Caroline D. Ciraolo quoted in "New Tools In Money Laundering Bill Could Be Used In Tax Cases", Tax Notes

A proposal under consideration in the Senate is facially targeted at money laundering, with only one overt mention of tax crimes, but it would provide a host of new tax enforcement tools.

The only reference to tax crimes in the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017 (S. 1241) is an extension of the definition of money laundering to include tax evasion as a predicate offense.

However, the bill includes other expansions of money laundering definitions — particularly concealment money laundering, and two new crimes for lying by or to a financial institution concerning the ownership of an account or assets involved in a transaction — that will become tax crime enforcement tools if the bill is enacted, according to practitioners. The two new crimes seem to cover the use of nominees to conceal beneficial ownership.

The bill would also expand the relevant definition of financial institution to account for virtual currency and prepaid access devices.

Further, the bill contains several enhancements to law enforcement tools that would affect tax crime investigations. In addition to restoring wiretap authority for money laundering investigations involving transaction reporting requirements and to allowing the government to freeze defendants’ bank accounts, the bill would provide for special subpoenas to foreign banks with correspondent accounts.

The correspondent account subpoena provision specifically excludes violation of the foreign bank’s home country secrecy laws as a basis for fighting the summons. In multiple provisions it also allows the subpoenas to require the subject banks to authenticate, as well as produce, the relevant records.

The bill was introduced May 25, and the Senate Finance Committee held a hearing on it November 28. It is sponsored by Finance Committee member and Senate Judiciary Committee Chair Chuck Grassley, R-Iowa, and cosponsored by ranking minority member Dianne Feinstein, D-Calif., Republican Majority Whip John Cornyn of Texas, Sens. Sheldon Whitehouse, D-R.I., and Amy Klobuchar, D-Minn., and Finance Committee Chair Orrin G. Hatch, R-Utah.

New Crimes

Bruce Zagaris of Berliner Corcoran & Rowe LLP said he could see the nominee crimes becoming staples of criminal tax enforcement efforts, including for hiding money offshore.

Scott D. Michel of Caplin & Drysdale Chtd. said the new nominee crimes would frequently fit the factual situations seen in offshore account tax cases, especially those seen since 2008. “It is, for example, not uncommon for someone who is setting up a foreign bank account for the purposes of hiding money to conceal their American status,” Michel said.

Under current law, the government could potentially charge that sort of concealment as either part of a conspiracy to defraud the government under 18 U.S.C. section 371, or possibly as tax obstruction under section 7212(a), subject to the Supreme Court’s eventual ruling in the appeal of United States v. Marinello, 839 F.3d 209 (2d Cir. 2016), Michel said. The two new provisions would codify specific offenses for misrepresentations connected to either opening financial accounts or ordering transactions, he said.

Michel said the expansion of concealment money laundering from “specified unlawful activity” to “some form of unlawful activity” would go even further than adding international tax evasion to the list of specified unlawful activities. By including any unlawful activity that generated proceeds, the expansion of concealment money laundering could apply to any number of offenses, tax or otherwise, that are now not “predicate acts,” he said.

“It is sort of a bank shot way of turning tax evasion into a predicate act for concealment money laundering, whether or not it has international overtones,” he said.

Caroline D. Ciraolo of Kostelanetz & Fink LLP said the nominee crimes seem both underinclusive and overinclusive. On the one hand, because the new provisions involve affirmative acts directed at a financial institution, they may miss conduct intended to conceal ownership in concert with that financial institution, she said. That sort of agreement between the bank and the client frequently appeared in concealed Swiss bank accountcases, she said.

“One of the defenses could be ‘the financial institution was in on it; I didn’t conceal anything from them,’” Ciraolo said.

The provisions also seem overly broad because they may catch mere attempts at maintaining privacy, Ciraolo said. She raised the possibilities of celebrities trying to avoid attention and abused spouses trying to escape their abusers.

“This seems like there should be something more than merely concealing or attempting to conceal a material fact concerning the ownership or control of an account or asset,” Ciraolo said. “I would like to see illegal conduct otherwise associated with this before it subjects someone to a 10-year felony. I understand that some may point to the felony for failing to file [a foreign bank account report] to support this proposed provision; however, many prosecutors are reluctant to indict someone for failing to file an FBAR when that same individual has complied with all tax obligations, and there is no evidence of other illegal conduct.”

New Tools

Michel said the expansion of the correspondent account subpoenas would “overrule traditional international standards of comity that have governed cases like this for decades.” Normally, when the United States issues a Bank of Nova Scotia subpoena to a bank, that bank can raise violation of local law as a defense in a court proceeding to enforce the summons, he said.

So-called Bank of Nova Scotia subpoenas — named for In re Grand Jury Proceedings (Bank of Nova Scotia), 691 F.2d 1384 (11th Cir. 1982) — are served on a U.S. branch of a foreign financial institution to seek documents held at one of the bank's foreign locations.

Though the United States wins nearly all the cases weighing foreign privacy interests against domestic enforcement interests, under the current system “there is at least attention paid to the fact that the law of another sovereign jurisdiction is at issue,” Michel said. The subpoena expansion proposed in the bill would overrule that consideration in a situation in which the bank would face the possible loss of its ability to conduct business in dollars if it does not comply with the subpoena, he added.

While Congress may well decide to adopt the proposal, it should consider the loss of the procedure allowing courts to evaluate the possible conflict between U.S. and foreign law, according to Michel. Without that procedure, “I think the United States can increasingly expect to be on the receiving end of similar legal process in other jurisdictions,” he said.

Ciraolo said the expansion of the PATRIOT Act subpoenas — and in particular the requirement that foreign banks authenticate the records produced — would be “one of the more important, biggest tools that is coming out of this legislation.” Under current law, even if the government obtains documents using a Bank of Nova Scotia summons or subpoena or a PATRIOT Act subpoena, the foreign bank providing the documents is not required to certify or provide testimony authenticating them, she said.

Without certification or an employee of the bank to authenticate, prosecutors have been unable to offer the records as evidence in court, Ciraolo added. “As a result of these hurdles, and the added obstacle of foreign bank secrecy and data protection, the government’s use of existing tools has been infrequent. Under the current version of S. 1241, we are sure to see an increase in subpoenas for records located outside the United States,” she said.

The Justice Department and the IRS "are now looking at going after people who are conspiring in their structuring of transactions to evade reporting requirements,” Zagaris said. While the push is independent of it, the bill will help with that push, he said.

Zagaris said the indictment of Paul Manafort “also indicates a trend of using violation of transparency laws — namely the Foreign Agents Registration Act and Foreign Bank Account Reports — to bring money laundering charges.”

Adding prepaid access cards and digital currency to the issuer money laundering definition mirrors actions the European Union took December 15, Zagaris said. Further, the expansion of correspondent account subpoenas could be significant, he said.

Tax Division’s Role

Zagaris said that what role the Justice Department Tax Division plays in both the new nominee crimes and the expansion of money laundering to include tax evasion as a predicate offense would be an interesting question. Normally, the Tax Division has to approve tax-related prosecutions pursuant to section 25.00 of the department’s Criminal Tax Manual.

“Presumably, they are still going to need to go to the Tax Division to get approval,” Zagaris said. “But who knows? Maybe as a result of this, somebody may decide that they no longer have to do that.”

The Justice Department’s Tax and Criminal divisions would have to coordinate jurisdiction of the new nominee crimes and the money laundering expansions, Michel said. “Tax Division Directive 128 provides that Tax Division authorization is required in any case where a federal prosecutor seeks to charge a money laundering or fraud offense based on conduct constituting a violation of tax law. It would be in the interest of tax administration for the Tax Division to continue to retain this authority even if this bill passes Congress,” he said.

It would be better to avoid a situation in which a large number of nontax prosecutors are bringing money laundering cases based on tax crimes because “the Tax Division exists to ensure uniformity and consistency and a high level of expertise in evaluating criminal tax prosecution,” Michel said. “That system has served tax administration well.”

“It would be a mistake if this new legislation became a mechanism to undermine the Tax Division’s authority by allowing prosecutors, whether in the Criminal Division or the U.S. Attorneys’ offices, to take on these new types of money laundering cases where tax offenses constitute predicate acts without Tax Division review and approval,” Michel said.

Ciraolo, a former head of the Tax Division, said prosecutors would need authorization from the Tax Division before charging the new offense because the conduct alleged arises under the internal revenue laws, and the Tax Division has a long-standing policy of rejecting attempts to convert routine tax crimes into money laundering offenses. The extra layers of review may deter some prosecutors from using the expansion, she said.

What the Future May Hold

Zagaris said he expects the bill to become law, citing the three sponsors from each party, the uniform support from the seven witnesses at the Senate Finance hearing, and support for similar ideas at a hearing held in the House a day later. While the House hearing concerned a different bill, all the speakers cited the same concerns about collecting beneficial ownership information and improving intergovernmental information exchange, he said.

“There seems to be growing momentum on behalf of the idea that our money laundering laws haven’t been changed since 2001 — since the USA PATRIOT Act — and that for a number of reasons, we need to act,” he said.

“I don’t know if [S.] 1241 will pass,” Ciraolo said. “These are not new concepts. Several provisions, including the expansion of the international prong of the money laundering statute to include tax crimes, were proposed by the department under the Obama administration.”

Even so, foreign banks with U.S. correspondent accounts should take notice, Ciraolo noted. “Now is the time for foreign financial institutions to review their know-your-customer and anti-money-laundering compliance programs, incorporate anti-tax-evasion provisions, conduct thorough risk assessments, and if warranted, reconsider relationships that may result in the receipt of a grand jury subpoena.”

“It’s becoming harder and harder for criminal organizations and individuals intent on violating the law to find places to hide their money, and this is another step in that direction, but the money laundering statute should not be a replacement for, or a means to increase statutory maximums under, Title 26 charges related to tax evasion or filing of false returns,” Ciraolo said.

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