Wednesday, November 1, 2017

Tax Aspects of the Manafort and Gates Indictment Obtained by Special Counsel Mueller's Office (11/1/17)

Readers of this blog will almost certainly have been exposed to news about the indictment that Special Counsel Mueller's office obtained against Paul Manafort and Rick Gates.  See e.g., Richard Gordon, Manafort is the Tip of the Iceberg (NYT Op-Ed 10/20/17), here, (Gordon, by the way is a law professor who, according to the article, is a "tax professor who specializes in anti-money laundering.")  Many of the articles said that tax fraud was a core claim in the indictment.  But, this is not a typical tax crimes indictment.

I thought it might be helpful to readers, particularly students, to focus on the tax allegations on the indictment.  A copy of the indictment is here.

  • COUNT ONE (Conspiracy Against The United States - 18 U.S.C. § 371)
  • COUNT TWO (Conspiracy To Launder Money - 18 U.S.C. § 1956(h))
  • COUNTS THREE THROUGH SIX (For Manafort - Failure To File Reports Of Foreign Bank And Financial Accounts For Calendar Years 2011-2014 - 31 U.S.C. §§ 5314 and 5322(b); 18 U.S.C. § 2)
  • COUNTS SEVEN THROUGH NINE (For Gates - Failure To File Reports Of Foreign Bank And Financial Accounts For Calendar Years 2011-2013)(31 U.S.C. §§ 5314 and 5322(b ); 18 U.S.C. § 2)
  • COUNT TEN (Unregistered Agent Of A Foreign Principal - (22 U.S.C. §§ 612 and 618(a)(l); 18 U.S.C. § 2))
  • COUNT ELEVEN (False and Misleading FARA [Foreign Agents Registration Act] Statements - 22 U.S. C.§§ 612, 618(a)(2); 18 u.s.c. § 2))
  • COUNT TWELVE (False Statements - 18 U.S.C. §§ 2, 1001(a)

What is not in the indictment is a Court for a Title 26 tax crime.  There is some nuance here related to the conspiracy counts, both the general conspiracy count (Count 1) and the money laundering conspiracy count (Count 2) which are Title 18 counts, that can in some cases relate to conduct where the gravamen of the crime is a tax crime.  I will get into a discussion of that nuance later.


Now, let me briefly summarize some of the the various allegations in the complaint that appear to relate to taxes.  The following will give you some flavor
  • wire transfer of monies from foreign sources upon which Manafort "did not pay taxes on this income."  ¶ 16.  A parallel allegation is made with respect to his 2012 tax return. in ¶ 17.
  • Manafort used his hidden offshore wealth to fund a lavish lifestyle without paying tax on the income. (¶¶ 4 & 15 & 16).
  • for the years 2008 through 2014, Manafort falsely represented on his tax returns that he did not have authority over any foreign accounts (¶ 32)
What is not alleged in the complaint is that the defendants acted "willfully" with respect to any thing that could possibly be construed as a tax crime.  As readers of this blog know, tax crimes in Title 26 usually have an element that require the taxpayer to have acted willfully, which has a specific meaning for tax crimes -- specific intent to violate a known legal duty.  (Note: § 7212(a), tax obstruction does not have a textual willfulness requirement but does have a corruptly requirement that parallels willfulness.)  The word willfully does not appear in the indictment except as to non tax crimes with an element requiring that the defendant have acted willfully.


Count One - (Conspiracy Against The United States - 18 U.S.C. § 371)

Count One charges a single conspiracy with two categories of objects of the conspiracy:  (1) to impair or impede the lawful functions of the Treasury Department and the Department of Justice ("DOJ") (commonly referred to as a defraud conspiracy) and (2) to commit specified offenses (commonly referred to as an offense conspiracy).  I infer that it is a single conspiracy alleged with both defraud and offense objects (inferred from ¶ 38 use of conjunctive "and" and ¶ 39 "the conspiracy") The precise key wording of Count One is:
conspired to defraud the United States by impeding, impairing, obstructing, and defeating the lawful governmental functions of a government agency, namely the Department of Justice and the Department of the Treasury, and to commit offenses against the United States, to wit, the violations of law charged in Counts Three through Six [FBAR Counts for Manafort] and Ten through Twelve [Counts for Unregistered Agent of a Foreign Principal, False and Misleading FARA Statements, and False Statements related to submissions to DOJ].
It appears, therefore, that the offense objects of the conspiracy are not tax related.  This means that this offense conspiracy allegation in Count 1 does not allege a conspiracy to commit tax evasion (§ 7201), to commit tax perjury (§ 7206(1) or to commit any other tax offense.  Hence, only the defraud objects of the conspiracy are potentially tax related, and the key elements of the defraud conspiracy for tax as usually articulated are (1) interfere with or obstruct a government function, in this case the IRS function (2) by means of deceit, craft, trickery or dishonesty.  There is considerable case law history around this usual articulation for the defraud conspiracy which would, seemingly, require in a tax context tax fraud which in turn most people would think would include tax evasion; fraud in its historical and usual criminal law sense is not required in that there is no requirement that the goal be to cheat the Government out of tax.  For those wanting more on that, please read my article John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 322-337 (2009), here. So, bottom line, in a defraud conspiracy fraud is not required. The result is that the elements of the defraud conspiracy charged in Count One of the indictment if they relate to the IRS (rather than to Treasury via the FBAR allegations) do not require tax fraud.

Count Two - (Conspiracy To Launder Money - 18 U.S.C. § 1956(h))

I deal here only with the second money laundering allegation in (b) alleging as follows:
(b) conduct financial transactions, affecting interstate and foreign commerce, knowing that the property involved in the financial transactions would represent the proceeds of some form of unlawful activity, and the transactions in fact would involve the proceeds of Specified Unlawful Activity, knowing that such financial transactions were designed in whole and in part (i) to engage in conduct constituting a violation of sections 7201 and 7206 of the Internal Revenue Code of 1986, and (ii) to conceal and disguise the nature, location, source, ownership, and control of the proceeds of the specified Unlawful Activity, contrary to Title 18, United States Code, Section 1956(a)(l)(A)(ii) and 1956(a)(1)(B)(i).
The conspiracy is described in § 1956(h) as a conspiracy "to commit any offense defined in this section or section 1957.  The underlying offence alleged has the following elements:

§ 1956(a)(l)(A)(ii) 
1. conducts or attempts to conduct a financial transaction
2. knowing that the property "represents the proceeds of some form of unlawful activity" which (whether known or not) is in fact specified unlawful activity [One key point to know about this element "specific unlawful activity" ("SUA") includes serious crimes but do not include tax crimes; in this indictment the only SUA alleged is a FARA violation which presumably is the subject of Count 11]
3. with intent to violate § 7201 (tax evasion) or § 7206 (having several subset crimes, but the ones most likely here is § 7206(1)).
§ 1956(a)(1)(B)(i) 
1. conducts or attempts to conduct a financial transaction
2. knowing that the property "represents the proceeds of some form of unlawful activity" which (whether known or not) is in fact specified unlawful activity [One key point to know about this element "specific unlawful activity" ("SUA") includes serious crimes but do not include tax crimes; in this indictment the only SUA alleged is a FARA violation which presumably is the subject of Count 11]
3. Knowing that the transaction is designed "to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity." [Again specified unlawful activity does not include tax evasion, so that the allegation of the § 1956(a)(1)(B)(i) crime is not applicable to the discussion in this blog relating to tax crimes.]
So, focusing only on the applicable provision, § 1956(a)(l)(A)(ii), there is an allegation that the defendants intended to commit the crime of tax evasion and probably tax perjury.  Presumably there is an implied allegation that there are (as yet not pled specifically) factual elements required for tax evasion and tax perjury, one of which for each crime is that they act willfully.  On this basis, I suppose, it is fair to state that tax fraud is involved, but it is not involved as a separate tax crime but as an element of the money laundering crime.

The Other Counts

None of the other counts have elements relating to tax evasion.  Normally, in straight up FBAR crimes related only to tax crimes (and not more egregious conduct such as money laundering), the charging of an FBAR crime implies tax crimes, but there is no factual element requiring tax crimes or any other crime for the FBAR violation (that is, other than the FBAR violation itself; but I am not aware that the DOJ has ever authorized an FBAR charge where there is no criminal conduct such as tax crimes related to the failure to file the FBAR).


Paragraphs 52-52 make forfeiture and substitute asset allegations.


1.  My impression is that the indictment is not particularly well crafted.  That is just an impression and I have not taken the time -- and do not have the time to take the time -- to test that with specifics by references to indictments that could serve as better exemplars.  I do note, however, that I would have thought that, at some point in the indictment, there would have been an allegation of willfulness with respect to the tax crime allegation in the money laundering count.

2.  I would have thought also that the tax crimes serving as elements of the money laundering count would have been alleged as specific separate tax crime counts.  There is always the possibility of a superseding indictment to add counts so long as the appropriate statute of limitations is met.  In this regard, the general statute of limitations for Title 18 crimes (which are the crimes alleged) is 5 years except that the statute of limitations for the defraud conspiracy is 6-years if it relates to the IRS and not just the Treasury Department with respect to the FBARs.

3.  Just based on the odds from historical criminal charges, a plea is statistically likely.  All of these guys posture by proclaiming their innocence through their lawyer and plead not guilty if they do not have a plea deal before charges are filed, as apparently is the case here.  Whether the Government will be willing to offer Manafort and Gates anything other than standard pleas (I am not sure what standard pleas in this case would be, but I suspect it would be one or both of the conspiracy counts and one substantive count so that enough counts are pled to produce an appropriate sentence), with an indication of favorable benefit in the Guidelines calculation and [One key point to know about this element "specific unlawful activity" ("SUA") includes serious crimes but do not include tax crimes; in this indictment the only SUA alleged is a FARA violation which presumably is the subject of Count 11] analysis for cooperation in the investigation of others (perhaps all the way up the chain).

4.  One other matter related to the use of tax crimes for the money laundering count.  Normally, according to Tax Division Directive No. 128, here and here:
Racketeering and Money Laundering Charges Based on Tax Offenses 
The Tax Division will not authorize the use of mail, wire or bank fraud charges to convert routine tax prosecutions into RICO or money laundering cases. The Tax Division will authorize prosecution of tax- related RICO and money laundering offenses, however, when unusual circumstances warrant it. 
A United States Attorney who wishes to charge a RICO violation (18 U.S.C. §1962) in any criminal matter arising under the internal revenue laws—including a predicate act based on a state tax violation, in the case of a parallel federal tax violation—must obtain the authorization of the Tax Division and the Criminal Division's Organized Crime and Racketeering Section. U.S.A.M. §9-110.101. 
A United States Attorney who wishes to bring a money laundering charge (18 U.S.C. §1956) based on conduct arising under the internal revenue laws must obtain the authorization of the Tax Division and, if necessary, the Criminal Division’s Asset Forfeiture and Money Laundering Section. U.S.A.M. §9-105.300.

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