U.S. Government successfully forfeits $13 .3 million from online poker sites

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The federal government recently forfeited $13.3 million in proceeds derived from two online poker sites for being in violation of the Unlawful Internet Gambling Enforcement Act (“UIGEA”). According to the civil forfeiture complaint filed in the case, the funds constituted proceeds of operating an illegal gambling business that were deposited between January 2009 and May 2009 in an account at Goldwater Bank in Scottsdale, Arizona. Those funds were traceable to PokerStars, the worlds biggest online poker firm, and other offshore online gambling companies, and include “proceeds of the illegal transmission of gambling information and operating an illegal gambling business.”

Ahmad Khawaja, together with his firms, Allied Wallet and Allied Systems, reached the civil settlement to end a year-long struggle that began when the FBI seized the $13.3 million in June 2009. According to the civil forfeiture complaint, all of the funds were linked to allegations of money laundering, and some of the funds were traceable to wire transfers from outside the U.S. by individuals who knew that the funds represented the proceeds of the illegal transmission of gambling.

This case is significant in that it shows that the government is focusing on enforcement in the area of internet gambling, a growing entertainment business in the U.S., often run from internet sites based outside the U.S.

The UIGEA makes it a crime for anyone engaged in “unlawful internet gambling ” across state lines to accept credit cards, wires, checks or other forms of financial transactions in connection with such gambling. In other words, it makes it illegal to pay money in regard to a bet, or receive money in connection with a bet in the U.S.

Under the UIGEA, “unlawful internet gambling” means to place, receive or transmit a bet or wager through the internet where the bet or wager is illegal, under among other things, any state law where the bet or wager is initiated or received. In addition, “unlawful internet gambling” does not include bets or wagers initiated or received entirely within a single state, or expressly authorized by that states laws.

The vast majority of states make it illegal to engage in gambling except under limited circumstances, such as tribal casinos, pari-mutuel horse racing, penny-ante poker games or regulated poker card rooms or slot machines. Currently, some states have proposed legislation to allow internet poker under restricted and regulated circumstances, but such legislation is still pending. Until the federal or state governments can figure out how to regulate, tax and otherwise obtain fees from internet gambling, it will most likely remain unlawful and the forfeiture of gambling proceeds from online gambling sites under the UIGEA will continue.

Department of Treasury Releases Updated Guidance To Financial Institutions On Informal Value Transfer Systems

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On September 1, 2010, the Financial Crimes Enforcement Network (“FinCEN”) of the US Department of the Treasury issued a guidance for financial institutions on Suspicious Activity Reports (“SAR”) involving Informal Value Transfer Systems (“IVTS”).

The Department of the Treasury defines an IVTS as “any system, mechanism, or network of people that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form.” IVTS transfers usually occur through non-bank financial institutions whose primary business may not be the transmission of money.

IVTS are allowed to operate in the US as Money Services Businesses (“MSB”) as long as they follow applicable federal and state laws. IVTS are required to register with FinCEN to operate within the US. Additionally, IVTS must comply with the Bank Secrecy Act’s provisions regarding anti-money laundering and counter-terrorist financing. More information on how IVTS operate, how financial institutions may be used in the IVTS process, and potential indicators of IVTS activity can be found in FinCEN Advisory 33.

In its most recent guidance FinCEN states “if a financial institution knows, suspects, or has reason to suspect that an ITVS is operating in violation of the registration requirement under the BSA for money transmitters not acting solely as agents of others, or, even if registered, is being used in the illegal transmittal of funds, a SAR should be filed.” FinCEN also advised that when financial institutions complete a SAR involving an IVTS that it note the abbreviation IVTS in the narrative of the SAR and include an explanation as to why the financial institution suspects that an IVTS is involved in reportable activity. The full guidance can be read at FinCEN September 1, 2010 Guidance.

FinCEN’s purpose in issuing this guidance is to make SARs involving IVTS more helpful to law enforcement. FinCEN reports that IVTS can be used to launder money and possibly fund terrorist activities throughout the world. For insight and strategies on maintaining compliance with state and federal regulation of financial services, please contact Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com.

Phone Companies Urge US Government To Loosen Telecommunications Regulations For Cuba

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Several of the largest telecommunications companies in the United States including AT&T, Verizon, and Nokia are urging the US government to ease regulations which currently prevent them from operating in Cuba. The regulations stem from the 47 year old trade embargo the US has enforced against Cuba due to the oppressive Castro regime. AT&T and Verizon are seeking a loosening of regulations to make it easier for telecommunications companies to directly connect calls to and from Cuba, while Nokia, the worlds largest mobile-phone manufacturer, is urging Washington to ease the embargo so it can export mobile-phone accessories from its US locations.

Under current rules, the Federal Communications Commission (“FCC”) has established a rate cap on the fee telecoms can pay the Cuban government for direct calls to Cuba which hampers the telecommunications industrys ability to do business in Cuba. Currently, US providers are only allowed to pay the Cuban government a fee no higher than 19 cents per call, however, Cuba demands 84 cents a call.

In June, Verizon wrote the FCC asking it to grant requests by others in the telecom industry for the FCC to waive its maximum rate cap rules. A copy of Verizons comments can be read at: Verizons reply to the FCC.

US telecoms are also interested in establishing roaming services on the island for US customers who visit the island as a first step to expanding cell phone services. Analysts believe that the mobile phone market in Cuba has the potential to be profitable given the islands population, 11.4 million, and the relative few between, 10 and 20 percent, who currently use mobile phone services.

The telecoms requests for greater access to Cuba come several months after the idea was first presented by the Obama administration. On April 13, 2009, President Obama issued a memorandum to the Secretaries of State, Treasury, and Commerce entitled “Promoting Democracy and Human Rights in Cuba” in which the President said that increased contacts between Cuba and the outside world would reduce Cubans dependency on the Castro regime. President Obama directed his Secretaries to take such actions as necessary to authorize US telecommunications providers to enter into agreements to establish fiber-optic cable and satellite telecommunications facilities linking the US and Cuba and to license US telecom service providers to enter into and operate roaming services agreements with Cubas telecommunications service providers. The Presidents full memorandum can be read at: White House Memo on Promoting Democracy and Human Rights in Cuba.

However, while an easing of telecommunications regulations may be in the near future, US companies looking to do business in Cuba still risk violating sanctions still in place, such as the Cuban Democracy Act of 1992 that prohibits investment in Cubas telecommunications network.

For guidance on how your import/export business, or related business, can take advantage of the surging trade economy while maintaining strong regulatory compliance, contact Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com.

Federal Prosecutors Drop Charges Against Former Westar Executives

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On August 20, 2010, U.S. District Court Judge Julie Robinson for the District of Kansas granted the United States Department of Justices motion to dismiss the charges against former Westar executives David Wittig and Douglas Lake. The charges were dismissed without prejudice, meaning they could be filed again.

Wittig and Lake were charged with conspiracy and circumvention of internal controls. The former executives were accused of manipulating a proposed merger for personal benefit and using Westars legal counsel to remove other directors who challenged their actions. Authorities also alleged that Wittig and Lake submitted false reports to the Securities and Exchange Commission (“SEC”) about their personal use of corporate aircraft. The SEC requires such reports if the added cost to the corporation for air travel exceeds $50,000. Prosecutors alleged that Wittig and Lake conspired to inflate their compensation from the company and took steps to hide their actions.

This case was the third attempt by the U.S. Department of Justice to try Wittig and Lake. The first case ended in a hung jury in December 2004. The government retried the case in early 2005 and in that second trial a jury found Wittig and Lake guilty of wire fraud, money laundering, circumvention of internal controls and conspiracy. The court also ordered millions of dollars in restitution. However, the U.S. Court of Appeals for the 10th Circuit reversed the convictions in January of 2007. The 10th Circuit threw out the money laundering and wire fraud convictions because of a lack of evidence and found that jury instructions for the circumvention and conspiracy charges were flawed.

After the 10th Circuit had ruled, prosecutors announced they would seek a third trial for the charges of conspiracy and circumvention. However, prior to trial, the Supreme Court announced its decision in Skilling v United States. Defense attorneys believe that the dismissal of this most recent case is byproduct of the recent Supreme Court decision that changed the landscape of the “honest services” fraud statute.

The decision of prosecutors to drop the charges comes less than two months after the Supreme Courts landmark decision in Skilling v United States. In Skilling, the Court severely narrowed the scope of the “theft of honest services” fraud statue, 18 U.S.C. Sec. 3146, by ruling that it is unconstitutionally vague except in cases involving bribery and kickback schemes. The Court ruled that federal prosecutors can no longer rely on the “theft of honest services” charge in cases involving private sector employees charged with self-dealing or undisclosed conflicts of interest without a bribery or kickback scheme. As a result of the Skilling decision, a once flexible tool in the arsenal of the federal prosecutors office has been sharply limited.

For information about Fuerst Ittlemans experience litigating white collar criminal cases please contact us at contact@fidjlaw.com.

Banco Colpatria, S.A. Settles Narcotics Trafficking Sanctions Violations

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On August 19, 2010, the Office of Foreign Assets Control, (“OFAC”), of the U.S. Department of the Treasury announced that it has reached a settlement with Banco Colpatria, S.A., (“Colpatria”), for alleged violations of OFACs Narcotics Trafficking Sanctions Regulations. The alleged violations stem from activities of Colpatrias Miami Agency which discontinued operations in 2007. OFAC is a part of the U.S. Department of the Treasury and administers and enforces economic sanctions against targeted foreign countries, regimes, terrorists, international narcotics traffickers, among others.

OFAC alleged that Colpatria Miami violated the Narcotics Regulations through a series of wire transfers which occurred between November 22, 2004 and May 24, 2005. OFAC stated that Colpatria Miami made 26 wire transfers on behalf of one corporate client after OFAC had designated the clients beneficial owners are Special Designated Narcotics Traffickers, (“SDN”).

Colpatria initially screened the names of the beneficial owners against the Specially Designated Nationals and Blocked Persons List when the account was opened; however, it did not screen the names after the list was updated by OFAC.

The penalty for these violations was initially set at $229,623; however, this amount was reduced by OFAC to $91,849. OFAC stated that the settlement amount was reduced because Colpatria voluntarily self reported to OFAC though it did not admit or deny liability, Colpatria revised its software to review automatically the names of beneficial owners of accounts rather than just names of account holders when performing account opening and periodic name checks, and because Colpatria signed a tolling agreement with OFAC.

This case highlights the importance of 2 crucial aspects of international banking. First, this case highlights the importance of monitoring government announcements, such as OFACs SDN list which is regularly updated and publicly available. Additionally, this case highlights the importance of self reporting OFAC violations. Indeed, self reporting can help otherwise compliant banks avoid criminal prosecution and aggravated fines, and can also help banks maintain good working relationships with OFAC and other agencies within the Department of Treasury.

For more information regarding OFAC and the laws governing international banking please contact us at contact@fidjlaw.com.

Barclays Bank PLC Reaches Settlement With US Authorities

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On August 18, 2010, the United States Department of Treasury Office of Foreign Assets Control announced that it has reached a settlement with Barclays Bank PLC to settle allegations of violations of multiple sanctions programs relating to transactions Barclays conducted with customers from Cuba, Sudan, Burma, and Iran. Barclays Bank is the United Kingdoms second largest bank earning $14.8 billion in net income last year. The Office of Foreign Assets Control (“OFAC”) administers and enforces economic sanctions against targeted foreign countries, regimes, terrorists, international narcotics traffickers, among others.

On August 16, 2010, a criminal information was filed in the U.S. District Court for the District of Columbia charging Barclays with one count of violating the International Emergency Economic Powers Act (“IEEPA”) and one count of violating the Trading with the Enemy Act (“TWEA”). It is a crime to willfully violate, or attempt to violate, any regulation issued under IEEPA and TWEA. Barclays has waived indictment and accepted responsibility for the criminal violations.

Barclays has agreed to forfeit $298,000,000 to the Department of Justice and the New York County District Attorneys Office for violations of the Sudanese Sanctions Regulations, the Iranian Transactions Regulations, and the Cuban Assets Control Regulations promulgated pursuant to IEEPA and TWEA.

According to the complaint, Barclays intentionally engaged in banking practices designed to avoid filters at U.S. Banks created to detect transactions in violation of OFAC regulations. Such practices included not naming or removing the names in payment messages in order to conceal the identity of sanctioned entities, routing payments through internal Barclays accounts to hide connections to sanctioned entities, and using cover payments to hide referencing parties targeted by U.S. sanctions.

Barclays voluntarily self-disclosed the violations under the terms of OFACs Economic Sanctions Enforcement Guidelines. In addition to forfeiting $298 million U.S.D., Barclays has also agreed to enter into a Deferred Prosecution Agreement for the next 2 years. This will require Barclays to improve its U.S. economic sanctions compliance programs as well as require Barclays to conduct annual reviews of its policies and procedures in regards to OFAC compliance. The British Financial Services Authority will assist OFAC in assuring future compliance by Barclays.

For more information regarding OFAC please contact us at contact@fidjlaw.com.

Justice Sandra Day O’Conner sides with a Small Business Against the IRS

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Recently, the Internal Revenue Service (IRS) has been on a rampage targeting banks and tax preparers, but a recent 11th Circuit decision might force the IRS to reconsider this strategy.

The IRS sought to shut down a local Miami tax preparation facility, Nations Business Center, owed by Abelardo Ernest Cruz. However, last month Cruz won a huge battle against the IRS setting forth negative precedent for the service and putting a halt to the “business death penalty.”

The 11th US Circuit Court of Appeals, with retired Supreme Court Justice Sandra Day OConner writing for the three-judge panel, upheld a district court order asserting that the IRS was not entitled to shut down Cruzs tax preparation company nor its affiliates, including Nations Tax Services. See opinion. The Justice Department, on behalf of the IRS, sued Cruzs company in the district court seeking a civil injunction to shut it down. However, US District Judge William Zloch denied the motion, finding the company had submitted bad returns for customers, but was mending its ways. Judge Zloch found the “death penalty” would be an extreme remedy and instead barred the company from engaging in deceptive practices and mandated IRS monitoring for compliance.

The 11th Circuit said the IRS launched its investigation of Cruzs company because Cruzs clients were receiving refunds and claiming earned-income tax credits at rates far beyond the national average. The 11th Circuit further stated that an audit revealed “numerous and repeated understatements of tax liability.” Cruz, however, changed preparing procedures and continuing education policies after learning of the IRS investigation, thus leading the 11th Circuit to conclude that the district court had correctly deduced that Cruzs company had significantly reformed its deceptive practices.

Before the 11th Circuit, the government argued that Judge Zloch abused his discretion by failing to enjoin the defendants from acting as tax preparers and failing to require the company to notify customers of the injunction. However, Justice OConner found that “the district court was within its discretion in finding that such a broad injunction was not warranted.” Justice OConner further stated that “[t]here is nothing illogical in finding that education programs could curb negligent misconduct while relying on the added sanctions of the district courts limited injunction to curb any excess of international misconduct.” Former Justice OConner did send one aspect of the case back to Judge Zloch because Judge Zloch gave no reason for rejecting the injunction requested by the IRS compelling Cruz to notify customers of the courts injunction.

Present and Future Regulations

In the past, tax preparers have not only faced civil fines and the business death penalty but criminal prosecution as well. Dan Boone, spokesperson for the IRS civil division, said the service is dedicated to bringing more regulation to the tax preparation industry. Training is currently not required in the State of Florida for one to establish a tax preparation facility. Yet, starting in September, anyone who is paid to prepare federal tax returns must register and receive a tax identification number. Then next year, all tax preparers must pass a competency test.

If you have any questions about the new rules and regulations tax preparers must abide by or if you are a tax preparer under audit, please contact us at contact@fidjlaw.com.

IRS Successfully Prosecuting Tax Evaders

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August 6, 2010

In the past two weeks, the IRS has announced lengthy prison sentences in cases involving conspiracy to defraud the U.S. government and related charges. Acting Assistant Attorney General John A.Dicco of the Justice Departments Tax division believes that recent sentences send a powerful message stating that, “Those who promote tax fraud schemes will be investigated, prosecuted and convicted, and they also face substantial prison sentences.”

On Thursday, July 29, the IRS announced that four out of eight Pinnacle Quest International (PQI) defendants have been sentenced to prison terms for charges relating to tax fraud, wire fraud, and money laundering. These individuals were sentenced between five to twelve years in prison.

PQI was an umbrella organization for a number of businesses operating tax and credit card debt elimination scams. One PQI company sold phony strategies for tax evasion and worked with clients to create sham businesses in the U.S. and Panama. Another provided a “reliance defense” in the form of frivolous correspondence to show good faith if prosecuted. Still other PQI vendors charged customers for ineffective letters to creditors, claiming to reduce credit card debt. Vendor MYICIS operates a “warehouse bank” where customers are able to make deposits into a joint bank account to hide assets from the IRS.

PQI claimed to sell only CDs and tickets to offshore conferences, but the government demonstrated that vendor customers were required to join PQI at a rate of $1,350 to $18,750. Four more PQI defendants are expected to be sentenced in the next two months.

Within a week, the IRS announced that John S. Lipton has been sentenced to 70 months in prison and ordered to pay restitution of $2,915,427.16 to the IRS after pleading guilty to conspiracy to defraud the United States and tax evasion on April 8th.

Lipton was a founder and principle member of the Genesis Fund which operated a ponzi scheme from May 1998 to June 2002. The Genesis Fund lured investors by falsely claiming returns of 4% monthly while actually utilizing investments to make “profit” distributions to its founders and early investors. The Genesis Fund also averred no reporting obligations to the IRS. Members advised investors to create offshore bank accounts, corporations, and trusts in order to conceal disbursements from the IRS and maintained “disclosed” and “undisclosed” accounts.

To obscure their operations, the Genesis fund maintained no financial statements, destroyed electronic data, and relocated its administrative offices and paper documents to Costa Rica. Lipton admitted to personally directing the transfer of 19 boxes of subpoenaed material outside the United States.

Co-defendants Richard B.Leonard, Victor H.Preston and Teresa R.Vogt have entered guilty pleas, and four remaining defendants will face trial in April 2011. A separate trial related to the Ponzi scheme is scheduled for September 2011.

If you are facing criminal tax prosecution or have questions about tax law provisions please contact our attorneys at contact@fidjlaw.com.

IRS Liens go Un-noticed

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The IRS has begun to automatically issue tax liens to taxpayers with more than $5,000 in “currently not collectable” debt, regardless of their circumstance. This policy led to 966,000 tax liens issued in the 2009 fiscal year; an increase from 1999, where the IRS issued only 168,000 liens. A lien attaches to all of an individuals property including car, home, real estate accounts, and even accounts receivable if the tax payer is a business. The IRS additionally places interest in unpaid tax ahead of future creditors. In her 2009 annual report to Congress, National Taxpayer Advocate Nina Olson expressed her concern, stating that the IRS rarely uses its authority to “withdraw” liens from a taxpayers record. Olson believes that automatic filings may destroy a taxpayers credit score, business and job prospects, thus reducing an individuals ability to repay the government.

In a report titled “Actions Are Needed to Protect Taxpayers Rights During the Lien Due Process” issued on July 9, 2010, Treasury Inspector General for Tax Administration, J.Russell George, expressed his concern over the IRSs recent failure to notify taxpayers or their representatives when a lien has been issued.

The IRS is required to notify taxpayers and their authorized representatives within five days of a lien filing at their last known address.  Yet, the report estimates that in the 12 months ending June 30, 2009, the IRS failed to send notices to taxpayer representatives in 60,675 cases (26% of cases where a representative was on file). In addition, the report estimates that within the above timeframe, 2% of lien notices were mailed late to the taxpayers themselves. Further, the Report indicates that IRS employees failed to perform a required search for a lienees correct address in 84% of 300 cases where the original lien notice was undeliverable. This may have serious implications, because taxpayers only have 30 days to appeal a lien with the IRS; thereafter, a lien may only be contested in the Tax Court.

The IRS believes only 1% of notices have not been sent out on time, but is reconsidering what procedures are needed to deal with undeliverable notices. Officials say that the IRS is working on lien issuance timelines and agree it is, “imperative for both legal and taxpayer rights purposes to timely issue lien notices.” 

For other TIGTA reports, please visit https://www.treas.gov/tigta/
If you have been issued a Notice of Federal Tax Lien or a Notice of Intent to Levy, our attorneys at Fuerst Ittleman, PL can help “ you may contact our attorneys at contact@fidjlaw.com.

HSBC is New Target of DOJ Investigation into International Banks and Tax Evasion

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The next bank to draw the attention of the Internal Revenue Service (IRS) after the UBS investigation, on which we previously reported, is London-based HSBC. 

The Department of Justice (DOJ) has begun a criminal investigation of U.S. taxpayers using HSBC Holdings PLC accounts in India and Singapore to evade domestic taxes.  The DOJ is investigating whether the taxpayers have violated federal law by failing to report financial interests in accounts held in foreign countries.

Over the past two months, at least 15 or more HSBC clients have received correspondence from the U.S. government indicating that they will be investigated for tax evasion.  Two HSBC customers will be in front of a federal court in Fort Lauderdale on tax evasions charges on September 7.

It has been estimated that there is approximately $700 billion in untaxed wealth in Asia where HSBC maintains a prominent presence.  HSBC was founded in Hong Kong in 1865.  The Internal Revenue Service (IRS) will be placing 800 new agents overseas to strengthen its international operations due to President Obamas goal to crack down on tax evasion.  Many of those agents will be heading to Asia.

HSBC is cooperating with authorities, unlike UBS which initially refused to release the names of its U.S. customers to authorities.  HSBC has already turned over names and customer service audio tapes to U.S. officials.

The IRS and DOJ have been investigating U.S. taxpayers using accounts with UBS in Switzerland to evade taxes by not reporting income on the assets in the accounts.  (See IRS announcement here and DOJ announcement here.)  UBS was recently hit with $780 million fine for hiding U.S. taxpayer assets.  It appears as if the IRS and DOJ interest in international banks will continue to spread and that the agencies will continue to take on tax evaders internationally.

For more information on international tax issues, please contact our tax attorneys at contact@fidjlaw.com.