FISCAL YEAR 2003

NATIONAL OPERATIONS

ANNUAL 

BUSINESS

REPORT

Internal Revenue Service

Criminal Investigation

The Criminal Investigation Mission

Criminal Investigation serves the

American public by investigating

potential criminal violations of the

Internal Revenue Code and related

financial crimes in a manner that

fosters confidence in the tax systems

and compliance with the law.

IRS CI

FISCAL YEAR 2003 / NATIONAL OPERATIONS / ANNUAL BUSINESS REPORT

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Table of Contents

Chief (CI) Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

STRATEGIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Compliance Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Criminal Investigation FY 2003 Annual Business Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ACCOMPLISHMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Annual Strategies and Operational Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

OTHER PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Counterterrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Narcotics Related Financial Crimes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Electronic Crimes and Technology Based Tax Crimes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Employee Satisfaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

EEO and Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

CRIMINAL INVESTIGATION STATISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

FY 2003–By Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

FY 2003–By United States Code, Title, and Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

OPERATIONAL OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Asset Forfeiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Undercover. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

National CI Training Academy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Communication and Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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Chief (CI) Message –

Nancy J. Jardini

Achieving Many Goals

Boardrooms to Baghdad and everywhere in between!

Criminal Investigation (CI) was there! The FY 2003

National Operations Annual Business Report showcases

CI’s continued emphasis on tax administration and

traditional support of important national law enforcement

priorities. This report is a tribute to all employees, whose

individual and collective efforts make CI such a unique

and dynamic law enforcement agency. 

In FY 2003, overall case initiations are up 2 percent from

last year and prosecution recommendations and

indictments rose 19 percent and 11 percent respectively.

Criminal Investigation’s highest investigative priority over

the past several years has been not only to increase the

number of tax case initiations but to concentrate on

egregious, high impact investigations. The successful

prosecution of major tax cheats fosters deterrence and

enhances voluntary compliance. Criminal Investigation

has partnered with the Small Business/Self Employed

(SB/SE), Large and Mid-Sized Business (LMSB), and Tax

Exempt & Government Entities (TE/GE) operating divisions

to develop quality fraud referrals and joint strategies to

identify and combat non-compliance with all of the

enforcement tools available. 

Tax evasion is a serious crime. In reviewing CI’s FY 2003

Annual Business Report, particularly those sections

dealing exclusively with tax offenses, I think most will

agree the sentences imposed reflect the seriousness of the

conduct! 

National law enforcement priorities remain an important

component of CI’s work. The unique financial skills of our

agents are in high demand. Criminal Investigation

traditionally has made important contributions to task

forces organized to combat money laundering, narcotics,

and health care fraud. More recently, CI agents have

become an integral part of the Department of Justice’s

Corporate Fraud Task Forces. Criminal Investigation

continues to apply its expertise to help combat

international and domestic terrorism as a member of the

Federal Bureau of Investigation’s (FBI) Joint Terrorism Task

Forces and is playing an important role in tracking down

assets looted from Iraq by Saddam Hussein and his

regime.

Commissioner Everson has made enforcement a top

priority, and I am committed to making every effort to

maximize CI’s use of resources. Criminal Investigation is

reviewing all aspects of the investigative process to make

recommendations for streamlining administrative

procedures, and enhancing productivity. These changes

coupled with technology upgrades already being

implemented will enable our employees to work smarter

and faster without compromising quality. 

In reviewing CI’s current achievements it is important to

look toward the future. Criminal Investigation is on the

verge of hiring a significant number of agents to replace

those that retired. The agents hired in recent years are

outstanding and I ask all employees to continue to actively

encourage qualified candidates to apply. 

Further, it is important to note that while CI develops and

implements strategies to recruit the best and brightest

candidates available, a strong emphasis will be placed on

building a diverse workforce. We are committed to

ensuring a positive, professional environment that respects

differences, values integrity, and capitalizes on the diverse

talents of all employees. Diversity improves the quality of

our workforce and offers a higher return on our investment

in human capital. 

I also encourage employees who have an interest in

management to join the management team. If CI can

continue to attract talented special agents and managers

there is nothing we can’t accomplish. 

IRS CI

FISCAL YEAR 2003 / NATIONAL OPERATIONS / ANNUAL BUSINESS REPORT

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Strategies

IRS, Criminal Investigation FY 2003

Compliance Strategy

Achieving Many Goals

IRS Criminal Investigation serves the American public by

investigating potential criminal violations of the Internal

Revenue code and related financial crimes in a manner

that fosters confidence in the tax system and compliance

with the laws.

The dynamic aspect of CI’s mission is that tax evasion and

money laundering schemes are limited only by human

ingenuity and are constantly evolving. Criminal

Investigation is working closer than ever before with the

other IRS operating divisions to maximize the effectiveness

of our enforcement tools. A new program titled "Abusive

Tax Schemes" has been initiated to counter the

proliferation of schemes using various flow-through

entities and offshore financial arrangements. 

During this fiscal year, CI also played a critical role in

many important national law enforcement initiatives,

especially the war on terrorism. The successful pursuit of

international terrorists requires the ability to analyze

complex domestic and international financial transactions.

The skills of our agents have taken them half way around

the world where they are assisting other law enforcement

agencies and nations in tracking terrorist fundraising,

curtailing the abuse of charities and pursuing assets

looted by Saddam Hussein. 

This year’s achievements cut across a broad range of

chronic and emerging compliance problems. Many

significant prosecutions involving the non-filing of returns,

employment tax fraud, refund crime, offshore tax evasion

schemes and a wide variety of general tax fraud were

brought to a successful conclusion. These

accomplishments reflect the high caliber of specialized

expertise and dedication of the IRS CI workforce. 

Criminal Investigation FY 2003 

Annual Business Plan

The operational priorities for CI’s Compliance Strategy

were:

• Support of the Non-Filer Strategy

• Address non-compliance with employment tax laws

• Refund and preparer crimes

• Electronic crimes (E-Crimes) and technology-based

tax crimes (domestic and international)

• International and domestic terrorism

• Promoters of abusive foreign and domestic trusts and

schemes based on frivolous legal arguments

• Inform and educate the public and enlist support of

the professional community to counter abusive

promotions

• Money laundering

Other program priorities included:

• Increasing the efficiency of criminal investigations

• Improving employee productivity and satisfaction

Criminal Investigation’s Compliance Strategy objective for

FY 2003 mandated continued emphasis on legal source

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IRS CI

FISCAL YEAR 2003 / NATIONAL OPERATIONS / ANNUAL BUSINESS REPORT

CI Overall Enforcement Statistics

 FY 2000 FY 2001 FY 2002 FY 2003

Incarceration Rate 80.9% 84% 82.2% 84%

Convictions 2249 2251 1926 1824

Prosecution Recommendations 2434 2335 2133 2541

Completed Investigations 3499 3340 3201 3766

Investigations Initiated 3372 3284 3906 4001
cases and other income tax related investigations.

Criminal Investigation sustained the same level of legal

and illegal source tax case initiations in FY 2003 that was

achieved in FY 2002. 

Criminal Investigation’s overall enforcement statistics

(legal, illegal, and narcotics) for FY 2003 are reflected in

the charts below:

Significant increases in prosecution recommendations,

indictments, and convictions were also achieved in the

following program areas during FY 2003 compared to FY

2002:

Accomplishments

Annual Strategies and Operational

Priorities

Fraud Referrals from Other IRS Operating

Divisions

To strengthen the fraud referral program, CI continues to

conduct fraud awareness training classes for the Small

Business/Self-Employed (SB/SE), Large and Mid-Size

Business (LMSB), Wage and Investment (W&I), and TaxExempt and Government Entities (TE/GE) operating

divisions. Fraud awareness training is one method used

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Number of Subject Criminal Investigations Initiated by Category

 FY 2001 FY 2002 FY 2003 Decrease1

Narcotics 951 867 960 10.7%

Illegal Source Tax 1313 1485 1535 3.4%

Legal Source Tax 1020 1554 1506 (3.1%)

 1 Increase/decrease from FY 2002 to FY 2003

 Prosecution

Recommendations Indictments Convictions

Counter-Terrorism 270% 655% 18.8%

Abusive Schemes 45.4% 65.9% 57.7%

Employment Tax 17.8% (20%) NA

Non-Filer 23.8% 0.4% (3.1%)

Return Preparer 89.9% 78.7% 4.7%

Questionable Refund 54.9% 21.6% 27%

IRS CI

FISCAL YEAR 2003 / NATIONAL OPERATIONS / ANNUAL BUSINESS REPORT
by CI to identify and develop legal source tax

investigations. Like CI, SB/SE has established a Lead

Development Center (LDC) to detect and combat abusive

scheme promoters and return preparers. Additionally,

the SB/SE LDC is a valuable source of fraud referrals. The

61 percent fraud referral acceptance rate for FY 2003 is

only 2 percent less than the all-time high acceptance rate

of 63 percent achieved in FY 2002.

Focusing on the coordinated enforcement efforts of the

civil and criminal functions at IRS has proven to be a

powerful tool in combating tax-related schemes. This

effort has resulted in the development of parallel

investigation procedures that maximize the effectiveness of

civil and criminal sanctions. These parallel investigations

permit the simultaneous investigation and litigation of

separate criminal and civil cases involving a common set

of facts. Today, civil injunctions are used to stop a scheme

promoter from continuing to sell his/her scams while a

criminal investigation is on-going. 

Refund Fraud Program

Criminal Investigation’s efforts to deter refund fraud are

critical to overall tax compliance. Both internal and

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Questionable Refund Program Statistics

 FY 2000 FY 2001 FY 2002 FY 2003

Average Months to Serve (All 15 19 19 22

Sentence)

Average Months to Serve (w/Prison) 19 22 21 24

Incarceration Rate 79.4% 88.3% 88.2% 90.6%

Convictions 104 102 100 127

Indictment/Information 102 95 125 152

Prosecutions Recommended 95 113 144 223

Investigations Initiated 154 170 328 291

Return Preparer Program Statistics

FY 2000 FY 2001 FY 2002 FY 2003

Average Months to Serve (All 17 19 23 19

Sentence)

Average Months to Serve (w/Prison) 20 20 27 23

Incarceration Rate 84.3% 92.9% 86.8% 83.7%

Convictions 58 63 64 67

Indictment/Information 61 70 61 109

Prosecutions Recommended 62 73 89 169

Investigations Initiated 139 116 254 229
external stakeholders play a valuable role. Criminal

Investigation works with W&I to address the organizational

and systemic issues involved with refund-related crimes.

In CI’s efforts to enlist the support of the practitioner

community, a new fraud alert poster and brochures were

published and distributed to further community outreach. 

Fraud and abuse associated with the Questionable Refund

Program (QRP) and the Return Preparer Program (RPP) are

increasing. A primary contributing factor to this increase

in fraud is identity theft. Additionally, the Earned Income

Tax Credit (EITC) program remains subject to widespread

abuse. To more effectively combat fraud, CI is evaluating

a streamlined investigative and report writing process to

reduce elapsed time and bring the investigations quickly

to fruition. The use of the Service's Electronic Fraud

Detection System and the analytical skills of the Fraud

Detection Centers (FDC) have enabled CI and W&I to

develop effective deterrents to both QRP and RPP

schemes.

The following case summaries are excerpts from public

record documents on file with the courts in the judicial

district in which the cases were prosecuted.

Lubbock Man Sentenced To Serve 30 Months In Prison

Following Federal Tax Conviction

On August 12, 2003, in Dallas, TX, Emilio Chavez, Jr., a

tax return preparer, was sentenced to 30 months in prison

following his May 2003 guilty plea to one count of false,

fictitious or fraudulent claims on income tax returns.

Chavez was also ordered to pay $126,315 in restitution

to the IRS. 

During the 2001 filing season, Chavez prepared

approximately 100 income tax returns and of those, 25

were fraudulent and claimed false income tax refunds.

Chavez admitted that he would take basic Form W-2

information from clients and then give them a verbal

estimate of their tax refund. Unknown to the client, Chavez

would prepare and report a fictitious Schedule C on their

return showing the client to be a self-employed long haul

trucker. The Schedule C would reflect fictitious amounts of

income and expenses. Chavez would also prepare a

fraudulent Form 4136, Credit for Federal Tax Paid on

Fuels, which reflected that the client was entitled to a fuel

tax credit. Chavez knew he was creating a large

fraudulent income tax refund to which the client was not

entitled. 

Chavez electronically filed these returns and requested

that the refund be direct-deposited into a Refund

Anticipation Loan account. When the refund was received,

Chavez would issue a check to the client for the smaller

estimated refund he had previously quoted and keep the

difference. The total amount of the fraudulent income tax

refunds claimed by Chavez on the 25 false returns was

$318,407.

Three Sentenced For Filing Numerous Bogus Tax

Returns

On March 19, 2003, in Los Angeles, CA, Leroy Green

was sentenced to 30 months in prison and ordered to pay

$195,998 in restitution. Green was convicted on ten

counts, including one count of conspiracy to defraud the

United States by filing false refund claims. On January 21,

2003, Herman Hill, and his wife Sharon Fields-Hill were

sentenced after pleading guilty to filing 30 false income

tax returns with the IRS that claimed refunds of $69,529.

Hill was sentenced to an 18-month prison term and

ordered to pay $213,878 in restitution. Fields-Hill was

sentenced to six months home detention and ordered to

pay $43,152 in restitution. Green, Hill, and Fields-Hill

prepared tax returns that contained bogus selfemployment Schedule C-EZ and Schedule C forms that

resulted in false claims for refunds based upon the Earned

Income Tax Credit.

Over $2.7 Million in Bogus Refunds Claimed

On October 24, 2002, in Baltimore, Maryland, Mark A.

Knight was sentenced to 40 months in prison for aiding

and assisting in the preparation and filing of more than

1100 fraudulent federal income tax returns seeking over

$2.7 million in refunds from the IRS. Knight offered

taxpayers his services in preparing amended income tax

returns by falsely claiming that he was previously

employed with the IRS. Knight charged his clients $100 for

each return prepared. Typically, Knight fraudulently

claimed unreimbursed business expenses, false medical

deductions, and personal property taxes on the returns he

prepared.

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Non-filer Program

The IRS has a national non-filer strategy that addresses

this chronic compliance problem. Criminal Investigation

plays an important role in this strategy. In addition to its

investigative efforts, CI launched a fraud alerts page on

the Internet summarizing recent prosecutions to inform

taxpayers about the serious consequences that can result

from the failure to file required tax returns. This site is also

linked to a paper prepared by IRS Chief Counsel that

refutes the frivolous arguments employed by some nonfilers. See www.irs.gov and type in "key word: Fraud" for

more information. Non-filer investigations remain an

important investigative priority.

The following case summaries are excerpts from public

record documents on file with the courts in the judicial

district in which the cases were prosecuted.

Maximum Sentenced Received

On October 1, 2002, Edward Bruce Baker of Altamonte

Springs, Florida was sentenced to 24 months in prison on

two counts of failure to file federal income tax returns and

was remanded to the custody of the Marshals at that time.

During 1994, Baker received gross income of

approximately $231,339 and in 1995 received

approximately $281,824. Baker failed to file returns for

either of these years. Baker was found guilty by a jury on

July 22, 2002.

Longest Prison Term for Tax Offenses in Alaska

On November 21, 2002 in the District of Alaska, Richard

Ray Blankenship received the longest sentence ever

imposed in Alaska for tax-related offenses. Blankenship

was sentenced to eight years and eight months in prison. 

Blankenship renounced his US citizenship and social

security number, claiming he had no obligation to the

Internal Revenue Service. Blankenship has not filed a

legitimate tax return since 1994. The indictment filed on

June 19, 2002, charged him with willful failure to file

returns for 1996, 1997, 1998, 1999 and 2000. The

indictment also charged Blankenship with several counts

of mailing threatening communications and passing

fictitious obligations. 

On September 12, 2002, a federal trial jury in Anchorage

convicted him of failing to file federal income tax returns,

mailing threats to judges and attempting to pay a hospital

bill with a fraudulent Unites States Treasury sight draft. 

In imposing sentence, Chief Judge John Sedwick

commented that Blankenship's conduct was among the

most selfish he had ever encountered. He likened

Blankenship to a recruit who was always out of step with

the rest of his company and reminded him of his

obligations to pay taxes and obey the law.

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Non-filer Program Statistics

 FY 2000 FY 2001 FY 2002 FY 2003

Average Months to Serve (all 33 36 49 40

Sentence)

Average Months to Serve (w/Prison) 39 43 45 44

Incarceration Rate 80.1% 83.2% 88.1% 81.7%

Convictions 232 219 227 220

Indictments/Information 265 257 233 234

Prosecutions Recommended 257 269 244 302

Investigations Initiated 376 464 503 536
Owner of Video Stores Failed to Report $1 Million in

Income

On November 7, 2002, in Mobile, Alabama, David

Eugene Bryan was sentenced to 27 months in prison

followed by three years supervised release and ordered to

pay restitution in the amount of $414,124 to the U.S.

Treasury, after pleading guilty to tax evasion. Bryan failed

to file federal income tax returns and report his income

from the operation of several video stores for the years

1996 through 2000. Bryan used eight different bank

accounts for depositing his gross receipts, but he placed

five of those bank accounts in the names of nominees. In

addition, he failed to deposit all of the cash receipts from

his businesses into these bank accounts. Bryan admitted

that he dealt extensively in cash, diverted business income

for personal use, and failed to keep accurate books and

records of his business. As a result, he intentionally failed

to report approximately $1,019,034 in taxable income

and failed to pay approximately $414,124 in federal

income taxes.

Employment Tax

Ensuring that income and employment taxes are withheld

and paid to the government is an important compliance

issue. Since 1999 CI has placed increased emphasis on

investigating a wide variety of employment tax evasion

schemes. 

The following case summaries are excerpts from public

record documents on file with the courts in the judicial

district in which the cases were prosecuted.

Operator of Convenience Stores Evaded $247,000 in

Employment Taxes

On July 25, 2003, in New Haven, CT, Russell Mahler, Sr.,

who operated a chain of gasoline/convenience stores,

was sentenced to 18 months imprisonment followed by

three years supervised release. Mahler was also ordered

to pay a fine of $40,000 and all back taxes, plus interest

and penalties. Mahler pleaded guilty on March 11, 2003,

to conspiring to impede the functions of the IRS. Mahler's

son, Russell Mahler II, also pleaded guilty to the same

charges in March and had been sentenced in May 2003

to one year and one day imprisonment followed by three

years supervised release. The Mahlers admitted to paying

a substantial portion of many of their employee's wages in

cash and failing to pay over to the IRS payroll taxes

totaling an estimated $247,000. In addition, Russell

Mahler, Sr. admitted evading about $46,000 of his

personal income taxes.

Small Business Consultant Withdrew Over $1 Million

from Client's Payroll Accounts

On July 14, 2002, in Kansas City, KS, Floyd McMillon,

owner of Acculine Consulting Group, Inc., was sentenced

to 63 months in prison and ordered to pay more than

$621,000 in restitution to the small businesses he

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Employment Tax Statistics

 FY 2000 FY 2001 FY 2002 FY 2003

Average Months to Serve (all 13 15 15 20

Sentence)

Average Months to Serve (w/Prison) 17 20 19 27

Incarceration Rate 80.0% 74.2% 78.0% 75.6%

Sentenced 45 31 41 45

Indictments/Information 47 33 55 44

Prosecutions Recommended 38 40 56 66

Investigations Initiated 36 64 92 104
defrauded. McMillon pleaded guilty on February 10,

2003, to one count of filing a false tax return and one

count of failing to pay over taxes to the IRS. McMillon's

business, Acculine Consulting Group, Inc., provided tax

return preparation, bookkeeping and payroll services for

small businesses. Acculine calculated employment taxes

to be withheld from the paychecks of employees of the

businesses, withdrew that amount from the businesses

bank accounts, deposited the funds into Acculine's bank

account, and submitted the required employment tax

forms to the IRS. However, McMillon admitted that he

withdrew more than $1 million from Acculine's bank

account which was set up to pay the employment taxes. 

Construction Contractor Pleads Guilty in $3.6 Million

Employment Tax Fraud Case

On March 14, 2003, in Memphis, TN, David Cantu Jr.,

was sentenced to 48 months in prison, ordered to pay

$860,435.13 in restitution to the IRS and pay a forfeiture

amount of $10,000,000 to the United States. On

December 17, 2002, David Cantu, Jr. and his company,

Brother's Construction II, pleaded guilty to conspiracy to

commit money laundering and willful failure to file proper

payroll taxes, as well as conspiracy to harbor, encourage,

or induce aliens to work at a variety of construction sites.

The construction sites included the Adelphia Stadium,

home of the Tennessee Titans NFL team, and the Federal

Express World Headquarters. Cantu maintained the

workers were 'independent contractors' and his company

was not responsible for taxes. During a five quarter tax

period covering January 1, 1999, and ending March 31,

2000, Cantu, doing business as Brother's Construction II,

paid in excess of $3.6 million in gross wages to

employees, which should have resulted in approximately

$631,478 in payroll taxes and federal withholding taxes.

Owner of Temporary Employment Services Businesses

Sentenced 

On January 3, 2003, in Boston, MA, Hong Van Lam was

sentenced to two years in prison, to be followed by three

years supervised release and ordered to pay restitution in

the amount of $372,000 to three insurance companies he

defrauded. Lam pleaded guilty to a three-count

information charging him with filing false personal and

employment tax returns and with mail fraud. Lam

established a business for the purpose of providing

temporary employment services to contracting companies

in the Boston area. The business operated until the spring

of 1998 using various names, including New England

Temporary Work, New England Temp Work and N. Tech

Temp Service. Lam, along with others, opened and ran

these businesses in the names of three individuals who

acted as "straws" in order to hide their true ownership.

During this time, no income tax returns were filed by any

of the businesses, however, U.S. Quarterly Employment

Tax Returns were filed which underestimated both the

maximum number of employees during any quarter, and

the annual payroll. It is estimated that Lam will owe the IRS

$575,000 in taxes, plus penalties and interest.

Former Owner of Defunct Security Agency Sentenced

to 32 Months

On December 11, 2002, in Philadelphia, PA, Samuel

Kuttab, former owner of the now defunct Central Security

Agency was sentenced to 32 months in prison, to be

followed by 3 years supervised release. In addition, Kuttab

was fined $10,000 and ordered to pay all back taxes, with

interest and penalties. On June 26, 2002, Kuttab pleaded

guilty to federal charges of conspiracy and tax fraud.

Central Security Agency paid some employees in cash to

avoid paying withholding taxes, thus causing the filing of

false Forms 941. Kuttab also admitted to not filing federal

tax returns for 1992 to 1999. The estimated tax loss is $2

million for both personal and business returns.

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Abusive Trust Schemes

Abusive tax promotions have proliferated in recent years,

creating a significant threat to the nation’s revenue.

Promoters and return preparers have grown increasingly

sophisticated and the Internet provides promoters

instantaneous and inexpensive access to a wide audience.

These advantages have permitted tax schemes to

proliferate at a phenomenal rate, sometimes faster than

the IRS has been able to react. Criminal Investigation

plays an important role in combating abusive tax schemes

by focusing their investigative efforts on the promoters and

prominent clients.

Abusive tax schemes have evolved from the abusive trust

promotions that historically were the primary vehicle for

committing these frauds. The growing complexity of the

schemes coupled with the extensive use of various flowthrough entities and offshore financial arrangements has

necessitated expanding the CI Foreign and Domestic Trust

Fraud Program. Beginning in FY 2004, the newly

renamed Abusive Tax Schemes Program will encompass

all methods used by promoters and preparers to assist

their clients evade tax. 

The following case summaries are excerpts from public

record documents on file with the courts in the judicial

district in which the cases were prosecuted.

Millions of Dollars Transferred to Corporations, Trusts,

and Bank Accounts in Ireland, the Bahamas, Gibraltar,

and the Isle of Jersey

On August 22, 2003, in Sacramento, CA, Neil R. Brown

was sentenced to 70 months imprisonment to be followed

by three years supervised release. In addition, Brown was

ordered to pay $4,797,603 in restitution to the victims of

his crimes. In March 2003, Brown pleaded guilty to

conspiracy to defraud the U.S. by impairing the impeding

the IRS in the assessment, and collection of federal

income taxes; aiding or assisting the filing of false tax

returns; conspiracy to commit mail and wire fraud, and

mail and wire fraud. 

Evidence presented in court, showed that from about July

1, 1993, through about November 15, 2000, Brown and

his associates schemed to defraud the U.S. by marketing

a program that used foreign corporations and trusts to

conceal income and assets from the IRS while giving the

false appearance of legitimate business expenses. Under

Brown's scheme, clients formed foreign corporations and

trusts in the Bahamas and were advised to transfer money

and income to these foreign entities. The funds were

repatriated back to the clients without paying taxes on it

through fictitious loans or through the use of credit cards.

Further, from about January 1, 1996, through about

November 15, 2000, Brown and his associates schemed

to defraud the U.S. by counseling their clients to transfer

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Abusive Trust Scheme Statistics

 FY 2000 FY 2001 FY 2002 FY 2003

Average Months to Serve (all 31 52 28 47

Sentence)

Average Months to Serve (w/Prison) 33 64 32 45

Incarceration Rate 93.1% 80.8% 88.2% 79.1%

Convictions 31 45 26 41

Indictments/Information 53 32 44 73

Prosecutions Recommended 44 30 55 80

Investigations Initiated 47 79 108 79
their rights to employment, money, and income to foreign

entities as part of a fictitious "employee leasing" program.

The purpose of the program was to give the appearance

that the clients earned substantially less income than they

actually had.

Promoter of Sham Trusts Sentenced 2100 Months

Imprisonment

On September 17, 2003, in Charlotte, NC, Terry W.

Stewart was sentenced to 2100 months in federal prison

and ordered to pay approximately $28 million in

restitution for his role in a $56 million "Ponzi" scheme

known as Banyan International Limited ("Banyan"). In the

same case, five other defendants, Phillip Mark Vaughan,

Philip B. Greer, Timothy B. Burnham, John Reaser, and

Howard T. Prince, III, have already been sentenced.

Stewart became involved in various groups which

encourage and assist individuals to evade taxes and other

liabilities by "asset protection" schemes which involve

hiding assets, income, and activities in sham or abusive

trusts or other purported entities, but supposedly allow the

owner to continue to control the income and assets.

Eventually Stewart became a leader in such groups,

including National Director of Customer Services and

Regional Manager for Commonwealth Trust Company, a

group which provided sham trusts or similar

arrangements, including their so-called "Pure Trust

Organizations" [PTOs], for persons who wanted to evade

taxes. On November 9, 2001, Stewart was convicted by

jury on 27 counts, including conspiracy to commit money

laundering, bank fraud, and securities fraud. The use of

sham trust arrangements was done to evade federal

income tax obligations. In addition, accounts were

opened in an offshore bank on the island of St. Vincents,

which Banyan could control from the United States and

which would cater to persons using sham trusts or other

devices to evade taxes.

Abusive Trust Scheme Promoter Goes to Federal

Prison

On August 11, 2003, in Los Angeles, CA, Edward J.

Lashlee was sentenced to 36 months imprisonment and

fined $12,500. Lashlee pleaded guilty on March 7, 2003,

to creating thousands of abusive trusts that helped

hundreds of people hide their income and assets.

According to court records, Lashlee promoted trust

investments into "The Genesis Fund," which claimed to be

an unregulated private investment fund based in Orange

County that engaged in foreign currency trading through

offshore brokerage accounts. Lashlee admitted that he

handled the transfer of approximately $24 million of

Genesis investor funds to offshore bank accounts in Hong

Kong and elsewhere.

Lashlee provided clients with offshore bank accounts and

Visa debit cards issued by Swiss American National Bank

of Antigua. These cards enabled clients to secretly retrieve

and spend money that had been transferred from offshore

accounts. Lashlee also created trusts for business owners

that improperly deducted the clients' personal expenses,

such as loan payments, rent, and personal living costs, as

expenses of the trust. Phony business expenses were also

created for the trust, such as bogus debts, so that the trust

tax returns would report little or no taxable income for the

clients' businesses. In his guilty plea agreement, Lashlee

also admitted that, from 1992 through 2000, he failed to

report approximately $3 million in income he earned from

promoting abusive trusts. 

Contractor Sentenced for Tax Evasion

On July 14, 2003, in Fresno, CA, Michael Gilbert was

sentenced to 24 months imprisonment followed by 36

months supervised release. Gilbert pleaded guilty on

December 23, 2002, to not paying more than a quartermillion dollars in taxes. By entering his plea to five counts

of tax evasion, Gilbert admitted to several elaborate

schemes to avoid paying over $266,000 in federal

income taxes. The methods used to hide his assets

included transferring assets into trusts, using fraudulent

business licenses, conducting cash transactions, using

false social security numbers, filing inaccurate Currency

Transaction Reports (CTR's), providing false taxpayer

identification numbers, utilizing a concealed room within

his residence to store hundreds of thousands of dollars in

cash, using incorrect identifying information when

opening up bank accounts and failing to file tax returns. 

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Golf Course Architect Sentenced to 121 Months

Imprisonment

On July 31, 2003, in West Palm Beach, Florida, Theodore

M. McAnlis, a well-known golf course architect, was

sentenced to 121 months imprisonment, followed by three

years supervised release. In addition, McAnlis was

ordered to pay the costs of prosecution and to cooperate

with the IRS to pay back taxes. On April 9, 2003, McAnlis

was convicted on eight counts of income tax evasion.

Evidence presented during trial showed that McAnlis

concealed his income and assets from the IRS by using

common law trusts, a sham church, false social security

numbers, nominee names, and a Bahamian bank

account. The estimated loss to the government was over

$1.3 million in federal taxes, penalties and interest.

Former CPA Sentenced to 39 Months in Prison for Tax

Fraud Using Abusive Trust Arrangements

On November 24, 2003, in Phoenix, Arizona, Ralph N.

Whistler, a certified public accountant, was sentenced to

39 months in prison. On July 30, 2003, Whistler was

convicted of 15 felony counts of aiding and assisting in

the preparation and filing of false 1995 federal income

tax returns. According to evidence, Whistler purchased a

so-called "trust package" that purported to legally reduce

his federal income tax liabilities. Whistler then modified

this package which he promoted and sold to

approximately 20 clients for between $5,000 and

$10,000 per client. Clients testified that Whistler directed

them to transfer business income to and through a series

of bank accounts titled in the names of trusts. Whistler

claimed the amounts placed in these bank accounts as

deductions on the client's federal income tax returns.

Dentist Used Sham Trusts to Evade Payment of Taxes

On December 16, 2002, in Detroit, Michigan, Dr. Gerald

T. Mann, a dentist, was sentenced to 28 months in prison,

followed by three years supervised release, ordered to

perform 300 hours of community service and fined

$6,000. Dr. Mann was also ordered to make

arrangements with the IRS to file corrected returns and pay

all back taxes, including interest and penalties. 

On April 11, 2002, Dr. Mann, along with his wife, Laurel

Rose Mann, were indicted on three counts of willfully

failing to file a 1993, 1994, and 1995 income tax return

and three counts of willfully attempting to evade and

defeat a substantial portion of their 1993, 1994, and

1995 income tax due and owing. The combined gross

income was approximately $671,000. Dr. Mann pleaded

guilty to tax evasion by failing to file a 1994 federal tax

return, coupled with affirmative acts of evasion by creating

and using sham trusts. Since 1993, Dr. Mann has not filed

federal or state income tax returns and has used nominee

bank accounts and sham trusts to evade the payment of

taxes. He put his dental practice into a trust and used a

trust with an offshore foreign business address to move

money from the dental practice to a Swiss bank account. 
Other Programs

Counterterrorism

Prior to the events of September 11, 2001, CI’s role in

counterterrorism primarily involved the investigation of

domestic terrorism, typically involving extremist groups

that espouse anti-government beliefs. Criminal

Investigation was often involved in investigations of

individuals affiliated with these groups because of their

reluctance to comply with our tax laws. Criminal

Investigation also participated on a limited basis in the FBI

Joint Terrorism Task Forces (JTTFs) in accordance with the

Attorney General’s counterterrorism plan. However, the

events of September 11th increased CI’s counterterrorism

commitment. Financial investigations are a critical part of

the total war on terrorism and CI’s expertise continues to

be in high demand. 

On a nationwide level, CI is now fully embedded with the

FBI’s JTTFs and the Attorney General’s Anti-terrorism Task

Forces (ATTFs), concentrating on the financial

infrastructure and the fundraising activities of domestic

and international terrorist groups. Criminal Investigation

works diligently with the FBI, other law enforcement

agencies, the Department of Treasury, and the

Department of Justice (DOJ) to disrupt and dismantle the

financial components of terrorist organizations. Money

laundering and income tax investigations relating to

terrorist fundraising activities and investigations involving

the use of tax exempt organizations to finance terrorist

activities are a high investigative priority. 

Aside from CI’s association with domestic task forces, CI’s

counterterrorism program includes direct participation in

a multi-agency, multi-government, financial investigative

task force located in Riyadh, Saudi Arabia. At the request

of the Saudi Arabian government, CI has recently agreed

to partner with the FBI and Saudi investigators in a

cooperative arrangement designed to provide access to

financial information previously considered to be

unattainable. Criminal Investigation special agents are

adept at conducting sophisticated financial investigations

and their unique statutory jurisdiction over tax, money

laundering and Bank Secrecy Act offenses should prove

extremely useful. 

In addition to the increased support to investigative task

forces, CI has recently assumed a new role regarding the

war on terrorism and the international conflicts in the

Middle East. The Department of Treasury, armed with

executive orders and United Nation resolutions, has been

tasked with identifying and tracing assets belonging to the

former Hussein regime for repatriation to the Iraqi people.

In this Treasury-directed effort, CI has assumed the

leading role and has partnered with the Department of

Defense (DOD), various intelligence agencies, and other

Treasury bureaus to accomplish this mission. 

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Counterterrorism Statistics

 FY 2002 FY 2003

Average Months to Serve (all Sentence) 41 36

Average Months to Serve (w/Prison) 41 40

Incarceration Rate 100.0% 90.5%

Convictions 16 19

Indictments/Information 9 68

Prosecutions Recommended 20 54

Investigations Initiated 157 151
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The following case summaries are excerpts from public

record documents on file with the courts in the judicial

district in which the cases were prosecuted.

Benevolence Director Sentenced After Pleading Guilty

To Racketeering Conspiracy 

On August 18, 2003, in Chicago, IL, Enaam M. Arnaout,

the executive director of Benevolence International

Foundation, Inc. (BIF), a purported charitable

organization based in south suburban Chicago, was

sentenced to 136 months in prison after pleading guilty in

February 2003 to racketeering conspiracy. Arnaout

admitted that he fraudulently obtained charitable

donations in order to provide financial assistance to

persons engaged in violent activities overseas. Arnaout

was ordered to pay restitution in the amount of $315,000

to the Office of the United Nations High Commissioner

for Refugees. Arnaout admitted that for approximately a

decade BIF was defrauding donors by leading them to

believe that all donations were strictly being used for

humanitarian purposes, while instead a material amount

of the funds were diverted to fighters overseas. Arnaout

specifically admitted providing items for fighters in

Chechya and Bosnia. 

Mohamad Hammoud Sentenced to 155 Years

On February 28, 2003, Mohamad Youssef Hammoud,

29, was sentenced to 155 years imprisonment.

Hammoud, a native of Lebanon, was convicted by a

federal jury in Charlotte, NC, of providing material

support to a designated foreign terrorist organization,

Hizballah. Mohamad Hammoud and his brother, Chawki

Hammoud, were both found guilty on numerous other

criminal counts, including racketeering, conspiracy,

cigarette smuggling, money laundering, and immigration

fraud. The guilty verdicts were returned following a fiveweek jury trial. 

Originally code-named "Operation Smokescreen," the

investigation went on for approximately four years. Trial

testimony revealed the story of a group of young Lebanese

man who came to this country illegally through

fraudulently obtained visas, remained in this country

through fraudulent marriages to U.S. citizens, and while

living here conspired to commit a host of crimes (interstate

smuggling of contraband cigarettes, the laundering of the

proceeds and bank and credit card fraud) and sent some

of the proceeds of their criminal enterprise to Hizballah, a

designated foreign terrorist organization.

Twenty-five individuals had been charged in the case.

Eighteen of the 25 entered guilty pleas and only the

Hammoud brothers requested trial by jury, which resulted

in their convictions. Ten individual defendants have been

convicted of conspiring under the RICO statutes to

engage in a series of criminal offenses and sending some

of the illegal proceeds to Hizballah. Six people were

indicted for providing material support and resources to a

designated foreign terrorist organization and of the six,

one entered a guilty plea and the other, Mohamad

Hammoud, was the first conviction in the country at trial

under the statute. Four defendants charged with material

support remain fugitives, including the chief of Hizballah’s

procurement activities, the leader of Hizballah in the

Beirut suburbs, and a top Hizballah operative. A fifth

fugitive is charged with conspiracy to commit cigarette

smuggling and money laundering.

Prior to September 11, Hizballah was responsible for the

deaths of more Americans than any other terrorist group.

Hizballah attacked the Marine barracks in Lebanon in

1983 resulting in the deaths of over 250 American

soldiers. Hizballah also attacked the American Embassy

in Lebanon in 1983. Today Hizballah remains very active

and threatens the entire Middle East peace process.
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Money Laundering

Money laundering is a term given to the various methods

by which individuals attempt to make illegally earned

money appear legitimate and to facilitate the evasion of a

variety of taxes. Since September 11, 2001, the definition

of money laundering has expanded to include the

movement of money into or through the United States for

the purpose of supporting terrorist activities. 

The ability to launder money is critically important to

criminal organizations because it not only enables them to

promote and finance their illegal activities but also to

enjoy their ill-gotten gains. The ways money can be

laundered are limited only by the imagination and the

available resources of the individual.

Money laundering is a threat to tax administration

because tax and money laundering violations are closely

related and involve similar activities. Illicit funds are rarely

reported on tax returns. Money laundering is not only

used by criminal enterprises to conceal their illegal

proceeds but is also an integral part of many tax evasion

schemes. Criminal Investigation’s Suspicious Activity

Report (SAR) review teams, in each of the 35 CI field

offices, have proven extremely useful in detecting not only

money laundering cases, but also legal and illegal source

tax schemes. To effectively utilize its resources, CI targets

high-profile money laundering investigations, particularly

those that directly or indirectly enhance tax compliance. 

Criminal Investigation is one of the key agencies

supporting the National Money Laundering Strategy. This

strategy was designed to coordinate the Federal

government’s anti-money laundering efforts. To further

the goals of the National Money Laundering Strategy, the

Department of Treasury has provided $3.1 million per

year to CI to equip and staff task forces located in High

Intensity Financial Crime Areas (HIFCA). These funds are

also used to support other money laundering task forces,

SAR review teams, and to develop an electronic Bank

Secrecy Act (BSA) report filing system for the Financial

Crimes Enforcement Network (FinCEN). 

The following case summaries are excerpts from public

record documents on file with the courts in the judicial

district in which the cases were prosecuted.

Telemarketing Fraud Promoter Sentenced to 292

Months 

On June 6, 2003, in San Diego, California, Marc Levine

was sentenced to 292 months in custody, 3 years

supervised release and was ordered to pay restitution in

the amount of $49,050,378.00. Levine was the lead

defendant in a 4 1/2-month telemarketing fraud/money

laundering trial in the Southern District of California.

Levine was sentenced following his conviction on multiple

counts including conspiracy, money laundering, mail

fraud, and wire fraud charges. The scheme operated by

Levine and others involved a series of offerings that were

Money Laundering Statistics

FY 2000 FY 2001 FY 2002 FY 2003

Average Months to Serve (all 66 66 70 66

Sentence)

Average Months to Serve (w/Prison) 71 71 72 68

Incarceration Rate 87.7% 89.4% 89.5% 89.2%

Sentenced 884 897 861 667

Indictments/Information 1279 1237 943 1041

Prosecutions Recommended 1342 1294 1061 1141

Investigations Initiated 1606 1459 1448 1590
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pitched to investors which included investments in

partnerships that purported to be ongoing businesses

about to begin profitable operations. The businesses

involved pay-per-call service providers, and "virtual

shopping malls" on the Internet, which were similar to

"QVC" and the "Home Shopping Network" shows on cable

television. The scheme defrauded over 3,000 victims of

nearly $50,000,000. 

Leader Of $74 Million Investment Fraud Scheme

Involving More Than 3,200 Victims Sentenced To 30

Years' Imprisonment 

On July 28, 2003, in Seattle, WA, John W. Zidar the

leader of a fraudulent investment program that defrauded

more than 3,200 victims in the United States and Canada

of approximately $74 million was sentenced to 30 years

imprisonment. Zidar was convicted in August 2002 of

seven counts of mail fraud, seven counts of wire fraud,

and nine counts of money laundering. Five additional

people, Steven C. Moreland, John W. Matthews, Elizabeth

Anne Phillips, William H. Cravens, and Larry Hall, either

entered guilty pleas, or were convicted at trial on charges

of fraud and conspiracy in connection with the same

fraudulent investment scheme. 

Beginning in 1997 and continuing until 2000, the

defendants induced members of the public to invest in a

series of purported investment funds called Vista

International (Vista), Oakleaf International (Oakleaf), and

Rosewood International (Rosewood). Investors were

required to pay $1,028 to purchase a unit in Vista or

$1,294 to purchase a unit in Oakleaf or Rosewood. The

defendants promised investors a return of 120% per year

and told them their principal was assured against loss.

Further, investors were told that if they rolled a single unit

over for ten years it would be worth millions of dollars. In

fact, the defendants were operating a Ponzi scheme, in

which early investors were paid with later investors' money.

The evidence at trial established that the defendants

diverted millions of dollars for their own use. The

defendants also laundered millions of dollars through

bank accounts in Samoa, the Bahamas, and Costa Rica.

The government has recovered in excess of $20 million

dollars of victims' money from bank accounts controlled

by the defendants and assets purchased by the defendants

using victims' money. The money recovered will be

returned to the victims of the fraud. 

Narcotics Related Financial Crimes

Criminal Investigation’s Narcotics Related Financial

Crimes Strategy supports the goals of the National Drug

Control Strategy and the National Money Laundering

Strategy by seeking to reduce or eliminate the profit and

financial gains of narcotics trafficking and money

laundering organizations.

With its specialized financial investigative expertise, CI

plays a unique role in the "war on drugs." Criminal

Investigation’s mission is to disrupt and dismantle

significant narcotics trafficking and narcotics money

Narcotics Related Financial Crime Statistics

FY 2000 FY 2001 FY 2002 FY 2003

Average Months to Serve (all 76 79 81 77

Sentence)

Average Months to Serve (w/Prison) 78 80 80 76

Incarceration Rate 87.8% 88.6% 89.7% 90.3%

Convictions 785 766 616 585

Indictments/Information 871 812 585 653

Prosecutions Recommended 926 847 659 684

Investigations Initiated 1109 951 867 960
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laundering organizations through the financial

investigation and prosecution of those involved and the

seizure and forfeiture of their profits. Criminal

Investigation uses all statutes within its statutory jurisdiction

to accomplish this mission.

Criminal Investigation is a participating member of the

Organized Crime Drug Enforcement Task Force

(OCDETF) Program, which was established in 1982. By

focusing on sophisticated cases that meet the high

OCDETF designation standards, CI contributes significant

value to the overall investigative effort.

The High Intensity Drug Trafficking Areas (HIDTA) Program

was established to provide assistance to federal, state,

and local agencies operating in areas most adversely

affected by drug trafficking. Criminal Investigation

supports the HIDTA program with staffing resources.

The following case summaries are excerpts from public

record documents on file with the courts in the judicial

district in which the cases were prosecuted.

Seattle Man Sentenced

On May 15, 2003 in Seattle, Washington, Melvin J.

Jordan was sentenced to 110 months in prison for his role

in a drug distribution and money laundering conspiracy,

which took place between 1999 and 2001. From at least

1999 to 2001 Jordan was involved in a marijuana

distribution conspiracy with co-defendant James

Altenburg and others. Jordan purchased at least 15

pounds of marijuana per month. After purchasing the

marijuana, which totaled at least 270 pounds, Jordan

sold the marijuana to other persons at a profit. Jordan

spent over $700,000 to purchase the drugs during the

course of the conspiracy. 

Jordan used at least $358,864 of the profits from the

marijuana sales to purchase, furnish, sell and/or gift 5

real properties and 9 vehicles. Jordan also spent at least

$474,914 for various personal items. Jordan’s primary

source of income came from drug dealing. With the help

of others, Jordan concealed his ownership of the

properties and the vehicles. 

Omaha man sentenced to eight years

On February 26, 2003, Gary A. Storey was sentenced to

eight years and one month in prison, to be followed by

five years supervised release. Storey entered a guilty plea

on October 11, 2002, to drug conspiracy and money

laundering charges, and agreed to the forfeiture of

currency and property totaling over $2,000,000. 

Storey admitted that on or about September 6, 1998

through November 1, 2001, he conspired with others to

distribute more than 100 kilograms of marijuana. On or

about July 22, 2000, Storey purchased a 2001 Dodge

Ram 1500 Quad Cab pickup truck, knowing that the

monies used to make the purchase were derived from

illegal drug activity. 

Storey agreed to forfeit several pieces of property derived

from the drugs proceeds, including trucks and residential

property, $371,920.00 from the sale of motorcycles, lake

properties and assets in a brokerage account and

$902,284.00 in currency that was seized by the

government on November 1, 2001. The Judge found that

Storey was a manager or supervisor of at least five people

in the conspiracy and that factor was taken into account

in determining the sentence.

Federal Tax Evasion Lands Lawyer 42 Months in

Federal Prison

On February 28, 2003, in Gainesville, FL, Henry John

Uscinski, Esq. was sentenced to 42 months in prison, to be

followed by three years of supervised release and was

ordered to pay a $250,000 fine. Uscinski pleaded guilty

to evading his taxes by failing to include $1.5 million he

received from his client Claude DeBoc in 1996. Uscinski

admitted that he knew the funds he received were drug

proceeds. Uscinski is the third lawyer to be prosecuted for

misuse of funds received from DuBoc. Previously, F. Lee

Bailey spent 44 days in federal prison on a contempt

conviction and Penelope Shelfer was sentenced to 135

months for her part in a money laundering conspiracy with

DuBoc.
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Electronic Crimes and Technology Based Tax

Crimes

Computers are increasingly used to facilitate or commit

sophisticated financial crimes. The records of financial

transactions are moving from the paper ledger to the

computer, to off-site, online storage. Criminal

Investigation is a leader in developing tools and

techniques to track and find records, wherever they may

be. 

The IRS CI Office of Electronic Crimes was formed in

2001 to organize and develop CI’s expertise in the critical

area of computer forensics. In FY 2003, Computer

Investigative Specialists (CIS) assigned to the Electronic

Crimes program participated in over 800 search warrants

and seized and processed over 85 terabytes of data. This

represents a tenfold increase over FY 2001 and more than

a hundred fold increase in five years. Criminal

Investigation set the standard for processing digital

information seized during search warrant execution.

Electronic Crimes provided training in computer forensics

to federal, state, and local law enforcement and to

European revenue collection agencies. In 2003,

Electronic Crimes opened the Technology and Support

Center, a 10,000-sq. ft. laboratory and training facility in

Springfield, Virginia. This state of the art facility will be

used to provide technical support and training and will

enable CI to conduct research on emerging technologies.

Employee Satisfaction

Criminal Investigation measures employee satisfaction

through the IRS Employee Satisfaction Survey, which is

administered on a yearly basis. Criminal Investigation’s

participation rate for Survey 2003 was up approximately

3% from Survey 2002. The increase in the participation

rate was attributed to a more aggressive communication

and marketing campaign entered into with CI

Communication and Education. Survey 2003 was again

administered by the Gallup Organization. The "Q12"

questions, which measure those aspects of employee

engagement that link to business outcomes, showed

increased results in both the CI Grand Mean score and

the overall satisfaction rate from Survey 2002 to Survey

2003. 

The CI function-specific question results and verbatim

responses from Survey 2003 highlighted certain areas of

concern for employees. These areas included: providing

employees with the resources and support they need to do

their jobs; balancing workload against employee staffing

and improving management effectiveness. The CI Senior

Staff instituted several measures to address these results.

A Chief’s Advisory Group, which will have representation

from field offices across the country, will meet on a regular

basis. Time has been allocated during the Senior Staff’s

scheduled FY 2004 managerial meetings to discuss the

Survey 2003 results. Additionally, the CI function-specific

questions for Survey 2004 are being structured to focus

on the employees’ areas of concern. The questions will

attempt to further define the employees’ issues and

identify the level of management where these concerns

originate. 

EEO and Diversity

Today’s tax evasion schemes are becoming more

complex, involving a more multi-cultural, diverse group of

individuals. As a result, it is imperative that CI establish

and maintain the technical, financial, and human

resources necessary to counter the latest schemes. This

includes the ability to recruit and retain a diverse staff of

skilled, highly trained agents and future leaders to identify

corporate fraud schemes, and support undercover

programs and surveillance operations. Building a diverse

group of talented agents to support these day to day

operations requires extensive planning, specialized

training, and effective recruitment. The Office of EEO and

Diversity (EEOD) is committed to supporting CI’s efforts to

identify and recruit qualified, diverse candidates who

support the Criminal Investigation mission. Ultimately,

CI’s goal is to become a model organization, one of

inclusion where differences are valued, employees are

respected, and our workforce is reflective of the public we

serve.

The Office of EEO and Diversity is heavily engaged in the

recruitment process, working closely with the CI Office of

Human Resources with respect to identifying and

eliminating barriers to minority recruitment, as well as with

the development of strategic recruitment initiatives. The
primary goal of EEOD is to support CI with respect to

creating a workforce that values diversity, is representative

of its customer population, and is in compliance with EEO

laws and regulations. 

During FY 2003, EEOD partnered with a group of human

resource officials to develop a CI Recruitment, Hiring, and

Retention strategy. The recruitment plan was developed to

serve as a tool designed to guide management recruiting

activities, placing an emphasis on identifying and

recruiting a diverse group of qualified candidates. In

conjunction with the plan, EEOD was involved in the

process which identified the more than thirty highly

qualified college students who were selected to participate

in the CI Student Career Experience Program (Special

Agent Training Program). More than 75% of the students

selected were minorities.

Addressing workplace conflict and EEO complaints

typically affects productivity, places a drain on resources,

and lowers morale. Criminal Investigation is committed to

treating employees, applicants for employment, and

customers fairly in an environment free from

discrimination on the basis of race, color, religion,

national origin, sex, sexual orientation, parental status,

age, protected genetic information, and mental or

physical disability. The Office of EEO and Diversity has

been instrumental in providing management with program

guidance and direction geared towards resolving

complaints at the lowest level possible. The office

develops and delivers EEO Program training to managers,

implements CI specific directives and guidance,

participates on executive level interview/award panels,

and provides guidance relative to new federal EEO laws

for implementation within CI. 

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TOTAL 4001 2541 2128 1824 1768 100.0

RECEIPT OF INFO/ OTHER 1.6

 TOTAL NARCOTICS 960 684 653 585 568 15.1

 HIDTA/OCDETF 304 207 187 166 164 4.7

 HIDTA 23 2 6 5 5 0.7

 OTHER 46 30 27 21 25 1.2

 OCDETF 587 445 433 393 374 8.5

NARCOTICS

TOTAL SUB-PROGRAMS 3041 1857 1475 1239 1200

 EXCISE TAX 12 5 4 3 5 0.3

 TELEMARKETING 64 30 30 47 46 1.0

 GAMING 62 61 61 51 39 1.6

 PUBLIC CORRUPTION 141 91 86 58 52 3.0

 INSURANCE 21 17 19 22 24 0.6

 BANKRUPTCY 58 21 16 11 14 1.4

 FINANCIAL INSTITUTION 167 127 108 82 83 3.9

 HEALTH CARE 103 59 47 42 45 2.4

 ABUSIVE SCHEMES 79 80 73 41 43 4.3

 RETURN PREPARERS 229 169 109 67 49 7.7

 QRP 291 223 152 127 128 6.9

 GENERAL FRAUD 1814 974 770 688 672 49.9 4

FRAUD SUB-PROGRAM

AREAS

 TOTAL FRAUD 3041 1857 1475 1239 1200 83.2 3

 ILLEGAL 1535 1034 874 760 726 40.8

 LEGAL 1506 823 601 479 474 42.4 2

FRAUD

SI1 INITIATED PROS RECS INDICTED CONVICTED SENTENCED DIT %

SUMMARY BY PROGRAM AREA FOR FY 2003

INTERNAL REVENUE SERVICE CRIMINAL INVESTIGATION

1 Subject Criminal Investigation.

2 Legal source investigations are defined as those involving taxpayers in legal occupations and industries, being investigated for tax or tax-related violations

only, with CI as the sole investigating agency. Illegal source investigations involve taxpayers in illegal occupations or industries which are investigated with

the cooperation of other federal or state agencies and may involve currency and/or money laundering violations.

3 Includes 0.2% direct enforcement time (DET) - protection, escort, special assignments and FOIA/Privacy Act/PRP.

4 The General Fraud sub-program area encompasses a variety of investigations including both legal and illegal source cases. The General Fraud program is

the source of new trends in the area of non-compliance.

Criminal Investigation Statistics
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Criminal Investigation Statistics

TOTAL 4001 2541 2128 1768

OTHER TITLES 0 0 0 111

TITLE 31 – Monetary Transactions 122 71 55 45

TITLE 18 TOTAL 2004 1594 1398 1018

Title 18 – Other 77 65 73 178

1957 – Money Laundering 107 98 100 70

1956 – Money Laundering 1298 886 798 492

1955 – Illegal Gambling 0 0 0 1

1623 – False Declarations 9 9 9 5

1001 – False Statements 11 9 9 4

371M – Conspiracy Title 18 30 35 43 44

371T – Conspiracy Title 31 6 25 26 8

371K – Conspiracy Title 26 148 220 168 107

371B – Conspiracy Title 26 or Title 31 3 3 3 0

287 – False Claims 173 98 71 56

286 – Conspiracy False Claims 142 146 98 53

TITLE 18 SECTION

TITLE 26 TOTAL 1875 876 675 594

Title 26 – Other 52 47 28 58

7207 – False Document 1 4 9 9

7203 – Failure to File 131 61 49 66

7206(2) – Aid or Assist 243 168 96 54

7206(1) – False Return 423 319 269 234

7201 – Evasion 1025 277 224 173

TITLE 26 SECTION

SI INITIATED PROS RECS INDICTED SENTENCED

SUMMARY BY UNITED STATES CODE TITLE AND SECTION FOR FY 2003

INTERNAL REVENUE SERIVCE CRIMINAL INVESTIGATION
Operational Overview

International

Criminal Investigation’s International Program plays an

important role in supporting the national Money

Laundering Strategy. One of the key roles is to assist

foreign governments with money laundering training. As

part of the State Department’s anti-terrorism working

group, CI continues to deliver training and technical

assistance to countries that are developing legislation to

track and combat terrorist financing. Criminal

Investigation also hosts numerous delegations and foreign

dignitaries through the CI International Visitor’s Program.

The international demands of large-scale investigations

and CI’s counterterrorism efforts resulted in increased

requests for assistance from CI’s 35 field offices. Requests

for information from the Caribbean Basin and Costa Rica

increased over 100 percent and requests for assistance in

the Middle East have increased significantly. In response

to the ratification of exchange agreements and requests

for assistance from foreign countries, CI International

expanded its global presence this year by adding a foreign

attaché post in Bridgetown, Barbados. Currently, foreign

attachés are located in Mexico City, Mexico; Frankfurt,

Germany; Hong Kong; Bogota, Colombia; Ottawa,

Canada; London, England and Bridgetown, Barbados. 

Asset Forfeiture

The Asset Forfeiture Program continues to be one of the

federal government's most effective tools against drug

trafficking, money laundering, and organized crime. The

asset forfeiture statutes are utilized to dismantle criminal

enterprises by seizing and forfeiting their assets. The

underlying investigations associated with forfeiture cases

include narcotics, money laundering, organized crime,

and illegal gaming, as well as a variety of other violations.

The equitable sharing and reimbursement provisions of

the Asset Forfeiture Program allow federal, state, and local

law enforcement agencies to apply forfeiture proceeds to

critical law enforcement efforts. 

Criminal Investigation’s Asset Forfeiture Program had

seizures in FY 2003 of approximately $139 million,

consistently making CI the second largest contributor to

the Treasury Forfeiture Fund and the largest net contributor

since FY 2000. Treasury agencies significantly benefited

from the contributions made by CI because these net

contributions are available to meet their law enforcement

needs.

Criminal Investigation has Asset Forfeiture Coordinators

(AFC) in each of its 35 field offices, who are charged with

oversight responsibility for the Asset Forfeiture Program.

These coordinators work directly with agents and

management to effectively utilize the forfeiture statutes by

providing assistance in identifying cases with

seizure/forfeiture potential.

The following case summaries are excerpts from public

record documents on file with the courts in the judicial

district in which the cases were prosecuted.

Americable Companies Sentenced and Ordered to Pay

$22 Million

On September 17th, 2003, United States District Judge

Patricia Seitz sentenced Americable International, Inc.,

Americable International Moffett, Inc., and Americable

International New York, Inc. (the "Americable companies")

to fines, forfeiture, and restitution in excess of $22 million.

On November 7, 2002, all three Americable companies

pleaded guilty to conspiring to defraud the United States.

Americable International, Inc. also pleaded guilty to

conspiring to launder the proceeds of mail fraud. Judge

Seitz fined Americable International, Inc., $7,500,000

and ordered that it forfeit $8,075,445.08 to the

government and pay separate restitution of $5,454,720.

Judge Seitz also fined Americable International Moffett,

Inc., and Americable International New York, Inc.,

$500,000 each, which represented the statutory

maximum fines applicable to their offenses. Judge Seitz

also imposed five-year terms of institutional probation on

all three Americable companies. 

The Americable companies provided cable television

service to customers residing at various locations in the

United States and Japan. The Americable companies

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serviced customers residing in private homes as well as

customers residing on military bases operated by the

United States Department of Defense (DOD). 

The defendants’ guilty plea to defrauding the United

States stemmed from a scheme in which they attempted to

defraud DOD. Starting in the early 1990s, DOD closed

military bases in various locations throughout the United

States, including bases that had received cable television

service from the Americable companies. In connection

with these closures, the Americable companies submitted

to DOD forms known as "Settlement Proposals" or

"Termination Settlement Proposals (TSP)" in order to seek

reimbursement from DOD for investments that had been

made by the defendant companies at closed bases and

that had not been fully depreciated. However, the

defendants submitted TSPs that falsely represented certain

expenditures, based upon approximately $8 million in

fictitious invoices and supporting documentation within

the companies’ records. 

The money laundering conspiracy stemmed from a sixyear scheme in which the Americable companies

defrauded various cable television networks, such as A&E

Television Network, Discovery Channel, ESPN, and MTV,

as well as other nationally-known and regional networks,

out of funds owed to them for providing their

programming to Americable customers. Americable

companies historically under-reported and under-paid

amounts owed to the networks. Former company head,

Charles C. Hermanowski, would direct employees to write

checks to the victim networks, which he would falsely

endorse and deposit into his personal bank account. This

scheme resulted in over $8 million in fraud proceeds

siphoned from the Americable companies into

Hermanowski’s personal bank account.

As part of the five-year term of institutional probation

imposed on the Americable companies, Judge Seitz

prohibited the Americable companies and their affiliates

from employing or transacting any business with Charles

C. Hermanowski and that the Americable companies

submit to a compliance program and hire a compliance

officer to monitor their activities. Judge Seitz further

ordered that Americable International, Inc., hire an

independent auditor to audit the company on behalf of

the Court and file all missing income tax returns within 10

months.

The government estimated that the fines, forfeitures, and

restitution imposed by Judge Seitz represented between

30-35% of the value of the Americable companies. 

Banco Popular de Puerto Rico Forfeits $21.6 Million

On January 16, 2003, a criminal information was filed

charging Banco Popular de Puerto Rico with one count of

failing to file Suspicious Activity Reports (SARs) in violation

of Title 31 USC 5318(g)(1) and 5322(a). Banco Popular

waived indictment and accepted responsibility. The bank

forfeited $21.6 million dollars to the United States. 

From approximately June 1995 and June 2000, a number

of unusual or suspicious transactions were conducted in

connection with certain accounts at Banco Popular.

Although the bank filed Suspicious Activity Reports (SARs)

on these accounts they were not timely or were inaccurate.

In one series of the transactions, Roberto Ferrario Pozzi

deposited approximately $20 million dollars in cash into

a Banco Popular account from June 1995 to March

1998. Deposits were made to the account by Ferrario

and employees of "Phone Home" a phone card, long

distance, and money transmission service - often in paper

bags or gym bags filled with small denomination bills.

Despite the suspicious nature of the deposits, the bank did

not investigate and file timely and complete SARs

reporting the activity. These untimely filings, in the

absence of supplementary SARs and the errors in the SARs

that the bank did file hindered law enforcement's ability to

initiate investigations on these accounts in a timely

manner, resulting in the laundering of millions of dollars

of drug proceeds through these accounts. Ferrario was

sentenced to 97 months imprisonment for money

laundering in 2002.

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Undercover

An undercover operation is a law enforcement technique

used to detect and expose criminal activity by acquiring

evidence for criminal prosecution.

Criminal Investigation utilizes undercover operations in

significant financial investigations when it is not possible to

obtain evidence through less intrusive means. Justifiably,

this technique is not routinely used. Undercover

operations are extremely sensitive and potentially

dangerous. Careful planning and management is critical

to the success of an undercover operation and to the

safety and security of the undercover special agent.

The IRS CI office of Special Investigative Techniques (SIT)

manages the undercover program and processes

undercover requests. This office also provides technical

assistance to field offices regarding the proper use of

other specialized investigative techniques, such as

electronic surveillance.

Criminal Investigation undercover operations are

classified as either Group I or Group II. Group I

operations include the most sensitive undercover

scenarios. The operations are anticipated to last longer

than six (6) months and/or have anticipated costs in

excess of $20,000. Operations not meeting these criteria

are classified as Group II.

National CI Training Academy

The Basic Training Section of the National Criminal

Investigation Training Academy (NCITA) is responsible for

the development and delivery of all new special agent

training. The Special Agent Basic Training (SABT)

program consists of three phases. Phase one is Pre-Basic,

a three day class during which agents receive the

materials they need as new IRS employees. The second

phase is Criminal Investigator Training Program (CITP).

This phase is approximately 9weeks long and is instructed

by the staff of the Federal Law Enforcement Training

Center (FLETC). During CITP, agents learn basic

marksmanship, policing skills, defensive tactics,

constitutional law and the Federal Rules of Criminal

Procedure. The final phase of training, which lasts about

14 weeks, is Special Agent Investigative Techniques (SAIT).

During this phase, agents acquire the specific knowledge

and practice the techniques which allow them to become

investigators for CI. During FY 2003 115 new special

agents graduated from the Academy. The Basic Training

Section is also responsible for the development and

delivery of On-the-Job-Instructor (OJI) training. 

During the past year, the Advanced Training Section of

NCITA provided audience driven training in leadership,

advanced agent, support, and international program

areas. During the year approximately 328 participants

benefited from CI’s domestic training programs while the

international training program was presented in

approximately 32 countries with over 1,145 in

attendance. Advanced Training is at the forefront of

creating training modules for E-learning and web-based

training initiatives. Several task forces were convened

during the fiscal year to ensure that CI’s domestic and

international training materials were updated. 

The Academy forged and maintained a strong working

relationship with training council partners, Tax Advisory

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Total 65 74 71

Group II 28 39 36

Group I 37 35 35

Undercover Operations FY 2001 FY 2002 FY 2003
Administrative Services, HQ International, Treasury’s

Executive Office of Terrorism, and Financial Crimes to

promote quality training programs. 

Communication and Education

The CI Communication and Education division develops

and delivers key messages to a wide range of audiences,

with a primary focus on external communications. The

key external audiences include the compliant taxpayer, the

practitioner community, and the non-compliant taxpayer.

Internal audiences include CI employees, IRS employees,

and other federal agencies, including the offices of the

United States Attorneys.

The compliant taxpayer has been identified as our most

important audience as IRS continues its efforts to foster

compliance and ensure the tax system is administered in a

fair and equitable manner. Working in conjunction with

the other IRS operating divisions, CI Communication and

Education disseminates that message via Internet sites at

www.treas.gov/irs/ci and www.irs.gov through fraud alerts

and the publication of the CI enforcement strategy. 

By working with the practitioner community, CI is able to

promote awareness and solicit information regarding the

numerous tax schemes being promoted across the United

States. This year, CI participated in IRS sponsored tax

forums where presentations regarding refund fraud and

abusive schemes were made to more than 15,000

attendees. As a result of this outreach effort, CI received

numerous fraud referrals and initiated several

investigations.

The community of non-compliant taxpayers is a difficult

audience to reach; however, publicity of criminal tax and

financial-related fraud efforts can deter others from similar

conduct. Criminal Investigation’s publicity efforts, through

the 35 Special Agent/Public Information Officers, are at

an all-time high and have expanded from newsprint to

vertical magazine publications, the nightly news and talk

radio broadcasts. 

Part of the outreach to the external audience is based on

the principle that "IRS does not want this to happen to

you." Statistical information and summaries of

investigations involving individuals who have been

convicted of tax and other financial related fraud are

developed regarding specific market segments. Fact

sheets regarding fraud in the construction, restaurant,

automobile sales, medical, and return preparer industry

have been published and posted on CI and IRS websites.

Follow-up articles and interviews within specific groups

have resulted in increased publicity and awareness in the

targeted market segment.

Criminal Investigation Communication and Education

posted a new webpage this year regarding IRS’ significant

role in national and international money laundering

investigations. 

The CI Communication and Education Strategy for FY

2003 was developed in conjunction with the IRS and CI

strategic plans. Some of the key elements of this strategy

include:

• Using the 35 Special Agent/Public Information

Officers to increase publicity related to local

investigations and to perform outreach efforts to the

tax practitioner community. 

• Expanding our web presence by posting criminal

enforcement information on www.irs.gov. 

• Continuing our institutional commitment to become

more open and provide more comprehensive

information about our enforcement efforts. 

• Implementing a press strategy that links individual

cases in a systematic way to larger compliance issues

and enforcement programs.

A significant part of CI’s media strategy is located on the

www.irs.gov website (keyword: fraud), which provides

information about compliance-related enforcement

activities to the public. The website includes fraud alerts

relating to Return Preparers, Employment Tax Fraud, Nonfilers, General Tax Fraud, and Abusive Schemes. During

FY 2003, a Money Laundering section was added. The

website allows CI to target its enforcement efforts to

specific media outlets or other specialized websites to

reach key audiences. This entire effort is accomplished in

cooperation with the United States Attorneys' Offices and

DOJ and adheres to the disclosure provisions of the

Internal Revenue Code.

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The goal of CI Communication and Education’s external

outreach strategy is to allow CI to provide the media, the

compliant taxpayer, the tax practitioner and the noncompliant taxpayer with more comprehensive information

about CI’s enforcement efforts and to place individual

prosecutions in the context of a larger compliance

initiative.

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Publication 3847 (Rev. 6-2004)

Catalog Number 32206Y