Export Compliance Update: OFAC Issues General License Easing Restrictions On Exportation Of Communications Services, Software, and Hardware To Iran

On May 30, 2013, the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury announced the issuance of a general license authorizing the exportation to Iran of certain services, software, and hardware incident to personal communications. The general license will allow U.S. persons to export consumer communications equipment and software to Iranian citizens. As described by Bloomberg Businessweek, the general license will cover a wide variety of software and hardware including mobile phones, satellite phones, laptop computers, modems, broadband hardware, and routers. A copy of the general license can be read here.

As we have previously reported, Iran is already subject to broad and sweeping sanctions which are administered by OFAC. The Iranian Transactions Regulations (“ITR”), which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act. 31 C.F.R. § 560.206 prohibits U.S. persons from “financing, facilitating, or guaranteeing” goods, technology or services to Iran. Additionally, 31 C.F.R. § 560.208 prohibits U.S. persons from approving, financing, facilitating, or guaranteeing any transaction by a foreign person where the transaction performed would be prohibited under the IRT if performed by a U.S. person. However, pursuant to the Iran-Iraq Arms Non-Profileration Act of 1992, the President has the authority to waive the imposition of certain sanctions if such waiver is “essential to the national interest” of the United States. General information regarding economic sanctions against Iran can be found at OFACs website.

While the decision to grant this general license may appear on the surface to run counter to recent OFAC sanctions, (more information on these restrictions can be read on our prior report here), two points must be noted. First, the general license does not authorize the export of any equipment to the Iranian government or to any individual or entity on the Specifically Designated Nationals (“SDN”) list. Second, general licenses permitting the sale and export of telecommunications equipment and technology currently exist in other OFAC administered sanctions regimes.

For example, similar general licenses exist within the Cuban Sanctions program. 31 C.F.R. § 515.542(b) provides that U.S. telecommunications services providers are authorized to engage in all transactions incident to the provision of telecommunications services between the United States and Cuba, the provision of satellite radio or satellite television services to Cuba, and the provision of roaming services involving telecommunications services providers in Cuba. In addition, section 515.542(c) authorizes persons subject to U.S. jurisdiction to contract with and pay non-Cuban telecommunications services providers for services provided to particular individuals in Cuba (other than certain prohibited Cubans). More information on the Cuba Sanctions regime can be found on OFAC’s website here.

Similar general licenses also exist under the Syrian Sanctions program. Pursuant to General License No 5, U.S. persons, wherever located, may export to persons in Syria services incident to the exchange of personal communications over the Internet, such as instant messaging, chat and email, social networking, and blogging, provided that such services are publicly available at no cost to the user.

The purpose of such general licenses is to help facilitate the free flow of information between persons located within countries subject to U.S. Sanctions and the outside world. As explained by the Treasury Department in its press release announcing the new general license:

The United States is taking a number of coordinated actions today that target persons contributing to human rights abuses in Iran and enhance the ability of the Iranian people to access communication technology. As the Iranian government attempts to silence its people by cutting off their communication with each other and the rest of the world, the United States will continue to take action to help the Iranian people exercise their universal human rights, including the right to freedom of expression.

The people of Iran should be able to communicate and access information without being subject to reprisals by their government. To help facilitate the free flow of information in Iran and with Iranians, the U.S. Department of the Treasury, in consultation with the U.S. Department of State, is issuing a General License today authorizing the exportation to Iran of certain services, software, and hardware incident to personal communications. This license allows U.S. persons to provide the Iranian people with safer, more sophisticated personal communications equipment to communicate with each other and with the outside world. This General License aims to empower the Iranian people as their government intensifies its efforts to stifle their access to information.

A copy of Treasury Department’s press release can be read here.

FIDJ will continue to watch for developments in the implementation of the new Iranian sanctions program with a keen eye. For more information regarding the Iranian Sanctions Program, the Iranian Transaction Regulations, OFAC and for strategies on maintaining compliance with federal regulations, please contact us at 305-350-5690 or contact@fidjlaw.com.

FDA Regulatory Update: Laboratory-Developed Tests Once Again Come Under FDA’s Microscope and Laboratory Industry Opposes

Laboratory-developed tests (“LDTs”) appear to be under FDA’s microscope once again. These tests, which include genetic tests, companion diagnostics, and genetic tests, are developed and performed by a laboratory and have been the source of years of strife between the laboratory industry and FDA. FDA has historically stated that it exercises enforcement discretion when it comes to LDTs. However, on June 2, Margaret Hamburg, commissioner of FDA, stated during an American Society of Clinical Oncology meeting that FDA is considering taking some sort of action with regard to its regulation of LDTs. That sentiment reflects FDA’s position from a June 17, 2010 Federal Register notice stating that more regulation of LDTs may be necessary due to FDA’s observations that the nature of LDTs was changing from “generally relatively simple, well-understood pathology tests” to tests that “are often used to assess high-risk but relatively common diseases and conditions and to inform critical treatment decisions and are often performed in geographically distant commercial laboratories instead of within the patient’s health care setting under the supervision of a patient’s pathologist and treating physician, or may be marketed directly to consumers.” A copy of that Federal Register notice is available here.

To complicate matters, the Food and Drug Administration Safety and Innovation Act (“FDASIA”), enacted last year, requires that FDA notify Congress with the details of any anticipated action at least 60 days before issuing any draft or final guidance on the regulation of LDTs. Not surprisingly, the laboratory industry strenuously opposes FDA regulation. As evidenced by a Citizen Petition submitted by the American Clinical Laboratory Association (“ACLA”) to FDA requesting that FDA confirm that LDTs are not devices under the Federal Food, Drug, and Cosmetic Act (“FDCA”), ACLA argues that LDTs are beyond FDA’s jurisdiction because the Center for Medicare and Medicaid Services has authority to regulate LDTs under the Clinical Laboratory Improvements Amendments of 1988 (“CLIA”). FDA has addressed and denied such Citizen Petitions in the past.

As FDA may move forward with regulating LDTs as medical devices, members of the laboratory industry should be aware of the potential controversial change in FDA policy and should be prepared to comment on any proposed guidance or regulation that the agency may produce on LDT policy or regulation. Additionally, physicians and laboratories developing and using LDTs should be aware of whether their tests meet the recognized criteria of LDTs or whether their tests could qualify as medical devices subject to FDA regulation.

Fuerst, Ittleman, David & Joseph, PL will continue to track and report on FDA’s position related to laboratory developed tests. For more information, please contact us via e-mail at contact@fidjlaw.com or via telephone at (305) 350-5690.

Announcing the FIDJ Mini-Blog

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

Click here to sign up.

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

Food and Drug:

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

Healthcare:

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

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

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

Tax:

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

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

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

Anti-Money Laundering:

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

Tax Litigation Update: IRS Commits to Prevent Double Taxation in Virgin Islands Economic Development Program Case

Disclosure: Joseph A. DiRuzzo, III of Fuerst Ittleman David & Joseph represented the taxpayers before the District Court of the Virgin Islands and before the Third Circuit Court of Appeals.

On May 17, 2013, the United States Court of Appeals for the Third Circuit issued its opinion in the case of Cooper v. Comm’r of Internal Revenue, ___ F.3d ____, 2013-1 U.S. Tax Cas. (CCH) P50,331. A copy of the precedential opinion is available here. The opinion is a consolidated one, and decided the cases of four separate taxpayers (Cooper, McGrogan, McHenry, and Huff) who had availed themselves of the Virgin Islands Economic Development Program (EDP).

The Court of Appeals began its opinion by aptly noting the following: “This case is about Taxpayers’ attempt to lawfully reduce their income tax liability by claiming certain tax benefits afforded exclusively to bona fide residents of the United States Virgin Islands.”

The facts of the case are as follows:

Between 2001 and 2004, the Taxpayers claimed that they were bona fide residents of the Virgin Islands and therefore eligible for the tax benefits granted by the EDP. (For more information about the EDP, including a history of the litigation between and among U.S. taxpayers, the IRS and the Virgin Islands Bureau of Internal Revenue, please review our prior blog entries here, here, here, here, here and here.) Consequently, the Taxpayers filed tax returns with the Virgin Island Bureau of Internal Revenue (VIBIR) and paid their taxes only to the Virgin Islands government. However, the Taxpayers did not file federal income tax returns with the IRS. Consequently, in late 2009 and early 2010, the Taxpayers were issued statutory notices of deficiency by the IRS challenging their claims of bona fide residency in the Virgin Islands. The Taxpayers challenged the deficiency notices in the District Court of the Virgin Islands. The District Court granted the IRS’s motion to dismiss on the grounds that the Tax Court was the only proper forum for the Taxpayers’ suits against the IRS and therefore the District Court of the Virgin Islands lacked subject matter jurisdiction to adjudicate the dispute.

After receiving a deficiency notice from the IRS in late 2009, McGrogan, in an effort to avoid double taxation, filed suit in the District Court of the Virgin Islands seeking a refund of taxes paid to the VIBIR. The District Court granted the VIBIR’s motion to dismiss McGrogan’s refund petition because McGrogan filed his claim outside the statute of limitations pursuant to I.R.C. § 6511(a) (statute of limitations for a refund petition expires either three years after the time of filing an income tax return or two years after the time of payment of the tax owed, whichever expires last).

On appeal, the Third Circuit noted that the mitigation provisions in the Internal Revenue Code allow qualifying taxpayers to bring refund claims that would otherwise be barred by the statute of limitations. See I.R.C. § 1311(a). However, according to the Third Circuit, the mitigation provisions did not afford relief to McGrogan because he could not show that a “circumstance of adjustment” had occurred. In short, although McGrogan claimed a circumstance of adjustment for the double inclusion of income, the Internal Revenue Code permits mitigation for the double inclusion of income only if the taxpayer’s claim involves “an item which was erroneously included in the gross income of the taxpayer for another taxable year or in the gross income of a related taxpayer.” I.R.C. § 1312(1). Such a double inclusion did not occur in this case. McGrogan did not allege that he erroneously paid taxes in an incorrect tax year and did not claim to have erroneously paid taxes for a related taxpayer. Rather, McGrogan’s overpayment of taxes is a situation not contemplated by the mitigation statute: payment to the wrong taxing entity.

The Court then went on to discuss the Court of Appeal’s concern “about the possibility of double payment of taxation to the IRS and to the VIBIR in cases such as the ones at issue here. The IRS assured us at oral argument it was willing to participate in the administrative procedure set up by the Tax Implementation Agreement:

[Counsel for the IRS]: At this point I don’t believe there’s any sign that there would be double taxation. We’ve indicated ”” the IRS has indicated its willingness to participate in competent authority once it is determined how much taxes are owed.

Obviously, if a particular taxpayer wins on their challenge, if they prove that they’re bon[a] fide Virgin Islands residents and they prove that the income in question was Virgin Islands income, there won’t be any double taxation because there won’t be any residual U.S. tax liability. But if, instead, there is determined that, yes, there is U.S. tax liability here because these were not Virgin Islands residents, or their income was not Virgin Islands income and, therefore, not subject to the EDP benefits, then we’ve indicated, as shown in the record cites I gave you for the Cooper notices of deficiency, that we’re willing to go in a competent authority at that point to determine which tax authorities should be getting the money.

“The IRS then qualified the above statement:

[Counsel for the IRS]: I’m not entirely certain what the remedy would be in a situation where someone, unlike the Coopers, failed to do a protective refund claim, failed to take that step to protect their right to go and get money back from the Virgin Islands BIR if, in fact, it is determined that they should have instead paid all of their taxes to [the IRS].

“Counsel for the Taxpayers replied to the IRS’s argument by pointing out that the protective mechanism of a refund claim was set up in 2006, after the time to file a protective income tax return for calendar years 2001 and 2002 had already closed. Therefore, McHenry and McGrogan could not have taken the protective actions advocated by the IRS.

“In view of the statement by the IRS that negotiation would be initiated to prevent double taxation ”” in the situation we could envisage if, for instance, McGrogan lost his pending case in the Tax Court ”” we trust that the IRS will live up to its commitment to prevent double taxation.”

Slip op. at p. 19-20, fn.6; (emphasis added).

A copy of the transcript of the oral argument is available here:

So, while this decision was resolved unfavorably for the named taxpayers, the decision has far reaching implications for all taxpayers who are litigating the issue of whether they were bona fide USVI residents. The IRS has now made the affirmative commitment to the Third Circuit that there will be no double taxation. This has effectively removed one of the bargaining chips that the IRS has had in its litigation position. Previously, the standard operating procedure of the IRS was that a taxpayer should settle, and upon settlement the IRS would give the taxpayer credit for taxes paid to the VIBIR. However, if the taxpayer wanted to litigate the residency issue (in the Tax Court for example) then the IRS would not give credit for taxes paid to the VIBIR. Further, based on the IRS’s representation to the Third Circuit, there is no longer the need to sue the VIBIR in an attempt to recoup the taxes paid to the VIBIR in an attempt to remit the previously paid taxes to the IRS.

This case, taken with the Third Circuit’s decision in Vento, see here, and the Tax Court’s decision in Appleton, see here, show that the federal courts have been willing to rebuff the IRS and its litigation position for those who have claimed to be bona fide USVI residents and therefore able to participate in the Virgin Islands Economic Development Program.

The attorneys at Fuerst Ittleman David & Joseph are actively litigating against the IRS, the United States, and the Virgin Islands Bureau of Internal Revenue in Virgin Islands residency cases in the District Court of the Virgin Islands, the U.S. Tax Court, the Third Circuit Court of Appeals, and the U.S. Court of Federal Claims. Additionally, Joseph A. DiRuzzo, III, is licensed to practice in the Virgin Islands and lived on St. Thomas for years before relocating to South Florida. Mr. DiRuzzo is actively litigating federal tax cases (both civil and criminal) on St. Thomas and St. Croix.

You can contact us via email at: contact@fidjlaw.com, or by telephone at 305.350.5690.

Virgin Islands Economic Development Program Update: Tax Court: Statute of Limitations Triggered by Filing Tax Return with Virgin Islands Bureau of Internal Revenue

On May 22, 2013, Judge Jacobs writing for the United States Tax Court ruled against the IRS which had taken the position that the statute of limitations did not apply to Virgin Islands taxpayers who filed an income tax return with the Virgin Islands Bureau of Internal Revenue (VIBIR). The case is Appleton and the Government of the United States Virgin Islands v. Commissioner of Internal Revenue, 140 T.C. No. 14, which may be read here. For a background discussion of taxation in the U.S. Virgin Islands, including the Virgin Islands Economic Development Program(EDP) and the ongoing litigation between the IRS and the myriad taxpayers who have availed themselves of the EDP, please see our prior blog posts on these issues  here, here, here, here and here.

The facts of the case are fairly straightforward. The taxpayer, Arthur Appleton, is a United States citizen who resided on the U.S. Virgin Islands and was a bona fide resident under Section 932 of the Internal Revenue Code. The taxpayer claimed an EDP tax credit.  The IRS received copies of the taxpayer’s 2002, 2003, and 2004 returns from the VIBIR, and both the VIBIR and the IRS examined the taxpayer’s income tax returns. The VIBIR proposed no adjustments, but the IRS did, determining that the taxpayer did not qualify for the section 932(c)(4) gross income exclusion. Treating the taxpayer as a nonfiler, on November 25, 2009, the IRS issued the taxpayer a statutory notice of deficiency.

In the Tax Court’s discussion, it observed that Section 7654(e) of the Internal Revenue Code required the Secretary to draft whatever regulations necessary to carry out the provisions of section 932, including prescribing the information which individuals to whom section 932 applies must furnish to the Secretary. The Secretary did not, however, promulgate regulations for the years at issue.

The court also recognized that the instructions to Form 1040 stated that that “permanent residents of the Virgin Islands should use: V.I. Bureau of Internal Revenue, 9601 Estate Thomas, Charlotte Amalie, St. Thomas, VI 00802” when filing their Form 1040 individual income tax returns.  The court noted that the IRS “concedes that the Forms 1040 petitioner filed with the VIBIR are returns within the meaning of section 6501(a)(1), sufficient to trigger the running of the period of limitations if properly filed.”  The court then went on to state that “[t]he Secretary, using the authority expressly granted to him by section 6091(b)(1)(B), promulgated section 1.6091-3(c), Income Tax Regs., which requires taxpayers like petitioner, residing in a possession of the United States, to file their tax returns as designated on the return forms or in the instructions issued with respect to those forms. The instructions to Form 1040 are explicit: The form is to be filed with the VIBIR.”

In dispensing with the argument that an income tax return filed with VIBIR cannot be an IRS return, the court recognized that the IRS’s position (i.e., that petitioner should have filed two returns–one with the VIBIR and one with the IRS) was undermined by its position that bona fide residents of the Virgin Islands who earn less than $75,000 may satisfy their Federal filing requirements by the single filing of a return with the VIBIR. Thus, even before the start of the Appleton case, IRS had accepted Mr. Appleton’s argument that a return filed with the VIBIR may be both a Federal return and a territorial return.

The Court concluded that the taxpayer proved that the section 6501(a) period of limitations expired before the date the IRS mailed the taxpayer the notice of deficiency.

The implications of the decision are far reaching, and it appears that the IRS’s ability to audit VI taxpayers indefinitely has been seriously undercut by the Tax Court.  We anticipate that the IRS will have to change its litigation position and that a good majority of the cases currently pending in the Tax Court will also be subject to dismissal based on the statute of limitations defense.  However, only time will tell how the IRS will respond and if the IRS will attempt to seek reconsideration and/or appeal.

Additionally, as we previously blogged, the U.S. Court of Appeals for the Third Circuit in the Vento case established the legal test for those who claim to be bona fide USVI residents under IRC section 932 (2004).  The implication of Appleton and Vento decisions working in tandem is that USVI residency is a low threshold to meet, and once one is a USVI resident the statute of limitation should prevent the IRS from assessing additional tax, penalties and interest.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive civil and criminal tax litigation experience and are currently litigating a large number of Virgin Islands tax cases before the Tax Court.  You can reach at attorney by calling us at 305.350.5690 or by emailing us at: contact@fidjlaw.com.

Florida Business Litigation Update: Florida Appeals Court Requires Insurer to Provide Separate Counsel for Multiple Insureds Under Single Policy

In Univ. of Miami v. Great Am. Assur. Co., 38 Fla. L. Weekly D392 (Fla. 3d DCA 2013), Florida’s Third District Court of Appeals announced a ruling in a case of first impression that will have a substantial impact in Florida’s legal community. Specifically, the court held that where multiple defendants are covered by the same policy of insurance, the insurer must provide independent and separate counsel for each defendant. This decision should be called the Lawyer’s Employment Opportunity Act of 2013. A copy of the decision is available here.

The Univ. of Miami decision was unique because one of the defendants, MagiCamp, contractually agreed to indemnify University of Miami (“The U”) for any damages arising from the activity. Because of that indemnification, the insurer took the position that there could be no conflict. The U disagreed, retained its own counsel, and later sued the insurer for reimbursement of its fees and costs. The Third District agreed with The U, and found that “where both the insured and the additional insured have been sued, and the allegations claim that each is directly negligent for the injuries sustained, a conflict between the insured and the additional named insured exists that would require the insurer to provide separate and independent counsel for each.”

Still, the decision raises more questions than it answers. Many policies are “wasting policies,” meaning that the total amount of coverage declines for every dollar expended on litigation costs. Thus, what happens when there a lawsuit claiming damages of $1,000,000 filed against an entire Board of Directors consisting of 6 directors, where the aggregate limits of total insurance coverage of their “wasting” policy is for $1,500,000? In this situation, there are (at least) two competing conflicts: (i) one for representation where there exists the possibility of finger pointing amongst the directors, and (ii) another where every available dollar of coverage is expended for every dollar spent on lawyers. To exacerbate the conflict, what should the insurer do when all but one of the insured-defendants agree amongst themselves that only one lawyer should represent them (in order to conserve available insurance dollars), yet there exists one dissenting director who wants his/her own counsel? The questions are endless.

It is expressly because of the endless array of “conflict questions” that Judge Shepherd dissented. Judge Shepherd rationalized that the issue of “conflict” is not and should not be decided on the basis of insurance law; rather, it is a question of professional ethics. Explaining that there was no conflict-in-fact because there was no adversity between the co-insureds, Judge Shepherd noted, “A conflict of interest between jointly represented clients occurs whenever their common lawyer’s representation is rendered less effective by reason of his representation of the other. Furthermore, the difference in the potential for liability [between] two insureds, standing alone, does not necessarily result in an actual conflict of interest between them so far as their joint defense is concerned.” In other words, a hypothetical “paper conflict” is insufficient to mandate the engagement of separate counsel.

Recognizing the logic of Judge Shepherd’s dissent, the majority noted that the Univ. Of Miami holding does not reach or address “[c]onflicts created by coverage or policy limit issues [which are] not the issue in this appeal.” Id. at fn 5. But that only begs the question of when the insurer must retain independent counsel for multiple insureds?

The answer, respectfully, lies not within the terms of the insurance policy, but within the confines of the professional responsibility of defense counsel. Rule 4-1.7(a)(1) provides that “a lawyer shall not represent a client if the representation of 1 client will be directly adverse to another client; or (2) there is a substantial risk that the representation … will be limited by the lawyer’s responsibility to another client.” Thus, the counsel retained to represent MagiCamp and The U was obliged to stand up to the carrier and explain that he/she was ethically barred from representing both parties. Unless, of course, said counsel was not ethically barred in fact, thus underscoring the point that the alleged “conflict” was nothing more than a “paper conflict.”

In any event, what remains clear is that skilled counsel is necessary to engineer the defense strategy at the inception of the case. Defense issues ranging from insurability and coverage, as well as counter-maneuvers and tactics designed to undermine the plaintiff’s case-in-chief need to be vetted at the earliest opportunities. Otherwise, parties remain entrenched in lawsuits even after the underlying case is over.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in all areas of complex litigation, including international and domestic business matters, contract disputes, and insurance issues. Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.

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

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

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

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

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

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

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

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

Update: FDA Regulation of Marijuana “Medibles” Presents Challenges and Uncertainty for Marijuana-based Food Manufacturers and Distributors

As we recently reported, federal regulators have continued to take measures aimed at stymieing the growth of the marijuana industry. Medical marijuana is now legal in over 18 states and, in November 2012, voters in Colorado and Washington legalized the sale of recreational marijuana to adults age 21 or older. However, possessing, cultivating, and distributing marijuana remains illegal under federal law, despite state laws to the contrary, and the federal government has aggressively pursued medical marijuana dispensaries for violating federal laws. (For more information about the federal government’s crackdown on medical marijuana dispensaries, please read our previous posts  here, here, and here.). As Colorado and Washington’s marijuana laws go into effect, the federal government is faced with new questions regarding the manufacture and sale of “medibles,” food and beverages infused with marijuana. Of particular concern for medibles manufacturers is how, if at all, edible marijuana products implicate regulation by the U.S. Food and Drug Administration (“FDA”). (For more coverage regarding edible marijuana products, please read NBC’s article here.)

The FDA, the federal agency primarily responsible for the safety of the nation’s food supply, has specific regulations regarding the manufacture, quality, and labeling of food products. Under 21 U.S.C. § 321(f) of the federal Food, Drug, and Cosmetics Act (“FDCA”), a “food” is loosely defined as “an article used for food or drink.” Products that are intended to be consumed as foods or are otherwise labeled or represented as food products must comport with the FDA’s regulations. Pursuant to the FDA’s regulations, food manufacturers must register their establishments with the FDA and operate in accordance with current good manufacturing practices (“cGMPs”). (Generally speaking, cGMPs are a series of regulations, found at 21 C.F.R. Part 110, designed to ensure that food products are prepared, packaged, and stored in sanitary conditions.).

In addition, food manufacturers must also ensure that food products do not contain any unapproved substances or additives and that the ingredients contained in food products are generally recognized as safe (“GRAS”). As described by the FDA:

GRAS is an acronym for the phrase Generally Recognized As Safe. Under sections 201(s) and 409 of the Federal Food, Drug, and Cosmetic Act (the Act), any substance that is intentionally added to food is a food additive, that is subject to premarket review and approval by FDA, unless the substance is generally recognized, among qualified experts, as having been adequately shown to be safe under the conditions of its intended use, or unless the use of the substance is otherwise excluded from the definition of a food additive.

More information on GRAS requirements can be found on the FDA’s website here.

Moreover, food products must bear correct food labeling, including a Nutrition Facts panel and appropriate food claims. Manufacturers that fail to meet cGMPs or use ingredients that are not GRAS in their food products could be subject to enforcement action under the misbranding or adulterated food provisions of the FDCA.

With marijuana legalization, commercial retailers in Colorado and Washington have started developing various “medible” products. However, as of now these manufacturers have been operating in a void of regulations because marijuana remains illegal under federal law. As a result, FDA has not developed GRAS regulations for marijuana and has not publicly commented on the applicability of cGMPs to medible manufacturers.

Although the FDA has not released an official position on whether or how it intends to regulate medible products, medibles likely could trigger heightened FDA scrutiny. An initial question which must be evaluated by the FDA is whether medibles qualify as foods at all, or whether their intended uses would qualify these products as drugs under the FDCA. (21 U.S.C. § 321(g) defines the term “drug” in part to mean “articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals.”).

If the FDA deems medibles to be foods, medibles would then be required to be manufactured using good manufacturing practices and product labeling compliant with FDCA regulation of foods. However, even if cGMPs and labeling requirements are satisfied, manufacturers, distributors, and sellers of marijuana medibles could still face liability under the FDCA because the FDA has not approved marijuana as a food ingredient or food additive and has not deemed marijuana to be GRAS. Generally speaking, products which contain food additives and ingredients that are not GRAS are considered adulterated under the FDCA. Thus, if the FDA were to assert jurisdiction and begin regulating medibles as foods, under the current regulatory regime FDA would likely allege that medibles are adulterated.

Manufacturers and distributors of marijuana medibles face the possibility of several FDCA violations should marijuana medibles be considered adulterated food products. These include: 1) the adulteration of a food product in interstate commerce; 2) introduction or delivery for introduction into interstate commerce of an adulterated food product; and 3) the receipt in interstate commerce of any food that is adulterated, and the delivery or proffered delivery thereof for pay or otherwise. See 21 U.S.C. § 331 (a), (c). The penalties and punishments associated with these crimes are governed by 21 U.S.C. § 333 and depend on whether the government charges the defendant with committing a violation “with the intent to defraud or mislead.” Each of these penalties is available regardless of whether marijuana is legal under State law.

Regardless of how FDA regulates medibles, the federal government has made clear that marijuana is still classified as a Schedule I drug under the Controlled Substances Act (“CSA”). Accordingly, distributors face the risk of additional criminal penalties beyond those prescribed within the FDCA.  21 U.S.C. § 841 prohibits the manufacture and distribution of a controlled substance expect as permitted under the CSA. Unlike the FDCA where first offenders convicted of adulteration violations face a maximum of three years imprisonment, first time offenders under the CSA face a minimum of five with a possibility of a maximum of forty years imprisonment. Because the production of medibles is not permitted under the CSA, criminal indictments under this separate regulatory regime are still possible.  Such indictments would be similar to those of three medicinal marijuana dispensary operators late in 2012. (More information on those indictments can be read in our previous report here.).

Due to the federal government’s apparently unwavering position on marijuana products, some Congressional lawmakers have introduced legislation that restricts federal involvement in regulating the sale and use of marijuana. On March 7, 2013, Representative Dana Rohrabacher proposed a new bill to Congress entitled the “Respect State Marijuana Laws Act of 2013” (H.R. 1523). The proposed bill protects both marijuana businesses and individual marijuana users from federal or criminal prosecution so long as their acts comply with existing state laws. Specifically, the Respect State Marijuana Laws Act of 2013 proposes to add the following language to the Controlled Substances Act (21 USC 801 et seq.): “Notwithstanding any other provision of law, the provisions of this subchapter related to marihuana shall not apply to any person acting in compliance with State laws relating to the production, possession, distribution, dispensation, administration, or delivery of marihuana.” Congress has yet to vote on this bill.

Unless and until the federal government begins to respect state laws governing marijuana, marijuana growers and commercial manufacturers should be aware of the potential issues that will continually arise due to the conflict between state and federal law.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, constitutional law, regulatory compliance, white collar criminal defense and litigating against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Florida Complex Litigation Update: Raymond James Financial Services, Inc. v. Phillips: Florida Supreme Court rules that statute of limitations applies to arbitration

Resolving a matter of first impression in Florida, the Florida Supreme Court recently issued its decision in Raymond James Financial Services, Inc. v. Phillips, Case No. SC11-2513 (Fla. May 16, 2013), concluding that Florida’s statute of limitations applies to arbitration.

The landmark decision in Raymond James affects arbitration provisions in every type of agreement or business contract in Florida and elsewhere governed by Florida law.

Specifically, in Raymond James, a financial services investment firm, like Florida businesses in many other commercial contexts, required its clients to sign an agreement to arbitrate all disputes arising under the agreement. After the clients’ investments subsequently lost significant value, the disappointed investors filed a joint claim for arbitration against the investment firm, asserting numerous commercial-based claims, including breach of contract, negligence, breaches of fiduciary duty, and various state and federal violations. The investment firm moved to dismiss the claims, maintaining that all of the claims were time-barred by Florida’s statute of limitations.

An arbitration panel was appointed, and a hearing on the motion to dismiss was scheduled.

However, before the hearing, the investors filed a separate lawsuit in state trial court, seeking a declaratory judgment that, in relevant part, Florida’s statue of limitations does not apply to arbitrations, but applies only to judicial actions. See Fla. Stat. § 95.011 (limiting the applicability of Florida’s statute of limitations to a “civil action or proceeding”), available here.

The trial court agreed with the investors. On appeal, Florida’s Second District Court of Appeals disagreed with the trial court, but certified the question as to the applicability of Florida’s statute of limitations to arbitration agreements to be of great public importance.

The Florida Supreme Court in Raymond James began its substantive analysis with the actual language of Florida’s statute of limitations, noting that the statue is limited to a “civil action or proceeding.” The Court then turned to the “ordinary” definition of those terms and concluded that the “broad” terms do include an arbitration proceeding. The Court in Raymond James also noted as a matter of statutory construction that, while “civil actions” may be limited to court cases, the term “proceeding” in the statute is clearly broader in scope. Thus, the Court concluded that limiting the term “proceeding” to apply to only judicial proceedings would construe the term in a manner inconsistent to the language of the statute of limitations and the Florida Legislature’s intent in drafting such language.

The Florida Supreme Court in Raymond James also found that any contrary interpretation would defeat the purpose of a related statute, section 95.03, Florida Statutes, which renders void any contract provision attempting to shorten the applicable limitations period. See Fla. Stat. § 95.03, available here.

Further, the Court in Raymond James deemed its interpretation of Florida’s statute of limitations to be consistent with the interpretation of the term “arbitration” in other statutory provisions, including the Florida Arbitration Code, set forth in chapter 682, Florida Statutes, referring to arbitration in various provisions as an “arbitration proceeding.” The Court likewise observed that its broad interpretation of the terms “action or proceeding” to include arbitration was consistent with the history of the statute of limitations and the purpose behind its enactment, i.e., to discourage stale claims and to avoid parties waiting to bring claims until documents or witnesses are difficult to locate.

A slip copy of the Florida Supreme Court’s opinion in Raymond James Financial Services, Inc. v. Phillips is available here.

At bottom, the recent opinion affects the claims and defenses available to every individual or corporation in a Florida civil action or proceeding, including FINRA and other arbitration proceedings, that conducts business in Florida and/or enters into contracts governed by Florida law containing arbitration provisions. Accordingly, business owners and decision makers with commercial operations in Florida would be well advised to review the arbitration provisions in existing agreements so as to better understand rights and obligations in light of Raymond James, and to tailor all future agreements as necessary.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in all areas of complex civil and criminal litigation, including international and domestic business matters and contract disputes. Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.

Bitcoin Regulatory Update: Understanding the Federal Government’s Attack on Mt. Gox

Bad news travels fast. On May 14, Magistrate Judge Susan Gauvey of the United States District Court for the District of Maryland signed a Seizure Warrant authorizing the Federal Government to seize “the contents of Dwolla Account 812-649-1010 registered in the name of Mutum Sigillum LLC, held in the custody of Veridian Credit Union.” After Judge Gauvey signed the warrant, the Government issued it, and the news spread like wildfire. Even though Bitcoin up until now has not been used in the mainstream markets and most people have probably never even heard of it, within a short period of time news of the warrant had proliferated the internet, appearing on mainstream websites such as Gawker (Bitcoin exchange Mt. Gox lands in feds’ crosshairs), CNN (Bitcoin exchange Mt. Gox lands in feds’ crosshairs), PC World (Mt. Gox accused of violating US money transfer regulations), Financial Times (US seizes accounts of Bitcoin exchange), and more underground sites such as Ars Technica (Feds reveal the search warrant used to seize Mt. Gox account), Betabeat (Warrant Reveals Homeland Security Seized Mt. Gox’s Dwolla Account …), PandoDaily (US authorities launch their first attack on bitcoin), and TheBlaze.com (Feds Seize Bitcoin Account for ‘Unlicensed Money Transferring’).

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.

On Thursday, Kim Dotcom (@kimdotcom) tweeted a question that seems to be on everyone’s mind in the wake of the warrant: “Is the U.S. govt trying to destroy Bitcoin?” While we are absolutely sensitive to Mr. Dotcom’s perspective on the issue, we won’t speculate on the answer to his question. However, we will say that – given the statement of facts included in the affidavit attached the warrant – the attack should come as no surprise.

Let’s start with the regulatory background. Between the time of its birth and this past March, Bitcoin existed in an area of the law where there was no law. That is not to say that Bitcoin issuers and users were not subject to the money laundering provisions of federal law if they used Bitcoin for unlawful purposes, but up until March of this year the federal government had not decided how to regulate Bitcoin as a thing. Then, on March 18, the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury issued its Guidance entitled, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.” This was a watershed moment for the regulation of Bitcoin, but sadly it seems that Mt. Gox either never knew about it or chose to disregard it. 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.

So, before March, whether FinCEN would ever regulate Bitcoin – and if so, how – was a mystery. However, after March 18, things became much more clear: if an entity is in the business of exchanging Bitcoin for “real currency” or vice versa, or accepts Bitcoin from one person and transmits the real currency equivalent to another person, that entity is a money transmitter and will be regulated as such in the United States, and will be subject to the criminal provisions of 18 USC 1960 for failing to register with the federal government as a money transmitter or being licensed in any state that would require a money transmitting license.

Next, FinCEN’s recently crafted regulatory scheme for Bitcoin dealers is unquestionably applicable for dealers operating outside of the United States. Thus, even assuming that Mt. Gox did not have the physical nexus in the United States which Special Agent McFarland described in his Affidavit, so long as Mt. Gox was servicing people located in the United States, Mt. Gox would be regulated as a money transmitter. As FinCEN explained on July 18, 2011, and as we blogged shortly thereafter, FinCEN’s rules make foreign-located businesses engaging in MSB activities within the U.S. subject to U.S. law:

As a result, even foreign based MSBs with no physical presence in the US can be classified as an MSB and thus subject to the rigorous requirements of the BSA. However, foreign banks as well as foreign financial agencies that engage in activities that if conducted in the US would require them to be registered with the SEC or CFTC are excluded from the definition of an MSB. As noted in the rule, “To permit foreign-located persons to engage in MSB activities within the United States and not subject such persons to the BSA would be unfair to MSBs physically located in the United States and would also undermine FinCENËœs efforts to protect the U.S. financial system from abuse.”

Finally, third, as we have repeatedly explained (and as we deal with over and over for clients), opening a bank account under false pretenses is never a good idea. Indeed, just this week we explained how state sanctioned marijuana dispensaries could face criminal liability for opening bank accounts in the name of shell companies or straw owners:

Generally speaking, the use of shell companies or other accounts to mask the profits derived from the sale of marijuana could subject the owner of a dispensary to a wide variety of federal criminal penalties, including bank fraud 18 U.S.C. § 1344, wire fraud 18 U.S.C. § 1343, and money laundering 18 U.S.C. § 1956. Additionally, those who assist in such actions, for example the friend or family member who allowed for money to be transferred through his or her account, would also face similar criminal charges. Moreover, should such fraud occur, the payment processors and banks who process this money can still be held liable for money laundering and face criminal and civil fines and penalties. Each of these penalties is available regardless of whether marijuana is legal under State law. Put simply, if a company lies for the purpose of opening a bank account, the consequences are severe.

Based on the contents of the Seizure Warrant and its accompanying Affidavit, the Mt. Gox case hits on all of these points. First, as the affidavit describes, Mt. Gox is a Japanese company which operates in the United States under a subsidiary named Mutum Sigillum LLC. Second, the Affidavit explains that neither Mt. Gox nor Mutum Sigillum had registered with the federal government as a money transmitting business. Finally, when Mt. Gox d/b/a Mutum Sigillum approached Wells Fargo for purposes of opening a bank account, the affidavit describes that Mark Karpeles, operating on behalf of Mt. Gox d/b/a Mutum Sigillum, told Wells Fargo that the account would not be used for purposes of exchanging currency or transmitting money. In all likelihood, when Wells Fargo saw on the one hand that the Mutum Sigillum account’s activity resembled that of a money services business, but that Karpeles had previously told the bank that Mutum Sigillum was not engaged in that business, Wells Fargo filed a Suspicious Activity Report which called in the federal government, and then the government made short work of the asset seizure. Unfortunately, while this is new to the Bitcoin industry, this is a common occurrence in the United States.

In conclusion, we cannot and will not comment on whether the government is simply attacking Bitcoin in an effort to eradicate it. What we will say though is that everything included in the government’s seizure warrant has been well known for some time, and it is unfortunate that Mt. Gox did not heed these warnings. Based on the contents of the government’s Seizure Warrant and Affidavit, this incident was totally avoidable.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the area of 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 and litigation against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.