Article On UH Tax Fraud and Money Laundering Student (3/29/18)

Today, I write to offer an article from WAPO on a former student, Drew Willey.  His Clients Weren’t Complaining. But the Judge Said This Lawyer Worked Too Hard (NYT 3/29/18), here.

Larry Campagna, here, and I taught the Tax Fraud and Money Laundering Course at UH Law School.  Basically, the course covered what I discuss on this Federal Tax Crimes Blog.  Drew was an outstanding student in the class of 2013.  Hence, I am not surprised that he is highly rated (see Avvo rating here).  I don't know if he works in the criminal tax area.  Based on what I know, if I had that type of problem in the Houston-Galveston area, he would be one I would want to talk with.  He certainly knows the subject from our course (he did very well).

Congratulations to Drew for fighting the good fight.  Drew's facebook page is here.

Lawyers as Enablers in Money Laundering (3/29/18)

Amol Mehra, My law degree wasn’t meant for money laundering. But boy, it would make it easy (WAPO 3/29/18), here.

I didn’t pursue a law degree to learn how to launder money for human traffickers, opioid kingpins or corrupt public officials. But my legal training has helped me to understand just how easy it would be. 

Anonymous companies are ubiquitous in most money-laundering schemes, and in the allegations against Trump campaign associates Paul Manafort and Richard Gates. Shell companies are formed with no record of the true owners, and because they are so easy to set up — especially if you’re a lawyer — you can easily layer dozens of them to confuse investigators and hide dirty money. 

A Delaware-based LLC could own a Nevada-based C corporation, which could be owned by a Panamanian company, and on and on. That makes it nearly impossible for investigators to untangle these webs. In 2012, Cyrus Vance Jr., district attorney of New York County, said this about anonymous companies: “My office, time and time again, finds its criminal investigations thwarted by an absurd system of secrecy whereby criminals can hide their money.” 

* * * * 

Because anonymous shell companies are a factor in so many kinds of cases — hiding proceeds from the ongoing opioid crisis, funding terrorism, enabling corruption in the oil and gas industries — there is large and growing bipartisan support for a bill to collect ownership information on anonymous companies. Remarkably, it might pass. 

These reforms are backed by a broad coalition, made up of supporters including law enforcement agencies, progressive anti-poverty groups and large financial institutions. They advocate policies that would require companies to disclose their owners to the government. In turn, the government would share that information with law enforcement and institutions with anti-money-laundering requirements. 

Yet bizarrely, and regrettably, the American Bar Association opposes these reforms. Even more bizarre are the ABA’s arguments.

And so on.  Very thoughtful piece.

JAT Comment:  Of course, money laundering is a crime separate from tax evasion or related tax crimes, but the conduct which enables money laundering can also be deployed to enable tax crimes.

Statistics and Extrapolations on Tax Cheating in the US (3/27/18)

This is an interesting article with some data and some extrapolations from the data. A high level overview of who cheats (at least certain segments of the tax cheat category) and why.  Evan Horowitz, Everyone Tries To Dodge The Tax Man, And It Keeps Getting Easier (FiveThirtyEight 3/19/18), here.

The author discusses the data in three subject categories:

Foe No. 1: A weakened IRS
Foe No. 2: Small businesses cheat, and tax reform fosters them
Foe No. 3: Partisanship

I add that, in the mix for accounting for the problem of tax cheating, should be corporations and wealthy taxpayers  and their enablers who have scammed the system with Bullshit Tax Shelters and variants for years.  Many of those Bullshit Tax Shelters and variants work because the IRS does not have the resources to ferret them out and give those taxpayers their due.  And, even when caught, the IRS is reticent to hold the wealthy taxpayers (corporate and individual) liable with civil and criminal penalties, often slapping them at most with the accuracy related penalty when they knew that they were gaming the system.  They may sometimes prosecute the tax professionals who enabled these taxpayers but rarely do they proceed against corporate and wealthy individual taxpayers how played the game and hid behind their professionals.

I have recently discussed in another context my opening session with many clients who may have criminal tax problems.  For clients who I did not have reason to know were straight-shooters, I made and emphasized two key conditions/statements.  First, if the client lies to me, I will fire them.  (Now, I knew when I told them that, that there would be some lies in many cases; I would cross-examine most of what they told me and if I caught them lying repeatedly, I would and did fire them.)  Second, I would tell the clients that, if anyone in the room is going to jail, it would be them and not me.  I am not the fall guy (although, as noted above, in the Bullshit Tax Shelter area, some taxpayer enablers have served as the fall guy for taxpayers who should have and, in many cases, did know better).

I raise this principally because a former student recently reminded me of my telling my Federal Tax Crimes law students of these opening sessions with clients.  He reminded me of this in the context of John Dowd resigning as principal lawyer for the President in the Mueller led investigation.

What Are the Implications for Marinello on the Defraud / Klein Conspiracy? (3/24/18)

I have recently written on the Supreme Court's opinion in Marinello v. United States, ___ U.S. ___, ___ S.Ct. ___ 2018 U.S. LEXIS 1914  (2018).  See Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (Federal Tax Crimes Blog 3/21/18; 3/22/18), here.  I write here to raise the question of how Marinello may affect the interpretation and application of the Klein conspiracy, which is a very common charge in criminal tax cases.

Marinello involved § 7212(a)'s Omnibus Clause which defines the crime I call tax obstruction as follows (from the Marinello opinion)

corruptly * * * endeavors to obstruct or impede the due administration of this title.

The defraud conspiracy (18 USC 371)--commonly referred to as a Klein conspiracy in a tax setting (see United States v. Klein, 247 F.2d 908 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958)--punishes a conspiracy:

to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy

From the textual words used, a connection between tax obstruction and the Klein conspiracy is not direct.  But, interpretation of the Klein conspiracy suggests the connection.  The Klein conspiracy is generally described in some variation of a conspiracy to impair or impede the lawful function  of the IRS.  Indeed, given this apparent overlap, the 2001 version of the DOJ CTM 17.02 (2001 ed.) said that tax obstruction may be charged where the Klein conspiracy is “unavailable due to insufficient evidence of conspiracy.”  CTM 17.02 (2001 ed.).  In effect, the elements of the crime are the same except for the requirement that there be two or more conspirators.

Since that is true, the Court's rejection in Marinello of the Government's sweeping claim as to the scope of tax obstruction might have some similar effect--a salutary one--on the scope of the Klein conspiracy.  Of course, there is no direct link between the conspiracy statute and some other statute such as the Supreme Court found persuasive in Marinello.  But the link is in the interpretation of the Klein conspiracy as interpreted and, now, the obstruction statute.  Now, what is not clear is whether the link between the tax obstruction statute and the general conspiracy statute as interpreted in Aguilar would be sufficient to import the pending investigation limitation in the obstruction.  Or whether, given the concerns expressed in the majority opinion, the Court might be inclined to leverage a limitation into the Klein conspiracy.

In this regard, I remind readers that the now infamous Judge Kozinski asked the following pithy question about the Klein conspiracy in the opening line of a seminal case, United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993):  "We consider whether conspiring to make the government's job harder is, without more, a federal crime."  Isn't that a variation of the question asked and answered in Marinello?  And Judge Kozinski found a way to reign in expansive interpretations of the Klein conspiracy.  Maybe Marinello could presage a similar reading of the Klein conspiracy.

At this time, I won't discuss the issue further.  I do refer readers to my prior article inspired by Judge Kozinski's opening line where I get into the various facets of obstruction crimes.  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here; and Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.

Finally, I offer a cut and paste from Klein on the defraud / Klein conspiracy:

Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (3/21/18; 3/22/18)

Today, the Supreme Court held in Marinello v. United States, 584 U.S. 1 (2018), here, that "To convict a defendant under the Omnibus Clause, the Government must prove the defendant was aware of a pending tax-related proceeding, such as a particular investigation or audit, or could reasonably foresee that such a proceeding would commence."  There is a lot to unpack there, and I haven't had time to study the opinion.  I therefore offer for now only the Court's syllabus of the opinion (not the opinion itself, but probably as good a discussion other than the opinion as available right now).

Between 2004 and 2009, the Internal Revenue Service (IRS) intermittently investigated petitioner Marinello’s tax activities. In 2012, the Government indicted Marinello for violating, among other criminal tax statutes, a provision in 26 U. S. C. §7212(a) known as the Omnibus Clause, which forbids “corruptly or by force or threats of force . . .obstruct[ing] or imped[ing], or endeavor[ing] to obstruct or impede,the due administration of [the Internal Revenue Code].” The judge instructed the jury that, to convict Marinello of an Omnibus Clause violation, it must find that he “corruptly” engaged in at least one of eight specified activities, but the jury was not told that it needed to find that Marinello knew he was under investigation and intended corruptly to interfere with that investigation. Marinello was convicted. The Second Circuit affirmed, rejecting his claim that an Omnibus Clause violation requires the Government to show the defendant tried to interfere with a pending IRS proceeding, such as a particular investigation.

Held: To convict a defendant under the Omnibus Clause, the Government must prove the defendant was aware of a pending tax-related proceeding, such as a particular investigation or audit, or could reasonably foresee that such a proceeding would commence. Pp. 3–11. 

(a) In United States v. Aguilar, 515 U. S. 593, this Court interpreted a similarly worded criminal statute—which made it a felony “corruptly or by threats or force . . . [to] influenc[e], obstruc[t], or imped[e], or endeavo[r] to influence, obstruct, or impede, the due administration of justice,” 18 U. S. C. §1503(a). There, the Court required the Government to show there was a “nexus” between the defendant’s obstructive conduct and a particular judicial proceeding. The Court said that the defendant’s “act must have a relationship in time, causation, or logic with the judicial proceedings.” 515 U. S., at 599. In reaching this conclusion, the Court emphasized that it has“traditionally exercised restraint in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress and out of concern that ‘a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed.’ ” Id., at 600. That reasoning applies here with similar strength. The verbs “obstruct” and “impede” require an object. The taxpayer must hinder a particular person or thing. The object in §7212(a) is the “due administration of [the Tax Code].” That phrase is best viewed, like the “due administration of justice” in Aguilar, as referring to discrete targeted administrative acts rather than every conceivable task involved in the Tax Code’s administration. Statutory context confirms this reading. The Omnibus Clause appears in the middle of a sentence that refers to efforts to “intimidate or impede any officer or employee of the United States acting in an official capacity.” §7212(a). The first part of the sentence also refers to “force or threats of force,” which the statute elsewhere defines as “threats of bodily harm to the officer or employee of the United States or to a member of his family.” Ibid. And §7212(b)refers to the “forcibl[e] rescu[e]” of “any property after it shall have been seized under” the Internal Revenue Code. Subsections (a) and (b) thus refer to corrupt or forceful actions taken against individual identifiable persons or property. In context, the Omnibus Clause logically serves as a “catchall” for the obstructive conduct the subsection sets forth, not for every violation that interferes with routine administrative procedures such as the processing of tax returns, receipt of tax payments, or issuance of tax refunds. The statute’s legislative history does not suggest otherwise. The broader context of the full Internal Revenue Code also counsels against a broad reading. Interpreting the Omnibus Clause to apply to all Code administration could transform the Code’s numerous misdemeanor provisions into felonies, making them redundant or perhaps the subject matter of plea bargaining. It could also result in a similar lack of fair warning and related kinds of unfairness that led this Court to “exercise” interpretive“restraint” in Aguilar. See 515 U. S., at 600. The Government claims that the “corrupt state of mind” requirement will cure any over-breadth problem, but it is difficult to imagine a scenario when that requirement will make a practical difference in the context of federal tax prosecutions. And to rely on prosecutorial discretion to narrow the otherwise wide-ranging scope of a criminal statute’s general language places too much power in the prosecutor’s hands. Pp. 3–9.

(b) Following the same approach taken in similar cases, the Government here must show that there is a “nexus” between the defendant’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action. See Aguilar, supra, at 599. The term “particular administrative proceeding” does not mean every act carried out by IRS employees in the course of their administration of the Tax Code. Just because a taxpayer knows that the IRS will review her tax return annually does not transform every Tax Code violation into an obstruction charge. In addition to  satisfying the nexus requirement, the Government must show that the proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant. See Arthur Andersen LLP v. United States, 544 U. S. 696, 703, 707–708. Pp. 9–11.

JAT Comments (revised through 3/22/18):

FBAR Civil Penalty Items (3/21/18)

Items of interest to FBAR fans:

• First, FinCEN has updated the inflation adjustment for the FBAR civil penalties stated in $ amounts.   See Inflation Adjustment of Civil Monetary Penalties (Final Rule Adopted 3/18/18),  revising Table 1 of § 1010.821—Penalty Adjustment and Table, here):  Those adjustments are 

Penalty	Statute	Amount as Inflation Adjusted
Nonwillful Penalty Maximum (§ 5321(a)(5)(B)(i))	$10,000	$12,921
Willful Penalty Minimum (§ 5321(a)(5)(C)(i)(1)	$100,000	$129,210

• The National Taxpayer Advocate posted the following article on her blog:  Analysis of Tax Settlement Programs as Amnesties - When Should the Government Offer Them and How Should They Be Structured? (Part 1 of 3) (NTA Blog 3/14/18), here.  This first installment addresses the general effect of tax and tax-related amnesties.  The blog indicates: "Next week we will apply what we’ve learned about amnesties to the IRS’s OVDP.."

Second Circuit Discusses Conscious Avoidance (Willful Bllindness) (3/21/18)

In United States v. Dambelly, 2018 U.S. App. LEXIS 6382 (2d Cir. 2018), unpublished, here, the Court had some interesting language regarding the willful blindness concept (which the Court, as often in the Second Circuit, refers to as conscious avoidance, see United States v. Ferguson, 676 F.3d 260, 278 n16 (2d Cir. 2011)).

Dambelly was convicted of "one count each of conspiracy to export, transport, and possess stolen motor vehicles in violation of 18 U.S.C. § 371; exportation of or attempt to export stolen vehicles in violation of 18 U.S.C. §§ 2, 553(a)(1); transportation of stolen vehicles in violation of 18 U.S.C. §§ 2, 2312; and possession of stolen vehicles in violation of 18 U.S.C. §§ 2, 2313(a)."

The opinion is short and discusses the conscious avoidance issue.  I excerpt here only a portion of the discussion (emphasis supplied by JAT):

As Dambelly points out, one of the prerequisites for a conscious-avoidance instruction is that "the defendant [have] assert[ed] the lack of some specific aspect of knowledge required for conviction." Svoboda, 347 F.3d at 480. A conscious-avoidance instruction permits the jury to draw an inference of knowledge, not an inference of specific intent. See United States v. Samaria, 239 F.3d 228, 239-40 (2001), abrogated on other grounds, United States v. Huezo, 546 F.3d 174 (2d Cir. 2008). To convict a defendant of aiding and abetting, a jury must find that the defendant had the specific intent to commit the underlying substantive offense; mere knowledge is not enough. United States v. Frampton, 382 F.3d 213, 223 (2d Cir. 2004). Conviction on a charge of attempt requires proof of intent unless it is clear from the language of the statute that only knowledge, not intent, is required. See United States v. Kwong, 14 F.3d 189, 194 (2d Cir. 1994) (citing Braxton v. United States, 500 U.S. 344, 351 n. (1991, 111 S. Ct. 1854, 114 L. Ed. 2d 385)).

While this is not a tax case, the discussion does echo the intent requirement in tax crimes requiring willfulness -- per Cheek, specific intent to violate a known legal duty. Cheek v. United States, 498 U.S. 192, 200-201 (1991).  As I understand it, at least some courts use the willful ignorance -- aka conscious avoidance -- instruction in such tax crimes cases.  So, I decided to look at the cases cited above.

Court of Appeals Affirms Exclusion of Amended Returns and Payments after Start of Criminal Investigation (3/20/18)

In United States v. Evdokimow, 726 Fed. Appx. 889, 2018 U.S. App. LEXIS 6564 (3rd Cir. 2018) (nonprecedential), CA3 here & GS here, Evdokimow was convicted of 8 tax crimes counts "relating to his failure to report and pay taxes on his personal and business income."  The issues he raised on appeal arose from his attempt after learning of the criminal tax investigation to file amended return and pay the indicated tax and interest.  (The opinion refers to payment of tax, penalties and interest, but penalties are not usually paid with amended returns; I suppose he may have paid penalties with the amended returns or upon assessment by the IRS; in any event, that is not relevant and I will just refer to his payments as payments of tax.)  The underlying gambit to evade his tax liability was contorted, but not particularly interesting to the point of this blog.  After obfuscating in a civil audit, the IRS opened a criminal investigation in 2009 but, for some reason, he was not aware of that investigation until 2012.  (The under the radar screen investigation for so long is not relevant to this blog, but I suspect there is a story there.) Then:

After he became aware of the investigation, Evdokimow took steps to repay his tax deficiencies. n1 He retained lawyers and accountants to assist him to identify his taxable income for the years 2005 through 2013 * * * * Evdokimow filed an amended tax return for 2006 in June 2013, and filed amended returns for the remaining years in September 2013. Evdokimow accordingly paid all of his tax liability, including penalties and interest, totaling $3,395,394.00.
   n1 Because the District Court precluded Evdokimow from testifying regarding the remedial steps he took after receiving the subpoena in 2012, our recitation of these facts relies on counsels' proffers of what the evidence would show, were it to be admitted.

Criminal tax practitioners will recognize this gambit designed to mitigate or avoid criminal prosecution.  The standard advice (at least in my experience) is that filing amended returns and paying the tax will not mitigate or avoid prosecution because the focus in a criminal tax trial is the tax loss and intent when the original returns were filed.  Later amended returns and payments, particularly in response to a criminal investigation, are not likely to be successful in staving off prosecution.  And here, it did not do so; the defendant was indicted.  But the defendant still wanted to present this to the jury as bearing on his good faith intent.

In the pre-trial skirmishing, the Government moved in limine to "the Government moved to preclude Evdokimow from presenting evidence that he filed amended tax returns and paid additional taxes after learning of the criminal investigation."  The district court granted the Government's motion:

The District Court concluded that any evidence concerning Evdokimow's subsequent tax payments was "of marginal probative value" that was "substantially outweighed by its potential for prejudice and confusion to the jury." App. 156. The Court reasoned that, while subsequent payments "could have probative value," the "delay of at least 18 months" between the point when Evdokimow learned of the investigation and when he filed his amended returns eliminated any such value in this case. App. 157. The Court further concluded that the eventual payment of the taxes was "potentially confusing to the jury" and created a risk of jury nullification that was "potentially uncurable . . . by even a careful instruction as to render it admissible" because it opened the prospect of the defendant "argu[ing] to the jury that [he] pay[s] [his] taxes like anybody else." App. 157-58. Evdokimow sought reconsideration of the District Court's decision on the first day of trial, but the request was denied.

Then at closing argument:

the Government, in its summation, described Evdokimow's conduct at several points in terms of the "tax loss" that he had caused. The Government also argued that Evdokimow had benefited from and "saved" millions of dollars by underpaying his taxes. Evdokimow objected to these comments, arguing that they misleadingly suggested to the jury that he still had tax obligations outstanding, when in fact he had satisfied the tax debt before he was indicted. As a remedy, Evdokimow requested that the District Court instruct the jury that he had paid his tax obligations after learning about the investigation, which he conceded was a fact not in evidence. The Court denied the request, but instructed the Government to be careful in rebuttal to make clear that the issue before the jury related only to the time period covered by the indictment. In rebuttal, the Government mentioned Evdokimow's wealth and ability to pay his taxes between 2006 and 2012, and argued that "[s]ometimes people that have a lot of money are willing to commit crimes to get more. And that's what happened here." App. 326-27.

Evdokimow was convicted on all counts.

Two Opinions on Joinder of Tax Charges and NonTax Charges (3/20/18)

I generally do not write about criminal cases where the gravamen of the case is a nontax crime but with a tax crime charge which, while an important charge, seems to be swamped by the nontax crime..  However, two such cases popped up in my searches recently.  United States v. Sabean, ___ F.3d ___, 2018 U.S. App. LEXIS 6619 (1st Cir. 2018), here, and United States v. Li, 2018 U.S. Dist. LEXIS 40411 (M.D. Penn. 2018), here.  In each case, the defendant objected to the joinder of the tax crime(s) with the nontax crime.  I focus this blog on the issue in each case of whether the tax charge should have been severed from trial from the nontax crime(s).  But, that requires some brief context.

Sabean

I wrote earlier about pre-trial skirmishing in the case.  See District Court Rejects Suppression for Interview of Target of Grand Jury Investigation Without Notifying His Counsel (Federal Tax Crimes Blog 10/4/16), here.  The trial occurred.  The First Circuit decision I write about today is from the conviction on all counts.

Judge Selya wrote the opinion.  He starts the opinion:

This case, which reads like an anthology of pain, pathos, and personal degradation, paints a grim picture of the human condition. It intertwines allegations of an incestuous relationship with criminal charges of tax evasion, unlawful distribution of controlled substances, and health-care fraud. Following a contentious trial, the jury found defendant-appellant Joel A. Sabean guilty on all of the charged counts. 

The defendant strives to convince us, through a wide-ranging asseverational array, that the jury's verdict should not stand. After careful consideration of a tangled record conspicuously free from prejudicial error, we are not persuaded. Consequently, we affirm the judgment below.

The indictment charged :

(i) "five counts corresponding to five different tax years, with knowingly evading nearly $1,000,000 in federal tax liability by claiming fraudulent medical deductions between 2009 and 2013. See 26 U.S.C. § 7201.  

(ii) "fifty-two counts, with having distributed Ambien, Lunesta, and Xanax to S.S. [S.S. is Sabean's daughter with whom he has a sexual relationship] on fifty-two separate occasions between December 15, 2010 to January 4, 2014 outside the usual course of professional medical practice and without legitimate medical purpose.1 See 21 U.S.C. § 841(a)(1); 21 C.F.R. § 1306.04(a)."

(iii) "a single count [of] health-care fraud by writing certain prescriptions meant for S.S. in his wife's name between March 28, 2010 and December 9, 2012. See 18 U.S.C. § 1347."

Sabean was convicted on all counts.  Of course, Sabean could not be charged in federal court with incest or any related crime, because those are not federal crimes.  But, the Government did sweep that conduct into the trial as other acts evidence under FRE 404(b).  The Court does discuss and affirm the use of that evidence, but I won't get into that discussion here because the detail is not directly relevant to the severance issue I discuss.

Ninth Circuit Rejects Bank Argument Against FDIC Cease and Desist Order from Failure to File SAR (3/20/18)

I have previously written on the Bank Secrecy Act requirement that financial institutions file Suspicious Activity Reports ("SARs").  31 USC § 5318(g); see IRS Use of Suspicious Activity Reports of Financial Institutions (Federal Tax Crimes Blog 11/23/12; revised 11/24/12), here; and Tidbits from ABA Tax Section May Meeting (Federal Tax Crimes Blog 5/13/15), here.  In California Pacific Bank v. FDIC, ___ F.3d ___, 2018 U.S. App. LEXIS 6047 (9th Cir. 2018), here, the FDIC issued a cease and desist order to the Bank for failure to file an SAR.  The Bank appealed; the Ninth Circuit sustained the FDIC action.  I thought some readers of this blog might appreciate the some of the discussion of the circumstance of the failure to file the SAR.

For introduction, the Ninth Circuit's summary of the opinion is as follows:

The panel denied a petition for review brought by California Pacific Bank, challenging the constitutionality of the Bank Secrecy Act ("BSA") and its implementing regulations, and alleging that the Federal Deposit Insurance Corporation Board of Directors' decision — finding that the Bank violated the BSA and ordering the Bank to implement a plan to bring the Bank into compliance — was not supported by substantial evidence. 

The FDIC Board concluded that the Bank did not comply with the BSA's implementing regulations because it failed to establish and maintain procedures designed to ensure adequate internal controls, independent testing, administration, and training — the "four pillars." 

As a preliminary matter, the panel held that the Bank preserved its constitutional challenges, and they were not waived. 

The panel held that the BSA and its implementing regulations were not unconstitutionally vague, and the FDIC and the administrative law judge did not exhibit unconstitutional bias against the Bank. The panel further held that the FDIC acted in accordance with the law by relying on the Federal Financial Institutions Examination Council Manual to clarify its four pillars regulation. The panel also held that substantial evidence supported the FDIC Board's decisions that the Bank failed to comply with the four pillars and that the Bank failed to file a suspicious activity report, where one was needed, and thus, that the Bank did not comply with the BSA.

I focus on the opinion discussion behind the last sentence of the summary.  That discussion is:

The FDIC Board affirmed the ALJ's finding that the Bank failed to file a SAR where one was needed and to document its decision on whether or not to file a SAR. The Bank argues that this decision is not supported by substantial evidence. The Bank argues that it could not have been obligated to file a SAR because the FBI and DOJ told the Bank not to disclose any aspect of an ongoing federal criminal investigation. The Bank further contends that the examiners manufactured a new justification for filing a SAR months after the 2012 examination was complete. 

Pursuant to 12 C.F.R. § 353.1, an insured state nonmember bank must file a SAR whenever it suspects "a known or suspected criminal violation of federal law or a suspicious transaction related to a money laundering activity or a violation of the Bank Secrecy Act." For transactions of $5000 or more that involve potential money laundering or BSA violations, a SAR must be filed with the appropriate federal law enforcement agencies and the Financial Crimes Enforcement Network, where "[t]he transaction involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities" or "[t]he transaction has no business or apparent lawful purpose or is not the sort of transaction in which the particular customer would normally be expected to engage, and the bank knows of no reasonable explanation for the transaction." Id. § 353.3(a)(4)(i) and (iii). The FFIEC Manual advises banks to review account activity for any customer for whom the bank receives a subpoena and to independently evaluate the need to file a SAR based on the bank's review of those materials. The FFIEC Manual discourages banks from referencing receipt or existence of a grand jury subpoena in the SAR and states that the SAR should only reference any underlying facts supporting the determination that the transaction at issue in the SAR is suspicious. 

During 2011 and 2012, the Bank received grand jury subpoenas seeking documentation and other information regarding certain customer transactions. These customers were part of an FBI investigation into international espionage and misappropriation of trade secrets. The FBI executed a search warrant on the Bank and interviewed Alan Chi and other Bank employees regarding these accounts. In early 2012, some of these customers were indicted for economic espionage and theft of trade secrets. 

It is undisputed that the Bank did not file a SAR or document its decision not to file a SAR. The only issue is whether the Bank's non-action was excused. The FDIC Board found that the Bank was not legally precluded from filing a SAR. On August 10, 2011, the DOJ sent the Bank a letter, directing the Bank to maintain the utmost secrecy with regard to the federal grand jury subpoena. Alan Chi interpreted this to mean that he could not disclose any aspect of the FBI investigation—including providing notice to regulators of customer activity in a SAR, even if that SAR did not include any mention of the FBI investigation. But this interpretation was erroneous. The Federal grand jury subpoena letter advised that "you and employees of California Pacific Bank [are required to] maintain the utmost secrecy with regard to this Federal grand jury subpoena." In recounting his conversation with an FBI agent, when Alan Chi asked if he could file a SAR, he recalled the agent saying, "Don't mention anything about the subpoena . . . just don't mention the subpoena." The FFIEC Manual explicitly contemplates the filing of SARs for customer activity that is also subject to law enforcement investigations and subpoenas, which suggests that investigations and subpoenas should often prompt filing SARs. The Bank's BSA Policy Manual reflected this guidance as well. Nothing prevented the Bank from filing a SAR that only referenced the suspicious activity at a general level without mentioning receipt of the subpoenas. The FDIC Board's finding that the Bank was able to file a SAR is supported by substantial evidence. 

Rawlins' draft 2012 ROE concluded that the Bank should have filed a SAR pursuant to 12 C.F.R. § 353.3(a)(4)(i) after learning of the indictments. Edmund Wong, Rawlins' immediate supervisor, initially disagreed, and concluded after conducting a second-level review of the ROE that an indictment alone was insufficient to support filing a SAR. However, upon receiving additional information on the accounts, Wong determined that the Bank should have filed a SAR. Wong detected several red flags, including "large dollar" and "round dollar" amounts that were much larger than the anticipated activity in the accounts, large wire transfers, and transactions that lacked any information on source of income, purpose of account, or expected activity—all of which he deemed evidence of a "layering scheme." The FDIC Board's findings that the filing of a SAR was warranted and that the examiners did not manufacture a justification for filing a SAR are supported by substantial evidence. 

The FDIC Board's decision that, in failing both to file a SAR and to document its decision not to file a SAR, the Bank violated 12 C.F.R. § 353 and did not comply with the BSA is supported by substantial evidence.

IRS to Ramp Down and Then End OVDP on 9/28/18, But the Streamlined Procedures for Offshore Assets Will Continue for Now (3/13/18)

The IRS has announced that it will "begin to ramp down [OVDP] * * * and close the program on Sept. 28, 2018."  IR-2018-52, here   Related FAQs, titled Closing the 2014 Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers are here.  I discuss the FAQs at the end of the blog.

First, the contents of the news release are:

Issue Number:    IR-2018-52 

IRS to end offshore voluntary disclosure program; Taxpayers with undisclosed foreign assets urged to come forward now 

WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.  

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.” 

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. 

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017. 

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns. 

Tax Enforcement 

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations. 

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS." 

Streamlined Procedures and Other Options 

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point. 

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets.  Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets: 

• IRS-Criminal Investigation Voluntary Disclosure Program;
• Streamlined Filing Compliance Procedures;
• Delinquent FBAR submission procedures; and
• Delinquent international information return submission procedures. 

Full details of the options available for U.S. taxpayers with undisclosed foreign financial assets can be found on IRS.gov.

Seventh Circuit Holds that Attorney Advising Client to Plead Guilty Without Discovery from the Government Was Strategic Decision Rather than Ineffective Representation (3/10/18)

In United States v. Jansen, 2018 U.S. App. LEXIS 5755 (7th Cir. 3/7/l8), here, Jansen pled to "to one count of wire fraud and one count of tax evasion."  He later sought to withdraw the plea, "arguing it was not 'knowing and voluntary' because of ineffective assistance of counsel."  In the plea agreement, the Government agreed to recommend the U.S.S.G. § 5K1.1 sentence reduction but only if he provided "substantial assistance."  Thereafter, Government determined that he had not provided substantial assistance and did not recommend the reduction.  That apparently caused Jansen to seek to withdraw his plea.  The district court took testimony sporadically over a long period and then concluded that his attorney at the time of the plea agreement -- Jansen had several attorneys over the course of the relevant events -- had not given ineffective assistance.

As I read the opinion, the principal factor which caused Jensen to seek to withdraw the plea was the Government's notice that it would not recommend the 5K1.1 sentence reduction.

In any event, the most interesting claim of ineffective assistance related to his attorney's failure to pursue discovery or other investigation before the plea agreement.  Jansen claimed that, had the attorney done so, Jansen would have had information that would have persuaded him not to plead guilty.  The larger background is that, in the course of legal representation in a criminal case, it is not uncommon for attorneys to advise clients to take certain action based on incomplete information.  Actually, that phenomenon is true of all of life.  The issue is when do we take action -- or recommend a course of action -- on the basis of information that we know is not complete?

That is what happened in the case.  To simplify the more complex facts, the attorney negotiating the plea had been substituted into the case after Jansen had decided to plead guilty and had, indeed, engaged the attorney to negotiate the plea.  That attorney apparently felt himself competent to negotiate the plea but not to handle the trial if a plea agreement were not reached.  The attorney, based on all the facts he knew and his discussions with the prosecutor, believed that Jansen was at significant risk for significant additional prosecutions and, for the wire fraud count to which he pled, a potentially higher sentence because of a change in the law.  Indeed, because of that change in the law, applicable to later years for which Jansen was at risk absent the plea, Jansen waived the statute of limitations on the fraud count year.  The attorney advised Jansen to accept the plea agreement based upon (i) the expectation that other charges which could be charged if the Government investigated would not be charged, and (ii) the Government would not assert that other conduct as relevant conduct.  Basically, the attorney felt it in Jansen's interest to truncate the Government's focus on the case, which if it continued may result in  greater damage.  In short, as the Court noted, the attorney's advice was "strategically motivated" and was not ineffective representation.