Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Archive for the ‘Financial Regulation’ Category
Aug 12
2016

The E-Rate Honey Pot

Pot is being filled with honey and a drizzler. Oblects are on wooden table.

When you grant access to a $ 4 billion fund and give fund participants relative autonomy in how they use those funds, ne’er-do-wells will sniff their way to the honey pot. Keeping them out can be a challenge. So goes the story of the federally administered Schools and Libraries Program, better known as E-Rate.

Established by the Telecommunications Act of 1996, E-Rate is a federal subsidy that helps schools and libraries–particularly those in disadvantaged areas–pay for telecommunications services (e.g., Internet access). The program runs a $3.9 billion fund today.

Schools and libraries that want to take advantage of E-Rate simply need to follow the program’s bid and approval process. Participants oversee the bidding process and choose their service provider. While participants are required to choose the most cost effective provider, there isn’t much of a check on whether they actually do: they need only self-certify that they chose the most cost effective bid.

E-Rate participant autonomy has been a problem as the program regularly faces allegations of fraud and abuse. These concerns prompted a GAO study and senate hearings in the early 2000s. Former Rep. Jim Greenwood (R-PA) told the New York Times, “You couldn’t invent a way to throw money down the drain that would work any better than this.” After the GAO reported its findings (2004), U.S. Rep. Joe Barton (R-TX), Chairman of the Committee on Energy and Commerce, said, “Unscrupulous vendors … fleeced the program while underserved communities and telephone customers pay the price.” Over the past decade, there have been a number of investigations and enforcement actions, resulting in civil as well as criminal penalties, including jail time for a few program profiteers.

Some noteworthy fleecing includes:

  • Puerto Rico wasted more than $100 million in program funds and its secretary of education was sentenced to three years in prison and fined $4 million.
  • In the Chicago Public School system, some $8.5 million in equipment was stockpiled (better yet, the CPS and E-Rate were essentially paying twice for equipment that was never installed!).
  • A company in the San Francisco Unified School District was required to pay $20.7 million in fines and restitution.

More recently, schools and libraries in the Chicago and New York City areas have been investigated for violating the competitive bidding process and taking E-Rate funds without actually providing E-Rate services. Those investigations are still underway, with dramatic raids last March.

Adding to the temptation for ne’er-do-wells are the millions of dollars left on the table in E-Rate funds each year. According to EducationDive, some $245 million in funds went unclaimed in 2014. It is almost hard to blame profiteers for seeking out what they perceive as free money, especially when they have so much control over the process.

There may be a lot of good intentions behind E-Rate. But in its current form and function, E-Rate is but one more example of a poorly administered federal funds that attract those able to game the system.

Apr 15
2016

Good News: The Feds Can’t Freeze Your Assets to Stop You from Hiring a Lawyer

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Republished with permission from FEE.org, originally published April 12, 2016

There are limits to what the government can take from you. The Supreme Court recently ruled that the Constitution forbids the government from freezing a defendant’s “untainted” assets in advance of prosecution. The ruling is a significant victory for those caught in the government’s crosshairs. It is also a significant victory for a traditional concept of justice, which prefers to err on the side of the accused over government agents.

In its decision in Luis v. U.S., the high court agreed with a criminal defendant who argued that her Sixth Amendment right to counsel was violated when the government froze assets unrelated to allegedly criminal behavior. Without access to those funds, the defendant would be unable to retain the attorney of her choice.

The Court considered the government’s interest in preserving funds to pay restitution and criminal penalties, but concluded that a defendant’s right to counsel is “fundamental,” outweighing any interest the government mightultimately have: “[The government’s] interests are important, but — compared to the right to counsel — they seem to lie somewhat further from the heart of a fair, effective criminal justice system.”

In a 5-3 ruling, the Court based its decision on this balancing test, as well as on traditional understandings of common law, which distinguish between assets directly related to alleged criminal behavior and assets considered “innocent” or untainted. The Court found no legal precedent to authorize “unfettered, pretrial forfeiture of the defendant’s own ‘innocent’ property.” Moreover, the Court highlighted concerns that the government’s position has no obvious stopping point and could erode defendants’ right to counsel considerably.

Encroaching on the Sixth Amendment is but one of the several concerns posed by the government’s growing love of forfeiture — it has become too handy of a tool in prosecutors’ pockets — but it is perhaps the gravest concern, as it threatens an individual’s ability to effectively defend him or herself. It puts defendants at a significant disadvantage: they want to obtain the best representation they can afford in order to defend themselves, but they may not be able to afford any if the government freezes all their assets in the hope of confiscating them after a conviction. They may be left begging friends and family to help fund their defense or relying upon overburdened public defenders to represent them. The government’s tactic is the courtroom equivalent of inviting an opponent to a boxing match and then tying one hand behind his back.

The criminal defense bar has decried government’s overuse of asset forfeiture for years. While the government has argued that pre-trial asset seizure is justified in order to preserve its ability to recover funds and penalties, the process has been used to try to deter behavior by making an example of people. Moreover, pre-trial asset seizure looks a lot like presumed guilt, as opposed to presumed innocence. The occasional constitutionally minded congressional representative has tried to curb forfeiture overuse through legislative initiatives, but these bills keep getting left to die in committees and subcommittees. It is nice to see some effective limits placed on the practice by the Court.

Justice Thomas, in a concurring opinion, took issue with Justice Breyer’s opinion “balancing” the state’s interest against individuals’ constitutional rights. He argued the Sixth Amendment prevents the government from seizing untainted assets, period; there is no need to consider a balancing approach. But at least the plurality of the Court recognized that, when balancing the government’s interests in the outcome of a case against the individual’s right to adequately defend him or herself, you should err on the side of the individual.

If that means the state sometimes loses out on full satisfaction of a monetary judgment, that is preferable to defendants being prevented from mounting an effective defense. More wrongful convictions would result from that policy, and the seizure of a few more dollars from the truly guilty would be no consolation. If there is any question whether historically we have favored individual rights over the state’s interests in criminal prosecutions, look only to the Bill of Rights. Justice demands that if anyone’s hand is to be tied in the courtroom, it should be the hand of the government.

Mar 30
2016

Online Poker: A New Way to Bank?

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In light of Tax Day (note that it’s on the 18th of April this year due to a holiday on the 15th) we want to point out a curious ramification from a federal case concerning online gambling, tax reports, and foreign accounts.

In United States v. Hom [1], the defendant, John C. Hom, was an online poker player who had money in player accounts situated outside America. Accounts such as these are used for depositing funds, wagering them on the site, and withdrawing whatever remains; they are not generally treated as “bank accounts” proper, and Hom did not bother to file a tax return on them. Surprisingly, the court said he should have.

As explained by the court in its decision, an individual is mandated to file an FBAR (a Report of Foreign Bank and Financial Accounts) for a reporting year if all of these requirements are satisfied:

(1) he or she is a United States person;

(2) he or she has a financial interest in, or signature or other authority over, a bank, securities, or other financial account;

(3) the bank, securities, or other financial account is in a foreign country; and

(4) the aggregate amount in the accounts exceeds $10,000 in U.S. currency at any time during the year.

Id. at 1178.

In Hom’s case, three of the requirements were clearly satisfied: the defendant was a U.S. citizen (1), the accounts, like the gaming companies holding them, were located in a foreign country (3), and the aggregate amount in those accounts exceeded $10,000 (4).

Requirement (2) was the sticking point. Could an online poker account really clear the definition of “other financial account,” thus compelling Hom to file an FBAR? His team argued that it didn’t: the funds weren’t held in a bank or securities account and the defendant’s actions were limited to making deposits and withdrawals. Strikingly, the court ruled that it was a financial account because “he opened up all three accounts in his name, controlled access to the accounts, deposited money into the accounts, withdrew or transferred money from the accounts to other entities at will, and could carry a balance on the accounts.” Id. at 1179. The ability to deposit and withdraw at will sufficed to make the gaming companies “function as institutions engaged in the business of banking. Accordingly, defendant’s accounts are reportable even under the current regulations.” Id.

This is a very broad expansion of what passes for a financial institution, and it begs the question of how far it can go. For example, are funds in an attorney escrow account, or other escrowed accounts for a foreign transaction, FBAR reportable? After all, they, too, permit the client to make withdrawals and deposits and carry a balance—and possibly even control access.

Hom is only one case; other courts aren’t bound by it. However, they could still be influenced by this decision. It is therefore prudent to file an FBAR on gambling accounts located overseas that exceed $10,000. Furthermore, one should wonder whether other courts will borrow this reasoning and apply it to other forms of escrow accounts. These questions are very pertinent in light of the IRS’s continuing emphasis on the disclosure of foreign accounts.

[1] United States v. Hom, 45 F. Supp. 3d 1175 (N.D. Cal. 2014)

 

Feb 11
2016

Normandie Casino Operator Pleads Guilty to Charges Stemming from Protection of High-Rollers

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Despite the old saying “the customer is always right,” the law places limits on customer service in the casino industry.  Normandie Casino has found this out the hard way.  The operator of the casino has agreed to plead guilty to charges that it violated anti-money laundering provisions of the Bank Secrecy Act, according to a Department of Justice press release.

Normandie Casino is one of the few remaining family-owned casinos in the country and one of the original card clubs in California.  In the 1980s, the casino expanded its offerings and now features Seven-card Stud, Texas Hold-em, Five-card Draw, Blackjack, Pai Gow Poker, and Super 9, among other games and entertainment.

However, amid all these offerings, it appears the casino failed to consistently observe the banking regulations.  Under the Bank Secrecy Act, casinos are required to take measures to prevent criminals from using the casino for money laundering.  In particular, casinos must report transactions involving more than $10,000 by any one gambler in a 24-hour period.

Under the agreement with the Department of Justice, Normandie Club, which operates Normandie Casino, has agreed to plead guilty to two felony offenses.  In the agreement, Normandie will admit that the casino used independent gambling “promoters” to locate high-rollers.  Once the high-rollers were at the casino, high-level employees would help the high-rollers avoid transaction reporting requirements.  Normandie would use the name of the promoter on the Currency Transaction Report, rather than the high-roller, and also structure the payments to make them appear to fall under the federal transaction reporting requirements.

Normandie has agreed to pay a $500,000 fine per charge, for a total of $1 million, plus the casino will forfeit the nearly $1.4 million it received in 2013 when failing to file accurate Currency Transaction Reports.

While the casino industry runs on making its customers happy, the casino must also do so within the bounds of the law.  Gamblers may seek anonymity, but casinos cannot guarantee this to high-rollers who are making significant transactions.

 

Jun 02
2015

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
2015

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

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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
2015

Court Reins In Prosecutorial Overreach in Insider Trading Cases

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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
2015

The World Wide Tax Web: FATCA Data Sharing Goes Online

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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
2014

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

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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
2014

FATCA: Trapped by the Land of the Free?

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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.

 

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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, health care, 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, partners Michelle Cohen and George Calhoun, counsels Jeff Hamlin and Drew Barnholtz, and associates Rachel Hirsch, Nicole Kardell, Steven Eichorn, David Yellin, and Jessica Feil. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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