Money Laundering in the News: Los Angeles Fashion District Raid Puts Trade-Based Money Laundering and Black Market Peso Exchange in Spotlight

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November 11th, 2014

On September 10, 2014, federal and local law enforcement officials raided the Los Angeles Fashion District in an effort to combat alleged money laundering for Mexican drug cartels which was occurring within the District. The raid, part of “Operation Fashion Police,” focused on the Fashion District due to the high potential for vendors to launder cartel money through a technique known as trade-based money laundering.

Law enforcement and financial institutions have seen an increase in trade-based money laundering since June of 2010 when the Mexican government announced regulations limiting deposits of U.S. cash in Mexican banks. (More information on Mexico’s deposit regulations can be found in the FinCEN Advisory entitled: “Newly Released Mexican Regulations Imposing Restrictions on Mexican Banks for Transactions in U.S. Currency” found here.)

A. Defining Trade-Based Money Laundering and understanding its common techniques.

Generally speaking, trade-based money laundering can be broadly defined as the process of disguising illicit proceeds and moving the value of such proceeds through a series of trade transactions in an attempt to disguise and legitimize their origin.

The basic premise of trade-based money laundering is as follows: Foreign drug traffickers who have an abundance of U.S. currency in the U.S. need a technique to move that money, the source of which is illicit drug profits, overseas. To accomplish this objective, traffickers, with the assistance of conspiring importers/exporters, arrange for the purchase of goods in U.S. dollars. Those goods are then shipped to foreign destinations, usually but not necessarily the home countries of the traffickers. Once these goods arrive, they are sold in the local currency. Thus, the traffickers have now moved their proceeds across the border, converted the U.S. dollars into local currency which traffickers use for day-to-day operations, and legitimized their income as the funds appear to be derived from legitimate trade and business transactions.

Trade-based money laundering can take several forms ranging from the very basic to the incredibly complex. While a complete list of trade-based money laundering techniques is beyond the scope of this article, some of the more common forms of trade-based money laundering include:

  • Over/Under invoicing goods and services: This technique involves the misrepresentation of the price of a good or service in order to transfer additional value between the importer and exporter. By invoicing the goods below fair market value, an exporter can transfer monetary value to an importer because the importer will be paying less for the good than the importer will receive when the good is sold. Alternatively, by invoicing at an amount above fair market value, the exporter receives added value as the goods have been purchased by the importer at a price higher than the value the importer will receive when they sell the goods.
  • Multiple invoicing of goods and services: This technique involves the issuance of more than one invoice for the same transaction. Through the issuance of multiple invoices, a money launderer can make multiple payments for the same goods, thus enabling more money to move in each transaction. Further, unlike over/under invoicing, these multiple payments can be made at fair market value. In order to increase difficulty in detection and avoid possible BSA reporting requirements, parties will often make payments for multiple invoices through different financial institutions.
  • Over/Under shipment of goods and services: This technique involves the misrepresentation of the amount of goods being shipped or services being provided. By shipping a greater quantity of goods than was paid for, an exporter can transfer addition value to an importer who will then sell these extra goods in the local market.
  • Falsely described goods and services: This technique involves the misrepresentation of the type or quality of the good being shipped or the service being provided. The false description creates a discrepancy between the listed invoice value and the actual market value of the good. For example, an exporter ships gold worth $3 per unit but falsely describes the shipment on its invoice as silver worth $2 per unit. The importer would pay the exporter $2 per unit for the goods shipped and then sell the higher valued product on the local market for $3 per unit and obtain the extra money as laundered profits.

The Financial Action Task Force, a 35 member inter-governmental policy-making body of which the U.S. is a member and whose purpose is to establish international standards to combat money laundering, has developed a comprehensive guide regarding the various trade-based money laundering techniques used to launder money. This informative guide can be read here.

B. The Black Market Peso Exchange

One advanced trade-based money laundering technique is known as the “Black Market Peso Exchange.” While the particular details of any Black Market Peso Exchange operation will vary on a case by case basis, the basic operation of any black market peso exchange arrangement usually follows the same steps.

To demonstrate, let’s use a hypothetical involving a Mexican drug cartel and apply their activities to the outline of trade-based money laundering provided by the Financial Action Task Force in its guide. In such a case, the black market exchange would operate as follows:

1) Drug traffickers smuggle drugs into the United States which are sold for U.S. dollars;

2) The drug cartel arranges to sell the U.S. dollars at a discount (i.e. a rate cheaper than that paid on the forex) in exchange for currency of the trafficker’s home country (in this example Mexican pesos) to a third party known as a “peso broker;”

3) The peso broker pays the cartel in pesos from his account located in Mexico;

4) The peso broker will then structure deposits of the U.S. dollars into the broker’s U.S. bank accounts, known to as “funnel accounts” in an effort to avoid triggering BSA reporting requirements;

5) The peso broker then locates Mexican importers who import goods from the U.S. and need to pay for these goods with U.S. Dollars;

6) Once located, the broker will arrange to pay the U.S. exporter on behalf of the Mexican importer in U.S. dollars from the broker’s U.S. bank account;

7) Goods are then shipped to the Mexican importer; and finally,

8) The importer sells the goods in Mexico, pays the broker his arranged discounted exchange fee in pesos deposited in the broker’s Mexican bank account, and thus replenishes the broker’s account with the pesos the broker needs to begin the cycle again with a new laundering transaction.

C. Trade-Based Money Laundering and Black Market Exchange Red Flags and Financial Institution Reporting Obligations

Pursuant to the Bank Secrecy Act (“BSA”), financial institutions are required to create reports and records in order to combat fraud, money laundering, and protect against criminal and terrorist activity. More specifically, federal law requires that financial institutions file Suspicious Activity Reports (“SARs”) if the financial institution “knows, suspects, or has reason to suspect” that an attempted or fully conducted transaction: 1) involves funds derived from illegal activities or is an attempt to disguise or hide such funds; 2) is designed to evade the requirements of the BSA and its implementing regulations; or 3) lacks an apparent lawful or business purpose. See 31 C.F.R. § 1020.320; see also 12 C.F.R. § 21.11; (more information on BSA requirements can be found on the Office of the Comptroller of the Currency’s website here).

Due to the complexity of many black market peso exchange arrangements, FinCEN has issued several Advisories regarding potential “red flag” indicators of trade-based money laundering or black market peso exchange activities that financial institutions must be aware of. Such red flags include in part:

  • Third party payments for goods and services made by an intermediary apparently unrelated to the seller or purchaser of good;
  • Wires where no apparent business relationship appears to exist between the originator and the beneficiary;
  • Funds transferred into U.S. domestic accounts that are subsequently transferred out of the account in the same or nearly the same amounts, especially those originating from or destined to high risk jurisdictions;
  • A foreign import business with U.S. accounts receiving payments from locations outside the areas of their customer base;
  • In the case of a business account, the deposits take place in a different geographic region from where the business operates. For example, an account for a company operating locally in Florida receives numerous small deposits, all below the threshold reporting requirement, at bank branches in Texas, Virginia, and Tennessee;
  • In the case of a business account receiving out-of-state deposits, the debits do not appear to be related to the stated business activity of the account holder;
  • If questioned, the individuals opening or depositing funds into these “business accounts” have no detailed knowledge about the state business activity of the account holder or the source of the cash deposited.

Should any of the above red flags be spotted, FinCEN urges financial institutions to submit a Suspicious Activity Report indicating possible trade-based money laundering or black market peso exchange activity. A more complete list of trade-based money laundering red flags can be found in FinCEN’s Advisory FIN-2010-A001, entitled: “Advisory to Financial Institutions on Filing Suspicious Activity Reports regarding Trade-Based Money Laundering” found here. More detailed information regarding funnel account specific red flags can be read in FinCEN’s more recent Advisory, FIN-2014-A005, issued on May 28, 2014 here.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, regulatory compliance, customs, import and trade law, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution, or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Third Circuit decision highlights power of “good faith exception” to the exclusionary rule

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October 8th, 2014

We previously discussed the decision of the United States Court of Appeals for the Third Circuit in United States v. Katzin, wherein the Court found that a warrant is required for GPS monitoring and that there was no good-faith exception to the exclusionary rule.  However, on October 1, 2014, the Third Circuit sitting en banc  overruled the decision of the three judge panel and held that although a warrant is required to use a GPS monitor, because the state of the law before the Supreme Court’s 2012 decision in United States v. Jones supported the FBI agent’s action, the exclusionary rule did not apply.

The Good Faith Exception to the Exclusionary Rule

By reversing its earlier decision, the Third Circuit joined the Second, Fifth Seventh, and Ninth Circuits which have also held that the use and installation of a GPS device without a warrant prior to the Supreme Court’s Jones decision did not require the suppression of the evidence because of the “good faith exception” to the exclusionary rule. Consistent with the Supreme Court’s decisions in Knotts and Karo, both of which stand for the proposition that law enforcement searches which are conducted with an objectively reasonable reliance on binding appellate precedent are not subject to the exclusionary rule, the Third Circuit ruled that the FBI agent acted in good faith reliance upon Jones and therefore the good faith exception to the exclusionary rule applied. In other words, even though the agent’s search was subsequently deemed to be unlawful, because at the time of the search he relied in good faith on binding judicial precedent, the evidence obtained as the fruit of that “unlawful” search was nevertheless allowed to be used against the defendant from whom it was obtained.

As explained by the Third Circuit sitting en banc, the recent trend in Supreme Court jurisprudence is to limit the scope and application of the exclusionary rule to those “unusual cases” in which the suppression of illegally obtained evidence may “appreciably deter governmental violations of the Fourth Amendment.” Indeed, as the Third Circuit observed, the cost of suppressing illegally obtained evidence is that evidence of a criminal defendant’s guilt, even though reliable and trustworthy, will not be admitted “thereby ‘suppress[ing] the truth and set[ting] [a] criminal loose in the community without punishment.”

The Ramifications

Law enforcement’s ability to avoid the suppression of evidence has been dramatically expanded. Katzin and similar decisions in other federal courts are incredibly powerful means for law enforcement to circumvent the Fourth Amendment. Thus, in all criminal cases where a defendant attempts to challenge evidence based upon law enforcement’s clear violations of the defendant’s Fourth Amendment rights, one should anticipate the prosecution’s attempt to establish that law enforcement relied in good faith upon some binding appellate precedent, even if that precedent has since been overruled.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience litigating and trying criminal cases both at the state and federal levels including before the United States Courts of Appeal.  You can contact us via email:  contact@fidjlaw.com or via telephone:  305.350.5690.

United States Supreme Court: Warrants are required to search digital data on seized cell phones

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July 2nd, 2014

On June 25, 2014, in Riley v. California, a unanimous United States Supreme Court held that the Fourth Amendment requires that police obtain a warrant prior to searching the digital data found on an arrested suspect’s cell phone. The opinion can be read here.

Generally speaking, a warrantless search is unreasonable and a violation of the Fourth Amendment unless it falls within a specific exception to the warrant requirement. At issue in Riley v. California was whether the warrantless search of the digital data of a cell phone is permissible under the long recognized “search incident to arrest” exception to the warrant requirement which generally provides that law enforcement may search an arrestee at the time of his or her arrest.

In a series of decisions, the Supreme Court has explained the bounds of the search incident to arrest exception. In Chimel v. California, 395 U.S. 752 (1969), the Supreme Court held that for a warrantless search incident to arrest to comport with the Fourth Amendment, the search must be limited to the area within the arrestee’s immediate control. The Chimel court made clear that the purposes behind the search incident to arrest exception are twofold: 1) the need to protect officer safety; and 2) the need to prevent the destruction of evidence.

The Supreme Court further explained the search incident to arrest exception in United States v. Robinson, 414 U.S. 218 (1973). In Robinson, the Court held that physical evidence found on a person during a lawful search incident to arrest could itself be searched pursuant to the doctrine announced in Chimel. Finally, in Arizona v. Gant, 556 U.S. 332 (2009), the Court again relied uponChimel in holding that a search incident to arrest permits searches of a car where the arrestee is unsecured and within reaching distance of the passenger compartment, or where it is reasonable to believe that evidence of the crime of arrest might be found in the vehicle.

In declining to extend Robinson and Gant to warrantless searches of digital data of an arrestee’s cell phone, the Court found that neither of the unique and narrow purposes (officer safety and preventing the destruction of evidence) is served by allowing the search of digital data on cell phones. As to officer safety, the Court found that digital data stored on a cell phone cannot itself be used as a weapon to harm an officer. Thus, while warrantless physical inspections of a seized phone are permissible to ensure officer safety, such as a search to ensure that a cell phone is not concealing a weapon which may harm an arresting officer, searches of digital content require a search warrant.

With regard to the destruction of evidence, the Court rejected the Government’s argument that, because remote wiping of information may be possible, officers should be allowed to conduct warrantless searches of digital data. The Court found that the Government’s briefing did not indicate that wiping and encryption were pervasive problems and that other techniques and technologies, such as simply turning the phone off or placing in a radio wave proof bag, could combat those problems.

Although finding that the purposes of Chimel were not satisfied, the Court did recognize that in certain rare circumstances the need for officer safety or the prevention of the destruction of evidence would necessitate the searching of a cell phone. However, the Court found that those rare instances would be governed by the “exigent circumstances” exception, not the search incident to a lawful arrest exception.

The Supreme Court also made clear that due to the vast storage capabilities of modern cell phones, greater privacy interests are implicated when addressing the Fourth Amendment’s warrants requirement as applied to the search of digital data. As explained by the Court, “[t]he search incident to arrest exception rests not only on the heightened government interests at stake in a volatile arrest situation, but also on an arrestee’s reduced privacy interests upon being taken into police custody.” Riley, 573 U.S. ___ (2014) slip op. at 15. However, the Court noted:

The fact that an arrestee has diminished privacy interests does not mean that the Fourth Amendment falls out of the picture entirely. Not every search is acceptable solely because a person is in custody. To the contrary, when privacy-related concerns are weighty enough a search may require a warrant, notwithstanding the diminished expectations of privacy of the arrestee.

Id. at 16 (internal citations and quotations omitted).

The Supreme Court also found that the privacy concerns regarding digital data on cell phones was different than those concerning the contents of physical objects. First, the Court found that modern “smart” cell phones allow users to store various distinct types of information that, when searched in combination, would reveal much more information than any one particular record in isolation. Second, the storage capacity of cell phones allows far broader access to information than previously possible. As explained by the Court, “the sum of an individual’s private life can be reconstructed through a thousand photographs labeled with dates, locations, and descriptions; the same cannot be said of a photograph or two of loved ones tucked into a wallet.” Id. at 18. Finally, the data on cell phones can date back years. Whereas “before cell phones, a search of a person was limited by physical realities and tended as a general matter to constitute only a narrow intrusion on privacy,” today the search of digital data of seized cell phones would be far more exhaustive, revealing, and intrusive. As a result, greater privacy concerns exist.

Of course, the Court’s decision does not mean that law enforcement is somehow foreclosed from searching cell phones. As explained by the Court:

Modern cell phones are not just another technological convenience. With all they contain and all they may reveal, they hold for many Americans the privacies of life. The fact that technology now allows an individual to carry such information in his hand does not make the information any less worthy of the protection for which the Founders fought. Our answer to the question of what police must do before searching a cell phone seized incident to an arrest is accordingly simple – get a warrant.

Id. at 28 (internal citations and quotations omitted)(emphasis added).

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, constitutional law, white collar criminal defense and litigating 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.

FDA Regulatory Update: International Crack Down on Online Pharmacies Identifies Over 1,900 Websites Selling Unapproved or Potentially Counterfeit Drugs to U.S. Consumers

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By participating in the organized, global action known as Operation Pangea VII, the U.S. Food and Drug Administration (“FDA”) made good on its promise to continue working with the international community to investigate online pharmacies that sell potentially unapproved, counterfeit, or adulterated drugs and medical devices. (To read the full text of FDA’s press release, please click here.) Between May 13 and May 20, 2014, the FDA partnered with the U.S. Customs and Border Protection (“CBP”), the U.S. Department of Homeland Security, INTERPOL and over 111 law enforcement, customs, and regulatory authorities around the world in targeting websites that sell potentially dangerous, unapproved prescription drugs to consumers. (For additional media coverage of Operation Pangea VII, please click here, here, and here.) This world-wide collaborative effort brought together even more countries than in previous years and required participating countries to carry out “extensive examinations at U.S.-based international mail facilities.” (To read INTERPOL’s summary of Operation Pangea VII, please click here and here.)

Operation Pangea VII resulted in the detention or seizure of 19,618 packages containing over 9.4 million unapproved or suspected counterfeit drugs, including insulin, estrogen, bimatroprost, tramadol, and sildenafil citrate. A large number of these packages claimed to contain medicines from Australia, the United Kingdom, New Zealand, and Canada. Upon further investigation, however, many of those packages were found to contain unapproved or suspected counterfeit drugs from other countries, such as India, China, Singapore, Taiwan, Mexico, Laos, and Malaysia. The total value of these seized and detained products amounted to approximately $36 million.

Based on these findings, regulators and customs authorities across the globe ordered more than 10,000 websites to shut down their operations and remove over 19,000 advertisements for these medicines on social media. Through these efforts, the FDA identified over 1,975 websites as selling products in violation of U.S. law and notified related internet service providers and domain name registrars of the websites’ allegedly violative practices.

Together, the participating countries launched roughly 1,235 investigations and made 239 arrests in connection with online operations for the sale of potentially dangerous or unapproved prescription drugs. Furthermore, INTERPOL’s report explained that Operation Pangea VII “identifi[ed] and dismantle[d] three illicit laboratories in Colombia” and “targeted the main areas exploited by organized crime in the illegal online medicine trade: rogue doman name registrars, electronic payment system and delivery services.” (To read the full text of INTERPOL’s announcement, please click here.)

As we previously reported here, after 2012’s Operation Pangea V, which targeted over 4,100 internet pharmacies and required 18,000 pharmacy websites to shut down their operations, the FDA launched a new website, BeSafeRx: Know Your Online Pharmacy, to provide consumers with information about the dangers of purchasing medicine from online pharmacies. Last year, the FDA participated in Operation Pangea VI, which resulted in the shutdown of over 9,600 websites and seizure of more than $41 million worth of illegal medicines worldwide. (To read the FDA’s announcement regarding Operation Pangea VI, please click here.)  The FDA’s continued participation in Operation Pangea sends a strong signal to industry that the FDA does not plan to back down anytime soon. Rather, it seems clear that the FDA intends to closely monitor online pharmacies and will continue to actively enforce drug and medical device regulations.

Fuerst Ittleman David & Joseph, PL will continue to monitor the regulation of online pharmaceutical drug companies. The attorneys in the Food, Drug, and Life Sciences practice group are well-versed in the complex regulatory framework for prescription drugs and medical devices. If you have any questions or would like more information, please email us at contact@fidjlaw.com or call us at (305) 350-5690.

White Collar Criminal Defense Update: Third Circuit Court of Appeals Discusses “Willful Blindness” Jury Instruction and Burden Shifting

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The following post, which was authored by Joseph DiRuzzo, originally appeared on the Federal Tax Crimes Blog on May 5, 2014. We re-post it here with permission.

 

On April 30, 2014, the Philadelphia based U.S. Court of Appeals for the Third Circuit issued its precedential opinion in United States v. Tai, ___ F.3d ___, 2014 U.S. App. LEXIS 8129 (3d Cir. April 30, 2014), here. A copy of the Tai decision is available here.

Before filing an appeal with the Third Circuit, Tai was convicted for mail and wire fraud related to the “Fen-Phen Settlement Trust” which was created to compensate victims who underwent surgery for heart valve replacement or primary pulmonary hypertension (PPH) after taking Fen Phen. The trust was established by the U.S. District Court for the Eastern District of Pennsylvania to administer all claims and benefit payments to Fen Phen victims who registered as part of the Nationwide Class Action Settlement Agreement with American Home Products Corporation.

Individuals wishing to make claims were required to submit a physician’s report from a cardiologist and the Trust would review the documents to ensure that the claims were legitimate. Tai was one of the cardiologists hired to prepare reports in support of individuals claims.  Tai admitted that in about 10% of his cases, he drafted reports that he knew were incorrect.  When Tai’s reports were audited, a substantial number were not only clearly incorrect, but included measurements which were “inconsistent with a human adult heart.” Slip op. at 6.

Tai was charged with mail and wire fraud in violation of 18 U.S.C. sections 1341 and 1343; he was found guilty on all charges and sentenced to 6 years in prison.  Tai appealed his conviction arguing that, among other things, the jury instruction was “constitutionally infirm because it shifts the burden of proof to the defendant to disprove intent.”

As a threshold matter, because Tai did not raise his objection to the jury instruction at the trial level and thereby failed to preserve it, the Third Circuit employed a “plain error” test, which is a highly deferential standard of review. Under the “plain error” test, criminal defendants have the burden of establishing than any error was “plain” and he must show:  (1) an error; (2) that is plain; (3) that affects substantial rights; and (4) which seriously affects the fairness, integrity, or public reputation of judicial proceedings.Johnson v. United States, 520 U.S. 461, 466-67 (1997).

Regarding the instruction, the Third Circuit observed that a “willful blindness instruction is typically delivered in the context of explaining how the Government may sustain its burden to prove that a defendant acted knowingly in committing a charged offense.”  A jury instruction must track the applicable law, but District Court judges have substantial latitude in the actual wording of the jury instruction.  However, insofar as jury instructions related to the Fifth Amendment’s requirement that the Government prove its case beyond a reasonable doubt on each element of the offense, “a jury instruction violates due process if it fails to place squarely on the Government the full burden of proving beyond a reasonable doubt the required mental state for the offense.”  Slip op. at 10 citing Patterson v. New York, 432 U.S. 197, 204-07 (1977).

In other words, as Tai argued, shifting the burden of proof in a criminal case violates the Fifth Amendment and can often result in a conviction being overturned.  SeeMullaney v. Wilbur, 421 U.S. 684, 703–04 (1975) (due process does not permit shifting the burden of proof to the defendant by the use of conclusive or burden-shifting presumptions); see also Boles Trucking v. United States, 77 F.3d 236, 241 (8th Cir. 1996)(discussing in a civil case that “it is reversible error to place the burden of proof on the wrong party or to place an unwarranted burden of proof on one party.” (internal quotations and citations omitted)). However, because the “willful blindness instruction then explicitly explained that ‘the Government may prove’ this element through evidence that established beyond a reasonable doubt that Tai ‘deliberately closed his eyes to what would otherwise have been obvious to him,’” (slip op. at 11), there was no impermissible burden shifting.  Ultimately, the Third Circuit concluded that the “instructions told the jury when willful blindness does or does not exist, but did not imply in any way that Tai must present evidence concerning his own beliefs or knowledge.” Accordingly, “there was no implicit or explicit shifting of the burden of proof to Tai.” Id.

The Tai case is instructive in criminal tax and Bank Secrecy Act cases to the extent that it addresses the willful blindness jury instructions which often arise in those cases.  Since the mens rea requirement requires that the Government prove that a criminal defendant had the culpable mental state, often the defense strategy will be along the lines of ignorance, negligence, incompetence, or lack of sophistication, but falling short of being criminal. In order to rebut this defense, the Government will typically attempt to introduce evidence that when a defendant “sticks his head in the sand” such deliberate acts – i.e., the willful blindness – cannot be used to escape criminal liability.  This essentially pits the criminal defendant’s subjective belief against the jury’s belief as to what was reasonable under the circumstances.

One other, special point is also worth mentioning. The Government may attempt to argue in “willful blindness” cases that the defendant’s actions were not objectively reasonable and hence the jury can conclude that the defendant intentionally intended to be willfully blind to the facts.  This subjective versus objective tension will often dictate the outcome of the case, but will almost always require a criminal defendant to take the stand in his defense to assert a Cheek defense. In Cheek v. United States, 498 U.S. 192 (1991), the Supreme Court established that a genuine, good faith belief that one is not violating the Federal tax law based on a misunderstanding caused by the complexity of the tax law is a valid defense to a charge of “willfulness,” even though the defendant’s belief is objectively irrational or unreasonable.

More often than not, willful blindness cases boil down to one question:  does the jury believe the defendant?

Your Expectation of Privacy in Your Cell Phone is Currently Governed by the Law of the State in Which You are Arrested

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Last year the Washington State Supreme Court considered two cases addressing the expectation of privacy one has when sending a text message. On February 27, 2014, the Washington State Supreme Court ruled in two parallel 5-4 decisions that text messages are private and that law enforcement agencies must obtain a search warrant prior to reading them. The decisions can be read here and here.

The decisions stem from the arrest of two men in 2009 by Longview police after a third man, Daniel Lee, was arrested for possession of heroin. After his arrest, Police seized Lee’s cell phone and, without consent or a search warrant supported by probable cause, read an incoming text message from Shawn Hilton that read: “Hey whats up dogg can you call me i need to talk to you.” The police detective, pretending to be Lee, replied and arranged a drug deal in a parking lot. When Hilton arrived at the meeting location, police arrested and charged Hilton with attempted possession of heroin.

Police also found old text messages from another man, Jonathan Roden, on Lee’s cell phone. Again, pretending to be Lee, a Longview police detective started a new text message conversation and arranged a drug deal with Roden in a parking lot. When Roden arrived, he was arrested and charged with attempted possession of heroin. Both Hilton and Roden were ultimately convicted.

On appeal, Hilton claimed that the detectives violated his rights under Article I, section 7 of the Washington State Constitution and his Fourth Amendment right against unreasonable searches and seizures. Roden further argued that Washington’s privacy act was violated by his conviction when the police searched the text messages without a warrant. Hilton argued that text messages are the equivalent of letters, which are protected by the Fourth Amendment. In response, the State argued that there is an “inherent risk in a text message” that someone else might read it after the text message is sent. The State continued and exclaimed that privacy ends the moment the letter is delivered””the sender has no control over what happens next. The State further argued that the text messages were in “plain view” of the detective and thus qualified as an exception to Hilton’s Fourth Amendment protections.

The Washington State Supreme Court vacated Hilton’s and Roden’s convictions. Whether individuals have an expectation of privacy in the contents of the text messages under state law was an issue of first impression in Washington. Justice Gonzalez resolved these cases under the Washington State constitution, which provides broader privacy protections than the Fourth Amendment. Specifically, the Washington State Constitution “protects citizens from government intrusion into their private affairs without the authority of law.” Justice Gonzales explained that text messages can enclose the same intimate subjects as phone calls or sealed letters and even though text messages make communication “more vulnerable to invasion, technology advancements do not extinguish privacy interests that Washington citizens are entitled to hold.”

This determination by the Washington State Supreme Court is the latest in a series of rulings that have extended privacy expectations in cell phones and the content stored on them. Courts in Texas, Massachusetts, New Jersey, and Rhode Island, which have been presented with the issue of the right to privacy surrounding technology advancements, have ruled in the same fashion as the Washington State Supreme Court. Moreover, on April 29, 2014, in United States v. Wurie, the Supreme Court of the United States is due to hear arguments about whether police are allowed under the United States Constitution to search a suspect’s cell phone without a warrant while making an arrest or soon thereafter. This is a critical question. Indeed, today’s cell phones have the potential to reveal an unprecedented level of detail about an individual’s “familial, political, professional, religious, and sexual associations” because the cell phone is often carried everywhere, at all times. See United States v. Jones, 132 S. Ct. 945, 955 (2012).

Under current Florida law, during a lawful arrest police are permitted to confiscate and search a suspect’s cell phone. Florida’s Fifth District Court of Appeal held in Florida v. Glasco, 90 So. 3d 905 (Fla. 5th DCA 2012), that a cell phone is the same as a container or piece of property on the suspect, which can be searched incident to a lawful arrest. However, given these recent decisions from other states, Florida judges may reexamine the issue. Like Washington State’s Constitution, the Florida Constitution’s right to privacy provision provides greater protections than the Fourth Amendment. Specifically, Article I, section 23 of the Florida Constitution states in part that “every natural person has the right to be let alone and free from governmental intrusion into the person’s private life except as otherwise provided herein.” The Supreme Court of the United States will soon provide courts a binding answer to whether the Fourth Amendment permits the police, without obtaining a warrant or consent, to search a cell phone found on a person who has been lawfully arrested. But states, like Florida, could always provide greater protections under their respective state laws regardless of the Supreme Court’s decision in United States v. Wurie.

The attorneys at Fuerst Ittleman David & Joseph, PL will continue to monitor developments in this and similar cases. Our attorneys have extensive experience in the areas of tax, tax litigation, administrative law, regulatory compliance, and white collar criminal defense.  If you have any questions, an attorney can be reached by emailing us atcontact@fidjlaw.com or by calling 305.350.5690.

 

Florida Criminal Law Update: Florida Appeals Court Declares Strict Liability Statute Unconstitutional

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On February 16, 2014, Florida’s Fifth District Court of Appeal issued its opinion in Florida v. Thomas, affirming the decision of the Circuit Court of Orange County declaring a portion of Florida’s “Counterfeiting a Payment Instrument” statute unconstitutional as an improper strict liability statute. A copy of the Court’s decision can be read here.

The Thomas case centered around the constitutionality of a portion of Florida Statute 831.28(2)(a) which makes it a crime to merely possess, without intent, a counterfeit payment instrument. Section 831.28(2)(a) states:

It is unlawful to counterfeit a payment instrument with the intent to defraud a financial institution, account holder, or any other person or organization or for a person to have any counterfeit payment instrument in such person’s possession. Any person who violates this subsection commits a felony of the third degree, punishable as provided in s.  775.082, s. 775.083, or s. 775.084.

As the District Court explained, § 831.28(2)(a) consists of two subparts: “the first makes it unlawful for a person to counterfeit a payment instrument with intent to defraud, but the second makes it unlawful for a person simply to possess any counterfeit payment instrument.” It was this second subpart that Thomas challenged as a facially unconstitutional strict liability statute.

On appeal, the State argued that in creating the “possession” portion of the statute, it was the Legislature’s intent to make it unlawful for a person to possess a counterfeit payment instrument with the intent to defraud. However, the District Court found that such an argument was belied by the plain language of the statute. As explained by the District Court, “it may be true that the Legislature meant to include ”˜intent to defraud’ as an element of the possession offense but did not pay close enough attention to the manner in which the statute was drafted.” The District Court noted that the statute as written not only criminalizes possession with intent to defraud but also the innocent possession of a counterfeit payment instrument. Therefore, the District Court found that “[c]riminalizing the mere possession of counterfeit payment instruments criminalizes behavior that is otherwise inherently innocent and thus violates substantive due process.” However, the District Court concluded its opinion by explaining how the Legislature could correct its error: “Simply by drafting the statute to include an intent to defraud, the Legislature can accomplish its purpose without infringing on innocent or protected conduct.”

While the District Court’s decision will not ring the death knell for all strict liability offenses, the decision did reemphasize the limits placed on the Legislature by the Florida Constitution in interfering with the individual rights of Florida residents. As explained, “[w]here the individual rights at issue are not fundamental rights, the test for the constitutionality of a legislative enactment is whether the means selected by the Legislature have a reasonable and substantial relation to the object sought to be attained and shall not be unreasonable, arbitrary, or capricious.” Citing State v. Saiez, 489 So.2d 1125, 1128 (Fla. 1986). In declaring the possession portion of the statute unconstitutional, the District Court found that criminalization of the mere possession of a counterfeit check regardless of intent was an unreasonable “prohibition of innocent acts in order to reach and secure enforcement of law against evil acts.”

Fuerst Ittleman David & Joseph, PL will continue to watch for the latest developments regarding this matter. Our attorneys have extensive experience in the areas of anti-money laundering, constitutional law, regulatory compliance, and white collar criminal defense. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Raminfard Guilty Plea Highlights Complexity Of International Tax Compliance, Seriousness Of Violations, Importance Of Irs Offshore Voluntary Disclosure Program

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Los Angeles Businessman, David Raminfard, pleaded guilty on November 4th, 2013 in the Federal District Court in Los Angeles to conspiring to defraud the United States, the Justice Department and Internal Revenue Service-Criminal Investigation (IRS-CI) announced.

Raminfard, a U.S. citizen, maintained undeclared bank accounts at an international bank headquartered in Tel Aviv, Israel, identified in court documents only as Bank A.  The accounts were held in the names of nominees in order to keep them secret from the U.S. government.  One of the accounts was held in the name of Westrose Limited, a nominee entity formed in the Turks and Caicos Islands.  To further ensure that his undeclared accounts remained secret, Raminfard placed a mail hold on his accounts.  Rather than having his account statements mailed directly to him, Raminfard would receive them from an international accounts manager with Bank A in Israel, who brought them to Los Angeles to review them with Raminfard during meetings at a hotel.

In 2000, Raminfard began secretly using the funds in his undeclared accounts as collateral for back-to-back loans obtained from the Los Angeles branch of Bank A.  A “back-to-back” loan is a two party arrangement in which a bank advances a loan on the basis of a loan advanced by another bank in another country. In this particular case, the “back-to-back loan” was taken out at Bank A’s Los Angeles Branch secured by funds in an account located at Bank A’s Israel Branch (the “pledged account”). The pledged account in Israel was held in a certificate of deposit, and there was usually a 1% to 2% spread between the interest earned on the certificate of deposit and the interest charged on the back-to-back loan.

Raminfard used the loan money to purchase commercial real estate in Los Angeles.  By using back-to-back loans, Raminfard was able to access his funds in Israel without the U.S. Government learning about his undeclared accounts.  These loans also enabled Raminfard to claim the interest paid on the loans as a business expense on his companies’ business tax returns, while not reporting the interest earned in Israel as income on his individual income tax returns filed with the IRS.  For tax years 2005 through 2010, Raminfard failed to report approximately $521,000 in income.  The highest balance in Raminfard’s undeclared accounts was approximately $3 million.

As we have previously explained , and , federal law requires all United States persons with a financial interest in or signature authority over at least one financial account located outside of the United States, the aggregate value of which exceeded $10,000 at any time during the calendar year, to be reported to the U.S. Treasury by filing an FBAR. Failure to disclose these accounts can result in both civil and criminal liabilities. As we have further explained, the IRS has established a voluntary disclosure initiative for taxpayers who want to disclose previously undisclosed accounts and avoid being criminally prosecuted.

Consequently, using the money in an undeclared bank account exposes a person to various forms of liability, and it therefore becomes highly difficult for the U.S. person to access it from within the United States.  Back-to-back loans, then, come into the picture as a vehicle to allow the account holder in the U.S. to access the account without the federal government discovering it. However, as the Raminfard case makes clear, the United States perceives this as tax evasion and will prosecute it as such.

Raminfard is the latest in a series of defendants charged in the U.S. District Court for the Central District of California with conspiring to defraud the United States in connection with using undeclared bank accounts in Israel to obtain back-to-back loans in the United States. He faces a potential maximum prison term of five years and a maximum fine of $250,000.  In addition, he has agreed to pay a civil penalty to the IRS in the amount of 50 percent of the high balance of his undeclared accounts for failing to file FBARs.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of international tax compliance and 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.

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.

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.