Sentencing Guidelines Analysis for FBAR Convictions (10/31/17)

A couple of days ago, I posted a blog entry about an FBAR plea where, in the plea agreement, the Government stated that it had changed its position on Sentencing Guidelines calculations for FBAR convictions related to tax crimes.  Another FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (10/27/17), here.  The plea agreement states as follows:

The Government contends that the applicable Guideline in this matter should be U.S.S.G. § 2S1.3(a)(2), § 2S1.1 , and § 2S1.3(b)(2) because the defendant filed two false FBARs and a false U.S. Individual Income Tax Return, Form 1040, within a 12-month period. However, at the time that the defendant agreed to plead guilty, the Government consistently took the position with similarly situated defendants that the applicable Guideline was U.S.S.G. § 2Tl.1 and § 2TI.4 due to the cross reference in 2Sl.3(c)(1).

I thought it would be good for me and perhaps the readers of this blog to step through the Guidelines on for FBAR convictions in the context of tax crimes to follow the detail behind the Government's change in position.  I will be dealing with the Sentencing Guidelines which, as of today, are the 2016 Guidelines.  New versions of the Guidelines are issued every year to incorporate changes.  Usually, most of the Guidelines are carried forward, with changes only to some of them.  The changes can be important.  I expected that there would be new Guidelines effective November 1, 2017, but could not find any posted on the United States Sentencing Commission web site and some indications that the 2017 Guidelines may not be adopted until later than November 1, 2017.  So, I decided to post this entry referring to the 2016 Guidelines.  Based on the changes that are being considered, I do not think there will be any change in the 2017 Guidelines from the provisions I refer to in the 2016 Guidelines.  When the 2017 Guidelines come out, I will review them and make any corrections that may be appropriate to this blog entry.

Before offering my analysis, I caveat that I limit the scope of the analysis to FBAR violations where the only other potential criminal conduct relates to tax crimes -- i.e., the use by U.S. taxpayers of offshore accounts to evade U.S. tax and the FBAR violations (usually failure to file the FBAR) were committed to hide the tax violations.  (Thus, for example, the recent Manafort and Gates indictments being prosecuted by Special Counsel Mueller, here, alleged counts for FBAR violations and a defraud / Klein tax conspiracy along with other contextual counts (such as money laundering) that would preclude the application of this analysis to the FBAR counts.)

Finally, one other caveat related to the links to the 2016 Guidelines.  I use links derived from the United States Sentencing Commission on-line version of the Guidelines, here.  I find that the links do get to the right Guidelines provision, but do so a bit below the start of the Guidelines provision.  So, just move the cursor up to get to the start of the Guideline provision and look for the specific part referred to.

1.  The applicable Guideline for FBAR offenses is §2S1.3. * * * Failure to Report Cash or Monetary Transactions; * * * Knowingly Filing False Reports * * *, here.  The relevant portion (§ 2S1.3(a)(2)) provides a Base Offense level "6 plus the number of offense levels from the table in §2B1.1 (Theft, Property Destruction, and Fraud) corresponding to the value of the funds."  This portion of the Guideline treats the amounts not reported on the FBAR the same as other financial crimes (including tax) -- it increases the Base Offense Level incrementally based on the amount involved.  §2B1.1(b), here, provides a Base Offense Level of 6 and Specific Offense Characteristics which increment the Base Offense Level based on the amounts involved in the offense -- higher amounts have higher offense levels.  (This is the same pattern for economic crimes generally, including tax crimes specifically.)  For the FBAR crime, example, the failure to report a single account for a single year (the year of conviction) having a high amount during the year of $1,000,000 will generate a incremented Base Offense Level of 20 (i.e.  6 + 14). (Note that, for this purpose, I do not include "relevant conduct;" I discuss the impact, if any, of relevant conduct later in this blog.)

2.  Back to §2S1.3 which, as noted in paragraph 1, produces, under subsection (a), a Base Offense Level of 6 plus the increments provided in §2B1.1. In the example noted above, the incremented Base Offense Level for a $1,000,000 account is 20.  §2S1.3(b), however, provides Specific Offence Characteristics that can affect the Base Offense Level calculation.  These are important, so I quote the provision:

(b)      Specific Offense Characteristics
(1)       If (A) the defendant knew or believed that the funds were proceeds of unlawful activity, or were intended to promote unlawful activity; or (B) the offense involved bulk cash smuggling, increase by 2 levels.
(2)       If the defendant (A) was convicted of an offense under subchapter II of chapter 53 of title 31, United States Code; and (B) committed the offense as part of a pattern of unlawful activity involving more than $100,000 in a 12-month period, increase by 2 levels.
(3)       If (A) subsection (a)(2) applies and subsections (b)(1) and (b)(2) do not apply; (B) the defendant did not act with reckless disregard of the source of the funds; (C) the funds were the proceeds of lawful activity; and (D) the funds were to be used for a lawful purpose, decrease the offense level to level 6.

The key in this exercise is to make sure the reduction to offense level 6 occurs under (b)(3) which requires that neither (1) nor (2) apply.  We can exclude (1) in the prototypical case addressed here of a foreign account used to evade U.S. tax, because there are no proceeds of unlawful activity or smuggling involved.  However, (2) is involved, at least depending upon the meaning of (2).  The Application Notes provide:

3.      Enhancement for Pattern of Unlawful Activity.—For purposes of subsection (b)(2), "pattern of unlawful activity" means at least two separate occasions of unlawful activity involving a total amount of more than $100,000 in a 12-month period, without regard to whether any such occasion occurred during the course of the offense or resulted in a conviction for the conduct that occurred on that occasion.

The interpretation of this provision is not clear to me. Does the term "two separate occasions" refer to (1) two occasions rather than the one for which the SG §1.3 calculation is being made (in which case, FBAR crime of conviction and the act of tax evasion by false return would not suffice) or (2) to simply two separate occasions -- i.e., separate from each other (in which case the FBAR crime of conviction and the act of tax evasion by false return would suffice)?  The quote above of the Government's announcement of change in position suggests the former interpretation because it says:  "the defendant filed two false FBARs and a false U.S. Individual Income Tax Return, Form 1040, within a 12-month period."  But, even assuming this is correct, there are some interpretive issues caused by the fact that the crime of conviction stated in the information for that defendant (Kim) was failure to file the FBAR for 2008.  The referenced separate occasions was two false FBARs and a false income tax return.  So, there are three separate occasions when only two are needed.  That alone is not a problem, but there is no indication that the "separate occasions" under this interpretation must occur in the same 12 month period  as the failure to file the FBAR crime of conviction for 2008.  Looking at the statement of facts in that case, the false FBARs were filed on June 14, 2005 (for 2004), October 15, 2006 (for 2005), October 14, 2007 (for 2006) and March 27, 2008 (for 2007).  The crime of conviction (failure to file the 2008 FBAR) occurred on June 30, 2009.  Hence, the separate occasions of the false FBARs were more than 12 months before the failure to file the 2008 FBAR.  This suggests that, as a matter of interpretation, even if there must be two "separate occasions" apart from  the FBAR crime of conviction, the separate occasions need merely occur within 12 months of each other and not within 12 months of the crime of conviction.  This gives the Government a long window to troll for the elements to invoke the application of (2) and thereby avoid the application of (3).  Thus, for example, the usual pattern for offshore accounts would involve the year of the FBAR conviction (say year 05) for the crime committed on 6/30/06 but there would be tax evasion in the preceding year committed on 4/15/05 (or 6/15/05 or 10/15/05) and another FBAR crime on 6/30/05 for the year 04.  Thus, there would be two separate occasions within a 12-month period and, so long as they involved in the aggregate more than $100,000 (say $100,000 of foreign bank account and at least $1 of tax evaded), (2) would apply and (3) would not.  This would mean that the offense level is determined  with the increments provided in § 21B1.  Not a good answer for the defendant convicted of an FBAR crime.

4.  The final consideration in S.G. § 2S1.3 is the Cross Reference providing:

If the offense was committed for the purposes of violating the Internal Revenue laws, apply the most appropriate guideline from Chapter Two, Part T (Offenses Involving Taxation) if the resulting offense level is greater than that determined above.

Now, under the above analysis, this reference to the tax Guideline calculation would kick in only where specific offense characteristic (3) applies to reduce the offense level to 6, because only in that case would the tax offense level be greater than the 2S1.3 level.  (This is based on the usual case exemplified by an account amount of $1,000,000 with resulting income of, say, $50,000 and resulting tax loss of, say, 16,667, which would mean that, in all cases, the 2S1.3 level except when specific offense characteristic (3) applies would exceed the tax offense level.)  Even if the tax loss included relevant conduct on the same pattern for say 4 years, the amount would still be less than $100,000 and the SG § 1B1 increments produce a higher offense level than tax.

5.  So, after stepping through this consideration, it appears to me that, in cases where tax evasion was the motivating factor for the FBAR violation and no other unlawful activity is involved, the Guidelines calculations will be under SG § 2S1.3 without consideration of the tax Guidelines calculations and that the resulting offense level and resulting sentencing range will usually be much higher than if the tax Guidelines applied even just considering the amount for the year of conviction.  (Again, I do not consider relevant conduct for the FBAR crime of conviction to this point in the analysis.)

6.  Now, we get to the subject of relevant conduct and what effect, if any, that could have in the Guidelines calculations.  Relevant conduct, provided in SG §1B1.3, here, permits unconvicted criminal conduct to be considered in making Guidelines offense level calculations the same as if the unconvicted conduct were convicted conduct.  The concept is easy to illustrate by example because most readers of this blog know how relevant conduct works for tax crimes.  Say the defendant is convicted of a single count for tax evasion for year 10 and that (i) the jury acquitted the defendant for tax evasion for years 07-09, (ii) the Government did not charge for years 04-06 (which were within the criminal statute of limitations), and (iii) the Government also did not charge for years 01-03, years outside the statute of limitations.  The relevant conduct concept permits the tax loss calculations to include all of those unconvicted years 01-09 in addition to the tax loss for the year of conviction, thus increasing the advisory sentencing range (although the actual sentence cannot exceed the maximum sentence for the single year count of conviction).  Now, if the relevant conduct concept applies to the FBAR calculations under § 2S1.3, offense level will rise up in cases of multi-year FBAR violations even where the defendant pleads to only one year.  For example, assume an FBAR plea for year 10 and that the same pattern of conduct (FBAR violations) occurred for years 01-09 (some of those years are outside the 5-year criminal statute of limitations) and that a static $1,000,000 deposit for each year (with a daily sweep of the income into a U.S. account (OK, this is not realistic but I am trying to show a static $1,000,000 plus one days income high amount for the reportable foreign account amount for each year, with the daily income being negligible)).  The FBAR for each of those years 01-10 should show $1,000,000 plus that negligible high income day amount.  Would the relevant conduct concept require that the sentencing calculations be based on $1,000,000+ for the year of conviction (year 10 in the example) or $10,000,000+ (the aggregate amounts for all years of the year of conviction plus the relevant conduct)?  In practical terms, that means an offense level of 20 without relevant conduct and 30 with relevant conduct.  Assuming a three-level Acceptance of Responsibility downward adjustment, the sentencing offense levels under the SG 5.A Sentencing Table, here, would be 17 and 27, respectively, and, with no criminal history, advisory sentencing ranges of 24-30 months and 70-87 months.

7.  For completeness, there are some steps in the determination of relevant conduct.  For present purposes, relevant conduct offense are "offenses of a character for which §3D1.2(d) would require grouping of multiple counts" if they had been convicted counts.  § 1B3(a)(2); Application Note 5.  The defendant does not have to be convicted of the counts but only that the counts would be grouped if the defendant had been convicted.  Here is the discussion in Note 5:

"Offenses of a character for which §3D1.2(d) would require grouping of multiple counts," as used in subsection (a)(2), applies to offenses for which grouping of counts would be required under §3D1.2(d) had the defendant been convicted of multiple counts. Application of this provision does not require the defendant, in fact, to have been convicted of multiple counts. For example, where the defendant engaged in three drug sales of 10, 15, and 20 grams of cocaine, as part of the same course of conduct or common scheme or plan, subsection (a)(2) provides that the total quantity of cocaine involved (45 grams) is to be used to determine the offense level even if the defendant is convicted of a single count charging only one of the sales. 

Under SG § 3D1.2, Closely Related Counts, here are grouped.  This would require that, upon actual FBAR convictions for two years, counts are grouped together.  And, it means that, for purposes of the relevant conduct calculation, the offenses for unconvicted years are grouped together., meaning that unconvicted FBAR crimes can be considered relevant conduct and the offense level incremented accordingly.

9.  Although not directly related to the above discussion, in trying to find out the expected date of the 2017 Guidelines, I did find some indication that relevant conduct is addressed in proposed changes but only to allow a defendant contest relevant conduct in good faith without blowing the benefit of acceptance of responsibility.  See discussion here.

10.  One final note.  All of this may be an academic exercise because actual FBAR sentences where tax is the only other crime, while requiring that the sentencing court calculate the Guidelines advisory sentencing range, will almost surely use its Booker variance discretion to vary downward from the advisory sentencing range and even downward from the tax guidelines range if it applied.  The only possible effect is that a judge may have to think a little harder about the extent of the variance if the advisory Guideline range is much higher as it will be under the above analysis.  (Of course, many believe that with liberal Booker discretion sentencing courts may not pay much attention to the Guidelines sentences anyway.)

I do urge those who have read this to let me know either by email or comment of any problems they see in the analysis and any other changes that might be appropriate for this blog entry.