This article first appeared on FEE.org – you can access this version at http://fee.org/freeman/detail/bureaucracy-unlimited
Big Gov and Big Biz. Are they holding hands, shaking hands, or boxing? It depends on the day and the issue. But while Big Biz hardly seems like a sympathetic character, Big Gov always has the upper hand.
Remember Arthur Anderson? Perhaps not. It used to be the biggest accounting firm around. Then the Justice Department went after it with little proof but lots of gusto. The megalith firm fought the law, and the law won (temporarily). The Department of Justice obtained a criminal conviction against the firm that was the equivalent of a death sentence: the company lost its reputation and therefore lost its clients. By the time the Supreme Court overturned the conviction, it was a pyrrhic victory for the defunct firm.
Through Arthur Anderson, companies learned that no matter how big you are, the government is bigger. When the government comes after you, stand down and don’t fight.
Do you care that Big Gov picks on Big Biz? While Big Gov is busy starting wars of attrition with Big Biz, it is building out its bureaucratic infrastructure — all while sharpening a strategy that means it can’t lose. And that’s everyone’s concern. Companies regularly acquiesce to government demands and pave the way for what I’ll call enforcement creep — de facto lawmaking whereby government agencies use the threat of costly litigation, the threat of multiple agency investigations, or the threat of Arthur Anderson’s sad fate to gain settlements with defendants, even when the companies haven’t committed any significant wrongs.
These settlements often exceed the scope of existing laws and regulations, more accurately reflecting what the agencies want, not necessarily what the law requires. Agencies thus further their policy initiatives — including those not defined by statute or by implementing regulations — on an ad hoc basis, outside the purview of traditional lawmaking.
Here are two examples of how enforcement creep plays out.
In May 2014, the Consumer Financial Protection Bureau announced a $96.6 million settlement against student loan servicer Sallie Mae (now Navient Solutions). The agreement was to settle allegations that the company failed to reduce interest rates on loans to military members as required under the Servicemembers Civil Relief Act (SCRA). In the settlement agreement, Sallie Mae didn’t admit to any wrongdoing (a typical agreement term) but nonetheless agreed to pay fines and restitution. It also agreed to institute new measures to ensure compliance with the SCRA.
Here’s the kicker: the new measures require that Sallie Mae not only comply with current law, but go several steps further. That is, current law puts the burden on service members to seek loan reduction relief, but the consent order shifts the burden to Sallie Mae. It requires that the company presume loan reduction requests based upon service member actions (such as a request from the service member for another form of relief). It also requires the company to undertake other measures proactively to seek service member rate reductions (such as creating an online intake form and training designated customer service representatives to advise on SCRA protections).
It probably seemed to government regulators that the loan servicer, instead of the service member, was in a better position to bear the burden of looking after SCRA rights. And so they shifted that burden through an investigation and settlement with a major loan servicer — as opposed to going through the more public rulemaking process and requesting that Congress revise the law.
Here’s another example. In September 2014, Costco settled charges with the Environmental Protection Agency. The government authorities alleged the company violated the Clean Air Act by failing to repair refrigerant leaks and failing to keep adequate records of the servicing of its refrigeration equipment. The consent decree, in which Costco admitted no liability, requires that the company cut its leak rate to almost half the legal maximum over the next three years. (The decree requires Costco to achieve corporate-wide average leak rates of 19.1 percent; the regulations, 40 C.F.R. § 82.156 and EPA guidance, provide a legal leak rate maximum for commercial refrigeration equipment of 35 percent.)
The agreement requires the company to retrofit, replace, and install systems in a manner that similarly appears to surpass legal standards. Comparing the EPA guidance with the consent decree, the decree looks like a big leap from current regulatory requirements. The settlement agreement terms sound a lot more like policy objectives, in keeping with the EPA’s GreenChill initiative, than legal standards.
Give us your lunch money
It’s okay to encourage companies voluntarily to adopt more rigorous environmental standards than the law requires, but when a company’s decision not to comply can result in steep sanctions, the decision is no longer voluntary. So when the government looks for excuses to impose extralegal preferences, it starts to sound less like cheerleading and more like bullying. Think of it this way: it is still legal to encrypt your smartphone, but would you feel free to do so if you knew that the police were investigating everyone pursuing that form of privacy?
Where companies don’t do anything wrong, or where the wrongs committed pale in comparison to the punishment exacted, why do they settle with the feds? It has a lot to do with cost-benefit analysis. Rational parties will assess whether it makes financial sense to defend their positions in protracted litigation or to settle and move on. Since legal defense can be very costly, accepting a reasonable penalty that frees time and economic resources may seem like the best option. It’s similar to the pressure on someone charged with a serious crime, even when they are innocent, to plea bargain rather than face the expense of a long legal defense and the real possibility of a wrongful conviction. Plus, these companies don’t want to face significant bad press or a conviction that could effectively shutter operations. So Big Biz stands down; Big Gov expands its legal reach by applying an extralegal strategy of legislation by threat.
The companies entering into settlement agreements will obviously have to adopt the terms of those agreements or be in breach. But they are not the only ones looking carefully at applying settlement terms. Other companies with similar business practices will recognize a world of limited choices: adopt the government’s policy objectives or prepare for your time in the ring. New de facto law is made outside the courts, outside Congress, and entirely outside the public sphere. The extent to which Big Biz could once serve as a check on Big Gov fades into history, as enforcement creep becomes the new reality.
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.
This week, the United States Supreme Court resolved some fishy matters on which prosecutors sought to base a federal felony conviction.
The case, Yates v. United States, arose from a offshore inspection of a commercial fishing vessel in the Gulf of Mexico. During the inspection, a federal agent found that the ship’s catch contained undersized red grouper, in violation of federal conservation regulations. The agent instructed the ship’s captain, Mr. Yates, to keep the undersized fish segregated from the rest of the catch until the ship returned to port. But after the officer left, Yates instead told a crew member to throw the undersized fish overboard. Yates was subsequently charged with destroying, concealing and covering up undersized fish, in violation of Title 18, United States Code, section 1519. That section provides that a person may be fined or imprisoned for up to 20 years if he “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence” a federal investigation.
At trial, Yates moved for a judgment of acquittal on this charge, noting that the provision was part of the Sarbanes-Oxley Act of 2002. That law was designed to protect investors and restore trust in financial markets after the collapse of Enron Corporation. Yates argued that the reference to “tangible object” was meant to refer to objects that store information, such as computer hard drives, and did not refer to fish. The Court denied the motion and the jury convicted Yates, and the Eleventh Circuit Court of Appeals affirmed the conviction, finding that fish are objects having physical form, and therefore fall within the dictionary definition of a “tangible object.”
In a majority opinion authored by Justice Ginsburg (and joined by the Chief Justice, Justice Breyer and Justice Sotomayor), the Court relied upon “[f]amiliar interpretive guides” in ruling that the “tangible object” to which section 1519 referred was indeed used to record or preserve information. In so ruling, the Court placed significant emphasis on context – in particular, the other parts of Title 18, Chapter 73. The Court noted Congress placed section 1519 at the end of that chapter immediately after pre-existing specialized provisions expressly aimed at corporate fraud and financial audits. The Court also noted the contemporaneous passage of section 1512(c)(1), which prohibits a person from “alter[ing], destroy[ing], mutilat[ing], or conceal[ing] a record, document or other object . . . with the intent to impair the object’s integrity or availability for use in an official proceeding” – a provision that would be unnecessary if section 1519’s reference to “tangible object” already included all physical objects. The Court also applied the statutory interpretation canons of noscitur a scoiis (“it is known from its associates”) and ejusdem generis(“of the same kind”), noting that beginning the provision with “any record [or] document” directs that the “tangible object” later referenced must be one used to record or preserve information. The Court also noted that the rule of lenity required that it resolve the dispute against finding criminal liability here. Justice Alito filed a concurring opinion relying on a narrower basis, while Justices Kagan, Scalia, Kennedy and Thomas dissented from the Court’s ruling.
The Court’s opinion in Yates makes for good reading for aficionados of classic statutory interpretation, and the Court’s decision to find that the scope of the statute was narrower than suggested by the government is a welcome respite from the seemingly ever-increasing scope of crimes in the U.S. Code. Congress could certainly pass legislation to make clear if it intended to include other tangible objects in the scope of this provision. But for now, tossing back the little ones does not constitute a SOX crime.
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.
It’s not every day that a federal court likens an Assistant U.S. Attorney’s argument to that “of a grade schooler seeking to avoid detention.” But, in a recent opinion, Judge Emmet G. Sullivan of the D.C. District Court did just that. In so doing, he reminded us that—despite the government’s (admitted) routine abuse of its subpoena power—the privacy rights of inmates matter, and a standard practice is not tantamount to a legal basis.
The overall case, one involving an alleged conspiracy to commit visa fraud, had taken some rare procedural twists before landing in Judge Sullivan’s courtroom: for example, the government had effectively incarcerated Ms. Truc Huynh (a former co-defendant) to postpone her deportation to Vietnam and ensure her availability to testify at a deposition against a remaining co-defendant. The primary issue addressed in Judge Sullivan’s recent ruling, however, was whether the U.S. Attorney’s Office violated the law when it issued subpoenas to the Central Treatment Facility (a local jail) for Ms. Huynh’s visitation logs, call logs, and recorded telephone calls—without notifying the Court, Ms. Huynh, or the defendant against whom Ms. Huynh was set to testify.
As a general matter, Rule 17 governs the issuance of subpoenas in criminal cases and allows the government to subpoena a witness to testify at a hearing or trial and may require the concurrent production of documents. It does not, however, allow for pretrial fishing expeditions for potentially relevant information. But that is precisely what the government had done in this case by “inviting” the jail to comply with the subpoena by promptly providing the requested documents directly to the Assistant U.S. Attorney handling the case. Within a matter of days, the jail complied with the production of 200 recordings, which were in Ms. Huynh’s native Vietnamese.
After having initially agreed to the defendants’ request for English language transcripts, the government later argued that compliance would be unduly burdensome because (upon review) the calls appeared to be irrelevant to the case. In so doing, the government showed its hand: the Assistant U.S. Attorneys had, essentially, used the Court’s subpoena power to conduct a fishing expedition into Ms. Huynh’s private phone calls without specific reason to believe that the calls would be admissible at trial.
To make matters worse, a similar subpoena had been issued for the remaining defendant’s jailhouse calls. When defense counsels moved to quash the subpoenas, the Assistant U.S. Attorneys failed to offer any legal authority in support of their actions—arguing instead that this was their general practice and they didn’t know of any authority saying they couldn’t. Fortunately for the defendants, Judge Sullivan—known for holding the government to account (see, e.g., his handling of the Ted Steven’s trial and the IRS scandal)—was not inclined to excuse such behavior. At oral argument, the Judge pushed back, “So that’s your authority: There’s nothing that says we can’t do it?” and the Assistant U.S. Attorney responded: “Right … That’s my authority.” The Court was not persuaded.
In his written opinion, Judge Sullivan held that the government had, indeed, overstepped Rule 17 by “inviting” the subpoena recipient to provide pretrial production of the documents requested. The government’s assertion—that an “invitation” for pretrial discovery did not obligate pretrial discovery—was of no moment, neither were its arguments that defendants lacked standing. Judge Sullivan made clear that “[b]ecause subpoenas are issued with the Court’s seal and backed by the threat of court-posed sanctions, the mere fact that an attorney abuses the subpoena power directly implicates the court itself and creates an embarrassment for the institution.”
In the end, Judge Sullivan boldly vindicated the privacy interests of these individual defendants. It remains to be seen, however, if his opinion will stymie the government’s practice of “inviting” pretrial discovery without court approval. If nothing else, perhaps the Assistant U.S. Attorneys appearing before Judge Sullivan will think twice before doing so.
Many small business government contractors may have to rethink the way they do business. The Small Business Administration issued a proposed rule at the end of December to implement provisions of the National Defense Authorization Act of 2013. The NDAA, which was signed into law in January 2013, requires several significant modifications to the rules for small business concerns, including changes to the Limitations on Subcontracting Rule (13 C.F.R. 125.6).
The proposed rule suggests a number of changes that would impact small businesses qualifying under one or more of the size or socioeconomic categories for set-aside contracts. These changes would (1) require companies to change how they determine compliance under §125.6, (2) require them to certify compliance in the bidding process, and (3) impose steep monetary penalties for delinquencies.
The Limitations on Subcontracting rule limits the extent to which prime contractors may subcontract obligations to outside entities, say to large companies that would not themselves qualify for a government set-aside. Under the current rule, a cost-based metric controls what prime contractors on set-aside contracts can subcontract to other entities: the prime must incur a certain percentage of the contract costs. For instance, for services contracts, a prime contractor must “perform at least 50 percent of the cost of the contract incurred for personnel with its own employees.” Section 125.6 currently provides different cost-base ratios based upon the type of contract (e.g., services, supplies, construction) and the type of set-aside (e.g., 8(a), SDVOB, HUBZone).
The proposed rule, if implemented, would alter how limitations are calculated, using an income-based, as opposed to a cost-based, metric. Under the proposed rule, prime contractors on set-aside contracts would be required to keep in-house a certain percentage of income—including passive income—paid by the government. For services and supply contracts, no more than fifty percent of the amount paid under the contract could be passed on to subcontractors; for construction no more than eighty-five percent; and for specialty trade, no more than seventy-five percent. (note that these are the same ratios used under the current cost-based metric, but now apply to the income-based metric). There no longer would be a distinction in ratios based upon type of set-aside, however.
An important exception to the rule would exist for “similarly situated entities.” Maintaining the philosophy behind the set-aside program, the proposed rule would allow prime contractors to contract out to companies who also qualify under their set-aside category without that relationship counting towards the income limit. In other words, the entities would be treated the same for purposes of the Limitations on Subcontracting rule. For instance, an SDVOB could subcontract out a services contract to another SDVOB and that contract relationship would not count towards the fifty percent income limit. However, the subcontractor must qualify under the same set-aside category as the prime in order to take advantage of this exception.
Another exception is that the rule would not apply to contracts valued under $150,000.
Closing a former loophole, the revised §125.6 would count all levels of subcontractor relationship, not just to the first prime-sub relationship. So companies could not get around the subcontract limitation through subcontracting out under the subcontractor.
In order to satisfy the new Limitations on Subcontracting rule, companies would need to address the rule in their contract bids for set-aside contracts. They would be required to certify that they can satisfy the rule. They would further be required to identify any similarly situated entities they planned to subcontract with and to what extent (percentage) they planned to subcontract with them. Any post-award changes would need to be presented to the contracting officer.
Unlike in the past, the proposed rule would institute steep penalties for non-compliance with the Limitations on Subcontracting rule. Companies found violating the rule would be subject to fines “the greater of either $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting.”
The SBA’s proposed changes may seem staggering to small businesses that have carefully defined their business relationships to remain compliant under the current cost-based regime. But the changes could ultimately help to ensure the viability of the SBA’s set-aside programs. When small and disadvantaged prime contractors subcontract the bulk of their work to large businesses, they call into question the purpose of the set-aside structure. Those interested in presenting comments on this proposed change may submit their comments through regulations.gov by February 27, 2015.
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.
Photo Credit: Steve Helber, AP
This afternoon, the long-running saga of Robert McDonnell came to what may be the end (not counting appeals) when the former Virginia Governor was sentenced to serve two years in prison after a jury convicted him of bribery while in office. As with many cases, this one has lessons to teach for those of us who carefully follow sentencing advocacy in federal criminal cases.
One lesson that we have observed before – but is worth repeating – is how powerful it can be to present a sentencing judge with written or spoken testimonials about the otherwise good character of the defendant. In the presentence report, the Probation Department had recommended an advisory sentencing range under the U.S. Sentencing Guidelines of more than ten years, though the judge concluded that the proper advisory range was 6-1/2 to 8 years. But the defense presented some 440 letters in support of the former Governor, as well as live testimony from a number of witnesses. Even the Assistant United States Attorney, who asked for a harsh sentence to be imposed on Mr. McDonnell, conceded that the letters and testimony were moving.
That, of course, is the point: When a criminal defendant – especially one convicted by a jury that rejected his testimony – comes before a judge for sentencing, all that the judge knows about him is that he has committed a crime. Letters and testimony help the defense to present the judge with a three dimensional human being, and facilitate the judge’s fuller consideration of the imposition of a fair and just sentence. In the case of Rajat Gupta, Judge Jed Rakoff was moved by the letters of hundreds of supporters to sentence him to a two-year sentence despite prosecutors’ calls for a sentence of ten years in prison. Here, Judge James Spencer was likewise motivated by evidence of Mr. McDonnell’s character to find that a sentence of eight years “would be unfair, it would be ridiculous, under these facts.”
But there is also a second lesson to be learned from Mr. McDonnell’s sentencing, and it is also one that is often repeated: No one is above the law, and indeed, we may hold our public officials to a higher moral standard in their conduct. Judge Spencer’s comments at sentencing reflected this view: “A price must be paid,” he said. “Unlike Pontius Pilate, I can’t wash my hands of it all. A meaningful sentence must be imposed.” For that reason, among others, Judge Spencer rejected defense lawyers’ calls for a non-incarceration sentence that they had suggested, which could have included thousands of hours of community service.
What were you doing Wednesday, November 5, 2014? If you are a staunch Republican, you might have been toasting the election results from the day before, dreamy-eyed and dancing. If you are a staunch Democrat, you might have been scratching your head profusely, thunderstruck and quiet. People across the country were talking politics and policy in a very public way that day. How would the results impact executive actions and legislative initiatives on immigration and healthcare? It seemed as though the democratic process was chugging along. Meanwhile, at the Thurgood Marshall Federal Judiciary Building in D.C., a little-publicized hearing with potentially far-reaching consequences to your privacy rights was taking place.
The hearing was before the Judicial Conference Advisory Committee on Criminal Rules. The topic for discussion was proposed rule changes to the Federal Rules of Criminal Procedure. The Justice Department had requested the regulatory body modify slightly Rule 41(b), which outlines the terms for obtaining a search warrant. So far so boring, right? And what does any of this have to do with you, a law-abiding citizen? No wonder that the hearing captured little attention. But the slight modification that the DoJ requested is nothing to yawn at. It is a rule change that would give federal investigators sweeping powers to access computers and electronic devices not only of their targets but also of anyone else whose online path crosses investigator initiatives. As civil liberties advocates have pointed out: the rule change could pose a serious threat to Fourth Amendment protections and privacy rights.
Last year, the DoJ requested Rule 41(b) be amended to permit courts to issue search warrants allowing remote access searches of computers and other electronic storage media when the location is concealed. The provision would further allow investigators to seize electronically stored information regardless of whether that information is stored within or outside the court’s jurisdiction. The request, especially when you consider how it would be carried out in practice, is a big leap from current procedure. As it currently stands, Rule 41(b) only allows (with limited exceptions) a court to issue a warrant for people or property within the court’s district. In order to keep a check on investigators and investigations, the rules impose this location limitation, among other limitations. The point is to not give investigators free reign to look in on whomever, wherever and whenever they choose; the point is to limit the impact their investigations could have on people’s right to privacy.
Courts and Congress have made it clear that to comply with the Fourth Amendment, a search warrant that involves surreptitious and invasive tactics must meet a number of rigorous safeguards. These safeguards were outlined in the 1960s when wiretapping and bugging developed as the investigative tools of choice. In 1967, the U.S. Supreme Court struck down New York state’s wiretapping law, holding that because electronic eavesdropping “by its very nature…involves an intrusion on privacy that is broad in scope,” it should be allowed only “under the most precise and discriminate circumstances.” Berger v. New York, 388 U.S. 41 (1967). The following year, Congress followed the Court’s cue and outlined those “precise and discriminate circumstances” in the Wiretap Act (a.k.a. Title III of the Omnibus Crime Control and Safe Streets Act of 1968). For a search warrant to be valid, the issuing judge must work through a number of questions to ensure the warrant will be sufficiently circumscribed to meet the Fourth Amendment’s particularity requirement and that it is based upon probable cause. These constraints help to ensure, among other things, that investigators don’t go on fishing expeditions in pursuit of a crime as well as a criminal or that investigators don’t otherwise misuse their ability to peer into the lives of individuals (say to badger someone with a different political affiliation).
Remote access searches of electronic devices are no less invasive than the forms of electronic eavesdropping envisaged in the Wiretap Act. As the Supreme Court recently pronounced in Riley v. California, the search of a modern electronic device such as a smartphone or computer is more intrusive to privacy than even “the most exhaustive search of a house.” 134 S. Ct. 2473, 2491 (2014). The proposed change to Rule 41 could short circuit the procedural safeguards in place and demand we carry out a fiction that somehow remote access searches are not a form of electronic eavesdropping demanding heightened standards (this would be a particularly challenging fiction if you consider that remote access searching could allow investigators to activate a device’s camera or microphone).
While the DoJ’s requested changes would not necessarily override requirements of the Wiretap Act, the Rule 41 amendments could facilitate statutory and constitutional violations. This concern, among a host of others, was well articulated by the American Civil Liberties Union in its comments on the rule change. (If you have the time, it is a worthwhile exercise to review the comments submitted by the ACLU and the Center for Democracy & Technology, among others that outlined the anticipated negative consequences of the proposed rule change.) Chief among the concerns are the risk that investigators’ techniques to gain remote access—such as hyperlinks on public pages (“watering holes”), where users with common interests tend to gather—could subject thousands of non-suspect individuals’ electronic devices to the government’s malware.
It remains to be seen what the Judicial Conference Advisory Committee will decide, whether they choose to rubberstamp the DoJ’s proposed amendments or whether they will stand down and submit the question to public and legislative debate. Considering the DoJ’s request raises significant constitutional questions, we can only hope the Committee recognizes the value of airing the matter before a more public forum where the system of checks and balances remains in place.
At the very core of judicial independence is the notion that courts and judges decide matters in accordance with the evidence and legal precedent, independent from political power or outside controls. The question of whether a bipartisan and independent judiciary is still alive and well in New Jersey has been called into question recently, as Governor Christie has been accused of packing the state supreme court with only those judges with whom he asserts his influence and will rule his way.
Since the New Jersey state constitution was ratified in 1947, every sitting state supreme court justice has been re-nominated for tenure by the governor after his or her initial seven-year term, regardless of whether the governor agreed with the justice’s rulings. . . until now. The seat of Justice John Wallace has been vacant since May 2010, after Christie failed to grant him tenure following his initial seven-year term. There is fear that Christie has created a climate in which fair and impartial justices fear for their futures if he doesn’t like a ruling. Some criminal defense lawyers believe that a signal is being unfairly sent to judges that they have to align their decisions with those of Governor Christie in order to seek reappointment, which may be detrimental to their clients’ interests, given that Christie has promised to make New Jersey courts more conservative.
The New Jersey State Bar Association created a task force earlier this year to study this issue of New Jersey judicial independence with a goal of producing a report that will contain recommendations for preserving the independence of the New Jersey judiciary. The task force held four hearings over the past several months and also accepted written comments during the same time period, all on the subject of judicial independence in New Jersey. It is anticipated that the Task Force will submit its report in the near future.
In the meantime, as a result of this standoff between Governor Christie, a Republican governor looking to nominate judges who will decide his way, and a democratic state Senate, which must confirm all of the Governor’s picks for the bench, a political stalemate has been created. Individual state senators also have the power to block appointments in their home counties – for any reason and without the need to give a reason, although several experts believe that this unwritten custom of “senatorial courtesy” should be abolished. Many blame this practice in part for holding up reasonable negotiations and preventing entire packages of judges from getting through to fill vacancies in the courts. Over the past six decades, senatorial courtesy has become a tool that can and has been used as a bargaining chip in bitter partisan battles.
This fall, the number of sitting judges in New Jersey hit the lowest point in almost 15 years, with rising case backlogs. Several counties in New Jersey face judicial vacancy rates greater than 20%. As a result, parties can sit for months in legal logjam, due to longer wait times and judges who are stretched beyond their capabilities. This can be particularly difficult for people seeking divorce or custody settlements or business disputes or criminal complaints. In August, Governor Christie and the state Senate reached a deal to fill eight such vacancies, which left a whopping 44 judicial vacancies or roughly 10% of the judicial seats in the state.
To help reduce the number of open seats and to keep the case calendar moving, court officials have called back retired judges, as it is a much easier process to call back retirees than the lengthy and cumbersome process of appointing new judges. As of November 6, there were 77 judges in Superior courts who reside on the bench past the mandatory retirement age of 70, alongside 392 active Superior Court judges. However, this practice of calling back retired judges is being challenged before the Supreme Court of New Jersey in State v. Buckner.
The Appellant Buckner was convicted of armed robbery and assault in 2012 and is currently serving a nine-year sentence. He argues that he is entitled to a new trial because the judge who convicted him retired in 2008 at the age of 70 but was recalled the same year. If he is successful in his challenge to judicial recall of judges past mandatory retirement age, the vacancy problem could become much, much worse. On the flip side, a constitutional amendment has been introduced in the New Jersey legislature to raise the mandatory retirement age from 70 to 75, which would help to alleviate some of the need to recall judges.
Some would say that New Jersey courts are at a crisis point. Partisan bickering and stubbornness must give way to action for the benefit of the millions of New Jerseyans who use the New Jersey court system each year.