Hardship Fund for Swiss Bankers Affected by U.S. Swiss Bank Initiative (8/20/18)

Finews reports that "Several Swiss bank staff advocacy groups launched a «hardship fund» to help employees finding themselves in dire financial straits."  Claude Baumann, Financial Aid for Swiss Bankers (Finews.asia 8/16/18), here. 

Excerpts:

The fund will exist until all Swiss bank still on the hook with U.S. prosecutors have settled their respective criminal investigations: those include Basler Kantonalbank, Liechtensteinische Landesbank's Swiss arm which is being wound down, as well as privately-held Pictet and Rahn and Bodmer. 

The situation around HSBC's Swiss bank as well as Israeli firms Hapoalim and Mizrahi remains unclear. All «hardship cases» were accepted, Wyder said; the lobby has committed to supporting personal difficulties, not legal expenses.  

Personal Data Shipped 

Any current or former Swiss banking employees who have had their data sent to the U.S. as a result of a 2012 government decision to do so or the 2013 settlement can apply for emergency funding. Applicants who can show financial, personal, or familial hardship as a result of their names being handed over to U.S. officials are likely to get financial aid.
The funding isn't lavish: payments are capped at 10,000 Swiss francs ($10,300), but in cases of exceptional hardship, bankers can submit a second application. 

JAT Comment:  I don't know whether the fund accepts donations from U.S. taxpayers who feel empathy for the Swiss Bankers.  I doubt, though, that a U.S. income tax deduction will be available for contributions.

District Court Opinion Over Parties' Sparring About Summons Enforcement for Foreign Account Records (8/18/18)

In United States v. Santoso, 2018 U.S. Dist. LEXIS 136889 (D. Md. 2018), here, the IRS issued one or more summonses to a taxpayer who, it seems, received large sums of money from overseas, "allegedly as 'gifts,' from members of her famously wealthy family in Indonesia."  Presumably, pursuant to summonses, "she has given sworn testimony to the IRS on three occasions for more than twenty hours and provided over a thousand documents."  But, the court reviewed the transcripts and concluded "that much of it is of little value because it is made up of speaking objections made by Santoso's lawyers, sparring between them and counsel for the IRS and the revenue agent, and assertions of the fifth amendment by Santoso."  So, over Santoso's objection that she did not have or control documents within the description in the summons, the IRS moved to enforce the summons.

In order to enforce the summons, the Government's initial burden is to meet the Powell requirements, well known to readers of this blog.  Those requirements are (i) a legitimate purpose, (ii) relevance to the IRS inquiry, (iii) information not already possessed by the IRS and (iv) compliance with the administrative steps.  The Government met that burden.

But, a witness cannot produce documents she does not possess or control.  So, after the Government meets the Powell requirements, the witness then must credibly show lack of ability to comply because of lack of possession or control.  The Court held that a hearing must be held as to whether Santos "made more than "a pro forma" effort to obtain records that she does not actually possess, or made more than a cursory search for them."

The Court then notes the dearth of authority on precisely what Santos must do to meet her burden.  The Government asserted (fn. 5) that her diligent efforts "should include (without limitation):

(1) Contacting the foreign financial institutions from which she received millions of dollars in wire transfers to determine whether she possessed a relevant legal interest in the originating or other bank accounts. See Resp.' Mot. Quash, ECF No. 19 at *5 (admitting that "the wire transfers originated from entities located in Singapore, Indonesia, or Hong Kong");
(2) Ascertaining whether she received and retained an interest in any assets of her mother's estate and, as a consequence, retains possession and control of related records. See Mot. to Quash, ECF No. 19-1 at *6 (December 6, 2017 letter from Respondent's counsel stating that Respondent's sister "was left with the responsibility of administering and managing [Respondent's mother's] estate after her death.");
(3) Taking additional steps to determine whether she owns stock in a foreign company, such as Sampoerna Tobacco, after Respondent's family conspicuously avoided answering Respondent's initial inquiry regarding such ownership. Compare Resp.' Mot. Quash, Ex. 1B, ECF No. 19-1 at *8 (December 6, 2017 letter from Respondent's counsel to counsel for Respondent's family, asking six numbered questions, including whether family was "aware of the existence of any records that show that Sharon Santoso owns foreign stock (e.g. Wismilak or Samporena)?" with id. at *10 (January 2, 2018 response from Blank Rome attorneys answering only five of Respondent's numbered questions, and failing to address or acknowledge the question concerning stock ownership); and
(4) Taking all other reasonable steps to (A) identify potential sources of summonsed records; (B) obtain information from those sources (including, if necessary, pursuing rights under local law); and (C) use newly discovered information, if any, to identify additional sources of summonsed records.
Pet.'s Resp. to Resp't's Request to Stay 2. The IRS also requested that Ms. Santoso provide an update on the steps she has taken to obtain the documents in question. Because it is uncertain what is required, I have ordered the parties to brief whether or not Ms. Santoso must update the IRS on the steps she has taken before the upcoming hearing.

The Court said, however, "it is far from clear to me that there is authority that she must do that much."

The Manafort Trial - Judging the Judge's Conduct (8/17/18)

While there have been any number of pundits pontificating on the Manafort trial, I have not offered those pundits pontifications because I am not sure whether they really contribute much to the readers of this blog.  I do, however, offer this one by Nancy Gertner (Wikipedia here), who has been a private practitioner and federal judge and is now Harvard Law School professor.  She is quite accomplished.  And, she is well known to students of tax procedure for a leading case -- United States v. Gertner, 65 F.3d 963 (1st Cir. 1995), here -- I had tax procedure students read.  In that case, the IRS attempted to end-run the requirements for a John Doe Summons procedure by issuing a regular summons to her law firm.  I provide a discussion of that case at the end of this blog.

I first offer her WAPO Opinion piece:  The extraordinary bias of the judge in the Manafort trial (WAPO 8/16/18), here.

Key excerpts:

The performance of U.S. District Court Judge T.S. Ellis III in the trial of Paul Manafort on bank fraud and tax evasion charges has been decidedly unusual. 

During the trial, Ellis intervened regularly, and mainly against one side: the prosecution. The judge's interruptions occurred in the presence of the jury and on matters of substance, not courtroom conduct. He disparaged the prosecution's evidence, misstated its legal theories, even implied that prosecutors had disobeyed his orders when they had not. 

Under the Code of Conduct for U.S. judges, a judge is supposed to be fair and impartial, as well as "patient, dignified, respectful and courteous" to those in his courtroom. The rule's concern is as much about the appearance of justice as its reality. If the judge violates that rule and a defendant is convicted, there may be a trial remedy — an appeal. 

But there will be no appeal available to address Ellis's anti-prosecution bias if Manafort is acquitted by the jurors, who began deliberating on Thursday. The prohibition against double jeopardy precludes it. And if President Trump's former campaign chairman is convicted despite Ellis's interventions, the judge's hostility toward the prosecution will have been irrelevant.

Comments on Manafort Jury Day 1 Deliberation Questions (8/17/18)

I thought I would offer some quick additional comments on the four questions the jury asked after its first day of deliberation in the Manafort trial.  I will take the questions and Judge Ellis' answers as reported by WAPO in this article:  Manafort jury enters second day of deliberations (WAPO 8/17/18 10:49am), here, and will offer my comment after each question and answer:

First, jurors asked if someone was required to file a form called an FBAR — which is required of people with foreign bank accounts containing more than $10,000 — if they owned less than 50 percent of such an account and did not have signature authority but did have the ability to direct disbursement. At trial, Manafort’s lawyers suggested their client might have believed he did not have to file such forms, because the companies in question were set up under his consulting firm. After 2011, he shared ownership of the firm equally with his wife. 

In response, the judge read to them again the legal instructions he provided on that point Wednesday. He told the jury that along with the requirement for people who own more than 50 percent of a company with foreign bank accounts, a person must file FBARs if he “controls the disposition of money, funds, or other assets held in a financial account by direct communications.”

JAT Comments on First Question:  Although I don't have the specific instructions as given by Judge Ellis, the law is clear that the Government has to prove that Manafort actually knew of the FBAR obligation and specifically intended to violate the obligation.  (Students and practitioners in this area will recognize this as the Cheek requirement made applicable to FBARs by Ratzlaf.) This is a specific knowledge and intent crime.  (Of course the required intent assumes that the defendant knew the obligation.)  Since a defendant rarely admits the specific knowledge and intent, the Government usually proves knowledge and intent by circumstantial evidence.  I don't know the state of the record on knowledge and intent.  Now, on the more specific question of whether there was an FBAR filing obligation in the first place, I presume that, if WAPO reports the judge's instructions correctly, the obligation arises in the disjunctive (i) if Manafort owned more than 50% which he apparently didn't or (ii) if Manafort had control over the account as the judge instructed.  While it seems clear that Manafort did have overall control over the account, the finer question under the instruction  is whether he could exercise that control by direct communications to the financial institution.  I don't know whether the Government proved that beyond a reasonable doubt.  (I have to say, however, that if there were no evidence sufficient to prove that type of control, the judge presumably would have directed a verdict in Manafort's favor, so I assume that there is some evidence of the required level of control.)  Also, I wonder whether the FBAR obligation can be avoided by having some minion (such as Gates) be the person with direct communication authority and what the state of the evidence and the instructions were on that issue.  In any event, if the jury does not get comfortable with the requirements for knowledge and intent, it would seem that the beyond a reasonable doubt instruction would require the jury to find not guilty on the FBAR count.

Second, jurors asked if the judge could define “shelf company” and the filing requirements related to income. Witnesses testified at Manafort’s trial that he used so-called shelf companies — companies previously created by a lawyer in Cyprus that could be used to control the bank accounts in question — in order to move Manafort’s money. To that question, the judge said the jury would have to rely on their memory of the evidence presented at trial.

JAT Comments on Second Question:  This seems like a fair question that a jury might ask.  The report of Judge Ellis' answer is curious to me.  It seems to me that the question, as reported by the WAPO article, is asking both a factual question -- a definition of "shelf company" -- and a legal question -- the relationship of a shelf company to income (presumably as the income must be reported on the return).  If I am right, the judge could and should have answered that legal question.  Perhaps the witnesses spoke to that issue, but usually in trials witnesses do not testify as to the law; nevertheless, in constructing the unreported income, the summary witness (presumably an IRS agent) would have to base the construction of income on the law as to whether the item is taxable income.  Since it is a question infused with a legal issue, I think the judge could have offered the jury some guidance -- such as that cash earned in the way the Government alleges would be taxable if the jury finds that the cash was received by the company (I am not sure that the judge would have to go into assignment of income, sham corporations or the subpart F reporting rules).  But that suggested answer depends upon the state of the record; I don't know the state of the record.  As with my concluding FBAR question comment, if the jury does not get comfortable that the law required Manafort to report the income, then it should acquit.  (Note, though, that if the law did not require him to report the income, Judge Ellis should have instructed a verdict.)

On the Manafort Tax, FBAR and Bank Fraud Trial - Complex White Collar Crimes Are About the Lie (8/16/18)

In the Manafort prosecution, each side claims that lies from the other side entitles it to win.  During the closing arguments yesterday, WAPO had a running commentary of the oral arguments and the lie word (or some variant) came up early and often on both sides.  See Rachel Weiner, Matt Zapotosky, Lynh Bui and Tom Jackman, Paul Manafort trial Day 12: Case heading to jury, deliberations start Thursday (WAPO 8/15/18), here.

Of course, the defendant who rests without putting on evidence has few defenses he can credibly argue. As I noted earlier, the defendant's lawyer can argue that the Government's evidence does not prove guilt beyond a reasonable doubt.  The defendant can make that argument credible if he can convince the jury that key government witness(es) lied.  So, not surprisingly, Manafort's lawyer, Kevin Downing (formerly of tax prosecution repute, Wikipedia here) makes that claim.

From the prosecution perspective, these complex financial crimes cases are about lies, which is why the prosecution hammered that claim home.  Juries may not understand complex financial, accounting and tax rules, but they do understand lies.

I have had a number of posts about "The Lie."  Those posts are collected here but the key ones for purposes of this discussion with appropriate excerpts (in chronological order) are:

• DOJ Tax's Further Attempts to Drum Up Business / Revenue (Federal Tax Crimes Blog 12/26/09), here.

4. Another good snippet reputedly from Downing consistent with his man on a righteous mission persona is: "I want to go after the privileged people who've had the benefits of this country and are cheating their taxes, get them in front of local juries and convict them." Lee A. Sheppard, The UBS Endgame, 2009 TNT 186-1 (9/29/2009). Even the crusty Lee Sheppard is enthralled by Himself, following up with: "It is reasonable to assume that the blasé Swiss and the complacent rich American tax cheats never counted on meeting up with a guy like Kevin Downing, senior trial counsel in the Justice Department's Tax Division, who has been leading the prosecutions against Swiss bank UBS AG. Downing, a former Marine." 

5. Jeff Neiman, an AUSA for SD Florida who is prominently involved in these prosecutions, said that he wanted to "avoid technical tax issues." Sheppard paraphrased: "Whether the defendant is lying, cheating, and stealing is what the argument to the jury boils down to for Neiman." See my earlier blogs on The Lie. This statement echoes the theme of the Enron prosecutions: "This is a simple case. It is not about accounting. It is about lies and choices." John C. Hueston, Behind the Scenes of the Enron Trial: Creating Decisive Moments, 44 Am. Crim. L. Rev. 197, 207 (2007). See also Stuart P. Green, Lying, Cheating, and Stealing: A Moral Theory of White Collar Crime 246-48 (2006)

And, in case you did not already know, that is the same Kevin Downing who is the lead defense lawyer.

NACDL Report on Diminishing Number of Criminal Trials and Corrosive Effects (8/15/18)

The National Association of Criminal Defense Lawyers recently released a report titled: THE TRIAL PENALTY:The Sixth Amendment Right to Trial on the Verge of Extinction and How to Save It (2018).  The report may be downloaded here.

The Executive Summary is (footnotes and blurbs omitted):

EXECUTIVE SUMMARY 

The Scope of the Problem 

In the words of John Adams, “[r]epresentative government and trial by jury are the heart and lungs of liberty. Without them we have no other fortification against being ridden like horses, fleeced like sheep, worked like cattle, and fed and clothed like swine and hounds.” President Adams’ colorful language reflected the strength of his view — a view shared by his  contemporaries — that the right to trial by jury protects our liberties every bit as much the right to cast votes for our representatives. 

To the modern ear, this view comes as a surprise. While Americans celebrate the notion of representative government just as much now as they did in the time of the Framers, few still think of trial by jury as a bulwark against the arbitrary and capricious use of government power. Why does this notion seem so surprising to the modern observer? What has become of the sense — so natural for Mr. Adams and his contemporaries — that trial by jury protects freedom? 

The answer, is simple: over the last fifty years, trial by jury has declined at an ever-increasing rate to the point that this institution now occurs in less than 3% of state and federal criminal cases. Trial by jury has been replaced by a “system of [guilty] pleas” which diminishes, to the point of obscurity, the role that the Framers envisioned for jury trials as the primary protection for individual liberties and the principal mechanism for public participation in the criminal justice system. 

Guilty pleas have replaced trials for a very simple reason: individuals who choose to exercise their Sixth Amendment right to trial face exponentially higher sentences if they invoke the right to trial and lose. Faced with this choice, individuals almost uniformly surrender the right to trial rather than insist on proof beyond a reasonable doubt, defense lawyers spend most of their time negotiating guilty pleas rather than ensuring that police and the government respect the boundaries of the law including the proof beyond a reasonable doubt standard, and judges dedicate their time to administering plea allocutions rather than evaluating the constitutional and legal aspects of the government’s case and police conduct. Equally important, the public rarely exercises the oversight function envisioned by the Framers and inherent in jury service. Further, the pressure to plead guilty, and plead early, is often accompanied by a requirement that accused persons waive many valuable rights, including the right to challenge unlawfully procured evidence and the right to appeal issues which have an impact not only in their cases but also for society at large.  

While scholars still debate the theoretical justifications for and against plea bargaining, neither the government nor the public have exhibited any significant resistance to its rise to dominance. This is not altogether surprising given the ostensible advantages of plea bargaining. Trials are lengthy, expensive processes that can leave victims waiting for years to obtain restitution and closure. Plea bargaining presents a seemingly reasonable alternative that promotes efficiency while providing defendants an opportunity for leniency and putting them on an early road to rehabilitation. Conventional wisdom understandably views this as a win/win solution, particularly because the Constitution affords defendants the right to choose to go to trial if they wish to do so. 

Inspired by the Manafort Trial, On the Beyond a Reasonable Doubt Standard (8/15/18; 8/17/18)

WAPO reports:  Rachel Weiner, Matt Zapotosky, Lynh Bui and Devlin Barrett, Jurors in Paul Manafort trial send judge four questions, including asking him to redefine reasonable doubt (WAPO 8/16/18 5:33pm), here.  I address all four questions in a subsequent blog:  Comments on Manafort Jury Day 1 Deliberation Questions (Federal Tax Crimes Blog 8/17/18), here.  Since I had already posted on the beyond a reasonable doubt question here, I will just leave that answer here and link it in the later blog:

The Beyond a reasonable doubt question and Judge Ellis' answer as reported in the WAPO article are:

Third, they asked if the judge could “redefine reasonable doubt.” Jurors sometimes struggle with what constitutes a reasonable doubt of someone’s guilt, versus an unreasonable doubt. The judge told them reasonable doubt “is a doubt based on reason,” but added: “The government is not required to prove guilt beyond all possible doubt.”  

Defense attorneys emphasized in their closing argument that it’s not enough to believe a defendant is “likely” guilty or even “highly likely” guilty, using a thermometer chart to make the point.

I offer as an addendum at the bottom of this blog a discussion of Beyond a Reasonable Doubt from my Federal Tax Crimes publication that I discontinued when I began working on the Tax Crimes Chapter in the Saltzman publication on Tax Procedure.  I think the discussion is still good, but without updated cases.

ORIGINAL POSTING IS BELOW EXCEPT FOR THE ADDENDUM AT THE BOTTOM:

I write today because of the Manafort case.  Yesterday, Manafort's attorneys did not put on evidence in defense and Manafort waived his right to testify.  Technically, the defense rested after the prosecution concluded its case.  The defense would say that they did elucidate evidence in Manafort's favor by cross examination of the prosecution's witnesses which, they will claim, produced some affirmative evidence in Manafort's favor and, in any event, they will claim, precludes the prosecution of meeting its burden to prove guilt beyond a reasonable doubt.

Addendum 2:24pm (EDT): WAPO has here a running report on the Manafort arguments as they progress.  Relevant to the beyond a reasonable doubt standard, the WAPO running report has this:

1:52 p.m.: Manafort attorney says defense put on no evidence because case wasn’t ‘beyond a reasonable doubt’ 

Defense attorney Richard Westling began his closing argument on behalf of Paul Manafort not with specific evidence but broad concepts — presumption of innocence, burden of proof and reasonable doubt. 

“You took a solemn oath” to abide by these legal precepts, he said. “Be steadfast.” 

One juror nodded as Westling emphasized the the fact that Manafort stands innocent. “If you’re thinking right now any of this evidence adds up to anything, you shouldn’t be,” Westling said. “Put it out of your mind.” 

He went on to explain that the burden of proof is on the government, and that the defense “made a decision not to put on evidence because… we believe the government has not met that burden.” 

The burden the prosecutors have to overcome, he explained with a thermometer-like chart, is not that Manafort “possibly,” “probably,” “likely” or “even highly likely guilty,” but that he is “guilty beyond a reasonable doubt.”

I thought readers might appreciate some links to discussions of what proof beyond a reasonable doubt means and how it is explained to the jury.  I first offer some of the more significant discussions I have had on the issue in this blog.  These offerings are in reverse chronological order.

• Reasonable Doubt and Jury Nullification (Federal Tax Crimes Blog 12/30/14), here.
• Daugerdas Retrial Jury Instructions - Part 01 Reasonable Doubt (Federal Tax Crimes Blog 11/12/13), here.
• Proof Beyond a Reasonable Doubt - Ramblings (Federal Tax Crimes Blog 9/1/13), here.
• Article on Importance of Jury Instructions in White Collar, including Tax, Crime Cases (Federal Tax Crimes Blog 1/29/13), here.
• Reasonable Doubt and Mickey Mouse (Federal Tax Crimes Blog 3/6/12), here.
• Reasonable Doubt - What is It? (Federal Tax Crimes Blog 10/16/09), here.

Zürcher Kantonalbank (ZKB) Reaches DPA for Conspiracy Charge; Two ZKB Employees Plead to Misdemeanor Conspiracy (8/14/18)

USAO SDNY announced here the deferred prosecution agreement (DPA) with Zürcher Kantonalbank, (ZKB) along with guilty pleas for two of its bankers.

Key points from the press release and linked documents:

1. "ZKB is charged with conspiring to help U.S. taxpayer-clients evade their U.S. tax obligations, file false federal tax returns, and otherwise hide hundreds of millions of dollars in offshore bank accounts held at ZKB."  "The criminal charge against ZKB is contained in an Information (the “Information”) alleging one count of conspiracy to willfully and knowingly (1) defraud the IRS, (2) file false federal income tax returns, and (3) evade federal income taxes."  Some of the conduct forming the basis for the charge is set forth in the press release and linked document.

2.  Under the DPA, "ZKB admitted to its unlawful conduct in assisting U.S. taxpayer-clients in violating their legal duties." "If ZKB abides by all of the terms of the Agreement, the Government will defer prosecution on the Information for three years and then seek to dismiss the charges. "

3.  The DPA requires ZKB to pay a total of $98,533,560, broken down as follows (DPA par. 4):

Restitution $39,142,000
Forfeiture   $24,266,300
Penalty       $35,125,260

• Per DPA par. 5, the restitution is for lost U.S. tax.  ZKB will get no credit for tax, if any, otherwise paid by the U.S. taxpayers.
• Per DPA par. 6, forfeiture is "a substitute res for gross fees paid to ZKB by U.S. taxpayers with undeclared accounts at ZKB from January 1, 2002, through approximately December 31, 2013."
• Per DPA par. 9, the penalty amount is based on the facts and "the factors set forth in 18 U.S.C. § 3553(a) and 18 U.S.C. § 3572(a)."

4.  ZKB was given cooperation credit, but the credit " was reduced by the Government due to ZKB’s actions, as described in the Statement of Facts, in dissuading two indicted ZKB bankers from cooperating with U.S. authorities for years after their indictment."  That reduction in credit is describe as follows:

Indictment of ZKB Employees and ZKB’s Response to the Indictment 

Despite ZKB’s cooperation with the Government in this case, the Government views the actions of ZKB with respect to indicted bankers FELLMANN and REIST, described in the Statement of Facts, as inconsistent with a policy of full cooperation.  Those actions, accordingly, have reduced the amount of cooperation credit afforded by the Government to ZKB. 

In December 2012, three ZKB bankers – FELLMANN, REIST, and Otto Hüppi – were charged in the Southern District of New York with conspiracy to defraud the United States and the IRS for their role in ZKB’s offense.  Although ZKB retained independent U.S. counsel for the bankers, beginning in 2013 and continuing through 2015, ZKB’s in-house counsel and, at times, ZKB employees from the Human Resources department and other departments, regularly met with FELLMANN and REIST.  At those meetings, which were not attended by FELLMANN and REIST’s independent U.S. counsel, ZKB, among other things, made statements that caused FELLMANN and REIST to feel dissuaded from reaching out to the U.S. Attorney’s Office in order to explore the possibility of cooperating.  In addition, ZKB’s in-house counsel suggested to FELLMANN that he did not have any information of value to contribute to the U.S. Attorney’s Office’s ongoing investigation.  Furthermore, based on conversations with ZKB, FELLMANN and REIST felt that their continued employment at ZKB and ZKB’s ongoing payment of their legal fees would be threatened should they take steps that were viewed by ZKB as inconsistent with the bank’s own interests.  Due in part to these discussions with ZKB, FELLMANN and REIST did not seek to cooperate with the investigation until the summer of 2015, approximately two and a half years after being indicted.

Mizrahi-Tefahot Bank Rejects DOJ $342 Million Settlement Offer for NPA (8/10/18)

A reader linked to this article:  Shoshanna Solomon, Mizrahi-Tefahot Bank rejects $342 million US fine to settle tax evasion probe (The Times of Israel 8/8/18), here.

I hesitate to do excerpts because the article is short and has good information throughout.  Still, here are some excerpts as a teaser:

In a filing to the Tel Aviv Stock Exchange late Tuesday, the bank said that it received a notice from the US Justice Department that it is willing to close the investigation if the bank agrees to pay a fine of $342 million. 

The letter from the representative of the US Justice Department stated the amount without any indication of how it was reached, the bank said in the filing. The letter also included a draft factual document that could be used as a basis for a Deferred Prosecution Agreement, with the aim of negotiating the terms of an agreement, the filing said. 

The board of directors instructed the bank’s attorneys to inform the US authorities that they reject the offer, saying that any amount to be paid to the US regulators should be “significantly lower” than the amount suggested. To date, the bank has set aside some $45 million to cover a potential settlement with the US authorities. 

* * * * 

US authorities targeted three Israeli banks with investigations regarding tax evasion in the US by customers. In 2014, Bank Leumi Le-Israel Ltd. agreed to pay some $400 million to US regulators to settle a criminal probe after admitting it helped US taxpayers hide assets. Investigations by US regulators into Bank Hapoalim Ltd. and Bank Mizrahi-Tefahot Ltd. are ongoing. 

As of February, Israel’s Bank Hapoalim had set aside some $343 million for the investigation, warning that the overall exposure could be even higher.

Peter Hardy Post on Reckless Conduct for BSA Civil Penalties (8/2/18)

Peter Hardy, here, has the great posting:  The BSA Civil Penalty Regime: Reckless Conduct Can Produce “Willful” Penalties (Money Laundering Watch 8/1/18), here.  Peter discusses the developments in the FBAR civil willfulness penalty context (often discussed on this blog) but says

[T]he point of this post is that the case law now being made in the FBAR and offshore account context will have direct application to more traditional Anti-Money Laundering (“AML”)/BSA enforcement actions, because the civil penalty statute being interpreted in the FBAR cases is the same provision which applies to claimed failures to maintain an adequate AML program and other violations of the BSA.  Thus, the target audience of this post is not people involved in undisclosed offshore bank account cases, but rather people involved in day-to-day AML compliance for financial institutions, who may not realize that some missteps may be branded as “willful” and entail very serious monetary penalties, even if they were done without actual knowledge.  This may be news to some, and it underscores in particular the risks presented by one the topics that this blog frequently has discussed: the potential AML liability of individuals.

Peter has good discussions of the Markus and Norman cases I have discussed on the blog.   Peter concludes:

When pursuing a civil or criminal enforcement action involving any kind of statute with a relatively low mental statement requirement (the classic examples are statutes involving public safety, such as regulations pertaining to the U.S. Food and Drug Administration), the government often will argue that, regardless of the thin statutory requirements, the facts at hand demonstrate actual knowledge and some sort of nefarious conduct. That may well be true in particular cases, and it should give comfort to AML professionals to the extent that it is true, because it suggests that the government will not pursue “willful” penalties unless the actual facts are sufficiently egregious and such a penalty is deserved (in the view of the government).  Nonetheless, AML requirements sometimes can be as amorphous as they are sprawling. As the FBAR cases reflect, the BSA presents the real-world possibility that severe civil penalties can be imposed in the absence of actual subjective knowledge.  This is a potentially sobering reminder to financial institutions and their Boards, executives, compliance officers and shareholders.

I do note that I link Peter's  Money Laundering Watch Blog on the right side of this blog, so readers having an interest can access it by clicking there or creating their own bookmark for his blog.

Court of Federal Claims Rejects Colliot; FBAR Willful Penalty Not Limited to $100,000 (8/1/18)

In Norman v. United States (Ct. Fed. Cl. Dkt 15-872T, Order dated 7/31/18), here, the Court held Norman liable for the FBAR willful penalty.  Basically, on the merits, the Court found that Norman was willful and deceitful about her willfulness.

Perhaps more importantly for most readers of this blog, the Court rejects Colliot's holding that the FBAR willful penalty is limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty.  Basically, the Court held that the statute trumps the regulation. 

The opinion is very short (9 pages, with the discussion relevant to the Colliot issue being at page 7-9).

The conclusion for the whole opinion is (p. 9):

The Court finds that Ms. Norman’s repeated and admitted lack of care in (1) filing inaccurate official tax documents without any review, (2) signing foreign banking documents without any review, and (3) later providing false sworn statements both to the IRS and to this Court, both with and without review, reaches the standard of reckless disregard for the law required to constitute a willful violation of § 5314. Contrary to Ms. Norman’s new argument in light of Colliot, Congress clearly raised the maximum civil money penalty in § 5321 to the greater of $100,000.00 or one half of the balance of the account. As such, the Court holds that Ms. Norman willfully violated U.S.C. § 5314, and that the assessment of the civil money penalty under 31 U.S.C. § 5321 in the amount of 50 percent of her account’s balance was appropriate. The Court therefore dismisses the case, and the Clerk is directed to enter judgment accordingly.

On the issue of whether the regulation caps the FBAR willful penalty after the statute's amendment, my prior blogs are (reverse chronological order):

• Another District Court Limits IRS Authority for FBAR Willful Penalty to $100,000 (Federal Tax Crimes Blog 7/18/18), here (on the Wadhan case reaching same result as Colliot)
• Update on Colliot Limitation on Discretion for FBAR Willful Penalty (Federal Tax Crimes Blog 7/16/18; 7/18/18), here.
• District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (Federal Tax Crimes Blog 5/19/18), here.

DOJ Tax Announces Supplemental Agreement with Category 2 Bank, Bank Lombard & Odier & Co. (7/31/18)

DOJ Tax announced here a supplemental nonprosecution agreement ("NPA") with Bank Lombard Odier & Co., Ltd., of Zurich Switzerland.  The bank previously obtained an NPA with an agreement to pay $99.809 million.  See Two More Banks Obtain NPAs under DOJ Swiss Bank Program (Federal Tax Crimes 12/31/15), here.  The supplemental agreement requires the bank to pay an additional $5.3 million.

The key excerpt explaining the supplemental agreement is:

Every bank that signed a non-prosecution agreement in the Swiss Bank Program had represented that it had disclosed all of its U.S.-related accounts that were open at each bank between August 1, 2008, and December 31, 2014.  Each bank also represented that it would, during the term of the non-prosecution agreement, continue to disclose all material information relating to its U.S.-related accounts.  In reaching today’s agreement, Lombard Odier acknowledges that there were certain additional U.S.-related accounts that it knew about, or should have known about, but that were not disclosed to the Department at the time of the signing of the non-prosecution agreement.  Lombard Odier provided early self-disclosure of their unreported U.S.-related accounts and has fully cooperated with the Department. 

Times of Israel Article on the Current State of Israeli Banks and U.S. Tax Evasion (7/31/18)

Simona Weinglass, Why are Israeli banks asking customers where their money comes from? (Times of Israel 7/21/18), here.  Excerpts:

Israelis with business interests abroad report being summoned to their local bank, being asked to explain how they earned their money, and, if unable to provide satisfactory answers, having their bank account closed. 

* * * * 

The reason for these changes, Supervisor of Banks Hedva Ber told a conference in December, is that three of Israel’s major banks have come under criminal investigation over the past seven years by the US Justice Department for allegedly helping thousands of US citizens launder money and evade taxes — a fairly devastating state of affairs that has garnered remarkably little public attention. 

* * * * 

Bank Leumi admitted wrongdoing in 2014, agreeing with the US Justice Department that it had conspired to aid and assist a minimum of 1,500 US taxpayers to prepare and present false tax returns to the US Internal Revenue Service by hiding income and assets in offshore bank accounts in Israel and elsewhere around the world. According to a US Justice Department press release, Bank Leumi’s “criminal activity” spanned over a decade from at least 2000 to 2011, during which time Leumi also provided “hold mail” service for approximately 2,450 US accounts whereby bank statements were held abroad and not sent sent to the customer’s address in the United States. To avoid prosecution, Bank Leumi agreed to pay $400 million in fines to the US and New York State governments. 

Meanewhile, Bank Hapoalim and Bank Mizrahi are still being investigated by the Department of Justice and the numbers of customers involved and size of the fines are expected to be on a similar scale. 

* * * * 

‘Switzerland for Jews’ 

Israeli banks for many years provided essentially the same services as Swiss banks did, minus the banking secrecy laws. 

“Israel has been Switzerland for Jews,” Ronen Bar-El, an economics professor at Israel’s Open University, told The Times of Israel. 

Shuster said that when the investigation is over, the Department of Justice will issue a press release that dryly says something like “the bank agrees that it has violated these statutes of US law and it is agreeing to pay a fine of X million dollars.” 

There will be little drama and it is very unlikely that any of the bank executives will face jail time. Nevertheless, the reason for Israeli banks’ extra caution in vetting customers’ sources of income is so as not to further anger the Department of Justice and to keep the penalty they have to pay to a minimum. 

* * * * 

As of this writing, the US government probe has extended to about 100 banks (most of them Swiss) and about 50 individuals. More than 50,000 people have come forward though the voluntary disclosure program and the IRS has collected more than $11 billion to date, said Shuster.

Another Swiss Asset and Financial Manager Reaches NPA with DOJ Tax (7/28/18)

DOJ Tax issued a press release, here, yesterday that Mirelis Holding, SA (Mirelis), a Swiss Asset and Financial Manager, had reached an NPA regarding its assistance for U.S. taxpayers.  Mirelis will pay an aggregate amount of $10.245 million broken down as follows:

Restitution:  $3.245 million
Disgorgement: $5 million
Other penalties: $2 million.

The press release is lengthy in giving many details.  Much of the typical pattern of Swiss Bank servicing of U.S. taxpayers hiding their income and assets.  The press release links the relevant documents, principally the NPA and Statement of Facts (identified as Download Mirelies (sic) NPA).

The following is an interesting disclosure:

Mirelis submitted a letter of intent to participate as a Category 2 bank in the Department’s Swiss Bank Program in December 2013.  Although it was ultimately determined that Mirelis was not eligible for the Swiss Bank Program due to its structure as both an asset management firm and a bank, Mirelis is required under today’s agreement to fully comply with the obligations imposed under the terms of that program.  Mirelis has fully cooperated with the Department of Justice in this investigation, including undertaking a separate and thorough review of the provision of independent portfolio and asset management services to U.S. taxpayer-clients with accounts maintained at third-party depository financial institutions and encouraging a significant number of its remaining non-compliant U.S. taxpayer-clients to participate, or provide proof of prior participation, in OVDP covering many of the U.S. Related Accounts maintained by Mirelis during the Applicable Period. 

Mirelis will be included on the IRS list of Foreign Financial Institutions or Facilitators, here,  (It was not on that list as of the posting of this blog entry.)  The press release says:

With today’s announcement of this non-prosecution agreement, noncompliant U.S. clients of Mirelis must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.  The IRS recently announced that the Offshore Voluntary Disclosure Program will close on September 28, 2018.

$10 Million Fine in Tax Crimes Case Affirmed on Appeal (7/28/18)

In United States v. Zukerman, ___ F.3d ___, 2018 U.S. App. LEXIS 20890 (2d Cir. 7/27/18) (per curiam), here, the Second Circuit rejected Zukerman's claim that the fine imposed after he pled guilty to significant tax evasion and tax obstruction was unreasonable.  Zukerman had been sentenced to 70 months in prison and fined $10 million.  Only the fine was in issue on the appeal.  Based on the Sentencing Guidelines calculations, the indicated sentencing range was $25,000 to $250,000.  But, courts can vary from the Guidelines ranges.  The district court did so here.  The Court of Appeals affirmed.

The opinion is relatively short so I will not try address all of its  points here.  I recommend it as a good read for the procedural aspects of sentencing.  I do offer the following excerpts (cleaned up).

First, the district court put significant weight on the nature and circumstances of Zukerman's crimes pursuant to 18 U.S.C. § 3553(a)(1), explaining that tax crimes represent an especially damaging category of criminal offenses, which strike at the foundation of a functioning government. Enjoyment of the privileges of residence in the state and the attendant right to invoke the protection of its laws are inseparable from responsibility for sharing the costs of government. Taxes are what we pay for civilized society. Accordingly, the district court expressed deserved opprobrium for Zukerman's calculated scheme to defraud the government of tens of millions of dollars for the sole purpose of increasing his personal wealth, executed through efforts that spanned fifteen years and involved submitting more than 50 falsified tax forms for at least ten different individuals

[Note that, although I have cleaned up the above quote to exclude case citations, I left in the quotes from the cases; readers will no doubt recognized the quote about taxes being what we pay for a civilized society.  I omitted the case, but thought readers would like to have that case citations: Compania Gen. de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting).]

Zukerman counters that these factors do not support an upward variance from the recommended fine range because they were already addressed as part of his offense level under the Sentencing Guidelines. But the district court was not bound to conclude that the offense level adequately accounted for the complexity and scope of Zukerman's actions. To the contrary, the historic role of sentencing judges, which continues to be exercised, is to consider he judge's own sense of what is a fair and just sentence under all the circumstances. Moreover, a district court's decision to vary from the Guidelines may attract the greatest respect when the sentencing judge finds a particular case outside the heartland to which the Commission intends individual Guidelines to apply. In particular, the Guidelines related to tax offenses drastically vary as to the recommended sentence based simply on the amount of money involved, such that a district court may find that even after giving weight to the large or small financial impact, there is a wide variety of culpability amongst defendants and, as a result, impose different sentences. Thus sentences varying from the Guidelines in tax matters, if adequately explained, should be reviewed especially deferentially. We therefore accede to the finding that an above-Guidelines fine was necessary to reflect the complexity, scope, and extreme nature of Zukerman's criminal activity. Cf. Scott A. Schumacher, Sentencing in Tax Cases After Booker: Striking the Right Balance Between Uniformity and Discretion, 59 VILL. L. REV. 563, 594 (2014) (noting that the Guidelines provide only a two-point increase for a sophisticated means adjustment, which can be cancelled out by an acceptance of responsibility adjustment, making the defendant's culpability and the manner in which the tax loss was generated virtually irrelevant).

[Note that I did leave in the citation to Professor Schumacher's article,  here, to give him credit.  He is a co-author with Larry Campagna, Steve Johnson and me on our Tax Crimes book, here.]

2018 Townsend on Federal Tax Procedure Books Available on SSRN (7/27/18)

The 2018 editions of my Federal Tax Procedure Book (Student Edition and Practitioner Edition) are available on SSRN.  The SSRN links are available on my Federal Tax Procedure Blog page for the books:  2018 Federal Tax Procedure Book & Supplements (7/17/18). 

District Court Holds that Santander's Arguments to Avoid Penalty for Bullshit Tax Shelter (No Substance) Lack Substance (7/24/18)

In Santander Holdings USA, Inc. v. United States (D. Mass. Dkt. 09-11043-GAO Dkt Entry 344 7/17/18), here, Santander previously lost the merits of its bullshit tax shelter on appeal, with the Court of Appeals holding that the shelter lacked economic substance.  Santander Holdings USA, Inc. v. United States, 844 F.3d 15 (1st Cir. 2016), here, cert. denied sub nom. Santander Holdings USA, Inc., & Subsidiaries v. United States, 137 S. Ct. 2295 (2017).  See my discussion of the Court of Appeals decision, First Circuit, Reversing the District Court, Rejects Santander's Bullshit Tax Shelter (Federal Tax Crimes Blog 12/17/16), here.

Santander argued that, although its tax shelter lacked economic substance -- i.e., was bullshit -- it should be able to avoid the accuracy related penalty.  Well, basically, the district court held that that argument too lacked substance -- was bullshit.  The opinion is short and, I think, predictable, so I forego addressing it further.

However, the district court did include a quote from the Court of Appeals' decision that I had included in my prior write up but was in a larger quote so that I had not focused on it.  The district court did focus on it as follows.  This is the quote (cleaned up):

When a transaction is one designed to produce tax gains not real gains—such as when the challenged transaction has no prospect for pre-tax profit—then it is an act of tax evasion that, even if technically compliant, lies outside of the intent of the Tax Code and so lacks economic substance.

The district corut did not quote the whole paragraph from the Court of Appeals which includes "tax evasion" twice, so I offer the whole paragraph (cleaned up):

The economic substance doctrine is centered on discerning whether the challenged transaction objectively lies outside the plain intent of the relevant statutory regime. A transaction fails the economic substance test if, though it actually occurred and technically complied with the tax code, it was merely a device to avoid tax liability. Courts may disregard the form of transactions that have no business purpose or economic substance beyond tax evasion. In other words, when a transaction is one designed to produce tax gains not real gains -- such as when the challenged transaction has no prospect for pre-tax profit -- then it is an act of tax evasion that, even if technically compliant, lies outside of the intent of the Tax Code and so lacks economic substance.

Readers of this blog will recognize the term "tax evasion."  At least in this blog and in other authorities on criminal tax matters, tax evasion is a term of art.  Narrowly, it means the specific tax evasion crime in § 7201, but is often used to cover the panoply of tax crimes where tax was evaded (e.g., the Sentencing Guidelines require that for a tax loss as the first step in the sentencing calculation).  But, the term usually does connote conduct that is criminal.  See e.g., the Wikipedia entry for Tax Evasion, here.

Attorneys and Summonses -- Some Lessons (7/23/18)

In Presley v. United States, ___ F.3d. ___, 2018 U.S. App. LEXIS 19832 (11th Cir. 2018), here, the court rejected an attempt to duck an IRS summons to a bank.  The parties wishing to avoid the summons were "a lawyer, his law firm and associated parties."  Those parties, let's call them appellants, faced "formidable" odds because of United States v. Miller, 425 U.S. 435 (1976), and United States v. Powell, 379 U.S. 48 (1964).  (Not to mention that the lawyer apparently appeared for himself and the appellants on the appeal; and the court illustrated the long odds with a sports illustration from 1980 that seems more of a detour to tell us that the author is a sports fan than really needed for the opinion.)

Challenging IRS summonses always face daunting odds because of Powell.  The Court said on the merits (cleaned up):

For IRS summonses of bank records, the "gist" of the Fourth Amendment protection is that the disclosure sought "shall not be unreasonable." This baseline requirement emanates from the interest of all citizens "to be free from officious intermeddling." But an IRS summons is not unreasonable, provided the IRS has complied with the Powell requirements. In other words, when it comes to the IRS's issuance of a summons, compliance with the Powell factors satisfies the Fourth Amendment's reasonableness requirement. 

The summonses here satisfy that standard. In fact, as we have mentioned, Plaintiffs do not contest that the summonses satisfy each Powell factor. For example, Plaintiffs do not suggest that the files containing their clients' records are not relevant to the IRS's investigation and that the summonses are not narrowly tailored. By definition, the IRS is not engaged in a "fishing expedition" when it seeks information relevant to a legitimate investigation of a particular taxpayer. In such cases, the incidental effect on the privacy rights of unnamed taxpayers is justified by the IRS's interest in enforcing the tax laws. 

Nor do Plaintiffs contend that the summonses were really just a subterfuge so the IRS could investigate their clients or invade the attorney-client privilege.  If the district court finds in the enforcement proceeding that the IRS does not in fact intend to investigate the summoned party, or that some of the records requested are not relevant to a legitimate investigation of the summoned party, the IRS could not obtain all the information it sought unless it complied with § 7609(f) [John Doe Summons procedure]. We are likewise unable to discern any other reason why the summonses should not be enforced. Because the Powell factors define the reasonableness of the summonses under the Fourth Amendment and Plaintiffs do not contest that the summonses satisfy them, our inquiry should be complete.

The Court also rejected an attempt to invoke the United States v. Gertner, 65 F.3d 963 (1st Cir. 1995), although not mentioned in the opinion by name.  Basically, the claim, such as it was, that the Government was attempting to use the regular IRS administrative summons rather than the more appropriate John Doe Summons.  The problem with that argument, if it had been properly raised, was that the investigate parties were named in the summons and there were not unknown parties the IRS was investigating.