Update: Crackdown on Casino AML Deficiencies Continues as Caesars Entertainment Corp. becomes subject of FinCEN and DOJ Investigation

/0 Comments/in , , /by

On October 21, 2013, Caesars Entertainment Corp. (“Caesars”) announced in its filing with the Securities and Exchange Commission that its subsidiary Desert Palace, Inc. (owner of Caesars Palace) was under investigation for alleged violations of the Bank Secrecy Act. A copy of the filing can be read here.

According to Caesars’ filing, on October 11, 2013, Desert Palace, Inc. received a letter from the Financial Crimes Enforcement Network (“FinCEN”) stating that the subsidiary was under investigation for alleged violations of the Bank Secrecy Act, found at 31 U.S.C. § 5311 et seq., and to determine “whether it is appropriate to assess a civil penalty and/or take additional enforcement action against Caesars Palace.” Caesars was also informed that a federal grand jury investigation regarding the alleged violation is on-going.

Like banks and money services businesses (“MSBs”), federal law defines casinos as financial institutions. See 31 U.S.C. § 5312 (X). As financial institutions, casinos are required to maintain robust anti-money laundering compliance programs designed to protect against the unique money laundering and terrorist financing risks posed by each individual casino. The basic minimum elements which must be included within any casino’s AML plan can be found at 31 C.F.R. § 1021.210. See also 31 U.S.C. § 5318(h).

Caesar’s announcement comes as FinCEN and the Department of Justice have increased their focus on the anti-money laundering policies and procedures of casinos. As we previously reported, on August 27, 2013, the U.S. Department of Justice announced that it had resolved its money laundering investigation into the Las Vegas Sands Corp. which resulted in Sands agreeing to pay $47,400,300 to the Government in order to avoid criminal prosecution. As we expressed in our previous report, we see the Sands and Caesars cases as a sign of the increased scrutiny that the casino industry will face in the near future and each should serve as a warning to casinos to ensure that their AML compliance programs are in full working order as soon as possible.

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

Andrew Ittleman: Hurdles in Accessing Banking Services

/0 Comments/in , , /by

The forthcoming 2013 Financial Edition of the South Florida Legal Guide will feature an article authored by Andrew Ittleman of Fuerst Ittleman David & Joseph titled “Hurdles in Accessing Banking Services.” The article focuses on how 18 U.S.C. 1014, which proscribes the making of a false statement to a bank for purposes of influencing the bank in any way, criminalizes even the acquisition of checking account services from a bank under false pretenses. The full text of the article reads as follows:

The federal Bank Fraud statute – 18 U.S.C. § 1344 – was designed to criminalize complex “schemes to defraud” banks and other financial institutions. Today, § 1344 has become a hugely popular tool for the government in white collar criminal cases, and generated far more attention than its older sister, 18 U.S.C. § 1014, which was designed to criminalize a less outwardly sinister variety of criminal conduct.

To obtain a conviction under § 1014, the government must prove first that the defendant made a “false statement or report,” and second that he did so “for the purpose of influencing in any way the action of [a described financial institution] upon any application….” The government need not prove that the false statement was material.

Like the Bank Fraud statute, § 1014 carries a maximum fine of $1,000,000 and a maximum prison term of 30 years. However, unlike the Bank Fraud statute, in recent years we have seen § 1014 increasingly applied in cases where the bank suffers no financial loss, and the only financial service obtained by the defendant is a checking account. While the issue seems simple, § 1014 cases often involve highly complex facts and circumstances, not necessarily about the misstatements made to the banks, but rather about the general circumstances in which the bank and customer find themselves.

First, banks are typically conservative and tightly regulated, and carefully choose the types of business they serve. Consequently, most banks avoid doing business with whole classes of businesses deemed to be “high risk.” Most banks believe that the compliance cost and reputation risk avoided by refusing to work with “high risk” companies outweighs whatever financial gain the banks would realize by taking in such companies.

However, simply because a business is deemed to be “high risk” by a bank, it does not necessarily follow that the business is a criminal enterprise or is operating unlawfully. Instead, without ever being afforded due process, it typically means that some government agency has determined that the business presents a heightened money laundering risk, and in many cases banks have been outright barred from doing business with them. For instance, the National Credit Union Administration (NCUA) recently barred the North Dade Community Development Federal Credit Union of Miami Gardens from doing further business with money services businesses (MSBs), a large class of businesses including money transmitters, check cashers, currency exchangers, providers of prepaid access, issuers of digital currency, and a variety of others. But the North Dade case was hardly unique. It happens often, and regulators rarely distinguish between compliant and non-compliant MSBs.

Because money is the MSB’s inventory, the MSB has no way to operate without a bank account. So, knowing that banks will not do business with them, many MSBs have lied (or at least obfuscated the truth) during the account opening process and told the bank that they are engaged in “import/export,” “consulting,” or some other vague term which they believed the bank wouldn’t investigate. And in many cases the MSB was right – the bank did not perform a due diligence during the account opening process. But eventually the lie was revealed, the feds were called in, and the otherwise compliant MSB became the target in a § 1341 (fraud) investigation.

Lack of access to banking is common for lawful businesses operating on the fringe. In one case, we represented an international seller of online pornography that was fully compliant with U.S. law, but had extraordinary difficulties maintaining bank accounts due to the nature of its business. So, before we were engaged, the company established a shell U.S. company and obtained an operating account for the shell at a small bank in the South. Soon after the account was opened, the bank realized the actual nature of the client’s business and called in the federal government. The client avoided criminal charges, but a fair amount of money was forfeited following the ensuing investigation.

We have also seen this issue play out for casas de cambio operating in Argentina and Venezuela. Due to strenuous currency controls, those businesses desperately need access to U.S. dollars and U.S. bank accounts. Knowing how unlikely it is that a U.S. bank will open an account for them, the casa de cambio will open a shell company in the U.S. and establish a bank account for the shell. In some cases, the casa de cambio will close the account before the bank catches on, but in other cases the lie is revealed and the criminal investigation ensues.

State-sanctioned marijuana dispensaries are experiencing this issue today. Even though they are perfectly lawful under state law, the federal government deems them to be “high risk,” and banks are refusing to do business with them. In a recent Bloomberg article addressing the issue, an expert gave this advice: “As long as the bank doesn’t find out, you should be safe.” It is easy to understand why this advice is so bad. Several members of Congress are currently sponsoring legislation designed to allow state-sanctioned dispensaries to obtain bank accounts, and hopefully new laws will help dispensaries avoid the worst case scenario.

While we recognize the critical importance of bank accounts, we urge people to be truthful and complete during the account opening process. There are legitimate ways around this problem, and no matter how valuable the account may be, it is nowhere near as valuable as your freedom.

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

United States v. Lang: Eleventh Circuit Clarifies How Structuring Violations Must be Pled in Federal Criminal Cases

/0 Comments/in , , /by

On October 3, 2013, the United States Court of Appeals for the Eleventh Circuit issued its decision in United States v. Lang clarifying how future indictments for structuring in violation of 31 U.S.C. § 5324(a)(3) must be pled. The decision is a game changer as it limits the ability of prosecutors to bring counts for each sub-threshold transaction used to evade reporting requirements within the greater structuring scheme. A copy of the decision can be read here.

Generally speaking, the Bank Secrecy Act (“BSA”), found at 31 U.S.C. § 5311 et seq., requires U.S. financial institutions to assist in the detection and prevention of money laundering. More specifically, the BSA requires that financial institutions file reports with the United States Department of the Treasury of all cash transactions which exceed a daily aggregated amount of $10,000. See 31 U.S.C. § 5313; 31 C.F.R. §§ 1010.311, 1010.313. In order to prevent circumvention of this reporting requirement, the BSA further prohibits attempts to “structure” transactions for the purpose of evading BSA currency reporting requirements. See 31 U.S.C. § 5324(a)(3); 31 C.F.R. § 1010.314.

The implementing regulations of the BSA define “structuring” as follows:

For purposes of § 1010.314, a person structures a transaction if that person, acting alone, or in conjunction with, or on behalf of, other persons, conducts or attempts to conduct one or more transactions in currency, in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading the reporting requirements under §§ 1010.311, 1010.313, 1020.315, 1021.311 and 1021.313 of this chapter. “In any manner” includes, but is not limited to, the breaking down of a single sum of currency exceeding $10,000 into smaller sums, including sums at or below $10,000, or the conduct of a transaction, or series of currency transactions at or below $10,000. The transaction or transactions need not exceed the $10,000 reporting threshold at any single financial institution on any single day in order to constitute structuring within the meaning of this definition.

See 31 C.F.R. § 1010.100(xx).

However, when a transaction has been structured, a question arises as to how many structuring crimes have occurred. In other words, the issue in such situations is whether a person may be separately charged with violating 5324(a)(3) for the act of structuring itself and for each sub-threshold transaction made in furtherance of the crime. In Lang, the 11th Circuit answered this question with a resounding no.

In Lang, the defendant was indicted on 85 counts of violating § 5324(a)(3), and each count of the indictment charged as a separate structuring crime a currency transaction involving a single check in an amount less than $10,000. In finding that the indictment was insufficient and vacating the conviction, the 11th Circuit initially turned its focus to the phrase “for the purpose of evading” found within 31 C.F.R. § 1010.100(xx). As explained by the court, “[i]n order to be “for the purpose of evading” the reporting requirements, the structured transaction must involve an amount that is more than $10,000; otherwise, evasion would not be necessary or possible because there would be no reporting requirement anyway.” Building on this logic, the court held that “the proper unit of prosecution in structuring is the amount exceeding the reporting threshold that is structured into smaller amounts below that threshold, not each of the resulting sub-threshold transactions.”

In Lang”s case, the court found that the indictment was insufficient because of how the Government drafted each count. As explained by the court, “[i]nstead of a series of counts each alleging a payment or payments totaling more than $10,000 that were structured into checks of smaller amounts…the indictment consists of 85 counts each of which separately alleges that a single check in an amount less than $10,000 was structured. That is not possible.” Simply put, “[a]cash transaction involving a single check in an amount below the reporting threshold cannot in itself amount to structuring because the crime requires a purpose to evade the reporting requirements, and that requirement does not apply to a single cash transaction below the threshold.” As a result, the court vacated the judgment against Lang and remanded the case with directions that the indictment be dismissed.

The decision in Lang restricts the ability of prosecutors to charge defendants with separate counts of structuring for each sub-threshold transaction used to evade reporting requirements within the greater structuring scheme.

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

Las Vegas Sands Casino Money Laundering Settlement a Bellwether for Future Cases

/0 Comments/in , , /by

On August 27, the Justice Department announced that it had resolved its money laundering investigation into the Las Vegas Sands Corp. (“Sands”) and that the Sands had agreed to “return” $47,400,300 to the Government in order to avoid criminal prosecution. For more about the case, see here and here.

A brief history of the Sands’ recent legal troubles is in order. First, the Sands is a publicly traded company (“LVS”), and its Chairman and CEO is Sheldon Adelson, who made headlines throughout the 2012 presidential election process for his outspoken support of Mitt Romney and criticism of Barack Obama. (We have no idea whether Mr. Adelson himself has been a lightning rod drawing the ire of the Obama administration, and we will not speculate.) Second, the Justice Department’s money laundering investigation into the Sands is not its only investigation. As has been reported  here, here and here, the Sands has also been the subject of an investigation into alleged Foreign Corrupt Practices Act (FCPA) violations related to its development of properties in Macau and China. The Sands actually reported to the SEC that the violations actually occurred, and Mr. Adelson and other members of the Sands Board of Directors are now defendants in multiple shareholder derivative suits alleging that they failed to stop the violations from occurring and thereby breached the fiduciary duties they owed to the Sands; see here. (Generally, in order to assert a derivative claim, the derivative plaintiff must show “either (1) that the directors knew or (2) should have known that violations of law were occurring and, in either event, (3) that the directors took no steps in a good faith effort to prevent or remedy that situation, and (4) that such failure proximately resulted in the losses complained of…” e.g. Stone v. Ritter, 911 A.2d 362 (Del. 2006)). The resolution of this money laundering investigation does not appear to resolve the FCPA investigation, and may prove to be additional fodder for the derivative claims. Copies of the derivative suits are available here and here.

Like the FCPA investigation, the money laundering investigation has been in the headlines for quite some time. In January, the Wall Street Journal reported that the Sands was bolstering its anti-money laundering compliance program, and ceased “executing international money transfers for its high-rolling customers”¦” In June, the Journal reported that a grand jury had been empaneled in Los Angeles to investigate the money laundering investigations, and that the investigation was being led by the U.S. Attorney’s Office in Los Angeles. In July,  the Las Vegas Review-Journal reported that as part of its compliance program overhaul, the Sands had retained Jerry Markling to be the Venetian’s new Director of Investigations. As the Review-Journal explained, Mr. Markling was formerly the Gaming Control Board’s Chief of Enforcement, and was able to circumvent the State of Nevada’s one year “cooling off period” because he had held his position as Chief of Enforcement longer than the “cooling off period” had been in place.

As discussed by the Wall Street Journal, the money laundering investigation followed the Sands’ relationship with two high rollers. The first, Zhenli Ye Gon, was charged in Mexico for manufacturing ingredients used in the manufacturing of methamphetamines and wiring the proceeds of his sales to himself at Sands-operated casinos in Las Vegas. All told, Zhenli received well in excess of $100,000,000, and according to the Justice Department’s press release, the Sands did virtually nothing to identify the source of the funds. As discussed in the press release,

The money being paid the United States represents money sent to the Venetian casino by or on behalf of Zhenli Ye Gon, who at the end of 2006 or early 2007 was “the largest all-cash, up-front gambler the Venetian-Palazzo had ever had to that point,” according to the non-prosecution agreement. In March 2007, Ye Gon’s residence in Mexico City was searched by law enforcement authorities, who seized approximately $207 million in United States currency from the residence in what remains the largest-ever seizure of currency by law enforcement.

Ye Gon was indicted by federal officials in the District of Columbia on narcotics charges, but that case was dismissed in 2009. Ye Gon is currently pending extradition to Mexico, which has charged him with drug trafficking offenses.

According to the agreement, prosecutors believe that in October 2006, prior to Ye Gon being publicly linked to drug trafficking as a result of the search of his residence, officials at the Venetian-Palazzo, should have identified as “suspicious” Ye Gon’s financial transactions, which included the wire transfer of approximately $45 million and depositing of approximately $13 million in cashier’s checks between February 2005 and continuing through March 2007. Casino officials should have filed one or more SARCs against Ye Gon in addition to a SARC it filed in April 2007, prosecutors contend.

For its part, the Las Vegas Sands, while unaware of Ye Gon’s alleged criminal activities prior to March 2007, acknowledges that “in hindsight…the Venetian-Palazzo failed to fully appreciate the suspicious nature of the information or lack thereof pertaining to Ye Gon in the context of the Venetian’s evaluation of whether to file additional SARCs against him earlier and in retrospect should have filed SARCs earlier, and should have filed a more complete SARC when it did file one.”

During his patronage at the Venetian, Ye Gon wire transferred money to the Las Vegas Sands Corp. and subsidiary companies from two different banks and seven different Mexican money exchange houses known as casas de cambios. The wire transfer originators included several companies and individuals the Las Vegas Sands Corp. could not link to Ye Gon. Ye Gon also transferred some funds from Mexican casas de cambios to a Las Vegas Sands Corp. subsidiary in Hong Kong for transfer to Las Vegas. In many instances, Ye Gon’s wire transfers lacked sufficient information to identify him as the beneficiary. The Las Vegas Sands also allowed Ye Gon to transfer funds several times to an account that did not identify its association with the Venetian, specifically an aviation account used to pay pilots operating the company’s aircraft. During its investigation, the government developed evidence that “when casino personnel asked Ye Gon to wire the money in larger lump sums, as opposed to breaking it up incrementally, and use consistent listed beneficiaries, Ye Gon stated that he preferred to wire the money incrementally because he did not want the government to know about these transfers.”

Copies of the Zhenli Ye Gon Arrest and Extradition Complaints are available here and here.

Interestingly, the Journal also reported that the Sands’ relationship with Ausuf Umar Siddiqui was also being examined by the grand jury. Following a 2008 indictment filed in San Jose, Mr. Siddiqui was convicted of taking illegal kickbacks while working as a buyer for Fry’s and wiring the proceeds (which well exceeded $100,000,000) to himself at Sands-operated casinos in Las Vegas. A copy of the government’s complaint against Mr. Siddiqui is available here. The Justice Department’s press release makes no mention of Mr. Siddiqui, and likewise makes no mention of why the government walked away from that issue.

But the Sands case is noteworthy for much more than the underlying investigations and the Ye Gon and Siddiqui cases. We see it as a bellwether, or more specifically, a sign of things to come for casinos operating in the United States. As the Justice Department made clear in its press release,

“What happens in Vegas no longer stays in Vegas,” said United States Attorney André Birotte Jr. “For the first time, a casino has faced the very real possibility of a federal criminal case for failing to properly report suspicious funds received from a gambler. This is also the first time a casino has agreed to return those funds to the government. All companies, especially casinos, are now on notice that America’s anti-money laundering laws apply to all people and every corporation, even if that company risks losing its most profitable customer.“

In short, having already resolved huge money laundering cases with the likes of HSBC, Wachovia, Wells Fargo, Bank of America, JP Morgan Chase, Citibank, Bank of New York, Bank of Hong Kong, Western Union, Pay Pal, and a host of others, Justice may now be turning its focus to casinos, which it may very well perceive as low hanging fruit, flush with cash and easy-to-locate program violations.

Like banks, federal law defines casinos as financial institutions; 31 U.S.C. 5312(X). This includes “Indian gaming operation(s) conducted under or pursuant to the Indian Gaming Regulatory Act other than an operation which is limited to class I gaming”¦” As financial institutions, casinos are required to maintain anti-money laundering compliance programs, which must include, at a minimum, the following critical elements:

(i) A system of internal controls to assure ongoing compliance;

(ii) Internal and/or external independent testing for compliance. The scope and frequency of the testing shall be commensurate with the money laundering and terrorist financing risks posed by the products and services provided by the casino;

(iii) Training of casino personnel, including training in the identification of unusual or suspicious transactions, to the extent that the reporting of such transactions is required by this part, by other applicable law or regulation, or by the casino’s own administrative and compliance policies;

(iv) An individual or individuals to assure day-to-day compliance;

(v) Procedures for using all available information to determine:

(A) When required by this part, the name, address, social security number, and other information, and verification of the same, of a person;

(B) The occurrence of any transactions or patterns of transactions required to be reported pursuant to § 103.21;

(C) Whether any record as described in subpart C of this part must be made and retained; and

(vi) For casinos that have automated data processing systems, the use of automated programs to aid in assuring compliance.

31 C.F.R. 103.64; see also 31 U.S.C. 5318(h).

However, it is not enough for the casino to simply have a compliance program. The program must be designed to protect against the unique money laundering and terrorist financing risks posed by the individual casino, and the program must be implemented. Additionally, to the extent that a casino employee (including dealers and cage personnel) will confront money laundering activities, they must be included as part of the program and given instructions regarding how to report suspicious activity. Finally, the program must be strong enough to withstand not only internal and external reviews, but the scrutiny of the IRS, which has been delegated the authority to audit casinos for compliance with the Bank Secrecy Act. Suffice it to say that the IRS has an extensive background auditing casinos for taxation purposes, and is well equipped to audit casinos for AML purposes too. The IRS is also perfectly willing to use information discovered during a compliance audit for tax purposes, and vice versa. So, again, a robust program, implementation, and the buy-in of all relevant casino employees are all critical, and the failure to have such a program can expose the casino and its directors to civil and criminal liability.

Today’s Wall Street Journal attributed the following quote to Bill Goss, senior director for anti-money laundering at IPSA International: The Sands investigation “will likely bring enhanced scrutiny upon the gaming industry for their anti-money laundering controls and procedures”¦Just one public and egregious incident of this type causes law enforcement and regulators to shine a very bright light on an entire industry group.” We agree. We see the Sands case as a sign of things to come for the casino industry, and a warning to casinos to have their compliance programs in working order as soon as possible.

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

Update: “Marijuana Businesses Access to Banking Act of 2013” proposed in Congress to ease burdens associated with providing banking services to marijuana-related businesses

/0 Comments/in , /by

On July 10, 2013, U.S. Representatives Ed Perlmutter (D-Colorado) and Denny Heck (D-Washington) introduced the “Marijuana Businesses Access to Banking Act of 2013” (“Access to Banking Act”) in the United States House of Representatives. The bill is designed to update federal banking laws to create protections for depository institutions that provide financial services to marijuana-related businesses. A copy of Rep. Perlmutter’s press release can be read here.

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 and here.). In addition to direct criminal prosecution for drug trafficking, dispensaries face additional legal barriers which make operation difficult. As we previously reported, one such practical legal barrier dispensaries face is finding banks, credit card companies, and payment processors to process the proceeds of marijuana sales. As we 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 funds from dispensaries.  As a result of these risks and possible penalties, banks have simply refused to allow marijuana dispensaries to maintain accounts or conduct business.

However, the Access to Banking Act attempts to resolve this problem by allowing “depository institutions,” defined within the act as 1) a depository institution as defined in 12 U.S.C. § 1813(c); or 2) a federal credit union or state credit union as defined in  12 U.S.C. § 1752, legal authority to provide banking services to “marijuana-related legitimate businesses.” (“Marijuana-related legitimate business” is defined within the act as “a manufacturer, producer or any person that (A) participates in any business or organized activity that involves handling marijuana or marijuana products, including selling, transporting, displaying, dispensing, or distributing marijuana or marijuana products; and (B) engages in such activity pursuant to a law established by a State or a unit of local government.)

The Access to Banking Act would provide a “safe harbor” for depository institutions under which a federal banking regulator may not:

  1. terminate or limit a depository institution’s access to FDIC depository insurance for providing financial services to a marijuana-related legitimate business;
  2. prohibit, penalize, or discourage a depository institution from providing financial services to marijuana-related legitimate businesses;
  3. recommend, incentivize, or encourage a depository institution not to offer financial services to an individual solely because the individual is a manufacturer, producers or owner/operator of a marijuana-related legitimate business; and
  4. take any action against a loan to an owner/operator of a marijuana-related legitimate business.

The Access to Banking Act would also provide immunity from Federal criminal prosecution for depository institutions who provide such services.

In addition, the Access to Banking Act would amend 31 U.S.C. § 5318 of the Bank Secrecy Act, 31 U.S.C. §§ 5311-5330, to exempt depository institutions from the requirement to file Suspicious Activity Reports (“SAR”) solely because a party to the transaction is a marijuana-related legitimate business. (12 C.F.R. § 21.11 requires national banks to file Suspicious Activity Reports (“SAR”) when the bank knows, suspects, or has reason to suspect that a transaction involves funds from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities as part of a plan to violate or evade any law or regulation or to avoid any transaction reporting requirement under Federal law.)

Although the bill has a long way to go before becoming law, the Access to Banking Act has the potential to be a game-changer for the State sanctioned legalized marijuana industry. Fuerst, Ittleman, David &Joseph, PL will continue to monitor the bill for its latest developments. 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.

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

/0 Comments/in , , /by

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.

Announcing the FIDJ Mini-Blog

/0 Comments/in , , , , , , , , , /by

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.

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

/0 Comments/in , /by

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.

Update: Florida Legislature Adopts OFC Workers’ Compensation Fraud Work Group Recommendations, Passes Law Establishing Real-Time Check Cashing Database and Check Casher Reporting Requirements

/0 Comments/in , /by

On April 30, 2013, the Florida Legislature passed House Bill 217, which when signed into law by Gov. Rick Scott, will place additional duties on check cashers by requiring them to log certain transactions in a real-time electronic statewide database. The bill is the latest effort by State officials to combat and prevent MSB-facilitated workers’ compensation fraud. A copy of the bill can be read here.

As we have previously reported, MSB-facilitated workers’ compensation fraud has been in the crosshairs of Florida officials since August of 2011. At that time, the Financial Services Commission of the Florida Office of Financial Regulation issued a cabinet report to Gov. Rick Scott regarding MSB-facilitated workers’ compensation schemes. The report revealed that MSBs have played an active, critical, and sometimes unknowing part in defrauding the workers’ compensation insurance market in Florida. As a result of these findings, Florida C.F.O. Jeff Atlwater announced the creation of the “MSB Facilitated Workers’ Compensation Fraud Workgroup” to develop comprehensive reforms to combat the fraud scheme. Our previous reports, detailing the fraud scheme, the OFR cabinet report, and the activities of the MSB Workers’ Compensation Fraud Workgroup can be read here, here, here, and here.

The new legislation adopts several of the Workgroup’s recommendations for curbing MSB-facilitated fraud. (A complete list of the Workgroup’s recommendations can be read here.) Once signed into law, House Bill 217 will require check cashers to submit the following information to the electronic check cashing database prior to cashing any checks of an amount greater than $1,000: 1) the transaction date; 2) the payor’s name; 3) the payee’s name; 4) the name of the conductor of the check cashing transaction if different than the payee; 5) the amount of the payment instrument; 6) the amount of currency provided; 7) the type of payment instrument; 8) the fee charged for cashing the payment instrument; 9)the location where the payment instrument was accepted; 10) the type of identification and identification number presented by the payee/conductor; and 11) the payee’s workers’ compensation insurance policy number. The legislation also requires that if multiple checks totaling $1,000 or more are cashed by any one person in one day, the amounts of each transaction must be aggregated, thus triggering a reporting requirement.

The new check cashing database will also be able to interface with databases which currently exist for the Secretary of State and the Department of Financial Services for purposes of verifying corporate registration and determining proof of workers’ compensation coverage. The Office of Financial Regulation believes that the ability to interface and receive real time information between agencies will allow law enforcement to more effectively track and investigate potential fraud. A copy of the Office of Financial Regulation’s press release can be read here.

FIDJ will continue to monitor this situation as implementation of House Bill 217 will result in fundamental regulatory changes for the Florida MSB industry. If you have questions pertaining to the Florida Office of Financial Regulations, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com.

Queen Shoals Ponzi Scheme Defendant Pleads Guilty

/0 Comments/in , , /by

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

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

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

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

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

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

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

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