News & Press: ACFCS News

Treasury watchdog criticizes DOJ, IRS for putting profit before service in civil asset forfeitures

Thursday, April 6, 2017   (1 Comments)
Posted by: Brian Monroe
Share |

By Brian Monroe
April 6, 2017

A U.S. government watchdog group has criticized a federal law enforcement agency for twisting financial crime laws meant to seize the assets of criminal groups, saying agents used them against innocent individuals and businesses and violated their rights while garnering billions of dollars for state and local partners.

That is the conclusion of the U.S. Treasury’s Inspector General for Tax Administration (TIGTA) after an audit of the Internal Revenue Services (IRS) Criminal Investigation (CI) division’s use of civil asset seizure powers granted under anti-money laundering (AML) rules, in many cases tied to the crime of structuring.

The TIGTA report is the culmination of a growing chorus of state and federal legislators, individuals, business and legal groups employing a mix of analytical and anecdotal evidence to argue that local and state police agencies are sometimes “policing for profit” - targeting businesses and individuals based on how much and how easily they could take their money.

The report is also clearly informed by federal and state initiatives to reform civil asset seizure laws that have been advanced by a number of legislators and advocacy groups. Proponents of reform say forfeiture efforts should focus on actual evidence of a crime or that the money is truly from an illegal source and the property owner knew that the asset or property was being used to, say, sell or create drugs, a charge that agents would be required to corroborate by a third party.

“There is a lot of momentum across the country to end civil asset forfeiture and replace it with criminal forfeiture,” said Lee McGrath, the senior legislative counsel for the Institute for Justice (IJ), which advocates on an extensive array of issues, including free speech, economic liberty and property rights.

“The American public overwhelmingly believes that someone should be convicted for a crime as a prerequisite to losing property through forfeiture,” he said. “No one acquitted of a crime should lose their property through civil forfeiture.”

The Bank Secrecy Act (BSA), the country’s chief AML statute, requires financial institutions to report currency transactions in excess of $10,000.

But the law also makes it a crime for property owners to structure currency transactions in such a way as to evade requirements and avoid the filing of the report, and subjects structured amounts to civil or criminal forfeiture proceedings.

As a critical counterpoint to these broad powers, according to TIGTA, the Eighth Amendment to the U.S. Constitution requires that penalties in a civil forfeiture case “be proportionate to the conduct and serves to limit what the government can forfeit depending on the facts of the particular case.” According to the report, this dynamic has gone awry in some cases through a combination of fear, intimidation and greed.

The changes to these laws, some of which have already been enacted in more than a dozen states, also focus on removing the “profit motives” for local and state police districts.

That would be done primarily by the elimination of what are called “equitable sharing” rules, allowing as much as 80 percent of the forfeited assets obtained at the regional level to be reimbursed back in a federal feedback loop to the departments that got them originally.

Purpose of civil forfeiture to destroy criminal groups, not innocent lives

While the BSA does not distinguish between legal and illegal sources of funds, “IRS procedures dictate that the overall purpose of its civil forfeiture program is to disrupt and dismantle criminal enterprises,” according to the TIGTA report.

Criminal forfeitures have a higher evidentiary threshold and can take longer to get court approvals, while civil forfeitures can be a vital tool to stop a range of criminal groups, both domestic and transnational. They can also be essential to help prevent criminals from moving funds and assets to offshore secrecy havens with impenetrable ownership structures and few if any legal treaties with the U.S.

The initiatives to mute civil forfeitures, however, are not expected to affect the use of civil asset forfeiture powers in large negotiated financial crime compliance settlements and actions against large, established organized criminal groups, drug trafficking operations and the movement of illicit funds tied to corrupt powerbrokers, kleptocrats and oligarchs, a major focus of federal investigators and regulators.

Some of the key highlights in the TIGITA report include:

·         Legal source of funds: TIGTA determined that 91 percent of the 278 investigations in its sample where source of funds could be determined were of businesses and individuals whose funds were obtained legally.

·         Legal businesses: Most people impacted by the program did not appear to be criminal enterprises engaged in other alleged illegal activity; rather, they were legal businesses such as jewelry stores, restaurant owners, gas station owners, scrap metal dealers, and others.

·         Easy prey, quick hits: One of the reasons why legal source cases were pursued was that the Department of Justice had encouraged task forces to engage in “quick hits,” where property was more quickly seized and resolved through negotiation, rather than cases with other criminal activity, such as drug trafficking and money laundering, which are more time-consuming.

·         CTR patterns: In most cases, CI generally relied on the pattern of currency transactions to support the seizure rather than initially seeking information from the property owners. When interviewed, agents also didn’t always properly identify themselves, advise the person of their rights or tell them they had committed a crime until the end.

·         Explanations disregarded: In 54 cases, property owners gave reasonable explanations for why currency transactions did not exceed $10,000, and, in most cases, TIGTA found no evidence that these explanations were investigated.

·         Fear, intimidation: In some cases, the government appeared to bargain non-prosecution to resolve the civil forfeiture case, though it is not clear whether the potential criminal matters were leveraged solely to resolve the civil matter, which would have been improper.

Funds seized under the federal asset forfeiture program, on the civil and criminal side, have climbed since 2007, but are falling in recent years.

FY 2007                      $1.6 billion

FY 2008                      $1.3 billion

FY 2009                      $1.4 billion

FY 2010                      $1.6 billion

FY 2011                      $1.7 billion

FY 2012                      $4.2 billion

FY 2013                      $2.1 billion

FY 2014                      $4.5 billion

FY 2015                      $1.6 billion

FY 2016                      $1.9 billion

Asset forfeiture program balloons in recent years, but now dropping

Even with its detractors, according to the latest budget documents, the federal asset forfeiture fund (AFF) program has become an ever more important tool to fund law enforcement, particularly at the state and local levels, and attempt to make fraud and other criminal victims whole.

Currently, there are more than 7,200 state and local law enforcement agencies that participate in the Equitable Sharing Program, “which allows those agencies to reinvest in law enforcement training and equipment, including body armor and rescue equipment.”

Annual forfeiture revenue to the AFF never exceeded $500 million during the first twenty years of the Program’s existence, according to the report. “But over the last ten years, the AFF has evolved into a multi-billion dollar national program.”

“Much of this growth can be attributed to a number of large fraud and economic crime forfeiture cases, especially cases where sizable assets have been seized and forfeited in order to compensate innocent victims of crime,” according to the report, adding that asset forfeiture is “frequently the most effective tool in recovering the proceeds and property of crime for victims.”

From FY 2010 to FY 2015, the program returned $2.8 billion to victims.

Asset forfeiture powers have also secured $4 billion tied to the implosion of Bernard Madoff’s ponzi scheme, the largest in U.S. history, and have been used in large AML and sanctions penalties, garnering hundreds of millions of dollars before they can be dissipated by schemers and criminals.

But the fund is also taking major hits from other budget and appropriations acts that have created “permanent recissions” of more than $1 billion, while two other programs to make whole victims of terror acts could further drain asset forfeiture proceeds.

Due to the budgetary shortfalls, the U.S. government actually halted the “equitable sharing” program for nearly a year, putting more pressure on local police force budgets.

IRS makes changes to satisfy watchdog, critics

The IRS as well could see its civilly forfeited assets fall.

It has stated it has adopted changes to improve the program, though the results, thus far, are inconsistent.

IRS-CI changed its policy in October of 2014 “so that, going forward, it would only pursue illegal source income in structuring cases unless there are ‘exceptional circumstances’ and made additional process changes to improve the program,” according to the report. 

In a sample of cases covering periods after the policy change, TIGTA “found some inconsistencies with the new policy,” according to the report.

In 2016, after two congressional hearings on this program, in a bid for recompense, CI also “began a process of notifying approximately 1,800 property owners who had funds forfeited in this program and inviting them to send in petitions for return of their funds.”

“Criminal Investigation has now made important improvements to this program; however, the IRS should ensure that protections are in place so that people have rights and that innocent people do not feel compelled to settle a civil forfeiture matter under the pressure of possible criminal prosecution,” said J. Russell George, the Treasury Inspector General for Tax Administration.

Moreover, IRS-CI “agreed that all reasonable explanations provided by subjects should be explored and has eliminated the use of Consents to Forfeiture,” a document where individuals could be pressured to sign away their rights without any judicial review or representation.

But IRS-CI “declined to provide additional guidance or training regarding the bargaining of nonprosecution to resolve a civil case,” according to the report.

More states taking a stand against civil asset forfeiture

In the case of many states, they are not waiting for IRS to make changes.

They are taking the issue directly to their elected representatives, who are building momentum in some cases to end the practice altogether.

Since 2014, 19 states and the District of Columbia have reformed their civil forfeiture laws, including Minnesota, Michigan, Nevada, Florida, Delaware and California, according to the Institute for Justice.

As well, currently 12 states now require a criminal conviction for most or all forfeiture cases, including California, Montana, Nevada, Oregon and Vermont.

Five states and the District of Columbia have passed anti-circumvention legislation to close the equitable-sharing loophole: New Mexico, Nebraska, Maryland, California and Ohio. Three states – North Carolina, New Mexico and Nebraska – have abolished civil forfeiture entirely.

Overall, nearly 90 percent of federal forfeitures were civil, not criminal, “so the government didn’t have to charge or convict anyone to take property,” according to the Institute for Justice.

But asset forfeiture, done properly, does have a proper place in the federal investigator’s toolkit.

“Asset forfeiture is a legitimate government function,” McGrath said. “No one has the right to the fruits of crime. The question is about process. Advocates across the political spectrum support the criminal forfeiture process.”

The various proposals at the state and federal levels “don’t affect the work of police officers,  sheriffs’ deputies and highway patrolman,” he said.

“Yesterday, today and tomorrow, they will be able to seize contraband and property if they have probable cause,” McGrath said. “What the proposals do is affect the work of prosecutors and require that the litigation dealing with the loss of title to the property owner to the state occurs after a conviction.”

Federal legislators taking cues from state counterparts

The various state initiatives run in parallel with federal legislative efforts to make it more difficult to seize assets without a conviction.

On Monday, U.S. Representatives Peter J. Roskam (R-IL) and Joseph Crowley (D-NY) stated they are renewing their efforts to rein in asset forfeiture abuse with the RESPECT Act, which would “limit the IRS’ ability to seize people’s money without first charging them with a crime.”

Roskam, who serves as Ways & Means Tax Policy Chairman, and Crowley, who chairs the Democratic Caucus, stated they believe the original goals of the law, targeting and crippling organized criminal groups, has been corrupted and entangled too many law-abiding citizens, chiefly under the guise of breaching anti-money laundering (AML) laws tied to evading certain dollar deposit and withdrawal thresholds.  

As Chairman of the Ways & Means Subcommittee on Oversight during the last Congress, Roskam stated that he spearheaded a “comprehensive investigation into Internal Revenue Service (IRS) and Department of Justice (DOJ) practices that led the IRS to change its policies and formally apologize to victims of forfeiture abuse.”

But he also added that IRS practices, and the 1,800 letters sent to victims, only occurred after several Congressional hearings and “intense pressure” on IRS and DOJ.

The individuals got on investigators’ radar for “structuring” transactions, which in itself is still technically a crime even if the underlying funds are of legal origin.

“It’s clear to everyone involved that there was rampant abuse in the forfeiture program,” Roskam said in a statement. “The IRS and DOJ abused their authority and took money from people who did nothing wrong.”

The legislation, if passed, would make “sure they can never do it again. With the support of so many lawmakers from both sides of the aisle, we can finally put this ugly chapter to rest.”

A prior bill unanimously passed the House by a 415-0 vote late last year. U.S. Senators Tim Scott (R-SC) and Sherrod Brown (D-OH) are introducing companion legislation and “expect swift consideration in the upper chamber,” according to the legislators.

“Civil asset forfeiture may have begun as a tool to combat criminal activity, but it has morphed into a complex process that unfairly entangles innocent individuals,” Crowley said. “There is no question that the laws are deeply flawed and the process was riddled with abuse.”

As well, last month, U.S. Senator Rand Paul reintroduced the FAIR (Fifth Amendment Integrity Restoration) Act to “protect property owners’ rights and restore the Fifth Amendment’s role in civil forfeiture proceedings.” 

Rep. Tim Walberg (R-MI) has introduced companion legislation in the U.S. House of Representatives.

“The federal government has made it far too easy for government agencies to take and profit from the property of those who have not been convicted of a crime,” Paul said.

The bill, if it became law, would ensure “government agencies no longer profit from taking the property of U.S. citizens without due process. It guards against abuse while maintaining the ability of courts to order the surrender of proceeds of crime.”   

The bill has several provisions meant to improve the current paradigm by removing state and local profit incentives and improving oversight and transparency at the federal level by requiring a breakdown of funds obtained by civil and criminal forfeitures, including:

  • Ends “Equitable” Sharing: The program currently allows state law enforcement officers to turn seized property over to federal officials for forfeiture, getting the lion’s share back.
  • Guilty or innocent: Now, federal agencies may take property suspected of involvement in crime without charging the property owner. Under the act, the government must show the individual consented to his property being used in a crime by a third party.
  • Clear, convincing evidence: Now, the government need only prove by a preponderance of the evidence the person’s property was used for an illegal purpose to forfeit it. The FAIR Act would require the higher standard of clear and convincing evidence. 
  • Removes the profit incentive: Law enforcement should be motivated by public safety, not financial rewards. The FAIR Act would restore the rule in which the proceeds of forfeiture go to the Treasury’s General Fund, where Congress appropriates the money. 

The act is also supported by a broad cross-section of legal, business and civil society groups, including the American Civil Liberties Union, Institute for Justice, FreedomWorks, National Federation of Independent Business, National Association of Criminal Defense Lawyers, Drug Policy Alliance, Americans for Tax Reform, and Campaign for Liberty.

“Over the past few years, we’ve seen a wave of stories where the government unjustly seized property from innocent Americans without charging them with a crime,” Walberg said in a statement. “These types of abuses of civil asset forfeiture laws should be a clarion call to reform the system and uphold the constitutional rights of the American people.”


Craig Hymowitz says...
Posted Friday, April 7, 2017
Excellent piece Brian. This is an area that has not gotten enough attention.

©2018 Association of Certified Financial Crime Specialists
All Rights Reserved