Wednesday, April 5, 2017

TIGTA Report on Civil Seizures for Structuring (4/5/17)

TIGTA has issued a report on civil forfeitures and seizures:  Criminal Investigation Enforced Structuring Laws Primarily Against Legal Source Funds and Compromised the Rights of Some Individuals and Businesses (Ref. 2017-30-025 3/20/17), here.

The highlights from the report are:
The Currency and Foreign Transactions Reporting Act of 1970, referred to as the Bank Secrecy Act, requires U.S. financial institutions to file reports of currency transactions exceeding $10,000. Title 31 of U.S. Code Section 5324(a) states that no person shall, for the purpose of evading the reporting requirements, cause or attempt to cause a U.S. financial institution to fail to file a report required or structure. Whoever violates the structuring law can be fined, imprisoned, or both. Any property involved in violation of this law may be seized and forfeited. 
In October 2014, a new policy was instituted by IRS Criminal Investigation (CI) that it would no longer pursue the seizure and forfeiture of funds related to legal source structuring. In the same month the policy changed, the New York Times reported that CI had been seizing funds in structuring investigations without filing a criminal complaint. Property owners were left to prove their innocence, and many gave up trying. This audit was initiated to evaluate the IRS’s use of seizures against property owners suspected of structuring transactions to avoid Bank Secrecy Act reporting requirements. 
Most of the seizures for structuring violations involved legal source funds from businesses. While current law does not require that the funds have an illegal source (e.g., money laundering or criminal activity other than alleged structuring), the purpose of CI’s civil forfeiture program is to interdict criminal enterprises. As a result, $17.1 million was seized and forfeited to the Government in 231 legal source cases. CI primarily relied on patterns of banking transactions to establish probable cause to seize assets for structuring violations. 
In most instances, interviews with the property owners were conducted after the seizure to determine the reason for the pattern of banking transactions and if the property owner had knowledge of the banking law and had intent to structure. CI procedures required agents to give subjects advice of rights in Title 26 cases (i.e., Internal Revenue Code) but not in Title 31 cases. In only five of the 229 interviews conducted, noncustodial statements of rights, such as the right to remain silent, were provided. For 54 investigations, the property owners provided realistic defenses or explanations, and for 43 of those cases, there was no evidence they were considered by CI. In 202 interviews, the property owners were not adequately informed of important information, such as the purpose of the interview, by CI during the interview. The outcomes for legal source cases lacked consistency. In 37 investigations, the Government appeared to have bargained nonprosecution to resolve the civil case.  
CI also needs to improve its process for identifying grand jury information. 
TIGTA recommended that the Chief, CI, establish controls to ensure that CI is selecting cases that meet the IRS’s goals and policies, return funds forfeited from legal source cases with no illegal activity, ensure that reasonable explanations are considered when interviews are conducted, ensure appropriate referrals to IRS’s Examination function, and improve the process for designating grand jury information. 
In response to the report, CI agreed with and implemented changes for five of the nine recommendations and partially agreed with another. CI disagreed with establishing guidance on bargaining nonprosecution and procedures that strive for fair and consistent outcomes, and did not agree to improve its grand jury information designation process.
Also helpful for readers are these excerpts from the background section of the report (footnotes omitted):

The Currency and Foreign Transactions Reporting Act of 1970, referred to as the Bank Secrecy Act (BSA), requires U.S. financial institutions to assist U.S. Government agencies by filing reports concerning currency transactions that are used to detect and prevent money laundering. It requires U.S. financial institutions to file reports, known as Currency Transaction Reports (CTRs), when currency transactions exceed $10,000 or multiple currency transactions aggregate over $10,000 in a single day. The reports are deemed useful in criminal, tax, terrorism, and other investigations. The BSA also requires U.S. financial institutions to file reports, known as Suspicious Activity Reports, of suspicious activity that might signify money laundering, tax evasion, or other criminal activities. Title 31 of United States Code (U.S.C.) Section (§) 5324(a) states that “no person shall, for the purpose of evading the reporting requirements … (1) cause or attempt to cause a domestic financial institution to fail to file a report required [CTRs]; (2) cause or attempt to cause a domestic financial institution to file a report … that contains a material omission or misstatement of fact; or (3) structure or assist in structuring, or attempt to structure or assist in structuring, any transaction with one or more domestic financial institutions.” 
Structuring can take two basic forms. First, a customer might deposit currency on multiple days in amounts under $10,000 (e.g., $9,900) for the intended purpose of circumventing a financial institution’s obligation to report any cash deposit over $10,000 on a CTR. Although such deposits do not require aggregation for currency transaction reporting because they occur on different business days, they nonetheless meet the definition of structuring under the BSA implementing regulations. Second, a customer or customers may engage in multiple transactions during one day, or over a period of several days or more, in one or more branches of a bank or credit union, in a manner intended to circumvent the currency transaction reporting requirement. While structuring may be indicative of underlying criminal activity, structuring itself is unlawful under the BSA. Whoever violates the structuring law may be fined, imprisoned, or both. Any property involved in a violation of § 5324 may be seized and forfeited. 
Federal Rules of Criminal Procedure Rule 416 states that probable cause is required for issuing a warrant to seize property. The burden of proof in a civil forfeiture action is on the Government to establish, by preponderance of the evidence, that the property is subject to forfeiture. Preponderance of the evidence means that there is a greater weight of evidence, on balance, as to an allegation, than that is offered in opposition to it, i.e., greater than 50 percent of the evidence points to a violation of § 5324. To prove a structuring violation, the Government must establish three elements—that a person has: (1) engaged in acts of structuring; (2) with knowledge that the financial institutions involved were legally obligated to report currency transactions in excess of $10,000; and (3) acted with the intent to evade this reporting requirement. Proof of willfulness and that the person was aware that structuring is illegal are not required. In January 1994, the Supreme Court ruled that the Government had to prove that an account holder was aware that structuring was unlawful and intentionally violated the law. In reaction to the Supreme Court’s decision, Congress removed the term “willfully” from 31 U.S.C. § 5324. In addition, current law does not require that the funds have an illegal source (e.g., money laundering or other criminal activity). 
The history of the BSA requirements are long and complex, but the purpose of the BSA reporting requirements is focused on detecting and deterring criminal behavior. In other words, the BSA reporting requirements were not put in place just so that the Government could enforce the reporting requirements. They were put in place to give the Government tools to address criminal behavior. Criminal Investigation’s (CI) procedures confirm that the intent of the Internal Revenue Service’s (IRS) seizure and forfeiture program is to pursue illegal activities: 
The Criminal Investigation (CI) Asset Seizure and Forfeiture Program utilizes CI’s seizure and forfeiture authority as an investigative tool and/or to disrupt and dismantle criminal enterprises. The program seeks to deprive criminals of property used in, or acquired through, illegal activities by directing CI’s financial expertise and resources towards significant seizure and forfeiture investigations in which CI can take a leading or key role. 
On October 17, 2014, a new policy was issued by the IRS indicating that CI will no longer pursue the seizure and forfeiture of funds related to legal source structuring cases unless exceptional circumstances justify it. CI officials indicated that there were a number of reasons for the change, including reputational risk and the desire to focus resources in a more strategic manner. In the same month, a New York Times article was published that claimed, “The Government can take the money without ever filing a criminal complaint, and the [property] owners are left to prove they are innocent. Many give up.” In response to the New York Times article, a statement from Richard Weber (Chief, CI) was issued: 
After a thorough review of our structuring cases over the last year and in order to provide consistency throughout the country (between our field offices and the U.S. Attorneys’ Offices [USAO]) regarding our policies, IRS CI will no longer pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases unless there are  exceptional circumstances justifying the seizure and forfeiture and the case has been approved at the director of field operations level.
In February 2015, the Institute for Justice issued a report which alleged that the IRS was seizing funds without sufficient proof of criminal wrongdoing. The Treasury Inspector General for Tax Administration (TIGTA) asked CI to comment on allegations in the report. In response, CI stated that it, as well as other law enforcement agencies, has the authority under the BSA to conduct structuring seizures and that it has had the authority to conduct these types of seizures pursuant to Title 31 since the BSA was passed in the late 1970’s. CI also asserted that the cases were largely pursued under the direction of the local Assistant U.S. Attorneys (AUSA) through *******11*************** Review Teams. 
A similar policy announcement followed from the U.S. Department of Justice in March 2015. The Attorney General noted that structuring laws enacted by Congress are critical tools that law enforcement employs to safeguard the integrity, security, and stability of our Nation’s financial system. After a comprehensive review of the Department of Justice’s Asset  Forfeiture Program, the Attorney General indicated that the Department of Justice’s resources will be focused against actors that structure financial transactions to hide significant criminal activity and will further other compelling law enforcement interests. 
A good Washington Post article on the report is:  Christopher Ingraham, The IRS took millions from innocent people because of how they managed their bank accounts, inspector general finds (WAPO 4/5/17), here.

For prior Federal Tax Crimes Blogs on this subject (in reverse chronological order):

  • Article on Structuring to Avoid Bank Currency Reporting Requirements (Federal Tax Crimes Blog 6/5/15), here.
  • Former House Speaker Indicted for Structuring and Lying to Federal Agents (Federal Tax Crimes Blog 5/29/15; 6/3/15), here.
  • Structuring Forfeitures Again in the News (Federal Tax Crimes Blog 2/12/15), here.
  • IRS CI Modifies Its Policy Regarding Forfeitures for Structuring on Bank Deposits for Legal Source Deposits (Federal Tax Crimes Blog 10/28/14), here.
  • IRS Use of Suspicious Activity Reports of Financial Institutions (Federal Tax Crimes Blog 11/23/12; revised 11/24/12), here.

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