U.S. Department of Justice (USDOJ)

Ian M. Comisky and Matthew D. Lee have authored a Journal of Taxation article entitled “IRS in the Offing? Marinello Limits Tax Obstruction Prosecutions.” In their article, Ian and Matt write that its recent decision in Marinello, the U.S. Supreme Court dealt taxpayers a rare win by significantly constraining the government’s ability to employ the criminal tax obstruction of justice statute. Construing the Section 7212(a) “Omnibus Clause,” which makes it a felony “corruptly or by force” to “endeavo[r] to obstruct or imped[e]… the due administration of [the Internal Revenue Code],” the Court rejected the notion that the statute covers “virtually all governmental efforts to collect taxes.” Concerned that the statute could reach, among other things, cash payments to a babysitter, the Court instead engrafted seemingly important nexus requirements to the statute. Specifically, the Court held that the provision requires specific interference with targeted governmental tax-related proceedings, “such as an investigation, an audit, or other targeted administrative action.” It will be up to the lower courts to determine the full scope of this limitation. You can read the full article here.

Reprinted with permission from the October 2018 edition of the Journal of Taxation.  

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August 23, 2018
Articles
Law360

Two weeks ago federal prosecutors announced criminal tax charges against the owners of five Chicago-area restaurants as part of an ongoing federal investigation into the underreporting of gross receipts using sales suppression software. The charges allege that the defendants willfully avoided paying the full amount of federal taxes by reporting gross receipts that were substantially lower than the true amounts. This case appears to be the largest and perhaps most significant federal criminal case to date against businesses that use sale suppression techniques to conceal revenue from tax authorities.

Commonly called “zappers,” sales suppression software programs run on a point-of-sale computers or cash registers and are used to secretly delete some or all cash transactions. The result is that the company’s books appear to be complete and accurate but are in fact false because they reflect fewer sales than were actually made. An article published by BNA last year reported that tax-zapping software costs states $21 billion in taxes annually and that 30 percent of the electronic cash registers, or point-of-sale systems, in the United States have a zapper installed.

To date, state attorneys general and revenue departments have taken the lead in cracking down on businesses that use sales suppression techniques. In the last two years, state authorities in Washington, Minnesota, Michigan, Illinois and Connecticut have successfully prosecuted criminal cases against businesses and their owners — primarily in the restaurant industry. Washington’s attorney general has been particularly aggressive in this area, filing earlier this year what he called the largest sales suppression case in the state’s history and two years ago what he called the “first-of-its-kind” zapper prosecution. In addition, numerous states have also passed laws outlawing the use of zappers and other types of sales suppression devices.

The Internal Revenue Service has been conspicuously absent from efforts to prosecute businesses and their owners for use of zappers, leading many to wonder whether the IRS would ever play a role or leave the anti-zapper efforts to the states. The only notable federal case to date involved John Yin, a salesman for a company that sold sales suppression software who was charged in December 2016. Yin sold zapper software to businesses in the Seattle area from at least 2009 through mid-2015. He pleaded guilty to assisting in the widespread distribution of zappers to dozens of customers in and around Seattle over the course of several years, and was eventually sentenced to 18 months in prison. While we expected a wave of federal prosecutions to follow the Yin case, that has not yet materialized (at least not publicly).

The federal charges in Chicago are the first federal charges in a zapper case since the Yin case. Five separate, and for the most part unrelated, business owners were charged in what was described as a “federal investigation targeting underreporting of gross receipts.” It appears that the federal investigation may have been prompted by a prior state case against one of the defendants. In August 2017, Illinois Attorney General Lisa Madigan announced charges against Sandra Sanchez, owner of Cesar’s Restaurant in Chicago. In that case, Sanchez was charged with theft and tax evasion for defrauding the state out of more than $100,000 by using a sales suppression device to underreport more than $1 million in sales to the Illinois Department of Revenue. The Attorney General alleged that between January 2012 and October 2015, Sanchez used a zapper to falsify electronic sales records to avoid paying the full amount of sales and use taxes to the state each month. The Sanchez prosecution was the first zapper case prosecuted in Illinois, following the state’s enactment of anti-zapper legislation in 2013. The press release announcing the charges noted that IRS criminal investigators assisted in the investigation. The Illinois Attorney General has not issued any subsequent press releases regarding this case, so it is not clear whether Sanchez has pleaded guilty or will be proceeding to trial or is cooperating with investigators.

Sandra Sanchez was one of the five individuals charged federally in Chicago two weeks ago. And the press release announcing the charges noted that she was charged by information, not by indictment, indicating that she has likely agreed to plead guilty. Also charged at the same time was Israel Sanchez, owner of a restaurant called Cesar’s on Broadway. Like Sandra Sanchez, Israel Sanchez was charged by information, indicating that he too is likely to plead guilty.

Given the prior state charges filed against Sandra Sanchez, and the apparent forthcoming federal guilty pleas by both Sandra Sanchez and Israel Sanchez, it may well be the case that one or both of these individuals are cooperating and assisting state and federal investigators with their zapper investigation. Indeed, last week’s Justice Department press release indicates that the federal investigation is ongoing and therefore may be more broadly focused than the five individuals charged. Indeed, the special agent-in-charge of the IRS Criminal Investigation Division in Chicago warned that these charges are just tip of the iceberg, and that cash-intensive businesses using zappers are at risk: “This is only the beginning. I want to warn those restaurants, gas stations, convenience stores and other establishments that are currently using or thinking of using sales suppression software, that we are on to you and your methods.”

Three other individuals were charged in Chicago last week: Shuli Zhao, owner of Katy’s Dumpling House in Westmont; Chun Xu Zhang, owner of Sushi City in Downers Grove; and Quan Shun Chen, owner of Hunan Spring in Evanston. It is not clear from the press release and charging documents whether these three individuals are related to each other or if they are related to the other two individuals charged, Sandra Sanchez and Israel Sanchez. Unlike the Sanchezes, these three business owners were charged by indictments, indicating that they are contesting the charges and are not pleading guilty.

The Chicago cases appear to be the most significant federal criminal case alleging use of tax zapper technology to date. As noted, for the past several years, state authorities have been taking a lead role in investigating and prosecuting businesses that use sale suppression technology. The Chicago cases are significant not only because they represent the first federal charges against business owners in many years (as opposed to the Yin case, which involved a zapper salesman) but also because they appear to be part of a larger investigation of Chicago-area businesses that use zappers. With guilty pleas expected from two of the individuals charged, at least one of those individuals likely cooperating, and the investigation ongoing, we anticipate seeing more federal charges arising out of this likely widening-probe.

Reprinted with permission from Law360. (c) 2018 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.

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Last month we wrote about the Justice Department’s new corporate resolution policy, which is intended to curb the practice of multiple government authorities imposing separate punishments on a corporate defendant for the same underlying conduct. Employing a football metaphor, Deputy Attorney General Rod Rosenstein explained that the intent of the new policy was to prevent “piling on,” which he described as “a player jumping on a pile of other players after the opponent is already tackled.” In the wake of this policy change, we have been carefully following Justice Department announcements of corporate investigations to see how this policy will work in practice.

The Justice Department recently announced resolution of a Foreign Corrupt Practices Act investigation involving a Hong Kong subsidiary of Swiss bank Credit Suisse. The allegations involved the awarding of employment to friends and family of Chinese officials in exchange for banking business. As part of the resolution, the Credit Suisse subsidiary entered into a non-prosecution agreement and agreed to pay a criminal penalty of $47 million. The SEC simultaneously announced that Credit Suisse entered into a settlement agreement covering the same underlying conduct and agreed to pay disgorgement of nearly $25 million with nearly $5 million of prejudgment interest. In an apparent nod to the anti-“piling on” policy, the SEC agreed to refrain from imposing any civil penalty. In fact, the SEC administrative order expressly provides that “[Credit Suisse] acknowledges that the Commission is not imposing a civil penalty based upon the imposition of a $47 million criminal fine as part of Credit Suisse’s settlement with the United States Department of Justice.”

When Rosenstein unveiled this new policy last month, he cited two examples of recent corporate resolutions that he said were consistent with the new anti-“piling on” approach. One of those resolutions, announced in April 2018, is very similar to the Credit Suisse resolution announced last week. In that case, the Justice Department entered into a deferred prosecution agreement in an FCPA investigation of the subsidiary of a global electronics company. The company paid a criminal penalty of $137 million. In a related proceeding, the SEC filed a cease-and-desist order against the company, which required the payment of $143 million in disgorgement for the same conduct. Rosenstein noted that the SEC agreed to forgo the imposition of penalties given the company’s agreement to pay a criminal penalty to the Justice Department.

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By Charles A. De Monaco, Matthew D. Lee and Jana Volante Walshak

Deputy Attorney General Rod Rosenstein unveiled a new Justice Department policy for resolving major corporate investigations last month at a speech to the New York City Bar White Collar Crime Institute.

The new policy encourages coordination among Justice Department components and other enforcement agencies in order to curb the practice of multiple government authorities imposing separate punishments on a corporate defendant for the same underlying conduct. Employing a football metaphor, Rosenstein said this new policy is meant to prevent “piling on,” which he described as “a player jumping on a pile of other players after the opponent is already tackled.”[1]

The goal of the policy is to enhance relationships with the Justice Department’s law enforcement partners in the United States and abroad, while avoiding what Rosenstein termed “unfair duplicative penalties.” And the Justice Department appears to have wasted little time in putting this policy into action, with the first such corporation resolutions of the new anti-“piling on” era announced this week, involving charges of foreign bribery and manipulation of the LIBOR interest rate.

Prior Instances of ‘Piling On’

Several corporate resolutions announced by the Justice Department over the last several years involved multiple penalties for the same underlying conduct which could be characterized as “piling on.” In 2012, international bank HSBC agreed to forfeit over $1.2 billion and enter into a deferred prosecution agreement with the Justice Department for violations of the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading with the Enemy Act.[2] In addition to the $1.2 billion forfeiture, HSBC agreed to pay $665 million in civil penalties for the same conduct to be apportioned among numerous other government agencies, including the Comptroller of the Currency, the Federal Reserve and the Treasury Department’s Financial Crimes Enforcement Network and Office of Foreign Assets Control.

In 2015, five global financial institutions pled guilty to charges that they conspired to manipulate currency prices in the foreign exchange market.[3] These banks paid a total of nearly $9 billion in fines to a long list of U.S. and foreign government agencies, including the Justice Department; the Federal Reserve; the Comptroller of the Currency; the New York State Department of Financial Services; the Commodity Futures Trading Commission; the United Kingdom’s Financial Conduct Authority; and the Swiss Financial Market Supervisory Authority.

The Justice Department’s New Corporate Resolution Policy

The Justice Department’s new anti-“piling on” policy has four key features. First, it reaffirms that the federal government’s criminal enforcement authority should not be used against a company for purposes unrelated to the investigation and prosecution of a possible crime. In particular, the Justice Department may not employ the threat of criminal prosecution solely to persuade a company to pay a larger settlement in a civil case.

Second, the policy addresses situations in which Justice Department attorneys in different components and offices may be seeking to resolve a corporate investigation based on the same misconduct. The new policy directs Department of Justice components to coordinate with one another, in order to achieve an overall equitable result. The coordination may include crediting and apportionment of financial penalties, fines and forfeitures, as well as other means of avoiding disproportionate punishment.

Third, the policy encourages Justice Department attorneys, when possible, to coordinate with other federal, state, local and foreign enforcement authorities seeking to resolve a case with a company for the same misconduct.

Finally, the new policy sets forth some factors that Department attorneys may evaluate in determining whether multiple penalties serve the interests of justice in a particular case. Factors identified in the policy that may guide this determination include the egregiousness of the wrongdoing; statutory mandates regarding penalties; the risk of delay in finalizing a resolution; and the adequacy and timeliness of a company’s disclosures and cooperation with the Justice Department. Rosenstein cautioned that under the new policy, the Justice Department may still seek penalties that may appear to be duplicative but are “essential to achieve justice and protect the public.” He also warned that a company’s cooperation with a different government agency or a foreign government is no substitute for cooperating with the Justice Department, and that his agency “will not look kindly on companies that come to the Department of Justice only after making inadequate disclosures to secure lenient penalties with other agencies or foreign governments.”

Rosenstein acknowledged that the new policy’s directive of cooperation is not a new idea. Certain Justice Department components and many U.S. Attorney’s Offices already coordinate with other federal agencies, including the Securities and Exchange Commission, the Commodities Futures Trading Commission, the Federal Reserve as well as authorities in other countries. For example, just a few months ago, the Justice Department’s Foreign Corrupt Practices Act unit announced a coordinated resolution with Brazil and Singapore.[4] The Justice Department’s Antitrust Division routinely cooperates with numerous foreign agencies in merger investigations, and its National Security Division works with the Treasury Department’s Office of Foreign Assets Control in investigations of sanctions and export control violations.

Rosenstein also reiterated that the Justice Department will continue to seek to identify and hold accountable culpable individuals in corporate investigations, a policy memorialized several years ago in the so-called “Yates Memorandum.” That policy document proclaimed that “[o]ne of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” Rosenstein explained that in corporate investigations, the primary question remains: “Who made the decision to set the company on a course of criminal conduct?”

Rosenstein also announced the creation of a “Working Group on Corporate Enforcement and Accountability” within the Justice Department. Designed to promote consistency in the Department’s white collar efforts, the Working Group includes Justice Department leadership and senior officials from the Federal Bureau of Investigation, the Criminal Division, the Civil Division, other litigating divisions involved in significant corporate investigations and the U.S. Attorney’s Offices. The Working Group will make internal recommendations about white collar crime, corporate compliance, and related issues.

Recent Examples

In a more recent speech, Rosenstein cited two recent examples of corporate resolutions that are consistent with the Justice Department’s new anti-“piling on” directive.[5]

First, in February 2018, the Justice Department announced that a U.S. subsidiary of an international bank pled guilty to obstructing its primary federal regulator by concealing deficiencies in its anti-money laundering program.[6] There, the bank agreed to forfeit nearly $370 million, and the Justice Department agreed that $50 million of that obligation was satisfied by the payment of civil penalties to the Office of the Comptroller of the Currency in a separate administrative action.

Next, in April 2018, the Justice Department and FBI announced a deferred prosecution agreement in an FCPA investigation of the subsidiary of a global electronics company.[7] In that case, the company paid a criminal penalty of $137 million. In a related proceeding, the SEC filed a cease-and-desist order against the company, which required the payment of $143 million in disgorgement for the same conduct. Rosenstein noted that the SEC agreed to forgo the imposition of penalties given the company’s agreement to pay a criminal penalty to the Justice Department.

And in early June, the Justice Department announced the first corporate resolutions since issuance of its new corporate resolution policy. First, a global bank headquartered in Paris and a wholly owned subsidiary agreed to pay more than $860 million to resolve charges in the United States and France involving bribery in Libya and manipulation of the LIBOR interest rate.[8] The financial institution also agreed to pay $475 million in regulatory penalties and disgorgement to the Commodity Futures Trading Commission in connection with the LIBOR scheme, and $293 million to French authorities in connection with the Libyan bribery scheme. In an apparent nod to the new policy discouraging “piling on,” the United States agreed to credit the $293 million French payment against the total U.S. criminal penalty for the bribery charges.

In a related case announced the same day, a U.S. investment management firm entered into a non-prosecution agreement and agreed to pay $64 million in criminal penalties and disgorgement to settle FCPA charges relating to bribery in Libya.[9] The $64 million payment includes approximately $33 million to be paid to the United States Treasury and disgorgement of approximately $32 million, which will be credited against disgorgement paid to other law enforcement agencies within the first year of the agreement.

Conclusion

While the Justice Department’s new corporate resolution policy appears to be a step in the right direction, it remains to be seen how well the Department will be able to coordinate resolutions with other enforcement agencies, particularly those at the state level as well as foreign counterparts. For example, there may well be instances in which other interested law enforcement agencies – such as state attorneys general – may be unwilling to accept a reduced, or coordinated, punishment from a corporate wrongdoer. Without written policies to prevent “piling on” by coordinate law enforcement agencies, the Justice Department may be unable to prevent imposition of “unfair duplicative penalties.”


[1] U.S. Department of Justice Press Release, “Deputy Attorney General Rod Rosenstein Delivers Remarks to the New York City Bar White Collar Crime Institute” (May 9, 2018).

[2] U.S. Department of Justice Press Release, “HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement” (Dec. 11, 2012).

[3] U.S. Department of Justice Press Release, “Five Major Banks Agree to Parent-Level Guilty Pleas” (May 20, 2015).

[4] U.S. Department of Justice Press Release, “Keppel Offshore & Marine Ltd. and U.S. Based Subsidiary Agree to Pay $422 Million in Global Penalties to Resolve Foreign Bribery Case” (Dec. 22, 2017).

[5] U.S. Department of Justice Press Release, “Deputy Attorney General Rod Rosenstein Delivers Remarks at the Bloomberg Law Leadership Forum” (May 23, 2018).

[6] U.S. Department of Justice Press Release, “Rabobank NA Pleads Guilty, Agrees to Pay Over $360 Million” (Feb. 7, 2018).

[7] U.S. Department of Justice Press Release, “Panasonic Avionics Corporation Agrees to Pay $137 Million to Resolve Foreign Corrupt Practices Act Charges” (Apr. 30, 2018).

[8] U.S. Department of Justice Press Release, “Société Générale S.A. Agrees to Pay $860 Million in Criminal Penalties for Bribing Gaddafi-Era Libyan Officials and Manipulating LIBOR Rate” (June 4, 2018).

[9] U.S. Department of Justice Press Release, “Legg Mason Inc. Agrees to Pay $64 Million in Criminal Penalties and Disgorgement to Resolve FCPA Charges Related to Bribery of Gaddafi-Era Libyan Officials” (June 4, 2018).

The Internal Revenue Service has announced that the nation’s tax season will begin on Monday, January 29, 2018. As is typically the case, the annual opening of tax season is accompanied by well-publicized enforcement actions intended to warn potential tax cheats of the perils of filing a false tax return. This year is no different, with the announcement that reality television personality Michael “The Situation” Sorrentino and his brother, Marc Sorrentino, pleaded guilty today to violating federal tax laws.

Michael Sorrentino was a reality television personality who gained fame on “The Jersey Shore,” which first appeared on the MTV network.  According to documents and information provided to the court, he and his brother created businesses, such as MPS Entertainment LLC and Situation Nation Inc., to take advantage of Michael’s celebrity status. Michael Sorrentino admitted that in tax year 2011, he earned taxable income, including some that was paid in cash, and that he concealed a portion of his income to evade paying the full amount of taxes he owed.  He also made cash deposits into bank accounts in amounts less than $10,000, in an effort to ensure that these deposits would not come to the attention of the IRS.  Marc Sorrentino admitted that for tax year 2010, he earned taxable income and that he assisted his accountants in preparing his personal tax return by willfully providing them with false information and fraudulently underreporting his income.  Gregg Mark, the accountant for the Sorrentino brothers, previously pleaded guilty in 2015 to conspiring to defraud the United States with respect to their tax liabilities.

Sentencing is scheduled for April 25, 2018.

Today’s announcement was replete with the usual warnings to would-be tax evaders from Justice Department and IRS officials:

“Today’s pleas are a reminder to all individuals to comply with the tax laws, file honest and accurate returns and pay their fair share,” said Principal Deputy Assistant Attorney General Zuckerman. “The Tax Division is committed to continuing to work with the IRS to prosecute those who seek to cheat the system, while honest hardworking taxpayers play by the rules.”

“What the defendants admitted to today, quite simply, is tantamount to stealing money from their fellow taxpayers,” said U.S. Attorney Carpenito. “All of us are required by law to pay our fair share of taxes. Celebrity status does not provide a free pass from this obligation.”

 “As we approach this year’s filing season, today’s guilty pleas should serve as a stark reminder to those who would attempt to defraud our nation’s tax system,” stated Jonathan D. Larsen, Special Agent in Charge, IRS-Criminal Investigation, Newark Field Office.  “No matter what your stature is in our society, everyone is expected to play by the rules, and those who do not will be held accountable and brought to justice.”

It is well-known that the IRS and Justice Department typically increase the frequency of their press releases announcing enforcement activity in the weeks leading up to the tax filing deadline. In fact, academic research confirms that these agencies issue a disproportionately large number of tax enforcement press releases as “Tax Day” approaches:

Every spring, the federal government appears to deliver an abundance of announcements that describe criminal convictions and civil injunctions involving taxpayers who have been accused of committing tax fraud. Commentators have occasionally suggested that the government announces a large number of tax enforcement actions in close proximity to a critical date in the tax compliance landscape: April 15, “Tax Day.” These claims previously were merely speculative, as they lacked any empirical support. This article fills the empirical void by seeking to answer a straightforward question: When does the government publicize tax enforcement? To conduct our study, we analyzed all 782 press releases issued by the U.S. Department of Justice Tax Division during the seven-year period of 2003 through 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. Our principal finding is that, during those years, the government issued a disproportionately large number of tax enforcement press releases during the weeks immediately prior to Tax Day compared to the rest of the year and that this difference is highly statistically significant. A convincing explanation for this finding is that government officials deliberately use tax enforcement publicity to influence individual taxpayers’ perceptions and knowledge of audit probability, tax penalties, and the government’s tax enforcement efficacy while taxpayers are preparing their annual individual tax returns.

Joshua D. Blank and Daniel Z. Levin, When Is Tax Enforcement Publicized?, 30 Virginia Tax Review 1 (2010).

As “Tax Day 2018” approaches, we can expect similar — and more frequent — announcements intended to deter would-be tax cheats from filing false tax returns.

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Our colleague Ryan Becker reports that the Foreign Corrupt Practices Act is alive and well and remains a top enforcement priority for the new administration.  In an article published today, Ryan writes that since 2016, the Justice Department’s Fraud Section has resolved 17 criminal corporate matters under the FCPA, obtaining more than $1.6 billion in penalties and forfeited profits.  Last week, Deputy Attorney General Rod J. Rosenstein reaffirmed DOJ’s commitment to FCPA enforcement while announcing a revised corporate enforcement policy aimed at incentivizing corporations to self-report violations and fully cooperate in exchange for a declination of prosecution.  The new policy largely formalizes principles previously announced in April 2016 as part of the DOJ’s “Pilot Program” on FCPA enforcement. Rosenstein credited the positive results of the Pilot Program with a significant increase in voluntary disclosures over the prior 18-month period. As a result, DOJ has adopted the new enforcement guidelines, which will be incorporated into the U.S. Attorneys’ Manual.  You can read Ryan’s article here.

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