U.S. Department of Justice indicts taxpayer for FBAR violation and tax evasion

On November 17, 2011, a grand jury in the Northern District of California returned an indictment against Ashvin Desai alleging violation of 26 U.S.C. sections 7201 (tax evasion) and 7206(2) (aiding in the preparation of a false tax return); 31 U.S.C. sections 5314 and 5322 (failure to file report of foreign bank and financial accounts). A copy of the indictment can be found here.

The indictment against Mr. Desai provides as follows:

“[The Defendant] who during the calendar year 2008 was married, did willfully attempt to evade and defeat a large part of the income tax due and owing by him and his spouse to the United States of America for the calendar year 2008, by preparing and causing to be prepared, and by signing and causing to be signed, a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040, on behalf of himself and his wife, which was filed with the Internal Revenue Service. In that false income tax return, it was stated that their joint taxable income for the calendar year 2008 was $69,917.84 and that the amount of tax due and owing thereon was $6,156.88. In fact, as DESAI then and there knew, their joint taxable income for the calendar year was in excess of the amount stated on the return, and, upon the additional taxable income an additional tax was due and owing to the United States of America, and he had an interest in, and signature or other authority over, bank accounts located in India during calendar year 2008.”

The significance of this criminal indictment is that the IRSs and the U.S. Department of Justices investigation of those holding unreported foreign bank accounts at HSBC have now started to produce tax evasion and FBAR failure to file cases against U.S. citizens who have attempted to use HSBC to avoid paying taxes to the U.S. government. This appears to be the first of many such cases as Title 31 violations are the criminal charge of the moment.

The attorneys at Fuerst Ittleman have experience defending against IRS investigations/audits and Department of Justice investigations and criminal prosecutions for those with unreported foreign bank accounts and unreported/under-reported income. You can reach an attorney by emailing us at: contact@fidjlaw.com.

Absolute Poker Co-Owner Pleads Guilty To Conspiracy To Violate UIGEA, Wire Fraud, And Mail Fraud In Connection With Internet Poker Site Operation

On December 20, 2011, Brent Beckley, co-owner of Absolute Poker, an internet poker website, pled guilty to conspiracy to violate the Unlawful Internet Gambling Enforcement Act (“UIGEA”), mail fraud, and wire fraud in connection to his operation of the internet poker website. In pleading guilty before Magistrate Judge Ronald Ellis of the United States District Court for the Southern District of New York, Beckley admitted his wrongdoing: “I knew that it was illegal to accept credit cards from players to gamble on the internet.”

While internet pay-for-play poker remains very popular, generating $5.1 billion in revenues last year alone, Beckley’s prosecution stems from a larger effort by Federal prosecutors to target internet gambling websites for violations of federal law. Although the law does not specifically address internet pay for play poker sites, 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. However, since UIGEA’s passage, debate has raged over whether pay for play poker actually violates federal law with poker sites and federal prosecutors reaching opposite conclusions. Internet poker site operators have argued that UIGEA does not apply because poker should be classified as a game of skill, not a game of chance, and thus beyond the reach of UIGEA.

As we previously reported, on April 15, 2011, federal prosecutors indicted eleven people, including Mr. Beckley, in connection with their involvement in running internet poker websites PokerStars, Full Tilt Poker, and Absolute Poker. Prosecutors alleged that after the passage of a 2006 law which prohibited banks from processing payments to offshore gambling websites, the defendants engaged in a fraudulent scheme to deceive US banks and financial institutions as to the true identity of the funds being transferred by using third party payment processors to make funds appear as payments for goods and services to non-existent online merchants and fake companies.

Beckley is scheduled to be sentenced on April 19, 2012 and is expected to receive between 12 and 18 months imprisonment as punishment. 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.

Third Circuit Vacates Sentence of John M. Crim in Commonwealth Trust Company Tax Shelter Criminal Tax Case

On December 12, 2011, the Third Circuit Court of Appeals entered an opinion and order in the consolidated case of United States of America, v. John M. Crim, et al.  case numbers 08-3028, 08-3931, 08-4077, and 08-4316.  The consolidated cases involved the appeals from the convictions obtained by the United States against  John M. Crim, John Brownlee, Constance Taylor, and Anthony Trimble.  John M. Crim was represented on appeal by Fuerst Ittlemans Senior Tax Associate Joseph A. DiRuzzo, III. Mr. Crim was not represented at trial by Mr. DiRuzzo.

The facts of the case are somewhat complex, and are, in relevant part, as follows:  Mr. Crim founded the Commonwealth Trust Company (“CTC”), and according to the Government used CTC to assist taxpayers in evading their federal income tax obligations.  CTC allegedly marketed both domestic and offshore trusts to be used to siphon off income and profits from domestic taxpayers and advised taxpayers not to file federal income tax returns.  CTC also allegedly advocated the use of liens to avoid IRS seizures and tax liens.

The Government indicted Crim, Brownlee, Taylor, and Trimble and charged violations of 18 USC section 371 (conspiracy to defraud the United States), commonly referred to as a Klien conspiracy and 26 USC section 7212 (the “omnibus clause” prohibiting the administration of the Internal Revenue Code) in the Eastern District of Pennsylvania.  Crim, Brownlee, Taylor, and Trimble were convicted at trial of all counts.  

On appeal, Mr. Crim raised various issues, such as the improper admission at trial of evidence concerning CTCs celebrity client Wesley Snipes (who was convicted of failing to file income tax returns as a result of heading CTCs advice); that the restitution order was improperly entered; and that the 96 month sentence on both counts was procedurally improper.

The Third Circuit ultimately held that the sentence imposed against Mr. Crim was improper and vacated his sentence and remanded to the District Court for resentencing.  The Third Circuit also remanded Mr. Crims case for clarification of the restitution order. A full copy of the opinion can be found here.

A petition for rehearing en banc was filed and was denied on December 12, 2011.  Joseph A. DiRuzzo, III will be filing a petition on behalf of Mr. Crim before the U.S. Supreme Court early next year.

Among other things, what the Third Circuits Decision in the Crim teaches is that having an attorney who is well versed in substantive tax and substantive criminal law is an absolute necessity in a criminal tax case.  Having an attorney who is versed in one area of the law but not the other may result in opportunities being lost for a criminal defendant.  The attorneys at Fuerst Ittleman have proficiency in substantive tax law and criminal law and have experience litigating civil tax cases, criminal cases, and criminal tax cases.  You can contact an attorney by emailing us at contact@fidjlaw.com.

Two Attorneys Arrested and Charged with Structuring Transactions to Avoid Bank Secrecy Act Reporting Requirements

On November 4, 2011, two New Jersey attorneys, Goldie Sommer and Edward Engelhart, were charged with conspiring to violate and violating the Bank Secrecy Acts (“BSA”) by “structuring” attorney trust account deposits in order to evade BSA reporting requirements. A copy of the criminal complaint can be read here.

Generally speaking, the BSA, 31 U.S.C. 5311-5330, and its implementing regulations, found at 31 C.F.R. Chapter X, require financial institutions to keep records of certain financial transactions and report these transactions to the federal government. The BSA was designed to prevent financial institutions from being used as part of illicit activity such as money laundering, drug trafficking, tax evasion, and terrorist financing.

In particular, 31 U.S.C. § 5313 (a) requires domestic financial institutions, including banks, which are involved in a transaction for the payment, receipt, or transfer of United States currency in an amount greater than $10,000.00, to file a currency transaction report (“CTR”) for each cash transaction with the IRS. Additionally, pursuant to 31 C.F.R. § 1010.313, “multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day.”

Occasionally, depositors will “structure” their transactions so that multiple cash deposits are made each under $10,000, sometimes over the course of several days or at multiple braches of a bank, in an effort to avoid the reporting requirements of the BSA. Such activity is known as “structuring” and is prohibited by federal law. 31 U.S.C. § 5324 makes it a crime for an individual to: a) “cause or attempt to cause a domestic financial institution to fail to file a report under § 5313(a);” b) “cause or attempt to cause a domestic financial institution to file a report required under § 5313(a) that contains a material omission or misstatement of fact;” or c) “structure or assist in structuring, any transaction with one or more domestic financial institutions” for the purpose of evading the reporting requirements of § 5313(a). More information on the BSA can be found on FinCENs website.

According to the complaint, between August 13, 2010 and September 22, 2010, Sommer and Engelhart structured a series of deposits into their attorney trust account totaling $118,000. The government alleged that most of these deposits included even dollar amounts each under $10,000 and occurred on the same day or within a short period of time. However, when taken in the aggregate, the deposits should each have exceeded the $10,000 threshold, thus requiring the filing of a report. Additionally, the government alleged that during the same period of time similarly structured deposits were placed into the personal accounts of Sommer, Engelhart and “other individuals associated with [them].” Checks were then drawn from the personal accounts and placed in the defendants trust account. In total, authorities allege that $354,000 was structured into the trust account.

The complaint further alleged that during a June 16, 2011 meeting with the IRS both Sommer and Engelhart admitted that they had agreed to structure the deposits into the trust account. Additionally, the complaint alleges that Sommer and Engelhart admitted to receiving the currency from a client of their firm for the purchase of real estate and “inferred that the client wished that the funds would be deposited into a bank without the filing of any forms with the [IRS].” If convicted of structuring, Sommer and Engelhart can face up to five years in prison, a $250,000 fine and forfeiture of the structured funds.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com

Second Circuit Overturns Conviction for Violation of Iranian Transactions Regulations and Operation of an Unlicensed Money-Transmitting Business

On October 24, 2011, the United States Court of Appeals for the Second Circuit issued its decision in United States v. Banki overturning the conviction of Mahmoud Reza Banki for violating trade sanctions with Iran and operating an unlicensed money-transmitting business. In this case, authorities alleged that Banki violated the ITR and 18 U.S.C. § 1960, which prohibits the operation of unlicensed money-transmission businesses, for his role in 56 money transfers to Iran through the informal money transmission system known as “hawala” which is widely used throughout the Middle East and South Asia. In the hawala system funds are transferred from one country to another through a network of hawala brokers known as “hawaladars.”

As previously reported, the ITR, which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act and are administered by OFAC.  31 C.F.R. § 560.204 prohibits the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States persons, of any goods, technology, or services to Iran unless “otherwise authorized” in 31 C.F.R. part 560. Pursuant to 17 U.S.C. § 1705, persons who willfully violate the ITR are subject to criminal penalties.

There are numerous forms of hawala but the two discussed by the Court were the “paradigmatic” system and the “match” system. The “paradigmatic” system works as follows: person 1 located in country A who wants to send money, for example $100, to person 2 in country B would contact a hawaladar located in country A and would pay the country A hawaladar the $100. Next the country A hawaladar would contact a country B hawaladar and ask the country B hawaladar to pay $100 in country Bs currency, minus any fees, to person 2. In the future, when country B hawaladar needs to send money to country A, he will then contact the country A hawaladar, with whom he now has a credit because of the previous transaction, and the country A hawaladar will complete the transaction. Normally, a number of transactions must be completed in order to balance the books between the two hawaladars and periodic settlement of the imbalances occurs via wire transfers or more formal money transmission methods. In this way, people can remit money to others without any actual money crossing the border between country A and country B.

The “match” system works on a similar premise. Under the match system, country As hawaladar seeks out a country B hawaladar looking to transmit money to a third party in country A. Once a “match” occurs, country Bs hawaladar would pay person 2 and then, upon knowledge of payment to person 2, country As hawaladar would pay the third party. Hawaladars derive their profits from the difference in the “buy” and “sell” exchange rates on completed transactions.

The use of the hawala system in the United States to remit funds to and from Iran is problematic for several reasons. First, transferring funds through a hawala qualifies as “money transmitting” under 18 U.S.C. § 1960. Therefore, hawaladars, which typically operate without licenses, are operating illegal money transmitting businesses and are thus in violation of 18 U.S.C. § 1960. As such, U.S. patrons of hawaladars may also be charged for using hawala in the U.S. Second, because money transmission is considered a “service” under the ITR, it is a violation of the Iranian sanctions to transfer money to Iran unless the transfer arises as part of an underlying transaction that is not prohibited.

In Bankis case, authorities alleged that Bankis family members in Iran engaged in 56 money transfers using a match hawaladar to transfer assets to Banki in the United States. Authorities further alleged that for each deposit made into Bankis U.S. bank account, a corresponding payment was sent to Iran for a third party. Additionally, although the funds being transferred into Iran were not Bankis, authorities alleged that Banki knew that for each deposit he received there was a corresponding payout in Iran. Thus, based on this knowledge, authorities alleged that Banki facilitated an American hawaladar in violating the IRT and in operating an unlicensed money-transmitting business.

Authorities charged Mr. Banki with: 1) conspiring to violate the ITR and operate an unlicensed money-transmitting business; 2) violating or aiding and abetting the violation of the IRT; 3) conducting or aiding and abetting the conduct of an unlicensed money-transmitting business; and 4) two counts of making materially false representations in response to an OFAC administrative subpoena. In May of 2010, Banki was found guilty of all counts and was sentenced to 30 months imprisonment and ordered to forfeit $3.4 million.

On appeal, Banki argued his conviction should be overturned for several reasons. First, Banki argued that executing money transfer to Iran on behalf of others only violates the ITR if undertaken for a fee. Second, he argued that even if hawala transfers are considered a service, non-commerical remittances, including family remittances like the ones in this case, are exempt from the service ban. Third, Banki argued his aiding and abetting of an unlicensed money transmitting business should be overturned because the trial court failed to instruct the jury that participation in a single, isolated transmission of money does not constitute a money transmission business.

In its decision, the Second Circuit provided a detailed analysis of Bankis arguments which will guide future IRT and 18 U.S.C. § 1960 cases. First, the Court found that because the IRT was designed to be a broad and overinclusive sanctions scheme designed to isolate Iran, “the transfer of funds on behalf of another constitutes a Ëœservice even if not performed for a fee.”

Although money transmittal for no fee is still considered a “service” under the ITR, the Court went on to find that 31 C.F.R. § 560.516, which provides that non-commercial remittances, such as family remittances, are exempt from the services ban, is ambiguous as to whether it applies to all instances of non-commercial remittances or only those which take place in depository institutions. In so holding, the Court found that the governments argument that U.S. depository institutions have exclusive authority to process family remittances is inconsistent with the language of the regulation. However, the Court also found that, based on the statutory and regulatory sanctions scheme in place, Bankis argument that anyone, including hawalas, could process a non-commercial remittance is inconsistent with the ITR scheme as a whole. Thus, based on the ambiguity of the breadth of the non-commercial remittance exemption, the Court overturned Bankis convictions for conspiracy and violations of the ITR.

The Court also vacated Bankis conspiracy and aiding and abetting of an unlicensed money transmitting business and remanded for a new trial. In so ruling, the Court agreed with Banki and stated that “to find a defendant liable for operating [or aiding and abetting] an unlicensed money transmitting business, a jury must find that he participated in more than a Ëœsingle, isolated transmission of money.” The Court found that because the evidence presented at trial only showed Bankis knowledge of “match” funds moving to Iran in one transaction, a jury instruction stating that participation in a single, isolated transmission of money does not constitute a money transmission business was appropriate. The trial courts failure to provide the jury with such an instruction was reversible error.

The Second Circuit further held that the lower court also erred in instructing the jury that hawala is both an informal money transfer system and a money transmitting business. The Court found that by so instructing the jury, the district court relieved the government of its burden of proving that Banki had knowledge that more than one transmission had occurred. As explained by the Court, “by later instructing the jury that Ëœa hawala is a money transmission business, the district court arguably was instructing the jury that if it found that Banki operated a hawala, then he necessarily operated a money transmitting business, thereby taking the latter issue away from the jury.” Thus, the Second Circuits opinion distinguishes between the use of a system of money transmission and the operation of a money transmission business.

Although the Court overturned Bankis convictions for conspiracy and aiding and abetting, it disagreed with Bankis argument that he was entitled to an “mere customer or beneficiary” instruction. In his appeal, Banki argued that he should not be held liable for conspiracy or adding and abetting because he was “mere customer or beneficiary” and thus exempt from criminal liability. However, the Court found that Banki was charged with aiding and abetting the facilitation of funds to Iran and not with receiving funds from Iran. Thus, because Banki was charged as the facilitator of the transfer he was an intermediary, not a customer, and thus the instruction would be inappropriate. As explained by the Court, “put simply, where the crime charged is transmitting money to Iran without a license, the Ëœcustomer is the wire originator and/or the intended recipient” not the intermediary.

The opinion is noteworthy not only because it is illustrative of the potential criminal charges Iranian sanction violators may face, but also because of the Courts detailed analysis of the Iranian Transactions Regulations (“ITR”) and the federal money transmitting laws. If you have questions pertaining to the OFAC sanctions on trade with Cuba and Iran, 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.

Longest Prison Sentence to Date for Violations of the FCPA

On October 25, 2011, the former president and the executive vice president of Terra Telecommunications Corp. (Terra) were sentenced in connection with their convictions at trial for money laundering and violating the Foreign Corrupt Practices Act (FCPA). Discussed here, the U.S. Department of Justice (DOJ) highlights the fifteen year sentence of Jose Esquenazi, Terra’s former president, noting how it is the longest prison sentence for a violation of the FCPA to date.

The Foreign Corrupt Practices Act makes it unlawful for certain classes of U.S. persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any willful or corrupt offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that such money or thing of value will be offered to a foreign official to influence the foreign official in his or her official capacity to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business.

According to the government, the executives committed several FCPA violations by funneling money into shell companies in order to use these monies to bribe Haitian government officials at the state-owned telecommunications company, Telecommunications D’Haiti S.A.M. (Teleco). In particular, Esquenazi and Terra vice president Carlos Rodriguez bribed Hatian officials in exchange for business advantages, including “the issuance of preferred telecommunications rates, reductions in the number of minutes for which payment was owed, and the continuance of Terra’s telecommunications connection with Haiti.” For more information about the case or the FCPA, see our previous report here. 

The government is trumpeting the harshest sentence ever against executives for violating the FCPA as a warning and deterrent against others who would violate the FCPA by bribing foreign government officials in return for business advantages. The government has made it a priority to prosecute FCPA violators and allocated substantial resources and created a task force at Department of Justice headquarters in Washington for such prosecutions. In fact, this case is one of the few FCPA prosecutions that proceeded to jury verdict, making the government’s victory and the harsh sentence all the more significant.

Fuerst Ittleman lawyers are experienced with handling white collar investigations and the defense of criminal prosecutions for white collar offenses. In addition, Fuerst Ittleman also can perform due diligence and compliance audits in order to assist businesses in their efforts to comply with the FCPA.

Company Pleads Guilty to Selling Misbranded Drug

On October 14, 2011, Medisca, Inc. pled guilty to introducing a misbranded drug into interstate commerce in violation of the federal Food, Drug and Cosmetic Act (FDCA). The Complaint, which was filed on October 14, alleged that Medisca purchased a drug called “Somatropin” from China and then proceeded to distribute the drug to various pharmacies throughout the United States.

The primary issue in the case was that Somatropin, a type of human growth hormone (HGH), was being marketed as having approval from the U.S. Food and Drug Administration (FDA). According to the Complaint, the drug was not FDA approved, rendering the drug’s labeling false and misleading and therefore misbranded under the FDCA. Although it was Medisca’s contention that it possessed a valid National Drug Code (NDC) pursuant to FDA’s rules requiring every manufacturer and/or distributer to register and list all drugs in commercial distribution, the FDA warned that a NDC does not denote a drug approval. Rather, in order for drugs to be properly distributed under the FDCA and accompanying FDA regulations, a New Drug Application (NDA) must be obtained for all new drugs prior to entering interstate commerce.

Additionally, only drugs that possess an NDA may be marketed as “FDA approved.” The Office of Prescription Drug Promotion (OPDP), formerly the Division of Drug Marketing, Advertising, and Communication (DDMAC), is a division within the FDA specifically tasked with overseeing promotional claims and labeling of drugs. OPDP ensures that marketing claims are within FDA regulations and limited to what the FDA has actually approved. Further, because drugs must possess a valid NDA before lawfully being advertised as “FDA approved,” the FDA flatly prohibits other types of products, like over-the-counter (OTC) drugs and medical devices with FDA clearance, from being marketed as approved by the FDA.

For more information regarding the FDA’s regulation of drugs and the requirements pertaining thereto contact us at contact@fidjlaw.com.

Second DCA Asks Florida Supreme Court To Rule On Drug Statute’s Constitutionality

On September 28, 2011, Floridas Second District Court of Appeal (“2nd DCA”) asked the Florida Supreme Court to rule on the constitutionality of Floridas Drug Abuse Prevention and Control law, § 893.13 Fla. Stat. in the case of State v. Adkins. A copy of the 2nd DCAs opinion can be read here. As we previously reported, on July 27, 2011, Judge Mary Scriven of the United States District Court for the Middle District of Florida declared the law unconstitutional under the United States Constitution as a violation of due process because it eliminated mens rea as an element of felony delivery of a controlled substance thus making the law a strict liability offense.

The federal courts decision has opened the floodgates to litigation in pending drug cases in Florida and has led to uncertainty for criminal defendants for two main reasons. First, because the United States and Florida are separate sovereigns, the rulings of federal courts other than the U.S. Supreme Court are generally not binding on state courts. Second, because neither the Florida Supreme Court nor any District Court of Appeal has ruled on the constitutionality of § 893.13, the Circuit Courts of Florida (the tribunals responsible for adjudicating felony criminal cases) have no binding precedent to rely upon in determining whether § 893.13 is constitutional.

As a result, the Circuit Courts have split on the issue as to whether § 893.13 violates the 14th Amendment. In fact, as noted in the 2nd DCAs Certification Order, in certain circuits, such as the Eleventh Judicial Circuit in Miami-Dade County, conflict exists within the different felony divisions with some judges adopting Judge Scrivens opinion and declaring the statute unconstitutional while others finding the Middle District of Floridas rationale unpersuasive because the precedent relied upon by that court was distinguishable.

In certifying the question of whether § 893.13 is constitutional, the 2nd DCA stated that because it would be the only district court of appeals to have ruled on the constitutionality of the drug law, its “decision would be binding statewide and could affect literally thousands of past and present prosecutions throughout the state.” The 2nd DCA noted that while the Florida Supreme Court prefers to resolve cases after multiple district courts have issued opinions, given the volume of the cases involved and the fact that the issue has been “fully briefed and thoroughly discussed” in trial court proceedings, it would be appropriate for the Supreme Court to decide this issue.

Although the 2nd DCA certified the question to the Supreme Court as one of “great public importance” pursuant to Fla. R. App. P. 9.125, it should be noted that because the Florida Supreme Court is a court of limited jurisdiction, the Court can choose not to decide the issue under  Article V § 3 of the Florida Constitution as jurisdiction over such certified questions is not mandatory.

Fuerst Ittleman will continue to track the progress of this matter with a keen eye as its final resolution could affect all strict liability offenses. The 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. The attorneys of Fuerst Ittleman have defended clients in cases involving numerous general intent and strict liability offenses including money laundering violations found at 18 U.S.C. § 1957, the operation of unlicensed money transmitting businesses found at 18 U.S.C. § 1960, and violations of the FDCA under 21 U.S.C. §§ 331 and 333 as well as prosecutions of corporate officials for FDCA violations under the Park Doctrine. For more information regarding Fuerst Ittlemans white collar criminal defense practice, contact an attorney today at contact@fidjlaw.com.

Recent Crackdown On “Commercial Marijuana Industry” A Concerted Effort By DOJ And IRS

On October 7, 2011, federal prosecutors announced that California-based medical marijuana dispensaries cannot shelter themselves from criminal prosecutions under federal law by claiming they are compliant with the states Compassionate Use Act. As we previously reported, over the past several months federal authorities have increased their efforts at prohibiting a growing medical marijuana industry because, although 15 states currently allow for the use of medical marijuana, marijuana remains prohibited under federal law. Additionally, prosecutors are now alleging that medical marijuana dispensaries violate the California Compassionate Use Act: "It is important to note that for-profit, commercial marijuana operations are illegal not only under federal law, but also under California law. While California law permits collective cultivation of marijuana in limited circumstances, it does not allow commercial distribution through the store-front model we see across California."

The announcement comes as 38 medical marijuana dispensaries were sent letters by the DOJ explaining that the operation of medical marijuana store-fronts violates the federal Controlled Substances Act. The AP reported that the letters advised the business owners, and their landlords, that the businesses have 45 days to cease operations or they will be subject to federal criminal prosecution and civil penalties. By focusing their efforts on store owners and their landlords, federal prosecutors are taking aim at the “sale, distribution, and cultivation” of medical marijuana and not the individual consumers.

The DOJ letters were issued only days after the IRS ruled that Harborside Health Center, the largest dispensary in California, owed $2.5 million in back taxes. In finding that Harborside owed back taxes, the IRS ruled that medical marijuana dispensaries are not allowed to deduct normal business expenses, such as payroll and rent. The IRS based its decision on § 280E of the Internal Revenue Code which disallows deductions in the trade or business of trafficking controlled substances. As explained by the IRS in a series of letters to Congress in December 2010:

Section 280E of the Code disallows deductions incurred in the trade or business of trafficking in controlled substances that federal law or the law of any state in which the taxpayer conducts the business prohibits. For this purpose, the term “controlled substances” has the meaning provided in the Controlled Substances Act. Marijuana falls within the Controlled Substances Act. See Californians Helping to Alleviate Medical Problems, Inc. v. C.I.R., 128 T.C. No. 14 (2007). The United States Supreme Court has concluded that no exception in the Controlled Substances Act exists for marijuana that is medically necessary. U.S. v. Oakland Cannabis Buyers Co-op., 532 U.S. 483 (2001).

While the threat of criminal prosecution and asset seizure for marijuana distribution are severe, the IRS ruling could have an equally devastating impact on the industry.

The attorneys at Fuerst Ittleman, PL have extensive experience dealing with administrative law, regulatory compliance, and white collar criminal defense. You can reach an attorney by emailing us at contact@fidjlaw.com.

Federal Prosecutors Take Aim At Corporate Officers For FDCA Violations With Revived Use Of The Park Doctrine

Although criminal sanctions against corporate officers for violations for the Food, Drug & Cosmetic Act (FDCA) have been on the books since 1938, federal prosecutors have taken aim at corporate executives personally with renewed vigor through the use of the “responsible corporate officer doctrine,” better known as the Park doctrine.

As we previously reported here and here, the Park Doctrine is named after a Supreme Court case called United States v. Park, 421 U.S. 658 (1975). In that case, Acme Markets, Inc. and Park, its president, in his personal capacity, were charged with violating § 301(k), now 21 U.S.C. § 331 (k), of the FDCA because interstate food shipments being held in Acme’s Baltimore warehouse were contaminated by rodents. At Parks trial, the trial court instructed the jury that, although Park need not have personally participated in the activity which cause the violation, he must have had "a responsible relationship to the issue" in order to be convicted. The jury convicted Park on all counts.

In affirming his conviction, the Supreme Court, noted that food and drug laws have historically been applied to persons by virtue of their managerial position if the person ultimately had the power to prevent the alleged unlawful act. Id. at 670-672. As a result, corporate executives have an affirmative duty to ensure the safety of their corporations products under the FDCA. Today, based on that decision, an executive may be criminally prosecuted for violations of the FDCA if he or she had, by reason of his or her position in the corporation, responsibility and authority to either prevent in the first instance, or promptly correct the violation.

The Park Doctrine does not require that the corporate officer be aware of wrongdoing within the company. Instead, these offenses are “strict liability” misdemeanors, and the government is only required to prove that the prohibited act occurred and that the executive had the authority to prevent or correct it. (More information on strict liability offenses can be found in our previous report here.) Additionally, should a corporate officer be convicted under the Park Doctrine, any subsequent violations of the FDCA are treated as felonies under 21 U.S.C. 333, even without proof that the defendant acted with the intent to defraud or mislead.

Initially used by the government in the 1960s and 1970s to regulate insanitary conditions in food warehouses, the Park Doctrine has reemerged as a tool for federal prosecutors in enforcement of misbranding and adulterated drug offenses. Although the FDAs position is that “misdemeanor prosecutions, particularly those against responsible corporate officials, can have a strong deterrent effect on the defendants and other regulated entities,” the practical effects of such prosecutions can be devastating. Indeed, a misdemeanor conviction can serve as a basis for exclusion from participation in numerous federal programs.

The Purdue Fredrick Co. case is an example of the potential collateral consequences of Park Doctrine prosecutions. In Purdue Fredrick, the corporation pled guilty to a felony count of misbranding OxyContin with the intent to defraud or mislead. Prosecutors alleged that the company falsely claimed that OxyContin was less addictive and less subject to abuse than other pain medications. Additionally, federal prosecutors sought Park Doctrine misdemeanor misbranding charges against the CEO, the general counsel, and the medical director of Purdue Fredrick. Ultimately, the three corporate officers pled guilty, were sentenced to probation, and disgorged millions of dollars of income.

However, soon after the officers entered their guilty pleas, the U.S. Department of Health and Human Services excluded the three officers 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. HHSs decision was upheld by the United States District Court for the District of Columbia and is currently on appeal. 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.

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 for FDCA violations under the Park Doctrine. For more information regarding Fuerst Ittlemans white collar criminal defense practice, contact an attorney today at contact@fidjlaw.com.