DOJ Is Moving Past Switzerland to Prosecute Financial Institutions - 2 Cayman Banks Plead Guilty (3/8/16 & 3/14/16))

In this press release titled First Conviction of Non-Swiss Financial Institution For Tax Evasion Conspiracy, here, DOJ Tax announces the guilty please of two Cayman banks -- 

Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNT), two Cayman Island affiliates of Cayman National Corporation, which provided investment brokerage and trust management services to individuals and entities within and outside the Cayman Islands, including citizens and residents of the United States (U.S. taxpayers).

Readers should note the DOJ Tax's choice of the word "First" in the title.  I think there is a suggesion that there will be a second, third, etc., over time.  Here are some excerpts (emphasis supplied by JAT):

“Today’s convictions make clear that our focus is not on any one bank, insurance company or asset management firm, or even any one country,” said Acting Deputy Assistant Attorney General Goldberg of the Justice Department’s Tax Division. “The Department and IRS are following the money across the globe – there are no safe havens for U.S. citizens engaged in tax evasion or those actively assisting them.” 

* * * * 

From at least 2001 through 2011, CNS and CNT, which are both located in Grand Cayman and organized under the laws of the Cayman Islands, assisted certain U.S. taxpayers in evading their U.S. tax obligations to the IRS and otherwise hiding accounts held at CNS and CNT from the IRS (hereinafter, undeclared accounts).  CNS and CNT did so by knowingly opening and maintaining undeclared accounts for U.S. taxpayers at CNS and CNT.  Specifically, and among other things, in furtherance of a scheme to help U.S. taxpayers hide assets from the IRS and evade taxes: 

CNS and CNT opened, and/or encouraged many U.S. taxpayer-clients to open accounts held in the name of sham Caymanian companies and trusts (collectively, structures), thereby helping U.S. taxpayers conceal their beneficial ownership of the accounts.
CNS and CNT treated these sham Caymanian structures as the account holders and allowed the U.S. beneficial owners of the accounts to trade in U.S. securities. 

 CNS failed to disclose to the IRS the identities of the U.S. beneficial owners who were trading in U.S. securities, in contravention of CNS’s obligations under its Qualified Intermediary Agreement (QI) with the IRS.

 After learning about the investigation of Swiss bank UBS AG (UBS), in or about 2008, for assisting U.S. taxpayers to evade their U.S. tax obligations, CNS and CNT continued to knowingly maintain undeclared accounts for U.S. taxpayer-clients and did not begin to engage in any significant remedial efforts with respect to those accounts until 2011 and 2012. 

The sham Caymanian structures that CNT set up for U.S. taxpayer-clients included trusts, which were nominally controlled by CNT trust officers, but which in fact were controlled by the U.S. taxpayer-clients; managed companies, for which CNT ostensibly provided direction and management services, but which in truth were shell companies that served only to hold the assets of the U.S. taxpayer-clients; and registered office companies, which were shell companies for which CNT simply supplied a Caymanian mailing address.  CNS treated these sham Caymanian structures as the account holders and then permitted the U.S. taxpayer-clients to trade in U.S. securities, without requiring them to submit Form W-9s, which are IRS forms that identify individuals as U.S. taxpayers, as CNS was obligated to do under its QI obligations for accounts held by U.S. persons that held U.S. securities.  CNS and CNT agreed to maintain these structures for U.S. taxpayer-clients after many of them expressed concern that their accounts would be detected by the IRS.

In or about April 2008, it became publicly known that the U.S. Department of Justice was investigating UBS for assisting U.S. taxpayers to evade their U.S. tax obligations.  Thereafter, despite the public disclosure of the UBS case, and CNS’s awareness of it, CNS continued to assist U.S. taxpayer-clients in concealing their accounts from the IRS by, among other things, failing to require them to complete Form W-9s.  Likewise, up through at least 2010, CNT continued to rely on account opening documentation that, rather than barring the creation of non-tax compliant structures, simply assigned higher “risk” points to such structures.  In or about June 2011, CNT hired a new president, who spearheaded a review of CNT’s files.  In the course of that review, not a single file was found to be complete and without tax or other issues.  Moreover, with respect to the structures that had U.S. beneficial owners, CNT’s files contained little, if any, evidence of tax compliance. 

At their high-water mark in 2009, CNS and CNT had approximately $137 million in assets under management relating to undeclared accounts held by U.S. taxpayer-clients.  From 2001 through 2011, CNS and CNT earned more than $3.4 million in gross revenues from the undeclared U.S. taxpayer accounts that they maintained.  

As part of their plea agreements with the U.S. Attorney’s Office for the Southern District of New York (the office), CNS and CNT have agreed to cooperate fully with the office’s investigation of the companies’ criminal conduct.  To date, CNS and CNT have already made substantial efforts to cooperate with that investigation, including by: (1) facilitating interviews that the office conducted of CNS and CNT employees, including top level executives; (2) voluntarily producing documents in response to the office’s requests; (3) providing, in response to a treaty request, unredacted client files for approximately 20 percent of the U.S. taxpayer-clients who maintained accounts at CNS and CNT; and (4) committing to assist in responding to a treaty request that is expected to result in the production of unredacted client files for approximately 90 to 95 percent of the U.S. taxpayer-clients who maintained accounts at CNS and CNT.

These banks will be be added to the IRS's Foreign Financial Institutions or Facilitators, here.  As indicated in the last quoted paragraph, accountholders in the listed banks joining OVDP after one of their banks are listed will be subject to the 50% penalty in OVDP (provided that they do not opt out, in which case, who knows).

I will update my statistics to show the tentacles for financial institutions going past Switzerland and post my opening entries later, hopefully this week.

This announcement raises several questions.

1.  Did these financial institutions decide to approach DOJ Tax to get ahead of the curve as the vise closes on non-Swiss foreign financial institutions with this genre of misbehavior.  Certainly, I speculate (for that is what it is) that foreign financial institutions with this genre of misbehavior might be able to get a much better deal by coming in early.

2.  Note that the bank produced files on certain U.S. persons and will assist in treaty requests for the bulk of the U.S. persons.  The message here is not so much for those persons -- they are cooked -- but for others in other, as yet publicly disclosed foreign banks, to get in line via either OVDP or, should they be so bold as to certify nonwillfulness, one of the streamlined programs.

3.  Under the plea agreements, which I have reviewed but do not have links to, the institutions are required to pay the following:

Institution	Forfeiture	Restitution	Fine *	Total Payment
Cayman National Securities Ltd.	$1,708,735	$906,587	$384,679	$3,000,000
Cayman National Trust Co. Ltd.	$1,708,735	$906,587	$384,679	$3,000,000

 *    This is the fine recommended in the plea agreement.  Under the Guidelines, the fine recommendation is not binding on the judge.  According to the plea agreement, the Guideline Fine Range is $4,128,768 to $8,257,536.  The recommended fine is a substantial downward departure based on substantial assistance and “ability to pay a fine.”

4. Neither company gets any credit or reduction “for payments made to the Government by U.S. taxpayers through the Offshore Voluntary Disclosure Initiative and similar programs before or after the date of this Agreement.”

5. Neither company gets any U.S. tax benefit by deduction or otherwise from the payments.

6.  The agreement does not provide any immunity or protection for any individual.

7.  The provision for continuing cooperation is:

                It is further understood that, consistent with its obligations under Cayman Island law, including data protection, bank secrecy, or other confidentiality laws (such as Mutual Legal Assistance Treaties or Tax Information Exchange Agreements, the Intergovernmental Agreement (IGA) between the United States and the Cayman Islands, Cayman Islands Monetary Authority's rules and regulations, the direction or order of the courts of the Cayman Islands, or The Royal Cayman Islands Police Service), CNS shall, with respect to the Office's Investigation: (a) truthfully and completely disclose all information with respect to the activities of CNS and its officers, agents, affiliates, and employees concerning all matters about which this Office inquires of it, which information can be used for any purpose; (b) cooperate fully with this Office, the Tax Division, IRS-CI, and any other government agency designated by this Office; (c) attend all meetings at which this Office request its presence and use its reasonable best efforts to secure the attendance and truthful statements or testimony of any past or current officers, agents, or employees at any meeting or interview or before the grand jury or at trial or at any other court proceeding; (d) provide to this Office upon request any document, record, or other tangible evidence relating to matters about which this Office or any designated law enforcement agency inquires of it; (e) assemble, organize, and provide in a responsive and prompt fashion, and upon request, on an expedited schedule, all documents, records, information and other evidence in CNS's possession, custody or control as may be requested by this Office, the Tax Division, IRS-CI, or designated governmental agency, including collecting and maintaining all records that are potentially responsive to United States' requests for documents located abroad so that these requests may be promptly responded to; (f) provide to this Office any information and documents that come to CNS's attention that may be relevant to this Office's Investigation, as specified by this Office; (g) provide testimony or information concerning the conduct set forth in the Information and/or Statement of Facts including but not limited to testimony and information necessary to identify or establish the original location, authenticity, or other basis for admission into evidence of documents or physical evidence in any criminal or other proceeding as requested by this Office, the Tax Division, the IRS-CI, or designated governmental agency; (h) bring to this Office's attention all criminal conduct by CNS or any of its employees acting within the scope of their employment related to the Office's Investigation, as to which CNS's Board of Directors, senior management, or United States legal and compliance personnel are aware; and (i) bring to the Office's attention any administrative, regulatory, civil, or criminal proceeding or investigation of CNS relating to the Office's Investigation. To the extent documents above are in a foreign language, CNS agrees it will provide, at its own expense, fair and accurate translations of any foreign language documents produced by CNS to this Office either directly or through any Mutual Legal Assistance Treaties or Tax Information Exchange Agreements. Nothing in this Agreement shall be construed to require CNS to provide any information, documents, or testimony protected by the attorney-client privilege, work-product doctrine, or other applicable privileges.

Here are my aggregate statistics:

Financial Institution Summary
Treaty requests	15
John Doe Summonses	12
Criminal Matters
Criminal (incl Investigations and Prosecutions)	23
Guilty Plea	5
Forfeiture	5
Deferred Prosecution Agreement ("DPA")	6
NonProsecution Agreement ("NPA")	82
IRS Financial Institution List (OVDP Offshore Penalty Bump to 50%) *	101
Total Costs (Fines, Restitution, Other Penalties, etc.)	$6,000,000
US DOJ Swiss Bank Program	Number	Number Resolved	Total Costs
U.S. / Swiss Bank Initiative Category 1 (Criminal Inv.) *	16	5	$4,017,800,000
U.S. / Swiss Bank Initiative Category 2 **	91	81	$1,363,683,990
U.S. / Swiss Bank Initiative Category 3	14		$0
U.S. / Swiss Bank Initiative Category 4	8		$0
Swiss Bank Program Results	129		$5,381,483,990
* Includes subsidiary or related entities counted as separate entities, so the numbers may exceed the numbers the IRS and DOJ posted numbers which combine some of the entities.
** DOJ says original total was 106 but that it expects about 80 to complete the process.
Foreign Bank & Bank Related Other than Swiss
Bank Leumi & Related			$157,000,000
Liechtensteinische Landesbank AG			$7,525,542
Cayman National Securities Ltd.			$3,000,000
Cayman National Trust Co. Ltd.			$3,000,000
Total			$164,525,542
Sum of Swiss Bank Program and Other			$5,546,009,532

Report on Remarks of AAG Tax and Practitioner Regarding Nonwillfulness and Foreign Account Enablers (3/7/16)

I recently blogged on the prepared comments for Caroline Ciraolo, Acting Assistant Attorney General, for a recent tax conference.  Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16), here.  Tax Notes Today has an article summarizing her remarks and Bryan Skarlatos, a prominent private practitioner in the offshore account practice, at the conference.  Nathan J. Richman, International Tax Enforcement Efforts Include Civil Tools, 2016 TNT 45-7 (3/8/16) [no link available].  I will highlight the key comments, as reported, that I think may be of interest to readers of this blog.

1.  Ciraolo and Bryan Skarlatos questioned whether foreign account holders can remain nonwillful about foreign account reporting obligations at this stage.  The article quotes from her prepared comments (linked above) as follows:

After three very well-publicized voluntary disclosure programs, nearly 200 criminal prosecutions, ongoing criminal investigations and the increasing assessment and enforcement of substantial civil penalties for failure to report foreign financial accounts, a taxpayer’s claims of ignorance or lack of willfulness in failing to comply with disclosure and reporting obligations are, quite simply, neither credible nor well-received. 

JAT Comment:  Obviously, it will be getting harder and harder to claim nonwillfulness as time moves on.  Skarlatos' point, I think, was that the practitioner must perform his due diligence to question whether clients coming in this late can really certify their nonwillfulness.  See paragraph 2, below.

2.  Ciraolo called out as having a weak case for nonwillful in streamlined submissions situations involving (1) accounts moving from category 1 banks to category 2 banks and then to a new foreign country and (2) accounts with nominee entities.  JAT Note:  Those are the obvious cases.  Those cases should always have proceeded in OVDP without opt out, from the inception in 2009.  Still, I suspect that there will be situations even into the future that, with due diligence, a professional may be able to advise a client that streamlined is appropriate.

3.  There was some discussion as nonwillful certifications in streamlined that should not have been made because the conduct was willful.  Skarlatos noted that some practitioners have been aggressive in advising the clients with the certification when they should use OVDP.  There was some discussion as to how to fix those cases rather than waiting for the IRS or DOJ to question the improper certification.

4.  Skarlatos reported that a key part of enforcement initiatives going forward will be focus on foreign enablers (bank employees and related persons), referring to them as "facilitators." (I will use here enabler which is the word I normally use for this type of player.)  Ciraolo suggested that some of those enablers should obtain counsel and start discussions with DOJ, rather than waiting "locked in their jurisdiction[s], waiting for contact or indictment to be filed in the U.S."  Skarlatos said that a significant number of these people would come forward if offered a path to do so.  JAT Note, there really are far too many of foreign enablers potentially subject to prosecution to be prosecuted.  Likely, only the worst or most visible/active of them will be prosecuted.  I have not heard any indication that the IRS or DOJ will attempt some type of program that will permit some "lesser" foreign enablers to solve their problem while leaving out in the cold the "greater" foreign enablers for DOJ to meet its criminal tax enforcement priorities.  I do note, in this regard, as I have noted before, these foreign enablers have a suspended statute of limitations for criminal tax prosecutions while they are out of the U.S.  See Section 6531, here.  However, when enablers are prosecuted, DOJ usually obtains indictments for conspiracy, a title 18 offense, which does not have a suspended statute of limitations solely for absence from the U.S.  But, if the conspiracy statute has lapsed and the DOJ wanted to prosecute, it could still easily prosecute the same conduct for a tax crime such as tax obstruction or even evasion for which the statute would have been suspended

U.S. Summonses Singapore Bank Records from UBS (3/4/16 & 3/5/16)

David Voreacos, Is Singapore the Next Switzerland for U.S. Tax Crackdown? (BloombergBusiness 3/3/16), here.  Excerpts:

The Internal Revenue Service is seeking to force UBS Group AG to turn over records on an account in Singapore held by a U.S. citizen, potentially opening a new front against offshore tax evasion beyond Switzerland. 

The IRS last month asked a federal judge in Miami to force UBS, the largest Swiss bank, to produce documents on Ching-Ye Hsiaw, who lives in China. The judge on Wednesday told UBS to show up in court on March 31 to explain why it has refused to supply the account records. 

* * * * 

Singapore will lift banking confidentiality when foreign authorities ask it to do so and when the law is used to shield criminal activities, according to a person with direct knowledge of the city-state’s bank-regulation framework who asked not to be named because of an ongoing court case. [JAT NOTE:  See ¶ 7 in my comments below.]

* * * * 

Singapore Secrecy 

The U.S. has focused largely on Switzerland in recent years as it has fought offshore tax evasion. More than 80 Swiss banks, including UBS and Credit Suisse Group AG, have agreed to pay a total of $5 billion or so in penalties and fines. The question is where the IRS and the Justice Department will turn next as they sift through a trove of data gathered from Swiss banks and from more than 50,000 U.S. taxpayers who disclosed their accounts to avoid prosecution. 

The Hsiaw case provides some clues. IRS agents served a summons on UBS in 2013 for records of his account in Singapore from 2001 to 2011. The bank said it couldn’t produce them because Singapore’s bank secrecy laws prevent disclosure without permission from Hsiaw, which he hasn’t provided, according to a court filing. 

“Even if Singapore’s bank secrecy laws, as UBS contends, precludes disclosure of the summoned bank records relating or pertaining to Hsiaw’s Singapore account(s), international comity requires that the records be disclosed,” IRS revenue agent James Oertel said in the filing.

The case is United States v. UBS AG (SD FL. 16-mc-20653)..

Documents and JAT Comments Added 3/6/16 11:15am:

The key documents are:

• IRS Summons, here.
• US Petition to Enforce Summons, here.
• IRS Agent Declaration for Petition to Enforce Summons, here.
• Show Cause Order, here.

JAT Comments:

1.  The summons is a regular IRS third party recordkeeper summons to a bank, requiring notice to the taxpayer which was given by registered mail to Hsiaw's Shenzhen, China address..  Because it is issued to a person (UBS) with sufficient U.S. presence to permit enforcement by contempt sanctions if necessary, even over the defense that foreign law does not permit the summonsee (UBS) to comply, it is of a type called a Bank of Nova Scotia summons.  In re Grand Jury Proceedings (Bank of Nova Scotia), 691 F.2d 1384 (11th Cir. 1982).  I have only seen the BNS summons applied to banks, and it is usually described in relation to banks.  For example in a Tax Notes Today article, the author says "ts used when a branch of a foreign financial institution is located in the United States and the IRS seeks documents located at the bank's foreign location."  Marie Sapirie,  DOJ Eyes UBS Accounts in Singapore in Latest Offshore Effort, 2016 TNT 44-4 (3/7/16) (the article is good on other points, so those with a TNT subscription should read it).  However, I think it can apply to other types of entities and, in my mind, perhaps to individuals as well.  For example, in the DOJ Tax Summons Enforcement Manual, here, the BNS summons is discussed as follows (p. 74):

6. Summonses to entities located in the United States for records located abroad 

A person or entity located in the United States may have control over documents located abroad that the IRS wants to review in connection with an investigation. For example, a foreign bank might have a United States branch and the IRS may seek documents located at the bank’s foreign headquarters. E.g., In re Grand Jury Proceedings (Bank of Nova Scotia), 691 F.2d 1384 (11th Cir. 1982). Similarly, the IRS may want to review documents of a foreign accounting firm that is controlled by an accounting firm located in the United States. Cf. In re Parmalat Sec. Litigation, 594 F. Supp. 2d 444 (S.D.N.Y. 2009) (holding in a tort suit that Deloitte & Touche USA had not established that it was entitled to summary judgment based upon its claim that it did not control an Italian accounting firm which was a member of the same accounting group as Deloitte & Touche USA). See also United States v. Vetco Inc., 691 F.2d 1281 (9th Cir. 1981) (affirming order enforcing summonses issued to U.S. company and to its U.S. auditing firm for records maintained in Switzerland by the company’s Swiss subsidiary and the auditing firm’s Swiss affiliate).

The key is that there be someone with power to actually produce the documents in the U.S. jurisdiction to impose sanctions.  UBS is present in the U.S. and thus is sanctionable.  The issue as in all BNS summons is whether the U.S. court will inflict enough pain or potential pain on UBS that UBS will comply regardless of the pain that Singapore could inflict for violating Singapore law..

2.  The facts alleged in the Agent's declaration seems to make out at least a prima facie criminal case. (I discuss the potential criminal case in more detail below in par. 4.)  Two things flow from that.  First, Hsiaw could assert his Fifth Amendment privilege to refuse to give any testimony that might incriminate him.  He is in China with no apparent plans to return (Agent Decl ¶ 9), so how much practical value his Fifth Amendment has is speculative.  Second, since he is in China with no apparent plans to return, the criminal statute of limitations will be suspended for tax crimes while he is out of the country.  Section 6531, here.  He apparently let the U.S. in January 2008 (Agent Decl ¶ 7), so the six year statute for tax crimes means that his tax years are open for prosecution of tax crimes back to at least 2002.  And, some of the facts alleged in the declaration might suggest that he committed some act in that period that refreshed the statute of limitations for even earlier years..

3.  The IRS learned of Hsiaw's offshore activity as follows:

12. Based on information that Switzerland disclosed to the IRS under the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation With Respect to Taxes on Income and pursuant to a settlement of the John Doe summons that the IRS served on UBS in 2008, the IRS learned, inter alia, that Hsiaw maintained a bank account at UBS in Switzerland, referred to herein as the Swiss account. See In the Matter of the Tax Liabilities of John Does, Case No. 08-mc-21864 (S.D. Fla.); United States v. UBS AG, Case No. 09-cr-60033 (S.D. Fla.), at Doc. 20, ¶¶ 13-14, and Doc. 32.

4.  A brief statement of the prima facie criminal case:  From the UBS disclosures, it was established that Hsiaw established a UBS account in 1994 with "hold mail" instructions.  (Agent Decl ¶¶ 13 & 14.)  On 9/15/00, in response to UBS's warning about new "Qualified Intermediary" rules that would require it to identify account holders having investments with U.S. source income (see e.g., 26 U.S.C. § 1441), Hsiaw signed a UBS form, stating, in pertinent part, that he "would like to avoid disclosure of [his] identity to the US Internal Revenue Service under the new tax regulations."  (Agent Decl ¶ 15.)  One of his account managers in the period was Chris Bagios who met with him in the U.S. and has pled guitly,.  (Agent Decl. ¶¶ 16 and 17.)  It would be expected that, in any criminal case, Bagios would be able to provide damning testimony (if a jury found it credible).  In 2002,Hsiaw closed the UBS account, withdrawing $600,066 by check, the proceeds of which have not been traced, and the balance of $194,356 by transfer to a Singapore account (presumably UBS).  (Agent Decl. ¶¶ 19-21).  Of course, a criminal case would have a lot more facts than these, but these facts certainly raise a real risk of criminal prosecution.  (In this regard, the U.S. could get a sealed indictment and arrest Hsiaw should he attempt to re-enter  the U.S.; alternatively or in addition, the U.S. might get an international warrant for his arrest that, although China would not enforce, another country might if he traveled internationally, but he does not seem to be a prominent enough target that the U.S. would go to that effort.)

5.  The petition does allege that there has been no criminal referral to DOJ as follows:

22. No Justice Department referral, as defined by 26 U.S.C. § 7602(d)(2), is in effect with respect to Hsiaw for the years under examination. See Oertel Decl., at ¶ 39.

Of course, the IRS is prohibited by the cited statute from using the IRS summons if a DOJ referral is in effect.  It seems to me that there might be a potential defense to this particular summons based on this provision.  Certainly, I have reason to believe that the formal referrals mentioned in § 7602(d)(2), here.  But the milieu of the press against UBS for the documents leading to the Hsiaw (and others) might mean that the documents indicating criminal culpability were originally shared with DOJ Tax originally and certainly by the time of the summons enforcement.  If, indeed, the documents were obtained under the double tax treaty exchange of information provision, that means that they shoulkd have gone to the IRS and not to DOJ Tax (although I suspect that they did get to DOJ Tax directly or indirectly).  Given DOJ's claim that it has independent authority to investigate tax crimes, how much use is this statutory prohibition if the IRS can give documents to IRS without a formal referral for criminal investigation or prosecution?  I think there is a lot of nuance there, but can't develop it here and really can't develop it in great detail without a client willing to fund my efforts and a forum to blast out information from the IRS and DOJ (such as a pending case).  Maybe UBS's lawyers, who, I presume, are very smart and well compensated will explore this issue.  (On the other hand, if this type of argument would taint the enforcement of the summons, the Government could simply present the compulsion in the form of a grand jury subpoena rather than a summons.)

6.  Of course, the bigger news is that this summons enforcement proceeding presages an IRS and DOJ move against Singapore whose financial institutions have offered tax haven with bank secrecy to U.S. persons for many years.

7.  The petition contain the allegation that:

Even if Singapore's bank secrecy laws, as UBS contends, preclude disclosure of the summoned bank records relating or pertaining to Hsiaw's Singapore account(s), international comity requires that the records be disclosed. See Oertel Decl., at ¶ 34. The interest of the United States in combating tax evasion by U.S. taxpayers through the use of secret foreign bank accounts substantially outweighs the interest of Singapore in preserving the privacy of its bank customers. See Oertel Decl., at ¶ 34. As a consequence, judicial enforcement of the summons is required. See Oertel Decl., at ¶ 34.

Neither the petition nor the declaration provides any support for that conclusory allegation.  International comity in this case would seem to be a matter between the U.S. and Singapore, not the U.S. and UBS.  I will look forward to the briefing on this issue.

7.  If, as is likely, this works, the U.S. will have a powerful tool to crack Singapore secrecy and, as with the initial UBS summons way back in 2008, this may start a series of events that requires Singapore to open the kimona to the U.S. at least for the more egregious instances of U.S. person use of Singapore banks for U.S. tax evasion.

D.C. Circuit Opinion in Sprawling NonTax Case (3/4/16)

My automated daily searches picked up this opinion, United States v. McGill, 2016 U.S. App. LEXIS 3734 (DC Cir. 2016), here.  It is not a tax crimes case.  Rather, it involved charges arising from an alleged conspiracy "to run a large-scale and violent narcotics-distribution" business. Here is the part pick up by the automated searches:

Finally, while the Alfreds, Simmons, and McGill object to evidence of their failure to pay taxes during the course of the conspiracy, "[i]t is well settled that in narcotics prosecutions, a defendant's possession and expenditure of large sums of money, as well as his or her failure to file tax returns, are relevant to establish that the defendant lacked a legitimate source of income and that, in all probability, the reason for the failure to report this income is due to the defendant's participation in illegal activities." United States v. Briscoe, 896 F.2d 1476, 1500 (7th Cir. 1990); see also United States v. Chandler, 326 F.3d 210, 215 (3d Cir. 2003) (same). 

That rationale holds true here. Simmons, McGill, and Ronald Alfred all suggested that they were operating a business or otherwise supporting themselves through legitimate means. Their failure to pay taxes thus was relevant to show that they were in fact getting income from illicit activities like drug trafficking that they assuredly did not want to report to the IRS. With respect to James Alfred, he failed to object to the tax-filing evidence in district court, and the court's failure to sua sponte exclude that evidence of his lack of a licit income source while in the drug conspiracy was not plain error. See United States v. Spriggs, 102 F.3d 1245, 1257 (D.C. Cir. 1996) ("Because appellants did not make a timely objection to [admitting evidence], we review its admission for plain error.").

I will let that reasoning stand for what it is.  Of course, if the inference sought is correct, the defendants could have been charged with a tax crime -- at least failure to file, § 7203.

Several other things about the case struck me.

1. The opinion is 178 pages long in the pdf format.  That is not your ordinary opinion.  The case was argued in February 2015, so there was a long time to produce the 178 pages (and of course, the judges and their clerks were working on other cases during the period).

2. Perhaps related to the first, the opinion is "per curiam."  Per curiam may mean a number of things, but one thing it does mean is that no single judge claimed authorship.  Perhaps it was a collaborative effort of the judges and the law clerks.

3. The opinion (at least parts of it) is an interesting read.  Readers who want to dig in might look at the following  which are the parts that particularly interested me (Paragraph numbers are the courts and page numbers supplied by me are to the pdf copy).

I. Removal of Juror  (pp. 4 - 28), regarding the removal of a rogue juror.


II. Government Overview Testimony (pp. 28 - 37), regarding the prosecution use of an initial "overview" witness -- here the FBI agent.  Referring to its holding in an earlier case related to the present one, the Court said:

We found that result to be highly problematic, and we therefore joined the other courts of appeals "that have addressed the issue in condemning" the government's use of overview witness testimony. Id. at 60. We noted that there were several "obvious" problems posed by the government's use of an overview witness. Id. at 56. "First, the jury might treat the summary evidence" from the overview witness "as additional or corroborative evidence that unfairly strengthens the government's case." Id. Second, the overview witness might serve as a conduit for the introduction of "otherwise inadmissible evidence." Id. And third, an overview witness "might permit the government to have an extra [opening] argument." Id. We also determined that the "[a]voidance of those dangers is largely beyond the ability of the district court, much less the defense." Id. at 60.

Nevertheless, the Court sustained that use on the plain error standard.

III. The Admission of "Other Crimes" Evidence (pp. 37 - 60).  This discusses the commonly encountered use of bad acts and the scope of FRE 403 and 404(b).  I won't get into the weeds of the particular facts, but the Court does open with the background for use of this type of evidence, particularly whether the evidence is intrinsic to the charged crimes and thus not within FRE 404(b):

Rule 404(b) generally bars the admission of "[e]vidence of a crime, wrong, or other act . . . to prove a person's character in order to show that on a particular occasion the person acted in accordance with the character." Fed. R. Evid. 404(b)(1). That same evidence, however, may "be admissible for another purpose, such as proving motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident." Fed. R. Evid. 404(b)(2). That means that, in practice, Rule 404(b) "does not prohibit character evidence generally, only that which lacks any purpose but proving character." United States v. Bowie, 232 F.3d 923, 930, 344 U.S. App. D.C. 34 (D.C. Cir. 2000). A prosecutor seeking to use evidence of other criminal or bad acts for one of those permitted purposes must, upon request, provide the defendant with reasonable notice, usually pretrial, of the anticipated evidence. Fed. R. Evid. 404(b)(2). 

A threshold question in determining the admissibility of evidence of other crimes and bad acts is whether the evidence, in actuality, relates to acts unconnected with those for which the defendant is charged, or instead is intertwined with the commission of charged crimes. Acts "extrinsic" to the crime charged are subject to Rule 404(b)'s limitations; acts "intrinsic" to the crime are not. See Bowie, 232 F.3d at 927; see also United States v. Mahdi, 598 F.3d 883, 891, 389 U.S. App. D.C. 374 (D.C. Cir. 2010). In other words, Rule 404(b) only applies to truly "other" crimes and bad acts; it does not apply to "evidence . . . of an act that is part of the charged offense" or of "uncharged acts performed contemporaneously with the charged crime . . . if they facilitate the commission of the charged crime." Bowie, 232 F.3d at 929. 

In conspiracy prosecutions, the prosecution is "usually allowed considerable leeway in offering evidence of other offenses 'to inform the jury of the background of the conspiracy charged . . . and to help explain to the jury how the illegal relationship between the participants in the crime developed.'" United States v. Mathis, 216 F.3d 18, 26, 342 U.S. App. D.C. 127 (D.C. Cir. 2000) (quoting United States v. Williams, 205 F.3d 23, 33-34 (2d Cir. 2000)). In addition, "where the incident offered is a part of the conspiracy alleged[,] the evidence is admissible under Rule 404(b) because it is not an 'other' crime." United States v. Hemphill, 514 F.3d 1350, 1357, 379 U.S. App. D.C. 441 (D.C. Cir. 2008) (quoting United States v. Mejia, 448 F.3d 436, 447 (D.C. Cir. 2006)). We have also permitted the introduction of "other acts" evidence in conspiracy cases (i) to link a defendant to other defendants and drug transactions for which the conspiracy was responsible, United States v. Gaviria, 116 F.3d 1498, 1532, 325 U.S. App. D.C. 322 (D.C. Cir. 1997); (ii) to show the nature of a conspiracy and "the kind of organizational control" a defendant exercised, Mahdi, 598 F.3d at 891; and (iii) to show the defendants' intent to act in concert, Mathis, 216 F.3d at 26; see also United States v. Straker, 800 F.3d 570, 590 (D.C. Cir. 2015) (evidence of uncharged hostage takings was "relevant to . . . how those defendants started to work together as kidnappers"). 

However, in defining the contours of intrinsic evidence that is not subject to Rule 404(b), we have rejected the rule embraced by some of our sister circuits that evidence is intrinsic if it "complete[s] the story" of the charged crime. Bowie, 232 F.3d at 928 (citing United States v. Hughes, 213 F.3d 323, 329 (7th Cir. 2000); United States v. Carboni, 204 F.3d 39, 44 (2d Cir. 2000)). That is because "all relevant prosecution evidence explains the crime or completes the story" to some extent, and the fact that "omitting some evidence would render a story slightly less complete cannot justify circumventing Rule 404(b) altogether." Bowie, 232 F.3d at 929. Instead, if the government wishes to introduce such "other crimes" evidence, we "see no reason to relieve the government and the district court from the obligation of selecting from the myriad of non-propensity purposes available to complete most any story." Id. 

Beyond Rule 404(b)'s specific limitations on the admission of prior bad acts, Federal Rule of Evidence 403 permits a court to exclude otherwise-relevant evidence "if its probative value is substantially outweighed by a danger of . . . unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence." Fed. R. Evid. 403. As relevant here, this court has recognized that "[e]vidence of other crimes or acts having a legitimate nonpropensity purpose," and thus unaffected by Rule 404(b), may nevertheless "contain the seeds of a forbidden propensity inference." Bowie, 232 F.3d at 931. As a result, Rule 403's balancing of prejudice and probativeness may still bar the introduction of evidence, even if Rule 404(b) by itself would not. Id.; see also Mathis, 216 F.3d at 26. 

We review the district court's admission of evidence under both Rule 403 and Rule 404(b) for an abuse of discretion. See United States v. Johnson, 519 F.3d 478, 483, 380 U.S. App. D.C. 218 (D.C. Cir. 2008) (Rule 404(b)); United States v. Clarke, 24 F.3d 257, 265, 306 U.S. App. D.C. 251 (D.C. Cir. 1994) (Rule 403). This court is "extremely wary of second-guessing the legitimate balancing of interests undertaken by the trial judge" in this context. United States v. Ring, 706 F.3d 460, 472, 403 U.S. App. D.C. 410 (D.C. Cir. 2013) (quoting Henderson v. George Washington Univ., 449 F.3d 127, 133, 371 U.S. App. D.C. 173 (D.C. Cir. 2006)). An erroneous admission of "other crimes" evidence must be disregarded as harmless error unless it had a "substantial and injurious effect on the jury's verdict." United States v. Clark, 747 F.3d 890, 896, 409 U.S. App. D.C. 160 (D.C. Cir. 2014) (quoting Kotteakos v. United States, 328 U.S. 750, 776, 66 S. Ct. 1239, 90 L. Ed. 1557 (1946)) (ellipsis and brackets omitted).

I note also that there is a subsequent discussion of bad acts used for impeachment (X. Impeachment with Prior Bad Acts (McGill), pp. 93-99).

XVII. Prosecutorial Misconduct During Closing and Rebuttal Arguments (pp. 118 - 126).  The Government made closing arguments based on inferences from facts not in evidence.  The Court said:

The government now concedes that the playbook theme's implication "that appellants, their counsel, or the defense witnesses had consulted the letters seized from Andrews' cell in formulating the defense strategy . . . was without any factual basis," Appellee's Br. 221-22, and the argument was "in some respects, ill-advised," id. at 221. 

"Ill-advised" indeed. The prosecution's argument theme and statements were entirely improper, unprofessional, and wholly unbefitting of those who litigate in the name of the United States of America. There was no evidentiary basis for even inferring, let alone repeatedly trumpeting, that appellants knew anything about Andrews's letters. See United States v. Valdez, 723 F.3d 206, 209, 406 U.S. App. D.C. 183 (D.C. Cir. 2013) (prosecutor's remarks were improper where there was "no factual basis" for them). Worse still, under our Constitution, prosecutors have no business in gratuitously maligning as lies, falsehoods, and corruption, without any evidentiary basis, the defendants' exercise of their Fifth and Sixth Amendment rights to present a defense in court. Cf. United States ex. rel. Macon v. Yeager, 476 F.2d 613, 615 (3d Cir. 1973) (prosecutor may not seek to raise in the jurors' mind an inference of guilt from the defendant's exercise of his Sixth Amendment rights). 

Prosecutors "ha[ve] an obligation 'to avoid making statements of fact to the jury not supported by proper evidence introduced during trial,'" Moore, 651 F.3d at 51 (quoting Gaither v. United States, 413 F.2d 1061, 1079, 134 U.S. App. D.C. 154 (D.C. Cir. 1969)), and this court expects prosecutors to litigate with the recognition that they represent "a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all," Berger v. United States, 295 U.S. 78, 88, 55 S. Ct. 629, 79 L. Ed. 1314 (1935). A just outcome obtained through a fair, even-handed, and reliable process should be the government's goal; it is not to win at any cost. 

District courts, too, must remain vigilant. While counsel may be afforded a long leash in closing argument, they should not be given free rein. Courts must stand in the gap to protect defendants and the judicial process from abusive arguments like this. That did not happen here. Appellants repeatedly objected, and "[w]hy the [166]  district court refused to sustain the defense objection[s] is beyond us," Maddox, 156 F.3d at 1283. "When a prosecutor starts telling the jury" that the defendants, their lawyers, and some of their witnesses all consulted the same letters—a so-called playbook for a false defense—without any factual basis to support that argument, "it is time not merely to sustain an objection but to issue a stern rebuke and a curative instruction, or if there can be no cure, to entertain a motion for a mistrial." Id. Instead, the district court wrongly, and without explanation, denied appellants' repeated objections to this blatantly impermissible closing argument. 

While we find the closing argument to be deeply troubling, we cannot conclude on the record of this case that it actually resulted in substantial prejudice. "[T]here was overwhelming evidence of appellants' guilt," Moore, 651 F.3d at 53; the "case was not close," Becton, 601 F.3d at 599. In addition, the playbook theme was not mentioned in the government's initial closing argument, and was primarily confined to the first hour of the three hour rebuttal argument. The misconduct was thus limited "to relatively small portions of lengthy . . . closing [and rebuttal] arguments." Moore, 651 F.3d at 54. Just as a short and simple trial can make a "prosecutor's improper remarks all the more potent," Maddox, 156 F.3d at 1283, here the length of the trial (nearly six months) and the relatively cabined nature of the improper conduct mitigated any possible prejudice to appellants. 

Finally, the district court specifically instructed the jury right before it began deliberating that "[t]he opening statements and closing arguments of counsel are also not evidence," J.A. 5450; see Moore, 651 F.3d at 53-54. Such an instruction "is usually a strong ameliorative consideration" when evaluating "prosecutorial misconduct during . . . closing argument[.]" Id. at 54 (citations omitted).