More on Willful Blindness (5/28/21)

Today, I revisit one of my “rant” topics – willful blindness (aka deliberate ignorance, conscious avoidance, etc.).  My past rants have been about using the concept of willful blindness as a substitute for a specific knowledge requirement in criminal statutes, particularly the willfully element of most Title 26 tax crimes.  To remind, that willfully element, often referred to as the Cheek interpretation of the willfully element in tax crimes, is specific intent to violate a known legal duty.  Cheek v. United States, 498 U.S. 192, 201 (1991).  Such a specific intent requires that a defendant know the facts that create a legal duty and must know the law (sufficiently) to know that he is violating a legal duty.  I have urged that, if Congress legislated a knowledge element for a crime, courts and juries should not be treating something that is not knowledge as knowledge.  That is effectively creating a common law crime, supposedly a no, no in our legal system.

I periodically review willful blindness cases to see if there is more ranting I can do without duplicating my ranting too much.  I read a case today that offered something that I should have noticed and ranted on before.

The willful blindness concept requires that the defendant:  "(1) The defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact."  Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 766 (2011).  Global-Tech was a civil case, but the Supreme Court looked to criminal analogies where the concept was deployed, so courts often cite Global-Tech in criminal cases.  The Supreme Court in Global Tech also said that willful blindness applies when the defendant “can almost be said to have actually known the critical facts.”  (pp. 769-770, emphasis supplied by JAT.)  I suppose that if one took that sentence literally, a defendant in a criminal case can be convicted of a crime requiring specific knowledge even without that specific knowledge.  But, we all know from the trajectory of the willfully requirement for the civil and criminal FBAR penalties that willfully is not the same for criminal purposes as for civil FBAR purposes, with willfully for civil FBAR purposes permitting something like willful blindness / reckless behavior to meet the willfully element in a way that could not suffice for the crime.  The statement in Global-Tech thus may be technically dicta.

I have urged in my rants that, instead of a substitute for the statutory element of specific knowledge, the role of facts indicating willful blindness should instead be circumstantial evidence of actual knowledge that would permit the factfinder (jury in most criminal cases) to infer the required knowledge (the actual statutory element for the crime) beyond a reasonable doubt.  It is not and should not be a substitute for the statutory element requiring specific knowledge.

Second Circuit Affirms Conviction of Lawyer Offshore Account Enabler (10/4/20)

In United States v. Little, 2020 U.S. App. LEXIS 31384 (2d Cir. 9/30/20), here, the Court affirmed the conviction and sentencing of Michael Little, a lawyer who enabled the Seggerman family to cheat on their taxes, using in part failure to file FBARs.  I have written on Little before (see blogs on him, including in some blogs the Seggermans), here

I discuss here only two points from the opinion.

1. Willfulness.

The Court rejected Little’s Cheek defense that there was insufficient evidence to prove that he knew the legal duty.  The Court handled the defense summarily (Slip Op. pp. 5-6):

            We conclude that substantial evidence supports the jury verdict on each of the challenged counts. In a nutshell, Little contends that he merely misunderstood the byzantine tax code. But Little is a British-trained barrister admitted to the New York Bar with a quarter-century of experience in complex international financial transactions who, for much of his life, has claimed German domicile for tax [*7]  purposes. A reasonable juror could easily conclude that the failures of such a sophisticated professional to report his income to the IRS, including compensation from the Seggerman family, and to report foreign bank accounts into which his compensation was funneled, were willful acts. See United States v. MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985) (permitting the inference of "knowledge of the law" from the "[d]efendants' backgrounds," including education). Similarly, Little's sophistication supports a conclusion that he was willfully misleading the Seggerman family's accountants when he informed them that the transfers from Lixam Proviso were merely "gifts from a kind benefactor from overseas" and not distributions.

2. Jury Instructions on Conscious Avoidance / Willful Blindness

The Court rejected Little’s claim that the conviction should be reversed because the Court improperly instructed the jury on conscious avoidance (usually called willful blindness, but the Second Circuit often uses conscious avoidance).  Again, the Court rejects the defense summarily as follows (Slip Op. 6):

First, Little challenges the "conscious avoidance" instructions on the failure to file return counts, the failure to file FBAR count, and the conspiracy count; and second, that the district court's instructions as to willfulness erroneously converted the standard into a reasonableness standard. Conscious avoidance instructions are permissible only when the defendant mounts a defense that he lacked "some specific aspect of knowledge required for conviction" and "a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Coplan, 703 F.3d 46, 89 (2d Cir. 2012) (citation and internal quotation marks omitted). Here, each predicate is met: Little defended himself by claiming ignorance of his obligations under the Tax Code and, because of Little's legal education and the relative straightforwardness of his obligations, a reasonable juror could conclude that Little was aware of a high probability that his actions were unlawful.

 So, in this case, the conscious avoidance / willful blindness instruction was properly given.

 JAT Comments:

First Circuit Pattern Criminal Jury Instruction on Willful Blindness (5/6/19)

I have expressed concern about the willful blindness instruction (which also goes by other names, such as deliberate ignorance, conscious avoidance and ostrich instruction).  So, I decided to look through the pattern jury instructions on willful blindness for the Circuits that have them to see what they may offer.  Among the ones I could find, I think the best one is the First Circuit's from the document titled "2019 Revisions to Pattern Criminal Jury Instructions for the District Courts of the First Circuit, pp. 47-49, from the District of Maine web site,here.  I bold face the part that I recommend readers pay attention to:

2.16 “Willful Blindness” As a Way of Satisfying “Knowingly”
[Updated: 12/15/17]

In deciding whether [defendant] acted knowingly, you may infer that [defendant] had knowledge of a fact if you find that [he/she] deliberately closed [his/her] eyes to a fact that otherwise would have been obvious to [him/her]. In order to infer knowledge, you must find that two things have been established. First, that [defendant] was aware of a high probability of [the fact in question]. Second, that [defendant] consciously and deliberately avoided learning of that fact. That is to say, [defendant] willfully made [himself/herself] blind to that fact. It is entirely up to you to determine whether [he/she] deliberately closed [his/her] eyes to the fact and, if so, what inference, if any, should be drawn. However, it is important to bear in mind that mere negligence, recklessness or mistake in failing to learn the fact is not sufficient. There must be a deliberate effort to remain ignorant of the fact.

Comment 

(1) This instruction is drawn from the instructions approved in United States v. Gabriele, 63 F.3d 61, 66 n.6 (1st Cir. 1995), and United States v. Brandon, 17 F.3d 409, 451-52 & n.72 (1st Cir. 1994). The First Circuit quoted and approved the last seven sentences (without mention of “recklessness”) in United States v. Jesús-Viera, 655 F.3d 52, 59 (1st Cir. 2011). The instruction was also approved in United States v. Denson, 689 F.3d 21 (1st Cir. 2012), where the court reiterated: “[t]he focus of [a] willful blindness instruction must be on the particular defendant and not on the hypothetical reasonable person.” Id. at 24 (quoting United States v. Griffin, 524 F.3d 71, 80 (1st Cir. 2008)). Indeed, it is erroneous to use “reasonable person” language. United States v. Bray, 853 F.3d 18, 24, 30 (1st Cir. 2017) (Although not finding plain error, the court stated that an instruction that a “reasonable person in [the defendant’s] shoes would certainly have known” mistakenly suggested that the jury could find the defendant guilty even if the defendant had not “consciously and deliberately avoided learning” about the violation.). 

(2) Although in United States v. Anthony, 545 F.3d 60, 66 (1st Cir. 2008), the First Circuit said that it was not error to omit reference to “recklessness,” we have nevertheless added the statement that “recklessness” in failing to learn a fact is not enough because of the Supreme Court’s decision in Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011). Although GlobalTech was a patent case, it described the doctrine of willful blindness as “well established in criminal law,” id. at 2068, and spoke approvingly of the circuits’ approach as “giv[ing] willful blindness an appropriately limited scope that surpasses recklessness and negligence.” Id. at 2070. In Denson, 689 F.3d at 24-25, the First Circuit recognized the authority of Global-Tech for a willful blindness instruction, but the issue there was not about recklessness. Following Global-Tech, the Fourth Circuit has agreed that recklessness is not sufficient. United States v. Jinwright, 683 F.3d 471, 480 (4th Cir. 2012); see also United States v. Goffer, 531 Fed. Appx. 8, 20-21 (2d Cir. 2013) (endorsing the standard that recklessness is insufficient, but finding that the jury instruction satisfied that standard without using the term “reckless”).  

(3) The rule in the First Circuit is that: A willful blindness instruction is warranted if (1) the defendant claims lack of knowledge; (2) the evidence would support an inference that the defendant consciously engaged in a course of deliberate ignorance; and (3) the proposed instruction, as a whole, could not lead the jury to conclude that an inference of knowledge was mandatory. Gabriele, 63 F.3d at 66 (citing Brandon, 17 F.3d at 452, and United States v. Richardson, 14 F.3d 666, 671 (1st Cir. 1994)); accord United States v. Valbrun, 877 F.3d 440, 445 (1st Cir. 2017); United States v. Figueroa-Lugo, 793 F.3d 179, 191 (1st Cir. 2015); United States v. Appolon, 695 F.3d 44, 63 (1st Cir. 2012); United States v. Mitrano, 658 F.3d 117, 123 (1st Cir. 2011); United States v. Coviello, 225 F.3d 54, 70 (1st Cir. 2000); United States v. Camuti, 78 F.3d 738, 744 (1st Cir. 1996). “The danger of an improper willful blindness instruction is ‘the possibility that the jury will be led to employ a negligence standard and convict a defendant on the impermissible ground that he should have known [an illegal act] was taking place.’” Brandon, 17 F.3d at 453 (quoting United States v. Littlefield, 840 F.2d 143, 148 n.3 (1st Cir. 1988)). “[T]he government is not required to prove willful blindness by direct evidence.” United States v. Valbrun, 877 F.3d 440, 446 (1st Cir. 2017). The government “may satisfy its burden of production by adducing evidence that red flags existed that the defendant consciously avoided investigating.” Id. 

Fifth Circuit Sustains Willful Blindness / Deliberate Ignorance Jury Instruction As Harmless Error (4/26/19)

In United States v. Martinez, 921 F.3d 452 (5th Cir. 2019), CA5 here and GS here, "the defendants were convicted of conspiracy to commit health care fraud and several substantive counts of health care fraud. Individual defendants were convicted of different additional offenses."  Id. at 462. They raised several arguments on appeal.  I address here only the deliberate ignorance instruction.  I usually in this blog use the term willful blindness rather than deliberate ignorance, but both terms refer to the same concept; accordingly, I will use the term willful blindness except when quoting.

Readers of this blog will recall that I have expressed concern about the willful blindness instruction.  In summary, my concern is whether the willful blindness instruction should require that the jury find the requisite specific knowledge element of a crime where the jury only determines facts of acts of willful blindness. I believe that, more properly, the willful blindness instruction should permit the jury to infer the requisite knowledge but not require the jury to find the requisite knowledge.  In other words, the acts of willful blindness are circumstantial evidence that the defendant had the requisite knowledge, but are not a substitute for a jury to find the requisite knowledge from finding only the acts of willful blindness.

The Martinez court addresses some of my concerns but I am not certain  that it got it right.

The Court starts with the Fifth Circuit pattern jury instruction which, I think, gets it right (pp. 477-478, bold face supplied by JAT):

You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.

Notice that willful blindness permits the finding of knowledge but does not compel that finding.

The district court did not give that Fifth Circuit pattern instruction but fashioned its own as follows (469):

The defendants must be found to have acted knowingly and willfully. "Knowingly" means that an act was done intentionally and not because of mistake, accident, or another innocent reason. "Willfully" means an act was done with a conscious purpose to violate the law.
. . . .
Circumstantial facts tend to be the only kind available [*41]  for subjective facts, something about which the jury lacks direct access to the defendant's mind. For instance, the jury may infer knowledge and intent from conduct or context.
Attempts to eliminate or minimize evidence of knowledge may justify an inference of it. Knowledge does not require certainty. The law permits inferred, expected judgments to count as knowledge. These inferences must be beyond a reasonable doubt.

The defendants claimed that this instruction, as given, permitted conviction for negligence.  Two defendants urged that the instruction essentially directed verdicts against the defendants.  One defendant argued that there was no evidence of "purposeful avoidance."

Court Rejects Defense Expert Testimony as to State of Law and Duty in Government FBAR Willful Penalty Case (6/3/2018)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 91665 (D. Conn. 2018), here, a Government suit to obtain judgment on an FBAR willful penalty, the Court granted the Government's motion in limine to preclude the testimony of the defense's expert witness.  The Court described the testimony thus excluded:

According to Defendants' expert disclosure, Mr. Epstein is a certified public accountant with over 25 years of experience. (Report of Howard B. Epstein, CPA, ECF No. 114-2 at 2.) His practice focuses on international tax planning and compliance for individual taxpayers and multi-national companies. (Id.) Defendants propose that Mr.  Epstein will testify at trial on the following general subjects: 

• "general reporting requirements as they related to Foreign Financial Accounts and Foreign Trusts"; and
• "general guidance published by the Internal Revenue Service, the Department of Treasury, and FinCen explaining the rules and reporting requirements to taxpayers and practitioners relating to such vehicles for the year the subject penalty is assessed (2005), as compared to years before and after." (ECF No. 114-2 at 2.) 

More specifically, Mr. Epstein's proposed testimony includes opinions on: 

• "the state of published guidance and public awareness of [foreign account] reporting requirements so as to provide an objective backdrop or perspective . . . .";
• "how such guidance evolved in the years before and after the subject year [i.e., 2005], and how, in that climate, international tax compliance has been viewed and understood by practitioners and taxpayers . . . ."; and
• "whether an individual taxpayer could have been unaware of his filing foreign income and asset reporting requirements." (ECF No. 114-2 at 3.) 

Mr. Epstein's proposed testimony purports to answer the question, "Should Paul Garrity Sr. have known of his requirements to report the Stiftung [a Liechtenstein entity]?" (ECF No. 114-2 at 9.) He opines that "the IRS should not and does not determine—without specific supporting evidence—that a taxpayer should have known of his foreign bank account reporting requirements." (Id. at 10.)

The Court excluded the testimony for three reasons:  First, it found that "it will not assist the jury to understand the evidence or to determine a fact in issue."  Second, it found the proffered testimony to be "is irrelevant to the question of willfulness."  Third, even if relevant, the Court invoked Rule 403 "because allowing Mr. Epstein to testify on the proposed subjects would risk jury confusion and invade the province of the Court.

The opinion is very short, so I encourage readers interest in this subject to read the opinion.  Basically, I think the reasoning is as follows:

1.  The issue in the case is whether the taxpayer (the deceased parent) was willful in not reporting the foreign accounts.  Willfully, the court says, means "knowingly or recklessly" failing to file.  Significantly, the court said:

Actual knowledge encompasses "willful blindness" to the obvious or known consequences of one's actions. McBride, 908 F. Supp. 2d at 1205 (citing Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 767 (2011)). The government may prove willful blindness with evidence that Mr. Garrity, Sr. made a "conscious effort to avoid learning about reporting requirements." Williams, 489 Fed. Appx. at 659. Evidence of a taxpayer's negligence, however, is insufficient to prove willfulness. See, e.g., Bedrosian, 2017 WL 4946433, at *6 (finding that the defendant was not liable for willful failure to file an FBAR because his actions amounted to, at most, negligence).

2.  On the issue the jury will resolve, the expert's report:

does not, and does not purport to, address the subjective standard at issue here. Instead, Mr. Epstein speaks only to an objective standard—whether Mr. Garrity, Sr. "should have known" of the reporting obligation in light of the IRS's public education on the issue at the relevant time. What Mr. Garrity, Sr. should have known—i.e., whether Mr. Garrity, Sr. was negligent in his failure to file an FBAR—is not the issue in this case. 

What Mr. Garrity, Sr. actually knew (or consciously chose to avoid learning) is the key issue, and there is no evidence linking that issue with Mr. Epstein's proposed testimony.

JAT Comments:

Willful Blindness -- Does the Concept Expand the Statutory Element of the Crime of Knowledge? (2/24/18)

In United States v. Carbins, 2018 U.S. App. LEXIS 3585 (5th Cir. 2018), here, the defendant "was convicted of one count of conspiracy to defraud the United States in violation of 18 U.S.C. § 371, seven counts of aiding and abetting theft of Government money in violation of 18 U.S.C. §§ 2 and 641, and one count of aiding and abetting aggravated identity theft in violation of 18 U.S.C. §§ 2 and 1028A."

Readers of this blog will know that I have been troubled for some time about the potential scope of the concept of willful blindness.  (See search on willful blindness here.)  The concept goes by several names other than willful blindness (e.g., willful ignorance, deliberate ignorance, conscious avoidance, etc.), but I use willful blindness because the Supreme Court did in Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (2011), a civil patent infringement case which discussed the criminal use of the concept.  My general concern has been that, in cases requiring some knowledge as an element of the crime, deliberate ignorance can be a substitute for the required degree of knowledge even though Congress stated in the statute that knowledge was required for the crime.

Most Title 26 tax crimes required a special, higher level of knowledge -- specific intent to violate a known legal duty.  I have been particularly concerned about the use of willful blindness to satisfy that knowledge element of the crime.

In Corbins, I read the following which was, I think, directed to a nontax crime that had a knowledge element:

As the Government contends, "[t]his court has expanded the definition of knowledge to include circumstances where a defendant exhibits deliberate ignorance." n19
  n19 United States v. Churchwell, 807 F.3d 107, 117 (5th Cir. 2015) (citation omitted).

I read Churchwell, here, and, indeed, the opinion does state (pp. 116-117):  "This court has expanded the definition of knowledge to include circumstances where a defendant exhibits deliberate ignorance."

The concept that a court can expand a statutory crime element seems to me to be fundamentally wrong.  I don't have any citation authority for my concern right now, but will be looking to see if there is any such authority.  I would appreciate any reader views on this subject.

If willful blindness is not a substitute for the knowledge element of the crime but is simply a factor, like circumstantial evidence, from which the trier of fact can infer the knowledge element, then it is not an expansion of the statute and my concern is not warranted.  My concern, of course, is that some triers of fact may be tempted to use it as a substitute for the statutory knowledge element of the crime.

Fourth Circuit NonPublished Opinion Offers Little on Willful Blindness Instruction (1/15/18; 1/17/18)

In United States v. Parker, 2018 U.S. App. LEXIS 712 (4th Cir. 2018) (unpublished), here, the Fourth Circuit affirmed Parker's conviction for "conspiring to file false tax returns, in violation of 18 U.S.C. § 371, and presenting false claims to the Internal Revenue Service (the "IRS"), in violation of 18 U.S.C. § 287."  As a nonpublished opinion, it may have diminished precedential value.  Still, there are some items in the opinion that I find worthy of mention.

First, the trial court gave the following willful blindness instruction:

If you find that the defendant was aware of a high probability that the tax returns at issue were false and that the defendant acted with deliberate disregard of the facts, you may find that the defendant acted knowingly. However, if you find that the defendant actually believed that the tax returns at issue were true, he may not be convicted.

I have previously discussed that the jury's finding of willful blindness should, like other circumstantial evidence, only permit the jury to infer the requisite knowledge rather than compel that finding.  E.g. The Willful Blindness Concept -- What Does It Do? (Federal Tax Crimes Blog 1/23/17), here.  The instruction, as given by the trial judge, adopts the permissive construct ("you may find" rather than "must find."  This aspect of the instruction was not in issue on the appeal.  (I return to this issue below.)

Second, at trial, "Parker objected to this [willful blindness] instruction arguing that he could not be willfully blind to a conspiracy."  From that cryptic comment, not further addressed in the opinion, I presume that the defendant was asserting that willful blindness is not proper in conspiracy because conspiracy requires specific intent to reach an agreement for an illegal object.  As with using the instruction for the standard tax crimes mens rea -- specific intent to violate a known legal duty -- it could be viewed as an oxymoron to say that willful blindness can substitute for the specific intent required for conspiracy.  It seems to me that, if the crime requires the specific intent as the element, courts cannot authorize something less than that specific intent under the rubric of willful blindness.  In other words, the willful blindness properly interpreted should merely be evidence that a jury may find persuasive that the defendant had the required intent.  Nevertheless, Courts do seem to authorize the willful blindness instruction in conspiracy cases.  See Ninth Circuit Pattern Instruction 5.7 Deliberate Ignorance, here, ("United States v. Ramos-Atondo, 732 F.3d 1113, 1120, 1124 (9th Cir.2013) (deliberate ignorance instruction may be given in conspiracy case).

Third, I also recommend readers read the entire Ninth Circuit pattern instruction and comment which demonstrates some of the confusion with the willful blindness instruction.  The actual pattern instruction uses the "may find" construct which seems to be that willful blindness merely supports an inference of the knowledge element of the crime.  In other words, it is like circumstantial evidence of the required knowledge.  Then, however, the comment says that, in the approved Jewell decision, "the district court must determine whether the jury could rationally find willful blindness even though it has rejected the government’s evidence of actual knowledge." (Bold-face supplied by JAT.)  Query, if the willful blindness instruction merely permits the jury to infer knowledge, how can it be appropriate where the jury has rejected finding knowledge?

Fifth Circuit on Bruton Confrontation Clause Issue and Deliberate Ignorance / Willful Blindness Issue (11/13/17)

In United States v. Gibson, ___ F.3d ___, 2017 U.S. App. LEXIS 22261 (5th Cir. 2017), here, a nontax case, the Court hit some themes that I have discussed before in tax cases.  In this regard, as readers know, tax crimes are merely one subset of white collar crimes.  See e.g., Geraldine Szott Moohr, Tax Evasion as White Collar Fraud, 9 Hous. Bus. & Tax Law J. 207 (2009), here.  That is why experienced white collar crimes lawyers can try criminal tax cases, even learning a little tax law along the way.  And, it works vice-versa as well.

The opinion starts off with a good summary of the issues presented (footnote omitted, but it is not Shakespeare):

"The trouble with conspiracies is that they rot internally." According to the government's cooperating witnesses, the appellants—Earnest Gibson, III (Gibson III) and his son, Earnest Gibson, IV (Gibson IV)—participated in three: one to defraud Medicare, another to pay unlawful kickbacks, and a third to launder money. A jury convicted the Gibsons for each, plus several substantive kickback counts. On appeal, the Gibsons advance sufficiency challenges and assert that the health care fraud and money laundering conspiracies merged. For his part, Gibson III argues that the district court infringed his constitutional rights by limiting one of his cross-examinations and by admitting a co-conspirator's confession, in violation of the Bruton doctrine. He also faults the trial court for giving the jury "deliberate ignorance" instructions on charges requiring specific intent. In turn, Gibson IV posits that the district court imposed too much restitution. Both appellants also invoke the cumulative error doctrine, claiming that the trial court's alleged mistakes infected the verdict. We find no reversible error and thus affirm.

The Bruton Holding:

The Bruton holding is complete, so I just cut and paste:

The Bruton doctrine addresses the thorny Sixth Amendment problem where one defendant confesses out of court and incriminates a co-defendant without testifying at their joint trial. In its landmark opinion, the Bruton Court reversed a defendant's postal robbery conviction, see 18 U.S.C. § 2114, on Confrontation Clause grounds where his non-testifying co-defendant had made "powerfully incriminating" statements against the defendant in a pretrial confession, 391 U.S. at 135-36. At trial, a postal inspector testified that the declarant twice confessed—once to say that both the declarant and the defendant committed the robbery, and again to admit to having an "an accomplice he would not name[.]" Id. at 124. Though the trial judge instructed the jury to consider the confessions against only the declarant, the Supreme Court reversed the conviction because there was a "substantial risk that the jury, despite instructions to the contrary, looked to the incriminating extrajudicial statements in determining petitioner's guilt[.]" Id. at 126.

Interesting NonTax Case on Willful Blindness (10/3/17)

In United States v. Parker, 2017 U.S. App. LEXIS 18103 (1st Cir. 2017), here, Parker was convicted of firearm transportation and firearm transportation after a felony conviction. 18 USC §§ 922(g)(1) and (a)(3).  Parker raised several interesting issues, but I focus on the willful blindness issue because it has played a prominent role in criminal tax cases.

As I read the Court of Appeals' discussion, the parties apparently did not ask for the instruction; rather, the judge raised the issue:

At a charge conference held before the close of evidence, the judge asked the parties if he should give a willful-blindness instruction and if so, why.

Of course, the defense will not ask for the instruction, so the judge was apparently just helping the Government out by raising the issue.  So, as recounted by the Court of Appeals, this happened:

The prosecutor responded that yes, the judge should give the charge. For support, the prosecutor pointed to Parker's post-arrest statement to law enforcement that Scott had paid him $200 "like three times" to drive him to New Hampshire but that "each time, when we stayed in the hotel, when we came back to Boston, the only thing we came back with was marijuana." Parker added that he "didn't want to know" what else Scott was up to — and though Scott once went to the car to get "stuff," a word Parker took to mean guns, Parker claimed that he left the room because he "didn't want to know about nothing." According to the prosecutor, Parker's comments show "that he's willfully blind by attempting to close his eyes to the conduct." "I think it's fairly presented in the evidence or it certainly will be when the government introduces [the] statement tomorrow," the prosecutor stressed. 

Parker's lawyer saw things differently, to put it mildly. The government does not "have to" put Parker's statement in evidence, counsel said. "We're not putting any evidence in" on the lack-of-knowledge issue, he added. And, he noted, the prosecutor "can't put [the statement] in and then say I want to get a particular instruction that otherwise would be inappropriate." Focusing on the proposed instruction's language, counsel complained that the judge could not use it because it would have "the effect of shifting the burden of proof" on the questions of Parker's knowledge and intent. 

The judge reserved ruling on the matter, saying he wanted to see what Parker said, "assuming [the statement] comes in." "I'm going to go back and look at the case law on willful blindness, when it's appropriate and when it isn't and give some more thought to it," the judge added. The next day, the judge told the parties that he intended to give a willful-blindness instruction. Regardless of whether Parker claims a lack of knowledge, the judge ruled, his statement — if it is as represented by the government — "suggest[s] a conscious course of deliberate ignorance," and the charge "as drafted does not suggest in any way that an inference of knowledge is mandated." Later that morning, the government — without objection — introduced the statement. 

The government rested its case that same day. The defense, in turn, rested too — without calling any witnesses. The attorneys then made their closing arguments. And the judge gave the final charge to the jury.  

Pertinently for our purposes, the judge instructed the jury that it "may infer" Parker "had knowledge of a fact if" it found Parker "deliberately closed his eyes to a fact that otherwise would have been obvious to him." "[T]o make such an inference," the judge explained, the jury had to "find two things: [f]irst, that [Parker] was aware of a high probability of the fact in question; and, [s]econd, that [he] consciously and deliberately avoided learning that fact — that is to say, he willfully made himself blind to that fact." And, the judge emphasized, whether Parker "deliberately closed his eyes to [a] fact, and, if so, what inference, if any, should be drawn," was "entirely up to you." Also, the judge cautioned the jury that Parker "must have consciously and deliberately avoided learning the fact" — neither "[m]ere negligence, recklessness or mistake in failing to learn the fact," nor "[t]he fact that a reasonable person in [Parker's] position would have known the fact," sufficed. Plus, the judge warned that a finding that Parker "made himself willfully blind to one or more facts" was not alone "sufficient to find him guilty of a crime." Rather, the prosecution had to "prove[] all of the elements of the crimes as charged in the indictment" — something the judge stressed after referring to Parker's presumption of innocence and the prosecution's burden to prove beyond a reasonable doubt the elements of each offense.

The Court of Appeals affirmed the use of the instruction as follows:

The Willful Blindness Concept -- What Does It Do? (1/23/17)

Willfulness is a statutory element of most Title 26 tax crimes.  E.g., § 7201 (tax evasion), here.  Willfulness is the "voluntary, intentional violation of a known legal duty." Cheek v. United States, 498 U.S. 192, 201 (1991).  Willfulness has been described as "specific intent to violate a known legal duty."  Safeco Ins. Company of America v. Burr, 551 U.S. 47, 58 n. 9 (2007) (citing Cheek).  For example, a typical jury instruction on the willfully element for tax evasion is (Seventh Circuit Pattern Jury Instructions, here, quoted in DOJ Tax CTM Government Proposed Jury Inst. No. 26.7201-18, here):

The term “willfully” means the voluntary and intentional violation of a known legal duty, in other words, acting with the specific intent to avoid paying a tax imposed by the income tax laws or to avoid assessment of a tax that it was the legal duty of the defendant to pay to the government, and that the defendant knew it was his/her legal duty to pay.

The question I address today is the role of the concept of willful blindness with respect to the willfulness element of tax crimes.  I have discussed this issue before and list at the bottom of this blog entry some of my more significant prior blog entries dealing with some aspect of this issue.  I want to address it again today because I continue to be concerned about the issue and would appreciate feedback from readers either by comment or by email (jack@tjtaxlaw.com).

First, readers should be aware that the willful blindness concept goes by several names -- willful ignorance, deliberate blindness, deliberate ignorance, conscious avoidance, etc.  I use the term willful blindness in the current blog.   (For more on the issue of the use of various terms and my decision to use willful blindness in this blog entry, see the note at the end of this blog entry.)  The key for present purposes to make sure that the use of the term willful blindness is not in any way conflated with the willfulness element of the tax crime.

In Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (2011), here, a civil patent case, the Supreme Court found support for applying a similar concept in the civil patent infringement area.  In dicta, the Court said (footnotes omitted):

The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes  by deliberately shielding themselves from clear evidence of [*2069]  critical facts that are strongly suggested by the circumstances. The traditional rationale for this doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge. Edwards, The Criminal Degrees of Knowledge, 17 Mod. L. Rev. 294, 302 (1954) (hereinafter Edwards) (observing on the basis of English authorities that “up to the present day, no real doubt has been cast on the proposition that [willful blindness] is as culpable as actual knowledge”). It is also said that persons who know enough to blind themselves to direct proof of critical facts in effect have actual knowledge of those facts. See United States v. Jewell, 532 F.2d 697, 700 (CA9 1976) (en banc). 

This Court's opinion more than a century ago in Spurr v. United States,  174 U.S. 728, 19 S. Ct. 812, 43 L. Ed. 1150 (1899), while not using the term “willful blindness,” endorsed a similar concept. The case involved a criminal statute that prohibited a bank officer from “willfully” certifying a check drawn against insufficient funds. We said that a willful violation would occur “if the [bank] officer purposely keeps himself in ignorance of whether the drawer has money in the bank.” Id., at 735, 19 S. Ct. 812, 43 L. Ed. 1150. Following our decision in Spurr, several federal prosecutions in the first half of the 20th century invoked the doctrine of willful blindness. Later, a 1962 proposed draft of the Model Penal Code, which has since become official, attempted to incorporate the doctrine by defining “knowledge of the existence of a particular fact” to include a situation in which “a person is aware of a high probability of [the fact's] existence, unless he actually believes that it does not exist.” ALI, Model Penal Code § 2.02(7) (Proposed Official Draft 1962). Our Court has used the Code's definition as a guide in analyzing whether certain statutory presumptions of knowledge comported with due process. See Turner v. United States, 396 U.S. 398, 416-417, 90 S. Ct. 642, 24 L. Ed. 2d 610 (1970); Leary v. United States, 395 U.S. 6, 46-47, and n. 93, 89 S. Ct. 1532, 23 L. Ed. 2d 57 (1969). And every Court of Appeals--with the possible exception of the District of Columbia Circuit, see n. 9, infra--has fully embraced willful blindness, applying the doctrine to a wide range of criminal statutes.

Seventh Circuit Opinions (Majority and Dissenting) on Use of Stingray Technology for Cell-Phone Information (11/26/16)

I have written before about federal law enforcement -- specifically IRS -- use of cell site simulators, often called Stingrays (the trademark of one brand of simluator).  IRS Use of Cell-Site Simulators (Also called Stingray) to Retrieve Information About and From Cell Phones (Federal Tax Crimes Blog 12/3/15), here.  The Seventh Circuit has just issued a decision involving the use of cell site simulators.  The technology was not used in a criminal tax investigation, but it could be so used.  Of course, in a federal criminal investigation, as noted in the prior blog entry, the DOJ Guidelines for use will be honored and the IRS has agreed to respect those guidelines.  But, since court opinions about use of the technology are rare (at least to date), I thought readers might want to know about a recent case with thoughtful majority and dissenting opinions on the use of the technology.

In United States v. Patrick, ___ F.3d ___, 2016 U.S. App. LEXIS 21090 (7th Cir. 2016), here, local police located a person for whom an arrest warrant had been issued by using stingray technology.  Police had first obtained a warrant to use the technology.  It did not specifically advise the court issuing the warrant for the electronic location as to precisely how it would locate the target.  Federal charges were then brought based on the fruits of the arrest.  The use of the stingray technology to locate the person was discovered only in post appeal briefing.  So, the issue presented to the Seventh Circuit was whether the use was inappropriate -- either at all or without a warrant or without a warrant issued for its specific use -- and if not in any respect, could this person obtain relief.

Judge Easterbrook wrote the majority opinion, joined by Judge Kanne.  Judge Wood wrote the dissenting opinion.  I have had occasion over the years to focus on the opinions of Judges Easterbrook and Wood.  Both are great judges.  I am less familiar with Judge Kanne, but he did not author the opinions.

I think the briefs might be helpful, but have been unable to log onto Pacer to obtain them.  I did find the link to the Amicus brief, here.:

I recommend that readers interested in this issue read both opinions.  I won't try to summarize them here, but I will excerpt portions discussing the potential uses of the technology.

Judge Easterbrook quotes the DOJ Guidance which I quote and link in my original blog entry.

Judge Easterbrook then says:

If the Department's description is accurate (a question not explored in this litigation) law-enforcement officials get the same sort of information that a phone company could provide using its own facilities, and they get it in real time rather than waiting for the phone company to turn over data. But instead of collecting information on just one person, as the warrant in this proceeding entitled the police to learn Patrick's location, a cell-site simulator collects the relative location of everyone whose phone is induced to connect to the simulator—though it may discard that information before alerting officials to the presence of the sought-after person (just as the phone company, which has location data about all of its customers, would disclose only one person's location). 

One potential question posed by use of a cell-site simulator would be whether it is a "search" at all, or instead is covered by Smith v. Maryland, 442 U.S. 735, 99 S. Ct. 2577, 61 L. Ed. 2d 220 (1979), and United States v. Knotts, 460 U.S. 276, 103 S. Ct. 1081, 75 L. Ed. 2d 55 (1983). The former holds that a pen register is not a search because it reveals the making of a call, and the number called, but not the call's communicative content. The latter holds that the use of a beeper is not a search, because it reveals a suspect's location but nothing else. Recent decisions such as United States v. Graham, 824 F.3d 421 (4th Cir. 2016) (en banc), and United States v. Carpenter, 819 F.3d 880 (6th Cir. 2016), apply these principles to hold that tracking a person via data from phone companies is not a search within the scope of the Fourth Amendment. (Graham involved historical cell-tower location information and Carpenter involved "transactional records" from phone companies, so both cases dealt with the sort of information covered by the location warrant in this proceeding.) Police freely use databases, containing information such as the addresses associated with automobile license plates and persons licensed to drive, to track down suspects; they search trash for credit card receipts showing where he made purchases; they consult a suspect's relatives and friends (and sometimes his enemies) to learn his whereabouts; no one thinks that those methods require a search warrant. 

A contrary line of argument analogizes cell-site simulators to GPS locators, which are treated as searches when police enter private property to install them, see United States v. Jones, 565 U.S. 400, 132 S. Ct. 945, 181 L. Ed. 2d 911 (2012), and may be searches when used for extended durations even if installed with a vehicle owner's consent, id. at 954-64 (concurring opinions of Sotomayor and Alito, JJ.). If a cell-site simulator is like a GPS tracker, and if the approach of the concurring opinions in Jones is adopted, then it would be necessary to know how long the police used a simulator while searching for Patrick and just how accurate is the location information it provides. (Is it information that leaves uncertainty about where in several city blocks a suspect may be, such as the beeper in Knotts, or is it closer to the precise location supplied by a GPS tracker?) Cf. Kyllo v. United States, 533 U.S. 27, 121 S. Ct. 2038, 150 L. Ed. 2d 94 (2001) (thermal image of the inside of a house is a search, given a person's strong privacy interest in his dwelling). 

The United States has conceded for the purpose of this litigation that use of a cell-site simulator is a search, so we need not tackle these questions. The parties join issue, however, on the significance of the fact that police did not reveal to the state judge who issued the location-tracking warrant that they planned to use a cell-site simulator—indeed, implied that they planned to track him down using his phone company's data. Patrick says that leaving the judge in the dark (perhaps misleading the judge by omitting a potentially material fact) makes the location-tracking warrant invalid. This poses the question whether a judge is entitled to know how a warrant will be executed. 

Articles on ICIJ's Panama Papers and Ramifications (4/12/16)

I've been traveling most of the day, so don't have much to offer.  I'll be back up and running in full stride tomorrow.

Eamon Javers, Swiss banker whistleblower: CIA behind Panama Papers (CNBC 4/12/16), here.  This article quotes Bradley Birkenfeld as saying that "the CIA I'm sure is behind this."  Well.

Panama Papers: Spy agencies widely used Mossack Fonseca to hide activities (RT 4/12/16) here. Excerpts:

Intelligence agencies from several countries, including CIA intermediaries, have abundantly used the services of Panamanian law firm Mossack Fonseca to "conceal" their activities, German newspaper Sueddeutsche Zeitung (SZ) says, citing leaked documents. 

Both "secret agents and their informants have used the company's services," wrote the newspaper, which earlier this month published online materials based on 11.5 million documents from the Panamanian law firm. It has been called the largest leak on corruption in journalistic history. 

"Agents have set up shell companies to conceal their activities," the Munich-based newspaper reported, adding that there are CIA mediators among them. 

According to SZ, Mossack Fonseca's clients also included some of those involved in the so-called Iran-Contra affair, in which several Reagan administration officials secretly facilitated arms sales to Iran in the 1980s in order to secure the release of US hostages and fund Nicaragua's Contra rebels. 

The Panama Papers also claim to reveal that some "former high-ranking officials of the intelligence services of Saudi Arabia, Colombia and Rwanda" are listed amongst the company's clients. Among them was Sheikh Kamal Adham, the former Saudi intelligence chief, who according to SZ, was "one of the CIA's key intermediaries in the 1970s" in the Middle East region.

Holly Watt, Panama Papers: global tax officials to launch unprecedented inquiry (Guardian 4/12/16), here.  Excerpts:

Tax investigators from 28 countries will meet in Paris on Wednesday to launch an unprecedented international inquiry following the publication of the Panama Papers.
Senior officials from tax authorities around the world have said they intend to work together to analyse information revealed by the documents, which have provoked international concern over the offshore industry. 

Investigations have been launched in a number of countries over the past week, but the Paris meeting will be an attempt to develop a global strategy to crack down on offenders.
The sheer scale of the leak – 11.5m documents, covering 210,000 companies in 21 offshore jurisdictions – has led to Wednesday’s hastily arranged meeting.

ICIJ Panama Report on Offshore Financial and Enabler Skulduggery (4/4/16; 4/5/16)

The International Consortium of Investigative Journalists ("ICIJ"), here, has another blockbuster release titled Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption (4/3/16), here.  The focus this time seems to be on the nontax side of offshore secrecy.  The article mentions some rich, famous and notorious players of the game.  I excerpt certain key parts that caught my attention (without dwelling on the players other than the major Panamanian law firm discussed):

In this story

• Files reveal the offshore holdings of 140 politicians and public officials from around the world 
• Current and former world leaders in the data include prime ministers of Iceland and Pakistan, the president of Ukraine, and the king of Saudi Arabia
• More than 214,000 offshore entities appear in the leak, connected to people in more than 200 countries and territories
• Major banks have driven the creation of hard-to-trace companies in offshore havens

* * * * 

The cache of 11.5 million records shows how a global industry of law firms and big banks sells financial secrecy to politicians, fraudsters and drug traffickers as well as billionaires, celebrities and sports stars. 

* * * * 

“These findings show how deeply ingrained harmful practices and criminality are in the offshore world,” said Gabriel Zucman, an economist at the University of California, Berkeley and author of “The Hidden Wealth of Nations: The Scourge of Tax Havens.” Zucman, who was briefed on the media partners’ investigation, said the release of the leaked documents should prompt governments to seek “concrete sanctions” against jurisdictions and institutions that peddle offshore secrecy. 

* * * * 

Most of the services the offshore industry provides are legal if used by the law abiding. But the documents show that banks, law firms and other offshore players have often failed to follow legal requirements that they make sure their clients are not involved in criminal enterprises, tax dodging or political corruption. In some instances, the files show, offshore middlemen have protected themselves and their clients by concealing suspect transactions or manipulating official records. 

* * * * 

The documents make it clear that major banks are big drivers behind the creation of hard-to-trace companies in the British Virgin Islands, Panama and other offshore havens. The files list nearly 15,600 paper companies that banks set up for clients who want keep their finances under wraps, including thousands created by international giants UBS and HSBC. 

* * * *

Fifth Circuit Speaks on Deliberate Ignorance (6/17/15)

In United States v. Kuhrt, ___ F.3d ___, 2015 U.S. App. LEXIS 9438 (5th Cir. Tex. 2015), here, the Fifth Circuit spoke most recently on deliberate ignorance.  (Note that the concept goes by various names, such as willful ignorance, conscious avoidance, etc.; early on, I used the key word conscious avoidance and have continued to use that term as the link term at the bottom of the blog entry.)  The defendant was convicted for nontax crimes requiring knowledge -- "for wire fraud and conspiracy to commit wire fraud, in violation of 18 U.S.C.S. §§ 1343 and 1349" which are here and here.  The trial court gave the jury the standard Fifth Circuit deliberate ignorance instruction which is (from the Fifth Circuit Pattern Jury Instructions (2001 ed.), par. 1.37, "Knowingly" - To Act, pp. 50-51, here) as follows:

[You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.]

The Note elaborates

 With regard to the deliberate ignorance instruction and the appropriate occasions for its submission, see United States v. Peterson, 244 F.3d 385 (5th Cir.), petition for cert. filed (U.S. June 5, 2001) (No. 00-10428); United States v. Sharpe, 193 F.3d 852 (5th Cir. 1999), cert. denied, 120 S.Ct. 1202 (2000); United States v. Moreno, 185 F.3d 465 (5th Cir. 1999), cert. denied, 120 S.Ct. 835 (2000); United States v. Threadgill, 172 F.3d 357 (5th Cir.), cert. denied, 120 S.Ct. 172 (1999); United States v. Lara-Velasquez, 919 F.2d 946 (5th Cir. 1990). The bracketed material should be used sparingly–only when the facts and statute under which the defendant is being prosecuted justify it. See United States v. Chen, 913 F.2d 183 (5th Cir. 1990). If a deliberate ignorance instruction is
given, a “balancing” instruction should be considered upon request of defendant. See United States v. Farfan-Carreon, 935 F.2d 678 (5th Cir. 1991).  

The deliberate ignorance instruction “does not lessen the government’s burden to show, beyond a reasonable doubt, that the knowledge elements of the crimes have been satisfied.” United States v. Reveles, 190 F.3d 678, 686 (5th Cir. 1999).  

A judge is cautioned that, in instructing on a statute which punishes “otherwise innocent conduct,” the knowledge requirement applies to each element. United States v. Ahmad, 101 F.3d 386, 390 (5th Cir. 1996), reh’g and suggestion for reh’g en banc denied, 108 F.3d 335 (5th Cir. 1997). 

When a deliberate ignorance instruction is appropriate only with respect to one of a group of co-defendants, the Fifth Circuit has approved the giving of the instruction accompanied by a statement that the instruction may not apply to all of the defendants. United States v. Reissig, 186 F.3d 617 (5th Cir. 1999), cert. denied, 120 S.Ct 832 (2000).

 Here is the full discussion of the topic from the Kuhrt decision:

On Ignorance - Deliberate or Otherwise (6/17/15)

I have written a lot about the mens rea concept that goes by various monikers such as deliberate ignorance, willful blindness, conscious avoidance etc. Today, I was reading a blog entry on the Volokh Conspiracy (I suppose that is an admission against interest) that deals with the large topic of Ignorance Studies.  Ilya Somin, Everything you ever wanted to know about ignorance, but were afraid to ask – the “Routledge International Handbook of Ignorance Studies” (Volokh Conspiracy 6/16/15), here.  The Amazon link for the book is here.

The facets of ignorance are too great to cover here (and, in any event, I am ignorant of most of those facets).  But I will focus on the portion of the blog entry that deals with some variation of the concept of deliberate ignorance.  Professor Somin starts by knowing that it is a large compendium on multiple facets of ignorance by many authors who, I suppose, make some claim to not be ignorant on the subjects they discuss.  Professor Somin then says:

My own contribution to the volume deals with the phenomenon of rational ignorance – situations where people make rational choices to forego acquiring knowledge that is potentially available to them. My previous work on rational ignorance focuses primarily on voter ignorance, which I argue is often dangerous. But in the Handbook chapter, I emphasize that in many situations, rational ignorance is actually beneficial. If people always learned the maximum possible amount of knowledge, they would pass up opportunities to use the same resources for more valuable purposes. Still, the chapter also emphasizes how rational ignorance can be harmful in situations where individually rational behavior can lead to bad collective outcomes. For example, it is often rational for individual for voters to be ignorant about politics; but an entire electorate of mostly ignorant voters can be a real menace. The chapter also explains why rational behavior (including rational ignorance) isn’t necessarily morally right, and how rational ignorance differs from irrational ignorance and what I call “inadvertent” ignorance.

Readers might want to review the Supreme Court decision in Global-Tech Appliances, Inc. v. SEB S.A., ___ U.S. ___, 131 S. Ct. 2060 (2011), Court slip opinion here and casetext opinion here.  Global-Tech is discussed in many blogs since the decision, but here is my blog entry on the decision: Global-Tech in Supreme Court Speaks on Willful Blindness (Federal Tax Crimes Blog 6/2/11), here.  For all blogs on the subject, click on the link below for Conscious Avoidance (which is the term I use on this blog for the concept going by the various names noted above.

Keep in mind that Global-Tech was a civil case but did discuss the used of deliberate ignorance in a criminal setting.  And, even in the civil setting discussed, it did not have the heightened level of mens rea applicable in tax and related crimes -- intentional violation of a known legal duty, which requires that the defendant know the duty (i.e., know the law) and intend to violate the law.

Which reminds me of one of the sayings of Will Rogers:  "You know everybody is ignorant, only on different subjects."

Deustche Bank's Offices Raided in Investigation of Tax Shelter Behavior; Echoes of Compaq Bullshit Tax Shelter (6/10/15)

This news item of a German authority raid on Deutsche Bank's headquarters involved potential behavior that sounds familiar.  Jenny Strasburg, Deutsche Bank Headquarters Raided in Tax-Fraud Probe (WSJ 6/9/15), here; see also Mihret Yohannes and Kaja Whitehouse, Deutsche Bank headquarters raided in probe (USA Today 6/9/15), here, From the WSJ article.

People close to the investigation said prosecutors were examining what role Deutsche Bank and its clients played in controversial “dividend arbitrage” trades that have been used by a wide range of financial firms and investors to reduce taxes on stock dividends by taking advantage of loopholes in European tax law. 

The German prosecutors have been focused on a type of dividend-arbitrage strategy known as “cum/ex,” which were done using dividend-paying shares, the people said. The strategy has been employed using shares issued by companies in Germany, Austria and a handful of other countries. Other legal battles have played out, including in Switzerland, tied to tax refunds paid by their governments stemming from dividend-tax trades. 

* * * * 

The term “cum/ex” refers to the timing of the transactions around dividend payments, when the market value of the shares declines after the dividend is no longer factored into the price. 

In past years, investment firms and banks used the carefully coordinated cum/ex trades to claim rebates on withholding-tax payments despite not having actually paid such taxes in the first place, according to market participants, lawyers and others familiar with the trades. 

* * * * 

The market for German cum/ex trades largely died off in 2011, when tax authorities closed loopholes and exchange officials fine-tuned how they handled certain transactions, making the trades less-profitable. Cum/ex trades continued on a smaller scale in other countries, but have subsided, market participants say. 

Deutsche Bank was among a number of active cum/ex market participants for several years and employed some traders who went on to start funds specializing in the trades, according to traders and brokers familiar with the transactions and trading documents reviewed by the Journal. The bank provided financing for some clients to carry out the strategy, including with asset-management firms that catered to wealthy individuals, the market participants said. 

Other European and global banks were also active in cum/ex trades, helped by close relationships with wealthy European investors and fund managers geographically located to take advantage of quirks in tax rules. A Deutsche Bank spokesman didn’t comment on the bank’s past cum/ex activity. 

German prosecutors and tax authorities have been pursuing a yearslong investigation of cum/ex trades, alleging that firms fraudulently obtained hundreds of millions of dollars’ worth of tax benefits. German authorities have sought help from other European governments, including in the U.K., to gather information about specific trades and clients, the Journal reported last year.

This sounds like a variation of the bullshit tax shelter involved in  Compaq Computer Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001), here; and IES Industries, Inc. v. United States, 253 F.3d 350 (8th Cir. 2001), here. The courts in those cases blessed the bullshit tax shelters. Here, however, is what the Federal Circuit recently said about those holdings in Salem Financial, Inc. v. United States, ___ F.3d ___ (2015), here:

ABA Tax Lawyer Publication Comment on FBAR Willful Penalty (2/16/15)

I refer readers to a very good Comment in the most recent ABA Section of Taxation Tax Lawyer publication on the FBAR willfulness penalty.  Kyle Niewoehner, Feigning Willfulness: How Williams and McBride Extend the Foreign Bank Accounts Disclosure Willfulness Requirement and Why They Should Not Be Followed, 68 Tax Lawyer 251 (2014), here.  The author is a J.D. Candidate in 2015 from Georgetown University Law Center.  The author acknowledges assistance from Jody Brewster, a Partner at Skadden, Arps, Slate, Meagher & Flom and Raven Keith, Georgetown University Law Center, J.D. Candidate 2015.  Here are some excerpts (footnotes omitted):

Since being handed enforcement authority from the Financial Crimes Enforcement Network in 2003, the Service has begun a campaign to provide stricter enforcement of the long-neglected Report of Foreign Bank and Financial Accounts (FBAR), which requires disclosure of foreign financial assets through Form TD F 90-22.1. Willful violations were required for any penalty under the pre-2004 law and carry heavy penalties under existing law, so these enforcement efforts rely to a great extent on the interpretation of the willfulness provision. 

Williams and McBride were the first two cases to address the willfulness requirement for an FBAR civil penalty. In Williams, the court held that failing to file an FBAR after signing a tax return constitutes “a conscious effort to avoid learning” about the FBAR requirement, which satisfies the willfulness requirement. In McBride, the court held that signing a tax return constitutes knowledge of the duty to comply with FBAR, which satisfies the willfulness requirement. By holding that taxpayers willfully violate the FBAR statute simply by signing a tax return and then failing to file, both Williams and McBride construe the willfulness requirement more broadly than applicable precedent would have dictated.

This Comment argues that the current text of the statute and precedent require a more narrow reading of the FBAR willfulness requirement. It argues that taxpayers should not be charged with constructive knowledge after signing a tax return. Instead, a court should have to find that the taxpayer is aware of the existence of the FBAR requirement in order to find a willful violation. In addition to being consistent with the text of the statute and precedent, this approach would avoid the liability nightmare created by a combination of the Williams–McBride strict liability standard and the ill-defined “other financial  account” language in the law. 

* * * * 

The Williams–McBride interpretation of the willfulness requirement in 31 U.S.C. § 5321(a)(5) is flawed because it imposes a strict liability standard where both the statute and the case law indicate otherwise. 

* * * * 

Before addressing the ways this standard misapprehends precedent, it must be noted that this standard cannot possibly be applied to the current version of section 5321(a)(5). Under the pre-2004 version applicable in Williams and McBride, the civil penalty in section 5321(a)(5) could be assessed only for willful violations. But under the current version of section 5321(a)(5), there are separate penalties for non-willful violations. Using the Williams–McBride standard of willfulness, it is difficult to conceive of how a violation could be nonwillful. 

* * * * 

IV. Conclusion: Future Courts Should Look to Sturman 

The solution for future courts is to look past the flawed Williams–McBride reasoning and adhere to the Sturman standard, which looked for an actual intent to violate the FBAR requirement or a course of conduct that would allow a court to infer willfulness. This would clearly avoid the liability problems created by the strict liability of Williams–McBride while upholding the relevant Supreme Court precedent and the current version of the statute.

More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (7/22/14)

Yesterday, I wrote a blog titled Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.  In that blog, I concluded that willful blindness for purposes of the income tax and the FATCA willful penalty did not include gross negligence or its parallel recklessness.  A reader pointed out that the Fourth Circuit had concluded that recklessness could meet the definition of willfulness.  United States v. Williams, 489 Fed. Appx. 655; 2012 U.S. App. LEXIS 15017 (4th Cir. 2012).  (For my prior blog on the Williams case, see Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here.)  Today's blog addresses this aspect of the Williams holding.

I will focus on the FBAR side of the issue here.  The FBAR willfulness civil penalty is as follows (Section 5321(a)(5)(C), here:

(C) Willful violations.— In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
    (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
        (I) $100,000, or
        (II) 50 percent of the amount determined under subparagraph (D), 

So, the key statutory term is willfully.  As the Courts have noted on many occasions, when Congress uses the term willfully in statutory schemes, it may mean different things.  See Bryan v. United States, 524 U.S. 184, ___ (1998), here; see also former Justice Souter's opinion in  Justice Souter’s opinion in United States v. Marshall, 2014 U.S. App. LEXIS 10415 (1st Cir.  2014), here (“willful” is a “chameleon” which changes in tone and color according to the Code section involved and the circumstances).  However, as Cheek noted, in the federal tax criminal provisions, it means intent to violate a known legal duty, the strictest formulation of scienter for the word willfully.  Cheek v. United States, 498 U.S. 192 (1991), here.  In Ratzlaf v. United States, 510 U.S. 135 (1994), here, the Supreme Court held that willfully as used in Section 5322(a), here, the criminal provision for willfully violating the antistructuring provisions, should be interpreted the same as in Cheek -- intent to violate a known legal duty.  Ratzlaf had to know that structuring was illegal and intend to violate the law in order to be prosecuted.  In the course of so holding, the Court said:

A term appearing in several places in a statutory text is generally read the same way each time it appears. See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479, 120 L. Ed. 2d 379, 112 S. Ct. 2589 (1992). We have even stronger cause to construe a single formulation, here § 5322(a), the same way each time it is called into play. See United States v. Aversa, 984 F.2d 493, 498 (CA1 1993) (en banc) ("Ascribing various meanings to a single iteration of [§ 5322(a)'s willfulness requirement] -- reading the word differently for each code section to which it applies -- would open Pandora's jar. If courts can render meaning so malleable, the usefulness of a single penalty provision for a group of related code sections will be eviscerated and . . . almost any code section that references a group of other code sections would become susceptible to individuated interpretation.").

The FBAR criminal penalty is in Section 5322(a) also. The FBAR civil willfullness penalty is part of the same regulatory scheme, incorporated in the immediately  preceding Code section, Section 5321.  Significantly, Section 5321(d) says that the civil penalty can apply "notwithstanding the fact that a criminal penalty is imposed with respect to the same violation."  So, referring to the above quote from Ratzlaf, willfulness for purposes of the civil penalty would have the same interpretation of willfully -- intent to violate a known legal duty.  Hence, the IRM  says that, for purposes of the FBAR civil penalty, "The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.  4.26.16.4.5.3  (07-01-2008) FBAR Willfulness Penalty - Willfulness, here.  We thus do not have to pick among possible meanings of willfully, we know the meaning of willfully.

Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (7/21/14)

Readers are aware of the willful blindness concept.  (Willful blindness goes by various labels, such as willful ignorance, conscious avoidance, etc.)  For most tax crimes and the FBAR crimes, willfulness -- defined as specific intent to violate a known legal duty -- is required.  Ignorance is an excuse.  In the context of tax crimes requiring willfulness, the willful blindness construct says that, if a trier of fact is otherwise unable to find the requisite specific intent for willfulness, the trier may consider the fact that the defendant deliberately acted in a way to be – or appear to be – ignorant of the facts or the law applicable to the facts and treat that real or feigned ignorance as either (i) the equivalent of the specific intent required or (ii) an inference of the specific intent which, with the other evidence, will permit the trier to find the required specific intent beyond a reasonable doubt.  (As I note below, I think the second of these is the only legally permissible application of the concept; willful blindness is not the equivalent of specific intent.)  In either event, if permitted, it can lead to a conviction of a crime requiring specific intent where the evidence might otherwise be insufficient for the trier to find the requisite specific intent.  In the FBAR civil penalty context, the willful blindness concept can permit the application of the FBAR willful civil penalty.

I have discussed before how uncertain the application of the willful blindness concept is.  The uncertainty has presented itself again in the certification for Streamlined relief -- offshore with a 0% penalty and domestic with a 5% penalty.  In each case, the U.S. person must certify that he or she was not willful in failing to report income or failing to file FBARs.   The certification is:

My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

I will demonstrate in the remainder of this blog that this definition of nonwillfulness is incomplete unless it is meant to state a special definition of nonwillfulness for the program (which I doubt).

Let's start with a discussion of the conceptual problem with the concept.  If the concept means that, as to a crime or penalty requiring specific intent, anything less than specific intent can be willful, then it expands the scope of the criminal statute or civil penalty by judicial interpretation.  For this reason, if willful blindness is to be in the landscape for tax crimes or FBAR crimes and penalties, the better interpretation for its application is the second alternative noted above – it merely permits an inference of specific intent which, with the other evidence, will permit the trier to find the required specific intent to the required level -- beyond a reasonable doubt in criminal cases and either preponderance or clear and convincing in a civil case.  E.g., United States v. Stadtmauer, 629 F.3d 238 (3d Cir. 2010) (approving jury instruction that "A finding beyond a reasonable doubt of a conscious purpose by the defendant to avoid knowledge that the tax returns at issue were false or fraudulent as to a material matter would permit an inference that he had such knowledge.") In other words, a finding of willful blindness is not a substitute for statutorily required specific intent.  As the DOJ CTM 8.08[4], here, warns prosecutors regarding conscious avoidance (same as willful blindness)

Judge Rakoff Speaks on the Dearth of Prosecutions from the Financial Crisis (12/18/13)

The notable and quotable Judge Jed Rakoff does it again in this article, The Financial Crisis: Why Have No High-Level Executives Been Prosecuted? (New York Review of Books 1/9/2014), here.  Yes although I often make mistakes on dates, this is on the one the printed --- well, the web -- page.  Perhaps that is the print publication date, but you can access it immediately via the link above.

Some commenters on this blog have lamented the prosecution off Swiss banks and their enablers and asked why, in effect, those who live in glass houses should cast those stones.  Perhaps this is an instance that tends to prove their case.

The whole article is a good read.  Excerpts I found interesting are:

But if, by contrast, the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years. Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past fifty years or so in bringing to justice even the highest-level figures who orchestrated mammoth frauds. Thus, in the 1970s, in the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken. 

* * * * 

Without giving further examples, the point is that, in the aftermath of the financial crisis, the prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud. In a nutshell, the fraud, they argued, was a simple one. Subprime mortgages, i.e., mortgages of dubious creditworthiness, increasingly provided the chief collateral for highly leveraged securities that were marketed as AAA, i.e., securities of very low risk. How could this transformation of a sow’s ear into a silk purse be accomplished unless someone dissembled along the way? 

* * * * 

But what I do find surprising is that the Department of Justice should view the proving of intent as so difficult in this case. Who, for example, was generating the so-called “suspicious activity reports” of mortgage fraud that, as mentioned, increased so hugely in the years leading up to the crisis? Why, the banks themselves. A top-level banker, one might argue, confronted with growing evidence from his own and other banks that mortgage fraud was increasing, might have inquired why his bank’s mortgage-based securities continued to receive AAA ratings. And if, despite these and other reports of suspicious activity, the executive failed to make such inquiries, might it be because he did not want to know what such inquiries would reveal?
This, of course, is what is known in the law as “willful blindness” or “conscious disregard.” It is a well-established basis on which federal prosecutors have asked juries to infer intent, including in cases involving complexities, such as accounting rules, at least as esoteric as those involved in the events leading up to the financial crisis. And while some federal courts have occasionally expressed qualifications about the use of the willful blindness approach to prove intent, the Supreme Court has consistently approved it. As that Court stated most recently in Global-Tech Appliances, Inc. v. SEB S.A. (2011): 

The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances. 

Thus, the department’s claim that proving intent in the financial crisis is particularly difficult may strike some as doubtful.