Wednesday, May 22, 2013

Tax Perjury and FBAR Charges Related to Illegal Income Fake Art Case (5/22/13)

Glafira Rosales, a Manhattan art dealer, has been charged by complaint with  tax perjury, 3 counts, and failure to file FBARs, 5 counts.  The complaint, based on the sworn affidavit of an IRS CI Agent, is here; the USAO SDNY press release is here.  The key features are:

Defendant (Taxpayer):  Glafira Rosales
Charges:  Tax Perjury (3 counts); Failure to file FBAR (4 counts)
Maximum Sentence: 34 Years (3 counts times 3 years, plus 4 counts times 5 years); but, the sentence will ultimately be determined under the Sentencing Guidelines subject to variances as the sentencing judge deems warranted.  (See discussion below))
Banks:  Caja Madrid [Wikipedia entry here.]
Tax Loss:  3.5 million (See discussion below)
Entities:  Yes

Ms. Rosales was arrested incident to the complaint.  I don't recall that arrests were involved in many prior indictments.  But, then, for the reasons noted below, this is not the ordinary tax case.  Other potential nontax misconduct may be animating treatment outside the tax crimes mainstream.

According to the indictment, although the investigation started "in or about 2009" -- criminal allegation speak for 2009 with some fuzziness, the investigation was an FBI investigation was into "the sale of various works of art that have been alleged to be counterfeit."  Ms. Rosales was heavily involved in the activity investigate.  The IRS agent became involved in the investigation in 2012.  (As noted above, she was not charged for any crime the FBI has authority to investigate (i.e., the FBI can't investigate tax crimes); hence the involvement of the IRS may have been to get a quick charge and arrest with perhaps an expanded indictment to follow (although the general five year statute of limitations for non-tax crimes may have been a factor, since tax crimes generally have a six-year statute of limitations, see Section 6531, here, which does not include the time the person is out of the country, which I suspect was significant in Ms. Rosales' case.)  Alternatively, as noted below in the New York Times article perhaps the art works even if fake were good enough that the Government might have difficulty proving they are fake in a criminal trial.  As is not uncommon, if they are not sure of making another criminal charge for a pattern of conduct, a tax crime may be the way to go (a la Al Capone).  Of course, if it proceeds as a tax case only, whether the pattern of conduct from which the income arose was otherwise illegal will come up in the two level upward adjustment to the Base Offense Level where the Government need prove the illegality only by a preponderance of the evidence and that likely will have been proved in the trial itself if she does not plead.  Of course, the sentencing range is already so high that adding the two level adjustment is probably irrelevant to the sentence she will receive.
Key parts of the USAO SDNY Press Release are:
Manhattan U.S. Attorney Preet Bharara said: “As alleged, Glafira Rosales gave new meaning to the phrase ‘artful dodger’ by avoiding taxes on millions of dollars in income from dealing in fake artworks for fake clients. Her arrest shows that no matter how clever the scheme, attempts to hide income from the government to avoid paying taxes on that income will be discovered and prosecuted.” 
IRS Special Agent-in-Charge Toni Weirauch said: “The sale of a piece of art for profit is a taxable event and the seller is responsible for paying his or her fair share of tax, even if the art is counterfeit. The allegations in this investigation illustrate a ‘double-barreled’ tax evasion scheme: disguising who was actually selling the art and profiting from the sales, through the creation of a fictitious seller and the use of the name of a collector not associated with the transactions, and further concealing the proceeds by depositing them in an unreported foreign bank account.” 
FBI Assistant Director-in-Charge George Venizelos said: “As alleged, Glafira Rosales committed tax fraud in falsely reporting that she was selling art on behalf of clients. In truth, those clients were just part of the picture she painted to perpetrate her multi-million dollar scheme. There is consistency in the scheme, however: The artwork Rosales sold appears to be as fake as her story about the clients she claimed to represent.” 
According to the allegations in the Complaint unsealed today in Manhattan federal court: 
In the 1990’s, ROSALES, an art dealer, began selling previously unknown paintings that had never been exhibited before, and that she claimed were painted by some of the most famous artists of the 20th century, including Jackson Pollock, Mark Rothko, and Willem de Kooning. From 2006 through 2008, ROSALES sold approximately one dozen of these paintings to two prominent Manhattan galleries for over $14 million. In selling most of the paintings to the two galleries, she purported to represent a client with ties to Switzerland who had inherited the paintings and wanted to sell them, but who also wished to remain anonymous (the “Purported Swiss Client”). For the remainder of the paintings, she purported to represent a Spanish collector (the “Purported Spanish Collector”). ROSALES also claimed that a portion of the price paid by the Manhattan galleries would be her commission for selling the paintings, and that the remainder would be passed along to her clients. 
In contrast to the claims made by ROSALES, the investigation has revealed that: 
• experts in the fields of art, art history, and materials science have concluded that at least several of the paintings sold by her are counterfeit;
• the Purported Swiss Client on whose behalf she claimed to sell most of the paintings to the Manhattan galleries never existed;
• the Purported Spanish collector on whose behalf she claimed to sell the remainder of the paintings to the Manhattan galleries never owned the paintings; and
• instead of passing along a substantial portion of the proceeds of the sale of the various paintings, she kept all or almost all of the proceeds, and transferred substantial portions to an account maintained by her then-boyfriend. 
ROSALES filed tax returns that falsely claimed she had not kept all, or almost all of the proceeds from the sale of the purported clients’ paintings, when, in fact, she had. Further, there was no Swiss client and no Spanish collector. In total, she failed to report the receipt of at least $12.5 million of income for the years 2006 through 2008.
In addition, ROSALES received most of the proceeds from the sale of the paintings in a foreign bank account that she hid from, and failed to report to, the IRS. U.S. taxpayers are required to report the existence of any foreign bank account that holds more than $10,000 at any time during a given year by the filing of a Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (“FBAR”). ROSALES failed to file FBARs for the years 2007 through 2011.
JAT comments on the Tax Loss Number and Sentencing Guidelines above:  The tax loss of $3.5 million is estimated from the Guidelines presumption of 28% of omitted income, here $12.5 million.  The $12.5 million only includes the charged years.  The pattern occurred in earlier years as well (perhaps beyond the criminal statute of limitations) and would be included in the Guidelines calculation as relevant conduct, so that the tax loss for sentencing purposes is certainly going to be higher.  Of course, fine tuning the tax loss is not relevant to the merits of the charge made (tax perjury as to the omitted income) and becomes material only at sentencing where the tax loss is the principal driver in calculating the Guidelines sentencing range.  My rough cut on the sentence range for the amount of tax alleged $3.5 million is 78-87 months if she goes to trial and is convicted.  The range is 57-71 months if she pleads guilty and gets the 3 level downward adjustment for acceptance of responsibility.

As suggested in the complaint and the press release, Ms. Rosales has achieved some degree of notoriety.  Some of the notoriety is laid out in the New York Times article, Graham Bowley, William K. Rashbaum and Patricia Cohen, Dealer at Center of Art Scandal Arrested on Tax Charges (NYT 5/21/13), here.  Excerpts from the article are:\
[Referring to the press release's allegations of "fake artworks"]   
The case drew attention in the art world because it illustrated the vulnerability of a market where value is based on authenticity but can be difficult for experts to determine with complete precision. Dealers who sold the works, often for millions of dollars, said they believed in their authenticity even after many of their clients began to challenge those assertions. 
But according to the government’s case, an apparently talented forger — or forgers — confounded the art world for years by turning out realistic-looking works said to be by masters including Jackson Pollock and Willem de Kooning. Authorities declined to comment on whether they have identified a forger, but a person briefed on the matter, who spoke on condition of anonymity because he was not authorized to comment, said the investigation is continuing and that any leads on the forgeries will be pursued. 
* * * * 
Beginning in the mid-1990s, Ms. Rosales sold most of the disputed works through the East 70th Street offices of Knoedler & Company, which was at the time New York’s oldest gallery. The works, all new to the market and many said to be from a collector based in Zurich and Mexico City whom Ms. Rosales initially refused to name, were embraced by Knoedler, which sold them for millions. They became an important source of revenue for the gallery. 
But then several experts called the works fake, and the F.B.I. began an investigation. In 2011, after 165 years in business, Knoedler closed and was later sued by a half-dozen clients who had bought the Rosales works. 
The scandal cast a shadow over Ann Freedman, a former president of Knoedler, who has not been criminally charged but has been named in several of the lawsuits. She has maintained that the works are authentic. Her lawyer, Nicholas Gravante Jr., said the case showed no evidence otherwise. 
Mr. Gravante said that if the government’s assertion that the works are fake is based on the reviews by experts cited in the civil cases, “it is not surprising that Rosales was not charged with selling fake art.” 
“We have yet,” he continued, “to see a credible expert report asserting that any of the works are fake.” 
The Knoedler gallery has said that, like Ms. Freedman, it never knowingly sold fakes. Charles D. Schmerler, a lawyer for the gallery, noted too that the government had also not charged Ms. Rosales with knowingly selling fakes. 
Federal authorities declined to comment on the decision not to charge Ms. Rosales with anything related to the sale of counterfeits. But the complaint they filed discussed in some detail their reasons for believing them to be fake and focused on holes in her accounts of how she had obtained them from two collectors. The first collector did not exist, investigators said, and the second denied ever owning the paintings in an interview with the F.B.I. In addition, authorities said that much of the money Ms. Rosales received as the broker in the sale should have been turned over to a collector, if one existed, but instead was largely kept by her.

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