Monday, March 13, 2017

Taxpayer with Israeli Bank Accounts Sentenced to 24 Months (3/13/17; 3/18/17)

DOJ Tax announced here the sentencing of Masud Sarshar.  (I had previously posted on his information and plea in an earlier blog entry Another Plea to Offshore Account Tax Crimes (Federal Tax Crimes Blog 8/1/16), here.)  The key information from the current news release regarding the sentencing is:
A Los Angeles, California businessman was sentenced to 24 months in prison today for hiding more than $23.5 million in offshore bank accounts * * * * 
According to court documents, Masud Sarshar, a U.S. citizen, maintained several undeclared bank accounts at Bank Leumi and two other Israeli banks, both in his name and in the names of entities that he created. Sarshar owned and operated Apparel Limited Inc., a business that designed, manufactured and sold clothing and other apparel. For decades, with the assistance of at least two relationship managers from Bank Leumi and a second Israeli bank (Israeli Bank A), Sarshar hid tens of millions of dollars in assets in these accounts in an effort to conceal income and obstruct the Internal Revenue Service (IRS). Between 2006 and 2009, Sarshar diverted more than $21 million in untaxed gross business income to those undeclared accounts and earned more than $2.5 million in interest income from the funds. Sarshar reported none of this income on his 2006 through 2012 individual and corporate tax returns. He also filed false Reports of Foreign Bank and Financial Accounts, commonly known as FBARs, with the U.S. Department of Treasury on which he omitted his ownership and control of these offshore accounts. 
* * * * 
Sarshar’s relationship managers at Israeli Bank A (RM1) and Bank Leumi (RM2) visited him frequently in Los Angeles. At Sarshar’s request, neither bank sent him his account statements by mail. Instead, RM1 and RM2 provided Sarshar with his account information in person. RM2 concealed Sarshar’s account statements on a USB drive hidden in a necklace that she wore when she visited Sarshar in the United States. Sarshar’s meetings with RM1 sometimes occurred in Sarshar’s car. RM1 and RM2 used their visits to offer Sarshar other bank products, including “back-to-back” loans. Through back-to-back loans, which Bank Leumi made to Sarshar through its branch in the United States and which Sarshar collateralized with funds from his account at Israeli Bank A, Sarshar was able to bring back to the United States approximately $19 million of his assets without creating a paper trail or otherwise disclosing the existence of the offshore accounts to U.S. authorities. At the direction of RM1 and RM2, Sarshar also obtained Israeli and Iranian passports in an effort to avoid being flagged as a U.S. citizen by the banks’ compliance departments. The banks still flagged Sarshar as a U.S. citizen after Sarshar received these two passports, so RM1 and RM2 advised him to transfer his remaining funds from Israeli Bank A to Israeli Bank B, which Sarshar did in late 2011. In addition, with the help of someone identified as Individual 1, Sarshar transferred approximately $5.8 million from his Bank Leumi accounts to an account at Hong Kong Bank A, which Individual 1 then helped transfer to Sarshar in the United States, disguising it as a loan to Apparel Limited. 
 In addition to the term of prison imposed, Sarshar was ordered to serve three years of supervised release and to pay more than $8.3 million in restitution to the IRS, plus interest and penalties. Sarshar also agreed to pay an FBAR penalty of more than $18.2 million for failing to report his Israeli bank accounts.
Addendum 3/18/17 6:00pm

As of today, the only documents that re on the pacer site were filed before the sentencing.  The key filings are:

  • Plea Agreement, here.
  • U.S. Sentencing Memo, here,
  • Sarshar Sentencing Memo, here.
  • Sarshare Sentencing Letters, here.

I offer these comments from the linked documents.

The Plea Agreement:

1.  The plea agreement is a FRCrP Rule 11(c)(1)(C) plea agreement.  FRCrP 11 is here.  The Rule 11(c)(1)(C) agreement is one that "a specific sentence or sentencing range is the appropriate disposition of the case, or that a particular provision of the Sentencing Guidelines, or policy statement, or sentencing factor does or does not apply (such a recommendation or request binds the court once the court accepts the plea agreement)."  The agreed upon sentence is based on a Total Offense Level of 23 (consisting of Base Offense Level 24, Sophisticated means +2, and Acceptance of Responsibility -3).   Assuming that Sarshar continues his cooperation, the Government will file a 5K1.1 for downward departure requesting a 6 level departure bring the Total Offense Level to 17.  With these adjustments, "an appropriate disposition of this case is [includes] a sentence of: 24 months' imprisonment (the low end of level 17).

2. The plea agreement stipulates $8,374,234 for restitution for "tax due and owing" -- criminal tax jargon for the unpaid evaded tax.

3.  The plea agreement stipulates that the 75% civil fraud penalty applies to the "understatements of tax liability for tax years 2006, 2007, 2008, 2009, 2011 and 2012."  I am not sure whether the based to which that civil fraud penalty rate applies is the same as the restitution amounts for the years.  At least in theory, the base could be more is the restitution amounts are net of some previous partial payments.

4.  The IRS is permitted to assess and collect additional tax liabilities not included above for the same years.  There is further agreement that the "tax loss determined for criminal purposes is not binding for civil purposes and is exclusive of civil penalties and interest."

5.  The FBAR penalty is unquantified, but shall be "fifty percent * * * for the one year with the
highest aggregate balance in all of the accounts for calendar years 2009 through 2012.

6.  The statement of facts states that Sarshar did not report the key bank accounts on the FBARs he filed.

US Sentencing Memo:

1.  The FBAR penalty is $18,242,547.65 pursuant to agreement between the parties after the plea agreement.

2.  Further explanation of the 5K1.1 departure is provided.  The following is that portion of the memo:
The defendant fully disclosed his dealings with RM 1 from Israeli Bank A and RM 2 at Bank Leumi. For instance, the defendant explained that RM 2 brought his foreign bank records into the United States on a USB necklace to avoid detection at Customs. In addition, the defendant explained the lengths in which Israeli Bank A went to keep him as a customer, when he contemplated transferring all of his funds to Bank Leumi. Specifically, Israeli Bank A provided a standby letter of credit to Bank Leumi to fully collateralize the back-to-back loan that the defendant received in order to keep him as a customer. 
* * * *\ 
The defendant provided substantial evidence that has allowed the government to move other investigations forward. The defendant’s cooperation with, and substantial assistance to, law  enforcement should be encouraged and recognized for its value. The timeliness of defendant's cooperation is also a factor that is properly considered with respect to the government's recommendation as to the extent of a  departure pursuant to § 5K1.1(a)(5). Accordingly, and consistent with the plea accepted by the Court pursuant to Rule 11(c)(1)(C) the government hereby respectfully recommends a 6-level departure and a resulting offense level of 17. Based on these factors, the defendant and the Government agreed to a sentence of 24 months’ imprisonment.
3.  Sarshar's lawyers masterfully tell his history believed to be pertinent to sentencing, reciting history and quotes from the letters to the sentencing judge.

4.  Sarshar's lawyers present a spreadsheet of sentences for offshore accounts (Exhibit A), mentioning the usual examples of lenient sentences (including Ty Warner of Beanie Baby fame (no incarceration) and Dan Horsky (7 months)).  The lawyers then state:
C. Reasons for the Light Sentences Imposed in Secret Foreign Bank Account Cases 
This repeated, radical departure from the Guidelines recommended sentences is likely the result of factors, which are present in every case: \ 
1. The massive FBAR penalty insisted on by the government in its plea deals results in a counterbalancing reduction in jail time. 
Although courts have not found that a 50% FBAR penalty on the balance in an unreported foreign bank account—charged regardless whether the funds contain untaxable or taxable funds and whether they were earned legally or illegally—constitutes a punishment for double-jeopardy purposes, the discrepancy between the penalty and the harm caused weighs on courts when sentencing FBAR defendants.  
Please look on Exhibit A at the FBAR penalty data. These civil FBAR penalties dwarf penalties imposed in other tax cases, and other fraud crimes. Nothing in the criminal law mandates imposing this civil penalty in a criminal case. Without the plea agreement, the prosecutors could not impose the FBAR penalty in this criminal case. Many courts apparently have the sentiment that the FBAR penalty alone is enough punishment for the non-disclosure, and have sentenced so. 
2. A Guidelines sentence would create disparity in the nationwide sentencing treatment of similar secret foreign bank account holders. 
We acknowledge this argument has a certain self-fulfilling prophesy to it. So what started this trend? We direct your attention to case number 40 on Exhibit A:  California case. The defendant in that criminal tax case paid $52 million in back taxes, penalties, and interest relating to undeclared foreign bank accounts aggregating $200 million. The defendant paid an FBAR penalty of zero. The defendant and the government stipulated to a no-tax-loss 7206(1) count based on defendant’s failure to check the box on Schedule B of his Form 1040, which asks whether the taxpayer has any interest in or signatory authority over foreign accounts.  
At sentencing the government argued for three years’ probation and the defendant argued for one year probation. The Court split the difference. Right after Olenicoff, we see the trend to low sentences in subsequent offshore criminal tax cases. The trend has held up through the present day. 
3. A Guidelines sentence would create disparity in the treatment of undisclosed foreign bank account holders processed under the OVDI and OVDP.  
Over 45,000 similarly situated taxpayers granted entry into “OVDI and OVDP” programs between 2009 and 2015, avoided prosecution altogether, and so avoided a felony criminal conviction, many for the same or far worse conduct. Logically, this pattern of non-custodial sentences results from the sentencing judges’ recognition of the disparity of treatment by the government between taxpayers denied entry into “OVDI and OVDP” programs and who are prosecuted and similarly situated taxpayers who received amnesty for the same conduct when the government allowed them to participate in the OVDI and OVDP. The difference between being prosecuted and allowed in to OVDI and OVDP was often a matter of luck. In one case in this office the distinction turned on whether the taxpayer applied to the government for the OVDP before going to lunch, when the IRS had not started his tax investigation, or after returning from lunch when, unknown to him, the investigation had officially begun. Absurdly, in the space of an hour, the taxpayer could go from solving his foreign bank problems with a civil case under the OVDP to having to accept a life-changing federal felony. Fortunately for the taxpayer, the request was made before lunch. 
4. A Guidelines sentence would create disparity in the local sentencing treatment of similar undisclosed foreign bank account holders. 
From what we can tell, this District has nine foreign-bank criminal cases sentenced.  Details are at Exhibit A.
Guidelines Range
Olenicoff, Igor
0-6 months
2 years probation
Sperling, Zvi
12-18 months
2 years probation
McCarthy, John
24-30 months
2 years probation
Kashfi, Guity
12-18 months
3 months incarceration
Iazlovsky, Alexei
30-37 months
time-served (estimated one month)
Francis, Michael C.
6-12 months
3 years probation; 6 months home detention
Cohen, Aaron
12-18 months
3 months incarceration
Ramifard, David
18-24 months
2 months incarceration
Hakimijoo, Monagem
12-18 months
6 months incarceration

This Judicial District follows the national trend to sentence well below Guidelines sentences in foreign bank criminal tax cases. Sentences of incarceration in secret foreign bank cases are rare, based on the harsh FBAR penalty imposed and courts continuing the trend of non-custodial sentences imposed by their predecessor courts. This case should be treated the same as others in this district and throughout the United States. The below Guidelines Sentence in our case is appropriate, even without the 5K1.1 adjustments.
Masud Sarshar now faces sentencing in Federal Court for the improper manner in which he concealed a portion of his income offshore during his years in business. He acknowledges this fact and has expressed his contrition for having broken the laws of his adopted nation. Nonetheless, based on interviews with those that know him best as well as the 36 highly complementary character reference letters received on his behalf, it is clear that his chastened individual has done a tremendous amount of good in the community over the past three decades. As part of his long-term commitment to Chabad, he has sponsored many dozens of charitable events and has made hundreds of deserving high school students, many of whom came from impoverished backgrounds, welcome in his home for holiday celebrations. Rabbi Boruch S. Cunin, the West Coast Director of Chabad, states with respect to Mr. Sarshar, “The long term impact of Mr. Sarshar’s generosity is everlasting and we will never be able to repay him for his kindness and compassion.” 
Mr. Sarshar has lost his business. He has suffered personal and professional humiliation and is in the process of paying very substantial restitution. His remorseful is unquestioned. Furthermore, Mr. Sarshar has a young son who needs his father to be present in his life. Pursuant to the Rule 11(c)(1)(C) binding plea agreement, the parties have stipulated to 24 month term of imprisonment. Based on the totality of the factors present in this case, it is submitted that such a sentence would be “sufficient, but not greater than necessary” to effectuate justice in this matter and satisfy the factors enumerated at 18 U.S.C. §3553(a), and is respectfully requested.
On the spreadsheet (Exhibit A), which is the type of spreadsheet I maintain, there are some columns for information I do not maintain.  That additional information is the docket number, 5K1 departure, the amount of the FBAR penalty (on my spreadsheet it is stated as a percentage of the high amount), a column titled Skim? (which is not meaningful to me), the defendant's attorney, and a notes column.

JAT Note:  When further documents are posted on Pacer, I may at to this.

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