IELR Blog

Official Blog of the International Enforcement Law Reporter

U.S. Tax Court Rules Against Constitutional Challenge to Passport Denial for Delinquent Taxpayers

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On March 30, 2021, the United States Tax Court granted summary judgment to the Internal Revenue Service with respect to a taxpayer debtor/physician’s constitutional challenge to the IRS’ certification of the delinquent tax debt under IRC, § 7345.  The taxpayer’s outstanding tax balance was close to $500,000 and so the IRS turned to a new tool in its collection toolbox – § 7345.1.  Under this section, the IRS certified that Robert Rowen, the taxpayer, had a seriously delinquent tax debt to the Treasury secretary, who then transmitted the certification to the State Department.  The IRS notified Rowen of the certification.  At the time of the suit and the Tax Court’s opinion, the State Department had not taken any action concerning Rowen’s passport.  Nevertheless, Rowen petitioned the Tax Court, challenging the IRS’s certification as unconstitutional and a violation of the Universal Declaration of Human Rights (UDHR).

Opinion

The court held that the certification does not deny his right to travel or his rights under the UDHR.

Judge Emin Toro authored the court’s opinion and observed that this is the first time the court has considered the merits of certification under 26 U.S. § 7345.  Judge Toro observed that §7345 was enacted as part of the Fixing America’s Surface Transportation Act (FAST Act).   The opinion explains that the IRS certifies the delinquent tax debt and sends it to the Treasury secretary, who must then transmit the certification to the State Department.  The State Department can revoke, deny, or limit a tax delinquent individual’s passport.

The opinion rejected Rowen’s argument that § 7345 violates his due process rights under the Fifth Amendment since it forbids international travel.  Rowen claimed such travel is a fundamental right.  The opinion ruled that claim was meritless since the plain text of the statute does not prohibit international travel.  The opinion observed that § 7345 only certifies that an individual has a serious tax delinquency.  Thereafter, the State Department makes any passport-related decisions.    The opinion also rejected Rowen’s claim that §7345 violates his right to travel under the UDHR, since the statute does not impose a limit on the right to travel.

According to the opinion, Rowen’s procedural due process and statute of limitations claims do not have merit because he did not make such arguments in his summary judgment motion.  In addition, Rowen to not introduce evidence establishing that the period of limitations has elapsed.  The opinion found that the IRS’s certification was not erroneous and that the IRS met the requirements for certification under § 7345.  Hence, the IRS was entitled to summary judgment.

Judge Paige Marvel wrote a concurring opinion, stating that the court’s opinion does not foreclose a constitutional challenge in a future case with appropriate facts and squarely presented arguments to the entire tax collection mechanism created by FAST.

Analysis

Clearly the taxpayer’s petition and request for summary judgment were flawed in their efforts to challenge one of the new mechanisms to collect taxes.

The current issue of the IELR will discuss the implications of the case in more detail.

FinCEN Starts Beneficial Ownership Regulation Comment Period and Announces Staff Changes

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On April 1, 2021, the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM) to request public comment on a wide range of questions related to the implementation of the beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA).

Advance Notice of Proposed Rulemaking

This ANPRM is the first in a series of regulatory actions that FinCEN will undertake to implement the CTA, which is included within the Anti-Money Laundering Act of 2020 (AML Act).  The AML Act is part of the FY 2021 National Defense Authorization Act, which became law on January 1, 2021.

The CTA amended the Bank Secrecy Act.  The CTA requires corporations, limited liability companies, and similar entities to report certain information about their beneficial owners (the individual natural persons who ultimately own or control the companies).  This new reporting requirement will enhance the national security of the United States by making it more difficult for malign actors to exploit opaque legal structures to launder money, finance terrorism, proliferate weapons of mass destruction, traffic humans and drugs, and commit serious tax fraud and other crimes that harm the American people.

Pursuant to the CTA, FinCEN  must  maintain the reported beneficial ownership information in a confidential, secure, and non-public database.  In addition, the CTA authorizes FinCEN to disclose beneficial ownership information subject to appropriate protocols and for specific purposes to several categories of recipients, such as federal law enforcement. Under the CTA, FinCEN must revise existing financial institution customer due diligence regulations concerning beneficial ownership to take into account the new direct reporting of beneficial ownership information.

FinCEN encourages all interested parties, particularly those that would be affected by the beneficial ownership information reporting provisions or would seek access to reported beneficial ownership information, to submit written comments.  The comments can come from interested persons outside the U.S.   Such written comments will help inform FinCEN’s implementation of all aspects of the beneficial ownership reporting rulemaking.

Comments should be submitted by May 5, 2021.

This ANPRM seeks comment on FinCEN’s implementation of certain provisions in Section 6403 of the CTA. Section 6403 requires reporting companies (corporations, limited liability companies (LLCs), and similar entities, subject to certain statutory exemptions) to submit to FinCEN specified information on their beneficial owners—the individual natural persons who own or control them—as well as specified information about the persons who form or register those reporting companies. Section 6403 further requires FinCEN to maintain this information in a confidential, secure, and non-public database, and it authorizes FinCEN to disclose the information to certain government agencies for certain purposes specified in the CTA, and to financial institutions to assist in meeting their customer due diligence obligations. In both cases, these disclosures are subject to appropriate protocols to protect confidentiality. This ANPRM seeks comment on numerous questions as FinCEN begins to develop proposed regulations implementing these provisions.

While only the regulations implementing the reporting requirements must be promulgated by January 1, 2022, with an effective date to be determined. FinCEN also requests comment on its implementation of the related database maintenance use and disclosure provisions. Section 6403 requires that the final rule on customer due diligence requirements for financial institutions be revised will be the subject of a separate rulemaking, about which the public will receive notice and opportunity to comment.

Staff Changes

Today, FinCEN announced a change in staff. Director Kenneth A. Blanco announced he will depart FinCEN on April 9, after serving as the organization’s director since December 2017. Michael Mosier, former FinCEN Deputy Director and current Counselor to the Deputy Secretary of the Treasury, will return to FinCEN as Acting Director. AnnaLou Tirol, former Associate Director of FinCEN’s Strategic Operations Division, is serving as FinCEN Deputy Director.

Mr. Mosier most recently served as Counselor to the Deputy Secretary of the Treasury, a role he assumed last month after serving as FinCEN’s Deputy Director and first Digital Innovation Officer. Mr. Mosier previously worked at the cryptocurrency analytics, compliance, and investigations firm Chainalysis, where he was Chief Technical Counsel. Prior to FinCEN and Chainalysis, Mr. Mosier was an Associate Director at Treasury’s Office of Foreign Assets Control. Mr. Mosier has also served as a Deputy Chief in the Department of Justice’s (DOJ’s) Money Laundering & Asset Recovery Section. He also served a tour at the White House National Security Council as Director for Transnational Organized Crime. Mr. Mosier began his public service as a prosecutor with the Manhattan District Attorney’s Office, and has served as an Adjunct Professor of Law at Georgetown University Law Center. He previously worked at a law firm representing technology, media, and financial services clients.

Ms. Tirol is now serving as Deputy Director. In this capacity, she assists in overseeing FinCEN’s wide-ranging work to enhance the national security of the United States. Ms. Tirol joined FinCEN in September 2019, serving as Associate Director of the Strategic Operations Division, where she worked extensively to promote FinCEN’s strategic partnerships with government and private industry stakeholders, both domestically and internationally. Ms. Tirol came to FinCEN after overseeing DOJ’s Public Integrity Section prosecuting public corruption matters. She began her public service as an Assistant U.S. Attorney in San Diego, and has served overseas tours for DOJ in Belgrade, Serbia, focusing on anti-corruption issues, and in Panama City, Panama, focusing on anti-money laundering and countering the financing of terrorism. Ms. Tirol is an Adjunct Professor of Law at Georgetown University Law Center.

Director Ken Blanco will depart on April 9th to Citi to lead Financial Crimes Compliance

 

 

FinCEN Will Require Persons to Report Virtual Currency as Part of Foreign Bank and Financial Accounts and Will Require Recordkeeping for Transfers into Crypto Wallets

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FinCEN is moving rapidly for reporting crypto currency and assets.

Reporting Virtual Currency on FBARs

On December 31, 2020, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) in a notice stated it intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR)  on IRS FinCEN Form 114 to include virtual currency as a type of reportable account under 31 C.F.R. § 1010.350.

At present, FBAR regulations do not define a foreign account holding virtual currency as a type of reportable account.[1]  As a result, a person with a foreign account holding virtual currency need not report such as holding on the FBAR unless it is a reportable account under 31 C.F.R. § 1010.350 because it holds reportable assets in addition to virtual  currency.

It remains to be seen how virtual currency will be reported on the FBAR.  Because FBAR penalties may be as high as 50 percent of an account’s highest balance per violation, the stakes are high.

Meanwhile, the Internal Revenue Service 2019 Form 1040 Schedule 1 added a question, inquiring whether taxpayers received, sold, sent, exchanged, or acquired a financial interest in virtual currency.  The recordkeeping for tax purposes alone on virtual currency is very challenging.

On December 31, 2020, the IRS issued draft instructions  on what constitutes reportable virtual currency transactions.  The instructions provide more guidance than did the previous version released October 23, 2020.  However, many tax attorneys have criticized the new guidance.[2]

Recordkeeping on Crypto Wallets

FinCEN will propose to amend the regulations implementing the Bank Secrecy Act (BSA) concerning reports of  foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

On December 23, 2020,  FinCEN issued a notice of proposed rulemaking requesting public comments on a proposal to require banks and money service businesses (“MSBs”) to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (“CVC”) or digital assets with legal tender status (“legal tender digital assets” or “LTDA”) held in unhosted wallets  or held in wallets hosted in a jurisdiction identified by FinCEN. FinCEN is proposing to adopt these requirements pursuant to the Bank Secrecy Act (“BSA”).

FinCEN proposes to prescribe by regulation that CVC and LTDA are “monetary instruments” for purposes of the BSA. However, FinCEN does not propose  to change  the regulatory definition of “monetary instruments” or otherwise alter existing BSA regulatory requirements applicable to “monetary instruments” in FinCEN’s regulations, including the existing currency transaction reporting (“CTR”) requirement and the existing transportation of currency or monetary instruments reporting requirement.

FinCEN is providing a 15-day period for public comments with respect to this proposed rule.

Analysis

Although there are many important technical and procedural issues, including whether Treasury is affording sufficient time for comments on the new regulations, the bottom line is that Treasury and other law enforcement agencies believe significant amount of crime is occurring due to the lack of transparency surrounding virtual currencies and digital assets, especially in international transactions.

The current issue of the IELR will have a more comprehensive discussion of these two regulatory initiatives.

[1]    See 31 CFR 1010.350(c).

[2]    Kirstin Parillo, New Draft 1040 Instructions Add More Crypto Details, Tax Notes Today  Int’l 2021 TNTI 5-3, Jan. 8, 2020.

Congress Passes Anti-Money Laundering Act over President’s Veto

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On January 1, 2020, the Senate voted to override President Trump’s veto of the annual military policy bill (the National Defense Authorization Act – NDAA).  Division E of the Act is the Anti-Money Laundering Act of 2020 (the AMLA or Act), which contains a number of international enforcement elements.  This post discusses selected international enforcement aspects, except for the beneficial owner/entity transparency provisions that were discussed in the December 2020 issue of the International Enforcement Law Reporter.

Increased Authority to Issue and Enforce Correspondent Account Subpoenas

The Act increases the ability of the Department of Justice (DOJ) and Treasury’s authority to issue and enforce correspondent account subpoenas under 31 U.S.C. § 5318(k).  Before, the DOJ and Treasury could issue such subpoenas to any foreign bank with a correspondent account in the United States and could “request records related to such correspondent account.”[1]  The Act widens this authority to permit DOJ to request “any records relating to the correspondent account or any account at the foreign bank, including records maintained outside of the United States,” if the records are the subject of an investigation concerned a violation of U.S. criminal laws, a violation of the Bank Secrecy Act (BSA), a civil forfeiture action, or a Section 5318A investigation.[2]

If a foreign financial institution does not comply, the Act authorizes the Attorney General to seek contempt sanctions from a court, and the Attorney General or Secretary of the Treasury may direct covered U.S. financial institutions to end their correspondent relationships with the non-compliant foreign financial and impose penalties on those institutions that fail to do so.[3]

Pilot Project to Share SAR Information Internationally

FinCEN has promulgated guidance allowing sharing of Suspicious Activity Reports (SARs) information internationally with foreign parent organizations or U.S. affiliates in other countries.[4]   The Act requires the Treasury within one year after the enactment of legislation to issue rules that establish a pilot program for financial institutions to share information related to SARS “with the institution’s foreign branches, subsidiaries, and affiliates for the purpose of combating illicit finance risks.”[5]

The Act allows the Secretary of the Treasury to prohibit sharing with certain jurisdictions, such as state sponsors of terrorism, states subject to sanctions imposed by the U.S. government, or those the Secretary has determined cannot reasonably protect the security and confidentiality of such  information.[6]

Provisions on Cryptocurrency and Antiquities Dealers, Advisors, and Consultants

The Act adds to the definition of financial institution and money transmitting businesses under the BSA, which are subject to anti-money laundering due diligence, businesses engaged in the exchange of transmission of “value that substitutes for currency.” [7]   The Act also expands the definition of financial institution to include antiquities dealers, advisors, and consultants.

The Act requires Treasury to prepare a study within one year that evaluates money laundering and terrorist financing through the art trade, including the markets that should be subject to regulation, the extent to which the regulations, if any, should target high-value trade in works of art, and “the need, if any, to identify persons who are dealers, advisors, consultants, or any other persons who engage as a business in the trade in works of art.”[8]

Foreign Financial Intelligence Unit Liaisons (FFIUL)

  • 6108 of the Act requires the appointment of not more than six FFIULs, co-located in a U.S. embassy, U.S., or a foreign government facility, among other things, to facilitate capacity building and outreach on AML/CFT regulatory and analytical frameworks; and coordinate with representatives of the DOJ at US Embassies.[9]

International Coordination

  • 6112 of the Act requires the Secretary of the Treasury to work with foreign counterparts, including bilateral contacts, the Financial Action Task Force, the IMF, the World Bank, the Egmont Group of FIUs, the OECD, the Basel Committee on Banking Supervision, and the UN, to promote stronger AML frameworks.

Financial Services De-Risking

  • 6213 of the Act states Congress supports effective measures to stop the flow of illicit funds and promote AML/CFT and sanctions goals, and AML/CFT and sanctions policies that do not unduly hinder or delay the efforts of legitimate humanitarian organizations to fulfill the needs of humanitarian crisis, prevent or alleviate human suffering. § 6213(c) requires the GAO to conduct a de-risking analysis and evaluate the effect of AML/CFT on individuals and entities, including charities, embassy accounts, money-service businesses, and correspondent banks that have been subject to categorical de-risking by financial institutions operating in the U.S. and or otherwise have difficulty accessing or maintaining certain financial services in the U.S. and evaluate the consequences of financial institutions de-risking entire categories of relations with individuals and entities mentioned above in this section. The GAO should propose changes to those requirements resulting in de-risking.

GAO Study on Fighting Illicit Networks and Detecting Human Trafficking and Drug Trafficking

  • 6504(c) of the Act requires the GAO to study how a range of payment systems and methods, including virtual currencies in online marketplaces, are employed to facilitate human trafficking and drug trafficking.

Treasury Study and Report on Trade-Based Money Laundering

  • 6505 of the Act requires Treasury to conduct a conduct a study, in consultation with appropriate private sector stakeholders, academic and other international trade experts, and Federal agencies, on trade-based money laundering and proposed strategies to combat trade-based money laundering.

Treasury Study and Strategy on Money Laundering by the PRC

  • 6506 of the Act requires the Treasury to conduct a study, relying substantially on information obtained through the trade-based money laundering analyses of the GAO, on, inter alia, the extent and effect of illicit finance risk relating to the PRC Government and Chinese firms, and a strategy to counter Chinese money laundering.

Treasury Study on Efforts of Authoritarian Regimes to Exploit the Financial System of the U.S.

  • 6507 of the Act requires the Treasury Secretary and Attorney General, in consultation with the heads of other relevant national security, intelligence, and law enforcement agencies, to conduct a study for Congress on how authoritarian regimes in foreign countries and their proxies use the financial system of the U.S., inter alia, to: “(1) conduct political influence operations; (2) sustain kleptocratic methods of maintaining power; (3) export corruption; (4) fund nongovernmental organizations, media organizations, or academic initiatives in the United States to advance the interests of these regimes; and (5) otherwise undermine democratic governance in the United States and the partners and allies of the United States.” The study should make recommendations for legislative or regulatory action, or regulatory action, or steps to be taken by U.S. financial institutions that would address exploitation of the financial system of the U.S. by foreign authoritarian regimes.

Kleptocracy Assets Recovery Reward Act

  • § 9701-03 of Division H of the NDAA establishes the Kleptocracy Asset Recovery Rewards Program in the Department of the Treasury, and authorizes appropriations for the purpose of paying rewards under the program.

Combating Russian Money Laundering

  • § 9711-9714 of Division H of the NDAA requires a report if the Secretary of the Treasury determines that certain institutions, transactions, or money laundering activities require domestic financial institutions or domestic financial agencies to take special measures described in 31 U.S.C. § 5318A(b), and permit implementation of such special measures.  These provisions would enable Treasury to impose special measures on transactions emanating from Russia, certain Russian financial institutions, and/or certain categories of transactions.

The current issue of the IELR will have a more comprehensive discussion of the AMLA and related provisions.

[1]    31 U.S.C. § 5318(k)(3)(A).

[2]    AMLA, § 6308 (31 U.S.C. § 5318(k)(3)(A)(i) as revised).

[3]    AMLA, § 6308 (31 U.S.C. §5318(k)(D), as revised).

[4]    FinCEN, FIN-2010-G006, Sharing Suspicious Activity Reports by Depository Institutions with Certain U.S. Affiliates (Nov. 23, 2010), https://www.fincen.gov/sites/default/files/shared/fin-2010-g006.pdf.  FinCEN, Interagency Guidance on Sharing Suspicious Activity Reports with Head Offices and Controlling Companies, January 20, 2006 https://www.fincen.gov/resources/statutes-regulations/guidance/interagency-guidance-sharing-suspicious-activity-reports.

[5]    AMLA, § 6212 (adding 31 U.S.C. § 5318(g)(8)(B)(i).

[6]    AMLA, §6212 (adding 31 U.S.C. § 5318(g)(8)(C).

[7]    AMLA, § 6102(d).

[8]    AMLA, § 6111(e).

[9]    AMLA, § 6108, adding  31 U.S.C. § 310(h).

U.S. Secretary of State Makes Historic Visit to Suriname and Guyana and Promises More Law Enforcement Assistance

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On September 17-18, 2020, U.S. Secretary of State Michael Pompeo made the first visit to Suriname and Guyana.  It coincided with promises that the U.S. would increase its technical assistance with respect to law enforcement and national security issues in both countries.

   Suriname

With respect to Suriname Secretary Pompeo traveled there on September 17 and met with President Chandrikapersad “Chan”  Santokhi , and key members of his cabinet. Santokhi was elected in July.

As part of his travel, the State Department issued a statement underscoring existing U.S. assistance to combat narcotics trafficking.  The statement noted that Suriname participates in various programs funded by the State Department’s Bureau of International Narcotics and Law Enforcement (INL) in an effort to stop the use of Suriname as an intermediary jurisdiction for drugs and other contraband.

The State Department has engaged in training for Suriname’s Port Control Unit, which seized more than 3000 kg. of cocaine in 2019, including a 2,300 kg seizure, one of the largest in Suriname’s history.

In addition, the U.S. government has committed more than $600,000 towards an anti-money laundering risk assessment, which identifies vulnerabilities in Suriname’s anti-money laundering (AML) regime.  The Financial Action Task Force requires a national risk assessment by each country because at both country and financial institution levels  AML must be conducted on a risk-based assessment (RBA).  The RBAs by financial institutions must depend on the national risk assessment.  Although Suriname is comparatively small in population and economy, it has a large territory and multiple sources of risks of laundering, such as informal gold mining, narcotics and gold smuggling from Venezuela and other neighboring countries, human trafficking, and the use as casinos in Suriname as a vehicle to launder.

The State Department has congratulated the fact that Suriname voted in free and fair elections and has apparently shown it wants to take a new direction based on transparency, rule of law, and democracy.  To support the new direction, the U.S., in addition to increasing trade and investment, is deepening its security relationship and supporting Suriname’s economic growth.  The State Department says it is prepared to help Suriname and its engagement with the international Monetary Fund and other international financial institutions.  In early February, it was revealed that $100 million in private citizens’ savings had disappeared from the Central Bank of Suriname (CBvS).[1]

The new Surinamese President is a former justice minister and police commissioner.  The loser of the election, president Desiré “Desi” Bouterse took power through a coup.  He has been convicted of narcotics trafficking in the Netherlands and is convicted in Suriname for ordering the execution of political opponents in 1982.[2]

The U.S. State Department has recognized that Suriname’s leaders and civil society must establish sustainable models to extract natural resources transparently and safely and use the resources to benefit the Surinamese people.  According to the State Department’s press release, U.S. investment in Suriname’s gold sector offers a model.  The State Department aims to work with Suriname to combat corruption.

In a brief press conference the two leaders fielded questions mainly concerning potential U.S. political and military pressure on Venezuela and the role of China in the region.

Guyana

On September 17, 2020, Secretary Pompeo also visited Guyana. After much controversy over the election of March 2 between incumbent David Granger, and Irfaan Ali, Granger challenged the results for months.  Granger eventually relinquished his challenged after the U.S. imposed sanctions on members of Granger’s administration for undermining democracy.[3]

The State Department issued a statement for the Guyana visit.  Pursuant to the Caribbean Basic Security Initiative, the U.S. provides technical assistance to Guyana on law enforcement professionalization, strengthening the rule of law, and combating transnational crime.  In particular, the assistance has focused on increased training for crime scene investigators, forensic video analysis, trial advocacy, and the development of a curriculum for continuing education programs for magistrates.  The program also focuses on training prosecutors and magistrates on implementing maritime security law.  The training has resulted in more criminal prosecutions and convictions and faster adjudications.

The State Department has assisted in training Guyana’s Port Control Unit to combat the trafficking of cocaine and other illicit goods through Guyana.  The U.S. Coast Guard provides training and mentoring to the Maritime Administration Department (MARAD) in order to improve port security.  The U.S. military trains the Guyana Defense Forces personnel annually.  The training includes a current student at the U.S. Coast Guard Academy.

After Secretary Pompeo’’s visit, a bilateral Shiprider Agreement will come into force, enabling joint maritime and airspace patrols to interdict narcotics.  The U.S. government has recently given $200,000 in equipment and interceptor boat parts to strengthen Guyana’s ability to patrol its territorial waters.

The U.S. has helped the development of Guyana’s energy sector through technical partnership on best practices for energy sector policy, regulation, and revenue management.  The U.S. Department of the Treasury’s Office of Technical Assistance supports training and development within the Guyana Revenue Authority’s Large Taxpayer Division. These recommendations will help Guyana.

Early in Ali’s administration racial tensions have arisen.  On September 6, badly mutilated bodies of two cousins, Isiah and Joel Henry, both black teenagers, were discovered in a field. Thereafter, in an apparent reprisal killing a 17-year-old Indo-Guyanese boy was found chopped and beaten to death.[4]

Meanwhile, overhanging the visit are mounting tensions between Venezuela, the neighbor of Guyana and Suriname.  Guyana and Venezuela have had a 120-year dispute over their boundary and now the matter is in the International Court of Justice (ICJ).  Two years ago Venezuela seized Guyanese ships and disputes jurisdiction of the ICJ.[5]  The disputed Essequibo area represents about two-thirds of Guyana’s 83,000 square miles.[6]

In the recent past U.S. initiatives towards the Caribbean have been in response to U.S. national security: in the 1980s the civil wars in Central America, the leftist administration of Maurice Bishop in Grenada, narcotics trafficking; more recently, counter-terrorism, money laundering, and human trafficking.  The next issue of the IELR will discuss these developments in more detail.

[1]    Dr. Scott MacDonald, Suriname and the Need for Good Governance March 10, 2020, CSIS, https://www.csis.org/analysis/suriname-and-need-good-governance.

[2]    Jacqueline Charles, Pompeo makes history as first U.S. secretary of state to visit Suriname and Guyana, Miami Herald, Sept. 16, 2020.  With Pompeo trip, oil boom raises focus on Guyana, Suriname, France24, Sept. 17, 2020.

[3]    With Pompeo trip, oil boom raises focus on Guyana, Suriname, supra.

[4]    Charles, supra.

[5]    Molly Quell, Border Dispute Between Guyana, Venezuela Hits UN Court, Courthouse News Service, June 30, 2020.

[6]    Charles, supra.

EU Funds Research Project on Interconnections between Tax Crimes and Corruption

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VIRTEU (www.virteu.com), a project funded by the European Union under the HERCULE III Programme (Grant Agreement no: 878619), of which Professor Constantino, Assistant Professor of Law at Coventry University,  serves as the Principal Investigator.

VIRTEU is a high-profile legal research project, which aims at exploring the interconnections between tax crimes and corruption so to unravel the intimate relationships that exist between fraudulent and corrupt practices in the area of taxation (https://lnkd.in/gW9V7ZM).

VIRTEU Research Team operates within and is supported by the Centre for Financial and Corporate Integrity (CFCI), which is directed by Prof. Panagiotis Andrikopoulos. The team includes two academics, Dr. Constantino Grasso (Principal Investigator) and Dr. Lorenzo Pasculli (Co-Investigator), who teach at the Law School of Coventry University directed by Prof Stephen Hardy. The team includes also two Research Assistants, ENGIN Erken and Mairi Laird, who are doctoral students at the CFCI.

If you would like to receive any further information on the project or evaluate the opportunity of cooperating with the Research Team, feel free to contact us through the VIRTEU official website (www.virteu.com).

Vat fraud: Interdisciplinary Research on Tax crimes in the European Union

Grant Agreement no: 878619

Project Coordinator: Dr. Costantino Grasso

VIRTEU is an eighteen-month (April 2020 – September 2021) high-profile legal research project, which includes both comparative and interdisciplinary studies, funded by the European Union under the HERCULE III programme.

Commentary

One common connection between corruption and tax crime is that bribery recipients commit tax crimes because they cannot legitimately declare properly their income.  Bribery payors normally commit crimes when they pay bribes because they typically falsely declare on their books the payment (e.g., as a consultancy or marketing fee) and even sometimes try to obtain a deduction for the payment.  In the extractive industry international organizations and civil society have tried to bring transparency to government records in order to enable citizens and interested persons to ascertain what payments are legitimate, as opposed to illegitimate (e.g., bribes).  Other connected areas include money laundering, asset forfeiture, transnational organized crime, and fraud.

ABA Issues Opinion Confirming Obligations of Lawyers to Avoid Counseling or Assisting in a Crime or Fraud in Non-litigation Matters

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On April 29, 2020, the American Bar Association’s Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 491 on “Obligations Under Rule 1.2(d) to Avoid Counseling or Assisting in a Crime or Fraud in Non-Litigation Settings.”

Model 1.2(d) prohibits a lawyer from advising or assisting a client in conduct the lawyer “knows” is criminal or fraudulent.  A lawyer or bar trying to discipline a lawyer will infer from the circumstances  such  knowledge, including a lawyer’s willful blindness to or conscious avoidance of facts.    Hence,  if facts known to the lawyer show a high probability that a client seeks to use the lawyer’s services for criminal or fraudulent activity, the lawyer has an obligation to make addition inquiring in order to avoid advising or assisting such activity.

Even if information obtained in the course of a preliminary interview or during a representation is not adequate to establish “knowledge” under Rule 1.2(d), other rules may require the lawyer to make more inquiries to help the client avoid crime or fraud, to avoid professional misconduct, and to advance the client’s legitimate interests.  These include the duties of competence, diligence, communication, and honesty under Rules 1.1, 1.3, 1.4, 1.13, 1.16, and 8.4.

If the client or prospective client refuses to provide information necessary to determine the legality of the proposed transaction, the lawyer must ordinarily decline the representation or withdraw under Rule 1.16.

The  issuance of the opinion comes in the content of  media reports adverse to the reputation of lawyers, disciplinary proceedings for assisting clients in criminal activities, such as money laundering, criminal proceedings, and increased reports about the involvement of lawyers in efforts by foreign corrupt officials to launder money into the United States.

The opinion highlights the need of lawyers to meet their obligation to inquire when they have a client who may be seeking to use the lawyer’s services in a transaction to commit a crime or fraud.  The opinion concedes that determining whether a client seeks to use the lawyer’s services for prohibited activities can be sensitive.  Lawyers generally must believe their clients and investigating the client’s intention can be both expensive and time-consuming.  The opinion discusses a lawyer’s obligation to inquire when faced with circumstances giving rise to suspicions about a prospective or existing clients activities is required by authority interpreting Rule 1.2(d) and in the rules on competence, diligence, communication, honesty, and withdrawal.

The opinion explains failure of a lawyer to make a reasonable inquiry is willful blindness punishable under the actual knowledge standard of the Rule.  Whether the lawyer must inquire further depends on the circumstances.  Rule 1.2(d) states that a lawyer “shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.”  Even where Rule 1.2(d) does not require further inquiry, other Rules may.

These Rues include the duty of competence under Rule 1.1., the duty of diligence under Rule 1.3, the duty of communication under Rule 1.4, the duty to protection the best interests of an organizational client under Rule 1.13, the duties of honesty and integrity under Rules 8.4(b) and (c), and the duty to withdraw under Rule 1.16(a).    Making further inquiry ensures that the lawyer will be able to give the informed advice and assistance to which the client is entitled, that the representation will not result in professional misconduct, and that the representation will not involve counseling or assisting a crime or fraud.

National Strategy for Combating Terrorist and Other Financing Highlights Gatekeeper Problems

In February 2020, the U.S. Government issued its National Strategy for Combating Terrorist and Other Illicit Financing (“2020 National Strategy”).  It identifies and analyzes the threats and vulnerabilities to the U.S. anti-money laundering and counter-financial terrorism (AML/CFT) system.   The 2020 Strategy discusses as a major illicit financing risk attorneys, who need not understand the nature or source of income of their clients or potential clients.  Attorneys advise on structuring transactions to avoid tax or other implications.  In this regard in 2016, the Department of Justice alleged in a civil forfeiture case that lawyer trust accounts held by two large law firms helped launder almost $600 million stolen from the Malaysian government into the U.S. financial system.

OECD Mandatory Disclosure Rules for Addressing CRS Arrangements and Offshore Structures

An area of potential risk to lawyers is inbound investment by investors from countries that participate in OECD automatic exchange of information, known as the Common Reporting Standard (CRS). The OECD has developed mandatory disclosure rules for addressing CRS Avoidance arrangements and offshore structures.  Each participating member should have penal or dissuasive sanctions to sanction violations.  The 2017 UK Criminal Finances Act illustrates a law implementing the mandatory disclosure rules and imposes criminal sanctions extraterritorially for intermediaries who help taxpayers plan or implement structures violating the Act.

Formal Opinion 491, in addition to heralding the likelihood of new disciplinary proceedings for lawyers failing to make sufficient inquiries for clients who engage in criminal activities, is likely to open the door to prosecutions against U.S. lawyers both by prosecutors in the U.S. and abroad.

 

 

J5 Chiefs Conduct First Coordinated Tax Enforcement Actions Arising from Investigations into a Central American Financial Institution

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On January 23, 2020, the members of the Joint Chiefs of Global Tax Enforcement (J5) announced on the preceding day its first coordinated set of enforcement actions undertaken on a global scale by the J5. The operation results from a series of investigations in Australia, Canada, the Netherlands, the United States, and the United Kingdom.

For instance, as part of the operation, HMRC officers executed a search warrant in the Stoke area and arrested a man as part of their investigation.    The HMRC questioned the man and then released him pending further enquiries.  A 59-year-old man, the HMRC arrested him on suspicion of cheating the public revenue.

As a result of the significant information it has collected, the HMRC expects further criminal, civil and regulatory action will occur in each country.

The law enforcement operation took place as a part of a series of investigations in multiple countries into an international financial institution located in Central America.  The J5 believes that through this institution a number of clients may be employing a sophisticated system to conceal and transfer wealth anonymously to evade their tax obligations and launder the proceeds of crime.

The operation of the first major operational activity for the J5 illustrates the role played by law enforcement networks, which in this case is an informal group of tax chiefs.  An important breakthrough in international enforcement has been the development, as part of regime enforcement, of governmental networks.  The identification of governmental networks has arisen in part out of the emergence of a world politics paradigm that conceptualizes transnational relations as transcending the nation-state and broadening the conception of actions to include transnational actors, such as nongovernmental organizations (e.g., J5).

OECD and IBA Issue Report on Proper Roles of Lawyers and International Commercial Structures

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On May 31, 2019, the International Bar Association and the Secretariat of the Organization for Economic Co-operation and Development published a Report of the Task Force on the Role of Lawyers and International Commercial Structures.

The Report observes that lawyers’ professional obligations and clients’ rights are regulated by domestic laws and regulations, and/or ethical and deontological codes.  The Task Force states that there are certain key principles that should apply in this context in order to balance between the rights of, and duties to, the client on the one hand and a lawyer’s other professional or legal duties on the other.  The Report sets forth seven principles without prejudice to the rule of law and related legal conventions, a lawyer’s duty of confidence and laws relating to privilege.

The Task Force recommends the Statement of Principles to national bar associations and law societies with a view to encouraging them to adopt the principles and engage with their governments to explain the role of the principles in ensuring the proper administration of justice and in upholding the rule of law.  The sponsors also published an executive summary of the report

The Task Force advocates that, where the Principles are adopted and become part of domestic law and/or professional regulations, their disregard should result in the application of proportionate disciplinary measures, including, where appropriate, disbarment, recognized also in foreign jurisdictions.

Principle 1:  Non-facilitation of illegal conduct – Although a lawyer may be unwittingly associated with illegal conduct, including financial crimes, a lawyer should not facilitate illegal conduct, and should undertake the necessary due diligence to avoid doing so inadvertently.

Principle 2:  Misuse of the duty of confidence and privilege.  Notwithstanding the lawyer’s duty of confidence to a client and the concept of legal professional privilege, a lawyer should not use the confidential nature of the lawyer-client relationship or the principles of legal professional privilege to shield wrongdoers.  A lawyer should give due and proper consideration to refraining from acting for a client if the lawyer is aware of, or has reasonable grounds to believe, that the primary purpose of the retainer is to permit the client to be able to rely on the confidential nature of the lawyer-client relationship or privileged communication) so as to permit or encourage the client to engage in illegal conduct.

Principle 3:  Client due diligence.  A lawyer should undertake and document all reasonable and proportionate inquiries in order to identify and verify a client, as well as identify any ultimate          beneficiary of the conduct or transaction, the origin of the funds for the transaction (consistent with applicable anti-money laundering or counterterrorism financing legislation), the substantive nature of the conduct or transaction (including expected revenue and taxation consequence of the transaction) and, subject to Principle 5, be satisfied that the conduct and/or transaction is legal in the lawyer’s jurisdictions.

Principle 4: Action where client conduct is may be or becomes illegal.  When the conduct of a client is, may be, or becomes illegal, even if it was originally legal and the lawyer continues to be retained by the client, a lawyer should advise the client of the consequences of the conduct and recommend that the client pursues alternative solutions.  If the client persists in the conduct, the lawyer should give due and proper consideration to ceasing to act, and terminate the retainer.

Principle 5:  Multijurisdictional risk.  Where a transaction involves conduct by a client, agents or representatives of a client in more than jurisdiction and the lawyer has reasonable grounds to believe that the conduct may be or may become illegal in a jurisdiction(s), a lawyer should verify that expert advice is or has been obtained by the client from a lawyer experienced in the conduct or transaction in that jurisdiction.  If such advice has not been obtained and the client wants to proceed with the transaction, the lawyer should recommend that such advice be obtained (at the cost of the client).  If the client declines to obtain such advice and persists in the conduct, then the lawyer should give due and proper consideration to ceasing to act and terminate the retainer.

Principle 6:  Use of illegal obtained information. Lawyers should strongly discourage a client from paying private parties or public officials to obtain illegally obtained evince, which of itself may constitute a criminal offense in many jurisdictions. To facilitate this, legal frameworks should be consistent across jurisdictions as much as possible, since it is often through cross-border conduct that confidential or secret information in country A is accessed (without the consent of the owner of the information) and then disclosed to a person in country B.  An independent court should, where necessary, resolve the question as to what use can be made of such information, based on the applicable domestic framework.

Principle 7:  Disclosure of beneficial ownership.  A lawyer should obtain and maintain up-to-date beneficial ownership information and take reasonable measures to verify its accuracy in relation to the lawyer’s clients.  Domestic laws should provide for the disclosure of ultimate beneficial ownership of any corporation, trustor other legal entity formed within that country’s jurisdiction.  Beneficial ownership information should be available to state regulators, investigators and enforcement agencies.  Governments must address whether it needs to be publicly available.

Principle 8:  Advertising by lawyers on international commercial structures.  Any advertising by lawyers should be transparent, accurate, and truthful.  Domestic regulation, bar associations, and law societies should ensure the lawyer advertising is accurate and truthful.

The Report does not seek to duplicate existing international or other national guides for the legal profession in terms how a lawyer should act or not act in certain circumstance.  The Report does not seek to cover the many anti-money laundering and counterterrorism financing laws, obligations and disclosure duties that exist in many countries.   Instead, it focuses on high-level issues of principle that should assist governments in policy formulation and in guiding lawyers as to how they should conduct themselves, consistent with a lawyer’s underlying domestic legal and ethical obligations.

The Report also sets form the minimum good practice required when a lawyer proposes to accept instructions in a cross-border commercial matter, especially, but not exclusively, from a new client or a client with whom the lawyer has not worked for at least 12 months.

The Report provides detailed guidance for the eight above-mentioned principles with citations to guide legal professionals.

Annex B contains existing guidance concerning the role of lawyers with regard to international commercial structures.

The July issue of the IELR will have a more comprehensive discussion of the Report.

 

U.S. Court Authorizes John Doe Summonses about Finnish Residents Using 3 U.S. Bank Payment Cards Linked to Non-Finnish Bank Accounts

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On May 1, 2019, the U.S. Department of Justice announced that a U.S. Court in North Carolina authorized the Internal Revenue Service to serve John Doe summonses on Bank of America, Charles Schwab, and TD Bank in an order that was unsealed on April 30.  The John Doe summonses seek information about persons residing in Finland that have Bank of America, Charles Schwab, or TD Bank payment cards linked to bank accounts located outside of Finland.  The summonses are known as “John Doe” summonses because the IRS does not know the identity of the persons under investigation.

The U.S. petitioned the U.S. District Court for the Western District of North Carolina to authorize the summons at the request of the Finnish government under the tax treaty between Finland and the U.S.  The treaty permits the two countries to cooperate in exchanging information that is required to carry out each country’s tax laws.  The IRS summons requests the identities of Finnish residents who have payment cards linked to bank accounts located outside of Finland so that the so that the Finnish tax authority can determine if those persons have complied with Finnish tax laws. Finland has told the IRS that, in circumstances where the payment cards are used only at ATMs or in other transactions where authorization is by PIN code, and the cardholder need not identify himself or herself to the merchant, the cardholders cannot be identified from sources in Finland.

The filing does not allege that Bank of America, Charles Schwab, or TD Bank violated any U.S. or Finnish laws with respect to these accounts.

Finnish Foreign Payment Project

The request is part of a foreign payment project that Finnish Tax Administration (FTA) .  The FTA uses information on the use of payment cards issued by foreign financial institutions to identify non-compliant Finnish taxpayers.  Prior FTA investigations of approximately 120 to 150 Finnish taxpayers who used foreign payment cards in a similar way have resulted in high rates of tax non-compliance, as  explained in the U.S. government’s memorandum in support of the petition.  It indicates that it is likely that the John Does sought by the summons are Finnish residents who are failing to report these foreign accounts and associated income.

Analysis

The court order in this case authorizing the enforcement action is part of ongoing international efforts by the U.S. and its treaty partners to stop persons from using foreign financial accounts to evade taxes.  U.S. courts have previously approved John Doe summons allowing the IRS to identify individuals using offshore accounts to evade their U.S. obligations,  and have also approved John Doe summons to be used to identify  individuals using U.S. financial institutions or accounts to evade foreign tax obligations, such as those in the Netherlands and Norway.

The current matter also shows an increase in efforts by foreign tax authorities to bring request assistance from the IRS and directly bring enforcement actions in the U.S.

The current issue of the IELR will have additional discussion of the case.

Disclaimer

Nothing in this blog constitutes or is intended to constitute legal advice. Neither transmission nor receipt of such materials creates an attorney-client relationship. Blog readers and subscribers should consult with an attorney. This blog may be considered attorney advertising under the rules of some states. The hiring of an attorney is an important decision that should not be based solely upon advertisements. Prior results do not guarantee similar outcomes.

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