The field of forfeiture saw significant action in 2016. The IRS offered to return forfeited funds used in structuring, but Congress still may clip its ability to forfeit such funds. Meanwhile, DOJ renewed a controversial program that incentivizes local law enforcement to aggressively pursue forfeiture. It filed a major forfeiture action which reminds law firms of their own need to vet the source of funds flowing into firm bank accounts. Finally, the U.S. Supreme Court made it clear that “clean” funds cannot be restrained pretrial when a defendant needs those funds for his criminal defense, even if the government wants to restrain the money in order to pay for forfeiture or restitution if the defendant is convicted.
Seizure and Forfeiture Relating to Structuring Offenses: IRS Policy Change and Proposed Federal Legislative Reform
The IRS continues to face widespread hostility to its use of administrative forfeiture. Although the IRS has reacted by changing its policy and even offering in 2016 to return forfeited funds, these self-imposed steps still may not prevent Congress from enacting legislation that will formally cabin the ability of the IRS to pursue forfeiture.
Under the Bank Secrecy Act, financial institutions are required to file a CTR for any deposit of more than $10,000. Attempting to avoid filing a CTR or preventing a bank from acquiring the duty to file a CTR, by breaking up a larger deposit into a series of deposits under the $10,000 threshold, is known as “structuring.” Structuring, when done to evade the reporting requirement, is a felony punishable by prison. It also can lead to civil or criminal forfeiture of the structured funds under 31 U.S.C. §5317(c).
The CTR requirement and anti-structuring provision are designed to identify criminal conduct as well as “illegal source deposits,” funds involved in or derived from criminal activity. Of course, structuring is not limited to illegal source deposits. It also can involve funds from legal activities, such as ordinary business operations or a legal sale or “legal source deposits.” For this reason, the anti-structuring provision can and does ensnare people who aren’t involved in underlying criminal conduct, such as ordinary business owners or banking customers whose behavior can either represent actual structuring (i.e., the conduct occurs with the requisite mental state, perhaps to further a tax crime) or merely resembles structuring but otherwise is innocent.
Recently, concerns have been raised about the use of the forfeiture power by IRS Criminal Investigation (IRS CI) in situations involving legal source deposits where there is no indication that the person is otherwise engaged in criminal activity. Critics have alleged that it has become standard practice for the government to seize individuals’ assets on the suspicion of structuring and then delaying, sometimes for years, any investigation or charges. According to these critics, these delays cause serious financial injury to small business owners and others who are never accused of a crime beyond the alleged underlying structuring and who are forced to battle the government for control of the seized funds. In response to these concerns, the Chief of IRS CI issued a statement in October 2014, explaining its decision to modify its policy on administrative forfeiture—the process by which property may be forfeited by the seizing investigative agency without judicial involvement—in “legal source” structuring cases. Under the policy, IRS CI no longer will pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases unless there are “exceptional circumstances” justifying the action and the case has been approved by the director of field operations. IRS CI special agents still will view structuring as an indicator that further illegal activity may be occurring, and the policy involving seizure and forfeiture in “illegal source” structuring cases was not changed.
In light of this new policy, the IRS announced a new procedure on June 16, 2016, for taxpayers who have had their property seized to request a return of their forfeited property or funds. These taxpayers can file a petition for remission or mitigation and must establish that the underlying funds came from a legal source and that there is no evidence that the requesting taxpayer engaged in other criminal activity. While the procedure is open to any qualifying taxpayer, the IRS has notified more than 700 taxpayers it thinks might qualify. Any taxpayer receiving a letter from the IRS has 60 days from the receipt of the letter to file a petition.
Meanwhile, members of Congress are seeking to codify the IRS’s internal policy in the “Restraining Excessive Seizure of Property through the Exploitation of Civil Asset Forfeiture Tools Act” (RESPECT Act) (H.R. 5523). The Act would amend the civil asset forfeiture provision of the BSA, Section 5317(c)(2), in order to provide that the IRS may pursue civil forfeiture on the basis of structuring violations only “if the property to be seized was derived from an illegal source or the funds were structured for the purpose of concealing the violation of a criminal law or regulation other than section 5324.” Accordingly, the IRS would be unable to pursue civil forfeiture based upon “pure” structuring activity not involving other criminal conduct. In addition, it would create a new post-seizure hearing where the government would have the burden of showing that there is probable cause to believe that there is a violation of section 5324 involving such property and to believe that the property to be seized was derived from an illegal source or the funds were structured for the purpose of concealing the violation of a criminal law or regulation other than section 5324. The court would have 30 days to rule, with a 30-day extension available at the request of either party. The Act would take effect immediately if passed by Congress and signed by the President.
In a time when bipartisan action often seems elusive, the RESPECT Act appears to be on track. The U.S. House of Representatives unanimously passed the Act in September 2016. It now awaits action by the Senate. Nonetheless, the language of the RESPECT Act that forfeiture is permissible when “the funds were structured for the purpose of concealing the violation of a criminal law[,]” even if the funds themselves are not tainted, still provides the IRS with a potentially broad theory for forfeiture because much structuring activity is undertaken to further tax fraud. Thus, the ability of the IRS to administratively forfeit “clean” funds used in structuring likely will come down to the institutional willingness of the IRS to pursue forfeiture in cases involving “only” alleged tax fraud—a move that might be legal but still is controversial.
DOJ Revives Controversial Equitable Sharing Program
In late December 2015, DOJ temporarily suspended its Equitable Sharing Program due to budget constraints—a $1.2 billion reduction in Asset Forfeiture Program funding. The suspension was applauded by critics of the program and its incentives for law enforcement, who hoped that it would not be revived. The federal Equitable Sharing Program is controversial because it allows state and local law enforcement to funnel state and local forfeiture proceeds through the federal program, and then receive up to 80 percent of those proceeds back from the federal government—at which point the forfeiting agency receives the proceeds directly. The funds do not feed the state or local general fund. Thus, the Equitable Sharing Program allows state and local forfeiting agencies to enhance their budgets and prevents forfeiture proceeds from funding general expenditures, such as schools and road repair. Critics have argued that the program creates a potentially pernicious profit motive for law enforcement officers and has resulted in state and local police departments amassing items such as expensive paramilitary equipment. Cases have even been cited in with departments have purchased frivolities like margarita makers.
The suspension was brief. Only a few months later, on March 28, 2016, DOJ announced that, effective immediately, equitable sharing payments would resume. According to the Chief of the DOJ’s Asset Forfeiture and Money Laundering Section, “it was always [the DOJ’s] intent to resume payments as soon as it becomes financially feasible,” and after “keeping a close eye on incoming receipts” to the Asset Forfeiture Fund, the Department determined that it was again possible to make the payments. The resumption suggests that the suspension always rested on funding issues rather than concerns over perceived abuses of the program. It will be interesting to see how the program and civil forfeiture in general fares under the new administration, and whether the value of funding local law enforcement will overcome the value of protecting individual property rights—the latter value being supported by both the political right and left.
The U.S. Supreme Court Shoots Down Pretrial Restraint of a Criminal Defendant’s Untainted, “Substitute” Assets When She Seeks to Use Assets to Retain Defense Counsel
In a 5-3 decision on March 30, 2016, the Supreme Court ruled in Luis v. United States that it is a violation of the Sixth Amendment for the government to obtain pretrial restraint of a criminal defendant’s untainted assets when the defendant seeks to use those assets to retain counsel of her choice. This defense win came on the heels of a 2014 win for the government before the Court in Kaley v. United States. In that case, the Court held that a criminal defendant who has been indicted and who is challenging the legality of a pretrial asset seizure under 21 U.S.C. § 853(e)(1) is not constitutionally entitled to contest a grand jury’s determination of probable cause to believe that he committed the crimes for which he has been accused. The holding in Luis is well-reasoned. As a practical matter, a contrary holding would have made it difficult, if not impossible, for many defendants charged with criminal forfeiture to use perfectly legal funds to hire counsel.
In 2012, Luis was charged with federal health care fraud, including paying kickbacks, conspiring to commit Medicare fraud, and “engaging in other crimes all related to health care.” According to the government, Luis obtained roughly $45 million as a result of her illegal conduct, almost all of which she had already spent. However, at the time of indictment, Luis still had $2 million, which the government agreed were “untainted funds.” Seeking to preserve the money for payment of restitution and other penalties, the government sought a pretrial order pursuant to 18 U.S.C. §1345(a)(2) to prevent Luis from dissipating her assets, which the district court granted.
Luis challenged the order, seeking modification to permit her to use the untainted funds to retain criminal defense counsel. The district court rejected her argument, ruling that “there is no Sixth Amendment right to use untainted, substitute assets to hire counsel.” The 11th Circuit agreed, relying on the Court’s prior decisions in Kaley v. United States, 571 U.S. ___, 134 S. Ct. 1090 (2014), Caplin & Drysdale, Chartered v. United States, 491 U.S. 617 (1989), and United States v. Monsanto, 491 U.S. 600 (1989).
The Supreme Court reversed, holding that “the pretrial restraint of legitimate, untainted assets needed to retain counsel of choice violates the Sixth Amendment.” The plurality opinion, authored by Justice Breyer and joined by Chief Justice Roberts and Justices Ginsburg and Sotomayor, balanced the defendant’s “fundamental” Sixth Amendment right to counsel against the government’s “contingent interest in securing its punishment of choice (namely, criminal forfeiture) as well as the victims’ interest in securing restitution (notably, from funds belonging to the defendant, not the victims).”
In support of its position, the government relied on the Court’s prior decisions in Caplin & Drysdale and Monsanto. However, the Court held that those cases are materially distinguishable from the present case because they involved criminal proceeds or funds traceable to the defendant’s alleged misconduct, while the funds at issue in Luis were untainted. Although the defendant does not have the superior interest in tainted property—either because title vests in the government at the time the crime is committed or because the victim’s title is superior—the same cannot be said of property that is untainted and which “belongs to the defendant, pure and simple.”
Justice Thomas concurred in judgment, but disagreed with the plurality’s balancing approach. In Justice Thomas’ view, the Sixth Amendment guarantee itself is sufficient to categorically preclude pretrial restraint of untainted funds. If there was no “constitutional protection for at least some of a defendant’s assets, the government could nullify the right to counsel of choice” and thereby “eviscerate the Sixth Amendment’s original meaning and purpose.” Given the determination that a pretrial restraint of untainted assets would infringe on the Sixth Amendment right, Thomas wrote that there was “no room for balancing” left.
Law Firm Bank Accounts Implicated in Significant Civil Forfeiture Actions
A major civil forfeiture action with some eye-catching allegations highlighted how law firms can be dragged into the spotlight of forfeiture enforcement. On July 20, 2016, the DOJ announced the filing of civil forfeiture complaints seeking the forfeiture of more than $1 billion in assets associated with an alleged international conspiracy to launder funds misappropriated from a Malaysian sovereign wealth fund. The complaints represent the most significant actions ever brought by the DOJ’s Kleptocracy Asset Recovery Initiative, which is led by the DOJ Criminal Division’s Asset Forfeiture and Money Laundering Section, which seeks to forfeit the proceeds of foreign official corruption. One of the complaints details how the alleged co-conspirators used the Interest on Lawyer Accounts (IOLA) held by a large international law firm based in the United States—not accused of any wrongdoing—to deposit illicit funds later used to acquire high-end assets.
According to the complaints, from 2009 through 2015, more than $3.5 billion in funds belonging to 1Malaysia Development Berhad (1MDB), which was created by the government of Malaysia to promote economic development through global partnerships and foreign direct investment, was allegedly misappropriated by high-level officials of 1MDB and their associates. The civil forfeiture complaints seek to recover more than $1 billion laundered through the United States and traceable to the conspiracy.
The conspirators allegedly diverted more than $3.5 billion in 1MDB funds through a series of complex transactions and fraudulent shell companies with bank accounts in Singapore, Switzerland, Luxembourg, and the United States. These transactions allegedly were intended to conceal the origin, source, and ownership of the funds, and ultimately were processed through U.S. financial institutions and used to acquire and invest in assets located in the United States. The complaints also allege that the co-conspirators misappropriated billions in funds raised through bond offerings and then laundered some of those funds by transferring them to the United States and using them to acquire and invest in various high-end assets. These assets allegedly included high-end real estate and hotel properties in New York and Los Angeles, a jet aircraft, art by Impressionist masters, an interest in music publishing rights, and the production of the 2013 film The Wolf of Wall Street, directed by Martin Scorsese and starring Leonardo DiCaprio. In regards to these latter asset acquisitions, one of the complaints alleges that the funds used to acquire these assets were moved through an IOLA held by a major U.S. law firm.
In addition to a sobering reminder of how lawyers may find themselves unpleasantly in the midst of the government’s fact pattern when dealing with clients with questionable funds, these forfeiture actions are entirely consistent with one of the primary 2016 AML enforcement approaches: the focus on identifying and tracing true ownership to prevent the movement of potentially dirty money—particularly when coming from foreign sources—through the United States. As the DOJ press release accompanying the filing of these actions declared, DOJ officials seek to send the message that “[t]he United States will not be a safe haven for assets stolen by corrupt foreign officials.”