FATCA Compliance Update: U.S. Treasury Announces Six Month Delay In Implementing FATCA

On July 12, 2013, the U.S. Treasury announced that due to overwhelming concern from countries around the world, the implementation of FATCA (the Foreign Account Tax Compliance Act) would be deferred from January 1, 2014 to June 30, 2014.

IRS Notice 2013-43, available here, provides that this additional time is necessary to 1) revise timelines for implementation of FATCA, and 2) develop additional guidance concerning the treatment of foreign financial institutions (FFI) in countries which have either signed an Inter-Governmental Agreement (IGA) with the United States or which the United States will treat as if they had.

The IRS has not yet established its on-line registration portal which would allow participating FFIs to begin the process of registering submitting the information by FATCA.  The registration portal is now expected to be open on August 19, 2013. In order to ensure that a FFI would be included on the IRS FFI list, the FFI would need to finalize their registration by April 25, 2014.

To date, only 10 IGAs have been signed although discussions have been ongoing with dozens of countries. Consequently, FATCA compliance may differ significantly depending on where the FFI is located, and more specifically whether the FFI is in a country with an IGA.  There will also be differences if the IGA is a form of a Model 1 IGA or Model 2 IGA and whether the IGA has provisions requiring U.S. reciprocity in reporting U.S. financial institution information.

Although the IRS has issued a draft form of IRS Form W-8BEN-E (an eight page form containing 20 different types of FATCA categories reflecting the enormous complexity of FATCA), it is expected that the IRS will finalize the W-8BEN-E sometime in the fall of 2013.  It is also expected that the IRS will finalize guidance so that affected taxpayers will be able to confidently prepare and file it.

There is a significant amount of ongoing controversy surrounding the IGAs and the potential for having the United States committed to reciprocity. The Treasury Department in its IGA negotiations had promised that the information reporting through an IGA or by the account holders directly would work as a two-way street, and not surprisingly, some foreign governments will only sign where the U.S. provides “equivalent levels of reciprocal automatic exchange” with foreign “FATCA partners.” However, Treasury has acknowledged that it does not have the statutory power to make any such promise of reciprocity and has requested that Congress provide it with such power so as to overcome what could be a fatal flaw in FATCA.

If Congress grants such statutory authority to the Treasury, the consequences may be that every financial institution in the United States would become a FFI to the other IGA countries. The U.S. financial institutions would then have to go through the same registration process and information reporting on their customers that the FFIs from IGA countries must deal with now.

Will Congress pass the necessary legislation?

At this point, there are opponents in the House of Representatives where the tax bills originate. Congressman Bill Posey (R-Florida, 8th) a key member of the House Financial Services Committee, has written a letter to Jack Lew, Secretary of the Treasury, sharply turning down any thought of imposing FATCA on U.S. financial institutions. A copy of Congressman Posey’s letter is available here. As Congressman Posey stated, “…it is difficult to conceive of any circumstance that would justify imposing such an expensive and counterproductive domestic mandate.”

In addition to getting approval from the House Financial Services Committee, an approval would be needed from the House Ways and Means Committee.

Without the IGAs being widely accepted among the financial centers of the world, FATCA could prove to be effectively unenforceable.

Fuerst Ittleman David & Joseph will continue to monitor IRS’s implementation of FATCA, as well as any and all further developments in Congress. For more information, please feel free to contact us via email at contact@fidjlaw.com or by phone at (305) 350-5690.

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.

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.

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.

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.

Tax Compliance Update: IRS Aggressively Pursues Foreign Banks; Offshore Voluntary Disclosure Programto Remain Open Indefinitely

In our most recent discussion of the IRS’s Offshore Enforcement Initiatives, found here, we discussed the John Doe Summons recently issued by the U.S. Department of Justice to Wells Fargo seeking information about First Caribbean National Bank and how it could affect foreign account holders in the U.S. We went on to discuss the IRS’s Offshore Voluntary Disclosure Program (“OVDP”), how it worked, and some issues that foreign account holders and foreign entities should consider when deciding whether or not to participate in the program. In this article, we explore how the most recent John Doe summons made its way to the Caribbean and why the IRS has become so interested in pursuing offshore account holders. We begin our discussion with a brief history of what has transpired since the establishment of the IRS’s OVDP back in 2009.

The IRS’s Criminal Manual has encouraged the voluntary disclosure of hidden offshore accounts for many years preceding the establishment of the OVDP. However, prior to the 2009 OVDP, the IRS had no formalized method for determining penalties. This lack of uniformity in making penalty determinations resulted in non-compliant taxpayers being reluctant to disclose information that would expose them to unpredictable financial liability. In response to these concerns and to promote transparency and uniformity, the IRS established the OVDP as a centralized means of processing voluntary disclosures that offered a uniform penalty structure, consistency, and predictability for taxpayers; see IRS discussion of OVDP objectives here.

The IRS’s efforts to increase offshore account transparency through the OVDP have been extremely successful. Since the establishment of the OVDP, the IRS and Tax Division of the Department of Justice have collected a wealth of data regarding previously undisclosed accounts and used this information to aggressively pursue U.S. taxpayers attempting to evade U.S. taxes and violate the Bank Secrecy Act.

Most notably, in February 2009, the Union Bank of Switzerland (“UBS AG”), Switzerland’s then largest bank, entered into a deferred prosecution agreement with the Department of Justice on charges of conspiring to defraud the United States by impeding the IRS. As part of this agreement, UBS AG paid the U.S. $780 million and surrendered data for nearly 5,000 U.S. clients who held United States securities in UBS AG accounts. Due to the intense pressure from U.S. law enforcement, most Swiss banks appear to have abandoned the practice.

Wegelin & Co. (“Wegelin”), the oldest Swiss private bank, saw this as an opportunity to capture market share and allegedly, at the direction of senior management, made efforts to attract old UBS AG clients. Under the assumption that there was no nexus between itself and the U.S. and its compliance with Swiss laws, Wegelin believed itself to be safe from exposure to U.S. prosecution. However, as noted in our previous discussion on this topic, when foreign banks assist U.S. taxpayers in committing tax evasion, a lack of physical nexus is irrelevant.

Wegelin guessed wrong and paid the ultimate price. In January 2013 the bank plead guilty to facilitating U.S. tax evasion by helping over 100 U.S. taxpayers hide more than $1.2 Billion in undeclared assets between 2002 and 2011. In total, Wegelin was required to pay the U.S. about $74 million in restitution, fees, and penalties and was ultimately forced to close. We previously reported on Wegelin’s indictment here and the final penalty issued to Wegelin here.

The success of the OVDP is unquestionably influencing the IRS’s continued focus on tracking down individuals involved in illegal offshore tax evasion. Following UBS AG’s deferred prosecution agreement, the flood gates opened for voluntary disclosure, resulting in the IRS collecting a treasure trove of information and forcing approximately 38,000 disclosures and well over $5 billion in taxes, interest, and penalties. Undoubtedly, the huge volumes of information and disclosures in the wake of the UBS AG indictment are leading to increased identification of key players and institutions that facilitate illegal offshore account activity for U.S. taxpayers.

The continued success of this program has clearly led the IRS to keep the OVDP active indefinitely; see the IRS’s announcement regarding the program remaining open indefinitely here. The IRS’s commitment to the initiative is clear; it seems to have found a formula for promoting disclosure of hidden foreign accounts that is working and it has no intentions of easing up.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who have availed themselves of the IRSs voluntary disclosure program. We will continue to monitor the development of this issue, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at contact@fidjlaw.com.

IRS Issues “John Doe Summons” to Wells Fargo Seeking Identities of U.S. Taxpayers with Offshore Accounts at First Caribbean International Bank

Introduction

On April 30, 2013, the United States Department of Justice issued a “John Doe Internal Revenue Code” summons to Wells Fargo Bank, as a provider of correspondent bank services for Canadian Imperial Bank of Commerce’s First Caribbean International Bank (“FCIB”), requiring it to turn over records relating to accounts held at FCIB by United States Taxpayers between 2004 through 2012.  The issuance of this summons is one of the aftershocks of the UBS AG debacle that destroyed Switzerland’s bank secrecy laws. [A discussion on this issue can be found here]. You can read more about the Department of Justice’s John Doe summons to Wells Fargo here.

Because First Caribbean operates in 18 Caribbean countries, it is inevitable that the issuance of the Department of Justice’s summons will reveal thousands upon thousands of U.S. account holders who reside in the United States, and particularly South Florida.  It is also inevitable that some of these U.S. account holders will be prosecuted for failing to disclose their accounts overseas.  Additionally, it is virtually certain that the Department of Justice will start issuing John Doe summonses to other banking institutions that maintain correspondent accounts.

Because of the urgent nature of this issue for holders of foreign accounts who may be unaware of their reporting requirements, and the consequences of failing to report their foreign accounts, over the course of several articles we will present a comprehensive overview of the IRS’s most recent efforts to thwart offshore tax evasion and raise money for the government through tax collection efforts. Additionally, we will explore the intricacies of this issue attempt to explain exactly what the IRS is doing here.

In this article, Part I includes a discussion of what exactly a “John Doe Summons” is and what effects the summons issued to FCIB may have on foreign account holders. Part II of this article focuses on immediate actions expected “violators” can/should take to insulate themselves from prosecution.

Part I:
The John Doe Summons: Who is John Doe?

So what exactly is a John Doe Summons and why is it particularly dangerous for US taxpayers with accounts abroad?

First, “[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, [or] determining the liability of any person for any internal revenue tax…”, the Internal Revenue Code empowers the Secretary of the Treasury, or its delegate, “[t]o summon the person liable for tax or required to perform the act…or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper…to produce such books, papers, records, or other data, and to give such testimony…as may be relevant or material to such inquiry.” 26 U.S.C. §§ 7602(a), 7701(11). The IRS power to summon extends even to those situations in which the identity of the taxpayer is unknown. 26 U.S.C. § 7609(f). Where the IRS seeks to summon information that pertains to an unknown taxpayer and is in the custody of a third party, the United States must first make a showing to a court that: 1) its investigation relates to an ascertainable class of persons; 2) a reasonable basis exists for the belief that these unknown taxpayers may have failed to comply with Internal Revenue Laws; and 3) the United States cannot obtain the information sought from another readily available source. Id.

The unknown or unspecified name of the target taxpayer gives rise to the notion of “John Doe.” The IRS defines a John Doe Summons as “any summons where the name of the individual taxpayer under investigation is unknown and therefore not specifically identified.” John Doe summonses are utilized by the IRS primarily to identify individuals participating in activities that would violate internal revenue laws or the Bank Secrecy Act and have most recently been utilized to uncover information regarding foreign accountholders who are illegally failing to report their offshore assets under U.S. tax law. Because the summons allows the IRS to seek information about unspecified taxpayers, the IRS commonly uses them as a means to collect information on an extraordinarily broad scale from financial institutions wherever located.

Although maintaining an offshore account is perfectly legal, United States tax law requires that a Foreign Bank Account Report or (“FBAR”) be filed with the United States Treasury for any citizens holding foreign accounts with balances exceeding $10,000.00 at any time during the calendar year. Under the FBAR regulations, deliberate failure to report a foreign account with a value that exceeds the threshold amount can result in penalties up to 50 percent of the amount in the account at the time of the violation. Of late, the IRS has been making concerted efforts to ensure that taxpayer who evade these reporting requirements are punished and John Doe Summonses have been the IRS’s weapon of choice.

In this most recent summons, IRS served Wells Fargo’s San Francisco branch which maintains correspondent accounts for the Barbados-based FCIB. Correspondent accounts are bank deposit accounts maintained by one bank for another. Typically, correspondent accounts are held by foreign banks without branch offices in the U.S. that do business in U.S. dollars. The United States Department of Justice is expecting that this summons will produce significant information about the account holders as well as the amount of money moved through their accounts. Beyond the identification of tax evaders, the John Doe summons also requires Wells Fargo to produce its own internal anti-money laundering compliance reports.

In a U.S. Department of Justice Press release found here, Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division, stated as follows: “The Department of Justice and the IRS are committed to global enforcement to stop the use of foreign bank accounts to evade U.S. taxes”¦This John Doe summons is a visible indication of how we are using the many tools available to us to purse this activity wherever it is occurring. Those who are still hiding should get right with their country and fellow taxpayers before it’s too late.” IRS Acting Commissioner Steven T. Miller went on to say that “[t]his summons marks another milestone in international tax enforcement”¦our work here shows our resolve to pursue these case in all parts of the world regardless of whether  the person hiding the money overseas chooses a bank with no offices on U.S. soil.”

The summons to Wells Fargo naturally begs the question of whether the U.S. government can assert jurisdiction over foreign banks that have no branches or employees within the United States. In response, the U.S. government maintains that despite a bank employee never stepping foot on U.S. soil, if a foreign bank’s employees knowingly assist a U.S. taxpayer evade tax filing obligations, the bank itself can and will be held criminally liable. The way the U.S. Department of Justice sees it, if there is any conspiracy to violate U.S. tax law, the fact that the conduct took place overseas is irrelevant. IRS’s success in pursing illegal offshore account activity in Switzerland which led to the closure of the historic Swiss bank Wegelin & Co., which we previous discussed here and here, is instructive on this point. What is even more damning for FCIB is that its correspondent accounts held at Wells Fargo’s San-Francisco branch further established the nexus – however limited – between it and the U.S. 

This John Doe summons will result in significant exposure to prosecution for foreign account holders, banks, bankers, and account facilitators such as insurance companies, lawyers, accounts and investment advisors who the IRS has suspected of facilitating tax evasion in the United States. Given the nature of the new international information sharing agreements, the disclosure of account names and information is becoming more frequent and intrusive. For example, the Foreign Account Tax Compliance Act  (“FATCA”) was implemented in 2010 to encourage non-U.S. financial institutions to “voluntarily” disclose their U.S. account holders to the IRS and requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest directly to the IRS. [See IRS press release here.]

These IRS initiatives to identify individuals evading taxes are moving forward, and as such, foreign account holders and those associated with facilitating those accounts both domestically and abroad will need to prepare themselves to quickly become compliant with U.S. tax laws or prepare for a legal battle with the IRS.

Part II:
The Offshore Voluntary Disclosure Program

We now look more closely at the IRS’s Offshore Voluntary Disclosure Program and what steps suspected holders of unreported offshore accounts can immediately take to mitigate penalties, fines, and possible criminal prosecution.

In 2009, as a means of encouraging U.S. taxpayers to report previously undisclosed income, the IRS created the first offshore disclosure initiative. This initiative was coined the Offshore Voluntary Disclosure Program (“OVDP”) and was a response to the IRS prosecution of wealthy Americans who evaded taxes with the help of UBS AG (located in Switzerland) along with information obtained from disclosures of former UBS AG banker Bradley Birkenfeld in 2008.[ We have previously blogged on the OVDP here, here, and here] This program was considered a success, reportedly collecting over $4 Billion between its inception in 2009 and 2011 and nearly $5 Billion to date. Furthermore, the OVDP has resulted in over 34,500 disclosures and led to information that has assisted the IRS in furthering its investigation into other offshore tax jurisdictions. [See IRS press release on OVDP success here.] Consequently, in 2012, the IRS decided to eliminate any deadlines and kept the program as an open ended vehicle for investigating tax evasion and collecting tax revenue.

The OVDP currently focuses on the main vehicles of offshore tax evasion – unreported foreign financial accounts and unreported foreign entities, examples of which include depositing unreported and untaxed income into foreign accounts and/or omitting investment income earned from the foreign account on tax returns.  Under the OVDP, current tax evaders are encouraged to report previously undisclosed foreign accounts through reduced penalties and elimination of criminal prosecution risks for evasion.

For example, by entering into the OVDP, the IRS will waive FBAR non-compliance penalties. Foreign Bank Account Report (“FBAR”) violations range from $10,000 per account per year of unreported foreign bank accounts exceeding $10,000 during any point in a calendar year to the greater of $100,000 or 50 percent (50%) of the maximum balance of the foreign account exceeding $10,000. In contrast, the ODVP rates general degrees of willful tax evasion, and penalizes tax evaders based upon the underlying severity of the evasive acts. The threshold limits are a respective 27.5%, 10%, and 5% of the maximum foreign account balance based on the three different levels of willfulness.

Beyond its focus on FBAR violations, OVDP also looks to unreported foreign entities. Tax evasion schemes created through sophisticated foreign trusts, corporations, and partnerships that do not report this foreign entity to IRS on annual tax returns are susceptible to between $10,000 and $50,000 in penalties. OVDP however, affords the same 27.5%, 10%, and 5% mitigated penalties for disclosures of foreign business entities.

Individuals and businesses fearful of being identified of illegally evading taxes through undisclosed foreign financial accounts must ultimately assess the prospective risk of penalties and/or criminal prosecution when reviewing their foreign accounts and should consider whether the OVDP is their best option for solving their tax issues. When making this assessment, foreign account holders should be mindful of the following rules under OVDP:

  • The 27.5%, 10%, and 5% penalties apply to all assets related to tax evasion.
  • The OVDP only covers the most recent 8 tax years.
  • The OVDP penalties apply to all tax evasion-related assets that may be both directly and indirectly owned by the tax payer. i.e. the beneficiary of a foreign trust account  that maintains $500,000 will be applied under OVDP the same as a $50,000 car purchased with funds from a non-compliant FBAR account.

When making this final decision we suggest that foreign accountholders contact a competent professional with specialization in offshore disclosures, FBAR compliance, and asset protection to ensure that the accountholder is making the decision that is best suited for his or her specific financial situation.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who have availed themselves of the IRSs voluntary disclosure program. We will continue to monitor the development of this issue, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at  contact@fidjlaw.com.

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

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.