapata, were sentenced for running a scheme that cost the U.S. government more than $38 million in lost tax revenue. Their shell companies deposited approximately $89 million in checks from construction subcontractors to facilitate off-the-books cash payrolls. To streamline the new reporting initiative, FinCEN has instructed financial institutions to use the key term “FINANCIALINTEGRITY-2026-A002” in their SAR filings to specifically flag activity related to the advisory. This will allow federal authorities to more easily aggregate and analyze data on these schemes. While the directive increases pressure on banks, it stops short of a more aggressive measure that some in the financial industry had anticipated: a mandate to collect citizenship or immigration status information from all customers. As banks do not currently gather this data, the advisory instead focuses on transactional behavior as the basis for suspicion. Moving forward, businesses in labor-intensive industries should prepare for heightened scrutiny from their financial partners regarding payroll processing and payments to third-party contractors. Banks will be updating their anti-money laundering and fraud detection systems to incorporate the new red flags, likely resulting in more frequent inquiries about transaction patterns. The long-term impact of the advisory will hinge on the consistency of bank reporting and the enforcement capacity of federal agencies to act on the information received.