Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Archive for the ‘Foreign Proceedings’ Category
Sep 03
2014

FATCA: Trapped by the Land of the Free?

FATCA

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.

 

Apr 04
2014

My, What Long Arms You Have, Uncle

Here’s a visual: Uncle Sam extending his arms around the world, reaching out for his citizens, wherever they may be. He may resemble a candy-striped Gumby, with disproportionately long rubbery arms spanning the globe. The visual is not an endearing one to many Americans abroad. They do not see Uncle Sam’s reach as an embrace, but rather as a stronghold. And a close-up of the visual will show that not only is Uncle Sam holding his citizens, he is also clutching foreign institutions and sovereigns.

This visual describes how many perceive the U.S. following the enactment of the Foreign Account Tax Compliance Act (FATCA), a law that takes effect July 1, 2014, and is purported to increase accountability of U.S. taxpayers who have foreign financial assets. Unlike most countries, the U.S. taxes its citizens on income regardless of where the income was earned. Either through inattention or willful ignorance, many Americans have not fully complied with all U.S. tax laws and have not reported all foreign assets and income earned abroad. Desperate to shore up a massive budget deficit, in 2010 U.S. Congress decided to go after tax revenues on these foreign assets with the passage of FATCA.

FATCA followed on the heels of a 2009 settlement between the U.S. Justice Department and UBS AG in which the bank agreed to pay a hefty $780 million fine to avoid prosecution for allegedly fostering American tax evasion. A savvy Congress may have seen revenue potential both in ferreting out tax evasion and finding reasons to penalize financial institutions that fail to comply with U.S. law. FATCA and its implementing regulations shrewdly address both.

FATCA has two general reporting requirements: (1) U.S. individual taxpayers must attach Form 8938 to their income tax return, reporting information about foreign financial accounts and offshore assets valued over a specified threshold ($50,000 for a single filer, though a higher threshold applies to those living outside the U.S.) and (2) foreign financial institutions (FFIs) must register with the IRS and report information (mainly account balances) about U.S. accounts (including accounts of foreign entities with substantial U.S. owners). The FFIs may be required to withhold 30% on U.S. sourced payments to foreign payees if those payees do not comply with FATCA.

Here’s another visual: a massive splitting headache. FFIs agreeing to comply with FATCA will need to confirm the identity of all account holders, culling U.S. accounts for reporting purposes. In instances where local law conflicts with FATCA, e.g., when accounts are located in countries with bank secrecy laws, FFIs will need to ensure account holders sign waivers to allow reporting of their information. Many FFIs will need to institute a process to withhold 30% of certain payments from recalcitrant account holders and non-compliant FFIs.  So not only must these banks track their account holders, they may be required to track payments to those account holders and to other FFIs. They must stay abreast of which of their account holders and which FFIs are not compliant with FATCA. Then for the non-compliant, the FFIs will need to track U.S. payments to those and withhold 30% of the U.S.-sourced payments. Good luck.

The compliance and reporting requirements will be onerous. And the tediousness of compliance with the U.S. laws and regulations is only one piece of the legal framework FFIs must navigate. As mentioned above, they also have the overarching concern of compliance with their own country’s banking and privacy laws. A clash of laws may subject FFIs to class actions in their respective countries. While intergovernmental agreements between the U.S. and FATCA-cooperating countries, as well as local legislative efforts, may attempt to remediate problems of conflicting laws, FFIs must tread carefully.

Why would foreign banks, or foreign sovereigns for that matter, choose to subject themselves to the U.S.’s jurisdictional overreach? Why wouldn’t countries, especially those known for their bank secrecy laws, simply refuse to submit this costly program? The answer is simple. FATCA includes a steep penalty for non-participation. As mentioned above, there is a 30% withholding of any U.S.-sourced payments to FFIs that do not adhere to the law. A simple solution to avoid the penalty and the regulatory nightmare is to no longer hold U.S. accounts. And many Americans abroad are now struggling to find banks that will take their cash.  But other FFIs have chosen to work with the U.S. and their local government to ease compliance and implementation.

The financial pressure and regulatory burden to which the U.S. has subjected these foreign banks and sovereigns is the impetus for many intergovernmental agreements (IGAs) between the U.S. and other countries. The carrot for these countries to enter an IGA is that the U.S. will reduce the oversight requirements the law foists upon banks. For instance, an FFI in a country with an IGA may not have to track and withhold payments; they merely need to report on U.S. accounts. This regulatory ease is why many big banks in foreign countries have pressured their local governments to sign an IGA with the U.S. The end result is places known for bank secrecy, like Switzerland and Hong Kong, are buckling. Thanks to FATCA, bank secrecy will be a concept as antiquated as carriage rides.

But FFIs who think they are dodging a bullet by lobbying for an IGA in their country should think again. This merely opens the door to an increasing level of U.S. involvement in their affairs. We can expect the U.S. Justice Department to leverage its increased presence in FFIs to expand its enforcement initiatives.

Nov 05
2013

District Court Holds Anti-Retaliation Provision of Dodd-Frank Act Does Not Apply in Case Virtually Lacking Any U.S. Connections

A recent decision in the United States District Court for the Southern District of New York has reinforced the United States Supreme Court’s jurisprudence on the extraterritorial application of federal statutes.

In Liu v. Siemens A.G., the plaintiff asserted that he was fired as a consequence of his disclosure of business practices by his employer in connection with sales in China and North Korea that he believed to be in violation of the Foreign Corrupt Practices Act, and sought damages from Siemens under the anti-retaliation provision of the Dodd-Frank Act.  But the multinational character of the case – with almost no contacts with the United States – led the Court to grant Siemens’ motion to dismiss on the ground that the anti-retaliation provision of Dodd-Frank has no extraterritorial application.

In Morrison v. National Australia Bank, the United States Supreme Court significantly limited the extraterritorial reach of federal statutes that do not affirmatively provide for such application.  That case involved alleged fraud in the shares of an Australian bank whose shares were not sold on any American exchange, and involved purchases of those shares outside of the United States.  Though the bank had American Depositary Receipts (ADRs) the Supreme Court affirmed dismissal of the securities fraud claims in that case.

The Liu case reaffirmed this principle based on a tailor-made set of facts.  As the Court explained: “This is a case brought by a Taiwanese resident against a German corporation for acts concerning its Chinese subsidiary relating to alleged corruption in China and North Korea.”  The Court noted that the only contact with the United States was that Siemens had ADRs traded on an American exchange, just as was the case in Morrison.

In granting Siemens’ motion to dismiss, the court observed that the anti-retaliation provision of the Dodd-Frank Act is silent as to extraterritoriality – a fact that the court viewed as weighing heavily against a finding of extraterritoriality.  The court also noted that other parts of the Dodd-Frank Act do provide for extraterritoriality – making the silence of the anti-retaliation provision even more meaningful.  The court also observed that the only other court to consider this issue also ruled against extraterritorial application of this portion of the statute.

While the court engaged in a lengthy discussion of whether the disclosures at issue fell within the scope of the statute, it ultimately concluded that there was no need to resolve that issue given that the statute simply did not apply to this conduct lacking almost any connection to the United States.  The court’s decision signals a willingness of the federal judiciary – at least in the context of civil litigation – to limit the extraterritorial reach of federal statutes where Congress has failed affirmatively to provide for such an application of the statute.  On the other hand, the case leaves open the question of whether a court might rule otherwise in a case in which there were greater contacts with the United States.

Mar 03
2013

New Zealand Court Hands U.S. a Victory in Kim Dotcom Piracy Case

A year ago, we wrote about the indictment in the Eastern District of Virginia of the executives and founders of Megaupload, one of the leading file-hosting sites on the Web. The charges were copyright infringement through the facilitation of piracy of copyrighted materials, money-laundering, and conspiracy. The site was shuttered after the indictment.

The case quickly got tied up in the U.S. Justice Department’s effort to extradite Kim Dotcom, Megaupload’s chief founder, from New Zealand, where he lives. After a series of setbacks, the DOJ just won a victory before a New Zealand appeals court. The extradition hearing is set for August 2013.

The issue before the appeals court was how much information the DOJ was required to turn over to Dotcom before the hearing. One of Megaupload’s defenses is that its activities were protected by the “safe harbor” provisions of the Digital Millennium Copyright Act, which protects Internet service providers from copyright liability for the activities of people who merely use their Web sites.

Dotcom wanted the DOJ to turn over, in advance of the hearing, information that it had about possible copyright infringement on the site – in other words, a good deal of the government’s evidence. Reversing a lower court, the New Zealand appeals court held that the DOJ need not turn over much of this material at this point.

“If a suspect was entitled to demand disclosure of all relevant documents on the basis that he or she wished to challenge not the reliability of the summarised evidence but rather the inferences that the requesting state seeks to draw from it,” the court wrote, then the extradition hearing process would not work properly. Rather, the suspect is entitled to a summary of the evidence but not to the government’s entire case at this juncture.

It thus appears that Dotcom will be able to get access to the DOJ’s entire case and to mount a full defense only if he is extradited to the United States and faces a criminal trial. But in order to hold such a trial, the DOJ will need to make a prima facie case at the extradition hearing, which Dotcom will be allowed to rebut, that Dotcom is guilty of the charged offenses. The appeals court said that this hearing will only involve a “limited weighing of evidence” and that the DOJ is entitled to some deference as to its reliability.

We have said before that this is a highly dubious prosecution. We are confident that despite this setback, Dotcom will get a full chance to present his case before an impartial tribunal.

Feb 12
2013

Domain Name Seizure – It’s Not Just a U.S. Law Enforcement Tactic

We have previously reported in this space about the use of domain name seizures by American law enforcement – for example, here and here.  Recent media reports show that domain name seizure has become the go-to tactic for law enforcement for other countries as well.

Canadian police made a series of arrests during an invitation-only Super Bowl party attended by 2300 people as part of Project Amethyst. A Royal Canadian Mounted Police spokesperson says this was connected with the arrest of 21 individuals related to a separate online credit betting operation in November. The more recent arrests were connected with an online sports betting operation that used the website located at www.platinumsb.com. In addition to arresting six individuals, officers also seized $2.5 million in cash as a result of the execution of nine search warrants in and around Toronto.

Police also seized the domain name associated with a Costa Rica-based website, which is registered with Washington State-based Enom, Inc. Police obtained a Canadian court order for that purpose, and then submitted a request under the Mutual Legal Assistance Treaty (MLAT) between Canada and the United States. The domain name was then transferred to the control of Canadian law enforcement authorities who, in turn, redirected it to a new landing page. Visitors to the platinumsb.com website are now greeted by a notice stating that the web site has been “restrained by court order granted to the Attorney General of Ontario.”

Media reports indicate that the website was back online as www.platinumsb.tk within hours of the shutdown. The .tk top level domain belongs to Tokelau, a non-self-governing territory off the coast of New Zealand. The .tk version of the domain name was reportedly registered in 2004, suggesting that the group operating the sports book had set up contingency plans for a seizure of its .com website.

Whatever the merits of the Canadian prosecution against individuals affiliated with PlatinumSB, the seizure of the platinumsb.com domain name certainly shows that domain name seizure is by no means a tactic used only by U.S. law enforcement. As more and more businesses move largely or exclusively to the Internet, the global use of this law enforcement tactic is sure to grow.

Oct 22
2012

EC Set to Unveil Framework for Online Gaming Across Europe

On October 23, 2012, the European Commission will unveil a series of initiatives and actions that it plans to put into effect relating to online gaming with the overall goal of providing a better framework for online gambling services in the European Union.

One of the main problems that the European Commission is facing is the differences in rules and regulations among member nations governing online gambling. Currently, no EU legislation specifically applies to the online gambling industry, which generated $13.7 billion in earnings in the EU in 2010.

Sigrid Ligne, Secretary General of the European Gaming and Betting Association (EGBA), which represents companies offering online betting games, has said that this is an excellent opportunity for Europe as a whole to offer strong consumer protection in the gaming arena.

Ligne has said, “We deplore the situation today where we see 27 ‘mini-markets’ for gambling in Europe. We are calling for the introduction of European rules to ensure proper protection for consumers and maintain a crime-free environment throughout the EU, while affording open, fair, and transparent licensing conditions for EU-regulated operators.”

Private online gambling operators have expressed frustration with the EC for not forcing member states to open their online gambling markets. According to EU treaties, any business should be able to sell products and services in the EU countries as easily as it does in its own local market. The EGBA has accused the Commission of “failing in its role as guardian of the treaties” by not requiring member states to apply EU treaty rules in the online gambling sector.

Several European national governments, however, have opposed broader EU legislation because they want to protect betting monopolies that generate significant revenues for the state. The EGBA was hoping that the Commission would develop model legislation for its member states, but the Commission stated in June that it would only be developing an action plan at this stage, despite demands from the European Parliament for legislation. The action plan is expected to set out the Commission’s plan in the areas of consumer protection, fraud prevention and sporting integrity. The Commission could still develop legislative proposals in the future.

The EGBA has announced that it will file a complaint against Germany in the near future because its gambling law does not meet the criteria set forth by the EU Court of Justice or the concerns that the Commission raised. The EGBA has said the Germany’s procedure for granting licenses has led to the exclusion of non-German operators in violation of EU treaty rules. The law, which was ratified by 15 of the 16 German states in June, will only allow a limited number of sports-betting licenses and does not allow for online poker licenses. The Commission had been critical of Germany’s gambling law in the past, but gave Germany some time to test the rules before it intervened.

The EGBA is also challenging the Belgian gaming law that has been in place since January 2012, which it argues is an “opaque and protectionist system.” The EC has yet to rule on the challenge.

Time will tell what the European Union action plan will look like, but we think the European Union should strive for universal legislation across states. Universal legislation will allow for greater quality and consistency in games offered to consumers and allow for gaming operators to be more efficient in the delivery of their product by only having to focus on one set of regulations.

Jul 05
2011

U.K. Juror Gets 8-Month Sentence for Facebook Use

Eight months seems a harsh sentence for a juror who made some ill-considered Facebook posts. Harsh, that is, until you hear the facts. The proceeding against U.K. resident Joanne Fraill is one of the first contempt prosecutions ever against a juror for improper Internet use. And the punishment she received is a reminder that, when pushed, courts have both the power and the will to protect the integrity of the jury system and the rights of criminal defendants to a fair trial.

On June 16, 2011, Fraill was found in contempt of court for improper communications and Internet research she conducted while serving as a juror in a criminal trial. The case involved four defendants who had been charged with drug-related offenses, including Jamie Sewart and her boyfriend, Gary Knox.

The day after jurors acquitted Sewart, while the case was still pending against her three co-defendants, Fraill contacted Sewart on Facebook. Using the pseudonym “Jo Smilie,” Fraill messaged, “You should know me, I’ve cried with you enough.” Sewart replied and asked about a charge against one of her co-defendants. Fraill answered that “no one [on the jury was] budging.” Fraill then asked Sewart not to disclose their communications because “they could call mmiss trial [sic] and I will get 4cked to0.” Minutes later, Fraill told Sewart, “Dont worry about that chge no way it can stay hung for me lol.” The chat log further disclosed that the two had been communicating in court with nods and blinks.

The following day, Sewart told her attorney about the incident. When confronted, Fraill admitted that she had contacted Sewart to discuss the case and that she had searched the Internet for information about a shooting that involved defendant Knox.

In previous blog posts, we have considered the extent to which jurors should be restricted from Internet use during trial. The proliferation of iPads and smartphones raises difficult questions about how best to protect a defendant’s right to a fair trial while minimizing the burdens of jury service. But some cases are beyond the pale.

Fraill’s conduct seems indefensible for several reasons. First, Fraill understood the judge’s restrictions on case-related communications, and she took an oath promising not to research any aspect of the case on her own. Moreover, the chat log makes clear that she understood the potential consequences of juror misconduct. Indeed, Fraill knew that, if discovered, her conduct could result in a mistrial and that she could be punished for it. Nonetheless, Fraill blatantly disregarded the judge’s instructions.

If Fraill’s conduct were not bad enough on its own, other details seem to make it worse. The 10-week trial against Sewart and her codefendants was the third of four attempts by the prosecution to try the case. By the time Fraill was placed on the third jury, the case had already imposed considerable costs on Britain’s taxpayers and court system. Ultimately, the case involved 10,000 pages of evidence, 500 witnesses, 14 lawyers, and five juries over 160 days in court. More costs will be imposed as defendants, like Knox, appeal their convictions based on Fraill’s Facebook posts.

Given the context, Fraill’s eight-month sentence does not seem patently outrageous. Fraill’s extraordinary misconduct left the court little choice but to make an example of her.

Nov 02
2009

Not so Fast Kentucky

When the Commonwealth of Kentucky petitioned the Franklin Circuit County Court to seize www.fulltiltpoker.com, Pocket Kings Limited, asked a U.K Chancery Court to injoin FTP’s registrar, Safenames Limited, from complying with the Kentucky trial court order.  In an order dated October 22, 2009, the Chancery Court granted Pocket King’s request and declared that Safenames shall not comply with any present or future seizure order from the Commonwealth of Kentucky.  See Safenames-Judgment.  The Court also ordered the Commonwealth of Kentucky to pay Pocket Kings for legal fees incurred in bringing the petition. See Safenames Signed Order.

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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, 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, partners Michelle Cohen, David Deitch, and associates Rachel Hirsch, Jeff Hamlin, Steven Eichorn, Sarah Coffey, Nicole Kardell, Casselle Smith, and Griffin Finan. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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