Florida Business Litigation Update: Confidential Settlements Really Need to Remain Confidential

The vast majority of bona fide commercial cases end in settlement.  It has become a generally accepted practice in commercial practices to include a confidentiality provision in settlements so as to ensure that the parties will not discuss the contents of the settlement with anyone.  The provision is designed to truly end the dispute, preclude boasting of success, and avoid having competitors or other similarly situated litigants know the extent of the negotiated bargain.

The clauses have become so common that they are sometimes glossed over by a lawyers who then fail to counsel their clients regarding the ramifications of the agreements, or ignored by the clients in their quest to pocket the long-awaited results.  The case of Gulliver Schools, Inc. v. Snay, decided on February 26, 2014 by Florida’s Third District Court of Appeals, demonstrates the catastrophe of such a callous review. A copy of the decision is available here.

Mr. Snay brought an action against Gulliver for wrongful termination due to unlawful age discrimination.  After a year of litigation, the parties settled the dispute whereby Gulliver agreed to pay Mr. Snay back pay and damages in the total amount $90,000, plus pay for his attorneys’ fees.  The settlement agreement included a provision stating:

13. Confidentiality. . . The plaintiff shall not either directly or indirectly, disclose, discuss or communicate to any entity or person, except his attorneys or other professional advisors or spouse any information whatsoever regarding the existence or terms of this Agreement. . . A breach . . .will result in disgorgement of the Plaintiffs portion of the settlement Payments.

Not unexpectedly, Mr. Snay shared with his family that the case had been settled.  Excited for her father and unable to restrain her disdain for Gulliver, Mr. Snay’s daughter turned to Facebook and made the following post:

Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.

Gulliver did not “suck it.”  Instead, Gulliver took the steps to disgorge the payments made to “Papa Snay.”  Mr. Snay defended against the disgorgement claim by asserting that he did not disclose the terms of the agreement, rather, “[m]y conversation with my daughter was that it was settled and we were happy with the results.”  The Third District found that such a “disclosure” was a material breach of the settlement agreement:

The plain, unambiguous meaning of paragraph 13 of the agreement between Snay and the school is that neither Snay nor his wife would “either directly or indirectly” disclose to anyone (other than their lawyers or other professionals) “any information” regarding the existence or the terms of the parties’ agreement.

Gulliver Schools, Inc. v. Snay, 39 Fla. L. Weekly D457a (Fla. 3d DCA Feb. 26, 2014).

The implications of the Gulliver case are far-reaching, and the moral of the story is quite clear.  A settlement agreement will not be treated differently than any other agreement.  Confidentiality clauses should be carefully crafted to include language that the parties will be able to understand and accept.  The inclusion, scope and remedy for such a breach are all negotiated terms, and counsel should not hesitate to strike or edit unacceptable language.  Then, particular attention should be given by counsel to explain the reach of each provision of the settlement agreement.

The lawyers of Fuerst Ittleman David & Joseph, PL stand ready to answer your questions.

Anti-Money Laundering Compliance Update: FinCEN Issues Guidance For Financial Institutions Providing Services To Marijuana-Related Businesses

On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) issued its guidance “BSA Expectations Regarding Marijuana-Related Businesses” in an effort to clarify Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to marijuana-related businesses. The guidance was issued in response to the growing number of states which have legalized the use of marijuana (recreational and/or medicinal) recent Department of Justice statements regarding marijuana enforcement priorities, and the uncertainty financial institutions in the United States face in providing financial services to this burgeoning industry.

Introduction

As we have previously reported, despite the growing number of States that have sanctioned the use of marijuana in various forms, the federal government has continued its efforts to crack down on dispensaries. (Our recent articles discussing these efforts can be read here, here, here, here, and here.). In addition to direct criminal prosecution for drug trafficking, dispensaries face additional legal barriers which make operation difficult. One such barrier dispensaries face is finding banks, credit card companies, and payment processors to process the proceeds of marijuana sales. As we have previously explained, because the sale of marijuana remains prohibited under federal law, banks are placed in a position where they would be required to report any banking transactions involving proceeds from marijuana dispensaries. Moreover, banks face the realistic possibility of criminal penalties for assisting in money laundering should they knowingly accept and process finds from dispensaries. As a result of these risks and possible penalties, banks have simply refused to do business with marijuana dispensaries.

Financial Institutions’ responsibilities under the BSA

Pursuant to the BSA, 31 U.S.C. §§ 5311-5330, financial institutions are required to create certain reports and records in order to combat fraud, money laundering, and protect against criminal and terrorist activity. For example, financial institutions are required to file with FinCEN suspicious activity reports (“SARs”) reporting any suspicious transaction relevant to a possible violation of law or regulation. More specifically, federal law requires that a financial institution file a SAR if the financial institution “knows, suspects, or has reason to suspect” that an attempted or fully conducted transaction: 1) involves funds derived from illegal activities or is an attempt to disguise or hide such funds; 2) is designed to evade the requirements of the BSA and its implementing regulations; or 3) lacks an apparent lawful or business purpose. See 31 C.F.R. § 1020.320.

As it relates to the proceeds derived from the sale of marijuana, FinCEN explained in its Guidance Document as follows:

Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law), in accordance with this guidance and FinCEN’s suspicious activity reporting requirements and related thresholds.

(emphasis added).

FinCEN’s guidance makes clear that a financial institution’s obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity. Thus, in an effort to explain how a financial institution can provide services to marijuana-related businesses while maintaining its responsibilities under the BSA, FinCEN issued this latest guidance.

Financial Institutions are required to engage in “thorough due diligence” prior to accepting marijuana-related businesses as clients.

FinCEN’s guidance makes clear that prior to providing financial services to a marijuana-related business, a financial institution must conduct a thorough customer due diligence. The guidance notes that this due diligence should include: 1) verifying that the business is licensed and registered with state authorities; 2) a review of the state license application and supporting documentation to operate as a marijuana business; 3) requesting available information about the prospective customer from state licensing and enforcement authorities; 4) obtaining an understanding of the nature of the business including the types of products sold and the customers to be served (recreational v. medical user); 5) monitoring of publicly available sources for adverse information about the potential business customer; and 6) monitoring for suspicious activity, including whether the business implicates one of the DOJ enforcement priorities or violates state law. In addition, FinCEN advises that financial institutions should periodically refresh their due diligence information once a business commences banking.

 

Financial Institutions  new marijuana-related businesses SAR filing responsibilities.

FinCEN’s “BSA Expectations” guidance should be read in conjunction with August 29, 2013 and subsequent February 14, 2014 DOJ memorandums issued by Deputy Attorney General James M. Cole to federal prosecutors regarding DOJ’s enforcement priorities with respect to marijuana. The “Cole Memo” lists out eight priorities that will guide the DOJ in its enforcement of the Controlled Substances Act against marijuana-related conduct. A copy of the DOJ’s August 29, 2013 memorandum can be read here. It is against this backdrop and with these priorities in mind that FinCEN drafted its guidance. FinCEN explains that the new guidance furthers the objectives of the BSA “by assisting financial institutions in determining how to file a SAR that facilitates law enforcement’s access to information pertinent to a [enforcement] priority.”

In describing a financial institution’s SAR filing responsibilities, FinCEN has established three categories: 1) “Marijuana Limited” SAR filings; 2) “Marijuana Priority” SAR filings; and 3) “Marijuana Termination” SAR filings.

In its Guidance, FinCEN explains that financial institutions should file a “Marijuana Limited” SAR when the institution reasonable believes, based on its due diligence, that the potential marijuana-related business customer does not implicate one of the DOJ Memo priorities or violate state law. It is important to note that this SAR filing should state “the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business,” and that no additional suspicious activity has been identified.

Throughout the time that a financial institution provides services to a marijuana-related business, the financial institution must file continuing activity reports which detail the amount of deposits, withdrawals, and transfers from the account since the previous SAR filing. (Guidance for filing timeframes for submitting a continuing activity report can be found at Question #16 of FinCEN’s Frequently Asked Questions Regarding the FinCEN Suspicious Activity Report.). However, FinCEN notes that should a financial institution’s continued due diligence reveal a potential violation of state law or implicate a DOJ Memo priority, the financial institution should file a “Marijuana Priority” SAR.

A “Marijuana Priority” SAR is only to be filed when a violation of state law is suspected or when the activities of a marijuana-related business may implicate DOJ Memo enforcement priorities. A Marijuana Priority SAR will be substantially more detailed should include: 1) identifying information of the subject and related parties; 2) addresses of the subject and related parties; 3) dates, amounts, and relevant details of the financial transactions involved; and 4) “details regarding the enforcement priorities that the financial institution believes have been implicated.”

In order to assist financial institutions in making the determination of whether to file a Marijuana Priority SAR, FinCEN’s Guidance includes two dozen “red flag” examples which may indicate a violation of state law or implicate DOJ Memo priorities. Such red flags include: that the business receives significantly more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates; that the business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law; a customer seeks to conceal or disguise involvement in a marijuana-related business activity; and that a business is unable to demonstrate the legitimate source of significant outside investments.

Additionally, financial institutions must be aware that these filing obligations also apply when the institution provides indirect services to a marijuana-related business such as providing services to a another domestic financial institution who in turn services marijuana-related businesses or to a non-financial customer who provides goods or services to a marijuana-related business (FinCEN uses the example of a commercial landlord who leases its property to a marijuana-related business). This naturally will require that financial institutions perform robust due diligence on all customers with potential indirect ties to marijuana-related businesses. However, FinCEN explains that “[i]n such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between “Marijuana Limited” and “Marijuana Priority.”

The final category of SAR filings is the “Marijuana Termination” SAR. “If a financial institution deems it necessary to terminate a relationship with a marijuana-related business in order to maintain an effective anti-money laundering compliance program, it should file a SAR  and note in the narrative the basis for the termination.”

Analysis and Conclusion

FinCEN’s guidance may in fact be a good faith attempt by the federal government to ease financial institutions anxieties about providing services to marijuana-related businesses. However, the banking industry’s reaction has been lukewarm at best.

As explained by the Colorado Bankers Association:

After a series of red lights, we expected this guidance to be a yellow one. This isn’t close to that. At best, this amounts to ”˜serve these customers at your own risk’ and it emphasizes all of the risks. This light is red.

Bankers had expected the guidance to relieve them of the threat of prosecution should the open accounts for marijuana businesses, but the guidance does not do that. Instead, it reiterates reasons for prosecution and is simply a modified reporting system for banks to use. It imposes a heavy burden on them to know and control their customers’ activities, and those of their customers. No bank can comply.

(emphasis added). A full copy of the Colorado Bankers Association Press Release can be read here.

Likewise, on February 14, 2014, the American Bankers Association commented as follows:

While we appreciate the efforts by the Department of Justice and FinCEN, guidance or regulation doesn’t alter the underlying challenge for banks. As it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions.

These fears are well founded. The FinCEN Guidance is not a regulation, does not amend existing law, and does not have the force and effect of law. Instead, financial institutions which choose to engage in providing services to marijuana-related businesses do so with only the words of FinCEN and the DOJ that it will exercise its prosecutorial discretion and not indict institutions for money laundering violations.

Moreover, regardless of the FinCEN Guidance, marijuana-related businesses also face potential violations of a host of federal laws, ranging from drug trafficking and money laundering to violations of the FDCA and the internal revenue code, for engaging in activities which are otherwise legal under state law.

In reality, the inability to access the banking and financial services industry may be potentially disastrous to the legal marijuana industry. The only true solution for both financial institutions and the marijuana-related businesses which seek their services is a comprehensive overhaul of the manner by which federal law governs marijuana and the businesses engaged in the sale of marijuana. The starting point is the Controlled Substances Act, but changes must also be made to the Banking Code found in Title 12, the bank fraud and money laundering statutes found in Title 18, the Food, Drug, and Cosmetic Act at Title 21, and the Internal Revenue Code found at Title 26. (A comprehensive overview of the most recent proposed amendments to the federal code, the “Marijuana Businesses Access to Banking Act of 2013” can be found in our previous report.). So long as federal law classifies marijuana as a Class I drug and all who deal in it “drug traffickers,” no mere Guidance Document will create the practical changes necessary to allow federally regulated banks to service the burgeoning marijuana industry.

Fuerst Ittleman David & Joseph, PL will continue to watch for the latest developments in the regulation of financial services and the marijuana industry. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, food & drug law, tax law and litigation, constitutional law, regulatory compliance, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution or marijuana-related business, or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Tax Litigation Update: Eleventh Circuit Reverses Tax Court in Virgin Islands EDP Residency Cases

Disclosure: Joseph A. DiRuzzo, III of Fuerst Ittleman David & Joseph represents the taxpayers in their Tax Court litigation against the IRS.

We have written extensively about the United States Virgin Islands Economic Development Program (EDP) and the litigation it has spawned between and among the IRS, the Virgin Islands Bureau of Internal Revenue (VIBIR), and the individuals and businesses which have sought to do business in the Virgin Islands and avail themselves of the EDP; see here, here, here and here. Much of this litigation has focused on the issue of whether the various taxpayers have been bona fide residents of the Virgin Islands, which On February 20, 2014, the United States Court of Appeals for the Eleventh Circuit issued its opinion in the consolidated appeals filed by the Government of the United States Virgin Islands (“Virgin Islands”) following the Tax Court’s denial of the Virgin Islands’ motions to intervene in the Tax Court proceedings of three separate taxpayers. The Eleventh Circuit’s precedential decision, Government of the United States Virgin Islands v. Commissioner of IRS, is available here.

The Eleventh Circuit described the background of the Taxpayers’ complex tax proceedings as follows:

The Taxpayers filed returns with the BIR for calendar tax years 2002, 2003, and 2004. The Taxpayers reported their worldwide income, which consisted of income from both United States and Virgin Islands sources, and paid taxes on that income to the Virgin Islands. None of the Taxpayers filed a return with the IRS.  In 2009 and 2010, the IRS issued deficiency notices to the Taxpayers for tax years 2002, 2003, and 2004. The IRS claimed, first, that the Taxpayers were not bona fide Virgin Islands residents during those tax years and, therefore, they should have filed returns with the IRS and paid taxes to the United States on the income they reported from United States sources Second, the IRS claimed that some of the Taxpayers’ income that they classified as Virgin Islands income on their BIR returns was, in fact, United States income and, therefore, the Taxpayers should have paid taxes to the United States on that income too. Rather than crediting the Taxpayers’ federal tax liability with the taxes paid to the Virgin Islands (which the IRS claimed should have been paid to the United States), the IRS issued a deficiency notice for the full amount owed to the United States, plus penalties for failing to file an IRS return and for delinquent payment.

***

The Taxpayers petitioned the Tax Court, challenging the IRS’s deficiency notices as time barred and, in the alternative, as incorrect. The Virgin Islands moved to intervene in the cases, the Tax Court denied its motions, and the Virgin Islands brought these appeals.

Slip op., at 4-5.

The Eleventh Circuit also explained the reasons why the Virgin Islands moved to intervene in the Taxpayers’ Tax Court cases in the first place:

If the Tax Court eventually determines that the Taxpayers were not bona fide residents, one of three things will occur: the IRS may ask the Virgin Islands to transfer over the portion of taxes that should have been paid to the United States; the Virgin Islands may choose to voluntarily refund the “overpaid” taxes as a matter of fairness; or the Virgin Islands may be forced to accept that the Taxpayers paid taxes twice on the same income.9 Thus, the Virgin Islands has an interest in the Tax Court proceedings for the same reason the United States had an interest in the Virgin Islands District Court proceedings in V.I. Derivatives: the court’s findings have practical implications for the Virgin Islands’ taxation of the same individuals.

Slip op., at 16.

In V.I. Derivatives, the IRS moved to intervene in an ongoing tax case proceeding before the District Court of the Virgin Islands. There, the IRS was permitted to intervene, but when the Virgin Islands sought to intervene before the Tax Court on exactly the same grounds, the IRS objected to the intervention. Thus, the Eleventh Circuit slammed the IRS’s position, at one point labeling it “unpersuasive [and] bordering on disingenuous”¦” and at another describing it as a “Monday morning quarterback.”

The Eleventh Circuit also noted that the Third Circuit had already ruled on this issue, reversing the Tax Court and rejecting the same IRS arguments made in the Eleventh Circuit, but recognized that there is a circuit split.  On the one hand, the Third and Eighth Circuits have reversed the Tax Court’s denials of the Virgin Islands’ motions to intervene, but on the other the Fourth Circuit had affirmed. Ultimately, the 11th Circuit held that Federal Rule of Civil Procedure 24(a)(2)applies to the Tax Court and that the Government of the USVI may intervene as a matter of right.

The take away from this decision is that the Government of the USVI may now intervene in cases reviewable by the Third, Eighth and Eleventh Circuits, which includes Florida, Georgia, Alabama, Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, New Jersey, Pennsylvania, Delaware, and the US Virgin Islands.  But the Government of the USVI cannot intervene in the Fourth Circuit which includes Maryland, North Carolina, South Carolina, Virginia, and West Virginia. It remains an open question in other parts of the country where a federal appeals court has not addressed the matter. Additionally, the overtly hostile view the Eleventh Circuit took on the IRS litigation position bodes well for both the taxpayers whom the IRS claims have no protection under the statute of limitations and the Virgin Islands seeking to intervene in further Tax Court disputes arising from the Economic Development Program.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax litigation before the Tax Court, the District Courts, the Court of Claims, and the United States Courts of Appeal.  Additionally, the attorneys at Fuerst Ittleman David & Joseph, PL actively litigate in the United States Virgin Islands and have on-going tax litigation before the District Court of the Virgin Islands against the USVI Bureau of Internal Revenue. For more information about our United States Virgin Islands Tax Law and Litigation practice, click here. If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.com or by calling 305.350.5690.

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

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

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

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

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

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

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

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

Bitcoin Regulatory Update: FinCEN Publishes Administrative Rulings Further Clarifying When Virtual Currency Activity Constitutes Money Transmission

On January 30, 2014, the Financial Crimes Enforcement Network (“FinCEN”) of the United States Department of the Treasury published two administrative rulings directly addressing when specific virtual currency activities constitute money transmission and thus requires registration with FinCEN as a money services business. The administrative rulings provide additional clarification to the guidance issued by FinCEN on March 18, 2013, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.”

In the March 18, 2013 Guidance, FinCEN distinguished between a “user,” an “exchanger,” and an “administrator” of virtual currency. As described in the Guidance:

A user is a person that obtains virtual currency to purchase goods or service. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.

(emphasis in original). The Guidance went on to explain that a user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not an MSB under FinCEN regulations as such activity does not fit within the definition of “money transmission services.” However, an administrator or exchanger that accepts and transmits a convertible virtual currency or buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN regulations, and must therefore register with FinCEN and is subject to reporting and recordkeeping regulations for MSBs, unless a limitation to or exemption from the definition applies.

Last week’s first administrative ruling, “Application of FinCEN’s Regulations to Virtual Currency Mining Operations,” addresses the circumstances under which a miner of Bitcoin would be considered an MSB under FinCEN regulations. FinCEN explains that a Bitcoin miner does not constitute an MSB to the extent it uses the Bitcoin solely for its own purposes and not for the benefit of another “because these activities involve neither ”˜acceptance’ nor ”˜transmission’ of convertible virtual currency and are not the transmission of funds within the meaning of the Rule.” FinCEN went on to explain that a miner may convert its Bitcoin into real currency or another convertible virtual currency and not be considered an MSB if the miner is undertaking the transaction solely for the miner’s own purposes ad not as a business service performed for the benefit of another. When a miner engages in both of these limited activities it will be considered a user of virtual currency and not an MSB. In making its determination, FinCEN stated that “[w]hat is material to the conclusion that a person is not an MSB is not the mechanism by which a person obtains the convertible virtual currency, but what the person uses the convertible virtual currency for, and for whose benefit.” A copy of FIN-2014-R001 can be read here.

Last week’s second administrative ruling, “Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity,”  addresses whether the periodic investment of a business in convertible virtual currency, and the production and distribution of software to facilitate the businesses purchase of virtual currency for purposes of its own investment, constitute money transmission under the Bank Secrecy Act. Regarding investing, FinCEN determined that a business that purchases and sells convertible virtual currency exclusively as investments for its own account will be considered a user of virtual currency and not an MSB because “it is not engaged in the business of exchanging convertible virtual currency for currency of legal tender for other persons.” Regarding the production and distribution of software intended to facilitate the sale of virtual currency, FinCEN ruled that mere production or distribution of such software does not constitute “money transmission services” and therefore a business’s production and distribution of such software would not make the company a money transmitted subject to BSA regulation. A copy of FIN-2014-R002 can be read here.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of anti-money laundering compliance, administrative law, constitutional law, white collar criminal defense and litigation against the U.S. Department of Justice. If you or your company has a question related to its anti-money laundering compliance obligations, our anti-money laundering attorneys can provide further information. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

 

 

CMS Expands Moratorium On New Home Health Agencies To Broward County; Extends Moratorium In Miami-Dade and Monroe Counties

On January 30, 2014, the Centers for Medicare and Medicaid Services (“CMS”) announced the expansion of its moratorium on the enrollment of new home health agencies in Medicare, Medicaid, and the Children’s Health Insurance Program (“CHIP”) to four new geographic areas around the country including Broward County, Florida. Concurrent with this expansion, CMS also announced that the moratorium on the enrollment of new home health agencies currently in place for Miami-Dade and Monroe Counties would be extended for an additional six months. (More information on the moratorium currently in place in Miami-Dade and Monroe Counties can be read in our previous report here.) A copy of CMS’s press release can be read here

Pursuant to section 6401(a) of the Patient Protection and Affordable Care Act and its implementing regulation found at 42 C.F.R. § 424.570, the Secretary of the Department of Health and Human Services (“HHS”), of which CMS is a member agency, is authorized to implement a temporary moratorium on new enrollment by fee-for-service providers and suppliers, if the secretary determines that such a moratorium is necessary to prevent or combat fraud, waste, or abuse. Additionally, pursuant to section 1866(j)(7)(B) of the Social Security Act, the Secretary’s decision to impose a temporary enrollment moratorium is not subject to judicial review.

In deciding to expand the moratorium to Broward County, CMS compared Broward County to other similarly sized metropolitan areas and found that the ratio of home health agencies to Medicare beneficiaries was 89 percent greater in Broward than in the comparison counties. In addition, Broward had the sixth highest payments per average Medicare home health user in the country. (The top five regions: Miami-Dade, County, FL; Dallas County, TX; Harris County, TX; Tarrant County, TX; and Oakland County, MI are all also subject to the home health agency moratorium.)

In addition, CMS’s rationale for expanding the moratorium was also prophylactic in nature. As explained by CMS:

As a part of ongoing antifraud efforts, the HHS-OIG and CMS have learned that some fraud schemes are viral, meaning they replicate rapidly within communities, and that health care fraud also migrates – as law enforcement cracks down on a particular scheme, the criminals may redesign the scheme or relocate to a new geographic area. As a result, CMS has determined that it is necessary to extend these moratoria beyond the target counties to bordering counties, unless otherwise noted, to prevent potentially fraudulent providers and suppliers from enrolling in a neighboring county with the intent of providing services in a moratorium-targeted area.

A copy of the notice to be published in the federal register announcing the moratorium can be read here.

CMS found it was not necessary to extend the moratorium to the other counties that border Broward, such as Palm Beach, Collier, and Hendry counties because of “the state’s home health licensing rules that prevent providers enrolling in these counties from serving beneficiaries in Broward.” This reasoning was the same relied upon by CMS in not placing Broward in the original moratorium that included Miami-Dade and Monroe. However, as is evident with the latest expansion of the home health agency moratorium, the mere fact that Florida prohibits home health agencies from serving patients located in a different licensing district (Florida is divided into 11 “licensing districts” for home health agency licensing purposes) will not necessarily prevent unscrupulous business owners from merely moving into moratorium-free districts to engage in their nefarious activity. Thus, as we questioned in our previous report, it remains to be seen whether the moratorium will achieve its prophylactic effect and prevent waste, fraud, and abuse or merely shift it to other licensing districts throughout the state.

As a result of the moratorium, new home health agencies will be barred from enrollment for the next six-months. Additionally, should CMS believe it is necessary, the moratorium may be extended in six-month increments. Existing providers will not be affected by the moratorium and will be allowed to continue to participate in the Medicare, Medicaid, and CHIP programs. However, we remind those providers still operating in South Florida that combatting fraud among South Florida HHAs has remained a major priority for CMS since as early as 2007 and we expect that these providers will remain under the CMS microscope for years to come.

The health law attorneys of Fuerst Ittleman David & Joseph, PL have extensive experience handling the various regulatory and compliance issues surrounding the provision of Medicare and Medicaid services. For more information, please contact at 305-350-5690 or contact@fidjlaw.com.

Charlie Shrem And Why We Need To Change Our Perspective Of Bitcoin

On Monday, January 27, 2013, Charlie Shrem, the 24 year old CEO of BitInstant and Vice Chairman of the Bitcoin Foundation, was arrested for his role operating a Bitcoin exchange service popular among users of Silk Road. Before being seized and shut down by the United States government in October 2013, Silk Road was a hugely popular online black market which allowed users to buy and sell  illegal drugs using Bitcoin as the primary medium of exchange. As described in the Complaint against Mr. Shrem, available here, “[t]he illegal nature of the commerce hosted on Silk Road was readily apparent to anyone visiting the site. The vast majority of the goods for sale consisted of illegal drugs of nearly every variety, openly advertised on the site as such and prominently visible on the home page.”

The Complaint against Mr. Shrem presents the underlying facts in excruciating detail. First, the Complaint makes clear that Shrem was the CEO and Chief Compliance Officer for BitInstant, referred to throughout the Complaint as simply “the Company.” Using his position at BitInstant, the Complaint also makes clear that Shrem helped a third party – Robert M. Faiella, a/k/a BTCKing – acquire Bitcoins for purposes of selling them to his own (Faiella’s) customers on Silk Road. The Complaint also alleges, primarily by quoting email exchanges between Shrem and Faiella, that Shrem knew that the Bitcoins he made available to Faiella would be used for unlawful purposes, and moreover that he circumvented the BitInstant anti-money laundering protocols he was responsible for controlling in order to sell Bitcoins to Faiella without raising any red flags.

Unfortunately, there is nothing new about the Shrem case, and at least as far as the technicalities of the legal case is concerned, not at all surprising. Indeed, given the allegations described above, the actual charges make perfect sense. Count One against Mr. Shrem is a violation of 18 U.S.C. § 1960, for operating an unlicensed money transmitting business. § 1960 proscribes the operation of an “unlicensed money transmitting business,” which is defined as:

”¦a money transmitting business which affects interstate or foreign commerce in any manner or degree and””

(A) is operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable;

(B) fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code, or regulations prescribed under such section; or

(C) otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity;

18 U.S.C. § 1960(b)(1)(A)-(C).

Although BitInstant had registered with FinCEN is required by section (b)(1)(B) and other provisions of federal law, BitInstant was not licensed by any state, and thus the government likely could have brought charges under § 1960(b)(1)(A). However, such a charge would have raised questions about whether BitInstant was required to become licensed and, if so, in which state(s), so the government appears to have taken the easier approach and pursued its case under § 1960(b)(1)(C). The Government’s § 1960 charge against Shrem describes that the Bitcoins Shrem made available to Faiella were “known to Shrem to have been intended to be used to promote and support unlawful activity, to wit, the operation of an unlicensed money transmitting business on Silk Road”¦and ultimately narcotics trafficking”¦”

The question of whether a Bitcoin exchange service like BitInstant can be labelled a money transmitting business may one day prove to be an interesting legal question. For now, the basis of the charge is derived from FinCEN’s March 18, 2013 Guidance Document, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.” In FinCEN’s Guidance, FinCEN does not mention Bitcoin by name, but does include a discussion of “De-Centralized Virtual Currencies” which explains as follows:

A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.

A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.

To the extent that Mr. Shrem may ever challenge the § 1960 allegation against him, he may argue that the FinCEN guidance document is not binding or legally enforceable and therefore should not be used in the government’s case against him. He may also argue that the allegation – which turns an exchange service into a transmitter without the presence of a third party recipient of funds – should be dismissed as a matter of law. Whether Shrem will pursue any defenses in court remains to be seen.

Mr. Shrem was also charged for participating with Faiella in a conspiracy to commit money laundering in violation of 18 U.S.C. § 1956(a)(2)(A), which provides that “(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States ”” (A) with the intent to promote the carrying on of specified unlawful activity” is subject to inter alia a twenty year prison term. This provision of the federal money laundering statute requires an international movement of money, and the government’s complaint therefore alleges that when Faiella ordered Bitcoins from BitInstant, Shrem “filled the orders by causing funds to be transferred to an account that Faiella controlled” at Mt. Gox in Japan. This will be a very difficult allegation for Mr. Shrem to defeat.

Finally, Mr. Shrem – BitInstant’s Chief of Compliance – was also charged with wilfully failing to file suspicious activity reports in violation of 31 U.S.C. § 5318(g) and 5322(a), and 31 C.F.R. § 1022.320. Again, given his position at BitInstant and his understanding of Silk Road, we see this as a very difficult allegation to defeat. Worse, with all of these charges, given Shrem’s sophistication and the manner by which he made use of that sophistication, the Federal Sentencing Guidelines do not play in his favor. Mr. Shrem will likely do real prison time here.

When the news about Mt. Gox broke in May of last year, we wrote not only about the case itself (which was primarily based on Mt. Gox’s alleged deception of its U.S. bank, Wells Fargo), we also discussed the widespread media attention it received. Seemingly within minutes of the government executing the Mt. Gox seizure warrant, the story was picked up by Gawker, CNN, PC World, the Financial Times, and a host of underground websites. We commented at the time as follows: “Tragically for this upstart currency, the mainstream will learn of Bitcoin for the first time as a fringe currency under attack by the federal government. Whether Bitcoin will survive this attack and shed itself of the stigma associated with this seizure is a matter for another day and another article. We certainly hope that it does.”

Those who had never heard of Bitcoin before Charlie Shrem was arrested have certainly heard of it now. Once again, seemingly within minutes following his arrest, the Shrem case was picked up by virtually every major news outlet, from Time, to the New York Times, the Wall Street Journal, the Los Angeles Times, the Washington Post, Bloomberg, the International Business Times, Reuters, Wired, and literally hundreds of others. If the mainstream had not heard of Bitcoin after the Mt. Gox story broke or after Silk Road was shut down, it has heard about it now, and the context is terrible.

That said, our concerns about this stigma potentially destroying Bitcoin are different today than when we commented last May. Indeed, in the intervening months, we have spoken with (and in many cases, represented) numerous players in the Bitcoin space and educated ourselves about some of the emerging technology. For instance, we attended the North American Bitcoin Conference last week in Miami Beach and had the opportunity to hear Vitalik Buterin speak about Ethereum, described by Wired as: “an online service that lets you build practically anything in the image of bitcoin and run it across a worldwide network of machines. At its core, bitcoin is a way of reliably storing and moving digital objects or pieces of information. Today, it stores and moves money, but Buterin believes the same basic system could give rise to a new breed of social networks, data storage systems and securities markets ”” all operated without the help of a central authority.” In other words, Ethereum borrows the concept of the Bitcoin blockchain, but allows users to interact with one another ways that are far more advanced than a typical Bitcoin transaction. We see Ethereum as a “Web 3.0” of sorts, and Buterin’s lecture in Miami Beach was simply mindblowing. We frankly had no idea that the technology – or even the vision of what the technology might someday be – was as far along as it apparently is.

For Buterin’s discussion, we sat next to Jay Postma with  MSB Compliance Inc.. Buterin ended his discussion to a standing ovation, and Jay turned to us and said, “this is the future.” We agree. Our chief concern when the Mt. Gox story broke, and even more so when the Silk Road story broke, was that the stigma could prevent Bitcoin from ever being used on a mass scale. But after hearing Buterin speak, we had to change our perspective in two critical ways. First, we need to stop looking at Bitcoin solely as an underground medium of exchange. It is so much more than that. Yes, it is a medicum of exchange, but it is also a cultural movement and radical technological development based upon the idea that people should be able to communicate directly with one another – in customizable language – with neither the involvement nor interference of anyone. And second, we need to stop looking at Bitcoin as meek and vulnerable to the taint that comes with stories like Mt. Gox, Silk Road, and Charlie Shrem. Bitcoin – as a medium of exchange but much more importantly as a totally radical idea of direct communication – is not going anywhere. We need to embrace it and take it very, very seriously.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in anti-money laundering compliance with a focus on non-bank financial institutions, including all varieties of money services businesses and Bitcoin dealers and exchangers, as well as white collar criminal defense, complex commercial litigation, tax compliance and tax litigation, international trade and corporate transactions. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Florida Business Litigation Update: Prevailing Party Attorneys’ Fees

Contracts are negotiated to establish clear rules to govern the parties’ working relationship, and to cast foreseeability for damages resulting from a breach of these rules.  Transactional counsel are paid handsomely to scrupulously scribe the details of the parties’ agreement and to ensure the contract adequately documents the complete understanding of the parties.  Typically, contracts today include prevailing party attorneys’ fees provisions.  Thus, when the relationship sours, the parties fully appreciate the exposure of paying their own attorneys’ fees as well as their opponent if a lawsuit arising under the contract is unsuccessful.

Enter the trial lawyer and all semblance of clarity transmutes to chaos.  A breach of contract claim becomes a multi-count pleading bolstered by theories of tort, statutory violations, and common law.  Forgetting the underlying exposure for the breach of contract claim, which holds a predictable calculation, the expectation of attorneys’ fees calculations become rightfully frightening.

The recent case of Effective Teleservices, Inc. v. Smith, 39 Fla.L.Weekly D234a (Fla. 4th DCA January 29, 2014), however, returns the chaos to a blurred clarity.  In Smith, the plaintiff sued for breach of contract, statutory violations, and under a sundry of common law theories.  Only the contract and statutory theories provided for fee-shifting events.  The plaintiff prevailed on all counts and sought his fees.  At the fee hearing, the plaintiff failed to differentiate the time spent on the “fee-enabled” claims from the common law claims.  Still, over the defendant’s objection, the trial court found that the plaintiff was entitled to all of his fees because the claims were bound by common facts.

Florida’s Fourth District Court of Appeal reversed, holding, “[T]he party seeking fees has the burden to allocate them to the issues for which fees are awardable or to show that the issues were so intertwined that allocation is not feasible.”  The Smith Court then explained the concept of “inextricably intertwined”:

Claims are “inextricably intertwined” when a determination of the issues in one action would necessarily be dispositive of the issues raised in the other. Conversely, claims are separate and distinct when they could support an independent action and are not simply alternative theories of liability for the same wrong. … [T]he court must evaluate the relationship between the claims and where the claims involve a common core of facts and are based on related legal theories, a full fee may be awarded. But, where the claims are separate and distinct, fees should be apportioned accordingly. The burden remains on the movant to apportion time attributable to claims for which either contractual or statutory basis for fees exist.

Id. (internal citations omitted). A copy of the Smith decision is available here.

The lessons to be gleaned from Smith are two-fold.  First, trial lawyers need to take pains to document their time in such a manner as to enable the differentiation of time expended on each count.  Second, transactional lawyers need to be cognizant of the issue and creatively draft language to encompass all “related” causes of action, not merely causes of action for the breach of such agreement, within the prevailing party fee provision.  Stated a little differently, there remains a solid, value-added place for lawyers throughout the entire spectrum of the relationship.

For more information, please contact us at contact@fidjlaw.com or call us directly at 305-350-5690.

 

Criminal Tax Litigation Update: Courts are Consistently Ruling that the Act of Production Privilege Will Not Defeat Grand Jury Subpoenas Calling for Foreign Bank Account Statements

On December 13, 2013, the United States Court of Appeals for the Fourth Circuit issued its decision in United States of America v. Under Seal, a copy of which is available here. On December 19, 2013, the U.S. Court of Appeals for the Second Circuit issued its decision in In Re: Grand Jury Subpoena, a copy of which is available here. In both cases, the parties found themselves on the receiving end of grand jury subpoenas demanding the production of, generally, records of his foreign bank accounts, including the names of the account holders, the banks, the account numbers, the type of the account, and the maximum value of the account all information that must by law be reported to the Commissioner of Internal Revenue. In both cases, the parties refused to comply with the subpoenas, and in both cases the government moved to compel production in federal district court.

Before the district court, the recipients of the grand jury subpoenas argued that the Fifth Amendment insulated them from producing the records demanded by the grand jury because, in short, the grand jurys subpoena requires him either to produce documents that might incriminate him or to confirm that he failed to register his foreign bank accounts, which itself could be incriminating. Thus, to the extent that the witnesss simple act of producing the documents could be used against the witness for example, in those cases when the simple fact that the witness possessed the documents would be incriminating the recipients of the subpoenas argued that the Fifth Amendment militated against compelled production. This is commonly referred to as the Fifth Amendment act of production privilege. See Fisher v. United States, 425 U.S. 391 (1976).

The act of production privilege is a serious one, but it is not without its limits. For instance, we have previously discussed the required records exception to the act of production privilege under the 5th Amendment to the U.S. Constitution here and here. As described by the Second Circuit, [t]he required records exception applies only when the Fifth Amendment privilege would otherwise allow a witness to avoid producing incriminating documents. It abrogates the protection of the privilege for a subset of thosedocuments that must be maintained by law. (emphasis added). So, in other words, if a witness receives a subpoena calling for production of documents which must be maintained by law, the witness cannot successfully assert that he is insulated by the act of production privilege. In Grosso v. United States, 390 U.S. 62, 6768 (1968), the Court established a three-factor test to determine whether documents are required records:

First, the purposes of the United States inquiry must be essentially regulatory; second, information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept; and third, the records themselves must have assumed public aspects which render them at least analogous to public documents.

In these two cases, the Second and Fourth Circuits travelled the same analytical course and arrived at virtually identical locations: the regulations under the Bank Secrecy Act require that individuals with foreign bank account maintain those records and produce them to the government upon request.  Consequently, statements received from foreign banks are “required records” and the Fifth Amendment act of production privilege does not apply.

As of today, the Second, Fourth, Fifth, Seventh, Ninth and Eleventh Circuits have address the issue and all have sided with the government.  Given that there is no decision from a Court of Appeals siding with a taxpayer on this issue, the probability that the United States Supreme Court would take up the matter is remote.

What does this mean for taxpayers? At a minimum, it means that when seeking to enforce a grand jury subpoena calling for records of foreign financial accounts, the Government will be able to proceed with virtually no fear that it will be quashed. Taxpayers who have undisclosed foreign accounts should consult with competent counsel so as to become educated about their options, including the IRS Offshore Voluntary Disclosure Program (which we have discussed inter alia here, here, here, here and here), and avoid criminal prosecution.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in civil and criminal tax litigation throughout the United States. You may contact us by calling 305.350.5690 or by emailing us at contact@fidjlaw.com

CFPB Proposes To Regulate Large International Money Transfer Providers

On January 23, 2014, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule that would extend its regulatory authority to certain nonbank international money transfer providers. A copy of CFPB’s press release can be read hereand the proposed rule can be read here.

Generally speaking, CFPB regulates electronic fund transfers through a series of regulations known as “Regulation E” found at 12 C.F.R. Part 1005. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), CFPB was tasked with supervising an additional comprehensive system of new consumer protections for remittance transfers sent by consumers in the United States to individuals and business in foreign countries. Dodd-Frank expanded the scope of the Electronic Funds Transfer Act to cover international remittance transfers. (Generally speaking, prior to Dodd-Frank, international money transfers were not specifically covered by federal consumer protection regulations, but have always been regulated for purposes of combating money laundering, terrorist financing, drug trafficking and fraud.)

Pursuant to this authority, CFPB issued its “Remittance Rule” which implemented new protections, including disclosure requirements, and error resolution and cancellation rights, to consumers who send remittance transfers to foreign countries. (The Remittance Rule is actually a series of regulations within Regulation E found at 12 C.F.R. Part 1005, Subpart B.). The Remittance Rule went into effect October 28, 2013. More information regarding the Remittance Rule can be found on CFPB’s website here.

Currently, CFPB has authority to assess large banks’ and credit unions’ compliance with the Remittance Rule. However, the proposed rule would subject any nonbank international money transfer provider that provides more than $1 million in international money transfers annually to CFPB’s regulatory authority. (Dodd-Frank gave CFPB the authority to supervise “larger participants” in consumer financial markets as defined by rule.)This would include brick and mortar and online money transmitting businesses, and may also include remitters and issuers of virtual currencies, such as Bitcoin.

The proposed rule would not only require that these larger nonbank institutions be compliant with the Remittance Rule, but it would also subject them to possible CFPB on-site examination and follow-up monitoring. CFPB’s examination methods are set forth in the proposed rule and allow CFPB to use the same examination procedures it uses for banks. Further, the proposed rule makes clear that money remitters who would not be considered “larger participants” may still be subject to CFPB’s supervisory authority if the Bureau has reasonable cause to determine that they pose a risk to consumers. Comments on the proposed rule may be submitted through www.regulations.gov for 60 days after the proposed rule’s publication in the federal register.

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