Source: https://federaltaxcrimes.blogspot.com/2018/09/
Timestamp: 2019-04-23 02:48:28+00:00

Document:
TIGTA has issued a report titled "The Internal Revenue Service’s Bank Secrecy Act Program Has Minimal Impact on Compliance (Ref. Num. 2018-30-071 9/24/18), here. Although included in the report, the highlights page is here.
1) Enforce the criminal provisions of the BSA as provided in 31 C.F.R. § 1010.810(c)(2).
n3 Originally delegated under Department of the Treasury Directive 15-41, December 1, 1992, and as authorized under 31 C.F.R. § 1010.810(b)(8). This regulation authorizes the IRS to conduct most of its Title 31 BSA examinations, such as those with respect to nonbank financial institutions. It does not authorize the IRS to investigate Report of Foreign Bank and Financial Accounts violations; that authority is found in 31 C.F.R. § 1010.810(g). Also, final authority to assess civil penalties is delegated to the FinCEN per 31 C.F.R. § 1010.810.
Accounts in April 2003.n4 (TIGTA’s review does not include a review of the Report of Foreign Bank and Financial Accounts program).
Accordingly, per 3), the report does not deal with the IRS's FBAR enforcement which has figured so prominently in this blog. The report does cover other authorities related to tax crimes.
Highlights of Reference Number: 2018-30-071 to the Commissioner of Internal Revenue.
The Currency and Foreign Transactions Reporting Act of 1970 requires U.S. financial institutions to assist U.S. Government agencies in detecting and preventing money laundering and to assist U.S. persons in reporting foreign bank and financial accounts. The law has been amended several times and is now known as the Bank Secrecy Act (BSA). The IRS received delegated authority to enforce the BSA’s criminal provisions and examine certain nonbank financial institutions. The IRS also has authority to examine trades and businesses for compliance with Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, under Internal Revenue Code Title 26 and 31 and authority to assess penalties under Title 26. However, the Financial Crimes Enforcement Network (FinCEN) retains the final authority to impose Internal Revenue Code Title 31 civil penalties.
This audit was initiated to evaluate the impact of the IRS’s compliance efforts related to its delegated authority under the BSA.
The IRS Small Business/Self-Employed Division conducts BSA compliance activities through its Specialty Examination function, which has a dedicated BSA Program. TIGTA reviewed a statistically valid random sample of 140 compliance cases from a population of 24,212 closed cases worked by the BSA Program for Fiscal Years 2014 through 2016 and found that 105 (75 percent) were closed with 383 Title 31 violations in which the respective business only received a letter citing the violations found. For the same fiscal year period, TIGTA found that 1) referrals to the FinCEN of Title 31 penalty cases go through lengthy delays and have little impact on BSA compliance; 2) the BSA Program spent about $97 million to assess approximately $39 million in penalties; and 3) while referrals were made to IRS Criminal Investigation, most of the investigations were declined and less than half of the cases were accepted.
Additionally, a September 2016 TIGTA report addressed the need for the IRS to incorporate BSA Program personnel in developing its virtual currency strategy; however, the IRS has still not effectively used the BSA Program in this area. TIGTA also found that until June 2017, the BSA Program did not require Publication 1, Your Rights as a Taxpayer, as a required enclosure to notify taxpayers of their rights when initiating a Form 8300, Title 26 examination, and some examiners still are unaware of the change that requires taxpayers to be notified of their rights.
TIGTA recommended that the IRS: 1) coordinate with the FinCEN on the authority to assert Title 31 penalties or reprioritize resources to more productive work; 2) leverage the BSA Program’s Title 31 authority and annual examination planning in the development of the IRS’s virtual currency strategy; 3) notify examiners of new appointment letter enclosures that includes Publication 1; 4) evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals; and 5) improve the process for referrals to IRS Criminal Investigation. The IRS agreed with four of the five recommendations. The IRS will incorporate its virtual currency strategy into its Title 31 compliance efforts; provide BSA examiners guidance on appointment letter enclosures; review and improve the FinCEN referral process; and review the BSA criminal referral criteria to maximize efficiency and enhance BSA referrals to Criminal Investigation. However, the IRS disagreed with pursuing Title 31 penalty authority stating it was outside its purview and that the FinCEN intends to retain this authority.
The Justice Manual is here.
I have not attempted to read through the provisions and thus cannot speak to how they may have been changed. I really don't intend to try to compare to the provisions in the now superseded USAM, but I do plan to work my way through them (hopefully sometime in October) to see whether anything catches my attention.
I have previously written on the Caterpillar kerfuffle. Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (Federal Tax Crimes Blog 3/6/17; 3/8/17), here; and The Whistleblower Behind Caterpillar Tax Commotion (6/2/17), here. A district court has just dismissed a shareholder claim securities fraud against Caterpillar for inadequate and misleading disclosures about the search warrant and criminal investigation. Société Générale Securities Services, GbmH v. Caterpillar, Inc. (N.D. Ill. No. 17 cv 1713), order dated 9/26/18, here.
Caterpillar’s creation of a Swiss subsidiary, Caterpillar S.A.R.L. (“CSARL”) in 1999, through which Caterpillar paid an effective tax rate of 4-6% to the Swiss government. Société Générale alleges that CSARL lacked a proper business purpose and thus was not a legitimate tax reduction plan. A former employee filed a whistleblower lawsuit that was resolved through a settlement. After that lawsuit, however, the IRS, Congress, and other government agencies began investigating Caterpillar’s tax position.
Large dollars are potentially involved which could substantially affect Caterpillar's financial position and stock price. In addition, if indeed Caterpillar participated in illegal tax shenanigans, major fines and other financial consequences could apply and reputational consequences could apply.
(1) General statements that Caterpillar’s consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). These statements appear in nearly identical form in Caterpillar’s Form 10-K (2013-2017) and Form 10-Q for each quarter of 2013 and 2014.
(3) Lagacy’s testimony before the Senate Subcommittee and corresponding press release in advance of that testimony in which she referred to Caterpillar’s legal compliance with tax laws, that CSARL is not a shell corporation, and that Caterpillar remains convinced that its restructuring complied with the tax code.
In United States v. Schoenfeld (M.D. Fla. 3:16-cv-1248-J-34PDB), by order dated 9/25/18, here, the Court held (p. 37) that the "the Court finds that the Government's claim did not abate upon Steven Schoenfeld's death." The reasoning for the holding is found at pp. 24-36. The first 24 pages include a short one-page introduction and then 23 pages disposing of procedural issues arising from the death of the person putatively liable that the Government sued after he had died but without knowledge of his death. I do not discuss the procedural issues because they do not appear to be of interest to readers of this blog.
I also do not discuss the key holding of interest -- that the FBAR civil willful penalty survives death. The Court does a good job of developing and resolving the issue. Whether its resolution of the issue will ultimately be sustained is an open issue.
I have discussed this issue before, so I refer readers to the blog entry discussion: Will the FBAR Willful Penalty Survive Death (Federal Tax Crimes Blog 6/6/14), here (which links to Les Book's excellent discussion on the Procedurally Taxing Blog).
It is conventional wisdom that the Government bears the burden of proving beyond a reasonable doubt that the criminal defendant is guilty. Where the criminal count is that the taxpayer failed to report a distribution from a corporation with respect to his stock, the distribution is only income if either (or some combination of both), the corporation has E&P and, to the extent there is no E&P, the distribution exceeds the defendant's basis in the stock with respect to which the distribution was made. So, does the Government have to prove beyond a reasonable doubt E&P and/or insufficient basis in order to convict the defendant for willfully evadinig tax on the distribution (§ 7201) or willfully misstating the quantum of his income (§ 7206(1))? The answer is no; the absence of the elements that would make the corporate distribution nontaxable is an affirmative defense that the criminal defendant must establish. See Boulware v. United States, 552 U.S. 421 (2008); and United States v. Boulware, 558 F.3d 971 (9th Cir. 2009); see also Boulware Wins the Battle Only to Lose the War (Federal Tax Crimes Blog 3/9/09), here (discussing the 9th Circuit decision on remand from the Supreme Court); and for more on affirmative defenses in criminal cases, see Supreme Court Decision on Burden of Proof for Affirmative Defense of Withdrawal from Conspiracy (Federal Tax Crimes Blog 1/10/13), here.
In Visconti, the Court held that "Visconti failed to establish that his stock basis exceeded the value of the distributions." The facts on that issue appear to me to be somewhat convoluted, but it does appear that Visconti failed to meet that burden.
What about the E&P issue? The Court did not discuss it, but Visconti would clearly lose unless he established both lack of E&P and sufficient basis to cover the distribution. By showing that he lacked that basis, the distribution would be taxable whether or not there was E&P.
2. Admission of a Witness' Plea Agreement and the Vouching Issue.
Visconti relies on dicta in United States v. Roberts, 618 F.2d 530, 536 (9th Cir. 1980), which raises concerns about admitting a plea agreement. But Roberts did not hold that a plea agreement containing a promise of truthfulness is per se inadmissible. References to a plea agreement “are only mild forms of vouching” and when “the credibility of [a witness] would almost certainly have been challenged during cross-examination, there [is] justification to bolster credibility.” United States v. Brooks, 508 F.3d 1205, 1211 (9th Cir. 2007). The prosecutor did not reference nor elicit testimony regarding the plea agreement’s truthfulness provision, nor did she bolster credibility by expressing personal belief in the witness’s credibility. Visconti challenged the witness’s credibility on crossexamination, and the district court instructed the jury to consider the witness’s testimony with “greater caution.” The district court did not plainly err by admitting the plea agreement. See United States v. Daas, 198 F.3d 1167, 1179 (9th Cir. 1999).
There is a lot of buzz in the legal community and among commentators about the closing of the OVDP program this Friday. I picked up substantial buzz from a listserv I am on and from posting on the web, including most prominently Peter Reilly's posting, Window Closing On IRS Program To Lessen Penalties, Avoid Prison For Offshore Shenanigans (9/25/18), here.
Some readers might find the following short comments helpful.
1. The OVDP program is for the bad actor -- the taxpayer who was willful in filing or failing to file income tax returns and FBARs. The willful bad actor is at risk of criminal prosecution and civil monetary costs (income tax, income tax penalties, interest and FBAR willful penalties). The bad actor can square up with the IRS via OVDP and get substantial peace of mind. After OVDP closes on Friday, the bad actor has no clear path to squaring up and getting peace of mind. However, the IRS will have the traditional voluntary disclosure program which most the bad actor can use to square up and get peace of mind, assuming the bad actor qualifies, although, even if he mitigates the risk of criminal prosecution, the risk of higher financial costs is greater.
2. For those who are not bad actors, the Streamlined Programs are still available. The key to the Streamlined Programs is the nonwillful certification and narrative supporting the nonwillful certification. The risk in entering the Streamlined Programs is that a taxpayer's certification and supporting narrative may be false or perceived by the IRS to be false or even suspect. This could lead to an audit in which the IRS can test the validity of the certification and supporting narrative. And, if those are false or misleading, the IRS could take away the financial benefit of the Streamlined Programs by making the taxpayer pay the income tax, income tax penalties (possibly the 50% civil fraud penalty), interest on both, and the FBAR willful penalty which is generally, by IRS exercise of discretion, a single 50% of high amount penalty, but might be more). And, if the certification and supporting narrative are false, the taxpayer is at risk of criminal prosecution for that submission, as well as for the prior conduct the taxpayer was trying to absolve in the Streamlined Program. Of course, that risk in the Streamlined Programs only apply to bad actors who should not have gotten into the program in the first place.
In short, the closing of OVDP on Friday only posits risks for bad actors -- those whose tax and FBAR noncompliance was willful. Even for that category, there are fixes. Those at risk of falling in that category should consult counsel.
The Government's Sentencing Memo, here.
The Government's Supplemental Memo re Restitution, here.
Mani pleaded guilty In July 2017 to one count of failing to file a foreign bank and financial account report (FBAR) for the 2013 tax year. When he pleaded guilty, Mani admitted failing to file FBARs with the Treasury Department for both the 2012 and 2013 tax years. He also admitted that he failed to report on his federal income tax returns the vast majority of the approximately $1.28 million in foreign income he earned in Dubai for the years 2012, 2013 and 2014.
Mani began to travel to Dubai in 2011 to perform plastic surgery for a foreign medical center. Mani’s accountant, who was aware that Mani was earning foreign income, informed him that he would be required to report to U.S. authorities any foreign bank accounts under his control. In 2012, Mani opened an account with a Dubai-based bank and began depositing income he earned from abroad into this account. He liquidated the account in 2013, when it held more than $400,000 in foreign currency.
1. The Governments Sentencing Recommendation.
I have just returned from a foreign trip and have had the opportunity to review the Manafort plea documents. Those documents are: (i) the plea agreement, here; (ii) the Statement of Offenses and Other Acts, here; and (iii) the Superseding Criminal Information, here.
1. The plea agreement (par. 1) requires that Manafort plead to two conspiracy offenses. The first conspiracy offense (Count One) is the type commonly required in major tax crimes conspiracy cases. Readers will recall that the conspiracy statute describes two types of conspiracy -- an offense conspiracy and a defraud conspiracy (commonly called in tax cases a Klein conspiracy). See 18 USC 371, here ("either to commit any offense against the United States, or to defraud the United States, or any agency thereof"). The Superseding Criminal Information to which Manafort pled as required by the plea agreement is for both the offense conspiracy (naming the offenses) and a defraud conspiracy, stating the defraud conspiracy first (see Count One, par. 61, "knowingly and intentionally conspired to defraud the United States by impeding, impairing, obstructing, and defeating the lawful governmental functions of a government agency, namely the Department of Justice and the Department of the Treasury.") Technically, I think (but have not updated my thoughts on this), the Government might have charged the offense and defraud conspiracies separately, but I have not seen that in tax cases where both were pled, particularly where both offenses are within the same range of conduct. In many tax cases, only one of the two types of conspiracies is charged even where the indictment could have included both types. For further nuance, given the Sentencing Guidelines keying the recommended sentence to tax loss and including relevant conduct tax loss, not charging any crime within the scope off the defendant's conduct may not affect the actual calculations.
2. Manafort agrees not to appeal the conviction verdicts in the ED VA case (plea agreement par. 1), and the Government agrees not to retry to counts on which the jury hung in the ED VA case.
DOJ Tax has announced here that an attorney, Jack Stephen Pursley, from Houston has been indicted as an enabler in an offshore account matter. The indictment is here.
The indictment alleges that Pursley received more than $4.8 million and an ownership interest in the co-conspirator’s ongoing business for his role in the fraudulent scheme. The indictment further alleges that for tax years 2009 and 2010 Pursley evaded the assessment of and failed to pay the incomes taxes due on this money by, amongst other means, withdrawing the funds as purported non-taxable loans or returns of capital. Pursley allegedly used the money he received to purchase personal assets, including a vacation home in Vail, Colorado and property in Houston.
Paul Manafort reached a plea agreement with the special counsel that requires his cooperation with the special counsel. See e.g., Spencer S. Hsu , Devlin Barrett and Justin Jouvenal, Manafort will cooperate with Mueller as part of guilty plea, prosecutor says (WAPO 9/14/18), here. I noticed just a couple of days ago that Trump's vocal counsel, one Rudy Giuliani, claimed that Trump and Manafort had a joint defense agreement ("JDA"). Colin Kalmbacher, Giuliani Confirms Trump and Manafort Have Joint Defense Agreement for Mueller Probe, Share Confidential Information (Law & Crime 9/13/18), here.
I had not heard that Trump and Manafort had a JDA before (or had not recalled that I had heard that), so I was intrigued as to why Trump's vocal counsel, one Rudy Giuliani, would be making a point of it now.
But the issue here may not be ability to prosecute Trump but ability to share relevant information with Congress as to whether Trump should be impeached and convicted. The rules that might require exclusion in a criminal prosecution of Trump would not apply in an impeachment proceeding. In that sense, the issue is not whether Trump should be convicted of a crime but whether his conduct is sufficient to justify impeachment by the House and conviction by the Senate. Manafort's use of the information he received under the JDA could be used for that purpose.
Earlier today in federal court in Brooklyn, Adrian Baron, the former Chief Business Officer and former Chief Executive Officer of Loyal Bank Ltd, an off-shore bank with offices in Budapest, Hungary and Saint Vincent and the Grenadines, pleaded guilty to conspiring to defraud the United States by failing to comply with the Foreign Account Tax Compliance Act (FATCA). Baron was extradited to the United States from Hungary in July 2018.
According to court documents, in June 2017, an undercover agent met with Baron and explained that he was a U.S. citizen involved in stock manipulation schemes and was interested in opening multiple corporate bank accounts at Loyal Bank. The undercover agent informed Baron that he did not want to appear on any of the account opening documents for his bank accounts at Loyal Bank, even though he would be the true owner of the accounts. Baron responded that Loyal Bank could open such accounts and provide debit cards linked to them.
In July 2017, the undercover agent again met with Baron and described how his stock manipulation scheme operated, including the need to circumvent the IRS’s reporting requirements under FATCA. During the meeting, Baron stated that Loyal Bank would not submit a FATCA declaration to regulators unless the paperwork indicated “obvious” U.S. involvement. Subsequently, in July and August 2017, Loyal Bank opened multiple bank accounts for the undercover agent. At no time did Baron or Loyal Bank request or collect FATCA Information from the undercover agent.
Baron’s guilty plea represents the first-ever conviction for failing to comply with FATCA. When sentenced, Baron faces a maximum of five years in prison.
Baron is the second defendant to plead guilty in this case. On July 26, 2018, Arvinsingh Canaye, formerly the General Manager of Beaufort Management Services Ltd. in Mauritius, pleaded guilty to conspiracy to commit money laundering.
Peter Hardy offers a very good discussion DOJ Secures First Ever Conviction for Violating FATCA (Money Laundering Watch Blog 9/17/18), here.
Ralph Atkins, Switzerland’s banks try to put the past behind them (FT.com 9/5/18), here.
In total, Swiss banks have paid $5.5bn in US penalties since the first moves against them a decade ago.
The Swiss would undoubtedly like to think the past is behind them. Times are certainly better. “After years of struggling with structural change stemming from the financial crisis, the tide has begun to turn,” consultancy KPMG reported recently in its annual survey of 90 Swiss private banks.
Swiss banks have overhauled compliance systems — Americans living in Switzerland today have a particularly hard time opening a bank account — and thrown out clients who cannot prove they are honest with their taxes. Bern has struck automatic exchange of information deals with EU states and 60 other countries.
Last month, two outstanding US tax cases — against Zürcher Kantonalbank and Basler Kantonalbank — were settled with penalties of $98.5m and $60.4m. The agreements offered a flashback to an era when Switzerland really was a haven for chancers. According to the US justice department, Basler Kantonalbank had in 2008 seen as a “business opportunity” the criminal investigations faced by its larger rival UBS. The Basel bank’s services had included “promoting” Swiss bank secrecy as a means of concealing assets and income.
15. In November 2001, Gentges signed documents to open the 4959 Account, choosing to open it as a numbered account rather than a “name account.” He identified himself as the beneficial owner of the 4959 Account and listed his address in Hawthorne, New York.
17. Gentges instructed UBS to retain his mail at the bank, for a fee, rather than mailing it to his address in New York. Subsequently, when Gentges would visit the bank in Switzerland—including three instances in 2007 alone—he retrieved his mail and then authorized UBS to destroy the mail that he did not take with him.
32. In September 2008, Gentges was informed by UBS personnel that he had to either file an IRS form W-9 or close his UBS accounts by the end of the year.
33. Instead of filing an IRS form W-9 and/or making a voluntary disclosure at that time, in September and October 2008, Gentges instructed UBS to transfer securities from his UBS accounts to Migros Bank, another financial institution based in Switzerland.
34. In November 2008, Gentges instructed UBS to transfer all remaining funds in the 4959 Account and the 4337 Account to accounts at Migros Bank.
Reuters has this article on a Swiss Asset Manager who reached an NPA with DOJ and turned over U.S. client files. John Miller, Asset manager who helped U.S. find tax cheats beats Swiss spy charges (Reuters 8/31/18), here. I reported on the NPA in Swiss Non-Bank Enabler Enters NPA and Cooperates to Identify U.S. Persons (Federal Tax Crimes Blog 5/9/14), here.
A Swiss asset manager who in 2013 provided U.S. prosecutors with more than 100 files from clients suspected of dodging taxes has been cleared of spying-related charges in his home country, recently published Swiss court documents showed.
“It can be presumed in favor of the accused that he believed in the legality of his approach and didn’t consider the possibility that he acted unlawfully for a foreign state,” the ruling said.
In November 2013, Egli's Swisspartners Group provided records on 109 clients to the U.S. Department of Justice, court documents show, helping his company secure a relatively mild $4.4 million settlement deal with American prosecutors aggressively pursuing tax cheats with wealth stashed abroad.
Egli’s case is an easy-to-miss footnote among the billions of dollars of U.S. settlements in recent years reached by dozens of Swiss banks over harboring untaxed assets.

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