New Year’s Resolutions

Speaking of compliance, here are two businesses that ended the year resolving charges they violated U.S. trade sanctions by dealing with blocked countries, people, or entities.

Both cases show how the government enforces its sanctions regime, and they illustrate how an ounce of prevention can beat a pound of cure. Both cases were brought by the Office of Foreign Assets Control, or OFAC, which is an agency within the Department of Treasury.

The first case concerns a dental-supply company that agreed to pay $1.2 million to settle charges that it violated the Iranian Transactions and Sanctions Regulations. The government alleged that, from the end of 2009 through the middle of 2012, the company exported 37 shipments of dental equipment to distributors in other countries knowing, or having reason to know, they would end up in Iran.

According to the government, it wasn’t an egregious case because the exports were likely eligible for a license if the company had only applied for one. But it didn’t, and that ended up costing it a lot more on the back end.

The second case concerns a luxury-goods company that agreed to pay $300,000-plus to settle charges that it violated the Foreign Narcotics Kingpin Sanctions Regulations. The government alleged that, from October 2010 to April 2011, the company exported four shipments of jewelry to a Hong Kong entity that was on OFAC’s list of blocked persons and interests. The blocked entity’s name and address squarely matched those of the ship-to party, but the company didn’t flag the transaction before shipping the goods.

According to the government, this wasn’t an egregious case either, but if you add up the settlement costs and legal fees, it sure does eat into the margin.

SEC Chair Offers Advice on Bitcoin and Its Ilk

This week, the chair of the U.S. Securities and Exchange Commission weighed in on crypto-currencies as well as ICOs or initial coin offerings. With the price of bitcoin nearing $20,000, it probably comes at the right time. You may have been wondering yourself: What are the rules for this stuff? Are they being followed? And what are the risks in these markets?

Here is a summary of his advice for both Main Street and Wall Street.

For Main Street

These are the folks at home who may be tempted to jump on the bandwagon.

  1. Understand that, for now, it’s the Wild West out there. The SEC hasn’t approved any crypto-currency-related funds or products for listing and trading, and no one has registered an ICO with the Commission. Don’t let anyone today tell you otherwise.
  2. Do your homework. If you choose to invest in these things, ask plenty of questions and demand clear answers. The Chair’s statement includes a list of sample questions to consider. Be especially careful if a pitch sounds too good to be true or you’re pressured to act quickly.
  3. Understand that these markets cross borders, so your money may travel overseas even without your knowledge. Once there, you may not ever be able to get it back.

For Wall Street

These are market professionals like brokers, dealers, lawyers, advisers, accountants, and exchanges.

  1. Although ICOs can be effective ways to raise money, you have to follow the securities laws if it constitutes an offering of securities. So ask yourself: Is this offering a security? Is it an investment contract? Is it, in other words, an investment of money in a pooled venture that expects to derive profit from the efforts of others? If you’re not clear on this then you need a lawyer because the Commission will look past the form of a transaction to its substance. So just calling it a currency doesn’t settle the question. We blogged recently about this fact-intensive inquiry here.
  2. If you handle transactions in crypto-currency, you should treat them as if cash were being handed from one party to the other. You should know your customer and mind anti-money-laundering laws whenever you allow payments in crypto-currencies, allow their purchase on margin, or otherwise use them to facilitate securities transactions.

Another Massive Medicare-Fraud Roundup

In case you missed it, two weeks ago, the federal Medicare Fraud Strike Force announced a nationwide sweep that ensnared 243 people for their alleged participation in fraudulent schemes to bill Medicare over $700 million. The individual cases are not all related, but the coordinated takedown was the largest we’ve seen so far—both in the number of targets and in the dollar amount of alleged loss. Among the targets were nineteen doctors and 27 nurses or other, licensed medical professionals.

The Medicare Fraud Strike Force is a joint task force of the Department of Justice and the Department of Health and Human Services that prosecutes fraud, waste, and abuse in the Medicare program. Since 2007, it has brought cases against 2,300 people and expanded its base operations to nine cities: Baton Rouge, Brooklyn, Chicago, Dallas, Detroit, Houston, Los Angeles, Miami, and Tampa.

This time around, the Strike Force descended on seventeen cities across Florida, Texas, Michigan, Louisiana, New York, and California. Miami alone accounted for 73 defendants.

The charges include healthcare fraud, illegal kickbacks, money laundering, and aggravated identity theft (which we recently covered here). They allege schemes involving home health care, physical therapy, psychotherapy, durable medical equipment, and pharmacies.

According to Attorney General Loretta Lynch, “the defendants … billed for equipment that wasn’t provided, for care that wasn’t needed, and for services that weren’t rendered.”

At least 44 of the targets were charged in connection with Medicare Part D, the prescription-drug-benefit program, which is the fastest-growing part of Medicare and thus a rising priority of enforcement. These charges include billing for drugs that either were not dispensed, were expired or adulterated, or were trafficked in for illegitimate use.

Here’s the Justice Department’s press release.

Abuses of Asset Forfeiture Appear to Abound

In an op-ed piece from the Washington Post, two former senior Justice Department officials have called for an end to the asset-forfeiture program they helped create for the federal government.

John Yoder and Brad Cates were each, in turn, director of the Department’s Asset Forfeiture Office from 1983 to 1989.  They say federal asset forfeiture was conceived to combat drug trafficking by kingpins, but in 1986, the concept began to expand to kickstart our modern anti-money-laundering regime, and eventually, asset forfeiture came to include more than 200 crimes beyond drugs.  They now say it should be abolished, and their story has attracted widespread attention.

The stories of abuses are not uncommon.  Just this week, the Des Moines Register covered the travails of two professional poker players who have sued for damages after they allege state troopers unlawfully seized $100,000 from them and then tried to compel them to capitulate by getting them charged with drug crimes.

When the two men were stopped in Iowa, they were driving from a World Series of Poker tournament in Illinois, and their rented car had Nevada plates.  They were supposedly stopped for passing another car without signaling, but dash-camera video from the patrol car clearly shows otherwise, and one of the officers may have fudged other facts at his deposition.  After hiring an attorney, the two were able to recover $90,000, but they had to spend $30,000 on legal fees to do it, and by then, one of them had suffered a stroke after their homes in California were raided for marijuana.  Why?  It seems California authorities received a “tip” from Iowa police after they found a tiny amount of pot inside a marijuana grinder during the traffic stop.  Those California searches led to felony drug-possession charges for the men, even though both had medical marijuana cards.  All charges in both states have since been dropped.

Their story has received some national attention as well.

Trade-Based Money Laundering is Like a Box of Chocolates

In the cat-and-mouse game of money laundering, which we earlier covered here (in an overview) and here (about what can go wrong), some of the more sophisticated schemes involve trade-based money laundering, which embeds the proceeds of criminal activity in legitimate cross-border commerce.

Take any good that is imported or exported around the world, and you can use the trade in that good to launder money by manipulating or misrepresenting price, quality, or quantity upon shipment.

Just think of a box of chocolates. If you import a box of chocolates worth $10 but agree with the seller to pay $100 for them, you’ve created cover to launder an extra $90 and transfer it abroad. Now add a few zeroes to those numbers and you get the idea.

The basic technique is in the invoicing: if you want to slip money into a country, you over-value exports or under-value imports; to get money out, you do the reverse. You can double-invoice, over-invoice (or under-ship), or under-invoice (or over-ship) to your heart’s content, or until you’ve washed all your money. And because you’re commingling dirty money with clean money and legitimate goods, the subterfuge becomes more difficult to detect. Trade-based money laundering is often a part of worldwide, alternative banking and remittance systems like the famed Black Market Peso Exchange, which is used to run drug money down to Latin America, or the hawala system, which is used to pay drug suppliers in Asia.

But the government is reacting. Since 2004, the U.S. Bureau of Immigration and Customs Enforcement (or ICE) has begun creating so-called trade transparency units (or TTUs) to generate investigative leads. These are agreements with certain trading partners to share data for comparison and analysis. The government then runs the data through a data-mining computer program called DARTTS, or the Data Analysis & Research for Trade Transparency System. The idea is to reveal anomalies that only appear when you examine both sides of a transaction.

When Money-Laundering Laws Become “Smurfin’ Ridiculous”

While we’re on the subject of money laundering, let’s talk about “smurfing.”

That’s slang for the term “structuring,” which refers to the purposeful act of breaking up larger financial transactions into smaller amounts in order to avoid federal reporting requirements. For example, the Bank Secrecy Act requires banks to report any deposits, withdrawals, or transfers of more than $10,000. So, if you’re a discreet drug dealer who wants to deposit $100,000 in your bank account, you might decide to break up that deposit into $9,999 increments so that your bank doesn’t go notifying the federal government. If you did, you might think you’re being clever, but you’re probably not, because you’d be guilty of a felony punishable by fines and up to five years in prison. (Not to mention, the government would likely catch wind of it anyway because your deposits would probably cause the bank to generate a suspicious activity report.) If you did it while violating another federal law or as part of a pattern of illegal activity involving more than $100,000 in a 12-month period, your maximum sentence would rise to ten years.

So why can federal structuring laws be smurfin’ ridiculous? Because it’s not illegal to deposit $9,500 (or even $9,999) in your bank account for cryin’ out loud. It’s only illegal to do it because you don’t want your bank to report the deposit to the government. But even then, it doesn’t matter if you didn’t know that doing so was a crime, or if you weren’t trying to cover up any criminal activity, or if you’d earned all the money legitimately, or if you reported every penny of it at tax time. You’d still be guilty. And it gets worse, because if the government suspects you of structuring, it can apply the civil-forfeiture laws to seize all your money or other assets, even if it never charges you with the crime. See 31 U.S.C. § 5317(c)(2).

For examples of government overreach that ruined or nearly ruined people’s lives, consider these two.

In one case, a Russian immigrant was trying to buy a house, but two weeks before closing, she learned that her bank in Russia wouldn’t wire the purchase money because of a mix-up over her married and maiden names. Scrambling, she spent the next two weeks withdrawing her maximum daily limit from every ATM in town and depositing it in her domestic bank account. She was charged with structuring, convicted of a felony, and ordered to sell her home and surrender the proceeds to the government. She finally got the conviction reversed on appeal but only because prosecutors had converted her trial into a general referendum on her character by asking her a bunch of unfair, unrelated questions on cross-examination. I’m sure she thought it was all worth it in the end.

In the second case, a father and daughter were running a small but successful grocery store in suburban Michigan. Their insurance only covered losses up to $10,000, so they would make frequent deposits below that threshold. Sure enough, they were investigated, and the government went after them, seizing all the money in their bank account and commencing forfeiture proceedings to keep it. The government finally backed off, but only after a public-interest law firm roused up publicity about the case.

The takeaway? If you’re a gas station, convenience store, used-car dealership, or another business that typically handles a lot of cash, take care. Here’s what one lawyer had to say about it:

“The emphasis is on basically seizing money, whether it is legally or illegally earned. It can lead to financial ruin for business owners, and there’s a potential for abuse here by the government, where they use it basically as a means of seizing money, and I think we’ve seen that happen.”

Cash, it turns out, is not always king.

Cleanliness is Next to Godliness for George, Tom, Abe, Alex, Andy, Ulysses, and Ben

In common parlance, money laundering is the process of taking illegally-gained, “dirty” money and making it appear legal or “clean.”

Who needs to wash money? A classic case is the drug dealer who’s sitting on a pile of cash but can’t very well explain where he got it from. The same concept, however, applies to other unlawful activity like financial frauds, computer crimes, alien smuggling, arms trafficking, public corruption, and illegal gambling.

How does one wash money? Although there are many ways to skin this cat, the process generally involves three steps:

  1. Introducing the dirty money into the financial system somehow (e.g. by making a deposit, buying an asset, making a loan, or funding an investment);
  2. Moving the money around through additional transfers or transactions to create confusion and make it harder to identify the original source of the funds; and
  3. Disbursing the money back to the launderer through a final set of seemingly legitimate transactions.

Money-laundering laws, however, apply to a broader range of conduct than that. They don’t just apply when people move around dirty money to disguise its source, nature, control, ownership, or location. They also apply when people move dirty money to promote the unlawful activity (e.g. by reinvesting the proceeds into it); to evade taxes; or to avoid currency-reporting requirements. See generally 18 U.S.C. § 1956; 31 U.S.C. §§ 5316, 5324, & 5332. They even apply when people knowingly engage (or attempt to engage) in any transaction involving more than $10,000 in dirty money, regardless of intent. 18 U.S.C. § 1957. And they apply to schemes to mask the source of legal money that is intended to support terrorism.

Below are a few of the important money-laundering laws we’ve enacted and their highlights.

Bank Secrecy Act (1970)

  • Required banks to keep adequate books and records to identify money flows and laundering.
  • Required banks to report cash transactions over $10,000 through a Currency Transaction Report (or CTR).

Money Laundering Control Act (1986)

  • Made money laundering a federal crime.
  • Prohibited the structuring of transactions to evade a CTR filing.
  • Introduced civil and criminal forfeiture for violations of the Bank Secrecy Act.

Annunzio-Wylie Anti-Money Laundering Act (1992)

  • Required banks to file suspicious activity reports (or SARs) if they know, suspect, or have reason to know or suspect that a transaction involves criminal activity.

Money Laundering Suppression Act (1994)

  • Regulated “money services businesses” (MSBs) that convert or transmit money (like Western Union, Check ‘n Go, or even a convenience store that issues money orders).
  • Criminalized the operation of an unregistered MSB. See, e.g., 18 U.S.C. § 1960.

Uniting and Strengthening America by Providing Appropriate Tools to Restrict, Intercept, and Obstruct Terrorism (USA PATRIOT) Act (2001)

  • Criminalized the financing of terrorism.
  • Facilitated government access to bank records.
  • Increased the civil and criminal penalties for money laundering.

Defending Yourself With Hands Tied Behind Your Back

If you’re a ham sandwich, beware.

Six months ago, this blog previewed a Supreme Court case that was to decide an important issue concerning your ability to pay for a defense, and two weeks ago, we got a decision.

Here’s the question: If the government charges you with a crime, and if it then seizes or freezes your money or property because it believes those assets are connected to the crime, can you challenge the government’s taking of your property before trial? What if that’s the only way you had of paying your lawyers to defend you? Doesn’t due process entitle you to a hearing on the issue?

The answer: Yes and no. Yes, you may be able to ask your trial court for a hearing, and at that hearing, you may be able to get your stuff back if you can show that it’s unrelated to the alleged crime. But no, you can’t try to get it back by using the hearing to challenge the decision to charge you in the first place.

The answer is more nuanced than that because the case concerned the government’s use of grand juries to charge felony cases, which is nearly every case in the federal system. (It’s less of an issue in state systems, which seldom use grand juries to bring criminal charges.) In the federal system, prosecutors typically decide what charges to bring and what evidence the grand jury hears.

And that’s the beef that some people have with the Court’s decision: the grand jury is supposed to perform a gatekeeping function, but in reality, the process is one-sided. There’s no defense attorney in there with them; there’s no cross-examination or presentation of defense evidence; and hearsay is permitted. What was enshrined in the Magna Carta as a shield against the King’s power is widely seen as a rubber stamp for the government and prosecution.

To the detriment of all ham sandwiches.

Lawful Marijuana Businesses Should Be Able to Bank, Says U.S. Attorney General

Three cheers for common sense. Speaking at the University of Virginia last Thursday, Attorney General Eric Holder said that lawful marijuana businesses should have access to the American banking system and that the government would soon offer rules to guide their relationships with banks.

Let’s hope so, because that is the only common-sense way to go about it, and for the twenty states that have legalized marijuana in some form or fashion, the alternative is something close to sabotage. If we are going to permit marijuana businesses to operate but then paint them in a corner by forcing them to hoard cash under their proverbial mattress, we should not feign shock or dismay if, for example, they come to rely on guns for protection, or if we leave potential tax revenue on the table, or if other ills follow as a result. “You don’t just want huge amounts of cash in these places,” according to Mr. Holder. “There’s a public safety component to this.”

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