Tuesday, December 31, 2013

Swiss Banks Participating in US DOJ Program (12/31/13)

This is my rough and ready list of participating Swiss banks.  I am sure that there are omissions, errors as to categories, etc.  I am incorporating this information into the master spreadsheet, so I would appreciate readers advising of additions, corrections, etc.  I should note that privately owned banks that do not require public reporting apparently do not have to disclose their participation in the program at this time.  Some are reporting participation.  I suppose at some point, almost all will be known, but I am certain this is an incomplete list.

Aargauische Kantonalbank 2
acrevis Bank AG 4
AEK Bank 1826 4
Appenzeller Kantonalbank 4
Baloise Bank SoBa 3
Bank am Bellevue 3
Bank Coop AG 2
Banque Cantonale de Fribourg 2
Banque Cantonale de Genève 2
Banque Cantonale du Jura 2
Banque cantonale du Valais 2
Banque Cantonale Neuchâteloise 2
Banque Cantonale Vaudois 2
Banque Privee Edmond de Rothschild 2
Basellandschaftliche Kantonalbank 3
Berner Kantonalbank 2
Cembra Money Bank AG 3
Cornèr Banca SA 2
Edmond de Rothschild Group 2
EFG International AG 2
Glarus Bank 4
Graubündner Kantonalbank 2
Hyposwiss Privatbank Zurich AG 2
Hyposwiss Private Bank Geneve SA 2
Linth Bank 2
Lombard Odier & Cie. 2
Luzerner Kantonalbank 2
Migros Bank AG 2
Nidwaldner Kantonalbank 2
Notenstein Privatbank Ltd. 3
Obwaldner Kantonalbank 4
Piquet Galland & Cie SA 2
Post Finance 2
Raiffeisen 3
Rothschild Bank AG, Zurich 2
Saanen Bank 2
St. Galler Kantonalbank 2
Schaffhauser Kantonalbank 2
Schwyzer Kantonalbank 4
Ticino Cantonal Bank 2
Union Bancaire Privee 2
Valiant Holding AG 2
Vontobel Holding AG 3
Valartis Bank (Switzerland) 3
VP Bank (Switzerland) 2
Walliser Kantonalbank 2
Zuger Kantonalbank 2

Friday, December 27, 2013

Judge's Improper Question of Defendant as Witness is not Reversible (12/27/13)

In United States v. Ottaviano, 738 F.3d 586 (3d Cir. 2013), here, a precedential opinion,, the defendant was convicted "for mail and wire fraud, money laundering, tax evasion, and conspiracy to defraud the Internal Revenue Service."  The Third Circuit held that the trial judge's questioning of the defendant was improper because it conveyed the trial judges conclusions on the ultimate issue and the credibility of the defendant, issues reserved to the jury.  The Court of Appeals, however, affirmed because, given the overwhelming proof of guilt, the questioning -- clearly error -- was not reversible error.

The Court of Appeals describes the defendant as "one of those peculiar Americans who does not believe himself bound by United States tax law" who promoted that belief to others for his financial gain.  The whole saga of his activities in that promotion is the usual stuff of which this type of tax protestor / tax defier case is made.

At trial, however, the defendant chose to represent himself.  The Court had standby counsel who participated in some portions of the case, including some questioning of the defendant when the defendant, as his own lawyer, chose to testify.  Standby counsel's questions were scripted by the defendant.  At some key points in the defendant's testimony, the Court began asking questions, particularly about the defendant's claim in his sales promotions to have been a law school graduate.  That was a lie.  Apparently not content with the prosecutors' ability to cross-examine on whatever points were appropriate (including the false law school claim), the judge bore in.

The opinion quotes significant portions of the judge's questions that most concerned the Court of Appeals.   Here is a snippet of the questioning which went, in total, for many pages:
THE COURT: Let me ask you this: Did you ever think that it was okay to earn money based on a similar premise you're articulating" 
OTTAVIANO: No, I wouldn't think so.
THE COURT: Wouldn't think so" . . . But it's okay to give law school [sic] your false transcript and to get a degree based on something that was fraudulent or false" That's okay"
The Court of Appeals concluded that this line of questioning by the judge went too far.

Tuesday, December 24, 2013

Articles on U.S. Program for Swiss Banks (12/24/13)

I report on two of the many articles populating the internet.

David Voreacos and Giles Broom, Swiss Banks Employ Army of Advisers for U.S. Amnesty Plan (Bloomberg 12/22/13), here.  Key excerpts:
Switzerland’s 300 banks have enlisted an army of auditors, lawyers and in-house workers as they race to meet a Dec. 31 deadline on whether to seek U.S. amnesty for helping American clients evade taxes. 
 * * * * 
“The hard work is getting to the right data and cutting through complex systems to get all the facts on the table,” said David Fidan, a partner in Deloitte LLP’s forensic services practice in Switzerland. “That’s very expensive and involves lawyers, forensic accountants and bank employees. It can take 20, 30 or 40 people over four or five months for bigger banks.” 
* * * * 
“It’s necessary for the banks to do a deep analysis of their clients and the history of those relationships,” said SBA spokeswoman Sindy Schmiegel. “That’s really expensive, and that’s why the program is at the limit of tolerability for the banks. It’s really a painful program.” 
* * * * 
To gain non-prosecution deals, banks must pay 20 percent of the value of accounts not disclosed to the IRS on Aug. 1, 2008, 30 percent for such accounts opened between then and February 2009 and 50 percent for accounts opened afterward. 
“The view seems to be that the penalty rates for this program came out way too high,” said Milgrim, who is advising a Swiss bank. “A lot of banks are having difficulty deciding whether to go into a program which doesn’t take into account the level of culpability and instead treats all banks the same.” 
* * * *

Sunday, December 22, 2013

Swiss Bank Hype and Over-Hype (12/22/13)

The Swiss hype -- I think, in some respects, overhype -- about the U.S. Swiss bank initiative continues unabated.  Perhaps it is the uncertainty that causes overhype -- perhaps even fear.  But, as I suggested before, setting aside the specific misconduct of specific bankers, the issue for the banks is whether there was enough critical mass developed that the misconduct infected the whole organization (at least in the sense required for business organization prosecution (as opposed to just prosecution to offending specific bankers)).

Let's take a look at one of today's articles.  Swiss banks sign up to reveal hidden accounts (Yahoo Finance 12/22/13), here.  Here are some of the key excerpts for this discussion.
Around 40 of Switzerland's some 300 banks have already said publicly they will take part in a US programme set up to allow Swiss financial institutions to avoid US prosecution in exchange for coming clean and possibly paying steep fines.
* * * *
Banks that opened undeclared accounts for US clients -- especially the ones that actively wooed such clients -- definitely should join the programme, experts say.
JAT Comment:  I think the program is targeted to those who actively wooed such clients.  And, by the same token, since all is relative, it is only the very bad banks that are likely to draw the DOJ fire if they don't join the program.

* * * *
Most so far are signing up for category two and thereby acknowledging they may well have had US clients with undeclared accounts.
JAT Comment:  I don't think banks are joining as Category 2 without some more belief than that they may well have had such U.S. clients with undeclared accounts.  Merely having U.S. clients with undeclared accounts is not the problem for those banks; it is those banks actions to become complicit in the U.S. clients' failure to report the accounts.  If the only problem were that U.S. clients did not comply with U.S. law, the banks would have no criminal exposure.
"More banks have said they will go for category two than would be expected," said Walter Boss, a tax lawyer with Poledna Boss Kurer AG in Zurich. 
Category three, reserved for banks that aim to prove their innocence, "won't be crowded, it looks like," he said.

Saturday, December 21, 2013

Swiss Banks, Federal Principles of Prosecutions of Business Organizations, and the U.S. Swiss Agreement (12/21/13)

A substantial amount of discussion has been generated in comments to earlier blog entries about the U.S. Swiss program for Swiss Banks.  I thought I would flesh out a point implicit in the blog entries I have already made and replies to some of the comments.  As I noted in an earlier blog, Category 2 under the program is designed for banks that might be at risk of criminal prosecution.  The particular language requires that the Swiss Bank have "reason to believe it may have committed tax-related offenses under Titles 18 or 26, United States Code, or monetary transactions offenses under §§ 5314 or 5322, Title 31, United States Code, in connection with undeclared U.S. Related Accounts held by the Swiss Bank during the Applicable Period."  The Applicable Period is defined as "the period between August 1, 2008, and either (a) the later of December 31, 2014, or the effective date of an FFI Agreement, or (b) the date of the Non-Prosecution Agreement or Non-Target Letter, if that date is earlier than December 31, 2014, inclusive." 

So the start of the period is the date that the world -- including all Swiss banks and their bankers in particular -- was on notice that the U.S. would no longer slumber while Swiss banks, in consort with U.S. taxpayers, raided the U.S. Treasury in stealth.  The corporate management of the banks at risk and the individual bankers knew that a tiger was awakened, but they thought, deluded themselves, and made sales pitches on the notion that, since they did not pitch and implement their services except on Swiss soil, they had a pass from U.S. criminal prosecution and could keep the U.S. depositors' information secret.  Buying that pitch was why many -- probably most -- U.S.  depositors opened secret Swiss bank accounts after August 1, 2008.  All players were intentionally complicit -- or, at best, willfully ignorant -- in such activity

Swiss banks fall into Category 2 only if they are at risk of criminal prosecution under the U.S. guidelines for criminal prosecution of organizations.  I discuss those guidelines below, but I want to say here that those guidelines do not contemplate prosecution for isolated rogue actions of officers, agents or employees.  The actions have to be sufficiently broad and significant so that they can be imputed to the organization (here the bank):.  In other words, the mere secret, relatively isolated pitching and implementation of secret Swiss accounts by one or two or three bank  officers while the other bank officers were careful to making such pitches or implementations would not be sufficient for the bank to be prosecuted.  In determining that they are at risk under Category 2, all of the banks were well counseled by top U.S. lawyers and must have determined that the actions went beyond the isolated and were sufficiently pervasive that the banks could be prosecuted under these guidelines.  Keep in mind that Category 2 applies only if the bank committed the potentially illegal conduct, not if some employee or agent committed the conduct (unless it is pervasive to be imputed to the organization).

So, let's look at the federal guidelines for prosecuting organizations.  These are set forth in the U.S. Attorneys Manual ("USAM") in Title 9, Chapter 9-28.000, titled Principles of Federal Prosecution of Business Organizations, here.  This subject is a big one and nuanced.  I cannot get into all of the nuances here, but will focus on only the one that seems to stand out in the Swiss bank situation.  For generally reading on the subject, however, see Brandon L. Garrett, Globalized Corporate Prosecutions, 97 Va. L. Rev. 1775 (2011), SSRN version here, (discussing inter alia the DPA of UBS); and Lucian E. Dervan, Reevaluating Corporate Criminal Liability: The DOJ's Internal Moral-Culpability Standard for Corporate Criminal Liability, 41 Stetson L. Rev. 7 (2011) (stating that the DOJ's guidelines below incorporate a concept of moral culpability on the part of the organization).

The following are excerpts from the USAM provisions cited above.
9-28.200 General Considerations of Corporate Liability 
* * * * 
Corporations are "legal persons," capable of suing and being sued, and capable of  committing: crimes. Under the doctrine of respondeat superior, a corporation may be held criminally liable for the illegal acts of its directors, officers, employees, and agents. To hold a corporation liable for these actions, the government must establish that the corporate agent's actions (i) were within the scope of his duties and (ii) were intended, at least in part, to benefit the corporation. In all cases involving wrongdoing by corporate agents, prosecutors should not limit their focus solely to individuals or the corporation, but should consider both as potential targets.  
Agents may act for mixed reasons—both for self-aggrandizement (both direct and indirect) and for the benefit of the corporation, and a corporation may be held liable as long as one motivation of its agent is to benefit the corporation. See United States v. Potter, 463 F.3d 9, 25 (1st Cir. 2006) (stating that the test to determine whether an agent is acting within the scope of employment is "whether the agent is performing acts of the kind which he is authorized to perform, and those acts are motivated, at least in part, by an intent to benefit the corporation."). 
In United States v. Automated Medical Laboratories, Inc., 110 F.2d 399 (4th Cir. 1985), for example, the Fourth Circuit affirmed a corporation's conviction for the actions of a subsidiary's employee despite the corporation's claim that the employee was acting for his own benefit, namely his "ambitious nature and his desire to ascend the corporate ladder." Id. at 407. The court stated, "Partucci was clearly acting in part to benefit AML since his advancement within the corporation depended on AML's well-being and its lack of difficulties with the FDA." Id.; see also United States v. Cincotta, 689 F.2d 238, 241-42 (1st Cir. 1982) (upholding a corporation's conviction, notwithstanding the substantial personal benefit reaped by its miscreant agents, because the fraudulent scheme required money to pass through the corporation's treasury and the fraudulently obtained goods were resold to the corporation's customers in the corporation's name).  
Moreover, the corporation need not even necessarily profit from its agent's actions for it to be held liable. In Automated Medical Laboratories, the Fourth Circuit stated:  
[B]enefit is not a "touchstone of criminal corporate liability; benefit at best is an evidential, not an operative, fact." Thus, whether the agent's actions ultimately redounded to the benefit of the corporation is less significant than whether the agent acted with the intent to benefit the corporation. The basic purpose of requiring that an agent have acted with the intent to benefit the corporation, however, is to insulate the corporation from criminal liability for actions of its agents which may be inimical to the interests of the corporation or which may have been undertaken solely to advance the interests of that agent or of a party other than the corporation. 
770 F.2d at 407 (internal citation omitted) (quoting Old Monastery Co. v. United States, 147 F.2d 905, 908 (4th Cir. 1945)).  
9-28.300 Factors to Be Considered  
A. General Principle: Generally, prosecutors apply the same factors in determining whether to charge a corporation as they do with respect to individuals. See US AM § 9-27.220, et seq. Thus, the prosecutor must weigh all of the factors normally considered in the sound exercise of prosecutorial judgment: the sufficiency of the evidence; the likelihood of success at trial; the probable deterrent, rehabilitative, and other consequences of conviction; and the adequacy of noncriminal approaches. See id. However, due to the nature of the corporate "person," some additional factors are present. In conducting an investigation, determining whether to bring charges, and negotiating plea or other agreements, prosecutors should consider the following factors in reaching a decision as to the proper treatment of a corporate target:  
1. the nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime (see infra section IV);  
2. the pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management (see infra section V);  
3. the corporation's history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it (see infra section VI);  
4. the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents (see infra section VII);  
5. the existence and effectiveness of the corporation's pre-existing compliance program (see infra section VIII);  
6. the corporation's remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies (see infra section IX);  
7. collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution (see infra section X);  
8. the adequacy of the prosecution of individuals responsible for the corporation's malfeasance; and  
9. the adequacy of remedies such as civil or regulatory enforcement actions (see infra section XI).  
* * * * 
9-28.500 Pervasiveness of Wrongdoing Within the Corporation  
A. General Principle: A corporation can only act through natural persons, and it is therefore held responsible for the acts of such persons fairly attributable to it. Charging a corporation for even minor misconduct may be appropriate where the wrongdoing was pervasive and was undertaken by a large number of employees, or by all the employees in a particular role within the corporation, or was condoned by upper management. On the other hand, it may not be appropriate to impose liability upon a corporation, particularly one with a robust compliance program in place, under a strict respondeat superior theory for the single isolated act of a rogue employee. There is, of course, a wide spectrum between these two extremes, and a prosecutor should exercise sound discretion in evaluating the pervasiveness of wrongdoing within a corporation.  
B. Comment: Of these factors, the most important is the role and conduct of management. Although acts of even low-level employees may result in criminal liability, a corporation is directed by its management and management is responsible for a corporate culture in which criminal conduct is either discouraged or tacitly encouraged. As stated in commentary to the Sentencing Guidelines:  
Pervasiveness [is] case specific and [will] depend on the number, and degree of responsibility, of individuals [with] substantial authority .. . who participated in, condoned, or were willfully ignorant of the offense. Fewer individuals need to be involved for a finding of pervasiveness if those individuals exercised a relatively high degree of authority. Pervasiveness can occur either within an organization as a whole or within a unit of an organization.  
USSG § 8C2.5, cmt. (n. 4). 
There are more of these guidelines that are potentially relevant to the situations of the Swiss banks within the scope of the U.S. Swiss agreement -- relating only to the opening of new secret accounts after 8/1/08 after they surely knew or willfully ignored that there was a problem with this type of behavior.  But, it seems to me these are the key ones.

Now, the foregoing, I think, is particularly relevant to the banks that, with the counsel of sophisticated U.S. criminal tax lawyers, are self-identifying themselves as Category 2.

It is also relevant to the banks that are Category 1 banks -- those already being criminally investigated.  Those principles will apply.  I don't know how DOJ Tax picked those banks as targets of investigations, but my sense from dealing in this area and with the prosecutors and IRS agents on some of the investigations is that the banks generally are the ones where it had a lot of indications of pervasive misbehavior -- developed from the OVDI/OVDP program, from whistleblowers and from other sources.  The ones with the most indicators of problems got the earliest and longest attention.  And, of course, the multitude of indicators would suggest the pervasiveness required to make the banks targets under these guidelines.

Let me say finally that I am not excusing U.S. taxpayers who joined Swiss bankers in the complicity (what we call here a conspiracy).  A number of those have been prosecuted.  A number have been able to resolve their past misbehavior civilly under the IRS's voluntary disclosure program, and its foreign bank-specific iteration, OVDI/OVDP.  That process is now playing out for Swiss Banks.  Some will be prosecuted.  Some will resolve their problems in a way that requires only public embarrassment and a significant penalty.

Friday, December 20, 2013

Status Report on Swiss Banks Joining US DOJ / Swiss Bank Program (12/20/13)

Reuters has this status report on Swiss banks joining the program.  Katharina Bart, Factbox: Swiss banks and the U.S. tax crackdown (Reuters 12/20/13), here.

This is a good report.  My list (which I have not compared to the Reuters report) is as follows:

Aargauische Kantonalbank
Bank am Bellevue
Bank Coop
Banque Cantonale Vaudois
Banque Cantonale de Genève
Banque cantonale du Jura
Banque Privee Edmond de Rothschild
Basellandschaftliche Kantonalbank
Berner Kantonalbank
Graubündner Kantonalbank
Hyposwiss Privatbank Zurich AG
Hyposwiss Private Bank Geneve SA
Hypothekarbank Lenzburg
Linth Bank
Luzerner Kantonalbank
Migros Bank
Nidwaldner Kantonalbank
Piquet Galland & Cie SA
Post Finance
St. Galler Kantonalbank
Valiant Holding
Vontobel Holding AG
Walliser Kantonalbank
Zuger Kantonalbank

Most of these are Category 2.  One or 2 may be Category 3.

I am updating my spreadsheet to include this and related data.  I will try to post by Monday.

The Schiffs Think Their Dad is "Right" (12/20/13)

I have previously written on the quixotic -- even tragic -- adventures of Irwin Schiff.  See Irwin Schiff's 2255 Denial Affirmed on Appeal (Federal Tax Crimes Blog 11/14/13), here; and Schiff, a Tax Protestor, Loses 2255 Motion to Vacate Conviction (Federal Tax Crimes Blog 9/29/12), here.  Mr. Schiff has been for a number of years a prominent player in the tax protestor field.  He has been twice convicted for his conduct.  Peter Reilly who writes a blog on tax issues of individuals, businesses and more has written a couple of blogs on Mr. Schiff.  Peter's blogs focus on Mr. Schiff's sons who believe that, however quixotic, their father's basic constitutional claim is correct at some level.  See Andrew Schiff Does Not Recommend That You Imitate His Father Irwin (Forbes 12/20/13), here; and Euro Pacific Capital's Peter Schiff Defends His Tax Protesting Father Irwin Schiff (Forbes 12/15/13), here.  I highly recommend Peter's blogs to readers of this blog.

The general thrust of Peter's most recent blog is that the Schiff's claim that some early cases establish the unconstitutionality of the income tax as it is applied to most taxpayers.  Peter says:
I heard from Andrew Schiff, Peter’s younger brother who works at Euro Pacific Capital, the investment firm Peter founded.  He wanted to emphasize a point that his father raised in his appeal, but he agreed to answer a couple of my questions.  The most important one was whether he and his brother recommend that people imitate their father.  He said absolutely not.  ”Don’t do it.  It is a bad idea.” Andrew and Peter both think that their father’s interpretation is correct, with Peter being perhaps a bit more vehement about it.  Nonetheless, they both recognize that the whole weight of the judiciary is on the other side.  Many proponents of positions similar to Irwin Schiff’s neglect to provided this important caveat to those they preach to.
The federal courts have heard hundreds, probably thousands, of tax protestor arguments of variations of the same theme.  Those courts have rejected the arguments.  The Schiffs' position is that the courts are wrong.  Which, in turn, make those courts wrong in punishing Irwin Schiff.

The problem as I see it is that words are indeterminate.  I am not a big fan of the plain meaning of words.  Context and history and nuance contribute to the meaning of words.  Those of my generation learned in the first week of law school Justice Oliver Wendell Holmes famous quote (Towne v. Eisner, 245 U.S. 418, 425 (1918), here):
A word is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.
The meaning of words changes; meaning evolves, sometimes subtly sometimes dramatically.  It is all in interpretation.  Those who study the Bible know that it is all about interpretation which can make the words mean something that is not self-evident or even what the words might have originally meant (if we even know what they originally meant; too bad we don't have legislative history for the Bible).  The words that the courts have interpreted to mean that taxes are constitutional are their meaning today, regardless of what the constitution may have meant to earlier interpreters..

Thursday, December 19, 2013

Basler Kantonalbank, Under U.S. Criminal Tax Investigation, Makes Accounting Provision for $100+ Million (12/19/13)

Basler Kantonalbank, one of the Swiss Cantonal banks, is currently under criminal investigation by the U.S. DOJ and thus is not qualified for the new U.S.Swiss Bank Program.  The bank announced today that was was making a provision for $112.74 for the costs it expects to incur.  See UPDATE 2-Basler Kantonalbank to take 100 mln Sfr provision for U.S. tax (Reuters 12/19/13),here.  Key excerpts:
Basler Kantonalbank said it will take a 100 million Swiss franc ($112.74 million) provision against full-year earnings to cover legal costs and fines from a U.S. crackdown on tax evasion. 
* * * * 
The bank said the move is in response to the Swiss financial regulator telling all Swiss banks, either being investigated or coming clean in a government-brokered programme, to prepare themselves financially. 
* * * * 
This could mean a wave of provisions from Swiss banks, which have until the end of the year to come forward if they are not already being investigated formally. 
Many have done so, including Geneva-based Banque Privee Edmond de Rothschild, which came forward on Thursday, though EFG International is one of the few that has remained silent on its intentions thus far. 
Swiss financial regulator FINMA denied that it called for Swiss banks to take provisions but said that it may issue recommendations later based on consultations it is conducting with trade bodies. 
* * * * 
The success of the scheme, open to a host of second-tier banks in Switzerland, is key for a future settlement for 14 larger Swiss banks being investigated. Among those under investigation are Credit Suisse, Julius Baer , Pictet, local government-backed Zuercher Kantonalbank (ZKB) and Basler Kantonalbank. 
Credit Suisse, which took a 295 million franc provision two years ago, and Julius Baer, which has not set anything aside, declined to comment on Thursday.
I suspect that the banks joining the program will also begin making such provisions for their costs.

The amount of these costs certainly suggests that Basler Kantonalbank's U.S. tax evasion activities were quite substantial, an inference one might also draw from the fact that it is under criminal investigation by the IRS.  See Swiss Cantonal Banks and the U.S. Tax Juggernaut (12/18/13), here.

Yet Another Government Victory on the Required Records Doctrine (12/19/13)

We have another required records opinion, this time from the Second Circuit.  In re: Grand Jury Subpoena Dated February 2, 2012, 741 F.3d 339 (2d Cir. 12/19/13), here.

I have not studied the opinion but my quick perusal of it saw nothing new in the basic analysis.  The opinion is 30 pages and concludes:

The required records exception to the Fifth Amendment privilege against self‐incrimination still exists. The BSA’s requirements at issue here are “essentially regulatory,” the subpoenaed records are “customarily kept,” and the records have “public aspects” sufficient to render the exception applicable. Because Doe cannot lawfully excuse his failure to comply with the subpoena, the district court was within its discretion to impose sanctions for his noncompliance.
I guess I am little surprised that, given the consistent holdings of the courts of appeals, the courts are still spending significant resources to replow the same ground over and over and over.  Of course, each court of appeals has to reach the an independent conclusion, but once it reaches the conclusion, does it have to say basically the same thing at great length in different words when it could incorporate by reference other holdings that are equally as good?

A couple of other excerpts that I found interesting:

1. On the evolution of the Fifth Amendment privilege to documents via the Act of Production privilege (pp. 8-9):
The privilege has thus evolved since its inception to a broader prophylactic regime that, in certain circumstances, protects individuals from producing documents where they are incriminated by the contents of the documents. See id. As applied, the privilege is practical; it inoculates people from being forced to contribute to their own prosecution while not unduly restricting grand juries’ ability to seek the truth. Doe argues – and the government does not meaningfully contest – that absent an exception, the act of production privilege shields Doe from complying with the grand jury’s subpoena.
2.  On the uses of and access to FBARs, In fn 5 on p. 19:
Doe points out that the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) lists the BSA as one of the tools that it uses to pursue its goals of criminal investigation. It is neither surprising nor persuasive that a law enforcement organization uses a multi‐purposed statute for law enforcement ends. We assume that insofar as the Central Intelligence Agency uses the BSA, it uses it for intelligence and counter‐intelligence purposes, while the Internal Revenue Service uses it for revenue collection purposes. Doe asserts that “[t]he government has never pointed to a ‘regulatory’ act that FinCEN performs with FBAR [Report of Foreign Bank and Financial Account] data.” Doe Brief at 35. However, other agencies also use the data obtained through the challenged reports:  
The Treasury Department shares the information it collects pursuant to the Act’s requirements with other agencies—including the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the 
Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of Thrift Supervision—none of which are empowered to bring criminal prosecutions. 
Grand Jury Proceedings, No. 4‐10, 707 F.3d at 1271 (quoting Grand Jury Subpoena, 696 F.3d at 434).
3. On ignorance of the BSA requirement, from fn 8 on p. 29:
fn8 Although it is not necessary to our resolution of this case in which Doe has not alleged ignorance of the BSA’s recordkeeping requirements, the government’s brief acknowledges that “an individual who was unaware that he was engaging in a regulated activity would not be able to establish a risk of self‐incrimination in the first place.” Appellee Brief at 38 n.17.

Another Bullshit Shelter Bites the Dust (12/19/13)

We have yet another of the genre out of the Tenth Circuit, this time proving Michael Graetz's famous observation that an abusive tax shelter is “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  The new case is Blum v. Commissioner, 737 F.3d 1303 (10th Cir. 2013), here.

Before discussing the case, I offer this description of tax shelters from my Federal Tax Procedure Book (footnotes omitted):
Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work designed to present the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate shift potential penalty risks to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.  More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”
Blum fits the pattern.

Mr. Blum was a very successful businessman.  He was apparently very capable in assessing risks and rewards of financial ventures.  Mr. Blum retained KPMG who sold him one of its tax shelter products which it marketed in the 1990s and early 2000s.  This particular product was OPIS, a basis enhancement strategy. The abusive basis enhancement strategies claimed to create large amounts of basis without the taxpayer having to incur a cost for the basis.  The taxpayer would then use the artificial basis to offset otherwise taxable gain, thereby artificially reducing the tax liability.  Mr. Blum got into the deal when he had a large gain that would otherwise be taxed.

When KPMG's representative made the pitch, Mr. Blum "claims he saw an investment opportunity; the Commissioner claims Mr. Blum saw a tax evasion opportunity."  (Emphasis supplied.) Mr. Blum bought the pitch and made a representation to KPMG that he was doing the deal for a legitimate nontax business or investment purpose.  (That representation was essential to KPMG's participation in implementing the transaction.)  Bottom-line, the Tax Court concluded and the Tenth Circuit concluded that the representation was false.

Wednesday, December 18, 2013

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.

Other BSA Prosecutions -- CTR Plea by Former FBI Special Agent (12/18/13)

Here is another facet of the Bank Secrecy Act, this time involving its currency transaction reporting ("CTR") requirements.  A former FBI special agent, Travis Raymond Wilson, has pled to a CTR charge.  Key excerpts from the press release are:
Travis Raymond Wilson, 38, of Huntington Beach, pleaded guilty today to structuring financial transactions in violation of the federal Bank Secrecy Act,United States Attorney Benjamin B. Wagner announced. 
The Bank Secrecy Act requires financial institutions, such as banks, to file Currency Transaction Reports (CTRs) on any cash transaction that is greater than $10,000. CTRs are filed with the U.S. Department of Treasury and are made available to law enforcement agencies, such as the Federal Bureau of Investigation. It is a federal crime to make cash deposits in an amount of $10,000 or less with the intent to prevent a financial institution from filing CTRs, such transactions are known as structuring. 
* * * * 
Between January 2008 and February 2013, Wilson regularly gambled at casinos in California, Nevada, Arizona, and West Virginia. Even though he frequently left the Casinos with more than $10,000 cash, Wilson regularly made deposits in amounts of $10,000 or less into his bank account. Wilson structured his cash deposits to attempt to prevent CTRs from being filed because he did want not the FBI to become aware of his gambling activities. In total, Wilson structured more than $488,000 in cash into his bank account. 
* * * * 
Wilson faces a maximum statutory penalty of five years in prison and a $250,000 fine. The actual sentence, however, will be determined at the discretion of the court after consideration of any applicable statutory factors and the Federal Sentencing Guidelines, which take into account a number of variables.

Swiss Cantonal Banks and the U.S. Tax Juggernaut (12/18/13)

I am currently supplementing my master spreadsheet to include the banks entering the U.S. / Swiss initiative.  Within the past week, a number of Swiss Cantonal Banks have announced that they will join the initiative as "Category 2" Banks.  Category 2 Banks are as announced in the agreement (emphasis supplied):
A. Any Swiss Bank
1. as to which the Tax Division has not authorized a formal criminal investigation concerning its operations as of August 29, 2013 (i.e., that is not a Category 1 Bank);
2. that is not a Category 4 Bank; and
3. that has reason to believe it may have committed tax-related offenses under Titles 18 or 26, United States Code, or monetary transactions offenses under §§ 5314 or 5322, Title 31, United States Code, in connection with undeclared U.S. Related Accounts held by the Swiss Bank during the Applicable Period,
So, assuming that these banks are honest at this stage, they are admitting that they have "reason to believe" that they committed U.S. tax related and monetary transaction offenses.

So, what exactly are Swiss Cantonal Banks?

The main web pages for those banks as a group is here.  Another page on that site, here, provides the following description (emphasis supplied):
Cantonal Banks 
The 24 Cantonal Banks are modern, independent institutions that are required to be managed in  accordance with proper business principles. They are either 100% or majority-owned by the cantons. Consequently, they differ from one another in their legal and organisational structure.  
The history of the Cantonal Banks goes back more than a hundred years. They have been offering low-cost loans and secure investment opportunities since the 19th century. The individual Cantonal Banks operate primarily in the market of their home canton, where many of them are the market leaders. 
The Cantonal Banks recognise their social and economic responsibility towards their customers, employees and sponsoring cantons. All the Cantonal Banks together account for around 30% of banking business in Switzerland and have a combined balance sheet total about 420 billion Swiss francs.
Wikipedia Entry here:
Cantonal banks (German: Kantonalbank, French: banque cantonale, Italian: banca cantonale) are Swiss government-owned commercial banks, which are provided by the canton in which they are based with a guarantee for the assets held there. Currently they are in the process of being partially privatised. The cantonal banks are organised and regulated by the Association of Swiss Cantonal Banks, with its office in Basel. As a group, the cantonal banks account for about 30% of the banking sector in Switzerland, with a network of over 800 branches and 16 000 employees in Switzerland. 
There are 24 cantonal banks, one in each canton of the country, except for the cantons of Appenzell Ausserrhoden, which sold its bank to banking rival UBS, and Solothurn, which privatised its bank in 1995 after a scandal. Each bank uses a distinctive motif as the logo, with a cantonal colour on white used as the colours of the bank, e.g. light blue for Zürcher Kantonalbank (Zurich Cantonal Bank). Despite appearances, cantonal banks are not small private banks: in fact two of them, Zürcher Kantonalbank and Banque Cantonale Vaudoise, are the third and fourth biggest banks in Switzerland (after UBS AG and Credit Suisse).

The following Swiss Cantonal Banks are reported to be under criminal investigation and thus are Category 1 banks: Basler Kantonalbank and Zürcher Kantonalbank.

Addendum 12/19/13 12:30pm:

I am a little surprised that, as of this point, there have been no comments on these developments with respect to the Cantonal Banks.  I left unsaid what I thought was noteworthy, so I will make some comments.

The Cantonal Banks are government-owned banks which claim to recognize social responsibility.  Yet, two are under criminal investigation, which in the context, means that they are considered among the more serious U.S. tax offenders.  Another 10, according to my list, have indicated that they will join the initiative under Category 2 which, as I noted above is the category designed for the banks who believe they have committed U.S. tax and money transaction offenses.  I don't think Category 2 is intended banks having the isolated, rogue bankers acting independently.  The only banks at risk of criminal prosecution and thus having need of Category 2 protection are banks with sufficient common activity that the activity could implicate the corporate responsibility of the banks.  In the U.S. entities are not prosecuted for independent, rogue actions of employees, otherwise all entities would be subject to criminal prosecution.  Only when the actions of employees reach critical mass are then deemed to represent the organization and can and should subject the criminal organization to prosecution.

Given that banks joining the program with the counsel of sophisticated U.S. lawyers, they must recognize that they had in their banks systemic issues that reached significantly high up that the banks were at risk of criminal prosecution.

My point was that these were government owned banks which claim to "recognise their social and economic responsibility towards their customers, employees and sponsoring cantons."  If the actions were sufficient to raise a risk of criminal prosecution, those at high levels must have known or, to use the common phrase, had reason to know of these activities.

Of course, these cantonal banks were not the only offenders.  There were others.  It is just that it strikes me as particularly telling that government-owned banks allowed this type of misbehavior.

Tuesday, December 17, 2013

Raoul Weil Has First U.S. Court Appearance (12/17/13)

For most readers of this blog, this is probably old news by now.  So, I will just link to one of the articles.
David Adams, Florida judge grants $10.5 million bail for ex-UBS banker (Reuters 12/16/13)., here.

Key points from the article are:

  1. Weil waived extradition.
  2. Through his lawyer, Weil asserts his innocence and intent to enter a not guilty plea.
  3. Weil was released to stay with friends in New Jersey " after putting up the bond, which included $9 million in a personal surety by Weil, $500,000 from the New Jersey family and the other $1 million a corporate surety bond signed with a bail bondsman."  He is on electronic surveillance and did surrender his passport.
  4. Weil oversaw $4 trillion in assets at UBS, Marcu said. "He rose from being a bit of a technocrat and demonstrated that he could run a bigger business.""
  5. Although Weil's lawyer denied that Weil is in negotiations with the prosecutors "at this time" (seemingly meaning right then, but not in the past or in the future) the article reports on speculations about Weil getting a sweetheart deal that will effectively buy his silence on the Swiss banking / tax evasion sins of prominent U.S. political figures.  From my experience, speculations should be viewed skeptically.  There will be time enough to react to real facts as they develop.

Monday, December 16, 2013

Weil, former UBS Exec and Former Fugitive, Set for Preliminary Hearing Today (12/16/13)

Raymond Weil, the former head of UBS's global wealth management business, who was a fugitive from justice until recently is expected cooperate with DOJ Tax incident to his extradition to the U.S.  See David Voreacos, Ex-UBS Banker Weil Seen Cooperating With Prosecutors (Bloomberg 12/16/13), here.  Key excerpts:
Weil, 54, is set to make an initial appearance today in federal court in Fort Lauderdale, Florida, where he was indicted in October 2008 and later declared a fugitive. His lawyer has said he is innocent. Weil hasn’t entered a plea in the case.
Weil is the highest-ranking banker among about 100 people charged since 2008 by the U.S. in a crackdown on offshore tax evasion. About three dozen foreign bankers, lawyers and advisers were charged. Most are at large. Tax lawyers not involved in the case said they expect Weil to plead guilty, cooperate with prosecutors, and seek leniency at sentencing. 
* * * * 
‘Less Useful’ 
“The window for his cooperation has shrunk and shrunk and shrunk as the U.S. government has gathered huge amounts of information from UBS and from taxpayers through the Offshore Voluntary Disclosure Program,” said Hochman of Bingham McCutchen LLP in Santa Monica, California. “What may have been useful five years ago is certainly a lot less useful today.” 
Still, Weil’s “only choice is to win at trial or turn over information that the U.S. government doesn’t have,” he said.

Saturday, December 14, 2013

The Intersection of Chevron Deference for Agency Interpretation and the Crimnal Rule of Lenity in Statutory Interpretation (12/14/13)

In Carter v. Wells-Bowen Realty, Inc., ___ F.3d ___, 2013 U.S. App. LEXIS 23852 (6th Cir. 2013), here, a nontax case, Judge Sutton in a concurring opinion addresses the intersection of the venerable rule of lenity in interpreting criminal statutes and Chevron deference in the context of interpreting statutes with criminal implications.  Chevron deference plays a prominent role in the interpretation of the Internal Revenue Code which, of course, contains criminal provisions.  Sections 7206 ff.  And, even when the IRS's statutory interpretations do not directly apply to the criminal sections, they may apply to the civil tax sections that, in a criminal case, the Government would have to claim satisfy the Cheek requirement of a known and knowable legal duty.  Let's say, for example, the IRS were to promulgate a regulation taking an IRS friendly view of the doctrine of economic substance -- either the tax common law doctrine or the statutory doctrine -- which would likely, by setting the interpretive legal duty, make it easier to convict for tax shelters violating the adopted regulatory interpretation but not the common law interpretation.  Now, let's go to the Carter opinions.

The majority panel decision opens as follows:
Under the Real Estate Settlement Procedures Act, a title services company may not pay a real estate agent a fee in exchange for a referral. 12 U.S.C. § 2607(a). Exempted from this prohibition are "affiliated business arrangements." Id. § 2607(c)(4). The statute establishes three prerequisites for this safe harbor, and everyone agrees that the defendants in this case (several realty companies and title companies) satisfied them. The plaintiffs (three home buyers) claim that the defendants nevertheless fall outside the safe harbor's coverage because they failed to satisfy a fourth condition announced by the Department of Housing and Urban Development through a policy statement. As that policy statement is not binding on the Department or anyone else and as it is not otherwise entitled to deference, it does not supplement the Act's existing safe-harbor conditions. We affirm.
The majority then telescopes its holding and analysis as follows:
The buyers claim that the profits earned by the owners of Welles-Bowen and WB constitute prohibited referral fees due to their relationship with WB. There is an easy way to look at this claim and a more complicated way to look at it.\ 
The easy way turns on the safe harbor provisions spelled out in § 2607(c)(4). Welles-Bowen's relationship with WB qualifies as an "affiliated business arrangement." The buyers agree that Welles-Bowen had an "affiliate relationship" with WB, that Welles-Bowen made referrals to WB, and that WB in turn provided settlement services. 12 U.S.C. § 2602(7). This relationship also satisfied the three safe-harbor conditions. Welles-Bowen disclosed the arrangement to the buyers, Welles-Bowen allowed them to reject the referrals, and neither Welles-Bowen nor its owners received anything of value from the arrangement apart from a return on their ownership interests. Id. § 2607(c)(4). Welles-Bowen and WB in short did everything the Act asked of them. They thus qualify for the affiliated business arrangement exemption. 

Article on New Sentencing Guidelines on Unclaimed Deductions and Credits (12/14/13)

I have posted previously on the unclaimed deduction / credit issue and the recent Guidelines resolution of the issue.  The 2013 Guidelines provision on this issue is here §2T1.1., Commentary par. 3, here, which provides:
3.      Unclaimed Credits, Deductions, and Exemptions.—In determining the tax loss, the court should account for the standard deduction and personal and dependent exemptions to which the defendant was entitled. In addition, the court should account for any unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent that (A) the credit, deduction, or exemption was related to the tax offense and could have been claimed at the time the tax offense was committed; (B) the credit, deduction, or exemption is reasonably and practicably ascertainable; and (C) the defendant presents information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy (see §6A1.3 (Resolution of Disputed Factors) (Policy Statement)). 
However, the court shall not account for payments to third parties made in a manner that encouraged or facilitated a separate violation of law (e.g., "under the table" payments to employees or expenses incurred to obstruct justice). 
The burden is on the defendant to establish any such credit, deduction, or exemption by a preponderance of the evidence. See §6A1.3, comment.
Joseph Rillotta, here, has a new article: New Sentencing Guidelines Provisions May Significantly Impact Criminal Tax Cases, J. Tax Prac. & Proc. 31 (October-November 2013), here, which provides excellent background and practice tips, including the following guides:
First, the defendant must prove up an unclaimed deduction by a preponderance of the evidence. 
Second, the defendant must claim the deduction “suffi ciently in advance of sentencing” to allow for meaningful scrutiny of the claim. 
Third, defense counsel should be prepared to explain how the previously unclaimed deduction is “related to the tax offense.” 
Fourth, defense counsel should be prepared to argue that the deductions are not based on payments that encouraged or facilitated third parties’ violation of the law.
He fleshes each one of these guides with suggestions as to how to meet the burdens imposed on the defendant in these provisions.

Is a Party Entitled to a Hearing in a Summons Enforcement Case Based Solely on Allegations of Improper Purpose? (12/14/13)

Yesterday, I posted on my Federal Tax Procedure Blog, an entry regarding the Government's petition for certiorari seeking to insure a streamlined procedure for summons enforcement proceedings.  See Is a Party Entitled to a Hearing in a Summons Enforcement Case Based Solely on Allegations of Improper Purpose? (Federal Tax Procedure Blog 12/13/13), here.  Because summonses and summons enforcement are key investigative tools in the criminal tax universe, I will post "cut and paste" the contents of that blog here:

The United States has petitioned the Supreme Court in United States v. Clarke, 517 Fed. Appx. 689, 2013 U.S. App. LEXIS 7773 (11th Cir. 2013), here, an unpublished decision.  The Eleventh Circuit's opinion in Clarke is short and pithy, so I quote it all (except I omit the caption and two of the three footnotes):
This case involves the Internal Revenue Service's (IRS) issuance of five administrative summonses, pursuant to 26 U.S.C. § 7602, during an investigation into the tax liabilities of Dynamo Holdings Limited Partnership (Dynamo). Specifically, [List of summonsed parties omitted] appeal the district court's orders granting the IRS's petitions to enforce the summonses. After careful review of the record, and having had the benefit of oral argument, we vacate the district court's order enforcing the summonses and remand for the district court to hold a hearing. 
To obtain enforcement of a summons, the IRS must make a four-part prima facie showing that (1) "the investigation will be conducted pursuant to a legitimate purpose," (2) "the inquiry may be relevant to the purpose," (3) "the information sought is not already within the Commissioner's possession," and (4) "the administrative steps required by the Code have been followed." United States v. Powell, 379 U.S. 48, 57-58, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964); see also Nero Trading, LLC v. U.S. Dep't of Treasury, IRS, 570 F.3d 1244, 1248 (11th Cir. 2009). Once the IRS makes its prima facie showing, the burden shifts to the party opposing the summons to either (1) disprove one of the four elements of the IRS's prima facie case, or (2) "convince the court that enforcement of the summons would constitute an abuse of the court's process." Nero, 570 F.3d at 1249 (internal quotation omitted). The Supreme Court has stated that because the district court's process is used to enforce a summons, the court should not permit its process to be abused by enforcing a summons that was issued for an improper purpose. See Powell, 379 U.S. at 58. According to the Powell Court, an improper purpose may include any purpose "reflecting on the good faith of the particular investigation." Id. 
In Powell, the Supreme Court also explained that a party opposing a summons is entitled to an adversary hearing before enforcement is ordered, and that, at the hearing, the opponent "may challenge the summons on any appropriate ground." Id. (internal quotation omitted). Subsequently, in United States v. Southeast First National Bank of Miami Springs, we held that "an allegation of improper purpose is sufficient to trigger a limited adversary hearing where the taxpayer may question IRS officials concerning the Service's reasons for issuing the summons." 655 F.2d 661, 667 (5th Cir. 1981) (footnote omitted). More recently, we have reaffirmed Southeast First National Bank, calling it "the legitimate offspring of the Supreme Court's seminal decision in Powell.Nero, 570 F.3d at 1249. 
Appellants contend they were entitled to discovery and an evidentiary hearing before the district court granted the IRS's petitions to enforce the summonses because they alleged the IRS may have issued and sought to enforce the summonses for at least four improper purposes.One of the reasons the IRS may have issued the summonses, according to Appellants, was solely in retribution for Dynamo's refusal to extend a statute of limitations deadline. Although Appellants raised the possibility of numerous improper purposes, federal pleading standards allow claims and defenses to be pled in the alternative, and do not require them to be consistent. See Fed. R. Civ. P. 8(d)(2) & (d)(3). If the IRS issued the summonses only to retaliate against Dynamo, that purpose "reflect[s] on the good faith of the particular investigation," and would be improper. See Powell, 379 U.S. at 58. 

Friday, December 13, 2013

Fourth Circuit Accepts Required Records Doctrine Exception to Fifth Amendment (12/13/13)

In United States v. Under Seal, 737 F.3d 330 (4th Cir. 12/13/13), here, the Fourth Circuit steps in line with the other Circuit Courts of Appeals on this issue.  (See the links below.)  It is a formal published opinion, but I am not sure that it breaks any new ground.  Barring some future split in the Circuits, I doubt that the Supreme Court will speak on the issue.  All that I could say about the issue has been said before.

If readers see anything new in the case or worthy of comment, please make appropriate comments or email me.

David Massey, Former USAO SDNY on Offshore Bank Prosecutions, Moves to Law Firm (12/13/13)

David B. Massey, a prosecutor, heavily involved in the prosecution of Swiss banks (including Wegelin) and bankers has left USAO SDNY to join Richards Kibbe & Orbe.  See Matthew Goldstein, Prosecutor Who Oversaw Swiss Bank Case Moves to Private Practice (NYT DealBook 12/12/13), here.  Key excerpts:
During his nine years as an assistant federal prosecutor in New York, Mr. Massey led the prosecution of the Swiss bank Wegelin & Company, which was indicted in February 2012 on charges of helping United States citizens hide more than $1.2 billion from the Internal Revenue Service. The private bank pleaded guilty this year to a tax evasion conspiracy charge and paid $74 million and fines and restitution.
David's bio information on the law firm website is here.  The firm's main webpage is here.

Thursday, December 12, 2013

Judge Rakoff, the Wegelin judge, Is Interviewed on the U.S. Initiative Against Swiss Banks (12/12/13)

Judge Jed Rakoff (Wikipedia here), who presided over the Wegelin case that brought the venerable firm down, is interviewed by this publication:  Matthew Allen, ‘US is no bully’ says judge in Swiss bank case (swissinfo.ch 12/12/13), here.

I highly recommend reading the interview for it offers a rare look into the view of the Court.

Key excerpts:
However, the US perception is that Swiss banking secrecy is an economic decision taken by Switzerland to foster its strong banking activity. That’s not sufficient justification for the harm done to us through massive tax evasion. 
* * * * 
There have been far worse financial crimes to have come before me or other judges, such as WorldCom and Madoff. These were committed by people who set out to commit fraud on a mammoth scale. 
 No one views the cases of the Swiss banks in that magnitude, but no one views them as trivial either. There were large sums of money involved and no government can operate unless people pay their taxes.
JAT Comment:  With due respect to Judge Rakoff, I think the systemic problem that evidenced itself in Switzerland's economic choice to actively violate the tax laws of not only the U.S. but other countries (Germany, France and others) does rise at least equal to WorldCom and Madoff.  Indeed, in those cases you had just a few people whose greed caused the problelm.  By contrast, the Swiss banking system is, in my view, massively corrupt.  They have enabled crooks, swindlers, potentates stealing from their people and other unsavory characters (not to mention tax evaders) for years.  And, lest we forget, they tried to steal the deposits of Holocaust victims.  See Wikipedia entry here.  The Swiss felt themselves entitled to the economic rewards of their questionable activities, and that attitude infected a wide swath of the Swiss population.  I am not meaning to "indict" all the Swiss.  Far from it, but the Swiss banking empire was built on this type of systemic skullduggery and thus had a corrupt influence on the country.  The Worldcoms and Madoffs don't do that, although to be fair much of the financial activity that brought the recession of 2008 was based on equally questionable and systemic activity in the U.S.

Wednesday, December 11, 2013

Are Brady Violations Epidemic? (12/11/13)

Judge Alex Kozinski (Wikipedia here), of the Ninth Circuit, has a blistering dissent to the denial of rehearing en banc in an alleged Brady violation case.  Brady v. Maryland, 373 U.S. 83, 83 (1963), here., see also Giglio v. United States, 405 U.S. 150, 153-54 (1972), here. The denial of rehearing en banc, with Judge Kozinski's dissent, is United States v. Olsen, ___ F.3d ___, 2013 U.S. App. LEXIS 24500 (9th Cir. 2013), here  The original panel opinion in the case is United States v. Olsen, 704 F.3d 1172 (9th Cir. 2013), here.

In broad sweep, perhaps the key evidence of guilt were spiked allergy pills that the prosecutor urged were spiked by the defendant.  But, the defendant alleged, the pills had been spiked by the state forensic investigator, one Melnifoff.  Well before the trial, that investigator was under investigation because of possibly intentional errors in other cases.  Although the defense knew of the investigation, the prosecutor down-played its significance and relevance to the case, and apparently did not take the trouble to learn the scope of the investigation which, by trial, had been completed and cast doubt on the investigator's diligence and credibility in other cases.  Judge Kozinski read the record as:
Nearly everything the district judge understood to be true was false. But the prosecutor did not correct the district judge, who then concluded that it would be "unfair to Mr. Melnikoff to allow counsel to delve into this issue" and "under an analysis of [Federal Rule of Evidence] 403, it just would be improper to go into that." As a result, the government introduced the spiked allergy pills and the jury heard Melnikoff's testimony, all without ever being informed of these serious doubts about their reliability.
The original unanimous panel opinion rejected Olsen's claim of a Brady violation, finding that, although perhaps more correct information should have been disclosed, the defendant had not shown the required probability that the correct information would have affected the outcome of the case, given the compelling force of evidence of guilt.  Olsen questioned that holding by petition for rehearing.  The petition was denied because "the matter failed to receive a majority of the votes of the nonrecused active judges in favor of en banc consideration."  Judge Kozinski dissented, with Judges Pregerson, Reinhardt, Thomas and Watford joining the dissent..

Judge Kozinski is good at the opening lines, and he does not disappoint.
There is an epidemic of Brady violations abroad in the land. Only judges can put a stop to it.
The facts of the case eliciting the sweeping statement can be reviewed in  the case.  I focus here on Judge Kozinski's broader claim of an epidemic of Brady violations.  I also incorporate some of his general statements of the state of Brady law.  Here are key excerpts (footnotes omitted):
Brady holds that a prosecutor violates due process when he (1) suppresses evidence (2) that is favorable to the defendant, when that evidence (3) is material to guilt or innocence. Id. at 87. This extends to evidence that bears upon the credibility of a government witness. Giglio v. United States, 405 U.S. 150, 153-54, 92 S. Ct. 763, 31 L. Ed. 2d 104 (1972). The panel expressly recognizes that the report was favorable to Olsen; nevertheless it dismisses Olsen's complaint on the ground that the WSP report wasn't material. Olsen, 704 F.3d at 1183-87.

Evidence is material under Brady if it creates "a 'reasonable probability' of a different result." Kyles v. Whitley, 514 U.S. 419, 434, 115 S. Ct. 1555, 131 L. Ed. 2d 490 (1995). "A reasonable probability does not mean that the defendant 'would more likely than not have received a different verdict with the evidence,' only that the likelihood of a different result is great enough to 'undermine[] confidence in the outcome of the trial." Smith v. Cain, 132 S. Ct. 627, 630, 181 L. Ed. 2d 571 (2012) (quoting Kyles, 514 U.S. at 434). To say that the undisclosed information wasn't material, a court must conclude that the other evidence was so overwhelming that, even if the withheld evidence had been presented to the jury, there would be no "reasonable probability" that it would have acquitted. This standard isn't satisfied if "the State's argument offers a reason that the jury could have disbelieved [the undisclosed evidence], but gives us no confidence that it would have done so." Id.

Tuesday, December 10, 2013

When Does the Conspiracy End? (12/10/13)

I have previously written that conspiracy is a common charge in tax crimes, as also in white collar and other crimes.  One of the many issues in conspiracy law is the scope of the conspiracy, one facet of which is when the conspiracy ends, thus setting the date for the statute of limitations.  In United States v. Grimm, 738 F.3d 498 (2d Cir. 2013), here, The Second Circuit reversed a conspiracy conviction because the overt acts alleged in the indictment did not occur within the applicable statutes of limitations.  The majority of the panel opens and summarizes its holdings as follows (emphases supplied by JAT):
Three employees of General Electric Company ("GE") conducted a multi-year scheme to fix below-market rates on interest paid by GE to municipalities. When municipalities receive proceeds of tax-exempt bond issues, they invest those proceeds (with GE and others) until such time as the funds become needed for the underlying capital projects. To prevent abuse of municipal bonds for pure arbitrage, the Internal Revenue Code and Treasury regulations require a municipality to rebate to the Treasury any excess over the municipal bond rate. To guarantee a market rate of interest on these investments, municipalities are required to use competitive bidding. The conspiracy between GE employees and brokers depressed the interest rate on the guaranteed investment contracts paid by unindicted co-conspirator GE; each instance cheated either the municipalities or the Treasury (or both). 
Steven Goldberg, Peter Grimm, and Dominick Carollo (collectively, "Defendants") were tried and convicted in the United States District Court  [*3] for the Southern District of New York (Baer, J.) of violating the general federal conspiracy statute, 18 U.S.C. § 371. Goldberg was sentenced principally to four years in prison, Grimm and Carollo to three. They appeal the judgments of conviction on the ground (inter alia) that the indictment is barred by the applicable statutes of limitations. The district court held that the statute of limitations continued to run during the period when GE paid the (depressed) interest to the municipalities, and that the interest payments could constitute overt acts. We conclude that those payments do not constitute overt acts in furtherance of the conspiracy.
Other key excerpts:
The applicable statutes of limitations are: five years for general conspiracy, see 18 U.S.C. § 3282(a), and six years for conspiracy to defraud the United States by violating the internal revenue laws, see 26 U.S.C. § 6531(1).3 The Initial Indictment was returned on July 27, 2010. To satisfy the statute of limitations for general conspiracy, the government must establish that a conspirator knowingly committed at least one overt act in furtherance after July 27, 2005; to satisfy the statute of limitations for a fraud on the United States, the government must establish at least one overt act in furtherance after July 27, 2004. See United States v. Salmonese, 352 F.3d 608, 614 (2d Cir. 2003) (citing Grunewald v. United States, 353 U.S. 391, 396-97 (1957)).

Criminal and FBAR Noncompliance, Offers in Compromise and the Public Interest (12/10/13)

Can the IRS deny an otherwise proper offer in compromise because the taxpayer has been involved in some type of activity that the IRS deems against the public interest?  For example, can the IRS deny an offer solely because the taxpayer was prosecuted for evasion of assessment or even payment of the taxes in question?  Or, even if not prosecuted, the taxpayer's activity had the characteristics of being prosecuted?

Keith Fogg of the Procedurally Taxing Blog has an interesting blog on the issue of whether developments in the law "will soon eliminate the ability of the IRS to make public policy or best interest of the government the basis for rejecting an offer in compromise."  See Keith Fogg, Oversight of Offers – Response to Comment raising Thornberry v. Commissioner (Procedurally Taxing Blog 12/6/13), here.  The article has a short summary of the history of the OIC and some valuable links. Professor Fogg believes that the IRS retains some residual right to reject claims on public policy or public interest bases.  The discussion is quite good, so I recommend it generally.

As respects matters relevant to this blog -- federal tax crimes -- here are some excerpts (bold-face by JAT):
Last week I wrote about a CDP case in which the Tax Court remanded the case to Appeals so that the Settlement Officer (SO) could better explain the impact of the taxpayer’s health on the decision to reject an offer in compromise.  In my post I suggested that the SO should have confronted the past criminal tax behavior of the individual directly since I felt it was coloring her decision.  I suggested that she should have decided if a public policy or best interest of the government rejection was warranted.  I further suggested that if she had decided to reject the offer on those grounds, subject to the approval of her supervisor once removed, the Court would not have remanded the case.  [The post he refers to is:  Keith Fogg, Anderson v. Commissioner – Public Policy Determination as Defense to Collection Due Process Challenge (Procedurally Taxing Blog 11/20/13),  here.] 
* * * * 
With the recent offshore initiatives [OVDP], the IRS faces taxpayers who have hidden their money in tax havens to avoid taxation or to avoid collection.  Once a taxpayer has taken such action, the IRS may forever remain uncomfortable accepting such a taxpayer for an offer in compromise for fear that still more money remains offshore.  I do not suggest these individuals cannot obtain an offer in compromise but simply that situations exist that may cause the IRS to reject an offer even though the Form 433-A (OIC) does not indicate the taxpayer has an ability to pay and the IRS cannot point to specific assets not showing on the form.  It must have room to exercise judgment in those situations.

Friday, December 6, 2013

Swiss Banks Scrambling to Commit to Participation in U.S.Swiss Bank Initiative (12/6/13)

Katharina Bart, Oliver Hirt and Patrick Temple-West, Swiss banks prepare to bow to U.S. demands, grudgingly (Reuters 12/5/13), here.  The key opening excerpt:
Switzerland's private banks have until Monday to decide whether to bow to U.S. pressure and ditch the centuries-old culture of secrecy that has made the Alpine state a global vault for the world's rich. 
Many are leaving it to the last minute to tell the Swiss financial regulator whether they will participate in a U.S. program to settle tax evasion suspicions that could trigger large fines and force them to identify U.S. customers suspected of using their Swiss accounts to dodge taxes.
Listed banks which participate in the program could start telling investors from next week whether or not they have to take provisions against possible fines. 
If they do not settle, individual banks and their senior staff risk criminal prosecution and, if a large number refuse to cooperate, it could hold up a future settlement for around a dozen of Switzerland's largest banks, including Credit Suisse, Julius Baer, Pictet, and local government-backed Zuercher Kantonalbank (ZKB). 
Most of the 300 or so smaller banks are expected to participate but they are anxious to find out what others are doing and wrestling with the risk of giving up client confidentiality, which could put off customers. 
"Probably a few dozen will risk being pursued by the U.S. later and stay out of the current program altogether," said a lawyer involved in bank talks.

Thursday, December 5, 2013

Economic Substance Uncertainty in Civil Cases (12/5/13)

In past entries on this blog, I have expressed concern about deploying the economic substance doctrine in criminal cases.  Here is yet another reason for concern.

In American International Group v. United States (SDNY 1:09-cv-01871), in a civil tax case, the IRS has raised economic substance to defeat AIG's tax sheltering activities. (This activities appear to have the earmarks of bullshit tax shelters, but I suppose that is the issue in the case.) Keep in mind that this is a civil case and the scope and application of the economic substance doctrine apparently is uncertain (yet in criminal cases, it is supposed to set a known and knowable line to meet the willfulness element).

On November 4, 2013, Judge Louis L. Stanton (Wikipedia here) entered an the following order (caption omitted):


On the letter-application of Plaintiff American International Group, Inc. ("AIG"), and over the opposition by defendant, I hereby certify my March 29, 2013 Opinion and Order denying AIG's motion for partial summary judgment for interlocutory appeal under 28 U.S.C. § 1292(b). 
I am well aware that "Only exceptional circumstances will justify a departure from the basic policy of postponing appellate review until after the entry of a final judgment", Klinghoffer v. S.N.C. Achille Lauro Ed Altri-Gestione Motonave Achille Lauro in Amministrazione Straordinaria, 921 F.2d 21, 25 (2d Cir. 1990), but this case presents the exceptional circumstances which warrant interlocutory appeal. My ruling turned on two related questions of law which together are controlling, and there are substantial grounds for difference of opinion as to each of them. 
A reversal on either ground would produce judgment for AIG on the most significant of its claims in this complex (by any standard) action. 
In each transaction, AIG's subsidiary sold preferred shares in its foreign affiliate (the "Special Purpose Vehicle" or "SPV") to a foreign lender bank and committed to repurchase these shares in the future. The SPV invested the money from the sales, paid taxes on the investment income to its foreign government, and made payments to the lender bank ("dividend"), which paid little, if any, tax on them because the local law treated the dividend as a tax-exempt intracorporate return of capital, since it regarded the bank as an owner, not a lender. AIG in effect shared the bank's tax benefit with it, by negotiating a "dividend" rate well below the return on the SPV's investments. It claims credits for the SPV's foreign tax payments, but will not obtain those credits if the application of the economic substance doctrine bars the transactions.

Tuesday, December 3, 2013

Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (12/3/13)

In United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, the Court rejected procedural arguments and applied the special 40% accuracy related penalty for valuation and basis overstatements.  §§6662(a), (b)(3), (e)(1)(A), (h).  The unanimous opinion is written  by Justice Scalia, the plain language justice, who not surprisingly concludes:  "The penalty’s plain language makes it applicable here."

I am sure others and even I will have a lot to say about the opinion and its ramifications later. For now, this caught my eye as Justice Scalia jabs at the use of the Blue Book:
Woods contends, however, that a document known as the “Blue Book” compels a different result. See General Explanation of the Economic Recovery Tax Act of 1981 (Pub. L. 97–34), 97 Cong., 1st Sess., 333, and n. 2 (Jt.Comm. Print 1980). Blue Books are prepared by the staff of the Joint Committee on Taxation as commentaries on recently passed tax laws. They are “written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law].” Flood v. United States, 33 F. 3d 1174, 1178 (CA9 1994). We have held that such “[p]ost-enactment legislative history (a contradiction in terms) is not a legitimatetool of statutory interpretation.” Bruesewitz v. Wyeth LLC, 562 U. S. ___, ___ (2011) (slip op., at 17–18); accord, Federal Nat. Mortgage Assn. v. United States, 379 F. 3d 1303, 1309 (CA Fed. 2004) (dismissing Blue Book as “a post-enactment explanation”). While we have relied on similar documents in the past, see FPC v. Memphis Light, Gas & Water Div., 411 U. S. 458, 471–472 (1973), our more recent precedents disapprove of that practice. Of course the Blue Book, like a law review article, may be relevant to the extent it is persuasive. But the passage at issue here does not persuade. It concerns a situation quite different from the one we confront: two separate, non­overlapping underpayments, only one of which is attributable to a valuation misstatement. 
Addendum 12/4/13 10:32am:

I have posted the foregoing, along with more discussion on the Blue Book on my Federal Tax Procedure Blog:   Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Procedure Blog 12/3/13), here.

Also, I have extended and updated those comments on the following:  More on the Supreme Court's Opinion in Woods on TEFRA and the 40% Basis Overstatement Penalty (Federal Tax Procedure Blog 12/4/13), here.

Addendum 12/10/13 8:45 am:

For a good crisp discussion of the holdings, see Alan Horowitz, Supreme Court Rules for Government on Both Issues in Woods (Tax Appellate Blog 12/3/13), here.