This article was originally published in the International Enforcement Law Reporter, www.ielr.com, a highly respected publication covering issues in criminal law, financial crime and more. It is reprinted with the kind permission of attorney, financial crime expert, and ACFCS Advisory Board member Bruce Zagaris.
By Bruce Zagaris
January 14, 2016
As the United States government tries to increase its ability to extend its authority to collect revenue and prosecute transnational criminal activity, it is increasingly at a cross road with budgetary limitations, hesitation to participate in international initiatives, and potential blowback from its failure to meet international cooperation standards.
- Budgetary Limitations Impact Evidence Gathering
A major impediment to the ability of the U.S. Department of Justice and other governments to prosecute transnational crime has been the growing number of transnational cases and the lack of resources in the Office of International Affairs, Criminal Division, U.S. Department of Justice (DOJ).
Over the past decade the number of requests for assistance from foreign authorities handled by the Criminal Division’s Office of International Affairs (OIA) has increased approximately 60 percent, and the number of requests for computer records has increased ten-fold. While the workload has increased dramatically, U.S. Government resources, including personnel and technology, has not met this increased demand.
The DOJ‘s Overview states that this MLAT reform is a cross-agency effort involving the Departments of Justice, State, and Commerce. Funds identified in FY 2015 President’s Budget for improvements to the MLAT program will be coordinated across these Departments and agencies as well as the commercial sector.
DOJ’s FY 2015 Budget requests an additional $24.1 million for the Department to significantly increase personnel dedicated to reviewing and executing MLAT requests as well as technological improvements to greatly improve the way requests are analyzed, categorized, and prioritized. The additional resources will help the DOJ implement a robust centralized processing system, reduce backlog, and reduce its response time by half by the end of 2015 and respond to legally sufficient requests in a matter of weeks. In addition, the resources will support training efforts for foreign partners to ensure they can fulfill U.S. evidentiary standards which will enable the DOJ to respond to their requests more quickly.
The FY 2015 was designed for the Criminal Division at $19.6 million in order to enable them to fill 141 positions with 77 attorneys. The Criminal Division, primarily through the Office of International Affairs (OIA), will use these resources to centralize the handling of MLAT requests, using MLAT modernization legislation signed by the President in 2009, eliminating the backlog of pending cases, and enhancing the technological resources supporting the MLAT process and OIA’s core functions. OIA and other sections in the Criminal Division will also provide training and outreach to key foreign partners to help them in developing MLAT requests that meet U.S. evidentiary standards.
Of the 77 attorneys requested, the DOJ obtained funding for 36 attorneys.
For mutual legal assistance reform the DOJ proposed to spend $1.3 million and 13 positions (8 attorneys). The DOJ proposed to assign Assistant U.S. Attorneys (AUSA) and support personnel in the District of Columbia and the Northern District of California to support OIA in the execution of foreign assistance requests and assist with litigation. The resources will align with OIA’s centralization project and provide a dedicated workforce to support these efforts.
The FY 2015 proposal was for $3.2 million and 14 positions (7 agents). The FBI will establish a dedicated MLAT unit that will centralize and standardize a variety of FBI responsibilities related to MLAT requests. This until will manage the intake, tracking, and management of all MLAT requests and will provide training to FBI Legats and their foreign partners in the MLAT process and structure of requests. This unit will also provide outreach to ISPs (internet service providers) to ensure the transparency of legal requirements and processes.
Similarly, the FY 2016 President’s Budget for DOJ mentions the shortage of OIA resources at a time when MLAT requests are dramatically increasing. For instance, in fiscal year 2014, OIA opened 3,270 foreign requests for assistance. That same year, OIA granted assistance in whole or in part, in 1,465 cases or 45% of the requests. While its workload has dramatically increased, OIA has seen minimal changes in its staffing, and in fact suffered significant attrition during the DOJ-wide hiring freeze. The significant period of short staffing has increased OIA’s case backlog.
- Technology Impediments
A limitation on OIA’s ability to process MLATs to and from the U.S. is that its case management system for managing its case work has not had a significant upgrade since its implementation in 1999. Hence, a lack of transparency exists for OIA to see the progress of each request at each iterative step, e.g., receipt of the request, conclusion of review by OIA, receipt of the request by a U.S. Attorney’s Office, court order date, and date evidence when it was received. More importantly, a significant source of frustrate for OIA’s state, local and foreign partners is that no public-facing system or website is available for them to monitor the status of their requests. Creating a secure, external website with information available to state and local counterparts as well as foreign authorities would reduce time and resources spent in communicating basic information, providing guidance, and transmitting exemplars and templates. As a result, it would be a significant step toward transparency in the process. Indeed, countries are increasingly employing technology to enable both their foreign and domestic partners to make their requests and follow the processing of the MLAT requests.
The DOJ argues that with additional resources OIA would (a) update its neglected internal website used currently by OIA and others within DOJ; (b) establish an external website of resources and email interface for foreign users; (c) fund in-house technological and analytic resources to manage those systems and keep them current; and (d) provide online advance and exemplars for foreign partners to accept MLAT requests electronically (beyond the email and PDF capacities now in use) and permit automated status updates.
- Structural Problems
President Obama signed into law the Foreign Evidence Request Efficiency Act of 2009, codified at 18 U.S.C. § 3512. Among other things the law was designed to implement efficiencies and create flexibility in the execution of foreign assistance requests. It provides for venue in the District of Columbia for court orders to compile the production of evidence sought by foreign authorities. This significant structural change permits OIA to respond directly to requests for evidence that require court orders, rather than working through U.S. Attorneys’ Offices (USAOs) in the district in which the evidence is situated. Through this legislation, the Obama Administration has facilitated a paradigm shift in how much mutual legal assistance requests are handled. However, to actualize this shift, OIA requires additional legal and professional personnel to undertake work currently performed by USAOs.
Lack of OIA resources forces OIA to rely on USAOs to handle many requests for evidence. This process results in much inefficiency. Often, Assistant U.S. Attorneys (AUSAs) defer execution of foreign MLAT requests while they address more pressing cases in their districts. Moreover, duplication of efforts occurs because all matters must be reviewed by OIA for legal sufficiency and consistency with DOJ and federal policy, but all matters that are referred to the USAOs for execution are likewise reviewed for legal sufficiency by the AUSAs responsible for securing the necessary court orders. At present, OIA has approximately 4,800 pending foreign MLAT requests and, of those, approximately 1,500 to 2,000 are pending execution with USAOs and U.S. law enforcement agencies.
Between FYs 2002 and 2008, OIA managed its steadily increasing volume of work without additional resources, through the efficient use of paralegals and improved case management practices. However, in FY 2009 OIA reached its saturation point and its backlog started to increase steadily as a result. In FY 2014, OIA’s backlog reached more than 11,000 cases for the first time since FY 2001.
- Beneficial Ownership
A major problem in the ability of DOJ to assist foreign law enforcement is the lack of beneficial ownership information. In 2006, the Financial Action Task Force (FATF) gave the U.S. a non-compliant rating in beneficial ownership information. In 2012, FATF toughened its standards. For several years, Sen. Carl Levin (D-Wisc.) introduced a bill, entitled Incorporation Transparency and Law Enforcement Assistance Act (ITLEA). ITLEA directs the U.S. to have laws that require corporations and limited liability companies formed in a state that does not have an incorporation system to make the disclosure, updating, and verification of beneficial ownership information and to file information about their beneficial ownership with the Secretary. States would impose the disclosure duties on a licensed formation agent who resides in the state.
ITLEA sets forth requirements for state incorporation systems with respect to beneficial ownership information, including: (1) identification of beneficial owners by name, current address, and non-expired passport or state-issued driver’s license; (2) identification of any affiliated legal entity that will exercise control over an entity to be incorporated and the identities of the beneficial owners of such affiliated entities; (3) updating of lists of beneficial owners not later than 60 days after any change in information related to such owners; and (4) additional information and verification required for beneficial owners who are not United States citizens or lawful permanent residents.
Under ITLEA, States that adopt an incorporation system must maintain beneficial ownership information for five years after an incorporated entity terminates.
ITLEA imposes a civil penalty on any person who: (1) provides false or fraudulent beneficial ownership information; (2) fails to provide complete or updated beneficial ownership information; or (3) knowingly discloses the existence of a subpoena, summons, or other request for beneficial ownership information without authorization.
ITLEA requires the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney General, to publish a proposal within 120 days of the enactment of the final law and a final rule within 270 days of the enactment, to require formation agents to establish anti-money laundering programs, which would require states to meet minimum international standards. The standards included having corporate formation agents obtain beneficial ownership information and have it available for law enforcement agencies in the event a criminal investigation concerned acts committed by the entity formed. The General Accountability Office (GAO) reported that the lack of beneficial ownership information often resulted in the DOJ OIA telling its partners that it was not able to fulfill MLAT requests.
In recent years as a member of the G8 and G20 the U.S. government agreed to participate in an initiative led by the Cameron Administration to strengthen beneficial ownership information. For instance, on June 18, 2013, at the G8 meeting in Northern Ireland, an action plan was adopted to prevent the misuse of companies and legal arrangements. The action plan contains core principles that are essential to ensure the integrity of beneficial ownership and basic company information, the timely access to such information by law enforcement for investigative purposes, as well as, where appropriate, the legitimate commercial interests of the private sector. A key element of the action is plan is that it was adopted “subject to our different constitutional circumstances, and understanding that a one-size-fits all approach” may not be the most effective.
To implement the action plan, the G8 members committed to publish national action plans based on the principles agreed upon, that provide the concrete action each G8 member will take to counter money laundering and tax evasion. To ensure that G8 members are accountable for their commitments, the G8 agrees to a process of self-reporting through a public update on the progress made against individual action plans and to inform the Financial Action Task Force (FATF).
A principle is that companies should know who owns and controls them and that their beneficial ownership and basic information should be adequate, accurate, and current. As a result, companies should be required to obtain and hold their beneficial ownership and basic information, and ensure documentation of this information is accurate.
While the UK has enacted legislation to implement its promises and required its overseas and dependent territories to do the same, the U.S. is apparently taking the position that its only responsibility is to advocate undertaking its promises.
- International Tax Enforcement
The Internal Revenue Service funding is at an unprecedented low as the number of taxpayers continues to grow and unfunded mandates persist. In FY2010 to FY2015, the IRS budget went from $13.2 billion to $10.9 billion while the number of returns in this time period went from 153 to 162 million. 
The U.S. spends roughly half what the average OECD country spends to collect $1,000. The U.S. spends roughly two-thirds less on tax administration relative to GDP than the OECD average, less than virtually all other advanced economies.
As a result of its budgetary problems the IRS has removed its tax attachés from several European cities, such as Paris, France. The removal of tax attachés means that at the very time that the many experts and organizations have complained about the difficulty for expatriate Americans to understand and comply with the byzantine worldwide system of taxation and reporting, they have no officials with whom they can talk and inquire. In addition, when the IRS needs to serve documents, obtain information about non-complaint taxpayers against whom they want to take collection action, and engage in a host of other tax administration, compliance and enforcement action, the tax attachés are no longer available to assist.
A challenge for U.S. international tax enforcement is that, whereas the U.S. used its superpower status to impose on the world the Foreign Account Tax Compliance Act (FATCA), whereby tax authorities and foreign financial institutions worldwide were tasked with reviewing bank accounts to find U.S. taxpayers and report the same to the IRS. FATCA required tax authorities, legislators, and the business community in every country to study over 600 pages of complex and technical regulations, enact their own implementing legislation and regulations, implement due diligence and training programs, and invest in information technology to be able to send instantaneously and protect the confidentiality of this new information — at the cost of millions of dollars for each government and requiring that they allocate scarce parliamentary drafting and financial regulatory resources so they could meet difficult deadlines imposed by the IRS.
On February 13, 2014, the Organization for Economic Cooperation and Development (OECD) unveiled the first half of its model framework for automatic exchange of tax information, which the U.S. and other major countries have awaited as a major weapon to fight offshore tax evasion.
The Common Reporting Standard (CRS) was developed by the OECD together with G-20 countries. It calls on jurisdictions to obtain information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
The OECD formally presented the standard for the endorsement of G-20 finance ministers during a February 22-23, 2014 meeting in Sydney, Australia. The G-20 invited the OECD to develop a global standard on automatic exchange of information in 2013 and remains the driving force behind the move toward greater tax transparency worldwide.
However, the U.S. has not yet joined either and Treasury has not articulated any reasons for remaining on the sidelines.
In late October 2015, the Global Forum on Taxation met in Barbados. Although not in OECD’s official communiqué, the discussion focused in part on the failure of the U.S. to either sign the CRS or the CAA, and the failure of the U.S. to meet beneficial ownership standards. In addition, the small member countries focused on the increasing use of tax haven black lists, including by states in the U.S. When small countries have complained to Treasury and the IRS, Treasury and the IRS have responded that they have no ability to control the states.
At the same time that states are increasingly enacting tax haven lists, states are enacting their own international financial services initiatives, designed to attract captive insurance companies in some cases, foreign investors in LLCs, and international trusts. One of the newest activities marketed by U.S. service providers is to use U.S. vehicles to avoid the CRS.
In recent years the U.S. government has expanded significantly its extraterritorial compulsory evidence-gathering powers. In 2010, the enactment of FATCA, as mentioned above, imposes U.S. evidence-gathering on foreign tax authorities and foreign financial institutions. In 2009, a U.S. court upheld the Department of Justice’s subpoenas on UBS to override Swiss bank confidentiality laws and send to the U.S. the names of their U.S. accountholders suspected of being non-compliance with U.S. tax and reporting laws.
The U.S. Department of Justice has used the Stored Communications Act (18 U.S.C. § 2703) to direct Microsoft to produce the contents of one of its customer’s e-mails where that information is stored on a server in Dublin, Ireland. Microsoft unsuccessfully argued that U.S. courts are not authorized to issue warrants for extraterritorial search and seizure, and that this is such a warrant. The DOJ chose to use the warrant instead of using the MLAT. .
The problems of lack of human resources, technology limitations, structural problems, inability of the U.S. to meet beneficial ownership and gatekeeper requirements of FATF, and its inability to reciprocate in international tax cooperation at the very time it has imposed FATCA on the world all create potential issues in terms of its ability to have its partners reciprocate.
This article was originally published in the International Enforcement Law Reporter, www.ielr.com and is reprinted with the kind permission of attorney and financial crime compliance expert Bruce Zagaris.
 U.S. Department of Justice, FY 2015 Budget Request, Mutual Assistance Treaty Process Reform.
 U.S. Department of Justice Criminal Division, FY 2016 President’s Budget 23.
 Id. at 24.
 Id. at 23-24.
 Id. at 28.
 G8, G8 action plan principles to prevent the misuse of companies and legal arrangements, June 18, 2013.
 IRS, IRS Funding Is at an Unprecedented Low as Number of Taxpayers Continues to Grow and Unfunded Mandates Persist, Tax Enforcement in a Resource-Challenged World, American Bar Association, Criminal Tax Fraud National Institute P-1, P-3 (Las Vegas, Dec. 9-11, 2015).
 Id. at P-4-P-5.
 For the text see http://www.oecd.org/ctp/exchange-of-tax-information/Automatic-Exchange-Financial-Account-Information-Common-Reporting-Standard.pdf. For background see OECD, OECD delivers new single global standard on automatic exchange of information, Feb. 13, 2014 http://www.oecd.org/tax/exchange-of-tax-information/oecd-delivers-new-single-global-standard-on-automatic-exchange-of-information.htm.
 OECD, OECD delivers new single global standard on automatic exchange of information, supra.
 Bruce Zagaris, Raising Revenue on the Backs of Caribbean Jurisdictions, 80 Taxes Int’l 607 (Nov 16, 2015).
 In the Matter of a Warrant to Search a Certain E-Mail Account Controlled and Maintained by Microsoft Corporation, ___ F. Supp. 2d __ , 2014 WL 1661004 (SDNY April 25, 2014); Bruce Zagaris, ECJ Decision in Schrems and Congressional Debate Loom in the Background as 2nd Circuit Court Considers Microsoft Warrant Case, 31 Int’l Enforcement L. Rep. 434 (Nov. 2015).