Criminal FBAR Prosecutions Underscore Importance of IRS Offshore Voluntary Disclosure Program

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According to statistics compiled by Jack A. Townsend, author of the Federal Tax Crimes Blog, nearly 130 individuals have been charged with maintaining and failing to report offshore bank accounts, or enabling those who do.  Specifically, 94 taxpayers and 35 enablers have been charged with various crimes arising out of the failure to report offshore accounts, including the criminal Foreign Bank Account Report (FBAR) statute (31 U.S.C. § 5322), the tax perjury statute (I.R.C. § 7206(1)), and conspiracy (18 U.S.C § 371).

These charges have in turn led to 72 guilty pleas and 12 guilty verdicts after a trial.  Only one individual has been acquitted of the charged crimes.  Of those charged, 53 individuals have been sentenced, with 28 receiving prison time as part of their sentence.  Of those individuals receiving prison time as part of their sentence, the average period of incarceration has been over 13 months, though incarceration periods have reached as high as 10 years.

These statistics underscore the aggressiveness with which the United States is pursuing individuals who fail to properly report offshore bank accounts and offshore income.  The statistics also underscore the value of the Offshore Voluntary Disclosure Program (OVDP), which permits delinquent taxpayers to disclose their offshore financial accounts and unreported income, in exchange for a generally lower monetary penalty and a promise from the IRS to not recommend the taxpayer’s case for criminal prosecution. 

As we have previously addressed, the OVDP is not available to taxpayers whose non-compliance is discovered by the Government through the Government’s independent investigation efforts.  For that reason, and given the unrelenting efforts by the United States to root out non-compliant taxpayers with offshore assets and the potentially severe penalties they face, those considering applying to the OVDP should act sooner rather than later.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who are seeking to avail themselves of the OVDP.  We will continue to monitor the development of these issues, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at  contact@fidjlaw.com.

TAX REFUND LITIGATION UPDATE: Court of Federal Claims Relies on “Substance Over Form” Doctrine to Recharaterize Transaction

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A decision by the United States Court of Federal Claims originally filed under seal and reissued on October 23, 2013 evidences an important trend in the substance over form doctrine created by the courts to recharacterize transactions for tax purposes to reveal their true purpose. A copy of the opinion can be found here.

This case, Unionbancal Corporation & Subsidiaries v. United States, involved a lease-in/lease-out transaction, more commonly known as a LILO, designed to transfer tax benefits from an entity not subject to U.S. income taxation (a tax-indifferent entity) to an entity that is subject to U.S. income taxation. At issue in this case was whether the “Pond Transaction” – a leveraged lease between a subsidiary of UnionBanCal Corporation (UBC) and the City of Anaheim, California – was undertaken solely for tax benefits and not for any true economic purpose or benefit.

As of 1998, Anaheim owned the Pond, an arena located in Anaheim, California, where the Anaheim Mighty Ducks agreed to play all of its regular season hockey games until February 2023. Ogden Facility Management Corporation of Anaheim managed and operated the Pond on behalf of Anaheim and had the exclusive right to use, manage, operate, market and promote the Pond.

UBC is a financial services company that enters into direct financing and leveraged leases through its Equipment Leasing Division (ELD). UBC’s ELD proposed to Ogden that it would acquire an “equity portion of a leasehold interest” in the Pond.  Among other things, the proposal strongly suggested that UBC’s main purpose in entering the LILO transaction was to achieve the tax benefits associated with rent and interest deductions. According to Lance Markowitz, Senior Vice President of UBC and head of the ELD, UBC “would not have pursued the transaction without the tax attributes.”

On the day the Pond Transaction closed, UBC and Anaheim executed a series of interrelated agreements, including two leases pertaining to the Pond: a Head Lease Agreement and Sublease Agreement. Pursuant to Head Lease, UBC leased an undivided interest in the Pond from Anaheim and simultaneously, via the Sublease, UBC conveyed its interest in the Pond back to Anaheim. The Lease and Sublease were part of an integrated transaction. In other words, one would not have been executed without the other.

      In its decision, the Claims Court stated that in a typical LILO, a U.S. Taxpayer purports to lease property from a tax-indifferent owner under a “head lease,” and then simultaneously leases that property to the owner under a sublease. Before and after the transaction, the tax-indifferent entity continues to operate the property. Nevertheless, the taxpayer claims deductions predicated under the head lease. The tax-indifferent entity receives a fee for agreeing, in effect, to transfer its “wasted” tax deductions to a tax-paying entity that can use them.

Here, the property that was leased/subleased in the LILO in question was the Pond, an arena owned by Anaheim (the tax-indifferent entity). UBC deducted the rent payments it made under this transaction under section 162(a)(3) of the Code, which permits a deduction for “rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business of property.” Further, it deducted the interest it paid on the loans used to discharge its rent obligations under 163(a) of the Code, which provides a deduction for “interest paid or accrued within the taxable year on indebtedness.”

In “substance over form” doctrine cases, “it is the taxpayer’s burden to demonstrate that the form of its transaction accords with its substance.”Principal Life Ins. Co. v. United States, 70 Fed. Cl 144, 160 (2006). “[J]udicial anti-abuse doctrines prevent taxpayers from subverting the legislative purpose of the tax code.” Consol. Edison Co. of New York, Inc. v. United States, 703 F.3d 1367, 1374 (Fed. Cir. 2013). Among these doctrines is that of “substance-over-form ”¦ which ”¦ provides that the tax consequences of a transaction are determined based on the underlying substance of the transaction rather than its legal form.” Wells Fargo & Co. v. United States, 641 F.3d 1340, 1354 (Fed. Cir. 2011). To permit otherwise, the Supreme Court has held, “would seriously impair the effective administration of the tax policies of Congress.” Comm’r of Internal Revenue v. Court Holding Co., 324 U.S. 331, 334 (1945).

The Court further described a phalanx of recent cases wherein courts considering analogous LILO/SILO transactions have concluded that, despite the form of those transactions, the taxpayers, in substance, never obtained the benefits and burdens of ownership, and viewed in their totality, the circumstances of the lease/sublease transactions did not permit the taxpayers to be viewed as possessing an interest in the property upon which their deductions were based. Thus, in those cases, the courts found that the structure of the LILO/SILO in question prevented the taxpayer from obtaining a genuine ownership interest in the property. And in each instance, the key inquiry has been the same – whether the taxpayer involved bore the benefits and burdens associated with the leased asset.

A central question in each case involving analogous transactions was whether the original property holder – the “tax indifferent” entity – could be expected to exercise its purchase option at the end of the sublease. That issue has proved to be determinative because if that option was to be exercised, the transactions would become offsetting leases, leaving the property in the hands of the original owner, at least for tax purposes. Furthermore, in each case the tax indifferent entity was to maintain uninterrupted use of the subject property without any involvement of the taxpayer. In addition, via the offsetting nature of the obligations established in the transaction, the taxpayer was insulated from meaningful economic risk of loss or potential gain, and thus obtained none of the benefits or burdens associated with the leasehold interest.

In this case, the Federal Claims Court considered the issue of whether a prudent investor in UBC’s position would have reasonably expected Anaheim to exercise the purchase option and buy out UBC’s Head Lease interest. Based on the record, the Court answered this question in the affirmative stating that the LILO here was “designed to strongly discourage alternative outcomes” to exercising the Purchase Option.

In reaching its conclusion, the Claims Court also noted the strong and strategic civic ties Anaheim has to the facility in question. The property in question is a highly-visible, public arena, which was acquired with public financing and which currently houses a professional hockey team that bears the city’s name on its sweaters. The Court also noted how UBC and Anaheim internally accounted for the transaction. In short, the Claims Court concluded that “the economic effects of repurchasing the asset were so desirable, and the alternatives to repurchasing that asset so odious, as to make it more likely than not that Anaheim would exercise the Purchase Option.” The Court additionally stated that “that finding makes plain that UBC did not have the requisite ownership interest in the Pond Head Lease to support its claimed rent deductions.” Finally, the Court held that the ultimate conclusion regarding the Purchase Option would have been the same even if it were more likely than not that Anaheim would fail to exercise the Purchase Option. That was so because UBC’s investment was assured of being recouped irrespective of the residual value of the property.

On the issue of whether UBC was entitled to its interest deductions under section 163(a) of the Code, in another case the Federal Circuit recently opined that the taxpayer must incur genuine indebtedness associated with the LILO transaction. Knetsch v. United States, 364 U.S. 361, 365-66 (1960). The Federal Circuit further held that whether payment constitutes “interest” on genuine “debt” depends upon the substance not the form of the transaction. Id. In this case, the debt incurred by UBC was, in substance, decidedly not genuine, deriving from circular transactions largely with the subsidiaries of a single entity – transactions in which UBC’s loan was paid with the proceeds of the same loan.

The doctrine of “substance over form” is a judicial creation. This case represents another instance in which a court has relied upon the premise that a transaction must be designed for a real business purpose or motive in order for the courts to respect it as valid. It is undeniable that the tax benefits or burdens of a proposed course of action are always relevant; they always make a difference in the decision-making process of business executives. However, taxpayers should be careful not let tax implications be the exclusive purpose behind a transaction or they run the risk of having the transaction recharacterized by the courts.

 The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax litigation.  They will continue to monitor developments in this and similar cases. If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.comor by calling 305.350.5690.

Litigation Update: Appellate Arbitration

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Taking yet another step to perfect the privatization of the judiciary, the American Arbitration Association has just announced that it has promulgated rules to govern the appellate review of an arbitrator’s “final” decision. The extension of this business model by the AAA is somewhat curious given that it has perpetually promoted arbitration as a cost-effective and efficient means to resolve disputes, frequently highlighting the “final and non-appealable” nature of arbitration. Indeed, there are only very narrow bases for one to appeal the final award of an arbitrator.

The new AAA appellate rules actually circumvent state and federal law. In fact, the AAA flaunts this very fact in promoting its new service: “Traditionally, courts use narrowly-defined statutory grounds to set aside an arbitration award.” As explained by the AAA in its Introduction, the new AAA appellate rules “provide for an appeal to an appellate arbitral panel that would apply a standard of review greater than that allowed by existing federal and state statutes.”

To avail oneself of this “high-level” arbitral review, all parties must agree in their arbitral contract, or otherwise expressly stipulate, to be bound explicitly by the AAA Appellate Arbitration Awards. If there is such an agreement, the appellate review is limited to: (1) an error of law that is material and prejudicial; or (2) determinations of fact that are clearly erroneous. A-9. If there is no such agreement, the AAA has no appellate jurisdiction.

AAA appellate review has certain unique features built within its rules. One is the fact that the underlying arbitration award is not to be deemed “final” until the conclusion of the appeal. A-2(a). Thus, there is a built-in, de facto stay of the award pending final appeal, and no bond is required. The prevailing party cannot confirm the award until the conclusion of the appellate review. Another component of the arbitral appeal is the tight time constraints imposed by the Rules. The initial brief is due twenty-one (21) days after the Notice of Appeal is filed; the Answer Brief is due 21 days after service of the Initial Brief, and the Reply Brief is due ten (10) days later. Extensions of time are limited to seven days. Generally, the arbitration panel must issue its decision within thirty (30) days of service of the last brief. While the arbitral panel is empowered to affirm the award, provide a substitute award, or even request additional information to render its decision, the arbitration panel is strictly prohibited from remanding the case back for a new arbitration hearing.

Succinctly, one of the main criticisms of arbitration is the lack of any colorable checks and balances on an arbitrator’s clearly erroneous understanding of the law. The AAA has now enacted a new procedure to remedy that problem. Businesses that desire the additional checks and balances should consult with counsel to ensure their arbitration provisions contain clear arbitration agreements that include the Appellate Arbitration Rules, as well as commonly referenced rules, such as the Commercial Arbitration Rules. Conversely, if the business does not want to have the added checks and balances, careful consideration should be given to ensure the Appellate Rules are not made a part of the arbitration agreement. Either way, the AAA has taken a huge step to mirror the judiciary’s procedures.

A complete copy of AAA’s up-to-date “Commercial Arbitration Rules and Mediation Procedures” is available here. If you have any questions about arbitration or “appellate arbitration,” please feel free to contact us at 305-350-5690 or contact@fidjlaw.com.

Litigation Update: American Arbitration Association Announces Changes to Commercial Arbitration Rules

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The American Arbitration Association has announced revisions to its Commercial Arbitration Rules which have taken place effective October 1, 2013. According to its website, the revisions include:

  • a mediation step for all cases with claims of $75,000 or more (subject to the ability of any party to opt-out);
  • arbitral control over information exchange (discovery);
  • the availability of emergency measures of protection;
  • access to dispositive motions; and
  • new preliminary hearing rules as well as remedies and sanctions for non-compliance.
These changes reflect a growing trend to duplicate the arbitral process with that of the courts, thus effectively privatizing the judicial process. The changes were made based upon feedback from arbitration practitioners over the years. A complete copy of AAA’s up-to-date “Commercial Arbitration Rules and Mediation Procedures” is available here. We break down the recent changes to the AAA rules as follows:
  1. Mandatory Mediation (Rule 9-A): The Rules now include mediation as an integral part of the process for all cases exceeding $75,000. Any party may affirmatively “opt out” of the process. The parties may agree on the date and time to mediate, and may further select the Mediator, who shall not be the appointed Arbitrator. If the parties do not otherwise agree on a date and time, the mediation shall take place “concurrently with the arbitration.”Although the terms “mediation” and “arbitration” are frequently used by the lay person interchangeably, the mechanics of these alternative dispute resolution tools are dramatically different. Mediation is a process where the parties endeavor to voluntarily settle the case. A mediator presides over the settlement conference, and labors to determine whether a suitable compromise may be agreed upon. Arbitration, on the other hand, is a formal process where a neutral arbitrator decides the dispute. Unlike arbitration, mediation allows the parties to voluntarily agree to a suitable resolution, and thus “purchase” certainty through compromise. Based on statistics, the vast majority of civil cases where mediation is required actually settle before trial. The new Rule reflects the preference of practitioners to allow the process of mediation to allow the parties one last step to settle their dispute before the arbitrator decides the dispute for the parties.
  2. More Active Management by the Arbitrator (Rules 21, 22, 23 and 58): In the past, the guiding principle of arbitration was to allow the parties to control the management of the litigation, which included everything from the selection to the arbitrator, to discovery, to the length, date and time of trial. Unfortunately, it has become rather clear that parties in a dispute frequently are incapable of agreeing to anything. The AAA has taken a great of the parties’ control and handed it back to the Arbitrator, much like the courts. While the parties still have the choice to agree in the first instance on the manner in which a case will be litigated, the new rules afford the arbitrator with the authority to control the process. Rules 21-23 have been amended to codify this power.Rule 21 governs the preliminary hearing and endeavors to ensure that the hearings are grounded with uniform procedures. New “Preliminary Hearing Procedures” have been enacted. See P-1 and P-2. The matters to be discussed seem to mirror many of the issues required in a federal court scheduling conference, and cover everything from the scope of discovery to the choice of substantive law that will apply at trial. Rule 22 provides the rules for exchanging information, including electronic data and the issues of third-party testimony. The process is more reflective of the courtroom litigation.

    Rule 23 empowers the arbitrator with the hammer to enforce his/her authority. If a party refuses to comply with “any order issued by the arbitrator,” the arbitrator is vested with the authority to sanction the offending party with such serious remedies as drawing adverse inferences, exclusion of evidence, and awarding fees and costs. Rule 58 provides additional authority to the arbitrator to sanction any party for failing to comply with any obligation or order of the arbitrator.

    Still, despite that the rules move the arbitral process closer to the normal courtroom experience, the AAA takes great pain to remind itself and the parties that arbitration is “designed to be simpler, less expensive and more expeditious.” P-1(b).

  3. Dispositive Motions (Rule 33): Perhaps the most important rule to be added is Rule 33, which now allows an arbitrator to enter summary judgments. Before the amendment, arbitrators were essentially powerless to enter an award before a final trial, even if there was no doubt whatsoever as the ultimate result. This lack of power resulted in tens of thousands of lost dollars expended in a needless and unnecessary trial. Now, just like a judge, an arbitrator is explicitly authorized to make a dispositive ruling or otherwise narrow the issues before trial. This may prove to be the rule which really affords arbitration to be the “simpler, less expensive and more expeditious” process that it was designed to be.
  4. Injunctions/Interim Relief (Rule 38): Prior to the revisions, parties had to agree to allow the AAA to enter injunctive relief (called interim relief in arbitration). Now, the Emergency Measures of Protection Rules are incorporated into all arbitrations proceeding under the Commercial Rules.
  5. Non-Payment (Rule 57): Typically, parties agreeing to arbitrate their disputes pay their proportional costs during the course of arbitration, subject to a final ruling apportioning the costs. However, what happens if one party refuses to pay? The former rules were silent on the issue. Rule 57 now allows any party to advance the fees of a non-paying party. If the non-paying party is the petitioner, the arbitrator may limit its ability to advance a claim; however, the Rule still allows even non-paying parties the right to defend against a claim or counterclaim. Likewise, the Rule now codifies that the arbitrator (or the AAA) may suspend the arbitration until payment is made, or terminate the proceedings if full payment is not received by a specific time following a suspension.

The changes we have described here include the “major” ones, but there have also been many other changes, revisions and modifications to the Rules, any one of which may significantly impact your case. Although arbitration allows individuals and companies to represent themselves (subject to state law), it is strongly recommended that you obtain representation of a seasoned professional. If you have any questions about this issue, and specifically about how the recent changes to AAA’s “Commercial Arbitration Rules and Mediation Procedures” may impact your case, please feel free to contact us at 305-350-5690 or contact@fidjlaw.com.

Third Circuit Decision Requires Warrant for GPS Monitoring and Limits Good-Faith Exception to the Exclusionary Rule

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A decision by the Third Circuit Court of Appeals issued on October 23, 2013 marks an important development in the area of Fourth Amendment law. In this case,United States v. Katzin, the court held that law enforcement must obtain a warrant prior to a GPS search and that the search in this particular case cannot be excused on the basis of good faith. A copy of the precedential opinion can be found here.

At issue in the Katzin case were three related issues of Fourth Amendment law: First, whether the installation of a GPS device requires a warrant; second, what is the scope of the good-faith exception to the exclusionary rule; and third, who has standing to move to suppress evidence obtained from the physical search of a car following a GPS search.

In 2009 and 2010, the states of Delaware, Maryland and New Jersey were hit by a wave of burglaries at Rite-Aid pharmacies. The method used in the various burglaries was largely consistent and the FBI came to suspect that Katzin and his two brothers were committing the burglaries using Katzin’s van. Suspicion increased as the pieces of the puzzle began falling into place. After consulting with the United States Attorney’s office, but without obtaining a warrant, the FBI affixed a “slap-on” GPS tracker to the exterior of Harry Katzin’s van. The device, which was attached to the car when it was parked on a public road, allowed the police to remotely monitor the location of the car in real-time. In just a few days the device yielded the results the FBI was after: the GPS showed the car parked for a few hours right next to a Rite-Aid pharmacy and when it finally moved, the police stopped the car, found the three brothers and, after a search of the car, found stolen property from the Rite-Aid pharmacy. All three defendants moved to suppress the evidence found in the van.

The Fourth Amendment to the United States Constitution mandates as follows: “[T]he right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures, shall not be violated, and no Warrant shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.” As the text makes clear, a search or a seizure is a necessary prerequisite to a violation of the Fourth Amendment. In its opinion, the Third Circuit begins with the proposition that magnetically attaching a GPS device to a suspect’s automobile constitutes a search. Here, the Third Circuit relied upon the United States Supreme Court decision in U.S. v. Jones, 135 S. Ct. 945  (2012), and Justice Sotomayor’s concurring opinion, which reasoned that “when the government physically invades personal property to gather information, a search occurs.”

The Third Circuit further articulated that the Fourth Amendment does not protect individuals from all searches, justunreasonable ones. “[W]hether a particular search meets the reasonableness standard is judged by balancing its intrusion on the individual’s Fourth Amendment interest against its promotion of legitimate governmental interests.” Vernonia Sch. Dist. 47J v. Acton, 515 U.S. 646, 652 (1995). Under this general approach, the courts look at “the totality of the circumstances.” United States v. Knights, 534 U.S. 112, 118 (2001). More often than not, courts strike this balance in favor of the procedures described in the Warrant Clause of the Fourth Amendment. Thus, any search conducted outside the judicial process is “per se unreasonable under the Fourth Amendment – subject only to a few specifically established and well-delineated exceptions.” United States v. Harrison, 689 F.3d 301, 306 (3d Cir. 2012).

Next, the Third Circuit described the instances in which a search would be reasonable under the Fourth Amendment even absent a warrant, including exigent circumstances, cases of diminished privacy expectations and Terry and its progeny. However, as the Court noted, none of these instances is applicable in this case. Furthermore, the Court explained that the “automobile exception” to valid warrantless searches was not applicable because that exception is “limited to a discrete moment in time ”¦ [whereas] ”¦ [a]ttaching and monitoring a GPS tracker ”¦ creates a continuous police presence for the purpose of discovering evidence that may come into existence and/or be placed within the vehicle at some point in the future.”

The Third Circuit held that the evidence uncovered as a result of the police officer’s unconstitutional actions should be suppressed under the exclusionary rule. According to the Court the exclusionary rule was created to compel respect for the constitutional guaranty of the right of people to be protected against unreasonable searches and seizures, mandating that evidence obtained in violation of the Fourth Amendment should not be available at trial.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of white collar criminal defense.  They will continue to monitor developments in this and similar cases. If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.comor by calling 305.350.5690.

Update: Crackdown on Casino AML Deficiencies Continues as Caesars Entertainment Corp. becomes subject of FinCEN and DOJ Investigation

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On October 21, 2013, Caesars Entertainment Corp. (“Caesars”) announced in its filing with the Securities and Exchange Commission that its subsidiary Desert Palace, Inc. (owner of Caesars Palace) was under investigation for alleged violations of the Bank Secrecy Act. A copy of the filing can be read here.

According to Caesars’ filing, on October 11, 2013, Desert Palace, Inc. received a letter from the Financial Crimes Enforcement Network (“FinCEN”) stating that the subsidiary was under investigation for alleged violations of the Bank Secrecy Act, found at 31 U.S.C. § 5311 et seq., and to determine “whether it is appropriate to assess a civil penalty and/or take additional enforcement action against Caesars Palace.” Caesars was also informed that a federal grand jury investigation regarding the alleged violation is on-going.

Like banks and money services businesses (“MSBs”), federal law defines casinos as financial institutions. See 31 U.S.C. § 5312 (X). As financial institutions, casinos are required to maintain robust anti-money laundering compliance programs designed to protect against the unique money laundering and terrorist financing risks posed by each individual casino. The basic minimum elements which must be included within any casino’s AML plan can be found at 31 C.F.R. § 1021.210. See also 31 U.S.C. § 5318(h).

Caesar’s announcement comes as FinCEN and the Department of Justice have increased their focus on the anti-money laundering policies and procedures of casinos. As we previously reported, on August 27, 2013, the U.S. Department of Justice announced that it had resolved its money laundering investigation into the Las Vegas Sands Corp. which resulted in Sands agreeing to pay $47,400,300 to the Government in order to avoid criminal prosecution. As we expressed in our previous report, we see the Sands and Caesars cases as a sign of the increased scrutiny that the casino industry will face in the near future and each should serve as a warning to casinos to ensure that their AML compliance programs are in full working order as soon as possible.

Fuerst, Ittleman, David & Joseph, PL will continue to monitor the Department of Justice and the casino industry for the latest developments. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of anti-money laundering compliance, administrative law, constitutional law, white collar criminal defense and litigation against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

United States v. Lang: Eleventh Circuit Clarifies How Structuring Violations Must be Pled in Federal Criminal Cases

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On October 3, 2013, the United States Court of Appeals for the Eleventh Circuit issued its decision in United States v. Lang clarifying how future indictments for structuring in violation of 31 U.S.C. § 5324(a)(3) must be pled. The decision is a game changer as it limits the ability of prosecutors to bring counts for each sub-threshold transaction used to evade reporting requirements within the greater structuring scheme. A copy of the decision can be read here.

Generally speaking, the Bank Secrecy Act (“BSA”), found at 31 U.S.C. § 5311 et seq., requires U.S. financial institutions to assist in the detection and prevention of money laundering. More specifically, the BSA requires that financial institutions file reports with the United States Department of the Treasury of all cash transactions which exceed a daily aggregated amount of $10,000. See 31 U.S.C. § 5313; 31 C.F.R. §§ 1010.311, 1010.313. In order to prevent circumvention of this reporting requirement, the BSA further prohibits attempts to “structure” transactions for the purpose of evading BSA currency reporting requirements. See 31 U.S.C. § 5324(a)(3); 31 C.F.R. § 1010.314.

The implementing regulations of the BSA define “structuring” as follows:

For purposes of § 1010.314, a person structures a transaction if that person, acting alone, or in conjunction with, or on behalf of, other persons, conducts or attempts to conduct one or more transactions in currency, in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading the reporting requirements under §§ 1010.311, 1010.313, 1020.315, 1021.311 and 1021.313 of this chapter. “In any manner” includes, but is not limited to, the breaking down of a single sum of currency exceeding $10,000 into smaller sums, including sums at or below $10,000, or the conduct of a transaction, or series of currency transactions at or below $10,000. The transaction or transactions need not exceed the $10,000 reporting threshold at any single financial institution on any single day in order to constitute structuring within the meaning of this definition.

See 31 C.F.R. § 1010.100(xx).

However, when a transaction has been structured, a question arises as to how many structuring crimes have occurred. In other words, the issue in such situations is whether a person may be separately charged with violating 5324(a)(3) for the act of structuring itself and for each sub-threshold transaction made in furtherance of the crime. In Lang, the 11th Circuit answered this question with a resounding no.

In Lang, the defendant was indicted on 85 counts of violating § 5324(a)(3), and each count of the indictment charged as a separate structuring crime a currency transaction involving a single check in an amount less than $10,000. In finding that the indictment was insufficient and vacating the conviction, the 11th Circuit initially turned its focus to the phrase “for the purpose of evading” found within 31 C.F.R. § 1010.100(xx). As explained by the court, “[i]n order to be “for the purpose of evading” the reporting requirements, the structured transaction must involve an amount that is more than $10,000; otherwise, evasion would not be necessary or possible because there would be no reporting requirement anyway.” Building on this logic, the court held that “the proper unit of prosecution in structuring is the amount exceeding the reporting threshold that is structured into smaller amounts below that threshold, not each of the resulting sub-threshold transactions.”

In Lang”s case, the court found that the indictment was insufficient because of how the Government drafted each count. As explained by the court, “[i]nstead of a series of counts each alleging a payment or payments totaling more than $10,000 that were structured into checks of smaller amounts…the indictment consists of 85 counts each of which separately alleges that a single check in an amount less than $10,000 was structured. That is not possible.” Simply put, “[a]cash transaction involving a single check in an amount below the reporting threshold cannot in itself amount to structuring because the crime requires a purpose to evade the reporting requirements, and that requirement does not apply to a single cash transaction below the threshold.” As a result, the court vacated the judgment against Lang and remanded the case with directions that the indictment be dismissed.

The decision in Lang restricts the ability of prosecutors to charge defendants with separate counts of structuring for each sub-threshold transaction used to evade reporting requirements within the greater structuring scheme.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of anti-money laundering compliance, administrative law, constitutional law, white collar criminal defense and litigation against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Litigation Outlook: Sender Beware: Texting a Driver May Impose Liability on the Sender

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Last year, we wrote about the corporation’s responsibility to put a stop to the employee’s dangerous and potentially fatal habit of texting while driving. Several developments have occurred in this quickly changing area of law, including laws enacted within Florida which make texting while driving illegal. While laws themselves may lack the power to keep people from texting while driving, civil lawsuits seem to be making real progress at punishing the reckless texters.

In a recent landmark decision, the Superior Court of New Jersey – Appellate Division held, “[A] person sending text messages has a duty not to text someone who is driving if the texter knows, or has special reason to know, the recipient will view the text while driving.” Kubert v. Best, 2013 WL 4512313, ___ A.3d ___ (N.J. Super. Ct. App. Div. 2013). A copy of the decision is available here. The court analogized the texting danger to the following hypothetical example:

A and B participate in a riot in which B, although throwing no rocks himself, encourages A to throw rocks. One of the rocks strikes C, a bystander. B is subject to liability to C. [Restatement § 876, comment d, illustration 4.] The example illustrates that one does not actually have to be the person who threw a rock to be liable for injury caused by the rock.

In refusing to distinguish the incident involving the rock thrower based upon the fact that the rock-thrower is not even present at the time of injury, the Court found that a texter is “electronically present” at the scene of injury. Indeed, the Court found no difference between the texting scenario and a duty which a passenger owes to the driving public to prevent an intoxicating driver from taking the wheel.

How far does the duty to avoid sending a text go? The Kubert court took pains to explain that not every text exposes a sender to potential liability. “[T]the act of sending such messages, by itself, is not active encouragement that the recipient read the text and respond immediately, that is, while driving and in violation of the law.” More is required; the sender must take active steps to urge the driver to read and respond to the text while driving.

Still, we are at the infancy of a developing body of case law defining the parameters of “electronic duty” that we all need to be mindful of. Equally important, corporations need to have firm policies in place to ensure that those in the office do not force their drivers, or others, to immediately respond to texts while driving. Otherwise, based on the Kubert decision and its soon to be ever-growing progeny, the sender will be equally liable as the driver for any harm results from the text.

Sender beware.

If you have any questions about this issue, and specifically about how our lawyers can help your company implement a ban on your employees texting while driving, please feel free to contact us at 305-350-5690 or contact@fidjlaw.com.

Las Vegas Sands Casino Money Laundering Settlement a Bellwether for Future Cases

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On August 27, the Justice Department announced that it had resolved its money laundering investigation into the Las Vegas Sands Corp. (“Sands”) and that the Sands had agreed to “return” $47,400,300 to the Government in order to avoid criminal prosecution. For more about the case, see here and here.

A brief history of the Sands’ recent legal troubles is in order. First, the Sands is a publicly traded company (“LVS”), and its Chairman and CEO is Sheldon Adelson, who made headlines throughout the 2012 presidential election process for his outspoken support of Mitt Romney and criticism of Barack Obama. (We have no idea whether Mr. Adelson himself has been a lightning rod drawing the ire of the Obama administration, and we will not speculate.) Second, the Justice Department’s money laundering investigation into the Sands is not its only investigation. As has been reported  here, here and here, the Sands has also been the subject of an investigation into alleged Foreign Corrupt Practices Act (FCPA) violations related to its development of properties in Macau and China. The Sands actually reported to the SEC that the violations actually occurred, and Mr. Adelson and other members of the Sands Board of Directors are now defendants in multiple shareholder derivative suits alleging that they failed to stop the violations from occurring and thereby breached the fiduciary duties they owed to the Sands; see here. (Generally, in order to assert a derivative claim, the derivative plaintiff must show “either (1) that the directors knew or (2) should have known that violations of law were occurring and, in either event, (3) that the directors took no steps in a good faith effort to prevent or remedy that situation, and (4) that such failure proximately resulted in the losses complained of…” e.g. Stone v. Ritter, 911 A.2d 362 (Del. 2006)). The resolution of this money laundering investigation does not appear to resolve the FCPA investigation, and may prove to be additional fodder for the derivative claims. Copies of the derivative suits are available here and here.

Like the FCPA investigation, the money laundering investigation has been in the headlines for quite some time. In January, the Wall Street Journal reported that the Sands was bolstering its anti-money laundering compliance program, and ceased “executing international money transfers for its high-rolling customers”¦” In June, the Journal reported that a grand jury had been empaneled in Los Angeles to investigate the money laundering investigations, and that the investigation was being led by the U.S. Attorney’s Office in Los Angeles. In July,  the Las Vegas Review-Journal reported that as part of its compliance program overhaul, the Sands had retained Jerry Markling to be the Venetian’s new Director of Investigations. As the Review-Journal explained, Mr. Markling was formerly the Gaming Control Board’s Chief of Enforcement, and was able to circumvent the State of Nevada’s one year “cooling off period” because he had held his position as Chief of Enforcement longer than the “cooling off period” had been in place.

As discussed by the Wall Street Journal, the money laundering investigation followed the Sands’ relationship with two high rollers. The first, Zhenli Ye Gon, was charged in Mexico for manufacturing ingredients used in the manufacturing of methamphetamines and wiring the proceeds of his sales to himself at Sands-operated casinos in Las Vegas. All told, Zhenli received well in excess of $100,000,000, and according to the Justice Department’s press release, the Sands did virtually nothing to identify the source of the funds. As discussed in the press release,

The money being paid the United States represents money sent to the Venetian casino by or on behalf of Zhenli Ye Gon, who at the end of 2006 or early 2007 was “the largest all-cash, up-front gambler the Venetian-Palazzo had ever had to that point,” according to the non-prosecution agreement. In March 2007, Ye Gon’s residence in Mexico City was searched by law enforcement authorities, who seized approximately $207 million in United States currency from the residence in what remains the largest-ever seizure of currency by law enforcement.

Ye Gon was indicted by federal officials in the District of Columbia on narcotics charges, but that case was dismissed in 2009. Ye Gon is currently pending extradition to Mexico, which has charged him with drug trafficking offenses.

According to the agreement, prosecutors believe that in October 2006, prior to Ye Gon being publicly linked to drug trafficking as a result of the search of his residence, officials at the Venetian-Palazzo, should have identified as “suspicious” Ye Gon’s financial transactions, which included the wire transfer of approximately $45 million and depositing of approximately $13 million in cashier’s checks between February 2005 and continuing through March 2007. Casino officials should have filed one or more SARCs against Ye Gon in addition to a SARC it filed in April 2007, prosecutors contend.

For its part, the Las Vegas Sands, while unaware of Ye Gon’s alleged criminal activities prior to March 2007, acknowledges that “in hindsight…the Venetian-Palazzo failed to fully appreciate the suspicious nature of the information or lack thereof pertaining to Ye Gon in the context of the Venetian’s evaluation of whether to file additional SARCs against him earlier and in retrospect should have filed SARCs earlier, and should have filed a more complete SARC when it did file one.”

During his patronage at the Venetian, Ye Gon wire transferred money to the Las Vegas Sands Corp. and subsidiary companies from two different banks and seven different Mexican money exchange houses known as casas de cambios. The wire transfer originators included several companies and individuals the Las Vegas Sands Corp. could not link to Ye Gon. Ye Gon also transferred some funds from Mexican casas de cambios to a Las Vegas Sands Corp. subsidiary in Hong Kong for transfer to Las Vegas. In many instances, Ye Gon’s wire transfers lacked sufficient information to identify him as the beneficiary. The Las Vegas Sands also allowed Ye Gon to transfer funds several times to an account that did not identify its association with the Venetian, specifically an aviation account used to pay pilots operating the company’s aircraft. During its investigation, the government developed evidence that “when casino personnel asked Ye Gon to wire the money in larger lump sums, as opposed to breaking it up incrementally, and use consistent listed beneficiaries, Ye Gon stated that he preferred to wire the money incrementally because he did not want the government to know about these transfers.”

Copies of the Zhenli Ye Gon Arrest and Extradition Complaints are available here and here.

Interestingly, the Journal also reported that the Sands’ relationship with Ausuf Umar Siddiqui was also being examined by the grand jury. Following a 2008 indictment filed in San Jose, Mr. Siddiqui was convicted of taking illegal kickbacks while working as a buyer for Fry’s and wiring the proceeds (which well exceeded $100,000,000) to himself at Sands-operated casinos in Las Vegas. A copy of the government’s complaint against Mr. Siddiqui is available here. The Justice Department’s press release makes no mention of Mr. Siddiqui, and likewise makes no mention of why the government walked away from that issue.

But the Sands case is noteworthy for much more than the underlying investigations and the Ye Gon and Siddiqui cases. We see it as a bellwether, or more specifically, a sign of things to come for casinos operating in the United States. As the Justice Department made clear in its press release,

“What happens in Vegas no longer stays in Vegas,” said United States Attorney André Birotte Jr. “For the first time, a casino has faced the very real possibility of a federal criminal case for failing to properly report suspicious funds received from a gambler. This is also the first time a casino has agreed to return those funds to the government. All companies, especially casinos, are now on notice that America’s anti-money laundering laws apply to all people and every corporation, even if that company risks losing its most profitable customer.“

In short, having already resolved huge money laundering cases with the likes of HSBC, Wachovia, Wells Fargo, Bank of America, JP Morgan Chase, Citibank, Bank of New York, Bank of Hong Kong, Western Union, Pay Pal, and a host of others, Justice may now be turning its focus to casinos, which it may very well perceive as low hanging fruit, flush with cash and easy-to-locate program violations.

Like banks, federal law defines casinos as financial institutions; 31 U.S.C. 5312(X). This includes “Indian gaming operation(s) conducted under or pursuant to the Indian Gaming Regulatory Act other than an operation which is limited to class I gaming”¦” As financial institutions, casinos are required to maintain anti-money laundering compliance programs, which must include, at a minimum, the following critical elements:

(i) A system of internal controls to assure ongoing compliance;

(ii) Internal and/or external independent testing for compliance. The scope and frequency of the testing shall be commensurate with the money laundering and terrorist financing risks posed by the products and services provided by the casino;

(iii) Training of casino personnel, including training in the identification of unusual or suspicious transactions, to the extent that the reporting of such transactions is required by this part, by other applicable law or regulation, or by the casino’s own administrative and compliance policies;

(iv) An individual or individuals to assure day-to-day compliance;

(v) Procedures for using all available information to determine:

(A) When required by this part, the name, address, social security number, and other information, and verification of the same, of a person;

(B) The occurrence of any transactions or patterns of transactions required to be reported pursuant to § 103.21;

(C) Whether any record as described in subpart C of this part must be made and retained; and

(vi) For casinos that have automated data processing systems, the use of automated programs to aid in assuring compliance.

31 C.F.R. 103.64; see also 31 U.S.C. 5318(h).

However, it is not enough for the casino to simply have a compliance program. The program must be designed to protect against the unique money laundering and terrorist financing risks posed by the individual casino, and the program must be implemented. Additionally, to the extent that a casino employee (including dealers and cage personnel) will confront money laundering activities, they must be included as part of the program and given instructions regarding how to report suspicious activity. Finally, the program must be strong enough to withstand not only internal and external reviews, but the scrutiny of the IRS, which has been delegated the authority to audit casinos for compliance with the Bank Secrecy Act. Suffice it to say that the IRS has an extensive background auditing casinos for taxation purposes, and is well equipped to audit casinos for AML purposes too. The IRS is also perfectly willing to use information discovered during a compliance audit for tax purposes, and vice versa. So, again, a robust program, implementation, and the buy-in of all relevant casino employees are all critical, and the failure to have such a program can expose the casino and its directors to civil and criminal liability.

Today’s Wall Street Journal attributed the following quote to Bill Goss, senior director for anti-money laundering at IPSA International: The Sands investigation “will likely bring enhanced scrutiny upon the gaming industry for their anti-money laundering controls and procedures”¦Just one public and egregious incident of this type causes law enforcement and regulators to shine a very bright light on an entire industry group.” We agree. We see the Sands case as a sign of things to come for the casino industry, and a warning to casinos to have their compliance programs in working order as soon as possible.

Fuerst, Ittleman, David & Joseph, PL will continue to monitor the Department of Justice and the casino industry for the latest developments. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of anti-money laundering compliance, administrative law, constitutional law, white collar criminal defense and litigation against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Business Litigation Update: When Settlement Agreements Settle Nothing

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In business, there is an absolute need for certainty. With the interminable uncertainty posed by the litigation process, businesses frequently “purchase” certainty by agreeing to settle a lawsuit, oftentimes at amounts which they may subjectively feel to be unjust. However, with such finality, a business is able to properly budget and forecast its financial needs, and hence make solid business decisions. But what happens when the certainty which was “purchased” remains uncertain?

In Nall v. Mal-Motels, Inc., a copy of which is available here, the Eleventh Circuit Court of Appeals opened the floodgates to uncertainty by reversing a settlement which was found to be, after an evidentiary hearing, “a fair and reasonable resolution of a bona fide dispute.” Before we pull all of the (remaining) hair from our heads, it must be noted that this case was decided under the limited confines of the Fair Labor Standards Act (“FLSA”). However, its implications are far-reaching.

Nall started as a routine overtime case. The plaintiff was coaxed by her employer to stop “punching the clock,” and instead was paid a “salary” equal to her hourly rate. There is no known exemption reported to apply. After a few years, the employee grew weary of not receiving any overtime, and quit. The employee, soon finding herself destitute and “homeless,” filed suit.

The employer, without counsel, reached out to the employee and explained that the lawsuit would “ruin his business,” and pleaded with her to quickly settle the case without lawyers. The employee met with the employer, without any counsel present, and at that meeting agreed to resolve the dispute, and signed a Notice of Dismissal With Prejudice along with a pre-prepared letter to her lawyer advising that the case had been settled. In return, the employee received a check and much-needed cash; however, the compensation was dramatically less than what she would have been entitled had she prevailed.

The Notice of Dismissal was filed; however, the trial court sua sponte rejected the Notice as it was not submitted by the employee’s lawyer. The employer then asked the court to enforce the settlement agreement, which the employee’s lawyer opposed. At the evidentiary hearing, the court found that a settlement had in fact been reached, and that the settlement agreement was “a fair and reasonable resolution of a bona fide dispute under the FLSA.” The court then dismissed the case with prejudice. The employee appealed.

The Eleventh Circuit, citing to Lynn’s Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982), noted that there are only two ways for an FLSA case to be settled by compromise: (a) under the supervision of the Secretary of Labor, which did not apply to the case; or (2) through a lawsuit between the employee and employer, where the parties “present to the district court a proposed settlement” and “the district court may enter a stipulated judgment after scrutinizing the settlement for fairness.” In so scrutinizing the settlement’s fairness, the court must balance the “often great inequalities in bargaining power between employers and employees.” Indeed, in legislating FLSA, Congress intended “to protect certain groups of the population from substandard wages and excessive hours which endangered the national health and well-being and the free flow of goods in interstate commerce.” The FLSA encompasses built-in deterrents in the form of liquidated damages to ensure the employer’s compliance, and thus, permitting “an employer to secure a release from the worker who needs his wages promptly will tend to nullify the deterrent effect which Congress plainly intended that [the FLSA] should have.”

The question thus becomes, what constitutes a “stipulated judgment”? A stipulation requires an agreement by two parties. Here, however, even though the court found as a matter of fact, after an evidentiary hearing, that a settlement was reached by the parties, and that the settlement was “a fair and reasonable resolution,” the Eleventh Circuit found that because the employee through her counsel later objected to the enforcement of the settlement agreement, there was no stipulation. Because there was no “stipulated judgment,” there could be no resolution of the FLSA claim. The dismissal was thus reversed.

The Nall Court did leave room to find that the holding was limited to cases where the employee is without counsel by noting, “[s]ettlements may be permissible in the context of a suit brought by employees under the FLSA” because the employees are “likely to be represented by an attorney who can protect their rights under the statute” when the settlement is reached within the “adversarial context of a lawsuit.” However, the court went on to further note that it was not deciding the question of whether a settlement reached by the parties with counsels’ respective participation, but later objected to by employee’s counsel, would comport with the “stipulation” requirement, thus leaving open the very real potential for FLSA-plaintiffs’ counsel to abuse the system by demanding more money at the “stipulation hearing.” Moreover, in virtually every case settled by agreement, a party may suffer from a form of “buyer’s remorse,” which may pervade the very need for certainty at inception. In other words, settlements may become unrealistic in the context of FLSA cases if the Nall doctrine is expanded.

The implications of the case are potentially far-reaching and impactful to other types of claims. Indeed, the case is open to reliance for any claim brought where there are statutory remedies available “to deter misconduct.” It would not take a leap of logic to apply the Nall doctrine and argue that parties cannot settle cases involving statutory claims without the involvement of counsel. After all, to enforce such pro-se agreements would “tend to nullify the deterrent effect which Congress plainly intended.” The holding, if so broadly applied, would actually tend to result in less money available to plaintiffs, as there is an obvious economic cost to pay the lawyers on both sides to “ratify” the parties’ agreement. That is not and cannot be the intent of Congress. Unless, of course, the courts tell us it is.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in all areas of complex litigation, including international and domestic business matters, contract disputes, and insurance issues. Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.