Part II of the Analysis of the Combatting Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017
As we recently blogged, Senators Chuck Grassley (R-Iowa) and Diane Feinstein (D-California) introduced on May 25, 2017 a bill, S. 1241, entitled the Combatting Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017. As we previously noted, the Panama Papers scandal presumably motivated much of S. 1241, which also may be seeking to respond to international criticism that the U.S. has become a haven for tax cheats and money launderers.
This post focuses on Section 11 of the bill, which seeks to amend 18 U.S.C. § 1956(a)(2), the “international” prong of the “transactional” money laundering statute. This amendment, if passed, would have a significant impact on any individual or company seeking to evade U.S. taxes through a cross-border transfer of funds. This is important because pursuing the use of undisclosed foreign accounts, and related efforts to evade taxes through the use of offshore instruments, has been the centerpiece of U.S. tax fraud enforcement for almost a decade.
The most commonly enforced section of the “transactional” money laundering statute, Section 1956(a)(1), requires the proceeds involved in the transaction at issue to in fact represent the proceeds of “specified unlawful activity” (“SUA”), a defined statutory term which broadly includes many types of criminal conduct. One of the few offenses not included is tax fraud: Congress has defined “SUA” so as to not include tax crimes under Title 26, the Internal Revenue Code. Indeed, and as we note below, DOJ currently has a general policy against trying to base money laundering charges on the proceeds of tax fraud.
In contrast, Section 1956(a)(2), the “international” prong, does not necessarily require the funds at issue to in fact represent “specified unlawful activity” proceeds. In fact, the proposed amendment in Section 11 of S. 1241 appears to transform any cross-border transfer of funds done with the intent to commit U.S. tax evasion or the filing of a false U.S. tax return into an actual money laundering violation, including transfers involving entirely clean funds.
The section-by-section summary of the bill reads, in relevant part, as follows:
SECTION 11 – APPLYING THE INTERNATIONAL MONEY LAUNDERING STATUTE TO TAX EVASION
The problem of individuals using foreign bank accounts to avoid paying U.S. taxes is well established. Section 11 would enable the government to target those individuals, including international drug dealers who seek to move funds to offshore banking centers, by making it a money laundering violation to transfer funds into or out of the United States with the intent to violate U.S. income tax laws.
Of course, the amendment would not apply just to drug dealers, but to anyone. If the bill is passed in present form, Section 1956(a)(2) would read as follows, with emphasis added. N.B.: Sections 7201 and 7206 of Title 26 prohibit tax evasion and filing a false tax return, respectively.
(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States—
(i) with the intent to promote the carrying on of specified unlawful activity; or
(ii) with the intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or
(B) knowing that the monetary instrument or funds involved in the transportation, transmission, or transfer represent the proceeds of some form of unlawful activity and knowing that such transportation, transmission, or transfer is designed in whole or in part—
(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or
(ii) to avoid a transaction reporting requirement under State or Federal law,
shall be [guilty of money laundering].
Money laundering is a felony which carries a maximum statutory sentence of 20 years, along with a potential criminal fine, forfeiture, and potentially severe advisory ranges under the Federal Sentencing Guidelines (“Guidelines”). In contrast, tax evasion, in violation of 26 U.S.C. § 7201 – which is generally considered to be the most serious criminal tax offense – carries a maximum statutory sentence of only five years, along with a potential criminal fine but no Title 18 forfeiture, and considerably less draconian advisory sentencing ranges under the Guidelines. Moreover, the label “money laundering” tends to elicit harsher reactions from most judges, juries and probation officers than the label “tax evasion.” Thus, the practical consequences of labeling a particular transaction as “money laundering” rather than as “tax evasion” can be very real for a defendant.
Currently, tax fraud, either foreign or domestic, could serve to form the predicate for related money laundering charges – but only through a strained analytical route which often would violate the DOJ’s stated charging policy. In Pasquantino v. United States, the Supreme Court held that a scheme to smuggle liquor from the U.S. into Canada to avoid Canadian taxes constituted a wire fraud scheme because Canada’s right to the uncollected taxes constituted property within the meaning of the wire fraud statute. Of course, mail fraud and wire fraud can constitute a SUA for purposes of the money laundering statutes, and thus can support such charges as the underlying criminal activity. As noted, Title 26 criminal tax statutes cannot. In theory, the mail and wire fraud statutes could displace almost entirely the use of criminal tax statutes to combat tax fraud, and could be used to turn tax fraud charges into money laundering charges.
To avoid that very consequence, the DOJ Tax Division has enacted policies to curb the use of the mail and wire fraud statutes in tax cases. However, these policies were relaxed in the mid-2000s. For years, the DOJ had a very restrictive policy regarding the use of the mail and wire fraud statutes under Tax Division Directive No. 99, issued in 1993. The DOJ issued a new, less restrictive policy in October 2004: Tax Division Directive No. 128. It still requires Tax Division approval for mail or wire fraud charges in tax cases and still limits the uses of the relevant statutes, although it does away with many of the specific limitations articulated in Directive No. 99, and essentially reduces the policy to an expression of self-imposed restraint. Nonetheless, the practical effect of Directive No. 128 is that garden-variety tax fraud charges rarely get transformed into money laundering charges.
If passed in its present form, S. 1241 ironically will take the one kind of offense which Congress has historically not allowed to form the predicate for money laundering – i.e., “garden variety” tax fraud not involving illegal proceeds – and turn things on their head. That is, transactions promoting a tax crime, so long as they involve a cross-border transaction, will be the one and only kind of transaction that can constitute a money laundering offense when the proceeds represent otherwise entirely legal funds (such as a transfer of legitimate, legally-obtained earnings that later go unreported on a tax return).
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