Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Archive for the ‘Financial Regulation’ Category
Jun 02

U.S. Justice Department v. FIFA Executives and Others in Bribery Indictment

BUDAPEST, HUNGARY - MARCH 8, 2014: Red card for Julian Jenner of Ferencvaros during MTK Budapest vs. Ferencvaros OTP Bank League football match at Hidegkuti Stadium on March 8, 2014 in Budapest, Hungary.

In an ironic twist, the U.S. Justice Department unsealed a 47-count indictment this morning charging nine present and former officials of the Federation Internationale de Football Association (better known by its acronym, FIFA) and five sports marketing executives with fraud, racketeering, bribery and money laundering. The guilty pleas of four individuals and two entities relating to these same allegations were also unsealed.

The indictment alleges that officials of FIFA, which controls the media and marketing rights to international soccer tournaments worldwide, received bribes totaling more than $150 million in connection with the award of those rights. The defendants also include sports executives alleged to have paid those bribes, and the indictment also charges that intermediaries were used to launder the proceeds of those bribes. The lead charge in the indictment is an alleged violation of the federal Racketeering Influenced and Corrupt Organizations Act (RICO).

At the request of U.S. authorities, Swiss authorities arrested a number of individuals in Zurich this morning where FIFA executives had gathered for the organization’s annual meeting. The indictment was disclosed along with a Swiss investigation into mismanagement and money laundering associated with the award of the 2018 World Cup to Russia and the 2022 World Cup to Qatar. FIFA has stated that the award of those tournaments will not be reconsidered.

The great irony of the indictment is that this is about football – not “American football” but “real” football (what we Americans call “soccer”) – the most popular sport on the planet. From a sports perspective, Americans are still newcomers to the game, though the women’s national team has enjoyed perennial success, the men’s national team has climbed in world rankings, and individual American players are becoming more commonplace on teams in the English Premier League and elsewhere in Europe. It is surely ironic for the U.S. to police a sport that struggles for attention at home.

But on the other hand, it should be no surprise to see a U.S. indictment that seeks to address corruption in FIFA that has been the stuff of rumors for years. The FIFA indictment is another example of how the United States projects not only military power but legal power overseas, using its robust Justice Department and court system to impose on the world the legal standard enshrined in its criminal laws. Given that the case is being prosecuted in the Eastern District of New York – where now-Attorney General Loretta Lynch previously served as the United States Attorney – the case may also signal something about Attorney General Lynch’s approach to such multinational cases.

The Department of Justice presumably justifies this extraterritorial exercise because the defendants include several Americans and because FIFA includes component associations located in the United States; the alleged offenses therefore impact Americans as well as those overseas. To the extent this is true, that seems to be appropriate justification. But another question is how that exercise of power will be perceived outside of the United States. Is the United States helping to solve a problem that has dogged international soccer for years? Or is it meddling in matters that are largely outside of its borders and that should not concern it? As news of this morning’s arrests and the unsealing of the indictment spreads, the world’s reaction may answer those questions.

Mar 09

What Expats Need to Know Now about their Taxes, FATCA and the IRS


Are you an American abroad living in perpetual fear of the IRS? Do you wake up every morning wondering if today you’ll receive a formidable notice that the taxman cometh? You are not alone. Expats around the world are facing (and fearing) the painful reality that the IRS’s global tax enforcement effort is underway. While you may want to stick your head in the sand, a brief review of where we are and how we got here may encourage you to confront your IRS situation.

It started in 2010 with the passage of the Foreign Account Tax Compliance Act. FATCA was billed as an effective way to tackle offshore tax evasion. The legislation requires foreign financial institutions (FFIs) to report on U.S. taxpayers’ accounts or face hefty withholding penalties on transactions passing through the U.S. Affected institutions include not only banks, but any entities substantially engaged in holding or investing financial assets for others. These institutions are required to comply with the law regardless of conflict with the laws of their home country. That means FFIs have been put in the position of potentially violating local data privacy or bank secrecy laws or getting hit with significant penalties on funds passing through the States.

While the PR for the legislation presented it as an important means to tackle rich and greedy tax cheats, the reality is that FATCA impacts a lot more people than Swiss banking billionaires. The legislation has plenty of repercussions for the seven million plus U.S. citizens living abroad. Suddenly, dual citizens with negligible ties to the U.S. (say, they were born in the States but haven’t lived in the U.S. since infancy) realize they are supposed to be reporting their income and assets to the IRS, regardless of foreign location. Many of the unwitting lawbreakers and quiet law deniers have been waiting out the storm, not seeking resolution with the IRS as they think FATCA is not a fixed reality.

There is good reason why some people have hoped FATCA would be repealed, overturned, or perhaps ignored by other countries: (1) the conflicts between local laws and FATCA reporting requirements, (2) the significant costs to FFIs to implement FATCA compliance programs, (3) the unintended consequences to average expats that makes the legislation politically unpopular. The Alliance for the Defense of Canadian Sovereignty launched a legal challenge to FATCA in the Canadian courts. U.S. super lawyer, James Bopp Jr., has helped Republicans Overseas launch a challenge to the law in U.S. courts. And Senator Rand Paul has reintroduced legislation to effectively repeal the law. One would think Senator Paul’s efforts should get traction since there is a Republican-controlled Congress and the party has made FATCA repeal a part of the Republican National Committee platform. But power assumed is hard to retract.

Meanwhile, implementation of the law has trudged on. After a few delays, the law took effect July 1, 2014, and reporting has begun. More than 100 countries have entered treaties (intergovernmental agreements) with the U.S. to facilitate reporting and to get around local law conflicts. Countries with data privacy laws have agreed to have FFIs report to local tax authorities who in turn will report to the IRS. Even countries known for bank privacy protection and bank secrecy (like Switzerland, Hong Kong, and Austria) have agreed to comply with FATCA, eliminating secrecy for U.S. taxpayers.

Paving the way for large scale reporting, the IRS recently launched its web application, the International Data Exchange Service (IDES), for FFIs and foreign tax authorities. IDES is supposed to allow these FFIs and tax authorities to submit U.S. taxpayer information efficiently and securely by an encrypted pathway.

With treaties in play, reporting underway, and technological platforms built, the chances of FATCA getting repealed, overturned, or ignored are dissolving. This is especially true as more countries take their cues from FATCA and consider their own global tax enforcement efforts. Moving in this direction, the Organization for Economic Cooperation and Development has issued a new standard to facilitate intergovernmental sharing of financial data.

Expats that are behind on their IRS reporting need to face this fact and bite the bullet before they shoot themselves in the foot. It is important to address options, like whether or how to use the IRS’s Online Voluntary Disclosure Program or whether and how to renounce U.S. citizenship (note, you’ll still have to pay up for past deficiencies). But the reality is that FATCA is in force and the IRS is invested in ensuring all U.S. taxpayers comply. You may disagree in principle and you may (and perhaps should) advocate for repeal or revision. But in the meantime, find a way to face Uncle Sam.


Feb 25

Court Reins In Prosecutorial Overreach in Insider Trading Cases


In an effort to reinstate powers stripped from them by the Court of Appeals in U.S. v. Newman and Chiasson, prosecutors have sought a rehearing of the landmark Second Circuit decision which severely curtailed the scope of insider trading cases.

The case is one which has already seen a dramatic reversal, so it is perhaps no surprise that prosecutors are hoping for the tide to turn in their favor.  In trial court, the jury heard evidence that financial analysts received insider information from sources at two companies, Dell and NVIDIA, disclosing the companies’ earnings before those numbers were publicly released.  The financial analysts in turn passed that information along to hedge fund traders Todd Newman and Anthony Chiasson, who executed trades in the companies’ stock.

Those transactions earned Newman’s funds approximately $4 million and Chiasson’s funds approximately $68 million. The prosecution charged both defendants with insider trading based on the trades they made with early knowledge of the earnings reports.  The trial judge instructed the jury that the defendants could be found guilty if they had knowledge that the information “was originally disclosed by the insider in violation of a duty of confidentiality.”  On December 12, 2012, the jury returned guilty verdicts for both defendants on all counts.

Newman and Chiasson appealed their convictions, arguing among other things that the prosecution had failed to present evidence that they had engaged in insider trading and that the trial judge improperly instructed the jury as to the level of knowledge required to sustain a conviction.  Newman and Chiasson argued that the government must prove beyond a reasonable doubt not only that the information was originally disclosed by the insider in violation of the duty of confidentiality, but that the insider disclosed the information in exchange for personal benefit.

The Court of Appeals agreed with their arguments, and found that the government had failed to present sufficient evidence that the insider received any personal benefit from sharing the information, or that Newman and Chiasson had knowledge of any such personal benefit an insider received from sharing the tip.

The Second Circuit’s December 10, 2014 opinion clearly lays out the requirements for “tippee liability,” that is, liability for one who received a tip originating from a corporate insider:

(1) The corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached the fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for personal benefit; (3) the tippee knew of the tipper’s breach, that is, he know the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.

Based on this standard, the Court of Appeals concluded that “without establishing that the tippee knows of the personal benefit received by the insider in exchange for the disclosure, the Government cannot meet its burden of showing that the tippee knew of a breach.”

The opinion also issued a stern rebuke of “recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.”  This admonition could be fairly interpreted as being directed toward Manhattan United States Attorney Preet Bharara, who has been aggressively prosecuting Wall Street insider trading cases and has obtained approximated 85 convictions so far.  Mr. Bharara issued a statement saying that the decision “interprets the securities law in a way that will limit the ability to prosecute people who trade on leaked inside information.”

The court has yet to rule on the prosecution’s January 23, 2015 request for a rehearing of the case.  Until any modification is issued, the Newman ruling remains the controlling law of the Second Circuit and it will affect other cases.  Already, at least a dozen criminal defendants in the Southern District of New York have cited to the case in requesting to overturn their conviction or vacate their guilty pleas.

For instance, soon after the Second Circuit issued its ruling in Newman, a federal judge in Manhattan vacated the guilty pleas of four men charged with insider trading related to IBM:  Daryl Payton, Thomas Conradt, David Weishaus, and Trent Martin. Instead of bringing the case to trial, the prosecutors instead asked Judge Andrew Carter to dismiss the indictment.  However, the prosecutors indicated that if the Newman decision is altered on rehearing or appeal, they might consider bringing the charges again.  Appeals of previously convicted defendants will likely remain on hold pending the court’s decision on the requested Newman rehearing.  Regardless of the outcome on rehearing, the Newman decision is a strong indication that courts are making a concerted effort to rein in prosecutorial overreach.

Jan 20

The World Wide Tax Web: FATCA Data Sharing Goes Online


The IRS has unveiled a secure web application, the International Data Exchange Service (IDES), for cross-border data sharing. IDES will allow Foreign Financial Institutions (FFIs) and tax authorities from other countries to transmit financial data on U.S. taxpayers’ accounts, via an encrypted pathway, to the IRS.

The tool is part of the IRS’s effort to track U.S. taxpayer income globally. It is intended to assist FFIs and foreign tax authorities in their compliance with the U.S. Foreign Account Tax Compliance Act (FATCA). The act requires that financial institutions send to the IRS financial information of American account holders or face a hefty 30 percent withholding penalty on all transfers that pass through the U.S. With such steep fines, FFIs and their respective countries across the globe have agreed to comply with FATCA and submit account holder information, regardless of conflicts with their local laws. According to the IRS website, some 112 countries have signed intergovernmental agreements with the U.S., or otherwise reached agreements to comply, and more than 145,000 financial institutions have registered through the FATCA registration system.

IRS Commissioner John Koskinen called the portal “the start of a secure system of automated, standardized information exchanges.” According to the IRS, IDES will allow senders to encrypt data and it will also encrypt the data pathway.  IDES reportedly works through most major web browsers.

It may sound efficient and it may even be secure; but IDES also serves as a reminder of the contradiction between FATCA and data privacy laws of many of the FATCA signatory countries. The conflict is part of why FATCA has earned the billing by many as an extra-ordinary extra-territorial law and an example of American overreach.

Countries like the United Kingdom, France, Italy, and Germany have data protection laws that restrict disclosure or transfer of individual’s personal information. To accommodate their own laws, these countries have entered agreements with the U.S. whereby FFIs report to their national tax authorities and the tax authorities then share data with the IRS. (The agreements highlight the questionable value to countries of their data protection laws—at least insofar of U.S. account holders are concerned—as they willingly sidestep their policies to avoid U.S. withholding penalties.)

Meanwhile, as FATCA-compliant countries prepare to push data overseas to the U.S., the E.U. is publishing factsheets directed to its citizens indicating that data protection standards will not be part of agreements to improve trade relations with the U.S. The E.U. is also working on more stringent data protection rules for member countries to strengthen online privacy rights. Are the E.U. member countries speaking out of both sides of their mouths? Or are they trying an impossible juggling act? Between the implementation of FATCA reporting and the growing concern of data privacy among FATCA signatory countries, these countries are bound either for intractable conflict or the continued subrogation of the rights of those citizens also designated U.S. taxpayers (an unfortunate result for dual citizens with minimal U.S. ties).

Regardless of ultimate upshot of this conflict, U.S. taxpayers—including those living abroad—should take heed that FATCA reporting is underway. You should consider how to disclose any unreported global income before your bank does it for you.


Sep 10

More Money, More Problems – Another Billion Dollar Settlement for the DOJ


This summer BNP Paribas, one of the five largest banks in the world, agreed to a $9 billion settlement with the U.S. Department of Justice. The settlement figure may seem nothing short of economic shock and awe; indeed it was the largest criminal penalty in U.S. history. What could justify such a staggering fine and was the DoJ too heavy-handed in its tactics against the French-based bank?

The $9 billion figure was not created out of thin air. It correlates to the value of transactions that BNPP helped to push through the U.S. financial system on behalf of Sudanese, Cuban and Iranian interests. These countries have been subject to U.S. sanctions under the U.S. International Emergency Economic Powers Act (IEEPA). The sanctions restrict, among other things, trade and investment activities involving the U.S. financial systems, including processing U.S. dollar transactions through the States. BNPP chose to ignore those sanctions. What’s worse, the Statement of Facts that the DoJ published with its press release states that BNPP used cover payments to conceal the transactions it processed through its New York location and other U.S.-based banks. It also removed identifying information about the sanctioned entities and used complicated payment structures in order to prevent the transactions from being blocked when transmitted through the U.S. BNPP helped to finance oil and petrol exports for both Sudan and Iran. And the bank’s involvement in Sudan has been instrumental to the country’s foreign commerce market. All told, BNPP’s actions effectively undermined the U.S. sanctions, opening the U.S. financial system to those countries.

BNPP’s actions justify DoJ prosecution as U.S. authorities certainly have jurisdiction over U.S.-based activities. A stiff penalty also seems in order, given the bank’s blatant disregard for both the legal violations and their ramifications. The DoJ quotes a May 2007 BNPP Paris executive memorandum: “In a context where the International Community puts pressure to bring an end to the dramatic situation in Darfur, no one would understand why BNP Paribas persists [in Sudan] which could be interpreted as supporting the leaders in place.”

But did the DoJ go too far when it imposed $9 billion in sanctions? As of the date of the settlement, the fine more than doubled the enforcement agency’s highest criminal penalty on record. (Of course, big settlements with banks are becoming the norm: the DoJ recently settled with Bank of America for $16.5+ billion and with JP Morgan Chase for $13 billion.) The $9 billion penalty may not have had the desired impact of shock and awe the U.S. may have sought. Instead of being perceived as a show of force with a deterrent effect, some of the international community has reacted with disdain. Not surprisingly, this includes the French, who have been quite vocal about their feelings. The French Foreign Minister, Laurent Fabius, said the fine was an unfair and unilateral decision.” The French Finance Minister Michel Sapin questioned its legality by pointing out that the offending transactions were not illegal under French law.

It is not as though the U.S. is jumping across the pond and punishing a French bank on French soil for activity in France.  The actions in question took place through U.S. markets and therefore make U.S. prosecution justifiable.  But the French finance minister’s statement demonstrates the U.S.’s waning credibility abroad. Sapin did not stop at the BNPP settlement – he went on to question the entire monetary regime based upon the U.S. dollar: “Shouldn’t the euro be more important in the global economy?” The U.S. should not ignore this growing antipathy. Nor should we take for granted our economic or political authority. Examples like this settlement, or the largely resented Foreign Account Tax Compliance Act, may not be seen as a show of force but rather as an act of bullying. As we throw our weight around, others are considering whether the cost of doing business with us is just too high. If we keep it up, we could find ourselves at a table of one.

Sep 03

FATCA: Trapped by the Land of the Free?


The Foreign Account Tax Compliance Act (FATCA) has been billed as the U.S.’s bold effort to go after tax dodgers and cheats. The picture painted is that of greedy rich people secreting their fortunes in offshore accounts and away from poor Uncle Sam. But this is not a fair representation of FATCA’s impact or reach. Since the law took effect July 31, there is increasing blowback as people of varied means are feeling the repercussions.

One of the most publicized reactions is a lawsuit filed in Canada by two Canadian-American citizens with negligible ties to the U.S. In their suit against the Canadian Attorney General, the plaintiffs contest the validity of the Canada-U.S. agreement to enforce FATCA in their country. The plaintiffs claim that the agreement violates provisions of the Canadian Charter of Rights and Freedoms and that it undermines the “principle that Canada will not forfeit its sovereignty to a foreign state.” The complaint, drafted by notable Canadian attorneys Joseph Arvay and David Gruber, alleges that Canada’s enforcement of the U.S. law violates affected people’s right to liberty and security by:

– failing to protect them from unreasonable search and seizure, and

– discriminating against them on the grounds of their country of birth.

The plaintiffs, Virginia Hillis and Gwendolyn Louise Deegan, are U.S. citizens through no willful action. They were born in the U.S. but both left the States for Canada when they were five years old. Neither has a U.S. passport and neither has significant contacts with the U.S. They are what you could call “Accidental Americans” – people who happen to be citizens because they were born here but otherwise identify with another country of citizenship. The plaintiffs hardly fit the image of the fancy tax cheats FATCA purports to target.

Here are some examples of people falling under FATCA’s umbrella of U.S. tax cheats:

(1)   Accidental Americans – dual citizens with nominal ties to the U.S. (e.g., they were born in the U.S.) who have not opted to undertake the tedious and costly process of renouncing citizenship. The group includes others who only recently learned they are U.S. citizens – many thought they effectively renounced citizenship but find themselves repatriated through changes in U.S. law or policy.

(2)   Snowbirds – citizens of other countries (generally Canadians) who think they do not face U.S. tax liability because they spend less than 183 days a year in the U.S. The 183-day maximum has been understood by many to be the U.S. tax code’s threshold to avoid tax liability. However, they are learning that the threshold is not so straightforward.  A “substantial presence test” also factors U.S. presence the year prior and year subsequent to a tax year, reducing the amount of time people can regularly visit in the U.S. without tax penalty.

(3)   Non-Americans who have ever worked in the U.S. or appear to have a “substantial” connection to the U.S. Since the law does not fully define what “substantial” means for reporting purposes, lots people are getting swallowed up into compliance and reporting requirements.

But also getting caught up in compliance requirements are Non-Americans who have joint accounts with a U.S. citizen, such as non-American spouses and “at-risk” trusts and investments with no U.S. ties. A recent article by the U.K.’s Telegraph noted that thousands of British families’ trusts are being reviewed for possible ties to the U.S. Many of these are run-of-the-mill family trusts. Regardless of outcome the customers are being billed for the review some £200-500 (roughly $300-750).

Compliance costs for the 77,000 + financial institutions worldwide that have signed onto to FATCA enforcement are staggering. It has been estimated that the 30 largest non-U.S. banks alone will be saddled with $7.5 billion related expenses. These costs are going to have to be absorbed by someone… and will invariably be passed on to those institutions’ customers in the form of increased fees for products and services.

FATCA is an expensive headache for Americans and non-Americans, financial institutions and foreign governments. It is running roughshod over other countries’ privacy laws, banking laws and national sovereignty. While these countries and banks have buckled to U.S. pressure because otherwise they would face 30% penalties on U.S.-generated payments, some may start to consider whether compliance is worth it. As highlighted in the Huffington Post, the Japanese Bankers Association is weighing whether divesting of U.S. assets may make better economic sense. Not only may countries sever their U.S. ties, U.S. citizens are renouncing their citizenship in record numbers. In a sign of poor-sportsmanship, the State Department has recently raised fees for renunciation more 400%, from $450 to $2,350; Senator Charles Schumer (D-NY) has introduced a bill to double exit taxes. Who would have figured that the U.S. would become the “Hotel California” from the 1972 Eagles’ album: you can check out anytime you like, but you can never leave.


Aug 12

Bitcoin Equal to Money According to District Court Ruling

Young businessman opening his shirt and showing bitcoin currency

Is it possible to commit money laundering with virtual currency? At least one federal judge thinks so. Last month, U.S. District Judge Katherine Forrest refused to dismiss a money laundering charge premised on the use of a Bitcoin-based payment system. She is the first federal judge to hold that the federal money laundering statute is broad enough to encompass the use of Bitcoin in financial transactions.

In February 2014, a grand jury in the Southern District of New York returned an indictment charging Ross William Ulbricht on four counts for participation in a narcotics trafficking conspiracy, a continuing criminal enterprise, a computer-hacking conspiracy, and a money-laundering conspiracy. The charges stemmed from Ulbricht’s alleged creation and operation of an underground website known as Silk Road. Prosecutors alleged that Ulbricht designed, launched, and administered the online marketplace to facilitate the anonymous sale of illegal drugs, malicious computer software, and other illicit goods and services. Two features of the site allegedly protected buyers and sellers from government surveillance and tracking. First, Silk Road operated using Tor—software and a network that allows for anonymous, untraceable Internet browsing. The site also required all purchases to be made in Bitcoin, an anonymous, untraceable form of payment.

Ulbricht asked the court to dismiss all four counts, including the charge for participation in a money-laundering conspiracy. Ulbricht argued that the money-laundering charge should be dismissed on grounds that Bitcoin transactions are not “financial transactions,” as defined under the statute.

The federal money laundering statute prohibits “financial transactions” involving the proceeds of illegal activity when conducted by a person who intends to further the illegal activity or who knows the transaction is designed to conceal material information about the proceeds, such as their source or location. The “financial transaction” requirement may be satisfied by: (i) a transaction involving the movement of funds by wire or other means; (ii) a transaction involving a monetary instrument; or (iii) a transaction involving the transfer of certain types of property. To fall within the second definition, the transaction must involve a “monetary instrument”—i.e., U.S. or foreign coin or currency, checks, money orders, investment securities, or negotiable instruments.

Ulbricht argued for dismissal of the money-laundering charge based on the second definition. Specifically, he contended that Bitcoins do not meet the statutory definition for monetary instruments, so the alleged transactions cannot form the basis for a money-laundering conviction.

But according to Judge Forrest, Ulbricht missed the mark by focusing exclusively on the second definition of “financial transaction.” She prefaced her analysis by acknowledging that anonymous financial transactions are not per se criminal. But in Ulbricht’s case, Bitcoins were problematic because they were alleged to be the medium of exchange for commercial transactions related to illegal activity—narcotics trafficking and computer hacking. The prosecution had ample support for its claim that Ulbricht chose Bitcoin as Silk Road’s exclusive payment system in order to conceal the nature of those transactions.

The court also explained that the government had alleged the necessary elements for a money-laundering conspiracy regardless of whether Bitcoin was deemed to be a “monetary instrument.” The statute defines “financial transaction” more broadly to include any transaction involving the movement of funds by wire or otherwise. Bitcoins were deemed to fit this broad definition because they are used as funds to pay directly for things or as a medium of exchange and can be converted into currency which can pay for things. As Judge Forrest noted, “the only value of Bitcoin lies in its ability to pay for things . . . . The money laundering statute is broad enough to encompass the use of Bitcoins in financial transactions. Any other reading would – in light of Bitcoins’ sole raison d’etre – be nonsensical.”

There is an inescapable irony here. While proponents of Bitcoin favor recognition of the currency as a financial instrument, large operators like Ulbricht argue the opposite.


May 22

The Taxman Cometh for US Holders of Foreign Bank Accounts

U.S. citizens and residents with unreported assets abroad may be feeling a steady increase of pressure these days. The July 1, 2014 effective date of the Foreign Assets Tax Compliance Act (FATCA) is looming. The number of countries that have agreed to enforce FATCA is growing (almost daily). That means the banks in those countries will be required to report U.S. citizens’ assets to the IRS. It seems inevitable that if you don’t report your income and assets, your bank will. This point has been reinforced through bank-issued letters, from foreign banks to their U.S. clients, notifying those clients of the impending reporting requirements. If you want to stick your head in the sand or hide in a dark corner, we feel your pain, but we highly recommend against denial. The consequences of doing nothing could be severe – from staggering monetary penalties to jail time.

Taxpayers who are behind in reporting foreign assets and paying taxes on foreign-based income have a few options before the gloom and doom of the taxman cometh. Since the passage of FATCA in 2010, the IRS has offered citizens three rounds of its Offshore Voluntary Disclosure Program (OVDP), whereby taxpayers can reconcile their status with the IRS through reporting assets, paying past due taxes, interest and penalties. The penalties can be fairly steep – 27.5% on unreported assets alone – but they are preferable to an enforcement action by the feds. For taxpayers considered low risk, i.e. those that owe less than $1500 a year, the IRS offers a Streamlined OVDP that is penalty-free and involves a less onerous reporting process.

Below we provide some additional detail on who should consider making a date with the IRS, what steps to take, and possible consequences of doing nothing.

Who Is Covered:

U.S. citizens and residents with foreign accounts who have failed to file U.S. tax returns, failed to report income from foreign accounts, failed to file a report on foreign assets (FBAR), or failed to file other forms on foreign-based assets (e.g., Form 3520 on foreign trusts, Form 5471 on controlled foreign corporations, Form 926 on transfers of property to a foreign corporation, or Form 8865 on interest in foreign partnerships), need to address what and how to report to the IRS.

Foreign assets that must be reported include (1) accounts containing $10,000 or more of assets at some point during the tax year in which you have a financial interest or over which you have signature authority (FBAR); (2) your interest in assets worth at least $50,000 on the last day of the tax year or $75,000 at any time during the tax year (Form 8938). The problem for many is that what constitutes a foreign asset is somewhat broad and includes not only foreign accounts, stock, and mutual funds but also foreign partnership interests, debt issued by a foreign person, interests in foreign trusts or estates, and certain derivative instruments with a foreign counterparty.

Options Available:

If you have unreported foreign-based income or assets that pass the threshold amount outlined above, the time is right to consider the disclosure options currently offered by the IRS. The IRS’s website provides guidance on several options available to taxpayers, based upon the level of failed disclosure.

à Delinquent FBAR Filing: Those who reported all taxable income, but were not aware of the need to file an FBAR on foreign assets can file an FBAR with an explanatory statement. There will be no penalty for those who fall under this category.

à Delinquent CFC/Foreign Trust Filing: Those who reported and paid tax on all taxable income associated with a controlled foreign corporation or foreign trust, but failed to file Forms 5471 or 3520, may file these forms with an explanatory statement. (The IRS notes that Form 5471 should be submitted with an amended return.) Provided there were no underreported taxes, the IRS will not impose any penalties.

à Streamlined OVDP: Non-resident taxpayers (i.e. only citizens living abroad) owing less than $1,500 per year in taxes may file delinquent returns and related information returns for the last three years, and delinquent FBARs for the past six years, including tax and interest due.  These taxpayers will also need to file additional information for the IRS to ascertain compliance risk. The IRS will review these submissions to confirm they are low-risk (i.e. that amount owed is less than $1,500 per year). If confirmed, the IRS generally will not impose any penalties beyond interest owed. If the IRS determines you are a higher risk, then you may be subjected to a more intensive review, including additional tax years, and may be required to file according to the standard OVDP (below).

à Standard OVDP: Taxpayers who have failed to report foreign accounts and income, especially those who seek to avoid criminal prosecution, may participate in the OVDP, which is structured like a civil settlement. Those taxpayers will pay an offshore penalty (instead of other penalties at the IRS’s disposal). This program involves several steps: (1) the taxpayer must submit a request to the IRS to be accepted into the program; (2) once accepted, the taxpayer must submit many items, including amended tax returns with schedules outlining unreported income for past eight years, FBARS, and information returns for the previous eight years; (3) the taxpayer must submit full payment of all tax and interest due along with penalties (including a penalty of 27.5 percent of the highest aggregate balance of foreign assets held over the last eight years, and a penalty of up to 40 percent of taxes owed on unreported income from foreign accounts). Note that if you disagree with the penalties, you may opt out of the settlement and request a mitigation of penalties (in limited circumstances, some taxpayers will qualify for a five percent or 12.5 percent penalty). You may also choose to opt out if statutory penalties would be lower under relevant laws (which should be reviewed on a case-by-case basis).  Taxpayers who opt out are still protected from criminal prosecution.

à Quiet Disclosures: A final option, which is neither offered nor suggested by the IRS, but which some taxpayers attempt, is to simply start disclosing foreign assets and follow normal reporting requirements without addressing delinquent reports from prior years. Some taxpayers may choose to file amended returns under normal reporting procedures. These quiet disclosures are generally not recommended, as they do not safeguard the taxpayer from an IRS enforcement action, including criminal prosecution. They may at least trigger an IRS audit, which can come with stiffer penalties than those incorporated in the voluntary disclosure programs.

A Couple of Caveats:

If the IRS has already contacted you requesting information or already initiated an investigation, it is too late to follow any of the programs outlined above. As the name suggests, the programs are strictly “voluntary.” Also, the IRS may choose to close down its voluntary disclosure programs at any point. Many out there are warning taxpayers to file with the IRS right away before it is too late.

Although, a minor point of observation: while it is possible that the IRS will determine that it will get all the information it needs through FACTA bank disclosures, it is also likely that the agency will be happy to let the taxpayers do the work for them: to volunteer information and pay fines without the need to expend resources on investigators and prosecution. However, the more delinquent you are in taxes owed, the more likely the IRS will seek stiffer action and penalties. Therefore, if you are significantly behind on taxes owed, be aware that you are a more likely candidate for criminal prosecution. See, for instance, the growing list of former UBS clients who have faced incarceration and hefty fines for tax avoidance.

Why Make A Disclosure?

Some taxpayers may have a high risk tolerance and choose to take a chance that their foreign accounts will not be reported. Or they may think the IRS will be sufficiently inundated with new information from FATCA-compliant countries that it will take years for the IRS to identify them… and by that time perhaps FATCA will be repealed. While a number of activists and politicians have been working hard to repeal FATCA, the reality is, it is probably here to stay. Because dozens of international agreements have been signed, and once the legislation takes effect, it will be very, very difficult to unweave this work and convince the government to relinquish its new power. Taxpayers should presume FATCA is here to stay and reconcile their finances with Uncle Sam.

As of May 2014, more than 50 countries have agreed to comply with and enforce FATCA. (Some countries are enforcing the American law as a part of information share agreements with the U.S. whereby the U.S. will also report information on those countries’ citizens. Other countries are enforcing the American law to avoid the harsh withholding penalties that non-compliant countries would otherwise face.) This means that the financial institutions in these countries will be required to report income and asset information to the IRS. Finding a place to park your money outside of Uncle Sam’s purview is nearing impossible.

And the consequences of the IRS initiating an audit or enforcement proceeding against you are invariably going to be more severe than the voluntary disclosure programs (otherwise, what would be the incentive to disclose?). For those severely behind in IRS reporting, the protection from criminal prosecution should be one of the biggest carrots of the voluntary disclosure programs, especially as the IRS steps up its initiatives to help offset a perilous budget deficit. In the last five years, federal prosecutors have brought more than 100 criminal cases against taxpayers with unreported income overseas. FATCA enforcement will likely increase this number significantly. Regardless of political, philosophical, or moral objections you may have to accept Uncle Sam’s reach abroad, unless you want to risk your estate and possible jail time, the time is right to make an appointment with counsel to address your situation with the IRS.

Apr 18

Are High Frequency Traders Playing Fast and Loose With the Rules?

When high frequency trading (HFT) first crept into the public consciousness, it related to primarily to the question of whether rapid, computer driven trading posed risks to the safety and stability of the trading markets.  Now it appears that HFT may have also been a means for some traders to gain a possible illegal advantage.

High frequency trading involves the use of sophisticated technological tools and computer algorithms to rapidly trade securities.  High frequency traders use powerful computing equipment to execute proprietary trading strategies in which they move in and out of positions in seconds or even fractions of a second.  While high frequency traders often capture just a fraction of a cent in profit on each trade, they make up for low margins with enormous volume of trades.

High frequency trading is viewed by many as particularly risky.  While some participants disagree, the Securities and Exchange Commission and the Commodity Futures Trading Commission issued a report in which their staffs concluded that algorithmic and high frequency trading contributed to the volatility that led to the May 6, 2010 “flash crash.” 

More recently, high frequency trading has come under scrutiny by law enforcement.  A number of agencies are investigating such practices to determine whether high frequency traders are profiting at the expense of ordinary investors.  The Justice Department and the FBI have recently announced investigations, while U.S. securities regulators and the New York Attorney General have said that they have ongoing investigations.

Heightening the recent HFT craze is renowned author Michael Lewis, who recently authored Flash Boys:   A Wall Street Revolt. In the book, Lewis claims that computer-driven stock trading has taken over the market at the expense of ‘the little guy’. According to Lewis, Wall Street is rigged by a combination of insiders – stock exchanges, big Wall Street banks and HFT. Lewis claims that HFT’s advantage is so severe that traders are able to predict which stock a common investor wants to buy before he or she can buy it, and drive the price up before the investor can initiate the purchase.

Not everyone is buying the claims Lewis makes in his book.  There have been many on record stating that HFT actually does not prey on mom and pop investors. Additionally, many individualsbelieve Lewis’ claims are overblown and that HFT does not provide traders with a huge profitable advantage.

Inevitably, the most pressing question about high frequency trading is whether any such businesses are given an unfair – and illegal – advantage in placing trades.  On April 11, three futures traders filed a federal class action lawsuit against CME Group, the owner of the Chicago Mercantile Exchange and the Chicago Board of Trade, claiming that high frequency traders are given an improper advance look at price and market data that permits them to execute trades using the data before other market participants.  While the plaintiffs claim that this practice has existed since 2007, CME denies the merits of the allegations.

Between the investigations and this lawsuit (and the others that will certainly follow), it will eventually be determined whether traders with high speed computers benefited improperly over other market participants.  Regardless of the merits of these accusations, it is unquestionable that high frequency trading, like all technological advances, poses special challenges to existing rules and laws that will require special consideration and possibly require new rules and regulations.

, , ,
Apr 16

Offshore Accounts? IRS is Watching

If you have unreported income from offshore accounts, now may be the best time to come forward and report those earnings; otherwise, you may be susceptible to criminal prosecution.

The IRS initially began this open-ended Offshore Voluntary Disclosure Program (OVDP) in 2009 and later renewed it in 2011. Due to strong interest from previous years, the IRS rolled the 2012 Offshore Voluntary Disclosure Program back out in January. This program provides a way for taxpayers to come forward voluntarily and report their previously undisclosed foreign accounts and assets. The program is designed to resolve an inordinate amount of cases without the IRS having to take the time to conduct independent, thorough investigations of alleged tax fraudsters.

Despite the name, and unlike its predecessors, the 2012 OVDP has no set deadline for taxpayers to apply. However, citizens should be cognizant of the fact that the IRS can change the terms at any given time. For example, the program’s tax penalty could increase, or worse – the program could completely end without any notice, leaving taxpayers as fair game for IRS crosshairs. Those choosing to not report their offshore assets could be prosecuted under the fraud penalty and foreign information return penalties, in addition to increasing their risk of criminal prosecution.

Additional and possible criminal charges that could stem from undisclosed tax returns include tax evasion, filing a false return and failure to file an income tax return. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Taxpayers should understand that the likelihood of undisclosed offshore accounts being found is increasing through information available to the IRS by tax treaties, information from whistleblowers and more revealing information by way of the Foreign Account Tax Compliance Act (FATCA), which we’ve blogged on before.

Citizens are wising up and taking advantage of the program. Since 2013, more than 39,000 citizens have utilized OVDP and disclosed unreported earnings. This has netted over $5.5 billion in recovered tax revenues for the IRS.

A few citizens, such as Ty Warner, have ignored the ODVP. The creator of Beanie Babies saw this enforcement first hand when the IRS came knocking on his door, alleging that he hid a secret offshore bank account. In September 2013, a federal court in Chicago issued tax evasion charges against Warner. The court fined Warner a civil fine of $53 million and he was sentenced to two years of probation. Additionally, Warner paid $14 million in back taxes.

While some citizens will surely be tempted to allow their offshore earnings go unreported, we are here to tell you that decision (and risk) may come at a high price.

Connect with Us Share

About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, healthcare, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partner Michelle Cohen, and associates Rachel Hirsch, Jeff Hamlin, Steven Eichorn, David Yellin, and Nicole Kardell. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

Visit the Ifrah Law Firm website