U.S. Account Holders at HSBC Now Under Scrutiny

Tax Notes Today reports that some U.S. owners of HSBC accounts are receiving letters from DOJ Tax Criminal Section advising that they are targets of criminal investigations with respect to their offshore accounts. Jeremiah Coder, HSBC Clients Under Criminal Investigation, 2010 TNT 128-1 (7/6/10); for past Blog discussions on HSBC see here.) Excerpts from short article are:

The Justice Department has opened criminal investigations into U.S. taxpayers with suspected unreported offshore accounts in HSBC Holdings PLC, practitioners told Tax Analysts July 2.

The practitioners, who spoke on the condition of anonymity, said the DOJ has sent letters to several taxpayers referencing HSBC as a potential target and notifying the account holders that they could be referred for criminal charges.

The DOJ does not appear to have identified the taxpayers using data received from Switzerland, because several of the contacted taxpayers hold offshore accounts only outside Europe, one practitioner said. Investigators may be using data from India to home in on HSBC accounts, another practitioner said.

Addenda

Additional reports are indicate:

1.  As to the connection with India, some reports (see here) speculate that the Indian Government may have provided the information under information exchange treaty provisions.  The article quotes an unnamed official as saying:  ""In all probability, Indian authorities must have passed on the information to their US counterparts through various exchange of information mechanisms either through bilateral or multilateral agreements,"


Additional Web Resources:

Bloomberg 
Main Justice
New York Times (Reuters) 

The Relevance of the Skilling Case to Tax Obstruction Crimes

A reader responded to my blog with the synopsis of the Skilling case (see here) by stating that Skilling decision was not appropriate to a Federal Tax Crimes Blog. I responded with a brief statement as to why I thought Skilling was appropriate. I want to follow through on those comments regarding at least the potential vagueness in the tax obstruction statutes – the defraud / Klein conspiracy and tax obstruction (§ 7212(a)).

In catching up with recent cases, I came across today United States v. Wood, 2010 U.S. App. LEXIS 12984 (10th Cir. 6/24/10) (Unpublished) where the defendant, Mr. Wood, did claim that§ 7212 as interpreted was vague, echoing the claims made in Skilling. The Tenth Circuit rejected the claim (and his other claims), fairly summarily, and did not even believe the resolution was worthy of being published. Focusing on the vagueness claim, the Tenth Circuit just said other courts rejected the claim and it agreed. The key parts of its slim analysis are:

The government charged Mr. Wood with deceptive techniques including using domestic non-interest-bearing bank accounts under his signature, offshore credit card accounts, and nominee entities to hide income and assets from the IRS. The jury found that Mr. Wood's actions were intended to obstruct or impede the administration of the tax code with the intent to gain an unlawful benefit, and § 7212(a) gives a reasonable person clear notice that these actions are prohibited. We conclude that § 7212(a) is not vague as applied to the particular conduct alleged in this case.

I nit-pick here, because this quote evidences a problem with a court that has not thought through the implications of what it says cryptically as the basis for a holding (not uncommon in unpublished opinions designed to resolve the case in hand but avoid the precedential effect in future cases). In the quoted portion, the Tenth Circuit says that the Government charged tax obstruction, in part, because Mr. Wood used “domestic non-interest-bearing bank accounts under his signature.” Although that is all the Tenth Circuit tells us in this critical part of its reasoning, the facts it recites earlier in the opinion show that Mr. Wood did something materially more than just create a non-interest bearing account. The cryptic analysis refers to domestic accounts (plural), but the rest of the opinion mentions only one domestic account. The account in question was an account not in Mr. Wood’s name and created and styled in the name of a Foundation for the benefit of others (“The Family Foundation”). Mr. Wood appears to have had only signatory authority and actually used the account to shuffle money overseas rather than the purposes for which the account was established.

Although the facts of the case make the case holding correct, I am concerned that, in this area, courts just are sloppy in how they describe what they are doing. In my view, it is not a crime to set up a non-interest bearing account so long as there is nothing deceptive about that. The Court was just too cryptic about what it said. The statement would have been proper had the Court elaborated that Mr. Wood created a “domestic non-interest-bearing bank accounts under his signature but in the name of a nominee in order to hide the transfer of money to offshore accounts.” But to suggest that creating “domestic non-interest-bearing bank accounts under his signature” is an action that can draw a criminal charge is just wrong.

I think a good case to set the framework for discussion is United States v. McGill, 964 F.2d 222 (3d Cir. 1992) where the Third Circuit held that creating a bank account in the taxpayer’s own name is not an act of evasion. As I said in my article (John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 334-335 (2009)).

Although McGill is an evasion case and not a conspiracy case, I think it frames the concern nicely. In terms of imposing criminal liability for conduct that defeats the lawful functions of the IRS, the government claims § 7212 to be a one-person counterpart of the defraud conspiracy. The question is whether McGill's actions, although failing the affirmative act requirement of § 7201 evasion, could be an attempt to defeat the lawful functions of the IRS under § 7212. And, if two or more people, conspired to perform the same act, they could be charged with the underlying substantive act (through § 7212) and a conspiracy framed both as an offense conspiracy (to violate § 7212) and a defraud conspiracy. Of course, McGill did not address § 7212 or either conspiracy, so any conclusion has to be an extrapolation, but the McGill court's concerns would be equally present in the context of a conspiracy or § 7212 charge. The McGill court's animating concerns are basically the same that prompted the Supreme Court in Hammerschmidt to limit the scope of criminality except where Congress has spoken clearly, which it has not in the spare language of the defraud conspiracy and § 7212. For now you might ask whether the government simply indicted McGill under the wrong statute(s), or whether, until Congress speaks more clearly than it has, there is something fundamentally wrong with the notion that legal activity which is nondeceptive can support a criminal conviction simply because an actor intended to make the IRS's job more difficult.

For those who want to consider further this issue, in addition to the article itself, I recommend looking through the Appendix to my article here.  In the Appendix, I discuss common examples in tax practice that, in some general sense make the IRS's job harder and may even give some pause as to whether they cross the line of square dealing with the Government, but hardly put anyone on notice that a crime is being committed.  In most the examples, of course, most prosecutors would not charge a tax obstruction crime, but not because some of the rhetoric would preclude the charge.  If a charge can be formulated in such a way that there is no discernible dividing line between the good and the bad, mere prosecutorial discretion (which may vary from prosecutor to prosecutor) should not be the test of criminality.

Supreme Court Limits Scope of Honest Services Fraud

The Supreme Court has handed down decisions in the Jeff Skilling and Conrad Black honest-services fraud cases  (Skilling v. United States, 561 U.S. ___ (2010) and Black v. United States, 561 U.S. ___ (2010)).  I have previously blogged on the honest-services fraud issue and its potential relationship to tax crimes here.  I have not had time to study the opnions and develop any impact on tax crimes, so I just offer for now the Supreme Court's summary of the honest-servces fraud reasoning of the majority opinion:

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2. Section 1346, which proscribes fraudulent deprivations of “the intangible right of honest services,” is properly confined to cover only bribery and kickback schemes. Because Skilling’s alleged misconduct entailed no bribe or kickback, it does not fall within the Court’s confinement of §1346’s proscription. Pp. 34–51.

(a) To place Skilling’s claim that §1346 is unconstitutionally vague in context, the Court reviews the origin and subsequent application of the honest-services doctrine. Pp. 34–38.

(1) In a series of decisions beginning in the 1940s, the Courts of Appeals, one after another, interpreted the mail-fraud statute’s prohibition of “any scheme or artifice to defraud” to include deprivations not only of money or property, but also of intangible rights. See, e.g., Shushan v. United States, 117 F. 2d 110, which stimulated the development of the “honest-services” doctrine. Unlike traditional fraud, in which the victim’s loss of money or property supplied the defendant’s gain, with one the mirror image of the other, the honest-services doctrine targeted corruption that lacked similar symmetry. While the offender profited, the betrayed party suffered no deprivation of money or property; instead, a third party, who had not been deceived, provided the enrichment. Even if the scheme occasioned a money or property gain for the betrayed party, courts reasoned, actionable harm lay in the denial of that party’s right to the offender’s “honest services.” Most often these cases involved bribery of public officials, but over time, the courts increasingly recognized that the doctrine applied to a private employee who breached his allegiance to his employer, often by accepting bribes or kickbacks. By 1982, all Courts of Appeals had embraced the honest-services theory of fraud. Pp. 34–37.

(2) In 1987, this Court halted the development of the intangible rights doctrine in McNally v. United States, 483 U. S. 350, 360, which held that the mail-fraud statute was “limited in scope to the protection of property rights.” “If Congress desires to go further,” the Court stated, “it must speak more clearly.” Ibid. P. 37.

(3) Congress responded the next year by enacting §1346, which provides: “For the purposes of th[e] chapter [of the U. S. Code that prohibits, inter alia, mail fraud, §1341, and wire fraud, §1343], the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.” Pp 37–38.

(b) Section 1346, properly confined to core cases, is not unconstitutionally vague. Pp. 38–51.

(1) To satisfy due process, “a penal statute [must] define the criminal offense [1] with sufficient definiteness that ordinary people can understand what conduct is prohibited and [2] in a manner that does not encourage arbitrary and discriminatory enforcement.” Kolender v. Lawson, 461 U. S. 352, 357. The void-for-vagueness doc-trine embraces these requirements. Skilling contends that §1346 meets neither of the two due-process essentials. But this Court must, if possible, construe, not condemn, Congress’ enactments. See, e.g., Civil Service Comm’n v. Letter Carriers, 413 U. S. 548, 571. Alert to §1346’s potential breadth, the Courts of Appeals have divided on how best to interpret the statute. Uniformly, however, they have declined to throw out the statute as irremediably vague. This Court agrees that §1346 should be construed rather than invalidated. P. 38–39.

(2) The Court looks to the doctrine developed in pre-McNally cases in an endeavor to ascertain the meaning of the phrase “the in-tangible right of honest services.” There is no doubt that Congress intended §1346 to refer to and incorporate the honest-services doc-trine recognized in Courts of Appeals’ decisions before McNally derailed the intangible-rights theory of fraud. Congress, it bears emphasis, enacted §1346 on the heels of McNally and drafted the statute using that decision’s terminology. See 483 U. S., at 355, 362. Pp. 39–40.

(3) To preserve what Congress certainly intended §1346 to cover, the Court pares the pre-McNally body of precedent down to its core: In the main, the pre-McNally cases involved fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who had not been deceived. In parsing the various pre-McNally decisions, the Court acknowledges that Skilling’s vagueness challenge has force, for honest-services decisions were not models of clarity or consistency. It has long been the Court’s practice, however, before striking a federal statute as impermissibly vague, to consider whether the prescription is amenable to a limiting construction. See, e.g., Hooper v. California, 155 U. S. 648, 657. Arguing against any limiting construction, Skilling contends that it is impossible to identify a salvageable honest-services core because the pre-McNally cases are inconsistent and hopelessly unclear. This Court rejected an argument of the same tenor in Letter Carriers, 413 U. S., at 571–572. Although some applications of the pre-McNally honest-services doctrine occasioned disagreement among the Courts of Appeals, these decisions do not cloud the fact that the vast majority of cases involved offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes. Indeed, McNally itself presented a paradigmatic kickback fact pattern. 483 U. S., at 352–353, 360. In view of this history, there is no doubt that Congress intended §1346 to reach at least bribes and kickbacks. Because reading the statute to proscribe a wider range of offensive conduct would raise vagueness concerns, the Court holds that §1346 criminalizes only the bribe-and-kickback core of the pre-McNally case law. Pp. 41–45.

(4) The Government urges the Court to go further by reading §1346 to proscribe another category of conduct: undisclosed self-dealing by a public official or private employee. Neither of the Government’s arguments in support of this position withstands close inspection. Contrary to the first, McNally itself did not center on non-disclosure of a conflicting financial interest, but rather involved a classic kickback scheme. See 483 U. S., at 352–353, 360. Reading §1346 to proscribe bribes and kickbacks—and nothing more— satisfies Congress’ undoubted aim to reverse McNally on its facts. Nor is the Court persuaded by the Government’s argument that the pre-McNally conflict-of-interest cases constitute core applications of the honest-services doctrine. Although the Courts of Appeals upheld honest-services convictions for some conflict-of-interest schemes, they reached no consensus on which schemes qualified. Given the relative infrequency of those prosecutions and the intercircuit inconsistencies they produced, the Court concludes that a reasonable limiting construction of §1346 must exclude this amorphous category of cases. Further dispelling doubt on this point is the principle that “ambiguity concerning the ambit of criminal statutes should be resolved in favor of lenity.” Cleveland v. United States, 531 U. S. 12, 25. The Court therefore resists the Government’s less constrained construction of §1346 absent Congress’ clear instruction otherwise. “If Congress desires to go further,” the Court reiterates, “it must speak more clearly than it has.” McNally, 483 U. S., at 360. Pp. 45–47.

(5) Interpreted to encompass only bribery and kickback schemes, §1346 is not unconstitutionally vague. A prohibition on fraudulently depriving another of one’s honest services by accepting bribes or kickbacks presents neither a fair-notice nor an arbitrary-prosecution problem. See Kolender, 461 U. S., at 357. As to fair notice, it has always been clear that bribes and kickbacks constitute honest-services fraud, Williams v. United States, 341 U. S. 97, 101, and the statute’s mens rea requirement further blunts any notice concern, see, e.g., Screws v. United States, 325 U. S. 91, 101–104. As to arbitrary prosecutions, the Court perceives no significant risk that the honest-services statute, as here interpreted, will be stretched out of shape. Its prohibition on bribes and kickbacks draws content not only from the pre-McNally case law, but also from federal statutes proscribing and defining similar crimes. Pp. 48–49.

(c) Skilling did not violate §1346, as the Court interprets the statute. The Government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but the Government never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations. Because the indictment alleged three objects of the conspiracy—honest-services wire fraud, money-or-property wire fraud, and securities fraud—Skilling’s conviction is flawed. See Yates v. United States, 354 U. S. 298. This determination, however, does not necessarily require reversal of the conspiracy conviction, for errors of the Yates variety are subject to harmless-error analysis. The Court leaves the parties’ dispute about whether the error here was harmless for resolution on remand, along with thequestion whether reversal on the conspiracy count would touch any of Skilling’s other convictions. Pp. 49–50.