Thursday, January 25, 2018

Offshore Account Defendant Sentence with Court Accepting Government's New Position on Guidelines Calculations (1/25/18)

DOJ Tax announced here the sentence for Hyung Kwon Kim for an FBAR violation.  (Note that the announcement identifies the defendant as Huong rather than Hyong, but Hyong appears to be a misspelling of his first name per the underlying documents.)  I previously blogged on Kim's guilty plea.  Another FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (Federal Tax Crimes Blog 10/27/17), here.

The key numbers are exceptional.  The amount of the unreported or underreported accounts is over $28 million.  The FBAR penalty is over $14 million.  The sentence is only 6 months. 

Key excerpts are:
According to documents and other information provided in court, Hyong Kwon Kim, a citizen of South Korea and, since 1998, a legal permanent resident of the United States, resided in Massachusetts and later in Connecticut.  Kim, a sophisticated business executive who ran family businesses with operations in the United States and internationally, inherited tens of millions of dollars that he stashed in secret accounts at Credit Suisse, its subsidiaries, and another Swiss bank.  Kim deliberately violated the U.S. bank secrecy laws by failing to report his foreign financial accounts to the Treasury Department.  U.S. citizens, resident aliens, and permanent legal residents with a foreign financial interest in or signatory authority over a foreign financial account worth more than $10,000 are required to file a Report of Foreign Bank and Financial Accounts, commonly known as an FBAR, disclosing the account. 
Kim conspired with a host of foreign enablers, including Dr. Edgar H. Paltzer, his Swiss attorney who pleaded guilty in 2013 in the Southern District of New York, and bankers to conceal his assets and income in Swiss accounts held in his own name, the name of a relative, and in the names of sham corporate entities.  Kim schemed with Paltzer and his bankers to structure financial transactions in a manner that allowed him to utilize the funds in the United States, while concealing his ownership and control of the offshore funds.  For example, Kim had checks issued to third parties in the United States in order to purchase a luxury home in Greenwich, Connecticut, a waterfront vacation retreat in Chatham, Massachusetts, and jewelry adorned with multi-carat diamonds, emeralds, and rubies.  In order to conceal his ownership of the vacation home, Kim and Paltzer created a sham entity to hold title to the home.  Kim and Paltzer acted as if Kim rented the home from a fictitious owner. 
In 2008, as Credit Suisse closed accounts held in the names of sham entities owned by persons residing in the United States, Kim refused to bring his assets to the United States.  Instead, he transferred his assets to another Swiss bank.  Kim send coded messages from the United States to his Swiss banker in order to maintain control of his account. 
Kim ultimately brought his assets to the United States by paying a Swiss jeweler millions of dollars for a ring with a 13.9 carat sapphire and three loose diamonds totaling 13 carats.
The described pattern of conduct is not particularly exceptional.

What is exceptional about the plea and the sentencing is the Government's announcement in the plea and resulting publicity that it had changed the position on the applicable Sentencing Guideline.  Historically, for FBAR violations related to income tax evasion, the DOJ had recommended and most cases had been sentenced under the tax guidelines which calibrated the additions to the Base Offense level based on the tax evaded.  In the Kim plea, DOJ Tax announced that the Guidelines would be under SG § 2S1.3 and the incremental offense levels under the theft guideline in SG § 2B1.1.  I discussed this in the blog on the plea agreement linked above and in a subsequent blog where the change in position was discussed at a tax conference.  More on New DOJ Tax Position on FBAR Sentencing Guidelines (11/9/17), here.  Notwithstanding this change of position, DOJ Tax agreed in the plea agreement that it would urge the application of the tax guidelines from fairness to this defendant.  I noted, however, that the Probation Office and Judge are not bound by this aspect of the agreement.  Indeed, one would think that the judge has to apply the right guidelines even if the parties agreed otherwise.  But, let's see.

The issue came up in the sentencing documents.  The sentencing documents are:

  • The U.S. Sentencing Memorandum, here.
  • The Defendant's Sentencing Memorandum, here.
  • The Minute Entry for the Sentencing Hearing, here.
  • The Judgment Imposing the Sentence, here.

(Note that there are sealed documents in the docket entries, here, but I do not know what they relate to.)

In the United States Sentencing Memorandum the following on this subject (bold-face supplied by JAT):
As explained below, while the government agrees with the Probation Office’s calculation of the sentencing range the advisory Sentencing Guidelines, the government nevertheless believes that the appropriate Guidelines range that should be applied in this case is that agreed upon by the parties, as set forth in the plea agreement. Taking into account the factors set forth in 18 U.S.C. § 3553(a) and the government’s filing under seal, the government makes a final sentencing recommendation of nine (9) months of imprisonment, three (3) years of supervised release, an appropriate fine, and a $100 special assessment.
* * * *
A. Guidelines Range 
   1. The Applicable Guidelines Provisions 
The defendant pled guilty to the willful failure to file an FBAR, in violation of 31 U.S.C. Sections 5314 and 5322. The offense of conviction in this case falls under U.S.S.G. § 2S1.3. The Probation Office calculated the Guidelines range under U.S.S.G. § 2S1.3(a)(2) (the “Part-S Guidelines”). See Presentence Investigation Report, ¶ ¶ 76-85. That provision includes a  crossreference to the theft and fraud Guidelines, and sets the base offense level as follows:  
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, if subsection (a)(1) does not apply.
Probation calculated the base offense level as 28. Probation added 22 levels as it placed the “value of funds” at $28,151,724, the year-end value of the assets in the unreported accounts in 2004 (the highest year-end balance). See PSR, ¶¶ 65(j), 76; U.S.S.G. § 2B1.1(b)(1)(L) (more than $25 million). 
The government contends, as does Probation, that two levels should be added as the defendant “committed the offense as part of a pattern of unlawful activity involving more than $100,000 in a 12-month period.” See U.S.S.G. § 2S1.3(b)(2). The Application Note to § 2S1.3 defines a pattern of illegal activity as “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.” Kim filed false FBARs on October 14, 2007 (for 2006) and again on March 27, 2008 (for 2008). On each FBAR, Kim failed to report that he owned and controlled any of the financial accounts in Switzerland. Kim also filed a false 2007 Individual Income Tax Return, Form 1040, on March 3, 2008, which omitted any income that Kim earned from the assets in his undeclared accounts in Switzerland. Kim’s attorneys calculated that Kim omitted $104,699 in ordinary income on the 2007 return. The filing of two false FBARs and a false return within a 12-month period qualifies as a “pattern of unlawful activity” sufficient to trigger the two-level enhancement. 
While 2S1.3 may be the proper Guideline, the government respectfully requests that the Court sentence the defendant under U.S.S.G. § 2T, the Tax Guidelines. As stated in the Plea Agreement, “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. § 2T1.1 and § 2T1.4 due to the cross reference in § 2S1.3(c)(1).” n2 Plea Agreement, Dkt. # 10, pp. 3-4.
   n2 U.S.S.G. § 2S1.3 states as follows: “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.” 
In 2012, Kim and the government commenced plea negotiations with the defendant’s counsel. At that time, the government had entered into plea agreements with a number of several other legal permanent residents that required those individuals to plead guilty to FBAR charges, and not tax charges. In each of those cases, the plea agreements specifically set forth a Guidelines calculation using the Tax Guidelines and not § 2S1.3. After Kim and the government had reached an agreement in principle, the government continued to employ the Tax Guidelines in virtually every other FBAR case. In order to ensure that this defendant receives equitable treatment, the government believes that the appropriate Guidelines which should be applied in this case are the alternative calculation under § 2S1.3(c)(1). 
The base offense level for this offense is 16 pursuant to U.S.S.G. § 2Tl.l(a)(1) and § 2T4.1(F), because the tax loss exceeded $100,000. The base offense level is increased by 2 levels, pursuant to U.S.S.G. § 2T1.1(b)(2), because the offense involved sophisticated means. The defendant should receive a 3-level reduction for acceptance of responsibility resulting in a total offense level of 15. The advisory range is 18 to 24 months of imprisonment and the fine range is $4,000 to $40,000.
So, to summarize, the Probation Office calculated the base offense level at 28 according to the Government's new position but the Government urged the tax guidelines base offense level of 16.  The documents I link above do not provide the Court's calculations except that the minute entry does state an offense level for the Sentencing Table of 27.  I infer that the Court accepted the Probation Office's proposed base offense level of 28, with the two level upward and 3 level downward discussed in the last quoted paragraph.  That offense level would provide an advisory range of 70-87 months, with sentencing limited to 60 months based upon the single offense of conviction.

Obviously, the Government's change in position on the appropriate sentencing guideline, now approved by at least this court, can produce dramatically harsher results.  Of course, in foreign account cases involving only tax evasion, the Courts have already indicated that they will usually exercise Booker variances and often the defendant will, as in Kim's case, provide substantial assistance for a 5K1 departure.  (In this regard, even with the Government's proposed lower calculation, it wanted a minimum 9 month sentence, but the Government usually asks for more than the Court's impose.)

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