Seventh Circuit: FBAR Forms Governed by Required Records Doctrine, Not Protected by Fifth Amendment

On August 27, 2012, the United States Court of Appeals for the Seventh Circuit decided In Re: Special February 2011-1 Grand Jury Subpoena Dated September 12, 2011, available here, holding that the “Required Records Doctrine” requires a taxpayer asserting a Fifth Amendment privilege over documents which the taxpayer is required to maintain pursuant to the Bank Secrecy Act to produce the documents.

In its decision, the Seventh Circuit’s wrote as follows: “In this appeal, we are asked to decide whether compulsory production of foreign bank account records required to be maintained under the Bank Secrecy Act would violate appellee T.W.’s Fifth Amendment privilege against self-incrimination. Because we find the Required Records Doctrine applicable to this case, we hold that T.W. must produce the subpoenaed records.” The Seventh Circuit’s holding is consistent with the Ninth Circuit’s holding in M.H. v. United States (In re Grand Jury Investigation M.H.), 648 F.3d 1067 (9th Cir. 2011), available here.

As discussed by the Seventh Circuit, the Required Records Doctrine can be traced to Shapiro v. United States, 335 U.S. 1 (1948), available here. In Shapiro, a fruit wholesaler invoked his Fifth Amendment privilege in response to an administrative subpoena that sought business records which were required to be maintained under the Emergency Price Control Act (EPCA), which was passed immediately following the outbreak of World War II to prevent inflation and price gouging.  The Court revisited its decision in Shapiro twenty years later in Marchetti and Grosso v. United States, 390 U.S. 62 (1968), available here.

In holding that the Required Records Doctrine was inapplicable to the circumstances before it in both Shapiro and Grosso, the Court articulated the following three requirements for determining the applicability of the Required Records Doctrine: (1) the purposes of the government inquiry must be essentially regulatory; (2) information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept; and (3) the records themselves must have assumed public aspects which render them at least analogous to a public document. Grosso, 390 U.S. at 67-68. When the requirements of the Required Records Doctrine are met, a witness cannot resist a subpoena by invoking the Fifth Amendment privilege against compelled, testimonial self-incrimination.

That the act of producing documents may be testimonial and incriminating is not a phenomenon unique to this case. The act of production privilege recognizes that, while the contents of the documents may not be privileged, the act of producing them may be. See, e.g., Fisher v. United States, 425 U.S. 391 (1976); United States v. Doe (Doe I), 465 U.S. 605 (1984); Braswell v. United States, 487 U.S. 99 (1988); Doe v. United States (Doe II), 487 U.S. 201 (1988). In other words, producing incriminating documents under government compulsion may have testimonial aspects”aside from the contents of the documents”that are protected under the Fifth Amendment.

One of the rationales, if not the main rationale, behind the Required Records Doctrine is that the government or a regulatory agency should have the means, over an assertion of the Fifth Amendment Privilege, to inspect the records it requires an individual to keep as a condition of voluntarily participating in that regulated activity.  That goal would be easily frustrated if the Required Records Doctrine were inapplicable whenever the act of production privilege was invoked.

The Seventh Circuit remarked that:
Recently, in a case nearly identical to this one, the Ninth Circuit held that records required under the Bank Secrecy Act fell within the Required Record Doctrine. In re M.H., 648 F.3d 1067 (9th Cir. 2011) cert. denied, No. 11- 1026, (U.S. June 25, 2012). In the Ninth Circuit’s case, the court held that the witness could not resist a subpoena”identical to the one in this case”on Fifth Amendment grounds because the records demanded met the three requirements of the Required Records Doctrine. Id. We need not repeat the Ninth Circuit’s thorough analysis, determining that records under the Bank Secrecy Act fall within the exception. It is enough that we find”and we do” that all three requirements of the Required Records Doctrine are met in this case.

The takeaway from this case is that the IRS and the Department of Justice will continue to assert that there are no viable 5th Amendment protections to taxpayers producing evidence of their foreign bank accounts.  However, as only the Ninth and the Seventh Circuits have ruled on this issue it remains to be seen whether the other Circuits will follow.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in both the civil tax and the criminal tax litigation before the U.S. District Courts and the U.S. Circuit Courts of Appeal.  You may contact us by calling 305.3560.5690 or by emailing us at contact@fidjlaw.com

Update: Eastern District of New York Judge Finds Poker to be Game of Skill Not Chance Under Illegal Gambling Business Act

On August 21, 2012, Judge Jack Weinstein of the United States District Court for the Eastern District of New York dismissed the indictment against Lawrence Dicristina under 18 U.S.C. § 1955, the Illegal Gambling Business Act (“IGBA”) for Mr. Dicristina’s operation of a poker room. Judge Weinstein found that poker does not fall under the definition of gambling, as that term is defined under IGBA because poker is a game of skill as opposed to chance. In so holding, the Court’s opinion may mark a sea change in the ability of federal prosecutors to prosecute online pay-for-play poker operators and the payment processors who transmit funds between those sites and their customers. A copy of the Court’s opinion can be read here. 

As we have previously reported here, here and here, ongoing federal prosecutions have targeted internet pay-for-play poker operators and their payment processors for violations of federal law under IGBA, the Unlawful Internet Gambling Enforcement Act of 2006 “UIGEA” 31 U.S.C. §§ 5361-5366 and various other violations of federal law including wire fraud and money laundering. Under IGBA, it is a felony for anyone to conduct, finance, manage, supervise, direct, or own a gambling business which is prohibited by the State in which the business is operating. IGBA defines “gambling” as: “includ[ing] but is not limited to pool-selling, bookmaking, maintaining slot machines, roulette wheels or dice tables, and conducting lotteries, policy, bolita or numbers games, or selling chances therein.”

The heart of Dicristina’s argument turned on the basic premise that merely because something is defined as “gambling” at the state level does not automatically make it “gambling” for purposes of federal prosecution under IGBA. In his Motion to Dismiss, Dicristina argued that IGBA was not designed to regulated poker because: 1) a business must involve games sufficiently similar to the games enumerated in the federal definition in order to be prosecuted as a “gambling business” under the IGBA; and 2) a game run by a “gambling business” must be both: a) house-banked, and b) predominated by chance. In its opposition, the Government argued that the statute’s plain language does not restrict what kinds of games constitute gambling under IGBA. The Government further argued that when the statute’s broad language is read in the context of its purposes of bolstering state efforts at reducing organized criminal gambling activity, any gambling activity that is illegal under state law should be considered gambling under IGBA.

In its decision, the Court noted that, based on the text and legislative history of IGBA, both Dicristina’s argument, that “gambling” under IGBA is restricted to those games predominated by chance, and that of the government’s, that “gambling” under IGBA is co-extensive with how gambling is defined in the state in which the business operates, were plausible. Therefore, the Court found that the rule of lenity placed the burden on the government to prove that its position was the correct interpretation of IGBA. As explained by the United States Supreme Court in United States v. Santos, when interpreting ambiguous criminal statutes, “[t]he rule of lenity requires ambiguous criminal laws to be interpreted in favor of the defendants subjected to them. This venerable rule not only vindicates the fundamental principle that no citizen should be held accountable for a violation of a statute whose commands are uncertain, or subjected to punishment that is not clearly prescribed. It also places the weight of inertia upon the party that can best induce Congress to speak more clearly and keeps courts from making criminal law in Congress’s stead.”

In evaluating skill versus chance, the Court stated that “chance (as compared to skill) has traditionally been thought to be a defining element of gambling and is included in dictionary, common law, and other federal statutory definitions of it.” The Court found that the fundamental question in determining whether poker was a game of chance or skill “is not whether some chance or skill is involved in poker, but what element predominates.” (emphasis in original). In finding that skill, not chance, predominates poker, the Court noted that poker involved more than the luck of the draw. Instead “expert poker players draw on an array of talents, including facility with numbers, knowledge of human psychology, and powers of observation and deception.” Thus, the Court found that the Government failed to show that it is more likely than not that chance predominates over skill in poker and therefore poker is not considered “gambling” under IGBA.

While this decision may have removed an arrow from the quiver of federal prosecutors in their efforts to prohibit pay-for-play poker, the Court expressly noted that prosecution at the federal level for organized criminal poker operations could still be prosecuted under other federal statutes, such as RICO, and states were free to prohibit poker site operations within their own jurisdictions.

Fuerst Ittleman will continue to monitor these developments. If you have questions pertaining to IGBA, UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about Fuerst Ittleman’s experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com.

Sixth Circuit Court of Appeals Vacates Sentence for Violating Constitution’s Ex Post Facto Clause

On August 2, 2012, the United States Court of Appeals for the Sixth Circuit vacated a criminal defendant’s sentence, because it violated the ex post facto clause of the U.S. Constitution.  The case was United States of America v. Welch,  ___ F.3d ___, (6th Cir. Aug. 2, 2012), available here.

The facts of the case are fairly straightforward.  The defendant in the case, Welch, was charged with counterfeiting after bleaching genuine, small denomination federal reserve notes and then using the bleached notes to print notes bearing higher denominations.  Welch was arraigned on March 30, 2010, in federal court on the counterfeiting charges. He pleaded guilty without a plea agreement to four violations of counterfeiting, including one count of conspiracy to manufacture and pass counterfeit obligations or securities with intent to defraud the United States in violation of 18 U.S.C. § 371, available here, and three counts of falsely making, forging, counterfeiting or altering, as well as passing, obligations or securities of the United States with intent to defraud in violation of 18 U.S.C. §§ 471, available here, and 472, available here.

Following his guilty plea, Welch was sentenced in the United States District Court for the Northern District of Ohio on August 5, 2010, to concurrent 42-month sentences on each of the four counts.

The question on appeal was whether the district court erred in using the United States Sentencing Guideline ("U.S.S.G.") § 2B5.1 (pre-2009), instead of U.S.S.G. § 2B1.1, available here, to calculate Welchs offense level. Generally, courts use the Guidelines in effect at the time of sentencing, which in this case (August 2010) would be the 2009 version of the Guidelines Manual. 

However, the Guideline language before November 1, 2009 raised a problem. Application Note 3 to § 2B5.1 expressly excluded altered genuine notes, which was what Welch used in his counterfeiting scheme, from the purview of § 2B5.1. The application note provided in pertinent part as follows:

3. Inapplicability to Genuine but Fraudulently Altered Instruments. “Counterfeit,” as used in this section, means an instrument that purports to be genuine but is not, because it has been falsely made or manufactured in its entirety. Offenses involving genuine instruments that have been altered are covered under § 2B1.1 (Theft, Property Destruction, and Fraud). 

In response to the confusion as to whether § 2B1.1 or § 2B5.1 applied to altered genuine currency, the Sentencing Commission issued Amendment 731, which amended § 2B5.1 to expressly include alterations of currency by bleaching within its purview.  Amendment 731, which became effective on November 1, 2009, provides in pertinent part: 

Section 2B5.1(b)(2)(B) is amended by inserting “(ii) genuine United States currency paper from which the ink or other distinctive counterfeit deterrent has been completely or partially removed;” after “papers”; and by striking “or (ii)” and inserting “Or (iii)”.

Based on these inconsistent guideline provisions, Welch argued at sentencing that because he “altered” federal reserve notes and did not “manufacture” them in their entirety, § 2B1.1 should apply under the plain language of Application Note 3 to § 2B5.1, as it existed at the time he committed the offense.  Welch further argued that using the 2009 version of § 2B5.1, which took effect between the time of his offense conduct and his sentencing, violates the Ex Post Facto Clause of the United States Constitution, available

here, because it was not in effect at the time of his offense and it subjectedhim to a significantly higher penalty.

Relying on Miller v. Florida, 482 U.S. 423 (1987) available here, the Sixth Circuit agreed. In Miller, the Supreme Court unanimously concluded that a revision in Floridas sentencing guidelines that went into effect between the date of the defendants offense and the date of his conviction violated the Ex Post Facto Clause of the U.S. Constitution. The Courts conclusion that the new guideline was more onerous than the prior law rested entirely on an objective appraisal of the impact of the change on the length of the defendants presumptive sentence. 482 U.S. at 431 (“Looking only at the change in primary offense points, the revised guidelines law clearly disadvantages petitioner and similarly situated defendants.”).

In this case, because the difference between the sentence (as a result of the change in the Guidelines) was 37-46 months versus 21-27 months, the Sixth Circuit concluded that the Ex Post Facto Clause had been violated, vacated the sentence and remanded for resentencing.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in both Federal and State Courts at the trial and appellate levels handling a variety of white-collar criminal cases. You can reach at attorney to discuss your case by calling us at 305.350.5690 or by emailing us at:  contact@fidjlaw.com.

Federal Appeals Court Affirms Collateral Consequences of Park Doctrine

On July 27, 2012, the United States Court of Appeals for the D.C. Circuit in Freidman v. Sebelius upheld the U.S. Department of Health and Human Services (“HHS“) determination to exclude three former Purdue Pharma executives from participating in federal healthcare programs after they pled guilty to misdemeanor misbranding violations under the Federal Food, Drug, and Cosmetic Act (“FDCA”) based on the Park Doctrine. The Freidman case is an example of the potential collateral consequences of Park Doctrine prosecutions.

The Park Doctrine, also known as the “Responsible Corporate Officer Doctrine” (“RCO”), allows corporate officials to be convicted of misdemeanors based entirely on his or her position and responsibility in a corporation. Notably, the Governments burden to support a misdemeanor conviction under Park is relatively low. The Government must only show that the violation occurred and that the alleged person to be the responsible corporate official occupied a position of responsibility where the official could have prevented or corrected the violation. There is no requirement that a person had any criminal intent or acted personally in any wrongdoing, or for that matter, was even aware of a violation. We have previously blogged about the recent use of the Park Doctrine by the U.S. Food and Drug Administration (“FDA“), here and here.

Background

As we previously reported, in 2007, Purdue Pharma L.P. and Purdue Frederick Company, Inc. (hereinafter “Purdue”) pled guilty to one felony count of misbranding in violation of 21 U.S.C. § 331(a) for knowingly and intentionally marketing OxyContin, a schedule II controlled substance, as less addictive, and less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medications. Additionally, three Purdue executives pled guilty to one count of misdemeanor misbranding in violation of 21 U.S.C. § 331(a) and for their admitted failure to prevent Purdues fraudulent marketing of OxyContin under the Park Doctrine. At sentencing, the three executives were sentenced to probation and disgorged millions of dollars of income.

However, soon after the executives entered their guilty pleas, HHS excluded them from any participation in federal health care programs for 12 years because their convictions were based on fraud and the unlawful manufacture of a controlled substance. As a consequence of this exclusion, the corporate officers will be unable to engage any in business which participates in federal health care programs such as Medicare and Medicaid. HHSs decision was upheld by the U.S. District Court for the District of Columbia.

Appeals Court Decision

On appeal to the United States District Court of Appeals for the D.C. Circuit, the executives argued that (1) their misdemeanor misbranding convictions did not rise to the level of "relating to fraud" as to warrant the penalty of exclusion under 42 U.S.C. § 1320a-7(b)(1), and (2) the length of their exclusions was not supported by substantial evidence and thus was arbitrary and capricious.

In its decision, available here, the Court of Appeals held that HHS has the authority to exclude individuals convicted of a misdemeanor if the conduct underlying the conviction is related to fraud, even if the individual is an executive that had no knowledge of the underlying fraudulent conduct based on the Park Doctrine. However, the Court of Appeals also found that the 12 year exclusion of the Purdue executives was arbitrary and capricious because HHS failed to justify the unprecedented length of the exclusion as required by the Administrative Procedure Act. The Appeals Court therefore remanded the case to the District Court with instructions to remand the matter on to HHS for further consideration of the length of the exclusions.

Significantly, the exclusions in Friedman, even if reduced, constitute a severe penalty for executives facing a misdemeanor prosecution under the Park Doctrine. As we previously reported, the FDA has expressly stated that it will seek to increase the amount of Park Doctrine criminal prosecutions of corporate executives whose companies commit FDCA violations.

The FDA and white collar criminal defense lawyers at Fuerst Ittleman are experienced in handling even the most complex cases where clients are facing allegations of criminal actions. Fuerst Ittleman attorneys have represented clients in a variety of FDA-related criminal investigations and prosecutions including violations of the FDCA under 21 U.S.C. §§ 331 and 333 as well as prosecutions of corporate officials under the Park Doctrine. For more information regarding Fuerst Ittlemans white collar criminal defense practice, contact an attorney today at contact@fidjlaw.com

IRS Win in Appellate Case Portends Bigger FBAR crackdown

On July 20, 2012, the U.S. Court of Appeals for the Fourth Circuit concluded that the district court clearly erred in finding that the Government failed to prove that J. Bryan Williams willfully violated 31 U.S.C. § 5314 by failing to report his interest in two foreign bank accounts for the tax year 2000 and reversed the district courts opinion.  United States v. J. Bryan Williams, case no. 10-2230 (4th Cir. 2012), an unpublished opinion, is available here.

The matter was before the Fourth Circuit following the Governments appeal of the decision of the U.S. District Court for the Eastern District of Virginia, available here, which had ruled that the IRS lacked evidence to prove Williams willful violation of the FBAR filing requirement.

The background and facts are incorporated in the opinion.  Pursuant to § 5314, taxpayers are required to report annually to the Internal Revenue Service (IRS) any financial interests the taxpayer has in any bank, securities, or other financial accounts in a foreign country.  The report is made by filing and completing form TD F 90-22.1, otherwise known as “FBAR.”  Section 5314 is available here. The FBAR must be filed on or before June 30th of each calendar year and the Secretary of Treasury may impose civil money penalties on any person who fails to timely file the report.  Under 31 U.S.C. § 5321, the Secretary may impose a maximum penalty of up to $100,000 or 50% of the balance in the account at the time of such violation if the taxpayer “willfully” fails to file the FBAR, which was the issue in the Williams case. 

The controversy began in 1993 when Williams opened two Swiss bank accounts in the name of ALQI Holdings, Ltd.  From 1993 through 2000, Williams deposited more than $7,000,000 into the ALQI accounts, earning more than $800,000 in income on the deposits.  Williams, in violation of § 5314, did not report to the IRS the income from the ALQI accounts or his interest in the accounts.  By late 2000, the Swiss and U.S. authorities became aware of the assets in the ALQI accounts, and froze the accounts after meeting Williams and his attorneys.

In January 2001, Williams completed a tax organizer, which had been provided to him by his accountant in connection with the preparation of his 2000 tax return.  The tax organizer included a question regarding whether Williams had “an interest in or a signature or other authority over a bank account, or other financial account in a foreign country.”  Williams answered “No.”  Williams 2000 Form 1040, line 7(a), asked the identical question and included instructions for exceptions and filing requirements for the FBAR.  Williams once again checked “No” and did not file an FBAR by the June 30, 2001 deadline. 

In January 2002, upon the advice of his attorneys and accountants, Williams fully disclosed the ALQI accounts to an IRS agent.  In October 2002, he filed his 2001 tax return that acknowledged his interest in the ALQI accounts. In 2003, Williams amended his 1999 and 2000 tax returns, which disclosed details about his ALQI accounts.

In June 2003, Williams pled guilty to conspiracy to defraud the IRS, in violation of 18 U.S.C. § 371, and criminal tax evasion, in violation of 26 U.S.C. § 7201, available here, for his connection with the ALQI accounts from 1993 to 2000.  Williams submitted an allocution, however, and received a three-level reduction under the Sentencing Guidelines for the acceptance of responsibility. In his allocution, Williams admitted to: (1) choosing not to report the income from the ALQI accounts until he filed his 2001 tax return; (2) knowing that he had an obligation to report to the IRS and/or the Department of Treasury the existence of the Swiss accounts but chose to hide his true income and evade taxes; and (3) knowing that what he was doing was wrong and unlawful and therefore admitting guilt of evading the payment of taxes for the tax years 1993 through 2000. 

In January 2007, Williams finally filed FBARs for each tax year from 1993 through 2000.  The IRS assessed two $100,000 civil penalties against him pursuant to § 5321(5), available here, for his failure to file an FBAR for the tax year 2000.  The IRS only assessed penalties for the tax year 2000 because the statute of limitations for assessing penalties for the other tax years had expired.  Williams subsequently failed to pay these penalties and the Government brought this enforcement action to collect them. 

All parties agree that Williams violated § 5314 by failing to timely file an FBAR for tax year 2000.  Thus, the only question is whether the violation was willful.  In holding that Williams violation was not willful, the district court explained that (1) Williams lacked any motivation to willfully conceal the accounts because the authorities were already aware of such accounts and (2) his failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred.”

In analyzing whether Williams conduct was willful, the opinion explains that willfulness “may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information,” and it “can be inferred from a conscious effort to avoid learning about reporting requirements.”  United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991).  Likewise, “willful blindness” may be inferred where “a defendant was subjectively aware of high probability of the existence of a tax liability, and purposefully avoided learning the fats point to such liability.”  United States v. Poole, 640 F.3d 114, 122 (4th Cir. 2011).  Importantly, in cases “where willfulness is a statutory condition of civil liability, [courts] have generally taken it to cover not only knowing violations of a standard but reckless ones as well.”  Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2007).  Whether a person failed to comply with a tax reporting requirement is a question of fact.  Rycoff v. U.S., 40 F.3d 305, 307 (9th Cir. 1994); accord U.S. v. Gormley, 201 f.3d 290, 294 (4th Cir. 2000). 

The Courts review of the district courts decision is narrow under the clearly erroneous standard set forth in Federal Rule of Civil Procedure 52(a).  If the district courts account of the evidence is plausible, the court of appeals may not reverse even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.  However, the district courts findings are not conclusive if they are plainly wrong and the appellate court is allowed to engage in meaningful appellate review.  The dissenting opinion points out that there was evidence to support the district courts ruling, and therefore the circuit court should not reverse. 

Nonetheless, the majority opinion did in fact believe, with a definite and firm conviction, that the district court clearly erred in finding that Williams did not willfully violate § 5314.  In support thereof, the Court explained that Williams signed his 2000 tax return, thereby declaring under penalty of perjury that he had examined this return and accompanying schedules and statements and that, to the best of his knowledge, the return was true, accurate, and complete.  His signature was prima facie evidence that he knew the contents of his return and at minimum, line 7(a)s directions for the FBAR requirements put Williams on inquiry notice of the FBAR requirement. 

As the Fourth Circuit wrote, nothing in the record indicated that Williams ever consulted the FBAR or its instructions. Williams testified that he did not read line 7(a) or paid attention to any of the written words on his tax return.  According to Sturman, Williams made a conscious effort to avoid learning about reporting requirements.  Thus, according to the Fourth Circuit, Williamss false answers on both the tax organizer and his tax return further indicated conduct that was meant to conceal or mislead sources of income or other financial information.  Struman, 951 F.2d at 1476.  This conduct also constituted willful blindness to the FBAR requirement.  Poole, 640 F.3d at 122.

Moreover, the Fourth Circuit held that Williamss guilty plea allocation confirmed that his violation of § 5314 was willful.  Williams acknowledged that he willfully failed to report the existence of the ALQI accounts to the IRS or Department of the Treasury as part of his larger scheme of tax evasion.  Thus, the Court held that that acknowledgement was itself an admission of violation § 5314, because a taxpayer complies with § 5314 by filing an FBAR with the Department of Treasury.  Accordingly, Williams could not claim that he was unaware of, inadvertently ignored, or otherwise lacked motivation to disregard the FBAR reporting requirement.

In conclusion, the Fourth Circuits majority was convinced that, at a minimum, Williamss actions established reckless conduct, which satisfied the proof requirement under § 5314.  Safeco Ins., 551 U.S. at 57.  Thus, the Court ruled that the district court clearly erred in finding that willfulness had not been established. 

The attorneys at Fuerst Ittleman, PL have extensive civil and criminal tax litigation experience before the U.S. District Courts, the U.S. Tax Court, and the U.S. Circuit Courts of Appeal.  You can contact us by calling 305.350.5690, or by emailing us at contact@fidjlaw.com.

Update: Workers Compensation Fraud Task Force Announces Multiple Arrests in Workers Compensation Check Cashing Scheme

On July 30, 2012, Florida Chief Financial Officer Jeff Atwater and Broward County Sheriff Al Lamberti announced multiple arrests in an investigation conducted by the Florida Workers’ Compensation Fraud Task Force known as “Operation Dirty Money.” The arrests come as part of a larger effort of the Florida Department of Financial Services’ Division of Insurance Fraud to combat workers’ compensation fraud facilitated by money services businesses (“MSB”)

As we previously reported here, MSB facilitated workers’ compensation fraud has been in the crosshairs of Florida officials since August of 2011. At that time, the Financial Services Commission of the Florida Office of Financial Regulation issued a cabinet report to Governor Rick Scott regarding MSB facilitated workers’ compensation schemes. The report revealed that MSBs have played an active, critical, and sometimes unknowing part in defrauding the workers’ compensation insurance market in Florida. A complete overview of the fraud scheme can be read here.

As a result of these findings, Florida C.F.O. Atwater announced the creation of the “MSB Facilitated Workers’ Compensation Fraud Workgroup” to develop comprehensive reforms to combat the fraud scheme. The efforts of the Workgroup culminated with its report and recommendations which were presented to the Insurance and Banking Subcommittee  of the Florida House of Representatives. A summary of the Workgroup’s report and recommendations can be read in our previous report here.

The efforts of the Workgroup ultimately paid off this past legislative session as the Florida Legislature unanimously passed CS/HB 1277, which adopted many of the the Workgroup’s recommendations. The changes implemented by CS/HB 1277 became effective July 1, 2012. A summary of the new law can be read in our previous report here.

According to officials, “Operation Dirty Money” has resulted in the arrests of eight individuals in Broward, Miami-Dade, and Palm Beach Counties for their involvement in a large-scale check cashing scheme to evade the costs of workers’ compensation coverage. The joint investigation revealed that Hugo Rodriguez was the ring leader of the group. According the authorities, Rodriguez and his company Oto Group, Inc. established 10 shell companies to funnel over $70 million in undeclared payroll through several MSBs in Broward, Miami-Dade, and Palm Beach Counties. Through the use of these shell companies, Rodriguez was able to conduct large construction projects while avoiding the costs associated with paying workers’ compensation premiums. Since the inception of the Florida Workers’ Compensation Fraud Task Force, the State of Florida has shut down 12 shell companies and identified $140 million in fraudulent transactions associated with their operation.

If you have questions pertaining to the Office of Financial Regulations, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fidjlaw.com.

Update: Online Poker Sites Reach Settlement With Justice Department Over Fraud Allegations; Payment Processor Associated with Online Poker Fraud Sentenced

As we have detailed in previous reports here and here, on April 15, 2011, federal prosecutors shut down online poker sites PokerStars, Full Tilt Poker and Absolute Poker and indicted eleven people in connection with their involvement with the sites’ operation.

As we discussed, these actions were part of a larger effort by the Justice Department to target internet gambling websites for violations of federal law. After more than a year of litigation, however, the dispute between the websites and the Justice Department appears to have been resolved in the final days of July, 2012.

Although the law does not specifically address internet pay for play poker sites, The Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA” defines “unlawful internet gambling” as: 1) placing, receiving or transmitting a bet, 2) by means of the Internet, even in part, 3) but only if that bet is unlawful under any other federal or state law applicable in the place where the bet is initiated, received or otherwise made. Thus, although there is no federal law directly addressing the regulation of online poker sites, the Department of Justice has used UIGEA to prosecute internet pay for play poker operators and their payment processors.

On July 26, 2012, Judge Lewis Kaplan of the United States District Court for the Southern District of New York sentenced payment processor Ira Rubin to three years in prison for his role in processing payments for the online poker sites. In January, 2012, Mr. Rubin pled guilty to conspiracy charges related to illegal gambling, bank fraud, wire fraud, and money laundering. Prosecutors had alleged that after the passage of a 2006 law which prohibited banks from processing payments to offshore gambling websites, Mr. Rubin engaged in a fraudulent scheme to deceive US banks and financial institutions as to the true identity of the funds being transferred by processing these funds to appear as payments for goods and services to non-existent online merchants and fake companies. As we have previously reported, federal prosecutors have focused on payment processor prosecutions as a way of combating online pay for play poker.

Additionally, five days later, on July 31, 2012, the U.S. Department of Justice announced that it had reached a $731 million settlement with PokerStars and Full Tilt Poker regarding the forfeiture Complaint filed against the two companies in April, 2011. Under the terms of the agreement, Full Tilt agreed to forfeit virtually all of its assets to the United States, however, the Government has approved the acquisition of these assets by PokerStars in exchange for PokerStars’s agreement to reimburse $184 million owed by Full Tilt to Full Tilt’s foreign players. Additionally, PokerStars agreed to forfeit $547 million to the U.S. which will be used to compensate U.S. account holders.

Fuerst Ittleman will continue to monitor these developments. If you have questions pertaining to UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about Fuerst Ittleman’s experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com.

Fourth Circuit Affirms Federal Tax Conviction

In United States v. Jinwright, available here, the Richmond, Virginia based 4th Circuit Court of Appeals affirmed two tax convictions. The facts of the case are as follows:

Mr. and Mrs. Jinwright were former co-pastors of the Greater Salem Church in North Carolina. When Mr. Jinwright first became pastor he earned about $10,000 per year. Mr. Jinwright’s salary had increased to  about $148,000 in 2001, and about $300,000 in 2007. Between 2001 and 2007, Mr. Jinwright’s employer provided him with substantial taxable benefits that he failed to report and/or underreported on his personal income tax returns. When taking into account Mr. Jinwright’s reported and unreported compensation between 2001 and 2007, he earned almost $3.9 million. During that same time period Mrs. Jinwright received similar compensation from the church amounting to nearly $1 million.

Mr. and Mrs. Jinwright also earned income separate and apart from the church, such as compensation for speaking engagements, which,  of course, they failed to report on their tax returns. The church, like many others, applied for tax exempt status under Section 501(c)(3) of the Internal Revenue Code, available here.

In 2002, the church understated Mr. Jinwright’s total compensation. The IRS denied the tax exempt status because Mr. Jinwright’s compensation was too high.  A second application by the church was filed in 2003, listing Mr. Jinwright’s compensation as $600,000. However, in contrast to the 501(c)(3) application, Mr. Jinwright reported on his personal income tax return compensation of $280,000.

Not surprisingly, the IRS began an audit and concluded that Mr. and Mrs. Jinwright had failed to properly report taxable income of approximately $2 million between 2002-2007, and federal criminal indictments soon followed.  

Mr. and Mrs. Jinwright were charged withparticipating in a Kleinconspiracy, 18 U.S.C. § 371, available here, of three counts of tax evasion for the years 2005-2007, 26 U.S.C. § 7201, available here, and aiding and abetting tax evasion under the federal aiding and abetting statute, 18 U.S.C. § 2, available here.

Mr. Jinwright was convicted, but not Mrs. Jinwright, of three counts of tax evasion for the years 2002-2004, as well as six counts of filing a false tax return, 26 U.S.C. § 7206(1), available here.

At sentencing, the district court concluded that certain sentencing factors were present, specifically that:  (i) a tax loss of $1.3 million for the period from 1998-2008 (based on relevant conduct), resulting in a base offense level of 22 under 2T1.1 of the U.S. Sentencing Guidelines, available here; (ii) sophisticated means enhancement, a 2 level increase; (iii) an abuse of trust enhancement, a 2 level increase, and (iv) an obstruction enhancement, a 2 level increase.  For a total base level of 28, see
here, Mr. Jinwright was sentenced to 105 months, and Mrs. Jinwright to 80 months.

On appeal, the Fourth Circuit addressed the defendants contentions of error and affirmed in all respects.  The relevant analysis is as follows:

First, the Court affirmed the trail court’s use of the willful blindness instruction and the contents of the instruction.  The Court agreed with the Jinwrights that the request for willful blindness instructions should be handled with care, but declined to provide a categorical exclusion of a willful blindness instruction as no court had previously adopted such a rule.  The Fourth Circuit relied on Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2069 (2011), available here, for the proposition that "[t]he traditional rationale for [the willful blindness] doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge."

The Fourth Circuit also held that "the district court properly set a high bar in its instruction for the government to prove willful blindness, while simultaneously recognizing the powerful evidence of such blindness in this case." The Court found that the conditions for use of the jury instruction were present: “Willfulness with respect to tax crimes has been defined in essence as a knowledge requirement, or the "intentional violation of a known legal duty." United States v. Pomponio, 429 U.S. 10, 12 (1976) (per curiam), available here. When applied, the doctrine of willful blindness permits the government to prove knowledge by establishing that the defendant "deliberately shield[ed] [himself] from clear evidence of critical facts that are strongly suggested by the circumstances." Global-Tech, 131 S. Ct. at 2068-69. Willful blindness may satisfy knowledge in a criminal tax prosecution, where "the evidence supports an inference that a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts pointing to such liability." United States v. Poole, 640 F.3d 114, 122 (4th Cir. 2011). 

According to the Fourth Circuit, these conditions were satisfied in the Governments prosecution of the Jinwrights. Mr. Jinwright denied knowledge of his legal obligations and testified that he and Mrs. Jinwright did not know that their tax returns contained a deficiency. But the Government presented evidence to suggest that defendants were aware of a "high probability" that they were understating their income to the IRS. The Fourth Circuit further discussed and affirmed the content of the willful blindness instruction, stating as follows:

The trial court’s instruction here was thus faithful to the willful blindness standard set forth in Global-Tech.  Global-Tech synthesized the case law on willful blindness to identify "two basic requirements": "(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact." Global-Tech, 131 S. Ct. at 2070. The district court included this relevant language here, instructing the jury: "If you find that the defendants were aware of a high probability" that they were violating the law "and that the defendants acted with deliberate disregard to these facts, you may find the defendants acted knowingly" (emphasis added). The Jinwrights were convicted before the Global-Tech decision, but the language of the willful blindness instruction still tracks the factors enumerated there by the Supreme Court.

The Fourth Circuit also addressed the "gift issue" as to whether a gift is taxable and the jury instruction appropriate for the issue. The defendants claimed that at least some of the income was not taxable under which Section 102(a), available here. However, payments to employees from employers cannot be treated as gifts, 26 U.S.C. § 102(c).  The Court held that the instruction was not erroneous or an abuse of discretion, insofar as the jury was left to determine the factual issue as to whether the defendant received payments from their employer (the church) instead of the parishioners, which the 4th Circuit concluded the defendants conceded.

Next, the defendants argued that some income was not taxable, and hence not reportable on a tax return, if they were reimbursements for employer-related expenses.  More specifically, the defendants argued that the Government had to prove that the payments they received were not reimbursements, but in contrast, the Government contended that it must merely prove the payments and then the burden was shifted to the defendants to prove that the payments were reimbursements.  The Court held that once the prosecution introduced credible evidence that there was income, the taxpayer was required to rebut this showing by introducing credible evidence showing that there were deductions reducing or eliminating the tax due.

The Court next turned to the claims of sentencing error, but dispensed with all of these issues quickly and we will not discuss them here.

In sum, this case shows that the Department of Justice and the IRS have been and continue to be aggressive in the areas of unreported income.  Further, inconsistent positions taken on filings with the IRS, in this case the defendants personal income tax returns and the 501(c)(3) application by the church, continue to provide the IRS with initial evidence of income tax evasion, which often, as in this case, lead to an IRS audit and/or criminal investigation.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS and the U.S. Department of Justice, in addition to addressing taxpayers’ needs during IRS audits.  You can reach an attorney by emailing us at: contact@fidjlaw.com or by calling us at 305.350.5690.

GlaxoSmithKline Agrees to $3 Billion Settlement to Resolve Fraud Allegations

On July 2, 2012, the U.S. Department of Justice (“DOJ”) announced that British drug maker GlaxoSmithKline (“GSK”) agreed to plead guilty and to pay $3 billion in criminal and civil penalties for liabilities arising from the companys unlawful activities involving the promotion and sale of several pharmaceutical products. The settlement is the largest health care fraud related settlement in U.S. history. A copy of the DOJs press release can be read here.

According to the terms of the settlement agreement, GSK has agreed to plead guilty to a three-count criminal information which includes two counts of introducing misbranded drugs into interstate commerce in violation of 21 U.S.C. § 331 (a) and one count of failing to report safety data about a drug to the FDA in violation of 21 U.S.C. § 331(e) and 21 U.S.C. § 355(k)(1). A copy of the Information can be read here.

The information alleges that for two drugs, Paxil and Wellbutrin, GSK unlawfully promoted both for unapproved “off-label” uses. Generally speaking, while doctors are free to use their medical judgment to prescribe FDA approved medicines for any use, pharmaceutical manufacturers cannot promote medicines for any use that is not approved by the FDA. The promotion of a drug for “off-label” uses by a pharmaceutical manufacturer results in the drug being considered “misbranded” under the FDCA. See generally 21U.S.C.§352(f)(1); 21 C.F.R. § 201.100. According to the Information, between 1998 and 2003, GSK promoted Paxil for treating depression in patients under age 18, despite the FDA never approving the drug for pediatric use. The Information alleges that GSK promoted this “off-label” use through publishing a medical journal article which misrepresented the drugs efficacy in treating depression in patients under age 18 as well as through a series of promotional events such as dinners and spa programs. The Information further alleges that GSK promoted Wellbutrin, an anti-depressant, for various off-label uses including weight-loss, sexual dysfunction, and attention deficit hyperactivity disorder.

GSK also pled guilty to one count of failure to report safety data to the FDA regarding its drug Avandia. The information alleges that between 2001 and 2007, GSK failed to report safety data regarding two studies conducted in response to concerns of European regulators about the cardiovascular safety of Avandia. As a result of these violations, GSK has agreed to pay a total of $1 billion in criminal fines and forfeitures.

GSK also reached a civil settlement with the DOJ regarding allegations of  violating the False Claims Act for: 1) the “off-label” promotion of Paxil, Wellbutrin, Advair, Lamictal, and Zofan (including using paid spokespersons such as Dr. Drew Pinsky from MTVs Loveline to tout the various off-label uses of such products in settings where it would appear he was not acting on behalf of GSK); 2) paying kickbacks to doctors to prescribe those drugs; 3) making false and misleading statements regarding the safety of Avandia; and 4) reporting false best prices and underpaying rebates owed under the Medicaid Drug Rebate Program. A copy of the Civil Complaint can be read here. As a result of these numerous violations, GSK agreed to pay a civil penalty of $2 billion. Additionally, GSK has entered into a 5-year Corporate Integrity Agreement with the Department of Health and Human Services which has required GSK to restructure its executive compensation program to permit the company to recoup annual bonuses and incentives from executives if they, or their subordinates, engage in misconduct.

The attorneys at Fuerst Ittleman have extensive experience litigating criminal and civil cases against the federal government at both the trial and the appellate levels. You can contact an attorney by calling us at 305.350.5690 or by emailing us at contact@fidjlaw.com.

Tax Return Preparers Indicted for Assisting in Income Tax Evasion

In a Superseding Indictment, available here,

filed June 14, 2012 in the United States District Court for the Central District of California, three of the managers (David Kalai, Nadav Kalai, and David Almog) of a tax return preparation service, United Revenue Service ("URS") were indicted.  The Department of Justice has issued a press release, available here, announcing the indictment.

As the press release details,  URS had 12 offices located throughout the United States. David Kalai worked primarily at URS’s former headquarters in Newport Beach, Calif., and later at URS’s location in Costa Mesa, Calif. Nadav Kalai worked out of URS’s headquarters in Bethesda, Md., as well as URS locations in Newport Beach and Costa Mesa, Calif. David Almog was the branch manager of the New York office of URS and supervised tax return preparers for URS’s East Coast locations.

The superseding indictment alleges that the defendants prepared false individual income tax returns which did not disclose the clients’ foreign financial accounts nor report the income earned from those accounts. In order to conceal the clients’ ownership and control of assets and conceal the clients’ income from the IRS, the defendants incorporated offshore companies in Belize and elsewhere and helped clients open secret bank accounts at the Luxembourg locations of two unnamed Israeli banks.  The first unnamed Israeli bank is a large financial institution headquartered in Tel-Aviv, Israel, with more than 300 branches across 18 countries worldwide. The second unnamed bank is a mid-size financial institution also headquartered in Tel-Aviv, with a presence on four continents.

As further alleged in the superseding indictment, the defendants incorporated offshore companies in Belize and elsewhere to act as named account holders on the secret accounts at the Israeli banks. The defendants  then facilitated the transfer of client funds to the secret accounts and prepared and filed tax returns that falsely reported the money sent offshore as a false investment loss or a false business expense. The defendants also failed to disclose the existence of, and the clients’ financial interest in, and authority over, the clients’ secret accounts and caused the clients to fail to file FBARs with the Department of the Treasury. (The FBAR form is available here. The charge is 18 USC 371, commonly referred to as a "Klien Conspiracy," available here.)

This indictment appears to be just the beginning of the Justice Departments attempts to prosecute not only those who have undeclared foreign bank accounts and under- (or un-) reported income to the IRS, but those who have assisted the taxpayers with improperly reducing (or avoiding altogether) their income tax liability to the IRS.  This also appears to be one of the first prosecutions that has implicated Israeli banks.  It has been widely reported that the Department of Justice has been investigating banks outside of Switzerland for aiding U.S. taxpayers in evading taxes. 

In criminal tax litigation, defendants must engage a trial team that can navigate both criminal law and tax law.  As federal prosecutions become increasingly sophisticated, the defense needs to keep pace with the prosecution and bring to the defense table the full array of skill sets needed to properly defend a federal indictment. The attorneys at Fuerst Ittleman have extensive tax and criminal litigation experience.  The firm regularly handles matters involving civil tax litigation, criminal defense, and criminal tax defense (at the trial and appellate levels, including U.S. Supreme Court litigation).  You can contact an attorney via telephone by calling us at 305.350.5690 or via email at contact@fidjlaw.com