Sunday, May 20, 2018

Excellent Presentation on Restitution in Tax Crimes Cases (5/20/18)

At the ABA Tax Section May Meeting, a panel discussed restitution in criminal tax cases and presented a slide presentation titled "The Gathering Storm: Grappling with the Impact of Restitution Orders on Civil Tax Litigation," here.  The slide presentation was prepared by Caroline Caraolo, here.

The Topics covered are:
  • Tax Loss in a Criminal Proceeding
  • Restitution
  • How is a Restitution Calculated?
  • How can a Restitution Order be Challenged?
  • How is Restitution Collected?
  • Restitution-Based Assessments
  • Can Restitution be Avoided?
  • Can a Civil Examination be Avoided?
  • Impact of Restitution-Based Assessments in Civil Tax Proceedings

I add some points that are inherent in the presentation, but I would state differently to make the points:
  • Practitioners should understand the difference between tax loss for Sentencing Guidelines purposes and restitution.  Restitution is the actual tax loss for the count(s) of conviction.  Tax loss for Sentencing Guidelines purposes can include, in addition to the tax loss for the count(s) of conviction, the tax loss attributable to "relevant conduct" -- which may include related criminal conduct not included in the count(s) of conviction, whether not charged, dismissed, or acquitted.  Further, tax loss for Sentencing Guidelines purposes can overstate the actual tax loss if calculated without consideration of unclaimed deductions or credits.  And tax loss calculations are, as the slide presentation notes, subject to certain estimating conventions if it is otherwise not reasonably estimable.  
  • I don't think those Sentencing Guidelines conventions for estimation apply to the tax restitution calculation, so at sentencing it is important to argue that the Government should not be able to get by on such estimations.  Estimations work for Sentencing Guidelines purposes because of the broad bands of tax loss in the Tax Table (S.G. §2T4.1., here).  Most of the time even significant differences between the estimated tax loss and the real tax loss will not affect the Guidelines calculations and will not affect sentencing because of Booker downward variances so common in tax cases.  But, restitution calculations will affect the real world.  The taxpayer (or other defendant liable for restitution) will have to pay any excess of restitution over the real tax loss (or at least be liable to pay such excess).  So, in my judgment, estimations should not work unless they resolve all reasonable doubt within the preponderance of the evidence standard in favor of the defendant.  As the presentation notes:  "To estimate loss [for restitution], there must be a reasonable basis to approximate loss, and impossible to determine actual loss. United States v. Futrell, 209 F.3d 1286, 1291-92 (11th Cir. 2000)."  I don't think that is inconsistent with saying that reasonable doubts as to the restitution amount should be resolved in favor of the defendant.  
  • Keep in mind that for tax restitution, the amount can be assessed immediately and cannot be reduced by the IRS, so that really serious consequences can apply if the restitution is higher than the real tax loss.  In this regard, if the IRS believes that the real tax loss is higher than restitution, it can use the standard deficiency procedures to assess and collect the tax, so foregoing asserting restitution amounts that may be too high will not impair the fisc.
Another thanks to Caroline.  (Thanks to Caroline are very common on this blog; or at least not uncommon.)

Prior Blogs on restitution and tax loss are (reverse chronological order):
  • Relevant Conduct Raised by the Probation Officer and Used by the Sentencing Judge in Calculating the Guidelines (Federal Tax Crimes Blog 3/10/15), here.
  • On Restitution, Count of Conviction and Tax Loss (Federal Tax Crimes Blog 10/24/13), here.
  • Restitution, Relevant Conduct, Counts of Conviction (Federal Tax Crimes Blog 4/11/13), here.

Saturday, May 19, 2018

Data Table and Statistics on FBAR Penalty Civil Litigation (5/19/18)

I provide here an excel spreadsheet titled FBAR Civil Litigation Spreadsheet.  As noted in the sources worksheet, I think the source for the raw data is DOJ Tax.  That raw data is in the worksheet titled Data.  I put that raw data into Excel's Table format so that it can be sorted, sliced and diced.  I also created the Statistics worksheet to derive statistics from the data table.  If anyone has corrections, updates or comments, please let me know at

There are some limitations to the spreadsheet

Outstanding Presentation on Collection of Title 31 International Penalties (Including FBAR) (5/19/18)

I offer here, with permission, an updated version of Caroline Ciraolo's outstanding PowerPoint presentation (with co-panelists Sandra Brown, Jeremy Herndon, Niles Eber, and Charles Pillitteri), titled Collection of Title 31 International Penalties.  This is from a presentation at the ABA Tax Section May Meeting.  Caroline's bio is here.  I highly recommend to all who have an interest in this area.

From the "Topics" page, the subjects covered are:
  • Title 31 – Bank Secrecy Act
  • FBAR Penalties
  • Authority to Assess and Collect
  • Statute of Limitations
  • Federal Debt Collection Procedures
  • Administrative Collection Tools
  • Suits to Collect - Tax Division, U.S. Department of Justice
  • Collection of Judgments
  • Suits to Challenge FBAR Penalty
  • Bankruptcy Procedures re: FBAR Penalties

Of the foregoing, probably the most interesting for readers of this blog is Taxpayer Suits to Challenge FBAR Penalties (slides 33-35).

Thanks to Caroline.

I posted the prior version of this presentation in 2013:  FBAR Penalty Collection -- Beyond the Collection Suit, Administrative Offsets Loom Large and Long (Federal Tax Crimes Blog 4/2/13; Updated 4/10/13), here.

District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (5/19/18)

In United States v. Colliot (W.D. Texas No. AU-16-CA-01281-SS), a case brought by the U.S. to obtain judgment on an FBAR willful penalty, the Court granted Colliot's motion for summary judgment, holding that the IRS cannot assess a willful penalty in excess of $100,000 despite the statute allowing a penalty assessment of the higher of $100,000 or 50% of the maximum amount in the unreported foreign account(s).  The order granting summary judgment is here.  This is a major holding which will surely follow, could dramatically affect the landscape for cases in the pipeline until the IRS acts to change the regulations landscape on which the decision was based.

First, I offer the relevant documents as follows:
  • Colliot's Motion, here.
  • U.S. Response to Motion, here, with a diagram, here.
  • Colliot's Reply, here.
  • U.S. SurReply, here.
  • Court Order Granting Colliot's Motion for Summary Judgment, here.
  • The docket entries in the case through today, here.
The following is the Court's summary of the relevant facts and regulatory background which, I think, is consistent with the summary judgment submissions by the parties.
A. Legal Framework 
To understand Colliot's argument, it is first necessary to briefly review the history of the provision used to impose civil penalties upon Colliot, 31 U.S.C. § 532 1(a)(5). A previous version of § 5321(a)(5) allowed the Secretary of the Treasury to impose civil monetary penalties amounting to the greater of $25,000 or the balance of the unreported account up to $100,000. See Resp. Mot. Summ. J. [#57] at 2. A related regulation promulgated by the Department of the Treasury via notice-and-comment rulemaking, 31 C.F.R. § 103.57, reiterated that "[f]or any willful violation committed after October 26, 1986 . . . the Secretary may assess upon any person, a civil penalty[] . . . not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000." Amendments to Implementing Regulations Under the Bank Secrecy Act, 52 Fed. Reg. 11436, 11445-46 (1987).  
In 2002, the Treasury delegated the authority to assess penalties under § 532 1(a)(5) to the Financial Crimes Enforcement Network (FinCEN). Treasury Order 180-01, 67 Fed. Reg. 64697 (2002). In addition to this delegation of enforcement authority, Treasury Order 180-01 provided that related regulations were unaffected by this transfer of power and should continue in effect "until superseded or revised." Id. Roughly six months later, FinCEN redelegated  the authority to assess penalties under § 532 1(a)(5) and its related regulation, § 103.57, to the IRS. Mot. Summ. J. [#52-5] Ex. E (Memorandum of Agreement and Delegation of Authority for Enforcement of FBAR Requirements). 
In 2004, Congress amended § 5321 to increase the maximum civil penalties that could be assessed for willful failure to file an FBAR. 31 U.S.C. § 532 1(a)(5); American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004). Under the revised statute, the civil monetary penalties for willful failure to file an FBAR increased to a minimum of $100,000 and a maximum of 50 percent of the balance in the unreported account at the time of the violation. 31 U.S.C. § 5321(a)(5)(C). 
Despite this change, the regulations promulgated in reliance on the prior version of the statute remained unchanged. Thus, § 103.57 continued to indicate the maximum civil penalty for willful failure to file an FBAR was capped at $100,000. FinCEN subsequently renumbered § 103.57it is now 31 C.F.R. § 1010.820as part of a large-scale reorganization of regulatory provisions. It also amended part of the regulation to account for inflation. Civil Monetary Penalty Adjustment and Table, 81 Fed. Reg. 42503, 42504 (2016). FinCEN did not, however, revise the regulation to account for the increased maximum penalty now authorized under § 5321 (a)(5). 31 C.F.R. § 1010.820. Nevertheless, the IRS did not let § 103.57 (now § 1010.820) constrain its enforcement authority, and since 2004, the IRS has repeatedly levied penalties for willful FBAR violations in excess of the $100,000 regulatory cap. Resp. Mot. Summ. J. [#57] at 3. 
Based on this Framewor, the Court held that, as written, the subsequent legislation did not implicitly repeal the regulation as written which capped the penalty at $100,000.  The reason is that, in its discretion, FinCEN and the IRS can set willful penalties anywhere under the ceilings under the amended § 5321(a)(5)(C) (the higher of $100,000 or 50% of the amount in the accounts) so that, by leaving the regulation in place, FinCEN In effect said that it would exercise that discretion to have a cap of $100,000 despite the statute allowing willful penalties up to 50% in the account(s) if greater than $100,000.  FinCEN and the IRS certainly have that discretion under the statute and, by leaving the regulation in place, exercised that discretion.

The Court summarizes its holding (p. 5):
In sum, § 1010.820 is a valid regulation, promulgated via notice-and-comment rulemaking, which caps penalties for willful FBAR violations at $100,000. 31 C.F.R. § 1010.820. Rules issued via notice-and-comment rulemaking must be repealed via notice-and-comment rulemaking. See Perez v. Mortgage Bankers Ass 'n, 135 S. Ct. 1199, 1206 (2015) (requiring agencies to "use to the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance"). Section 1010.820 has not been so repealed and therefore remained good law when the FBAR penalties in question were assessed against Colliot. Consequently, the IRS acted arbitrarily and capriciously when it failed to apply the regulation to cap the penalties assessed against Colliot. 5 U.S.C. § 706(2) (requiring agency action to be "in accordance with law"); see also Richardson v. Joslin, 501 F.3d 415, (5th Cir. 2007) ("[A]n agency must abide by its own regulations.") (citing United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954)).
   fn 3  If FinCEN or the IRS wished to preserve their discretion to award the maximum possible penalty for willful FBAR violations under § 5321(a)(5), they might easily have written or revised § 1010.820 to do so. For example, § 1010.820 might have incorporated § 5321 (a)(5) 's maximum penalty thresholds by reference, or alternatively, the IRS might have revised § 1010.820 to reflect the increased penalty limits. Instead, FinCEN and the IRS enacted and then left in place the $100,000 penalty cap.
JAT comments:

Tuesday, May 15, 2018

Special Counsel Opposes Motion to Dismiss FBAR Count as Untimely Because of Secret 18 USC 3292 Order (5/15/18)

Paul Manafort filed a motion to dismiss the FBAR count, Count 11 of the superseding indictment, here, in the case in E.D. Virginia, United States v. Manafort (E.D. Va. No. 1:18-cr-83 (TSE)).  The argument was the the statute of limitations prevented that count.  As described in the superseding indictment:

COUNTS 11-14: 31 U.S.C. §§ 5314 and
5322(a); 18 U.S.C. §§ 2 and 3551 et seq.
Failure To File Reports Of Foreign Bank
And Financial Accounts

Count 11 was for failure to file the FBAR for 2011, due on June 29, 2012.  The statute of limitations is 5 years (18 USC 3282(a), here), which had lapsed on June 29, 2017.  The original indictment was brought on February 13, 2018, and the superseding indictment brought on February 22, 2018.  The indictment was clearly out of time unless some special rule applied.  And it did.  As the prosecutors explained in its response to the motion, here (and Exhibit A here):
Section 3292(a)(1) of Title 18 suspends the running of the statute of limitations where the government, before the return of an indictment, applies to a court in which a grand jury is investigating the offense to suspend the running of the statute of limitations because evidence of the offense being investigated is in a foreign country. In connection with that application, the government must show, by a preponderance of the evidence, that “an official request has been made for such evidence and that it reasonably appears, or reasonably appeared at the time the request was made, that such evidence is, or was, in such foreign country.” 18 U.S.C. § 3292(a)(1). If the government is successful in making that showing, the running of the applicable statute of limitations is suspended from “the date on which the official request is made” until “the date on which the foreign court or authority takes final action,” id. § 3292(b), though the suspension may not exceed three years, id. § 3292(c).
Because the government secured a timely and valid order in this District to suspend the running of the applicable statute of limitations until at least the date on which the Superseding Indictment was returned, Manafort’s motion should be denied. On June 6, 2017, the government transmitted a request pursuant to a mutual legal assistance treaty (“MLAT”) to the Republic of Cyprus seeking, among other evidence, bank records, articles of incorporation, and witness interviews concerning certain of Manafort and Richard Gates’s bank accounts in Cyprus.  
On June 26, 2017, the government applied, ex parte, to this Court for an order pursuant to 18 U.S.C. § 3292 to suspend the applicable statute of limitations in light of the government’s MLAT request to Cyprus. This Court (Hilton, J.) granted the government’s request on June 27, 2017, thus suspending the applicable statute of limitations during the pendency of the government’s official request to Cyprus. See In Re Grand Jury Investigation, No. 14 GJ 1420 (E.D.V.A. June 27, 2017) (attached hereto as Exhibit A). As found by Judge Hilton, a grand jury impaneled in this District was conducting an investigation into, as relevant here, the flow of foreign money to Manafort, DMP International, Davis Manafort Partners, Smythson LLC, and Jesand Investment Corporation, and into subject offenses that included potential violations of 31 U.S.C. §§ 5314 and 5322(a) (Failure to File a Report of Foreign Bank Accounts). Judge Hilton further found, based on a preponderance of evidence, that evidence of such offenses was located in Cyprus and that the government had made an “official request” to Cyprus for that evidence under 18 U.S.C. § 3292(d) on June 6, 2017. Having found the requirements of Section 3292 satisfied, Judge Hilton ordered that the statute of limitations be suspended for the FBAR offenses, among others, for the period authorized by Section 3292(c). 
Because Cyprus had not taken “final action” on the government’s June 6, 2017 official request at the time the Superseding Indictment was returned, the statute of limitations remained suspended. Specifically, Cyprus produced documents in response to the government’s June 6 request on September 6, 2017; October 2, 2017; November 1, 2017; and April 30, 2018. Several of the items requested in the June 6, 2017 request remained outstanding at least until the time of the April 2018 production. For example, on December 8, 2017—before Cyprus’s most recent production—the government wrote to Cypriot authorities to renew its June 6, 2017 request (and a related request made two weeks later). The government’s December 8 letter stated that, after reviewing the records produced thus far, investigators had identified several items called for in the MLAT request that Cyprus had not produced. And Cyprus did not make a subsequent response to the government’s request until the April 30, 2018 production mentioned above. The bottom line, then, is that Cyprus had not fully satisfied the government’s official request when the original and Superseding Indictment of Manafort were returned on February 13 and 22, respectively. As a result, no “final action” had yet occurred as of the date of the operative indictments, and the applicable statute of limitations remained suspended. See United States v. Bischel, 61 F.3d 1429, 1433-34 (9th Cir. 1995) (construing “final action” to mean “a dispositive response by the foreign sovereign to both the request for records and for a certificate of authenticity of those records”); see also, e.g., United States v. Ratti, 365 F. Supp. 2d 649, 659-60 (D. Md. 2005) (following Bischel’s interpretation of Section 3292).

More On Joint Defense Agreements (5/15/18)

I previously wrote on joint defense agreements in response to news articles regarding the special counsel investigation of Russian meddling.  On Joint Defense Agreements (Federal Tax Crimes Blog 11/23/17), here.  I thought I would provide some update information that is less topical to the news cycle.

In United States v. Krug, 868 F.3d 82 (2d Cir. 2017), here, the Second Circuit rejected a claim of joint defense/common interest with respect to hallway communication between two clients to a joint defense agreement ("JDA").  One of the members of the JDA decided to cooperate with the Government.  In that cooperation, the cooperating defendant disclosed the contents of a "hallway" discussion between he and one of the other participants in the JDA.  Their lawyers were not present for that discussion.  The precise content of the discussion is redacted.  Based on the common interest privilege, the district court precluded the Government from using the testimony about the contents of the discussion.  The Government appealed.

The Court of Appeals reversed, thus permitting the Government to use the evidence.  The Court offers a good discussion of the privilege, illustrating the danger of applying the privilege beyond its intended scope.  The key discussion is short, so I excerpt it all.  Please note that I am using the "cleaned up" technique (see here) to make the excerpt more readable.
The underlying purpose of the attorney-client privilege is to encourage full and frank communication between attorneys and their clients. As a result, the attorney-client privilege creates a rule of confidentiality that recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyer's being fully informed by the client. To that end, the attorney-client privilege protects communications (1) between a client and his or her attorney (2) that are intended to be, and in fact were, kept confidential (3) for the purpose of obtaining or providing legal advice. 
In order to balance this protection of confidentiality with the competing value of public disclosure, however, courts apply the privilege only where necessary to achieve its purpose and construe the privilege narrowly because it renders relevant information undiscoverable. The parties asserting the privilege, in this case [Krug and Wendel], bear the burden of establishing its essential elements. 
The joint defense privilege, more properly identified as the common-interest rule, is an extension of the attorney-client privilege. It serves to protect the confidentiality of communications passing from one party to the attorney for another party where a joint defense effort or strategy has been decided upon and undertaken by the parties and their respective counsel.The common-interest rule protects only those communications made in the course of an ongoing common enterprise and intended to further the enterprise. As with all attorney-client privilege claims, a claim of privilege under the common-interest rule requires a showing that the communication in question was given in confidence and that the client reasonably understood it to be so given.  
Although the common-interest rule somewhat relaxes the requirement of confidentiality by defining a widened circle of persons to whom clients may disclose privileged communications, a communication directly among the clients is not privileged unless made for the purpose of communicating with a privileged person, the lawyer, agents of the client or of the lawyer who facilitate communications between the client and the lawyer, and agents of the lawyer who facilitate the representation. In this vein, we have stated that it is not necessary for the attorney representing the communicating party to be present when the communication is made to the other party's attorney under a common-interest agreement. Ultimately, what is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer.  
The communications at issue in this case did not serve the interests that justify the privilege. The communications occurred outside the presence of any lawyer. Notwithstanding that the lawyers for the defendants were nearby and had recently been in communication with their clients, the excluded statements were not made for the purpose of obtaining legal advice from a lawyer, nor did the excluded statements share among defendants advice given by a lawyer, nor did the excluded statements seek to facilitate a communication with a lawyer. Here, the hallway discussion consisted of one member of the JDA (Wendel) conveying his independent, non-legal research to another member of the JDA (Krug) while noting he had sent the same research to his attorney. No legal advice was mentioned, much less shared or otherwise conveyed, among the co-defendants. The mere fact that the communications were among co-defendants who had joined in a joint defense agreement is, without more, insufficient to bring such statements within the attorney-client privilege. We know of no precedent applying the attorney-client privilege on such facts and we find no circumstances present here that could justify extending the attorney-client privilege to these communications. 
For the reasons discussed above, we reverse the order of the district court. The government may offer the proffered testimony by Kwiatkowski regarding the hallway discussion at the trial of Krug and Wendel.

Another Offshore Account Guilty Plea (5/15/2018)

I recently reported on the district court resolution of pretrial motions in an offshore account case charging tax obstruction (§ 7212(a)), tax perjury (§ 7206(1)), and conspiracy (18 USC § 371).  See Pretrial Order Excluding Government Evidence in Criminal Tax Case for Offshore Accounts (Federal Tax Crimes Blog 4/22/18), here, discussing  United States v. Doyle, 2018 U.S. Dist. LEXIS 66980 (S.D. N.Y. 2018), here.  Shortly after that disposition, the defendant in the case, Lacy Doyle, pled guilty to one count of tax perjury, § 7206(1), a three year felony.  See SDNY USAO press release, here.  (Note the USAO press release does not mention the count for the plea, but I have confirmed from other sources that it was tax perjury; I could not find any plea documents on Pacer as of today.)

Key excerpts from the USAO press release:
As alleged in the Indictment and other documents filed in the case, DOYLE, assisted by others – including Beda Singenberger, a Swiss citizen who ran a financial advisory firm – established and maintained undeclared bank accounts in Switzerland and hid those accounts from the IRS.  DOYLE used a sham entity to conceal from the IRS her ownership of some of the undeclared accounts and deliberately failed to report to the IRS the accounts and the income generated in the accounts. 
In 2003, DOYLE’s father died, and DOYLE was appointed the executor of her father’s estate.  At that time, DOYLE and her father jointly held an account at Credit Suisse with a value of approximately $3,700,000.  DOYLE then made court filings falsely stating under penalty of perjury that the total value of her father’s estate was under $1 million when, in truth and fact, it was more than four times that amount.  Doyle initially held the secret inheritance from her father in an account at Credit Suisse under her own name.
Thereafter, in 2006, DOYLE, with Singenberger’s assistance, opened an undeclared Swiss bank account for the purpose of depositing the secret inheritance from her father.  The account was opened in the name of a sham foundation formed under the laws of Lichtenstein to conceal DOYLE’s ownership.  As of May 15, 2007, the account held assets valued at approximately $5,056,548. 
In 2010, the sham foundation controlled by DOYLE was re-domiciled from Lichtenstein to Panama.  As of December 31, 2016, the sham foundation maintained assets of at least approximately $3,028,562.
JAT Comments:

Monday, May 14, 2018

Reversal of Tax Obstruction Conviction Based on Marinello; A Win in a War Already Lost? (5/14/18; 5/15/18)

I assume all readers are already aware of the Supreme Court's decision in Marinello substantially paring back the Government's expansive reading of the tax obstruction crime.  See my blog, 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), here.  As I noted in that blog discussion, because of other counts of conviction that stand unreversed, it is not clear that Marinello's sentencing will be affected by the "victory." 

Marinello has resulted in other reversals of tax obstruction convictions.  I read another today, and briefly discuss it because it too may not win anything for the defendant.

In United States v. Gentle, 2018 U.S. App. LEXIS 12119 (2d Cir. 2018) (unpublished), here, the Second Circuit remanded a case to dismiss the conviction for tax obstruction and to re-sentence the defendant.  Unfortunately for the defendant, the remand left standing 38 counts of aiding and assisting under § 7206(2), each being a 3-year felony.  Although the Second Circuit did not say specifically what the court should do on re-sentencing, it did say (cleaned up):
  fn 1 The process of resentencing under these circumstances "need not be overly cumbersome" for the district court.  While the court may not automatically impose the same sentence on remand, it need not accept new evidence that could have been submitted at the original sentencing, and it may, in exercising its discretion anew, decide to impose the same sentence it did at the initial sentencing.
As Sentencing Guideline fans know, since the key Guidelines calculations are driven principally by the tax loss for the conduct of conviction and relevant conduct (conduct for other crimes whether charged, uncharged or acquitted), I would think it likely that the tax loss may be unaffected by the dismissal of the tax obstruction count of conviction or will not be affected in a meaningful way.  So, it well may be that the Guidelines calculation will be basically the same.  The key question is whether the sentencing judge will think that the dismissal of the tax obstruction count should meaningfully affect any decision whether to vary the sentence downward under Booker.

I further note that, in the event the tax loss originally calculated included loss from conduct other than to the unreversed counts of conviction, then that loss could probably be included anyway, albeit through relevant conduct for uncharged tax evasion or uncharged aiding and assisting counts.

Addendum 5/15/18 2:00pm:

Friday, May 4, 2018

District Court Opinion Rejecting Fifth Amendment Act of Production Claim by Password Holder for Encrypted Devices (5/4/18)

In United States v. Spencer, 2018 U.S. Dist. LEXIS 70649 (N.D. Cal. 2018), here, the Court (District Judge Charles Breyer) rejected a Fifth Amendment claim to being compelled to decrypt three devices--phone, laptop, and an external hard drive--after the Government seized them pursuant to search warrant. The issue involves the act of production doctrine and the foregone conclusion exception to the act of production doctrine.

In the excerpts below, I use the "cleaned up" technique here to eliminate unnecessary noise in quotations and citations.

Judge Breyer explains the standards as follows:
The Fifth Amendment to the United States Constitution provides that "No person . . . shall be Compelled in any criminal case to be a Witness against himself." It applies only when the accused is compelled to make a Testimonial Communication that is incriminating.  Accordingly, the Fifth Amendment is not violated whenever the government compels a person to turn over incriminating evidence. Instead, it is only implicated when the act of production itself is both "testimonial" and "incriminating." 
The act of production is neither testimonial nor incriminating when the concession implied by the act adds little or nothing to the sum total of the Government's information by conceding that he in fact has the evidence—that is, where the information conveyed by the act of production is a "foregone conclusion." It is important to stress the limited scope of the "foregone conclusion" rule. It only applies where the testimony at issue is an implied statement inhering in the act of production itself. Otherwise, the government cannot compel a self-incriminating statement, regardless of whether the contents of the statement are a "foregone conclusion."  
For instance, the government could not compel Spencer to state the password itself, whether orally or in writing. But the government is not seeking the actual passcode. Rather, it seeks the decrypted devices. Spencer argues that production of the devices would not fall within the act-of-production doctrine because producing the devices would require him to enter the decryption password. In other words, Spencer argues that because the government cannot compel him to state the passwords to the devices, it cannot compel him to decrypt the devices using the passwords, either. This argument has some superficial appeal, and finds support in a dissent by Justice John Paul Stevens, who once contended that a defendant could not be compelled to reveal the combination to his wall safe either by word or deed. While the analogy is not perfect, we may assume that storing evidence in encrypted devices is equivalent to securing items in a safe protected by a combination, and that Justice Stevens' reasoning applies equally to the situation at hand.

Wednesday, May 2, 2018

Second Circuit Opinion in NonTax Case on Willfulness and Willful Blindness (5/2/18)

In United States v. Henry, 888 F.3d 589 (2d Cir. 2018), here, Henry was convicted by jury of "one count of conspiracy to violate and one count of violating, attempting to violate, and aiding and abetting the violation of the Arms Export Control Act ("AECA"), 22 U.S.C. §§ 2778(b)(2), (c)."  The Court explains the AECA (footnotes omitted and "cleaned up" per the explanation here):
The AECA, in relevant part, authorizes the President in furtherance of world peace and the security and foreign policy of the United States—to compile the United States Munitions List ("USML"), which is to be comprised of goods and services that he designates as defense articles and defense services.The AECA also authorizes the President "to promulgate regulations for the import and export of such articles and services." Any good or service placed on the USML cannot be imported or exported except by license, and the statute imposes criminal penalties on violators. The President has in turn delegated the authority to compile the USML and to grant or deny applications for export licenses to the Secretary of State. 
As promulgated pursuant to this authority, the USML sets forth twenty categories of defense articles. For each category, it enumerates a list of specific defense-related materials subject to regulation under the AECA.26 The ablative materials and microwave amplifiers that Henry exported or attempted to export are among the defense articles enumerated in the USML.

Criminal violation of the AECA required that the defendant act "knowingly and willfully."  At trial, the court gave the jury the following instruction:
The fourth and final element that the government must prove, is that the defendant acted knowingly and willfully. A person acts knowingly if he acts intentionally and voluntarily and not because of ignorance, mistake, accident, or carelessness. Willfully means to act with knowledge that one's conduct is unlawful and with the intent to do something that the law forbids. That is to say, with a bad purpose, either to disobey or disregard the law. The defendant's conduct was not willful if it was due to negligence, inadvertence, or mistake. However, it is not necessary for the government to prove that the defendant knew the precise terms of the statute or regulatory provision he is charged with violating—that is, the government is not required to prove that the defendant knew the existence or details of the Arms Export Control Act or the related regulations. All that is required is that the government prove that the defendant acted with the intent to disobey or disregard the law.
The defendant urged on appeal that this instruction incorrectly stated the law.  The Court rejected the argument as follows (footnotes omitted and cleaned up):