Comisky Article on Tax Evasion and Money Laundering (11/26/20)

Readers of this blog will likely be interested in a recent practice point offering from the ABA Tax Section, Ian M. Comisky, May Tax Evasion Be Charged as a Money Laundering Offense? The Times Are A-Changing (ABA Tax Times 8/25/20), here.  (To access the document ABA or Tax Section membership may be required.)  Comisky (bio here) is a long-time practitioner and commentator on the interface of tax crimes and money-laundering.

Here are some paragraphs introductory and one more (from the already short offering) to tease the interest (footnotes omitted):

Tax evasion has never been a predicate offense for a money laundering charge in the United States. The government, however, has employed mail and wire fraud offenses to charge money laundering arising out of a tax crime. This article reviews the basics of U.S. money laundering laws, the use of mail and wire fraud crimes to transform tax offenses into money laundering, and recent developments worthy of discussion.

The basic U.S. money laundering laws are contained in Title 18 of the U.S. Code: section 1956 (laundering of monetary instruments, referred to herein as the primary money laundering statute) and section 1957 (engaging in monetary transactions in property derived from specified unlawful activity). The primary money laundering statute involves one who engages in a financial transaction knowing that the property represents the proceeds of some form of unlawful activity, which, in turn, involves the proceeds of a specified unlawful activity (SUA) with certain types of knowledge or intent. There is a tax intent money laundering provision contained within the primary money laundering statute, but the defendant must engage in a transaction with SUA proceeds (taxes are not an SUA), and then engage in conduct that violates one of the two primary U.S. criminal tax provisions. Historically, the government would encounter a defendant who engaged in a different type of illegal activity (e.g., securities fraud, which is an SUA) and then later transferred the proceeds from that activity in a way that evaded taxes with those proceeds. In those circumstances, a tax intent money laundering offense could be charged.

There are two other provisions of the primary money laundering statute where money is represented to be from illegal activity: one involving what is known as international money laundering and a “sting provision.” Noteworthy, the international money laundering provision does not require the use of proceeds from a prior offense but only the transfer of funds with an intent to promote an SUA. A violation of the money laundering statute is a twenty-year felony and permits forfeiture of property involved in or representing the proceeds of the offense.

For purposes of this discussion, the statute references SUAs that are defined by way of a combination of predicate offenses listed in the money laundering statute itself and offenses listed in the Racketeering Influenced and Corrupt Organizations Act (RICO). Despite there being well over two hundred and fifty SUAs, what is notable is what is absent: any violation of the Internal Revenue laws dealing with tax offenses. Although a tax offense is not a direct predicate for money laundering, both mail fraud and wire fraud are listed as SUAs. Because the use of the mails or the use of the wires is likely to occur in connection with the filing of a tax return, tax evasion could, in theory, create a mail or wire fraud violation that is itself a predicate for a violation of the money laundering laws.

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It is of concern, nonetheless, that the government has begun charging money laundering for what is nothing more than a traditional tax offense accomplished in part via wire fraud. The government certainly has sufficient statutory tools under the Internal Revenue Code for charging a conspiracy to defraud and failing to file FBARs that do not require the use of the U.S. wire fraud statute. The money laundering charges, as noted, permit the forfeiture of all property involved in or traceable to the offense and the advisory sentencing guidelines are more severe for money laundering than for tax offenses.

JAT Comments:

Third Circuit Sustains Application of Gun Possession Prohibition to Tax Felon (11/25/20)

In Folajtar v. Attorney General of the United States, ___ F.3d ___, 2020 U.S. App. LEXIS 37006 (3rd Cir. 2020), here, decided yesterday, the Court held that a tax felon (tax perjury, § 7206(1)) was subject to the prohibition in 18 USC § 922(g)(1) denying felons the right to possess firearms.  Basically, Folajtar argued that, because her nonviolent crime did not implicate valid reasons to deny her Second Amendment right to bear arms, she should be exempted from the prohibition.

Most readers of this blog will understand the nature of the claims made and resolved by the Court in the case.  The case raises the constitutional issue, but also the political issue of the Second Amendment.  There was a strong dissent, wrapping the political argument into the legal argument.  Already, one of the pundits who straddles the legal / political divide is suggesting that this opinion is a good opportunity for the conservative majority on the Court (enhanced by Amy Coney Barrett) to bolster gun rights.  Jonathan Turley, Barrett Reloaded? A New Third Circuit Decision Could Prove The Perfect Base For A Second Amendment Blowout (Res Ipsa Loquitur 11/25/20), here.

 Until and unless the Supreme Court holds differently, tax crimes practitioners must make sure that to advise clients being prosecuted or at the risk of prosecution for tax crimes that their gun “rights” will be proscribed by conviction.

Update on Brockman Indictment (11/11/20)

I previously posted on the Brockman indictment in ND CA.  One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog10/16/20), here. There have been some developments via pre-trial motion practice that I note in this blog.  (Readers may follow these and future developments either on PACER (requiring fees) or on CourtListener, here, which, once a CourtListener user has first accessed via PACER, makes the docket entries and documents available for free.)

1. Brockman has moved to transfer the venue for the tax counts (tax evasion, Counts Two through Eight) to the Southern District of Texas, the district of Brockman’s residence or “in the alternative, for a bill of particulars necessary to fully litigate this motion.”  (Dkt. 21, here) This would, if granted, have the effect of severing the tax counts from the other counts, generally considered more serious counts.  But, it appears that Brockman may be up to something broader than just transfer of those tax counts to SD TX, for he advises in p. 3 n. 1 that he intends to file a motion to transfer the entire case to SD TX “for several reasons, including Mr. Brockman’s serious health issues.”  If the entire case is transferred to SD TX, there may then be a motion to sever some of the counts for separate trials.

The motion for transfer of the tax counts is based on venue requirement that criminal cases be brought in the district where the crime occurred.  The particular motion is filed now rather than as part of the larger motion because 18 USC § 3732(b) requires the motion be file 20 days after arraignment.  That is why Brockman advised the court that he will file the broader motion later.

The Government opposes the motion (both the primary and the alternative).  Dkt. 24 here.

2.  The Government has moved for an order permitting it to disclose third party tax return information pursuant to 26 U.S.C. § 6103(h)(4)(D), in order for the government to comply with its obligations pursuant to 18 U.S.C. § 3500, Rule 16 of the Federal Rules of Criminal Procedure, and Brady v. Maryland and its progeny.”  (Dkt. 25, here.)  The Government identifies a range of potentially sensitive information that the IRS has gathered in the investigation and thus is subject to § 6103’s confidentiality requirements.

JAT Comments:

These are fairly mundane are relatively short filings, so I don’t discuss them further.  Students of tax crimes might want to follow the development of the case through the docket entries because, given the stakes and the resources available to both sides, the case should be well litigated, with a raft of pretrial motions from which the student can learn.

Thoughts on NonProsecution for Trump (11/9/20)

Yesterday, Josh Blackman, law professor at South Texas College of Law, posted this blog:  Would President Biden's Nominee for Attorney General Pledge Not to Prosecute Former-President Trump? (The Volokh Conspiracy 11/8/20), here.  Blackman argues that the Senate, controlled by Republicans, can condition advice and consent to the Attorney General nominee upon the AG nominee agreeing or promising not to prosecute Trump and his associates (whatever associates really means, see below).  I understand that prosecuting Trump for crimes is probably not good for the country, given the passion that almost half the country has for Trump.  I think, however, there is some reason to warrant further investigation as to whether Trump committed serious crimes, including tax crimes, I thought I would state my thoughts on what might be a good resolution of the issue.  I frame my thoughts in terms of tax crimes but it would apply generally for all federal crimes.  And, I frame the discussion in terms of nonprosecution (whether that nonprosecution takes the form of Presidential pardon, full letter immunity, or nonprosecution agreement).

1.  The tax crimes for which nonprosecution is granted to Trump should be identified perhaps without specifying details (such as specific years or tax loss, etc.).  The nonprosecution could be, for example, for all tax or tax related crimes prior to January 2021.  The tax crimes could be listed such as 26 U.S.C. § 7201 (tax evasion) or 18 U.S.C. § 371 (tax conspiracy, offense or defraud).  [As I said above, a similar technique could be applied for other crimes, but I think the crimes for which the country grants nonprosecution should be named.]  I don’t think that Trump should be required to admit specific crimes in the nonprosecution agreement, because he simply won’t do that and investigating the crimes would take too much time and be divisive.  Any crimes Trump commits after January 2021 are not within the scope of nonprosecution.

2.  In return for the country’s gift of nonprosecution, Trump must pledge that he will not attempt to pardon himself or any of his “associates” as Blackman calls them.  [This will require that the agreement be reached before he leaves office.]  I would include in associates that he will not pardon the following: V.P. Pence and all White House officers or appointees (even if serving in a voluntary capacity), cabinet-level appointees, all agency political appointees, all Trump family members, all Trump off-the-Government books minions (like Rudy Giuliani, etc., and Trump players such as Manafort, Stone, etc.), and Trump’s affiliated business entities and their officers, employees or agents.  (This may not be a complete list.)

3. Trump’s civil liabilities to the Government may be pursued.  In the tax area, Trump must agree to cooperate with the IRS and DOJ Tax as necessary to determine tax liabilities, penalties and interest for himself and his affiliated entities.  Trump may still assert any defenses he may otherwise have (e.g., nonliability for the tax or penalties, statutes of limitations, etc.), but Trump must assist and cooperate with the IRS and DOJ Tax in the determination of his liabilities.  On the statute of limitations issue, for years not otherwise within the three or six-year statute of limitations, the IRS would still have to meet the substantial burden of proving fraud by clear and convincing evidence.  (I mention DOJ Tax here only protectively, for the determination of the liabilities is initially an IRS function alone unless it somehow gets to court.)

Smith NPA and the FBAR Costs (Fines or Penalties?) Described (11/6/20)

I have written about the travails, self-imposed, of Robert T. Brockman and Robert F. Smith.  See Private Equity Guru Smith Got a Hell of a Deal (Federal Tax Crimes 10/23/20), here, and One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes 10/16/20), here.  I offer another installment today, focusing on Smith who achieved a nonprosecution agreement (‘NPA”).  

My subject today is the FBAR penalties.  The Smith NPA, here, provides (par. 3.(i)) that Smith will pay FBAR penalties (boldface applied by JAT).

all penalties and interest computed by the IRS, pursuant to Title 31 U.S.C. §§5314 and 5322, in the amount of $82,930,165, related to Robert F. Smith's failure to timely file truthful and accurate Foreign Bank Account Reporting Forms TD F 90-22.1 ("FBARs"), reporting his financial interest in the foreign bank accounts referenced in the Statement of Facts for the calendar years 2012, 2013, and 2014.

Assuming that the NPA is accurate, the penalties and interest relate to the criminal FBAR penalty in § 5322, here, with respect to the reporting requirement in § 5314, here.  One problem is that, exception in the title of the section, § 5322 describes the monetary imposition as a criminal fine rather than a penalty.  The civil willful penalty, by contrast, is stated to be a penalty, both in the title and in the actual provision.  See § 5321(a)(5)(C), here.  I am not sure the quantified amount of $82,930,165 is consistent with the "fines" that could be imposed under § 5322.  Moreover, I am not sure that the criminal fines in § 5322 could be imposed without a conviction for the crime.  If anyone can provide more information on these issues, I would greatly appreciate it.

Assuming that the quantified amount includes, in whole or at least in significant part, the civil willful penalty under § 5321(a)(5)(C), I would like to develop an issue I have on the application of the civil willful penalty.  The willful penalty maximum of the greater of $100,000 or 50% of the amount in the unreported accounts.  Note that the penalty is stated as a maximum and can be less than the maximum, in the IRS's discretion.

Robert Frank Editorial on Decline in Enforcement Resources and Tax Evasion (11/3/20)

Noted economist Robert H. Frank (Wikipedia here) has written an excellent NYT op-ed: Without More Enforcement, Tax Evasion Will Spread Like a Virus (NYT 10/30/20), here.  Excerpts

Few people enjoy paying taxes, but as Oliver Wendell Holmes Jr. reminded us, “Taxes are what we pay for civilized society.” On reflection, most of us therefore offer at least implicit support for penalties against tax evasion — penalties that have little meaning unless backed by significant enforcement resources.

Yet prodded mainly by anti-tax Republicans, Congress has cut the Internal Revenue Service budget steadily since 2011. By 2019, the agency was auditing only one in every 222 individual returns, down from one in 90 in 2011. Similar reductions have occurred for corporate returns, and were proportionately larger for the wealthiest individuals and largest corporations.

These cuts have not saved the government money. The former I.R.S. commissioner John A. Koskinen estimated, for example, that every $1 trimmed from the agency’s budget has resulted in $4 in lost revenue. But this estimate refers only to direct, or first-round, losses. Because the extent to which people comply with tax laws depends strongly on the behavior of others around them, the ultimate revenue losses are certain to be much larger.

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What the reductions in I.R.S. funding will continue to unleash, then, is a characteristic feature of all behavioral contagion processes: an explosive chain of feedback loops that greatly amplify any initial change in behavior.