Under pressure in global tax evasion crackdown, Swiss havens begin stripping away secrecy layers

For seven decades, Swiss financial institutions have been synonymous with secret bank accounts holding hidden assets for clients averse to paying taxes and financial criminals averse to having their loot discovered. Swiss bank accounts are said to hold almost 30% of the world’s private banking assets under management, a staggering sum that is estimated at $2.1 trillion dollars.

Switzerland bank secrecy laws provide strict confidentiality to accountholders. They have earned a well-deserved reputation as a safe haven for tax evasion and criminal proceeds, including those that come from all types of financial crime, including fraud, money laundering and corruption. Switzerland does not deem tax evasion a criminal offense and does not honor requests for assistance from nations pursuing tax evasion by their citizens. The profits for Swiss banks from this long-standing confidentiality are enormous.
Swiss bank secrecy encountering first major breach since 1934
Now, for the first time since its secrecy laws were enacted in 1934, the era of strict bank secrecy in Switzerland may be nearing an end. Swiss institutions are facing unprecedented legal pressure from the US Department of Justice in the civil and criminal realms.

At the same time, Switzerland is confronting demands for new tax treaties from its European neighbors, who seek agreements to detect citizens who hold accounts at Swiss institutions to evade their home state taxes. Under the weight of a global crackdown on tax evasion, Swiss bank secrecy is imperiled.

As a result, tax evaders are scrambling to find new safe secrecy havens, which they may not have trouble finding. About 60 offshore secrecy havens around the world think money has no odor, irrespective of provenance.

“Switzerland is certainly getting less attractive,” says Jeffrey Neiman, a former federal prosecutor at the Justice Department’s Tax Division, who helped lead the 2009 case against UBS for opening secret accounts for 52,000 tax-evading US citizens. “The money is leaving, and a lot of it is going to places in Asia, like Hong Kong.”

Facing lawsuits and political pressure, some Swiss bankers are even admitting that it may be time to give up some of the secrecy from which they benefit. “Switzerland got rich through black money,” said UBS CEO Sergio Ermotti in an October 2011 interview with Swiss newspaper SonntagsBlick. “That will change in the future.”

Swiss tax treaties with Germany and UK signed, but US pact lags

On April 5, the German and Swiss governments signed a treaty that levies taxes on accounts of German citizens at Swiss institutions. Last year, Switzerland struck a similar accord with the UK, which takes effect in 2013.

Representatives of several US agencies and the Swiss finance ministry have conducted long-running negotiations on a treaty to tax US accountholders. Swiss media reports say an agreement may be close.

“This is the end of Swiss bank secrecy the way it used to be,” Bruce Zagaris told ACFCS. He is a partner at the law firm, Berliner, Corcoran and Rowe, in Washington, DC, and publisher and editor of the respected International Enforcement Law Reporter.

“But it doesn’t mean that it is the end of the Swiss commitment to financial confidentiality. There’s still a strong culture in Switzerland that wants to protect confidentiality as a main tenet of the country’s financial system,” he adds.

US Justice Department tests Swiss commitment by indicting Swiss bank
The Swiss commitment to banking secrecy is being tested by the US Justice Department, which has aggressively pursued Swiss banks since the groundbreaking UBS case in 2009.

That case, in which Neiman and other US prosecutors obtained a Deferred Prosecution Agreement against the financial giant and indictments of some employees for conspiring to assist thousands of US persons evade US taxes, led to UBS revealing the accounts of 4,450 US persons and paying $780 million in penalties.

Meanwhile, the US has stepped up legal pressure on Swiss financial institutions. Reports published in The New York Times say the Justice Department is investigating Credit Suisse and 10 other Swiss banks.

In recent months, the Justice Department has brought civil and criminal cases against other Swiss institutions and investment managers on tax evasion charges. Most notably, it obtained a grand jury indictment of Wegelin, Switzerland’s oldest private bank, on February 2, 2012.

The fraud and conspiracy charges in the 59-page indictment accuse Wegelin of facilitating the evasion of US taxes by US persons on an estimated $1.2 billion in assets the bank held. The indictment also accused bank executives and managers of advising their US customers to not disclose information about their accounts to the IRS.

Novel charge of ‘aiding and abetting US tax evasion’ against Wegelin bank
Wegelin is one of the first foreign financial institutions to be indicted for aiding and abetting US tax evasion. It has not answered the indictment, but has chosen to avoid the confrontation. Its owners chose to effectively dissolve the bank and sell it days before the indictment was returned.

“When you look at the facts of the Wegelin case, if the US didn’t formally charge Wegelin, there’s not a bank on the planet it would not go after,” says Neiman. “This gives the US credibility as it pursues other Swiss institutions.”

“The Wegelin case is significant because of the timing,” says Zagaris. “The indictment came one or two days after the Swiss said they had the tax information the US was looking for, but that it was encrypted, and they wouldn’t turn it over until there was a global agreement” covering all Swiss financial institutions.

As part of the wider agreement, “the Swiss want the US to not prosecute its institutions and individuals,” says Zagaris. “In response, the US issued the Wegelin indictment. The US hasn’t formally said anything, but it’s done something.”

Swiss court, politicians battle to preserve confidentiality

Despite the mounting US legal pressure, some Swiss financial institution and political officials are still willing to fight to maintain bank secrecy. On April 11, the Federal Administrative Court in Bern rejected an IRS request for information on US accountholders at Credit Suisse. The judge called the request too vague, and said it violated a 1996 US-Swiss tax treaty by not including the names of accountholders. The decision cannot be appealed.

The Swiss have maintained a level of anonymity for foreign customers in their tax agreements with other European nations. The deal struck with Germany this month calls for taxation of investment accounts of German citizens at Swiss institutions but does not require the names and personally identifying information of accountholders to be disclosed to German tax authorities.

The treaty faces an uphill battle in the German Bundesrat, which must approve it. German opposition parties have criticized the arrangement as too lenient and are demanding higher tax rates and the collection of more information about German accountholders.

The agreement last year between Switzerland and the UK also allows for taxation of UK citizens at Swiss institutions without gathering the names of these accountholders. This treaty also awaits approval by the British parliament.

So far, the US seems unwilling to accept any agreement that would allow similar anonymity for US account holders.

Foreign money slipping away from Switzerland to Asian havens, says expert

Notwithstanding these negotiations and US legal efforts, it may be too late for Swiss institutions to salvage many of the foreign assets they had under management. Foreign assets in the nation’s financial institutions have declined in each of the past three years, according to figures released by the Swiss National Bank.

“Money has gone to places like Singapore, Malaysia and Hong Kong, but it’s going there for a variety of reasons” beyond confidentiality, says Zagaris. He notes that these Asian destinations for hiding “alleged dirty money” do not have the codified secrecy laws or reputation for discretion cultivated by Swiss institutions.

For the US Justice Department, the decline of Switzerland as a tax haven can be counted as a victory in its global combat against tax evasion, even it if drives some tax evaders farther underground.

‘Disclosing assets and paying taxes may become the easier option,’ says prosecutor of UBS
“The Department of Justice recognizes that there are always going to be places to hide money,” says Neiman. “They want to make it as difficult and unpleasant as possible to do it.”

For US persons looking him to hide assets, “instead of a six-hour flight, it’s now a 14-hour flight,” Neiman says. “Instead of meeting with a banker from UBS, you’re now meeting with a guy with an eye-patch, handing over a briefcase full of money to someone you’ve never met before.”

“At some point,” Neiman continues, “disclosing assets and paying taxes becomes the easier option.”

Guarding Against the ‘Enemy Within’ – Best Practices in Employee Due Diligence at Onboarding

Financial institutions spend great time and money “onboarding” new customers to see if they pose an intolerable financial crime risk. But, financial institution employees, who spend their entire working days learning valuable information, seeing sensitive things and having access to key functions that could be compromised, sold or stolen are often scrutinized a little before they are hired and virtually forgotten after they are given the keys. The challenge is to keep good employees in and bad ones out. Recent cases, such as the TD Bank-Coquina case, show the harm employees can do to a financial institution. How should institutions and other businesses manage employee due diligence programs to reduce the risk of harm from the “enemy within”? What are the best practices for monitoring employees after they are hired? What internal controls are permissible and good for detecting and controlling illicit employee behavior? Here, our expert gives you answers, guide you on good employee due diligence procedures and shows you legal pitfalls you should avoid.

John F. Walsh, CEO, SightSpan Inc., Charlotte
A highly regarded industry leader on the subjects of risk management, financial crime risk management, security, anti-money laundering and combating terrorist financing, John has been the CEO of SightSpan Inc, since 2007. He has also held numerous high-level positions within the financial services industry, including leadership roles at Wachovia Bank, Bank of America and Merrill Lynch. His expertise and insight into international business management, compliance, security and overall operational risk management have earned him the reputation as a leader in the financial crime field.

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TD Bank says ‘copying error’ caused altered document in fraud-money laundering case

The case in which TD Bank has already lost a precedent-setting verdict for “aiding and abetting fraud” arising from collusion with one of its customers to defraud numerous persons and to launder the proceeds has taken an ugly turn.

A 70-day trial that ended in January produced a $67 million victory for Coquina Investments in its civil suit against TD Bank. Coquina was a victim of a megafraud perpetrated by TD Bank customer, Scott Rothstein, a convicted former lawyer now serving a 50-year prison term. The bank has appealed the verdict.

But now, TD Bank, one of the world’s largest banks, confronts explosive post-trial charges that it produced a fraudulent piece of evidence at the trial that falsely hid its internal assessment that Rothstein and his firm were a “high risk” for money laundering.

The evidence, a 2009 TD Bank document called a “Customer Due Diligence” form, contained the findings of the pre-account opening inquiry by the bank of Rothstein’s firm, Rothstein, Rosenfeldt and Adler.

Coquina Investments, the fraud victim that won the unprecedented verdict, alleged on March 26 that the bank perpetrated a “fraud on the court and jury” by hiding a red banner that contained the all-upper-case words “HIGH RISK.”

The accusation, in the form of a motion for sanctions filed by Coquina’s lead lawyer, David Mandel, of the Miami firm, Mandel & Mandel, alleges that TD Bank and its lawyers at Greenberg Traurig intentionally altered the form to keep the jury from seeing the official designation of Rothstein’s law firm as “high risk.”

TD Bank says altered form did not hurt plaintiff’s case

TD responded to the accusation on April 12, denying any intention to mislead the jury. It said the alteration of the form resulted from a “copying error” by clerical staff and that Mandel knew of the high risk designation and stressed that to the jury in his closing argument. The bank said the altered form did not significantly influence the jury or change the trial’s outcome, which was favorable to Coquina in any event.

Mandel countered with a strongly-worded reply on April 16, saying the bank’s “response is tantamount to a continuing fraud on the court.” He said TD Bank’s explanation that its “copying process” was to blame for the doctored document “is not credible and can’t be replicated.”

He said “the trial would have proceeded much differently had the defendant produced the true document.” Coquina’s $67 million verdict included $35 million in punitive damages. Mandel had asked the jury to award $140 million in punitive damages.

With true form in hand, jury may have awarded higher damages

“Coquina is unfairly left to wonder what the jury’s punitive damages award might have been if [TD Bank] had produced an unaltered version of the document before trial,” says Mandel.

“The integrity of our judicial system demands that [TD Bank’s] actions have consequences,” he added.

Mandel said the bank not only introduced “the altered document into evidence,” but also “affirmatively used it, both to cross-examine Coquina’s expert and in closing argument.” The bank, he says, “insisted that (Rothstein’s firm) was a Low Risk customer” and berated Coquina’s expert for asserting otherwise.

He alluded to a federal law at Title 18 USC, Section 1512(c)(1), which makes it a criminal offense to intentionally alter a document for use in a trial.

‘Unreasonable’ to believe alteration was accidental, Mandel says

The version of the Customer Due Diligence form the bank introduced in evidence had a simple black bar as a heading. Mandel says the true form, which he obtained in another case in which TD Bank is being sued, contains the words “HIGH RISK” emblazoned across the top, highlighted by a red background.

He says the alteration was so obvious and egregious that it had to be deliberate and that the misleading form propped up TD’s defense that it knew nothing of Rothstein’s fraud, did not help him perpetrate it and viewed his law firm as low risk.

“With tens of millions of dollars on the line, the Defendant asks the Court to believe… that it accidentally altered the document and presented it to the jury in a fashion that was undeniably misleading,” says Mandel. He calls the argument “nonsense.”

TD Bank denies bad faith

The bank’s April 12 response denies it acted in “bad faith” and says changes to the form were unintentional by unnamed administrative staff.

The bank submitted a signed declaration by Sara Pinkus, a risk officer who had been asked to “gather customer due diligence records” to send to Greenberg Traurig for the trial. Pinkus says she printed the form and turned it over to an assistant for photocopying. The form was sent to the law firm, where a clerical assistant scanned the form and converted it to electronic format.

The bank says “the printing and copying process inadvertently blackened all of the words in all of the colored headers of the [form],” including the “HIGH RISK” designation.

Mandel calls this explanation “insufficient, inaccurate and potentially perjurious.”

“Coquina attempted to replicate the Defendant’s ‘copying process,’ but none of our efforts resulted in the words HIGH RISK being obscured from the document.” he adds.

TD Bank declined requests for comment by ACFCS.org, citing its policy of not commenting on “pending litigation.”

TD Bank says it “sincerely regrets this copying error,” but contends that the obliterated “HIGH RISK” heading had no impact on Coquina’s presentation at trial.

TD Bank’s laundering expert testified Rothstein’s firm was not ‘high risk’

TD Bank’s response is silent on why Ivan Garces, who was TD Bank’s anti-money laundering trial expert, testified that Rothstein was not a high-risk customer when its Customer Due Diligence form labeled him as such. Garces’ had this colloquy at trial with a lawyer in Mandel’s firm:

Coquina lawyer: Now is it – it’s your opinion, sir, that TD Bank did not consider RRA [Rothstein’s law firm] to be a high-risk customer of the bank; is that right?
Garces: Yes, ma’am. That’s correct.
Coquina lawyer: It’s not a high-risk customer.
Garces: It did not consider it a high-risk customer.

Mandel says in his new reply that “if the true document had been produced and entered into evidence…, it is hard to imagine anyone brazen enough to claim that [TD Bank] did not consider [Rothstein’s law firm] to be a HIGH RISK customer.”

Call for sanctions includes referral to Justice Department, Florida Bar

Mandel has requested that US District Court Judge Marcia G. Cooke impose a series of sanctions, including referring TD Bank to the US Department of Justice for criminal investigation and referral of Greenberg Traurig to the Florida Bar for review of possible ethical violations.

Judge Cooke, who presided over the long trial, has not yet acted on the motion, which requests sanctions.

The case offers many anti-money laundering and fraud control lessons to financial institutions. The experience of TD Bank also plants the seeds of headaches for financial institutions whose employee compensation plans include bonuses for attracting “assets under management.”

Failed FCPA prosecutions highlight consequences of lack of e-discovery rules in US criminal cases

The recent setbacks of the US Justice Department in Foreign Corrupt Practices Act cases have shed light on the challenges prosecutors face when electronically stored information is involved, as it abundantly is in most financial crime cases today. Mismanagement of electronic discovery has played a role in several of the setbacks. One notable example was the collapse of the “Africa sting” prosecution in February. The cases shed light on the necessity of proper management of e-discovery in financial crimes cases, especially in FCPA actions. They also spotlight the importance of the new protocol in which the Justice Department, the US federal courts and criminal defense bar agreed to the first ground rules on e-discovery in federal criminal cases.

The ink had not dried on the landmark e-discovery protocol setting ground rules for the management of electronically stored information (ESI) in federal criminal cases when the US Department of Justice moved to dismiss charges against all the defendants in a high-impact Foreign Corrupt Practices Act case that goes by the popular name “The Africa Sting.”

What started out as an effort focused on 22 arms dealers for offering corrupt payments to an undercover FBI Special Agent who was posing as a representative of Gabon’s defense ministry ended up costing the US Department of Justice a prized prosecution.

US District Judge Richard J. Leon leveled a stern rebuke to federal prosecutors in the Washington, DC, case for conduct, including discovery practices, which he said had “no place in a federal courtroom.”

Assisting in the collapse of the case were a series of text messages between FBI agents and a key informant in the case, Richard Bistrong, which were deleted and were not able to be produced to defense attorneys, who say the agents improperly lured their clients into the alleged illegal conduct. The FCPA, generally, prohibits any person conducting business in the US from bribing foreign officials.

“Against government resistance it was a constant battle to push to get information,” Paul Calli, an attorney for a defendant in the case, told ACFCS. “The text messages and discovery of other internal documents eviscerated the government’s credibility.”

New criminal protocol provides e-discovery baseline

The Africa sting case is one of several FCPA cases that have collapsed in part due to discovery failures by federal prosecutors. In November, US District Judge Howard Matz, in Los Angeles, dismissed FCPA charges against Lindsey Manufacturing executives when prosecutors “recklessly failed to comply with… discovery obligations” and inappropriately obtained emails from the defendants. In a June 2011 hearing, Matz said the case “had a bad odor at times” and called the government’s conduct “extremely troublesome.”

The new protocol for e-discovery in criminal cases, issued on February 15 and titled “Recommendations for ESI Discovery Production in Federal Criminal Cases,” is intended to enhance predictability, efficiency and cost-savings in an area traditionally lacking in all three. It will help establish a judicial baseline for determining appropriate discovery conduct.

The protocol was developed by a working group representing the Justice Department, Administrative Office of the US Courts, which represented the federal judiciary, and the Federal Defender Organizations, including private attorneys who accept appointments to represent indigent defendants under the Criminal Justice Act. The preface to the protocol says the guidance will be useful where “the volume and/or nature of the ESI produced… significantly increases the complexity of the case.”

“The Justice Department has said it is behind the times,” says Gray Wallington, of Columbia, SC, and formerly a litigation technology specialist at the Justice Department. “This puts a system in place, and a roadmap for e-discovery which has been a long time coming.”

FCPA cases normally present large e-discovery challenges

FCPA cases are unique in that they create a strong possibility of generating several simultaneous parallel investigations. They could include regulatory inquiries by the Securities and Exchange Commission, stockholder derivative actions, grand jury investigations by the Justice Department and investigations by foreign authorities him.

FCPA cases create large-scale e-discovery issues because of their international scope, large volume of ESI, foreign language records and testimony, the involvement of multinational corporations and government agencies from various countries. With the enactment of the UK Bribery Act, the size and breadth of these issues are expanding.

The large volume of ESI is “a common theme in all [FCPA] cases,” says Calli, of Carlton Fields, in Miami. In the Africa sting case, there were thousands of pages of ESI and disagreements over the government’s e-discovery obligations, he added.

The new e-discovery protocol aims to standardize procedures and stresses the importance of educating prosecutors about their discovery obligations, meeting early with opposing counsel to address e-discovery issues, protecting sensitive ESI from unauthorized access, and “reasonably limit[ing] costs.”

The protocol includes a detailed checklist addressing formats for producing ESI and how to handle data and metadata contained in third-party productions. The protocol will be particularly useful in FCPA cases where both the prosecution and defense typically deal with ESI obtained from custodians in several countries that is in multiple formats and languages.

The protocol, which is not binding, addresses several types of ESI that civil litigators do not encounter, and on which criminal and civil rules of procedure are silent. Wiretap recordings, search warrant returns and other investigative material are addressed in 14 general ESI categories that the protocol defines. Most of the types of records mentioned in the protocol arise routinely in financial crime cases and regulatory actions.

A federal magistrate judge pleads for e-discovery rules in criminal cases

In the absence of formal e-discovery rules, federal courts have turned to federal civil law to settle e-discovery disputes in criminal cases. Recently, federal magistrate Judge Hugh Scott, of the Western District of New York, applied Rule 34 of the Federal Rules of Civil Procedure to order federal prosecutors to produce ESI in native or searchable format. The case, United States v. Briggs, highlighted the dearth of e-discovery standards in criminal cases and a similar void in case law. Rule 34 is titled “Producing Documents, Electronically Stored Information, and Tangible Things,….”

”While the rules for such ESI have been developed (and are being fleshed out) on the civil side of litigation, this case gives the example of the need for a more uniform regime on the criminal side,” Scott wrote in a September 2011 order. “It is hoped that the Advisory Committee on Criminal Rules will take note of the omission and address it at the earliest opportunity.”

Opportunities to employ protocol abound

The protocol will likely take “years not months” to take full effect, says Wallington. The Justice Department has begun conducting diverse e-discovery training programs for its thousands of prosecutors and support staff throughout the nation.

TD Bank, lawyers accused of ‘fraud on court’ for presenting false ‘Customer Due Diligence Form’

TD Bank, one of the world’s largest financial institutions, is facing another legal action piled on top of its recent legal woes tied to the Scott Rothstein Ponzi scheme. In a federal district court in Miami, it was accused this week of “working a fraud on the court and the jury” by doctoring a crucial document it presented in evidence at a recent trial it lost.

The accuser and winner of the recent trial, Coquina Investments, of Texas, says the false document gave the appearance that TD Bank officially considered its former customer, Scott Rothstein, as being “Low Risk,” when, in fact, the true document it allegedly withheld from the court stated “HIGH RISK.”

Coquina won landmark $67 million verdict against TD Bank in January

Coquina won an unprecedented $67 million jury verdict against TD Bank in January after a 2-1/2 month trial in Miami federal court before US District Judge Marcia G. Cooke. TD Bank was found liable by an eight-person jury of having “aided and abetted fraud” by helping Rothstein, a South Florida lawyer, to perpetrate a $1.2 billion fraud and to launder the proceeds.

It is believed to be the first case in history in which a bank has been held liable of “aiding and abetting fraud” for helping a customer execute a fraud and launder the proceeds.

Rothstein curried favor with bankers with gifts
Rothstein is serving a 50-year sentence in federal prison after pleading guilty in 2010 to the fraud and laundering. He is actively cooperating with federal agents and the bankruptcy trustee in the wide ranging, international case. His testimony has not spared his former Ft. Lauderdale law partners or the TD Bank officials who received his favors and gifts, including access to a hideaway pad in Ft. Lauderdale Rothstein stocked with wine and women.

TD Bank, through spokeswoman Rebecca Acevedo, told ACFCS, “We are vigorously opposing the motion and our opposition papers will be filed very shortly.”

Lawyers for TD Bank, at Greenberg Traurig, did not respond to a request for comment.

OCC has been silent on TD Bank

The Office of the Comptroller of the Currency has been monitoring the case but has not taken any regulatory action against TD Bank in the 30 months since the Rothstein scandal broke.

Coquina’s lawyer, David Mandel, of Mandel & Mandel in Miami, who is a former federal prosecutor, said on March 26 in the “Plaintiffs Fourth Motion for Sanctions” that TD Bank and Greenberg Traurig presented as evidence a Customer Due Diligence Form for Rothstein that had been stripped of a red banner that read “HIGH RISK” in bold letters. The comments “Complete-Approved” and “Date Submitted 12-Dec-2007” flanked the banner and were also missing in the version presented in the Coquina trial. The form documented that Rothstein had been found to be a high risk for money laundering activities based on certain factors, such as total monthly check deposits and cash activity.

The form also documented that TD Bank had performed “enhanced due diligence” procedures on Rothstein, including visits to his offices and a check of commercial databases.

These procedures are mandated by regulations issued by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) under the US Bank Secrecy Act (Title 31 USC, Sections 5311 et seq.)

Coquina discovered true version of “HIGH RISK” form in related case

Mandel’s motion says he discovered the “fraud” when, in a different but related case, TD Bank “produced a substantially different… Customer Due Diligence Form” for Rothstein. “Even a cursory examination of the recently produced documents [in the related case] shows that… [t]he document admitted into evidence in (the Coquina) case, is a fraud,” the motion for sanctions continues.

The Customer Due Diligence Form that TD Bank presented in the other case was identical to the one it presented in the Coquina case except for the “HIGH RISK” banner at the top.

The new accusations by Coquina which were presented to Judge Cooke arise after TD Bank filed its appeal of the $67 million verdict with the 11th US Circuit Court of Appeals, in Atlanta.

The simultaneous appeal and allegation of falsified evidence puts a rarely-seen wrinkle in a civil case. Judge Cooke has ample remedies at her disposal, including the imposition of monetary penalties and the striking of pleadings, but she may feel constrained by the uncertainty of what the 11th Circuit Court may decide in the appeal of the main case. The appellate court is not officially aware of the new allegations by Coquina.

Another question is what effect the true Customer Due Diligence form may have had on the jury, which ruled in favor of Coquina anyway.

Coquina asks judge for referral to Justice Department and Florida Bar

An allegation of knowingly presenting falsified records in court is extremely serious and is usually dealt with harshly by a sitting judge. In its motion, Coquina asks Cooke to take three steps:

  1. To sanction TD Bank “in the manner and extent that the Court deems just and appropriate,”
  2. To refer TD Bank “to the Office of the United States Attorney for investigation of potential obstruction of justice charges,”
  3. To refer “Defense counsel to the Florida Bar for investigation into what role, if any, Defense counsel had in this matter.”

Whatever the outcome in the 11th Circuit Court of Appeals and before Judge Cooke on the Coquina motion, it is clear the tangible and intangible costs TD Bank incurs may end up being far greater than the $67 million a Miami federal jury found it should pay to the Texas investors in Rothstein’s fraudulent Ponzi scheme.

US ‘Reciprocation Agreement’ with EU nations puts booster engine on FATCA dragnet for tax evaders

The US Treasury Department has put a booster engine on the Foreign Account Tax Compliance Act in the form of a new agreement with five European nations. Announced February 8, the agreement will enlist the nations in an automatic process of reporting possible tax evaders – and financial criminals – between nations. It is an important new initiative that may augment government tax revenues – and uncover hidden financial crime fortunes and fronts in the process.


The Foreign Account Tax Compliance Act aims to detect US persons who evade US taxes by hiding assets in accounts and other devices at foreign financial institutions. The law will require those institutions to identify US account holders and inform the Internal Revenue Service, with penalties incurred if institutions fail to report.

The law is not winning popularity contests at many foreign and US financial institutions, even after the IRS recently issued 389 pages of proposed regulations that clarify FATCA’s requirements and delay its implementation.  The law and its accompanying regulations will add significant compliance duties to financial institutions worldwide, and some foreign financial institutions have already taken the easy way out, telling United States accountholders that they can take their business elsewhere.

Opponents of FATCA are a diverse group, encompassing several bankers associations, US expatriate groups, and government agencies of other countries. They claim FATCA is unwieldy, unfair and possibly unworkable.

A new direction in multinational tax evasion crackdown

The US Treasury Department has responded to these complaints in a way that points to a new direction in international efforts against tax evasion. On February 8, it unveiled a tax information-sharing agreement with France, Germany, Italy, Spain and the United Kingdom. Born from bilateral talks on FATCA implementation, the “reciprocation agreement” establishes procedures for the ongoing exchange of tax information among the six nations. The IRS will know the names of US citizens that have accounts in Germany, for example, as well as their account balances and other details, without the need to request the information officially as part of a criminal case or other action.

“It’s fair to say this agreement is quite revolutionary and not precisely patterned after anything we’ve seen in this area,” Susan Morse, a professor at University of California Hastings College of Law told ACFCS. She is the author of the recent article “Ask for Help, Uncle Sam: The Future of Global Tax Reporting,” published last month in the Villanova Law Journal.

The agreement may provide the US with a blueprint for broader international cooperation for cross-border gathering of tax information and financial crime proceeds to boot.

FATCA will require considerable data about offshore accounts of US citizen

Enacted in March 2010, FACTA requires financial institutions outside the US, including banks, broker-dealers and investment firms, to report substantial information to IRS about account held by US citizens. They must provide names, addresses, tax identification numbers, account balances, and annual receipts and withdrawals of US citizen customers. Starting in January 2013, foreign institutions must register with the IRS as covered entities. Those that fail to report will face a 30 percent withholding tax on any payments or income due to them in the United States.

FATCA’s critics say the technical difficulties of constructing a withholding procedure for non-compliant banks are enormous. Many foreign institutions also face the prospect that reporting customer information to the IRS may be a violation of their home country’s privacy, bank secrecy or data protection laws. The new agreement is intended to address and mitigate these concerns for the nations involved.

Five European nations will get vital IRS help under Reciprocation Agreement

The six-nation agreement obviates legal conflicts for financial institutions by having them report the required information to their own authorities. The institutions would not be required to register separately with the IRS. They would be considered FATCA-compliant by reporting information to their home country’s agency, and would not be subject to the 30% withholding tax on payments due from the US.

In turn, the IRS would share comparable data with the signatory nations. The US Treasury says it will be “collecting and reporting, on an automatic basis… information on the US accounts of residents of the FATCA partner country.”

Pact goes beyond present treaties, signaling new era in international tax cooperation

The Treasury points out that the agreement builds on a preexisting legal framework. “The United States already has a network of agreements providing for tax information exchange with more than 60 countries…,” Emily McMahon, the Treasury’s acting assistant secretary for tax policy, told a gathering of the New York Bar Association in February. “The laws of those countries already permit the transmission of U.S. account information, like that required by FATCA, from the foreign government to the IRS,” she added.

Unlike existing tax treaties, the agreement establishes a regularity of information-sharing among multiple countries. The only tax information-sharing arrangement that is remotely comparable is a 1980 treaty between the US and Canada. Otherwise, the United States and bilateral treaty signatories share tax information only when requested as part of pending legal proceedings, including  criminal investigations. The routine, regular sharing established by the agreement removes the need for specific requests and makes sharing a predictable process. It is a different approach than the tax reporting system initially contemplated by FATCA, and is a notable expansion of international cooperation to counter tax evasion.

No timetable set for exchange because laws, regulations may need amendment

The  six nations have not announced a schedule for implementation of the agreement. It may be a lengthy process, requiring changes in laws and regulations in all affected countries. The European nations must modify a 1998 EU law, the Data Protection Directive, that prevents the type of information sharing contemplated by the agreement.

Regardless, the US Treasury already hopes to use the six-nation agreement as a model for a wider international accord. McMahon alluded to “multilateral, global approaches to the exchange of financial account information for tax purposes,” and stated that the Treasury hopes to involve more countries in similar tax-information sharing arrangements in the near future.

Morse, the University of California-Hastings law professor, says it is in the best interest of the United States to achieve broad international cooperation on tax evasion. She believes it would be unwise and probably impossible for the US to make FATCA work on its own.

“It’s my view that the US cannot unilaterally enforce FATCA– for example, it would be loath to really make use of the punitive 30 percent withholding tax,” says Morse, “and so I think this is a very positive development, a good step on the way to building an effective global reporting system.”

Financial institutions will be global tax gatekeepers and sources on financial criminals

Estimates of the true cost of tax evasion are difficult and imprecise.  The Tax Justice Network pegged the annual tax revenue loss from unreported offshore accounts at $255 billion worldwide. A University of Michigan researcher estimated that tax evasion through foreign accounts costs the US $50 billion a year.

Tax evasion and other financial crimes, including money laundering, corruption and fraud, are interlinked. The interplay of tax evasion and other financial crime has been recognized by international counter-financial crime organizations, like the Financial Action Task Force, which recently revised its 23-year-old “40 Recommendations” to include tax crimes as a predicate offense to money laundering prosecution.

With so much at stake, the United States and other developed nations can be expected to further tighten the net on tax evasion, and employ banks and other financial institutions to do so.

“There is an emerging consensus that financial institutions will be tax intermediaries cross-border,” says Grinberg. FATCA is not the only international effort to enlist financial institutions as collectors and reporters of tax information. A similar piece of legislation in the EU, the Savings Directive, requires financial institutions to report details on account holders between certain member nations of the European Union. The OECD’s Treaty Relief and Compliance Enhancement Group, an intergovernmental advisory group on taxation across borders, has also advocated measures that would make tax information reporting by financial institutions a central element of international cooperation on tax issues.

For financial institutions, this means more compliance rules, know-your-customer requirements and regulatory structures are likely, if not inevitable.

For financial criminals, FATCA, the resultant tax information- sharing agreement, and the increasing international focus on tax evasion undoubtedly mean a visit or call to their well-paid financial consultants and money launderers has already been made.

FinCEN takes first step to forcing institutions to unmask ‘beneficial owners’

The US Financial Crimes Enforcement Network on February 29 took one of the most significant steps any financial regulatory agency has ever taken to unmask fronts who hide the ownership of financial accounts of financial criminals. In its “Advance Notice of Proposed Rulemaking,” FinCEN laid the groundwork for a Bank Secrecy Act regulation that would impose new duties on some financial institutions to upgrade customer due diligence and step up efforts to identify beneficial owners of accounts they house. Coupled with other recent government measures, the FinCEN action intensifies the crackdown on the ruses of financial criminals to hide dirty money.


Is it possible a pre-existing government master plan is steadily emerging that introduces, unifies and intensifies the overall global effort against financial crime?

Some telling developments in the past few months — President Obama’s announcement of the creation of a new “Financial Crimes Unit” in his State of the Union address, significant possible budget increases for regulatory and law enforcement agencies to fight financial crime, proposed broad IRS regulations implementing the Foreign Account Tax Compliance Act (FATCA), and the US-supported amendments of the Paris-based Financial Action Task Force’s “40 Recommendations” to include tax evasion and beneficial owners — suggest a coordinated global approach to attack financial crime more frontally.

The Notice of proposed regulations last week by the Financial Crimes Enforcement Network on customer due diligence and beneficial ownership may be the most enduring threat to financial criminals that do business or hide money in the United States.

One widely-respected veteran of anti-money laundering and financial crime regulatory compliance at financial institutions says the proposed FinCEN rules, if implemented, will bring about “massive, fundamental changes that will materially impact the industry at a level we haven’t seen since the passage of the Patriot Act in 2001.”

Beneficial owners now sporadically identified by financial institutions

The proposed FinCEN regulation is aimed at the heart of the device financial criminals use to hide their control of financial crime proceeds. An essential part of an effective counter-financial crime strategy is the uncovering of the layers of obfuscation the criminals construct to hide their ownership.

Uncovering beneficial ownership is the most neglected and most difficult part of counter-financial crime efforts worldwide.

Generally, a beneficial owner is a person or entity who owns or profits from an asset, account or property without having his or her name linked to it. Presently, there are no regulations requiring financial institutions to identify the beneficial owners of accounts, except for private banking accounts and foreign financial institution correspondent accounts, according to FinCEN.

FinCEN says financial institutions may choose to identify beneficial owners of other accounts “based on [their] risk assessment.” The vast majority of accounts, like retail banking and brokerage accounts, are not subject to heightened scrutiny to confirm or uncover beneficial owners.

Many financial institutions already follow “customer due diligence” procedures, or CDD, that govern the collection of information and verify the identity of persons who open and hold accounts. These procedures typically apply only to an account’s nominal owner, leaving the beneficial owner, if any, unknown. Procedures to identify beneficial owners, outside the two exceptions, are inconsistent or nonexistent at many institutions, says FinCEN.

Rules would require beneficial owner identification for first time

FinCEN says it is considering “expanding the requirement to obtain beneficial ownership information to all customers.” The proposed BSA regulation would make beneficial owner identification a “new express regulatory obligation.”

FinCEN says the rule might be as simple as,”… [financial] institutions shall identify the beneficial owner(s) of all customers, and verify the beneficial owners’ identity pursuant to a risk-based approach.”

“The explicit requirement that a financial institution know its customers, and the risks presented by its customers, is basic and fundamental to both serving those customers and implementing a program that protects a financial institution from abuse by illicit actors,” said James Freis, Director of FinCEN, in a statement on the release of the Notice.

The agency says it would consider exempting certain accounts and businesses, and allow institutions to forgo identifying beneficial owners where it “may not be warranted given the [anti-money laundering/counter terrorist financing] risk or other factors.”

The 22-year-old Treasury Department bureau may extend the proposed new beneficial owner rule to all “covered financial institutions,” meaning those that fall under its BSA regulatory purview, as specified in Title 31, USC Sec. 5312(a)(2), where “financial institution” is defined. FinCEN says it has not determined who would be subject to the final regulations.

Person opening an account will be expected to identify beneficial owner

FinCEN expects that “the individual opening the account… will identify its beneficial owner, and that covered financial institutions will generally be able to rely upon the beneficial ownership information presented by the customer,” unless they doubt the information or believe there are money laundering or terrorist financing risks involved.

The Notice guides institutions on two possible procedures they could follow to verify beneficial owners. In one, they would verify that the beneficial owner exists “by using procedures similar to those currently required [under the BSA],” but “applied to the identified beneficial owner rather than to an individual customer.”

In the other, the institutions would verify that the beneficial owner named by the person who opened the account is the real beneficial owner.

FinCEN seeks comments on these procedures and says it is looking for a standard that is “reasonable and practicable, and sufficient to form a reasonable belief that the financial institution knows the identity or status… of the beneficial owner.”

FinCEN may narrow definition of ‘beneficial owner,’ facilitate compliance

The agency is thinking of refining the definition of a beneficial owner to a narrower, technical description in the case of legal entities, such as corporations, limited liability companies, limited partnerships, and other organizations. FinCEN now defines a beneficial owner as “an individual who has a level of control over… the funds or assets in the account that…enables the individual, directly or indirectly, to control, manage or direct the account.”

The new proposed definition would define a legal entity’s beneficial owner as “each of the individual(s) who, directly or indirectly” holds more than a 25% ownership stake in the entity. If no one has a 25% stake, the beneficial owner would be an “individual that has at least as great an [ownership stake] in the entity as any other individual,” as well as the person most responsible “for managing or directing the regular affairs of the entity.”

The proposed “specific and limited definition,” FinCEN says, makes it easier for financial institutions to deal with the “vast array of complex ownership structures of legal entities that may become customers.”

FinCEN proposal a part of wider Treasury efforts to regulate beneficial ownership

Regulation of beneficial ownership in the US has been a contentious issue for several years. In 2006, the FATF criticized the US for not complying with standards to identify beneficial ownership. Senator Carl Levin, of Michigan, the most active financial crime expert in the US Congress and author of most of the financial crime provisions of the USA Patriot Act of 2001, has said the failure of the US to regulate beneficial ownership hurts international counter-financial crime operations.

A  FinCEN report of May 2011 quoted Jennifer Shasky Calvery, the Chief of the Justice Department’s Asset Forfeiture and Money Laundering Section, as saying that “the lack of beneficial ownership information… not only damages our reputation, but also undermines our efforts to join with foreign counterparts in a global offensive against organized crime and terrorism.”

FinCEN says the proposed regulations are “one key element of a broader U.S. Department of the Treasury strategy to enhance financial transparency in order to strengthen efforts to combat financial crime.”

One part of the strategy involves “working with Congress to promote legislation that enhances transparency of legal entities.” That refers to the Incorporation Transparency and Law Enforcement Assistance Act, which Senator Levin has labored mightily to pass for several years. The bill has been opposed by offshore secrecy havens and the secretaries of state in the United States, who view their incorporation laws as a good revenue source. That law would require states to identify the beneficial owners of corporations in their jurisdiction.

Notice gives guidance on ‘effective’ customer due diligence programs

In addition to identifying beneficial ownership, FinCEN lays out what it says are three other essential elements of a financial institution’s due diligence program. It proposes to cover each of them in its rules:

  1. Initial due diligence on customers – “Covered financial institutions shall identify, and on a risk-basis verify, the identity of each customer… such that the institution can form a reasonable belief that it knows [the customer’s] true identity.”
  2. Understanding the nature and purpose of account — “Covered financial institutions shall understand the nature and purpose of the account… for the purpose of assessing the risk and identifying and reporting suspicious activity.”
  1. Conducting ongoing CDD — “… covered financial institutions shall establish and maintain appropriate policies [for] conducting on-going monitoring of all customer relationships, and additional CDD as appropriate.”

These proposed rules augment requirements already in place, including customer identification procedures mandated under Section 326 of the USA Patriot Act. The rules, FinCEN says, will “codify, clarify, consolidate, and strengthen existing CDD regulatory requirements and supervisory expectations.”

FinCEN seeks public comment on various points

FinCEN seeks comment from affected institutions and persons on 10 listed questions, including:

  • “Aside from policies and procedures (concerning) beneficial ownership, what changes would be required in a financial institution’s CDD processes (by) adoption… of an express CDD rule?
  • “How do financial institutions currently obtain beneficial ownership information?”
  • “What information should be required… to identify, and verify on a risk basis, the identity of the beneficial owner?”

Comments must be received by May 4, 2012, which is 60 days after the Notice appeared in the Federal Register. They may be sent in via www.regulations.gov or by mail addressed to FinCEN, P.O. Box 39, Vienna, VA 22183. Other regulators and law enforcement agencies have also been invited to share their comments.

“Broad public input… will assist FinCEN in considering a CDD obligation that would bring consistency and uniformity both within and across financial institution sectors,” said Freis in a statement on the release of the Advance Notice. “With this consistency, FinCEN seeks to disrupt the ability of criminals to hide their assets behind the shroud of anonymity.”

Read the full FinCEN Advanced Notice of Proposed Rulemaking here.

FATCA may identify tax cheats, but its dragnet for financial criminals may produce a bigger yield

The Foreign Accounts Tax Compliance Act would require financial institutions worldwide to report information on accounts of US persons. The Act gives the IRS unprecedented new power to catch tax evaders worldwide, but its concurrent dragnet for financial criminals may be an equally desirable endgame. The landmark law creates major new compliance responsibilities for foreign and domestic financial institutions, and some question the law’s fairness and feasibility.


The days of US persons easily hiding their money in foreign bank accounts may be coming to an end.

The question currently posed by the federal government is how many US persons have foreign bank accounts. The answers will come when the Internal Revenue Service implements the final regulations of the Foreign Accounts Tax Compliance Act, or FATCA. Enacted in March 2010, the law is a huge US undertaking to stanch tax evasion through foreign financial institutions, including banks, brokers and securities dealers.

Targeting US tax evaders and financial criminals with undeclared assets offshore, FATCA would compel foreign institutions to collect and report the names, addresses and tax identification numbers of customers who are US citizens, as well as their account balances and annual receipts and withdrawals. Failure to do so, among other things, will subject the pertinent institutions to a 30 percent withholding tax on United States income, apart from other applicable taxes.

Foreign financial institutions would be required to register with the IRS starting on Jan. 1, 2013, as a reporting institution. The final IRS regulations on FATCA are not expected before the fall of 2012, at the earliest. The proposed rules are now in a “public comment” period.

FATCA threatens the bank secrecy of many jurisdictions, a vital cog in the operations of big-league financial criminals. Offshore secrecy havens facilitate the laundering of financial criminal proceeds, establishment of fronts to hold the dirty money and disguise the movement of money worldwide into investments that further mask beneficial ownership.

IRS Commissioner Doug Shulman is optimistic about ongoing efforts to pierce the veil of offshore secrecy havens. In a recent statement about FATCA, he said US enforcement agencies have “pierced international bank secrecy laws, and we are making a serious dent in offshore tax evasion. By any measure, we’re in the middle of an unprecedented period for our global international tax enforcement efforts.”

FATCA has roots in UBS case, secrecy havens still widespread

The groundbreaking UBS case inspired FATCA. In 2009, Senator Carl Levin and the U.S. Senate Permanent Subcommittee on Investigations identified 52,000 US persons with tax-evading bank accounts at UBS, the huge Swiss bank. The US Department of Justice issued “John Doe” summons against UBS, demanding the names and information of its US accountholders. The DOJ eventually reached a settlement with UBS, collecting a $780 million fine, a minor sum for the bank. With the Swiss government negotiating for UBS, the US also was granted the right to receive the names of 4,500 US accountholders. While the settlement was far less than what the US initially sought, the case focused federal government attention on international banking secrecy and its facilitation of financial crime, and the ensuing uproar in the US Congress over offshore tax evasion paved the way for FATCA.

It is unknown how many of the 52,000 accounts originally requested in the UBS case held the proceeds of Ponzi schemes, mortgage fraud, embezzlement, official corruption, and dozens of other lucrative financial crimes. What is not subject to guesswork is that there are about 60 secrecy havens around the globe allowing for the same kind of tax evasion that UBS was caught doing. Other developed countries are undoubtedly also pondering if the secrecy havens, including Swiss banks, have lured their own citizens with promises of protection from the tax laws.

Complex new compliance measures in store for US, foreign institutions

FATCA has caused its own uproar among domestic and foreign financial institutions complaining about the compliance burdens the law and the IRS regulations will impose. Foreign institutions will be required to sift through customer data to determine US citizens and gather required information. Some foreign institutions will have to augment customer due diligence procedures for new accounts to assure they are properly classifying and capturing information on US customers.

Although the compliance burden will fall most heavily on foreign institutions, the law also imposes new requirements on US institutions. Those who process payments to foreign financial institutions (called “pass-through” or “payable-through” payments) will be required to know if the foreign institutions have registered with the IRS to report the required information. If foreign institutions are not complying with FATCA reporting duties, the US institutions must withhold 30 percent on certain payments originating in the US, including interest, dividends, and proceeds from sale of property.

“Almost like anti-money laundering controls and alerts, US financial institutions will have to add a new alert to their transfers to foreign institutions,” says David Gannaway, a principal in Valuation and Forensic Services at Citrin Cooperman, a New York accounting firm.

“US institutions should expect to enhance their due diligence programs and enhance their internal controls of movement of funds outside the US,” he adds.

Foreign financial institutions, including banks and broker-dealers that process payments to foreign institutions will also be required to implement similar new tax withholding procedures and payment monitoring to compliant and non-compliant institutions.

The taxing of pass-through payments has been criticized by many banks, accounting firms and trade associations, including the British Bankers Association. They call it unenforceable and unreasonably complicated. A KPMG report says the withholding system on pass-through payments may be burdensome and complex by design, in order to stimulate greater compliance with FATCA by financial institutions.

The Treasury Department has implied as much, saying it hopes it will not collect revenue from the withholding taxes.

“The withholding requirements incorporated in FATCA are not intended to raise revenue,” said Emily McMahon, Treasury’s Acting Assistant Secretary for Tax Policy, in a recent speech. “Ideally, every foreign financial institution would comply with the reporting requirements, and (none) would be subject to withholding tax,” she said.

FATCA may be expensive for institutions, and revenue producer for IRS

Foreign financial institutions may face steep costs for FATCA compliance, according to studies by KPMG and Deloitte. KPMG recently estimated that as many as 200,000 foreign institutions would fall under FATCA’s purview, including banks, broker-dealers and investment firms. Estimates of their FATCA costs—mainly in compiling, analyzing and sifting huge amounts of customer data and creating new systems to handle pass-through payments—range from hundreds of millions of dollars to well over $10 billion.

The European Commission estimates it will cost European banks alone $100 million to comply with FATCA. Unless the final IRS rules change which foreign institutions are covered by FATCA and what information must be reported, KPMG estimates the cost of compliance for foreign institutions will far outweigh any tax revenue the IRS may collect.

What the studies do not discuss is what the totals of financial crime proceeds may lie in foreign financial institution accounts that are uncovered by FATCA compliance by foreign institutions. That could be the biggest surprise emerging from enforcement of the new law.

According to IRS estimates, $8 billion in tax revenue may be recovered from offshore accounts over the next 10 years. The real total may be far higher. Already, since 2009 the IRS has received more than $4.4 billion in revenue from its “Offshore Voluntary Disclosure” program that was a byproduct of the UBS scheme. The Offshore Voluntary Disclosure program allows US taxpayers with hidden offshore accounts to voluntarily disclose their assets and accounts and avoid criminal prosecution.

Proposed IRS rules clarify coverage and reporting duties, but leave uncertainties

The proposed IRS rules define the institutions and types of accounts that would be covered and extend the date some of measures take effect. The rules addressing some of the points raised by the foreign institutions that have objected to the requirements in dozens of letters the IRS has received from them, as well as investment firms and trade associations.

Only accounts that have more than $50,000 for individuals and $250,000 for businesses would be subject to reporting. The rules would narrow the type of covered accounts to brokerage, money market and bank accounts, along with interest on investments. Information-gathering requirements have also been relaxed. Many foreign institutions will be able to meet the requirements with the customer information they already collect.

The proposed rules also define types of institutions that are automatically “deemed compliant” or are not required to register with IRS. They would include entities like retirement plans and banks that operate solely on a local level.

One of the more significant changes would delay compliance with FATCA in countries where reporting would clash with domestic bank secrecy laws. The institutions in those countries would get an extra two years to become compliant.

Many foreign banks and trade associations had voiced concerns about conflicts between FATCA and their bank secrecy and privacy laws. Credit Suisse, Barclays, and the Japanese Bankers Association were among those that raised this issue in comment letters to the IRS.

The requirement to withhold 30 percent on pass-through payments has also been extended to January 1, 2017. By that year, FATCA will apply fully to all foreign institutions specified in FATCA, regardless of their local laws. Financial institutions that do not report the required information after this date would be subject to the 30 percent withholding tax on income or revenue that originates in the United States.

Some foreign institutions are already taking an alternate approach to compliance. Rather than compiling customer data, they are simply closing accounts of US persons.  At the end of 2011, Deutsche Bank, Credit Suisse and HSBC had adopted this approach, closing the investment accounts of US persons and refusing to open new accounts. Other European banks are considering similar action, although many are taking a wait-and-see approach until the final IRS regulations emerge.

Uncertainty surrounding FATCA may be the largest obstacle to compliance by financial institutions.

“We’re all sitting in the airplane at the gate, but they haven’t backed us out onto the tarmac yet,” says Gannaway, referring to FATCA implementation. “I don’t think we’ll find out how it’s working until we’re in the air and there’ve been some tests.”

With few exceptions, US agencies get big boost in financial crime funding in FY 2013 Obama budget

President Barack Obama’s FY 2013 budget includes large funding boosts for regulatory and enforcement agencies that combat financial crime. If it passes, financial institutions and corporations will face increased oversight, tighter regulations and the threat of possible legal actions.


On the surface, financial criminals appear to face formidable opposition from the regulatory networks, investigators and law enforcement agencies arrayed against them. In reality, regulators and counter-financial crime agents are often under-financed and over-worked, unable to follow up with even a fraction of investigations or violations.

The successful financial criminal, meanwhile, has access to a resource that not even the most dedicated regulator or investigator can match: money. Financial criminals can often tap massive funding streams, whether laundered fraud or corruption proceeds, which they can use to buy top legal defense teams, corrupt officials, and hide dirty money. In many cases a single big league fraudster can receive billions of dollars from victims over time, sometimes more than the entire operating budgets of the agencies assigned to catch him.

The Fiscal Year 2013 budget that President Obama has sent to Congress may narrow that funding gap a little. It requests big funding boosts for several financial regulatory agencies. The Securities and Exchange Commission, Commodities Futures Trading Commission (CFTC), and Consumer Financial Protection Bureau would all receive large budget increases of between 20 and 50 percent.

Proposed budget increases for the Department of Justice and the FBI would augment their counter-financial crime operations, and tighten their focus on investigating and prosecuting mortgage fraud and corporate fraud cases.

Major Funding Increases Target Financial Crimes, But Huge Obstacles Remain

The biggest winner under the proposed budget is the Commodities Futures Trading Commission (CFTC), which would see its funding jump by 50% to $308 million. The CFTC says it would use the increased funds to hire new staff and update technology to improve oversight of derivatives trading.  The agency oversees markets for swaps, over-the-counter derivatives, futures and other exotic investment vehicles. These multi-trillion dollar markets were loosely regulated in the past, and many experts contend they had a hand in triggering the financial crisis of 2008.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 increased the authority of the CFTC to regulate these markets, but the agency still struggles to implement the new rules the legislation requires.  As of February 1 of this year, the CFTC had missed its deadlines on creating and enacting 28 of the 64 new rules mandated by the Dodd-Frank Act. The SEC also lags behind, having missed deadlines on nearly 60 percent of the rules it was charged with making and enforcing.

The SEC is planning to use increased funding on much-needed regulatory staff, according to its budget request. The agency has stated that it would use the nearly $200 million in new funding to employ 191 enforcement division staff, who investigate alleged violations of securities laws and negotiate settlements. It would also add another 222 employees to its Office of Compliance Inspections and Examinations, which oversees financial institutions like broker-dealers and investment companies. In sum, the budget increase would allow the SEC to grow its staff by 676 persons, a 15 percent increase.

Although the proposed increases are large, they pale in comparison to the size of the multi-trillion dollar markets and assets these agencies regulate.

“A number of financial firms spend many times more each year on their technology budgets alone than the SEC spends on all of its operations,” the SEC bemoans in its budget request.

Department of Justice, FBI would increase financial crime staff, focus on financial institutions

The Department of Justice is seeking another $55 million to investigate and prosecute financial crimes. It would use these funds to increase  the number of lawyers devoted to financial crime cases, including 16 new attorneys in the Criminal Division and 38 in the Civil Division. The Civil Division says in its budget request that increased funding will allow it to act on fraud cases brought by whistleblowers, including an “unprecedented number that alleged mortgage fraud.”

The FBI, by far the largest federal investigative agency, says additional funds will “increase resources for investigating the highest impact Complex Financial Crime cases.” It asks for a $15 million increase to spend on hiring 40 new agents and four forensic accountants.

In their requests, the Department of Justice and the FBI both highlight the record numbers of financial crime cases they are pursuing. They emphasize the need for more agents, and more staff time to devote to these cases. The FBI said it had more than 761 corporate fraud cases  pending in 2011 alone.

The budget requests are significant because they magnify the focus on high-level crime at financial institutions. The Obama administration has been sharply criticized for failure to bring major financial crime cases against Wall Street banks and financial institutions for their role in the housing collapse.

Lack of resources has hamstrung counter-financial crime actions, say agencies

Both the SEC and the CFTC are far behind on implementing reforms mandated by the Dodd-Frank act, and struggling to fulfill their core regulatory functions.”Over the past decade, the SEC has faced significant challenges in maintaining a staffing level and budget sufficient to carry out its core mission,” SEC Director Robert Khuzami said in  last year’s House budget hearings. “It is the next step of making the new oversight regimes [mandated by Dodd-Frank] operational that will require significant additional resources.”

A long list of items still await the SEC’s attention, from adopting rules on executive compensation, to reporting to Congress on short selling violations, to establishing and staffing offices to regulate credit ratings and municipal securities. The agency hopes to accomplish some of these goals by the end of this year, but others have no timeline attached. Without increased funding, the SEC contends it will remain overtaxed and unable to fully meet its regulatory requirements.

The proposed agency budgets are now in the hands of Congress, to be taken up for debate in coming weeks. The increases will face an uphill battle in the Republican-controlled House of Representatives. It is unlikely that the final numbers will match current proposals.

Chart on Proposed FY 2013 Budgets for Federal Counter-Financial Crime Agencies

With e-discovery now a staple in federal criminal cases, ‘e-data rooms’ may become routine

The recent e-discovery “Protocol” signed by the Department of Justice, the federal courts and the criminal defense bar demonstrates the growing importance of electronic records and e-discovery in financial crime cases. E-discovery has already played a big role in some high-profile financial crime cases, most notably in the massive fraud case of Bernard Madoff and the battle to find and recover assets for victims.

In mid-February 2012, the US Department of Justice, federal courts and criminal defense bar agreed to a groundbreaking new e-discovery “Protocol,” applying certain e-discovery norms to federal criminal cases and spotlighting the vital role of e-discovery in these cases. The Protocol, agreed to on Feb. 13, spells out the first-ever standards for discovery and disclosure of “electronically stored information” (ESI) in federal criminal cases.

The Protocol (read here) underscores the pressing need for counter-financial crime professionals in the private and public sectors to learn and understand e-discovery best practices. Financial crimes, particularly fraud schemes, usually generate huge volumes of ESI. It was inevitable that e-discovery would become a major component of financial crime cases on the criminal and civil sides.

Since the advent of electronic data, nowhere has e-discovery in financial crime been more prominently on display than in the Bernard L. Madoff case and the long quest to recover assets for his victims. Long before the e-discovery Protocol, Madoff was perpetrating his $65 billion Ponzi fraud for 20 years, with specialized databanks and sophisticated computer programs to churn out phony financial records and defraud sophisticated “investors.” Now the remnants of his scheme have been put under the glare of e-discovery and specialized “e-data rooms.”

Intersection of e-discovery and financial crime
No case has put into clearer focus the intersection of e-discovery and financial crime, a situation that will proliferate as financial criminals and counter-financial crime professionals look more to technology and ESI to ply their respective trades.

Irving Picard, the trustee who leads the seemingly endless multinational effort to find and liquidate Madoff’s assets, created “e-data rooms” for the millions of documents the 900 lawsuits and 16,000 parties in 30 countries have produced in the overall case. Data rooms are web-based review platforms that can be accessed by the host and approved third parties. The Madoff data rooms act as a clearinghouse for production requests and as repositories of the electronic records that his historic fraud generated.

Federal agents arrested Madoff on December 11, 2008 for multiple crimes in the long-running Ponzi scheme that generated $45 billion in fictitious profits for his company, Bernard L. Madoff Investment Securities. The Securities Investor Protection Corporation, a government agency that initiated liquidation proceedings, selected attorney Picard, of Baker Hostetler, in New York, as trustee shortly after the arrest. Picard has said his efforts have recovered about $8.6 billion Madoff’s many victims.

“Special masters” aim to teach and expedite discovery
To date, Picard has secured about five million documents in various investigations that his team has conducted or overseen. In November 2010, Picard and his law firm established a first e-discovery room for so-called “avoidance actions,” which seek solely fictitious profits from some of Madoff’s “investors.”

In October 2011, Picard asked US bankruptcy Judge Burton Lifland, in Manhattan, to appoint “special masters” to mediate e-discovery disputes with the targets of his efforts, many of which deal with the confidentiality of records in the e-data rooms and access to them. A special master is a court-selected authority who ensures a court order is compiled with.

Picard obtained the appointment of a special master for each data room. One special master is specifically designated to resolve e-discovery disputes.

Charles Bobinis, a Pittsburgh attorney who serves as e-discovery special master in federal cases, said bankruptcy courts value special masters for their ability to navigate and resolve esoteric discovery issues.

“There tends to be a ‘wheeling and dealing’ culture in these types of case, because if you don’t resolve discovery issues quickly, nobody will get anything,” Bobinis says. “The paramount role of the e-discovery special master is to bring knowledge of this relatively new field to the parties. If you can’t pinpoint what electronic evidence is important, you’re going to blow a lot of money.”

Financial institutions face new hurdles in e-discovery
One of the truisms of financial crime is that nearly all financial criminals require a financial institution to perpetrate, prolong, or protect the crime. As a result, when a financial crime is detected and the unraveling begins by government authorities or the victims, the records of the affected financial institutions come into play.

Therefore, with the new “Protocol” now applicable in federal criminal cases, financial institutions of all types, if they haven’t done so already, will need to study closely the requirements of the new Protocol and of e-discovery best practices in general.

Financial institutions may be unwitting participants in many financial crimes, as in the case of Madoff, but they can now count on much of their data being a critical part of federal criminal proceedings.

Trustee offers safeguards in response to data room objections
The Madoff-Picard experience in creating and managing e –data rooms is instructive for all financial crime cases. In response to objections that the documents placed in the e-data rooms would be accessible by inappropriate parties, Picard isolated certain sensitive material, including records subject to court, marking them all as “Confidential” and extending very limited access to them.

The parties also were given up to 60 days to object to the inclusion of “highly sensitive commercial information” that they feared could end up with competitors. Other safeguards controlled dissemination of confidential material by restricting access to parties formally engaged in discovery with the trustee, and also limiting printing, downloading or saving information in the data room.

As of December 2011, Picard had “resolved the overwhelming majority of objections” to the second data room, and all but two parties had withdrawn their objections.

The Madoff case and Picard’s data-room operations still continue, with no end in sight and with billions still contested. Even so, Madoff’s mega-fraud and Picard’s e-discovery practices have already created a template for financial crime cases and the application of e-discovery principles.

With the new Protocol in place, counter-financial crime professionals have much-needed guidance for e-discovery in fraud cases. However, the obstacles and innovations raised by the Madoff case will most likely continue to test financial crime litigants and defenders for years to come, as their civil-side brethren can already attest.

New Obama ‘Financial Crimes Unit’ seeks to parlay federal, state resources and laws

The Obama administration launches a new “financial crimes unit” that brings broadened resources, state partners and a sharpened focus to bear on investigating and prosecuting financial crimes related to mortgage securities fraud.

The Obama administration’s latest effort at attacking financial crime comes under an innocuous name: The Residential Mortgage-Backed Securities Working Group. Beyond the bureaucratic title, however, lies an initiative that significantly re-thinks the federal government’s approach to mortgage fraud cases, which fall under the larger and well-populated rubric of “financial crime.”

First announced as a new “financial crimes unit” in President Obama’s State of the Union address on January 24, the Working Group may signal a re-boot of government efforts to bring civil and criminal suits against major financial institutions involved in the packaging and selling of mortgage-backed securities.

Two factors make the Working Group stand out from the swarm of other inter-agency financial crime task forces: its concentrated focus, and its new emphasis on state-level agencies as key partners. They may be a harbinger of things to come in the counter-financial crime arena.

The Working Group “brings a focus on a particular aspect of fraud,” says Alma Angotti, formerly a senior enforcement official at the Securities and Exchange Commision and the Treasury’s Financial Crimes Enforcement Network, and now a director at Navigant, in Washington, DC.

“The other group [the Financial Fraud Enforcement Task Force, launched in 2009] was pretty broad,” Angotti adds, “and this one recognizes that this is a particular discreet issue that needs discreet resources.”

Multiple federal agencies and a notable state agency

The details and structure of the new “Financial Crimes” Working Group were revealed on Jan. 27 at a press conference by Attorney General Eric Holder, who was flanked by Housing and Urban Development Secretary Shaun Donovan, Securities and Exchange Director of Enforcement Robert Khuzami, and New York Attorney General Eric Schneiderman.

Holder announced the Working Group will seek to “streamline and strengthen current and future efforts to identify, investigate, and prosecute instances of wrongdoing in the packaging, selling, and valuing of residential mortgage-backed securities.”

That could entail a number of financial crimes that can be handily prosecuted under broad federal laws prohibiting mail fraud, wire fraud, conspiracy, money laundering, racketeering influenced and corrupt organizations and other federal counter-financial crime weapons.

The mortgage-backed securities in question are bonds composed of residential debt, including home mortgages, home-equity loans and subprime mortgages. They began as relatively straightforward, government-guaranteed financial instruments. Private financial institutions began issuing their own mortgage-backed securities in the early ‘80s, eventually transforming them into massive, exotic investment vehicles.

The financial crimes that brought a nation to its knees

Many securities, including multi-trillion dollar quantities held and sold by major banks, were stuffed with subprime and other risky debt. These securities were exposed as being massively overvalued in the financial crisis of 2008, and were a primary culprit in the collapse of the housing market and the bailout packages for many financial giants. Almost all of the nation’s largest banks, from JPMorgan Chase to Bank of America to Citibank, were involved in the creation, sale and trade of mortgage-backed securities, and they and their officials may now be in the government’s sights.

The Working Group brings together a powerful array of financial crime enforcement entities, including the Justice Department, Federal Bureau of investigation, IRS Criminal Investigation, Consumer Financial Protection Bureau, Financial Crimes Enforcement Network, Securities and Exchange Commission, Department of Housing and Urban Development, and the Office of Inspector General of the Federal Housing Finance Agency.

The group will be housed under the wider umbrella of the Financial Fraud Enforcement Task Force. Holder and the SEC’s Khuzami will co-chair the group, along with Lanny Breuer, Assistant Attorney General of the Criminal Division. Also c-chairing are Tony West, Assistant Attorney General for the DOJ’s Civil Division, and John Walsh, U.S. Attorney for the District of Colorado.

States will play key role in Group’s operations

The Attorney General of New York, Eric Schneiderman, who has been given a big share of the limelight in the launch of the new unit, will also co-chair and lead state-level enforcement efforts.

Perhaps counter-intuitively, it is not increased federal resources but a stronger involvement by state-level agencies that may be the Working Group’s greatest asset. “Given the local nature of mortgage issues, the Working Group is a great idea because it brings in a lot of state agencies for the first time,” says Angotti.

State attorneys general have recently racked up high-profile victories in mortgage fraud cases. On February 8, all 50 state AGs announced a $26 billion settlement with five major mortgage providers in a civil fraud suit. The next day, Nevada Attorney General Catherine Matzo announced a separate $750 million settlement with Bank of America.

Schneiderman has waged battles against big banks

Since his election in 2010, Schneiderman has led a highly-publicized crusade against Wall Street banks and major financial institutions, most recently filing suits against JPMorgan Chase, Wells Fargo, and Bank of America for alleged “deceptive and fraudulent foreclosure filings.”

Schneiderman has been a leading and outspoken proponent of sweeping investigation into the role financial crime played in the nation’s historic economic collapse, calling for “a full inquiry into the financial irregularities and misconduct that brought down the American economy.”

Many state agencies have an advantage over federal enforcement agencies in investigating fraud: they play by laws of their state, which are often more flexible than federal law. Schneiderman has already indicated that New York’s Martin Act, which grants the state’s attorney general vast investigative powers in cases of financial crime, may give him new avenues to bring suits related to mortgage fraud.

“States have always had that flexibility,” says Angotti, “now this group allows them to take advantage of greater intelligence information and economies of scale” that come with working alongside federal agencies.

Pooling of agency resources and state participation is key to success

Agencies involved in the Group also point to the pooling of information and efforts as a critical advantage, allowing for the convergence of resources across state and federal lines.

“The real value of the Working Group is in its ability to leverage resources and expertise across agencies, which will enable us to aggressively investigate fraud in the securitization process,” says Troy Gravitt, spokesperson for the Special Inspector General of the Troubled Asset Relief Program, a participant in the Group.

Holder himself emphasized a “focus on collaboration” when announcing the Group, and the Justice Department’s said “enhancing coordination and cooperation among federal, state and local authorities” is a Working Group priority.

Holder announced that “civil subpoenas” had been issued to “11… financial institutions – and you can expect more to follow.” He and the Justice Department declined to name the institutions subpoenaed.

Doubts remain that the Working Group will bring anything new to the prosecution of mortgage-related financial crimes, despite pledges of increased cooperation and resources by its many participating agencies.

Being named to the team and activating players are two different things

“Designated to be part of the Group and actually putting bodies on the ground are different things. It all goes back to resources,” says Michael McDonald, a pioneer in counter-financial crime and money laundering enforcement, who served on several inter-agency financial crime task forces before his retirement as Special Agent of the IRS Criminal Investigation.

“If agents are devoted to investigations right now, these are complex processes, and it’s going to be slow pulling them off what they’re doing now and aligning them with something new,” adds McDonald, now president of an anti-money laundering consulting firm, Michael McDonald and Associates, in Miami.

Holder said the Group will eventually include 65 of the 93 U.S. Attorneys in the nation, as well as an unspecified number of FBI agents and support staff. Presently, 15 U.S. Attorneys and 10 FBI agents, along with analysts, have been detailed to the Working Group.

The new “financial crimes unit” is operating at a fast pace and, in an election year, is probably anxious to achieve the first indictments against high-ranked individuals and entities to fend off accusations that it amounts to little more than political posturing.

However, given the complexity of assembling a fraud case against a major corporation and its officials, tangible results from the Working Group may be months or even years away.

Justice Department, US courts and defense bar agree to implement e-discovery “Protocols”

It was inevitable. The drumbeats were getting too loud. The federal criminal courts were beckoning. Electronic information in criminal cases could no longer wait for rules.

ACFCS has obtained a landmark 21-page protocol, not yet publicly released, which brings e-discovery rules into the criminal realm for the first time.

The US Department of Justice, the federal courts and criminal defense bar have taken a major step to bring e-discovery into the criminal courtroom and in pretrial proceedings. The Justice Department prosecutes thousands of criminal cases each year for a wide range of crimes that are contained in various titles of the US Code, particularly Title 18, 26 and 31. The crimes range from arms trafficking to wire fraud and hundreds in between.

A new “Protocol,” issued earlier this week, has been negotiated for 18 months. It was produced by the Joint Electronic Technology Working Group (JETWG), which “was created to address best practices for the efficient and cost-effective management of post-indictment ESI discovery… in federal criminal cases”.

The JETWG is composed of representatives of the Justice Department, Administrative Office of the U.S. Courts, , Federal Defender Organizations, private attorneys who accept Criminal Justice Act (CJA) appointments, and liaisons from the United States Judiciary.

The “Protocol” delineates the electronic records that will be the subject of the e-discovery exchanges in criminal cases, as follows:

  • Investigative materials (investigative reports, surveillance records, criminal histories, etc.)
  • Witness statements (interview reports, transcripts of prior testimony, Jencks statements, etc.)
  • Documentation of tangible objects (e.g., records of seized items or forensic samples, search warrant returns, etc.)
  • Third parties’ ESI digital devices (computers, phones, hard drives, thumb drives, CDs, DVDs, cloud computing, etc., including forensic images)
  • Photographs and video/audio recordings (crime scene photos; photos of contraband, guns, money; surveillance recordings; surreptitious monitoring recordings; etc.)
  • Third party records and materials (including those seized, subpoenaed, and voluntarily disclosed)
  • Title III wire tap information (audio recordings, transcripts, line sheets, call reports, court documents, etc.)
  • Court records (affidavits, applications, and related documentation for search and arrest warrants, etc.)
  • Tests and examinations
  • Experts (reports and related information)
  • Immunity agreements, plea agreements, and similar materials
  • Discovery materials with special production considerations (such as child pornography; trade secrets; tax return information; etc.)
  • Related matters (state or local investigative materials, parallel proceedings materials, etc.)
  • Discovery materials available for inspection but not produced digitally
  • Other information

ACFCS is bringing this breaking landmark news to its members within hours of its receipt of the “Protocol,” and will provide more in-depth coverage in the following weeks.