ICIJ Investigations In the News - Panama Papers and Suspicious Activity Reports (9/22/20; 9/25/20)

I offer two related items in which the International Consortium of Investigative Journalists (“ICIJ”) is involved.  I have written on ICIJ with respect to the so-called “Panama Papers” which involved ICIJ’s investigation into offshore accounts via access to and disclosure of the Panama-based law firm Mossack Fonseca’s files helping tax evaders, including persons subject to U.S. tax.  Most readers of this blog will already be familiar generally with the Panama Papers.  

1. Yesterday, DOJ posted this release:  “U.S. Taxpayer in Panama Papers Investigation Sentenced to Prison (DOJ 9/21/20), here.  The defendant, Harald Joachim von der Goltz (also identified with several pseudonyms) pled guilty to “one count of conspiracy to commit tax evasion; one count of wire fraud; one count of money laundering conspiracy; four counts of willful failure to file Reports of Foreign Bank and Financial Accounts, FinCEN Reports 114; and two counts of false statements.”  The pattern is familiar.  Von der Goltz conspired with others to conceal assets and income (defraud / Klein conspiracy), using offshore accounts and shell companies.  He was assisted by Mossack Fonseca and others, including a Panamanian lawyer and a U.S. accountant.

2. ICIJ is at it again having gained access to a trove of FinCEN Suspicious Activity Reports that indicate some inattention by major banks and perhaps FinCEN who should be paying attention and even likely violations of money laundering, tax and related laws. The entry page for ICIJ’s revelations is here.  See also ICIJ’s the following ICIJ pages for further information:

• FAQs on “What is the FinCEN Files investigation?”, here.
• About Suspicious Activity Reports, here.
• About the FinCEN Files investigation, here.

The latter article summarizes:

The FinCEN Files investigation was able to trace banks’ roles in hiding money looted from government treasuries, scammed from pensioners, and generated through drug sales, illegal gold mining and other illegal activities.

The findings expose – from the inside – the consequences of allowing banks themselves to lead the world’s anti-money laundering defenses against kleptocracy, crime and terror, even as they earn huge profits from these same malefactors.

They also show how laundered money provides the lifeblood for corrupt authoritarian regimes and the enemies of democracy worldwide.

The Treasury Department documents reveal how major banks continued to move staggering sums of suspect cash even while on criminal probation after highly touted money-laundering crackdowns by U.S. and U.K. authorities.

ICIJ’s analysis of the FinCEN Files and U.S. authorities’ enforcement actions indicates that imposing fines and deferring prosecutions of banks and declining to prosecute bank executives hasn’t stopped banks from continuing to profit from moving suspect transactions

3.  (Added 9/25/20 11:30am).  Relating to Item 1 above, Richard Gaffey, aka Dick Gaffey, 76, the accountant / enabler for von den Goltz and other offshore tax cheats was sentenced by the same judge on 9/24/20 "to 39 months in prison for wire fraud, tax fraud, money laundering, aggravated identity theft, and other charges."  See DOJ Press Release, titled U.S. Accountant in Panama Papers Investigation Sentenced to Prison (9/24/20), here.  As described in the press release, Gaffey was a bad actor as enabler of offshore and related tax cheating.

JAT Comments:

District Court Grants Government Summary Judgment on FBAR Civil Willful Penalty (9/19/20)

In United States v. Toth, 2020 U.S. Dist. LEXIS 169173 (D. Mass. 2020), CL here, the Court granted the Government’s motion for summary judgment that Toth was liable for the FBAR civil willful penalty.  The holdings break no new ground, so I just list the holdings:

1. The maximum penalty is the greater 50% of the account(s) that should have been reported or  $100,000, rather than being capped at $100,000.  This is the mainstream holding (after a couple of early aberrations).  (Slip Op. 7-10.)

2. The submissions on the motion satisfied the Government’s burden to prove Toth’s failure to file FBAR for 2007 was willful.  (Slip Op. 10-12.)

3. Lenity does not apply to reduce the amount of the willful penalty.  (Slip Op. 12-13.)

4. The Eighth Amendment’s excessive fines prohibition does not apply. (Slip Op. 13-18.)

5. The penalty does not violate Due Process. (Slip Op. 18-19.)

The CL docket entries are here.

Prior blog entries on the Toth case (in reverse chronological order) are:

• In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (Federal Tax Crimes Blog 12/28/19), here.
• Government FBAR Willful Penalty Suit Survives Motion to Dismiss (Federal Tax Crimes Blog 5/9/17), here.

District Court Holds Failure to Properly Report Foreign Accounts on a Fifth Amendment FBAR Is Subject to FBAR Willful Penalty (9/18/20)

In United States v. Bernstein, 2020 U.S. Dist. LEXIS 167278 (E.D. N.Y. 2020), CL here and GS here, the Court granted the Government’s motion for summary judgment determining that the defendants, husband and wife (“Bernsteins”), were each subject to the willful FBAR penalty.  Those interested in the motions (and commotions) can find it in the Court Listener docket entries, here, where the motions are available free.

The key facts are;  For many years prior to 2010, the year for which the willful FBAR penalties were assessed, the Bernsteins had foreign accounts.  For the per-2010 years, they did not file FBARs, answered “no” to the Form 1040 Schedule B question about the foreign accounts, and did not report the income from the foreign accounts.  Over the years, they did not tell their accountant about the foreign accounts because they wanted to keep the accounts secret. That conduct, the Court found on summary judgment, was to cheat on their U.S. taxes.

They had the misfortune of having selected UBS as their foreign bank (although they moved the accounts into a single account at Bank Sal Oppenheim after they realized that UBS was caving to Government pressure as readers of this blog already know).  The following series of events then occurred:

Daniel Bernstein later consulted with a U.S. tax attorney, who told him that it was "nothing serious" because the account held "only a million dollars" and therefore the Government would not likely pursue it. Furthermore, Nemirovski, who consulted with a Swiss attorney, conveyed to Mr. Bernstein that the attorney had assured him that their account information had not been turned over to the IRS. Thus, the Bernsteins decided not to take any action in response to the letter and, specifically, not to participate in the Government's voluntary disclosure program.

In April 2011, the Government advised the Bernsteins that it was auditing their 2007 tax return. By that time, the Bernsteins were aware of publicity about the Government's prosecution of UBS account holders. They returned to the U.S. tax attorney who had told them not to worry two years earlier, but this time he told them, "I can't help you; you need a white-collar criminal attorney." He referred them to Lawrence S. Feld, Esq., who is known for his white-collar practice with a specialty in tax prosecutions, and the Bernsteins retained him.

Attorney Feld effectively disagreed with the prior decision not to participate in the voluntary disclosure program. He found the facts as presented to him "deeply disturbing" and believed that there was a "substantial risk" of criminal prosecution. He advised the Bernsteins to file an FBAR for the 2010 tax year in which they would invoke their privilege against self-incrimination under the Fifth Amendment of the U.S. Constitution. He prepared an addendum to the FBAR describing the basis for the privilege in which the Bernsteins offered to make more detailed disclosures if they received use immunity from criminal prosecution. In addition, the Bernstein's 2010 tax return and Schedule B invoked the Fifth Amendment with regard to any questions about foreign accounts.

Attorney Feld believed that this would protect the Bernsteins from criminal prosecution, although they still might be required "to pay [a] fine." The Bernsteins followed his advice and filed an FBAR for the year 2010 in which they did not provide information about the accounts, instead, in the spaces calling for account information, inserting "Fifth Amendment" in answer to each question. At their depositions, the Bernsteins testified as to their belief, based on the advice from Attorney Feld, that by submitting the FBAR in this manner, they had complied with the disclosure requirements for 2010.

The advice given by Attorney Feld appears to have been sound as there is no suggestion in the record that the Bernsteins are subjects or targets of a criminal investigation. However, in May 2017, the IRS assessed a penalty in the amount of $262,288.50 each for the 2010 tax year. 

The Government brought this collection suit  for the FBAR willful penalties.

Mr. Feld, the attorney advising the Bernsteins to file Fifth Amendment FBARs, is a prominent tax lawyer practicing in the criminal tax arena and is  a co-author of Ian Comisky,  Lawrence Feld,  Steven Harris, Tax Fraud and Evasion (Thomson Reuters), here.

Updated CTM Chapter on Tax Related Conspiracies (9/17/20)

DOJ Tax has updated its Criminal Tax Manual (“CTM”) chapter 23.00 titled Conspiracy to Commit Offense or to Defraud the United States (Revised September 2020), here.  I have reviewed the chapter very cursorily.  Although I did not compare the old and new versions, except in two instances noted below, I don’t think much has changed except to add some recent cases in chain citations or in examples.  In identifying items of interest, I leaved through the whole chapter (60 pages) and did searched for year from 2012 through 2010.  Here are my quick comments.:

1. 23.04[2][a] Limitation on Naming Unindicted Co-conspirators, p. 5.  Prosecutors should not name in the indictment unindicted co-conspirators, citing Justice Manual 9-11.30 (April 2018). “The recommended practice in such cases is to merely allege that the defendant ‘conspired with another  person or persons known’ and supply the identity, if requested, in a bill of particulars.”

2. 23.07[2][c] Overbreadth Concerns, pp. 42-43. Not sure if this is new but it is a subject I have been interested in).  Discusses the interpretation of the defraud clause which, in United States v. Coplan, 703 F.3d 46, (2d Cir. 2012), cert. denied 571 U.S. 819 (2013), the Second Circuit expressed “skepticism” about the correctness as an original matter of the Supreme Court’s statutory interpretation of the defraud clause in Haas v. Henkel, 216 U.S. 462 (1910), and Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  I discussed that aspect of Coplan in Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog12/1/12), here.

3. 23.07[2][d] Precedent Governing Different Statutes, pp. 43-44.  This is new, generated by the holding in Marinello v. United States, 138 S. Ct. 1101 (2018)  that tax obstruction, § 7212(a), requires knowledge of a pending proceeding.  Some defendants argued that, because of potential overlapping and overbreadth concerns, Marinello’s pending proceeding required should apply to the defraud / Klein conspiracy.  The position of the Government is that that element of § 7212(a) does not apply to defraud / Klein conspiracies.  The Government’s position has been sustained in the cases.  The section discusses two 2020 cases:  United States v. Atilla, 966 F. 3d 118 (2d Cir. 2020); and Marinello v. United States, 138 S. Ct. 1101 (2018).  I discussed the Flynn case Eighth Circuit Holds that Marinello Pending Proceeding Nexus in § 7212(a) Does Not Apply to Defraud / Klein Conspiracy (Federal Tax Crimes Blog 8/17/20), here. 

Second Circuit Applies the Foregone Conclusion Doctrine to Overcome the Fifth Amendment's Act of Production Doctrine (9/15/20)

In United States v. Fridman, 974 F.3d 163 (2d Cir. 2020), CA2 here and GS here, the Court held that the Government had overcome Fridman’s claim of Fifth Amendment privilege (via Act of Production doctrine) under the foregone conclusion doctrine which requires “the Government must establish with reasonable particularity its knowledge as to (1) existence of the documents, (2) the taxpayer's possession or control of the documents and (3) the authenticity of the documents.” Fridman, Slip Op. 13.  The Court also held that a “traditional trust” is a collective entity that could not assert a Fifth Amendment privilege.

I focus here on the Act of Production Doctrine under which production can be testimonial and the exception known as the foregone conclusion doctrine.  The Court discusses and applies these concepts at Slip Op. 13-29.  Readers can study the opinion for the particular application of the law to the facts.  I thought that it would be most helpful to most readers to excerpt the general discussion of the applicable law.  I do caution that the Court calls it the Act of Production Privilege; the privilege involved is the Fifth Amendment privilege; Act of Production is is not a separate privilege but a doctrine as to a particular application of the Fifth Amendment privilege.   In this excerpt, I have substantially cleaned up for easier readability (footnotes omitted):

The Fifth Amendment provides that no person shall be compelled in a criminal case to be a witness against himself. U.S. Const. amend. V. In Fisher v. United States, 425 U.S. 391, 409-11 (1976), the Supreme Court defined the contours of the Fifth Amendment as it applies to document requests. The Court held that documents voluntarily prepared prior to the issuance of a summons were not compelled testimony, so there was no Fifth Amendment protection for the contents of these records. At the same time, however, the Court recognized a narrow privilege against the act of production. Because producing documents tacitly concedes the existence of the papers demanded and their possession or control by the taxpayer as well as the taxpayer's belief that the papers are those described in the subpoena, the Court concluded that the act of production could, in some cases, communicate incriminatory statements and thus may fall under the Fifth Amendment's protection against self-incrimination; but the Court hinted that such a determination would be conditioned on the facts and circumstances of particular cases. Similarly, when a defendant must make extensive use of the contents of his own mind in identifying the hundreds of documents responsive to the requests in the subpoena, he or she contributes to a "link in the chain" of their prosecution in violation of the Fifth Amendment privilege. United States v. Hubbell, 530 U.S. 27, 42-43 (2000).

The act-of-production privilege is not an absolute one. Fridman challenges the district court's ruling that two exceptions to the act-of-production privilege permitted enforcement of the requests at issue in this case.

I. The Foregone Conclusion Doctrine

IRS Continues Efforts to Crack Cryptocurrency (9/15/20)

The IRS is offering to pay private contractors who can ““reliably produce useful results on a variety of real-world CI cryptocurrency investigations involving Monero and/or Lightning.”  Kelly Phillips Erb, IRS Will Pay Up To $625,000 If You Can Crack Monero, Other Privacy Coins (Forbes 9/14/20), here.  I don’t expect readers of this blog to jump at the opportunity, but readers of this blog should be aware of this and related developments that constrict taxpayers’ ability to hide untaxed income in cryptocurrency.  

Key excerpts:

The IRS has made no secret that it believes that taxpayers are not correctly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, when IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.

Cryptocurrency Compliance Efforts

A new cryptocurrency compliance measure for taxpayers was introduced in 2019 in the form of a checkbox on the top of Schedule 1, Additional Income and Adjustments to Income (Schedule 1 is used to report income or adjustments to income that can't be entered directly on the front page of form 1040). And in 2020, the IRS noted that it will post a cryptocurrency question right on the front page of your Form 1040.

In 2019, the IRS also announced that it was sending letters to taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

* * * *

About Privacy Coins

Tax Travails of the Rich (Perhaps Famous) Enablers of the Rich (Perhaps Famous) (9/8/20)

USAO D NJ issues a press release, Former Luxury Car CEO and Luxury Watch Dealer Admit Tax Charges in Connection with Scheme to Misallocate Limited Edition Sports Cars, here.

Excerpts:

The former chief executive officer [Maurizio Parlato, 58] of a New Jersey-based importer of Italian luxury cars admitted today that he failed to report to the IRS as income kickback payments he received for misallocating limited edition sports cars, Attorney for the United States Rachael Honig announced.

A luxury watch dealer [Gigi Knowle, 69] also admitted failing to report to the IRS commission he received for helping facilitate the unauthorized sale of one of those limited edition sports cars.    

* * * *

Parlato was a resident of Florida and served as the CEO of a company (Company B) based in Englewood Cliffs, New Jersey, from 2002 to 2009. Company B was responsible for distributing automobiles that were produced by a luxury automobile manufacturer (Company A) based in Maranello, Italy. Company B distributed Company A’s luxury automobiles in the Western Hemisphere through dealers based in the Americas.

Company A produced several highly desired automobile models in small quantities. Parlato had some measure of authority over the allocations of those limited edition automobiles.  In 2013, Company A announced it was creating its most exclusive model to date: a “supercar,” limited to only 500 units and carrying a manufacturer’s suggested retail price (MSRP) of approximately $1.4 million. Company A and Company B established a formula to determine which customers would be placed on the approved list to buy a supercar. 

After resigning as CEO of Company B, Parlato assisted Company B dealers and supercar purchasers in misallocating supercars in exchange for kickback payments. Between 2015 and 2017, Parlato received approximately $2.8 million from Company B dealers and supercar purchasers in exchange for, among other things, assisting them in misallocating supercars to customers who were not on the list of approved purchasers. Parlato admitted that he failed to report the $2.8 million in kickback payments he received as income on his federal individual income tax returns. Parlato also admitted that he attempted to hide some of these funds from the IRS by depositing them in a bank account in Spain and failing to disclose the existence of that bank account.  Parlato admitted that he avoided paying more than $1.1 million in taxes.

Knowle also received payments in connection with his role in misallocating a supercar.  In 2015, Knowle lived in Florida and worked as a luxury watch dealer. That year, Knowle assisted Parlato in facilitating the sale of a supercar to another individual who was not on the approved list. Knowle received approximately $560,000 as commission for his role in the sale, some of which Knowle distributed to Parlato and others who were also involved in misallocating the supercar to the unapproved purchaser. Knowle failed to disclose the commission on his personal income tax returns. Knowle admitted that he avoided paying approximately $175,000 in taxes. 

District Court Sustains FBAR Willful Penalty But Rejects Fraudulent Failure to File Penalty for Income Tax (9/1/20)

In United States v. DeMauro (D. N.H. Dkt. 17-cv-640-JL Order and Verdict After Bench Trial dtd. 8/28/20), CL here, the Court sustained the FBAR willful penalty but rejected the fraudulent failure to file penalty.  In both cases, in broad strokes the conduct penalized is the same.  If that statement is correct, the difference in outcome is based on the differing burdens of persuasion.  The Government must prove application of the FBAR willful penalty by a preponderance of the evidence; the Government must application of the fraudulent failure to file penalty by clear and convincing evidence.

The willful FBAR penalty requires that the conduct penalized (failure to report) be willful.  In the FBAR civil penalty context, the Courts have held willfulness is (i) specific knowing failure to file (more or less the Cheek standard) or (ii) willful blindness or reckless disregard of the obligation to report.

The fraudulent failure to file penalty, like the civil fraud penalty for filed returns companion in § 6663, requires fraud.  The following is from my Federal Tax Procedure Book in discussing civil fraud under § 6663, but the same applies for the fraudulent failure to file:

The Code does not define fraud, but it may be viewed as the civil counterpart of criminal tax evasion in § 7201. n1 Examples of how courts have stated civil fraud under § 6663 are:  (i)  civil fraud requires “intentional commission of an act or acts for the specific purpose of evading tax believed to be due and owing”; n2 and (ii) civil fraud requires that “the taxpayer have intended to evade taxes known to be due and owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes and that is an underpayment.”n3  In making the determination, as with criminal cases, courts will often look to certain common patterns indicating fraud–referred to as badges of fraud, such as unreported income, failure to keep adequate books, dealing in cash, etc.n4  The key differences between the two is that § 6663 is a civil penalty and has a lower burden of proof (clear and convincing rather than beyond a reasonable doubt) as I note later.
   n1 Anderson v. Commissioner, 698 F.3d 160, 164 (3d Cir. 2012), cert. denied 133 S. Ct. 2797, 133 S. Ct. 2797 (2013) (“the elements of evasion under 26 U.S.C. § 7201 and fraud under 26 U.S.C. § 6663 are identical.”).
   n2 Erikson v. Commissioner, T.C. Memo. 2012-194.
   n3 Nelson v. Commissioner, T.C. Memo. 1997-49; Zell v. Commissioner, 763 F. 2d 1139, 1142-1143 (3rd Cir. 1985) (“Fraud means "actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing.”); and Fiore v. Commissioner, T.C. Memo. 2013-21 (“Fraud is the ‘willful attempt to evade tax’” and using the criminal law concept of willful blindness to find the presence of civil fraud; note that, in the criminal law, the concept of willful blindness goes by several names.)
   n4 E.g., Kosinski v. Commissioner, 541 F.3d 671, 679-80 (6th Cir. 2008).  For use of a negative inference from assertion of the Fifth Amendment privilege in concluding that the IRS had met its burden of proving civil fraud by clear and convincing evidence, see Loren-Maltese v. Commissioner, T.C. Memo. 2012-214.