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.

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.

Announcing the FIDJ Mini-Blog

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This week, Fuerst Ittleman David & Joseph is launching a Mini Blog, which will be submitted to its readers on a weekly basis. Unlike its usual Blog, which will continue to be updated here, the Mini Blog will allow FIDJ to communicate with its readers in a short and to-the-point style, delivering critical news updates with just enough commentary to explain why the updates are critical. We believe that this Mini Blog will be a valuable resource for our readers, and will allow subscribers to stay up to date on issues affecting all of our practice areas, including Tax & Tax Litigation, Food Drug & Cosmetic Law, Complex Litigation, Customs Import & Trade Law, White Collar Criminal Defense, Anti-Money Laundering, Healthcare Law, and Wealth & Estate Planning. Additionally, subscribers may sign up to receive only the content relevant to their interests on a subject-by-subject basis. As always, please feel free to reach out to us with comments regarding our content or suggestions regarding how we may better keep you up to date.

Click here to sign up.

Here is a sampling of what you can expect to receive in our Mini Blog:

Food and Drug:

On May 28, 2013, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued guidelines for voluntary “serving facts statements” that alcoholic beverage manufacturers may include on their packaging. A copy of TTB’s press release can be read here. The serving facts statements are similar to the nutrition panels currently found on non-alcoholic foods and beverages. According to the rule, serving facts statements will include: 1) the serving size; 2) the number of servings per container; 3) the number of calories; and 4) the number of grams of carbohydrates, protein, and fat preserving. In addition, serving fact statements may also include the percentage of alcohol by volume and a statement of the fluid ounces of pure ethyl alcohol per serving. TTB is providing the interim guidance on the use of voluntary serving facts statements on labels and in advertisements pending the completion of rulemaking on the matter. A copy of the TTB Ruling can be read here.

Healthcare:

A new bill in the U.S. House of Representatives, the Medicare Audit Improvement Act of 2013, seeks to amend title XVIII of the Social Security Act to improve operations of recovery auditors under the Medicare integrity program and to increase transparency and accuracy in audits conducted by contractors. A few proposals include limiting the amount of additional document requests, imposing financial penalties on auditors whose payment denials are overturned on appeal and publishing auditor denials and appeals outcomes.

In related news, the Department of Health and Human Services c/o the Centers for Medicare and Medicaid Services  (“CMS”) is proposing to increase the maximum reward for reporting Medicare fraud from “10 percent of the overpayments recovered in the case or $1,000, whichever is less, to 15 percent of the final amount collected applied to the first $66,000,000”¦” In case you don’t have a calculator handy, that’s a change from $1,000 to a potential maximum windfall of $9,900,000. It’s safe to assume that the number of whistleblower reports of alleged Medicare fraud are going to skyrocket. As the saying goes, you miss 100% of the shots you don’t take.

As decided by the United States Court of Appeals for the Eleventh Circuit, HIPAA preempts Florida’s broad medical records disclosure law pertaining to a decedent’s medical records. In Opis Management Resources, LLC v. Secretary of Florida Agency for Health Care Administration, No. 12-12593 (11th Cir. Apr. l 9, 2013), the 11th Circuit Court of Appeals ruled that Florida’s broad medical records disclosure law did not sufficiently protect the privacy of a decedent’s medical records. The Court noted that Florida allows for “sweeping disclosures, making a deceased resident’s protected health information available to a spouse or other enumerated party upon request, without any need for authorization, for any conceivable reason, and without regard to the authority of the individual making the request to act in a deceased resident’s stead.” In contrast, HIPAA only permits the disclosure of a decedent’s protected health information to a “personal representative” or other identified persons “who were involved in the individual’s care or payment for health care prior to the individual’s death” to the extent the disclosed information is “relevant to such person’s involvement”.

Tax:

On May 29, 2013, the New York Times reported that the Swiss Government will allow Swiss Banks to provide information to the U.S. Government in exchange for assurances that Swiss banks would only be subject to fines and not be indicted in an American criminal case. Per the New York Times,

The New York Times article reports that: But [Ms. Widemer-Schlumpf (Switzerland’s finance minister)] said the Swiss government would not make any payments as part of the agreement. Sources briefed on the matter say the total fines could eventually total $7 billion to $10 billion, and that to ease any financial pressure on the banks, the Swiss government might advance the sums and then seek reimbursement”¦. Ms. Widmer-Schlumpf said the government would work with Parliament to quickly pass a new law that would allow Swiss banks to accept the terms of the United States offer, but said the onus would be on individual banks to decide whether to participate.

This appears to be the beginning of the end of Swiss bank secrecy. If the Swiss relent to the U.S., the European Union will be next in line to obtain the same concession.

Anti-Money Laundering:

Our thoughts on the United States government’s attack on Mt. Gox can be read here, and Bitcoin continues to remain a hot topic all across the internet; see here, here, and here. Another virtual currency, Liberty Reserve, has also made a splash since being shut down by the Feds last week in what many have described as the largest money laundering scheme of all time; see here for details of the takedown, as well as the following articles describing the initial bits of fallout from the Liberty Reserve takedown: online anonymity, anti-money laundering compliance,Barclays Bank involvement, and the not guilty pleas entered by Liberty Reserve’s proprietors on Thursday. We will keep our eyes on these two cases as the fallout continues.

International Tax Compliance Update: Florida Couple Indicted for Failing to Report Offshore Bank Accounts as IRS Continues Enforcement Against Offshore Tax Evasion and FBAR Violations

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In line with our recent coverage of the Internal Revenue Service’s initiatives to pursue illegal offshore tax havens, on May 16, 2013 a Florida couple – Drs. David Leon Fredrick and Patricia Lynn Hough – was indicted by a federal grand jury in Fort Myers, FL for conspiring to defraud the IRS. A U.S. Department of Justice press release on the indictment can be found here. Our recent coverage of the IRS’s recent efforts to pursue offshore tax evasion, including IRS’s John Doe Summons to Wells Fargo seeking information about the First Caribbean International Bank, may be reviewed here, here, here, and here.

According to the Department of Justice, the couple, both of whom work as physicians in the Sarasota area, conspired with a Swiss citizen currently under indictment in the Southern District of New York, and a banker from the United Bank of Switzerland (“UBS”) to defraud the IRS. The indictment goes on to describe that the couple used nominee entities and undeclared bank accounts in their names and the names of the nominee entities at several foreign banks, including UBS, for the purposes of illegal tax evasion. It is further alleged that the couples’ assets and income, including proceeds from real estate sales for more than $33 million, were deposited into undeclared foreign bank accounts. The Department of Justice claims the couple instructed Swiss bankers via email, telephone, and in-person meetings to make investments and funds transfers to undeclared accounts at UBS. Those undeclared funds were then allegedly used to purchase an airplane, several homes in North Carolina, a Florida condominium, and funds transfers of over $1 million to relatives.

The couple was additionally charged with falsifying tax returns between 2005 and 2008 by substantially underestimating their income and failing to report their foreign accounts. A trial date has yet to be set, but the charges carry the possibility of imprisonment for up to five years for the conspiracy charges and three years for each false tax return filing. The charges also carry penalties of $250,000 for each count.

This indictment offers a real world example of the severe consequences that U.S. taxpayers can face for the non-disclosure of foreign accounts to the IRS. Individuals who believe that they may be in violation of foreign account disclosure requirements under United States tax law should take a moment to read our discussion regarding the mitigation of possible criminal culpability, penalties, and fines under the IRS’s Offshore Voluntary Disclosure Program (“ODVP”) which can be found in Part II of our discussion of the IRS’s initiatives to curb offshore tax evasion in the Caribbean.

Furthermore, as noted in the Department of Justice’s press release, U.S. citizens, resident aliens, and legal permanent residents alike should be aware of their obligations to report their financial interest in, or signatory authority over, a foreign account in a particular year on Schedule B of the U.S. Individual Tax Return, Form 1040, when filing their tax returns.

This issue is a critical one for U.S. taxpayers holding foreign accounts, as well as the professionals advising them. The IRS is continuing to ensure that offshore tax evasion is eradicated and, based on recent history, it appears to have no intentions of leaving any stone unturned.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and have availed themselves of the IRS’s voluntary disclosure program. We also have considerable experience litigating against the Department of Justice and the IRS in civil and criminal tax matters. We will continue to monitor the development of this issue, and we will update this blog with relevant information as this issue continues to develop. You can reach an attorney by calling us at 305-350-5690 or emailing us at contact@fidjlaw.com.

Update: Banking Difficulties May Lead Marijuana Dispensaries to Commit Bank Fraud

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As we have previously reported, despite the growing number of States that have sanctioned the use of marijuana in various forms, the federal government has continued its efforts to crack down on dispensaries. (Our recent articles discussing these efforts can be read here, here, and here.). In addition to criminal prosecution for drug trafficking, state sanctioned dispensaries face additional legal barriers which make operating difficult. As we previously reported, one such barrier is the inability of marijuana dispensaries to deduct business expenses. An additional barrier dispensaries face is finding banks, credit card companies, and payment processors to process the proceeds of marijuana sales.

The Colorado Task Force Report on the Implementation of Amendment 64 (which legalized marijuana use) summarized the problems associated with banking marijuana dispensaries as follows:

Financial institutions that are federally licensed or insured are required to comply with federal regulations. Since marijuana is a controlled substance under federal law, banks must either refuse to hold accounts for legal marijuana businesses…or risk prosecution.

The Task Force’s report can be read here.

As a result of marijuana remaining a Class I substance under the Federal Controlled Substances Act, banks face increased anti-money laundering (“AML”) risks when seeking to bank even those dispensaries which are fully compliant with state law. Pursuant to the Bank Secrecy Act, 31 U.S.C. §§ 5311-5330, as part of a bank’s anti-money laundering program, banks are required to create certain reports and records in order to combat fraud, money laundering, and protect against criminal and terrorist activity. More specifically, 12 C.F.R. § 21.11 requires national banks to file Suspicious Activity Reports (“SAR”) when the bank knows, suspects, or has reason to suspect that a transaction involves funds from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities as part of a plan to violate or evade any law or regulation or to avoid any transaction reporting requirement under Federal law. (More information on bank AML requirements under the BSA can be found on the Office of the Comptroller of the Currency’s website.)

Because the sale of marijuana remains prohibited under federal law, banks are placed in a position where they would be required to report any banking transactions involving proceeds from marijuana dispensaries. Moreover, banks face the realistic possibility of federal criminal penalties for assisting in money laundering should they knowingly accept and process funds from dispensaries. As a result of these risks and possible penalties, banks have simply refused to allow marijuana dispensaries to maintain accounts or conduct business with them.

Banks’ refusal to allow dispensaries to maintain accounts has made it extremely difficult for dispensaries to operate. As a result, many legal marijuana businesses have resorted to all cash operations. With the bank prohibition in place, dispensaries are looking for “creative” ways to engage in banking including: 1) establishing shell companies to disguise marijuana proceeds; 2) funneling marijuana derived profits into accounts of other legitimate businesses; and 3) placing marijuana derived profits into bank accounts of family members or personal accounts.

These alternative banking methods were the subject of a recent Bloomberg article, entitled “Pot Shops Can’t Take American Express or Deposit in Banks.” In the article, Bloomberg quotes Dale Gieringer, director of the California office of the National Organization for the Reform of Marijuana Laws, as saying “[a]s long as the bank doesn’t find out, you should be safe.” A copy of Bloomberg’s article can be read here. Despite Mr. Gieringer’s contentions, each of these methods could expose dispensary owners to criminal and civil liability.

Unfortunately, Bloomberg’s article never mentions the potential criminal and civil liabilities faced by dispensary owners should they use any of the above-referenced methods to open bank accounts. Generally speaking, the use of shell companies or other accounts to mask the profits derived from the sale of marijuana could subject the owner of a dispensary to a wide variety of federal criminal penalties, including bank fraud 18 U.S.C. § 1344, wire fraud 18 U.S.C. § 1343, and money laundering 18 U.S.C. § 1956. Additionally, those who assist in such actions, for example the friend or family member who allowed for money to be transferred through his or her account, would also face similar criminal charges. Moreover, should such fraud occur, the payment processors and banks who process this money can still be held liable for money laundering and face criminal and civil fines and penalties. Each of these penalties is available regardless of whether marijuana is legal under State law. Put simply, if a company lies for the purpose of opening a bank account, the consequences are severe.

The online poker industry has already experienced just how severe the consequences can be. There, several online poker companies, such as Full Tilt Poker and PokerStars, established shell companies in order to facilitate payment of gambling winnings to their members. The companies used third party payment processors to disguise financial transactions between the companies and U.S. players so that the transactions would appear to be unrelated to online gambling. The third party payment processors would then lie to U.S. financial institutions about the source of the funds, often facilitated by the creation of nonexistent online companies and phony websites. The ultimate conclusion of that case resulted in $731 million in civil monetary penalties as well as criminal convictions for executives of the payment processing companies that facilitated the fraud. (A full recount of the online poker saga can be read in our previous reports here, here, here, here, and here).

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, constitutional law, regulatory compliance, 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.

Queen Shoals Ponzi Scheme Defendant Pleads Guilty

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A United States District Court Judge for the Western District of North Carolina sentenced Gary D. Martin, of St. Augustine, Florida, to a 10-year prison sentence for his participation in a 30 million dollar commodities and foreign exchange Ponzi scheme. As reported, Martin pled guilty in February 2012 to one count of money laundering conspiracy, and was sentenced this week to the statutory maximum 10-year prison term. Along with his prison sentence, he was also ordered to pay $28.5 million in restitution to scheme victims.

According to court documents, Martin, through Queen Shoals Consultants, LLC and the Queen Shoals web site and other means, also made false claims about Queen Shoal’s financial expertise in “Self-Directed IRA Strategies and Fixed Rate Accounts.” Martin held Queen Shoals out as “leaders in Professional Private Placement Retirement Planning” and falsely claimed that Queen Shoals had a “proven method of diversification [that] spreads the risk nicely for a balanced portfolio,” when, in fact, Queen Shoals offered no such diversification and funneled victim funds solely into the scheme.

Martin and his wife, Brenda, acted as so-called “consultants” who, after forming Queen Shoals Consultants, LLC solicited potential investors by telling them that Queen Shoals Consultants had over 20 years of experience in financial services, and that Martin had vast experience dealing with commodities and foreign currencies. Investors were promised annual returns ranging from eight to twenty-four percent, along with an additional 1% to investors who rolled over their IRA balances.

Through Queen Shoals Consultants, the Martins raised over $20 million from investors through in-person solicitations, written materials, and a website. All funds raised by the Martins were then turned over to Sidney Hanson (the operator of the Ponzi scheme), who paid the Martins at least $1.44 million in undisclosed referral fees.

However, Queen Shoals was far from a legitimate operation. Instead, Hanson masterminded an elaborate Ponzi scheme that incurred massive losses in the minimal forex trading that actually did occur. The remainder of the funds taken in from investors were used to pay quarterly interest payments to existing investors, referral fees to so-called “consultants”, and to sustain Hanson’s lavish lifestyle.

Martin and his wife previously agreed to settle (see here and here) an action brought by the U.S. Commodity Futures Trading Commission by agreeing to permanent bans from the commodities trading industry, as well as agreeing to make full restitution to defrauded investors. Completing the pile-on, the SEC also brought an action, see here.

Between Hanson and the Martins, over $9 million has been paid into the Court registry for eventual distribution to victims.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience litigating against the federal government in both civil and criminal matters involving highly regulated industries. You can reach at attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

US Court Orders Wegelin to Pay a Total Penalty of $74 Million

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As has been widely reported, the United States District Court for the Southern District of New York sentenced Wegelin & Co, the oldest Swiss private bank, to pay an additional $58 million after it admitted to helping wealthy Americans evade taxes. The press release issued by the U.S. Attorney’s Office for the Southern District of New York is available here. Our prior report on the Wegelin indictment is available here and our prior report on the Wegelin guilty plea is available here.

As noted in the press release

Together with the April 2012 forfeiture of more than $16.2 million from WEGELIN’s U.S. correspondent bank account, this amounts to a total recovery to the United States of approximately $74 million. WEGELIN pled guilty in January 2013 to one count of conspiracy to defraud the IRS, file false federal income tax returns, and evade federal income taxes before U.S. District Judge Jed S. Rakoff, who also imposed today’s sentence. This case represents the first time that a foreign bank has been indicted for facilitating tax evasion by U.S. taxpayers and the first guilty plea and sentencing of such a bank.

Manhattan U.S. Attorney Preet Bharara said: “Wegelin has now paid a steep price for aiding and abetting tax fraud that should be heeded by other banks, bankers, and advisers who engage in the same conduct. U.S. taxpayers with undeclared accounts – wherever those accounts may be – should know that their bank may be next, and they should pay what they owe the IRS before we come find them.”

Wegelin, which had $25 billion in assets at the end of 2010, said at the time of its guilty plea in January said it would close.

Reuters described the March 4 hearing as follows:

During Monday’s hearing, [District Court Judge] Rakoff followed prosecutors’ recommendations and imposed a $22.05 million fine and ordered $20 million in restitution. He also entered an order finalizing $15.82 million in forfeitures, which he preliminarily approved at the time of the guilty plea.

But while Rakoff approved the plea deal, he said there was a “funny tension” between the U.S. Justice Department’s decision not to seek the maximum $40 million fine and its assertion Wegelin acted with “extreme willfulness.”

Rakoff said even including the $16.3 million the government recovered in April 2012 by seizing money in Wegelin’s U.S. correspondent account, the bank will be giving up just 12 percent of the 560 million Swiss francs ($613 million) it earned after it sold most of its assets to regional Swiss bank Raiffeisen last year.

“Not much pain there, is there?” Rakoff said.

Rakoff, who has previously rejected U.S. Securities and Exchange Commission settlements with Citigroup Inc and Bank of America Corp, ultimately accepted the proposal, which prosecutor Daniel Levy called “very substantial.”

What does the prosecution mean for U.S. taxpayers? While it remains to be seen, it appears that the U.S. Government’s attempt to increase the pressure on U.S. taxpayers and foreign banks that have assisted U.S. taxpayers with skirting their reporting obligations has not slowed at all. In fact, it appears to be increasing. The result is that U.S. taxpayers who still are attempting to hide their assets out of the country to avoid U.S. taxation may be losing their window of opportunity to make amends and pay civil penalties and avoid criminal prosecutions.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in navigating the world of offshore bank accounts and the reporting requirements of U.S. taxpayers with the IRS. One can contact an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Senate Committee on Banking Holds Hearing on Lax Enforcement of the Bank Secrecy Act

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As recently reported, the Senate Committee on Banking, Housing and Urban Affairs (information here), on March 7, 2013, held a hearing on “Patterns of Abuse: Assessing Bank Secrecy Act Compliance and Enforcement”, see here. The committee, led by Senator Tim Johnson of South Dakota, and Ranking Member Mike Crapo of Idaho, directedquestions to David S. Cohen, the U.S. Treasury Department’s Undersecretary for Terrorism and Financial Intelligence, Thomas J. Curry, Comptroller of the Comptroller of the Currency, and Jerome H. Powell, a Federal Reserve governor. Mr. Cohen’s testimony is available here, Mr. Curry’s testimony is available here, and Mr. Powell’s testimony is available here.

The Senators asked numerous questions regarding why international banks appear to be too large to prosecute and why no individuals at the large international banks have been prosecuted. Senator Mark Warner

of Virginia commented, “I do not… believe that it can be the position of the United States government that any institution should be too large to prosecute.”

With respect to HSBC, Senator Elizabeth Warren noted that “HSBC paid a fine, but no individual went to trial, no individual was banned from banking, and there was no hearing to consider shutting down HSBC’s activities here in the United States.”  HSBC avoided criminal prosecution in its deferred prosecution agreement with the Justice Department and paid a penalty of $1.92 billion.  Warren went on to state: “But evidently, if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fine and you go home and sleep in your own bed at night,” she added. “I think that’s fundamentally wrong.” (Rolling Stone’s rhetorical coverage of the HSBC case, which is representative of the coverage this story has received since being made public, is available here.)

Recently, Attorney General Eric Holder testified that some large banks are too large to prosecute, see here and here. In December, Senator Jeff Merkley was one of three Senators who wrote to Attorney General Eric Holder asking about the lax enforcement of financial institutions, specifically HSBC, and the widespread use of deferred prosecution agreements with them.  The recent activity on Capitol Hill suggests that after years of lax enforcement of international banks the U.S. Department of Justice, with overwhelming pressure from Congress, may be forced to increase scrutiny, which may result in criminal prosecutions for institutional and/or individual violations of the Bank Secrecy Act.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive civil and criminal experience litigating against the U.S. Government and defending targets of both civil and criminal investigations by the U.S. Department of Justice, the various Agencies of the U.S. Government, and the State of Florida.  You can contact an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Ernst & Young to Pay $123 Million to Resolve Federal Tax Shelter Fraud Investigation

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Ernst & Young has entered a non-prosecution agreement admitting “wrongful conduct by certain E&Y partners and employees in connection with the firm’s participation, from 1999 to 2004, in four tax shelters that were used by approximately 200 E&Y clients in an effort to defer, reduce, or eliminate tax liabilities of more than $2 billion.” The press release from the U.S. Attorney’s Office for the Southern District of New York (which includes Manhattan), is available here. As part of its agreement with the United States, E&Y agreed to pay $123 million to the United States and acknowledged a detailed Statement of Facts in which it admitted the wrongful conduct of certain partners and employees. E&Y also agreed to certain permanent restrictions and controls on its tax practice, including a prohibition against planning, promoting or recommending any “listed transaction.”

Generally, the term “prohibited tax shelter transaction” means listed transactions, transactions with contractual protection, or confidential transactions. When a taxpayer participates in a listed transaction he/she/it must file Form 8886, available here, with the IRS. Treasury Regulations also require taxpayers to disclose listed transactions on their tax returns. The applicable Treasury Regulation is 26 C.F.R section 1.6011-4, available here.

The non-prosecution agreement also requires E&Y’s continued cooperation with the Government’s investigation. In exchange, the United States agreed not to criminally prosecute E&Y for its participation in the tax shelter scheme. The agreement applies only to E&Y and not to any individuals. E&Y has cooperated with the Government’s investigation into these tax shelters since approximately 2003. In the event that the firm violates the NPA, the U.S. Attorney’s Office may prosecute E&Y.

E&Y admitted to the following facts:

Beginning in 1999 and ending in 2002, E&Y, in conjunction with various law firms, banks, and investment advisers, developed, marketed and implemented four tax shelter products called COBRA, CDS, CDS Add-On, and PICO. E&Y implemented these four tax shelter products for approximately 200 high net worth clients in an effort to defer, reduce, or eliminate $2 billion in aggregate tax liabilities. E&Y prepared tax returns reflecting tax losses claimed to have been derived from those tax shelter products and subsequently defended certain of its clients in connection with audits of those transactions by the IRS.

A small group within E&Y known as the Strategic Individual Solutions Group (“SISG”) was primarily responsible for supervising and coordinating the marketing, implementation and defense of E&Y’s tax shelter products. Certain SISG tax shelter products were designed to appear to the IRS to be substantive investments that had favorable tax consequences when, in reality, the products were actually designed and marketed to clients as a series of preplanned steps that would defer, reduce or eliminate their tax liabilities. The typical client participating in these shelters was primarily, if not exclusively, motivated to achieve a desired tax savings.

In order to deceive the IRS as to the true nature of the tax strategies, and to bolster arguments that the transactions had economic substance, some SISG personnel agreed upon and directed other E&Y employees to participate in a concerted effort not to create, disseminate, or publicize documents reflecting the tax motivation behind the strategies, or the preplanned sequence of steps necessary to effect the strategies. These SISG personnel thereby sought to prevent the IRS from detecting their clients’ purposes in employing these strategies. For example, in certain instances, members of SISG falsely portrayed the transactions under examination as purely investment-driven transactions, and falsely denied a tax motivation for the transactions in response to IRS Information Document Requests and in testimony to the IRS.

Further, in implementing the sale of tax shelter products, certain members of SISG also prepared documents or correspondence that falsely and inaccurately reflected events or conversations, and that were designed to improperly influence the IRS’s view of the merits of the transactions in the event of an audit. These activities continued into 2003 and 2004.

The Ernst & Young case demonstrates that the U.S. Department of Justice together with the IRS will continue to attack tax shelters from every possible angle, including the taxpayers themselves and the professionals designing and promoting the tax shelters. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience litigating against the IRS and the U.S. Department of Justice in the U.S. Tax Court, the U.S. Court of Federal Claims, the various U.S. District Courts and Courts of Appeals in both civil and criminal tax cases. You can contact us by emailing us at: contact@fidjlaw.com or by telephone at 305.350.5690.