DOJ Targets Professional Enablers of Alleged Tax and Laundering Schemes

On December 4, the Office of the U.S. Attorney for the Southern District of New York unsealed an elaborate indictment charging three professionals — a lawyer, an asset manager, and an accountant — along with a client in connection with an alleged tax evasion scheme arising out of the international Panama Papers scandal. At the heart of the Panama Papers story is the former Panamanian law firm of Mossack Fonseca, which had been a key offshore legal services provider until April 2016, when it became the center of a massive global controversy because approximately 11.5 million of the firm’s internal legal and financial documents were leaked to the media. These leaked documents – publicized primarily by the International Consortium of Investigative Journalists (“ICIJ”) – allegedly reveal a global system of undisclosed offshore accounts, money laundering and tax evasion, and how the rich and powerful around the world use shell companies to conceal assets and possible illegal activity.

The indictment and accompanying government press release stress the potentially pernicious role which professionals can play in facilitating criminal money laundering and tax schemes, as well as the role played by foreign shell companies in masking beneficial ownership.  However, this indictment ultimately describes a scheme to evade taxes and hide assets.  It does not allege that any of the assets were the proceeds of a separate crime, other than the tax scheme itself.  Although the indictment charges a single count of conspiracy to launder money, it relies on the “international” money laundering provision, which does not require that the relevant financial transactions involve the proceeds of underlying criminality, so long as the transactions are designed to promote a criminal scheme.

In this post, we will focus solely on two of the many issues presented by the indictment: (i) the indictment “bootstraps” what are basically general tax fraud allegations into wire fraud and money laundering charges (thereby enabling the government to pursue higher statutory maximums, higher potential sentences, and criminal forfeiture, which the government would be unable to obtain through “pure” tax fraud charges), and (ii) the indictment serves as another reminder to defense lawyers of the potential consequences of presenting a client’s purportedly exculpating factual representations to the government during an investigation.

The indictment is detailed and dense, so we will rely on portions of the government’s press release to summarize the allegations.  The press release describes the defendants and the charges thusly (in contrast to the indictment, the press release incorrectly capitalizes all of von der Goltz’s surname):

Ramses Owens, 50, a Panamanian citizen; Dirk Brauer, 54, a German citizen; Richard Gaffey, 74, a U.S. citizen, of Medfield, Massachusetts; and Harald Joachim Von Der Goltz, 81, a German citizen, have been charged in an 11-count indictment.  Owens, Gaffey and Von Der Goltz are charged with one count of conspiracy to commit tax evasion, one count of wire fraud, and one count of money laundering conspiracy.  Owens and Brauer have been charged with one count of conspiracy to defraud the United States and one count of conspiracy to commit wire fraud.  Gaffey and Von Der Goltz are additionally charged with four counts of willful failure to file an FBAR.  Von Der Goltz has been additionally charged with two counts of making false statements.

Three of the four defendants named in the indictment have been arrested.  Brauer, who worked as an investment manager for Mossfon Asset Management, S.A. (“Mossfon Asset Management”), an asset management company closely affiliated with Mossack Fonseca, was arrested in Paris, France, on Nov. 15.  Von Der Goltz, a former U.S. resident and taxpayer, was arrested in London, United Kingdom, on Dec. 3.  Gaffey, a U.S.-based accountant, was arrested in Boston, Massachusetts earlier today.  Owens, a Panamanian attorney who worked for Mossack Fonseca, remains at large.

The press release then describes the scheme in part as follows, emphasizing the use of legal entities to mask beneficial ownership:

According to the indictment, from at least in or about 2000 through in or about 2017, Owens and Brauer conspired with others to help U.S. taxpayer clients of Mossack Fonseca conceal assets and investments, and the income generated by those assets and investments, from the IRS through fraudulent, deceitful, and dishonest means.  To conceal their clients’ assets and income from the IRS, Owens and Brauer allegedly worked to establish and manage opaque offshore trusts and undeclared bank accounts on behalf of U.S. taxpayers who were clients of Mossack Fonseca.  Owens and Brauer allegedly marketed, created, and serviced sham foundations and shell companies formed under the laws of countries such as Panama, Hong Kong, and the British Virgin Islands, to conceal from the IRS and others the ownership by U.S. taxpayers of accounts established at overseas banks, as well as the income generated in those accounts.  As structured by Mossack Fonseca, the sham foundations typically “owned” the shell companies that nominally held the undeclared assets on behalf of the U.S. taxpayer clients of Mossack Fonseca.  The names of Mossack Fonseca’s clients generally did not appear anywhere on the incorporation paperwork for the sham foundations or related shell companies, although the clients in fact beneficially owned, and had complete access to, the assets of those sham entities and accounts.

In furtherance of the scheme, and in exchange for additional fees, Owens and Brauer allegedly provided support to clients who had purchased the sham foundations and related shell companies by providing corporate meeting minutes, resolutions, mail forwarding, and signature services.  Moreover, Owens and Brauer are alleged to have purposefully established the bank accounts in locations with strict bank secrecy laws, which impeded the ability of the United States to obtain bank records for the accounts.  Owens and Brauer also allegedly instructed U.S. taxpayer clients of Mossack Fonseca about how to repatriate funds to the United States from their offshore bank accounts in a manner designed to keep the undeclared bank accounts concealed.  Among other things, Owens and Brauer instructed clients to use debit cards and fictitious sales to repatriate their funds covertly, the indictment alleges.

Von Der Goltz was allegedly one of Mossack Fonseca’s U.S. taxpayer clients.  At all relevant times, Von Der Goltz was a U.S. resident and was subject to U.S. tax laws, which required him to report and pay income tax on worldwide income, including income and capital gains generated in domestic and foreign bank accounts. . . . Von Der Goltz is alleged to have evaded his tax reporting obligations by setting up a series of shell companies and bank accounts, and hiding his beneficial ownership of the shell companies and bank accounts from the IRS.  These shell companies and bank accounts allegedly made investments totaling tens of millions of dollars.  According to the indictment, Von Der Goltz was assisted in this scheme by Owens and by Gaffey, a partner at a U.S.-based accounting firm.  In furtherance of Von Der Goltz’s fraudulent scheme, Von Der Goltz, Gaffey, and Owens are alleged to have falsely claimed that Von Der Goltz’s elderly mother was the sole beneficial owner of the shell companies and bank accounts at issue because, at all relevant times, she was a Guatemalan citizen and resident, and — unlike Von Der Goltz — was not a U.S. taxpayer.

Tax Evasion Charged as Wire Fraud as a Predicate for Money Laundering Charges

As we have blogged (here and here), 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 very 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.  As we discuss 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.  Cross-border transfers involving entirely clean funds can represent money laundering violations, if they are performed with the specific intent of promoting a criminal scheme.

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.  So for prosecutors, money laundering (and the underlying SUAs such as fraud) is often a much more effective charge than a tax fraud charge.

Currently, tax fraud, either foreign or domestic, could serve to form the predicate for related money laundering charges – but only through an 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.

The indictment against Owens et al. — presumably with DOJ Tax Division approval — takes a two-pronged approach to bootstrapping generic (even if complex) tax fraud charges into more severe criminal charges.  First, it charges the defendants with wire fraud, both as a conspiracy and a substantive count, based on emails and  bank wire transfers designed to support a scheme to defraud the IRS.  Second, it charges all of the defendants except Brauer with conspiracy to commit “international” money laundering — through cross-border transfers not alleged to involve SUA proceeds, but designed to promote the underlying wire fraud scheme directed against the IRS.

Presumably, the DOJ was motivated to use as many weapons as possible in its inaugural indictment relating to the Panama Papers.  But the indictment confirms that Tax Division Directive no. 128 is merely a policy of self-restraint and nothing more, which may be overcome when deemed appropriate.  Ultimately, there is no principled analytic bar against charging tax fraud as money laundering and wire or mail fraud.

Representations Through Counsel Charged as False Statements

As described above, the indictment alleges that the client von der Goltz evaded his taxes by setting up a series of shell companies and bank accounts, and hiding his beneficial ownership of the shell companies and bank accounts from the IRS, in part by falsely claiming that von der Goltz’s elderly mother was the sole beneficial owner of the shell companies and bank accounts at issue (because she, unlike von der Goltz, was a Guatemalan citizen and resident, and was not a U.S. taxpayer).

However, in addition to the original false reporting forms allegedly filed by von der Goltz, the indictment also alleges that von der Goltz committed another crime by continuing to present his story about the role of his mother to investigators, with his lawyer in part serving as a vehicle for that crime:

In or about early May 2016, a representative of the U.S. Law Firm (the “U.S. Law Firm Representative”) contacted the DOJ on von der Goltz’s behalf. The U.S. Law Firm Representative indicated that von der Goltz had recently appeared in news reports regarding the “Panama Papers,” and offered to make von der Goltz available for an interview to “correct” the statements that had been made about him in the press. The so-called Panama Papers story broke on or about April 3, 2016 . . . .

On or about May 11, 2016, shortly after contacting the DOJ on von der Goltz’s behalf, the U.S. Law Firm Representative followed up with an email. In this email, which the U.S. Law Firm Representative sent to a DOJ official in New York, New York, the U.S. Law Firm Representative included a “Statement of Facts” which purportedly described von der Goltz’s “situation.” The Statement of Facts, which was written in the first person with von der Goltz as the speaker, falsely represented, in substance and in part, that upon the death of von der Goltz’s father, in 1990, the Mother became the beneficial owner of EMJO and the other Revack Entities. The Statement of Facts further falsely represented, in substance and in part, that von der Goltz was not the beneficial owner of EMJO, that he had “signature only” authority over the Swiss Bank EMJO Account, and that he had not used EMJO “to hide funds from the U.S. or other tax authorities.” The email also attached copies of the materially false Amended [Reports of Foreign Financial Account, or FBARs], which von der Goltz filed in 2014.

Approximately one week later, on or about May 19, 2016, von der Goltz was interviewed by representatives of the DOJ, including an Assistant United States Attorney for the Southern District of New York, and Special Agents from an IRS Field Office in New York, New York. During the interview, which was also attended by the U.S. Law Firm Representative, von der Goltz falsely stated, in substance and in part, that he only had signature authority over the Swiss Bank EMJO Account, and that the Revack Entities were beneficially owned by the Mother.

This lawyer’s email and the subsequent interview became the foundations for Counts Ten and Eleven in the indictment, respectively, both of which charge von der Goltz with making materially false statements to the government, in violation of 18 U.S.C. § 1001.  (In another version of pitting a client against his professional advisor, the indictment elsewhere describes how another client cooperated with the government and made incriminating undercover tapes during conversations with defendant Brauer, the client’s investment manager.)

These allegations of course have not yet been proven, and the government does not allege that the “U.S. Law Firm Representative” had guilty knowledge of the misrepresentation or otherwise committed an offense.  It is notable that this lawyer forwarded to the government the client’s statement of facts as coming directly from the client (i.e., the statement was written in the first person).  Whether that approach clearly prevented the lawyer from being perceived as affirmatively vouching for the accuracy of the statement, and/or sent an implicit message to the government that the statement was potentially questionable, is perhaps debatable. We are not second-guessing here the approach of the lawyer, who is obligated to carry out the directives of the client when that can occur in good faith.

What is clear is that aggressive prosecutors are increasingly willing to pursue defendants based directly on representations made through their lawyers. Although there is no suggestion of improper conduct by counsel in this case, no lawyer wants to get dragged into the government’s fact pattern under any circumstances, and face the prospect of being conflicted out of the case and having to provide documents or even testimony against the (former) client.  This indictment also reminds practitioners that, in the early (or any) stage of an investigation, the reflexive desire by many “white collar” targets to explain themselves can be a major minefield. Silence by the client is often golden.

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Peter D. Hardy | 215.864.8838 | view full bio

Peter is a national thought leader on money laundering, tax fraud, and other financial crime. He is the author of Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a comprehensive legal treatise published by Bloomberg… | 215.864.8838 | view full bio

Peter is a national thought leader on money laundering, tax fraud, and other financial crime. He is the author of Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a comprehensive legal treatise published by Bloomberg BNA.  Peter co-chairs the Practising Law Institute’s Anti-Money Laundering program, and serves on the Steering Committee for the Cambridge Forum on Sanctions & AML Compliance

He advises corporations and individuals from many industries against allegations of misconduct ranging from money laundering, tax fraud, mortgage fraud and lending law violations, securities fraud, and public corruption.  He also advises on compliance with the Bank Secrecy Act and Anti-Money Laundering requirements.  Peter handles complex litigation involving allegations of fraud or other misconduct.

Peter spent more than a decade as a federal prosecutor before entering private practice, serving as an Assistant U.S. Attorney in Philadelphia working on financial crime cases. He was a trial attorney for the Criminal Section of the Department of Justice’s Tax Division in Washington, D.C.