Casino AML Compliance Update: Las Vegas Sands Corp. Places Macau Casino Junkets Under Increased Scrutiny.

April 9th, 2014

On April 4, 2014, Bloomberg reported that the Las Vegas Sands Corp. (“Sands”) has increased its scrutiny of casino junket operators in Macau. The decision comes as casinos seek to meet the increased demands of federal regulators to prevent money laundering.

Macau’s casino industry relies heavily on junket operators to connect wealthy Chinese mainland gamblers with the casinos. However, as the U.S.-China Economic Security Review Commission notes, “[t]he main channel for money laundering [in Macau] is in the gaming sector through underregulated junket operators and their affiliates, which include the underground banking system, that supports their operations.” As described in 2013 Annual Report of the Congressional-Executive Commission On China, the “movement of money through Macau is fueled by a ‘junket’ system, which reportedly aids mainland VIP patrons in bypassing China’s limits on how much money can be taken out of China.” The 2013 Annual Report estimated that $202 billion in ill-gotten funds are laundered through Macau each year.

Although Sands has not disclosed how, exactly, it plans on conducting enhanced due diligence on junket operators, the measure no doubt comes as part of a designed series of steps that Sands has taken to increase its AML Compliance program. In January 2013, the Wall Street Journal reported that the Sands was bolstering its anti-money laundering compliance program, and ceased executing international money transfers for its high-rolling customers. Sands also reportedly limits the use of checks and money transfers from business accounts and restricts the amount of cash a customer can withdraw from their casino account on a given day.

Like banks and money services businesses (“MSBs”), federal law defines casinos as financial institutions. See 31 U.S.C. § 5312 (X). As financial institutions, casinos are required to maintain robust anti-money laundering compliance programs designed to protect against the unique money laundering and terrorist financing risks posed by each individual casino.

The minimum elements which must be included within any casino’s AML plan can be found at 31 C.F.R. § 1021.210. See also 31 U.S.C. § 5318(h). These include, at a minimum, the following:

(i) A system of internal controls to assure ongoing compliance;

(ii) Internal and/or external independent testing for compliance. The scope and frequency of the testing shall be commensurate with the money laundering and terrorist financing risks posed by the products and services provided by the casino;

(iii) Training of casino personnel, including training in the identification of unusual or suspicious transactions, to the extent that the reporting of such transactions is required by this part, by other applicable law or regulation, or by the casino’s own administrative and compliance policies;

(iv) An individual or individuals to assure day-to-day compliance;

(v) Procedures for using all available information to determine:

(A) When required by this part, the name, address, social security number, and other information, and verification of the same, of a person;

(B) The occurrence of any transactions or patterns of transactions required to be reported pursuant to § 103.21;

(C) Whether any record as described in subpart C of this part must be made and retained; and

(vi) For casinos that have automated data processing systems, the use of automated programs to aid in assuring compliance.

31 C.F.R. § 1021.210; see also 31 U.S.C. 5318(h). In addition, the casino’s AML Compliance program must be designed to protect against the unique money laundering and terrorist financing risks posed by the individual casino. Further, to the extent that a casino employee (including dealers and cage personnel) will confront money laundering activities, they must be included as part of the program and given instructions and training on how to report suspicious activity.

In addition, U.S. based casinos must ensure that these AML Compliance programs which are required under U.S. law are implemented in their Macau facilities due to the potential effects extraterritorial violations could have on the casinos’ domestic licenses. (U.S. Casino operators Sands, MGM Resorts International, and Wynn Resorts Ltd. each have subsidiaries operating in Macau.) For example, the Nevada Gaming Control Board has exercised its authority under Nevada law to oversee U.S. casinos’ Macau operations. As the Bloomberg article explains, “[r]ules in Nevada and other local jurisdictions require regulators to monitor licensees’ activities elsewhere to guard against cross-border violations and damage to the market’s reputation.”

Sands’ change in policy comes as the casino industry as a whole, and Sands in particular, has faced increased scrutiny from State and federal regulators regarding the industry’s AML compliance efforts. As we have previously reported here and here, both Sands and Caesars Entertainment Corp. have been the subjects of Department of Justice investigation into alleged violations of the Bank Secrecy Act. In the case of Sands, on August 27, 2013, Sands resolved its money laundering investigation and agreed to forfeit $47 million to the Department of Justice in order to avoid criminal prosecution based on the Sands’ relationship with a high-stakes gambler who was later linked to international drug trafficking. We assume that Sands’ enhanced responsibilities under its non-prosecution agreement played a critical role in its decision to increase scrutiny of Macau junket operators.

Fuerst, Ittleman, David & Joseph, PL will continue to monitor the Department of Justice and the casino industry for the latest developments. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of anti-money laundering compliance, administrative law, constitutional law, white collar criminal defense and litigation against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fuerstlaw.com or by calling us at 305.350.5690.

 

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Florida Supreme Court Holds Statutory Cap on Non-Economic Wrongful Death Damages in Medical Malpractice Actions Violates the Equal Protection Clause of the Florida Constitution

March 24th, 2014

In Estate of Michelle Evette McCall, et. al. v. United States of America, SC11-1148 (Fla. 2014), the Florida Supreme Court decided the following certified question:

DOES THE STATUTORY CAP ON WRONGFUL DEATH NONECONOMIC DAMAGES, FLA. STAT. §766.118, VIOLATE THE RIGHT TO EQUAL PROTECTION UNDER ARTICLE I, SECTION 2 OF THE FLORIDA CONSTITUTION?

Between 2005 and 2006, Michelle McCall received prenatal medical care at a U.S. Air Force clinic as an Air Force dependent.  She had a healthy and normal pregnancy until the last trimester.  On February 21, 2006, Ms. McCall’s medical condition required that labor be induced immediately. During delivery, Ms. McCall lost a significant amount of blood.  Following delivery, her blood pressure began to drop rapidly and remained dangerously low.  The attending physician never checked her vital signs and instead relied exclusively on inaccurate and/or incomplete information from the attending nurse. When the treating physician finished treating Ms. McCall, he ordered an immediate blood count and, if necessary a blood transfusion.  An hour after the physician’s order, a nurse presented to draw blood. The nurse found Ms. McCall unresponsive.  Ms. McCall never regained consciousness and subsequently passed away.

The Estate of Michelle E. McCall filed a lawsuit alleging medical malpractice against the United States of America under the Federal Tort Claims Act (“FTCA”).  In its simplest form, the FTCA constitutes a limited waiver of sovereign immunity and permits a private citizen to sue the United States in federal court for torts committed by persons acting on behalf of the United States.  See 28 U.S.C. §1346(b)

(…the district courts…shall have exclusive jurisdiction of civil actions on claims against the United State,, for money damages, accruing on and after January 1, 1945, for injury or loss of property, or personal injury or death caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.).

The application of Florida Statute §766.118 (“Determination of noneconomic damages”) was triggered because FTCA “damages are determined by the law of the State where the tortious act was committed…, subject to the limitations that the United States shall not be liable for ‘interest prior to judgment or for punitive damages.’” Hatahley v. United States, 351 U.S. 173, 182 (1956).

Florida Statute §766.118 places a cap on noneconomic damages in personal injury claims arising out of medical malpractice.  For practitioners, noneconomic damages are limited to $500,000, unless the negligence results in a permanent vegetative state or death, in which case the total noneconomic damages are limited to $1,000,000.

At trial, the United States District Court for the Northern District of Florida determined that Petitioners’ economic damages totaled $980,462.40, while the noneconomic damages totaled $2,000,000 ($500,000 for Ms. McCall’s son and $750,000 for each of her parents).  Applying Fla. Stat. §766.118(2), the district court then limited the Petitioners’ recovery of wrongful death noneconomic damages to $1,000,000.

On appeal to the Eleventh Circuit, the Petitioners launched a constitutional challenge against Fla. Stat. §766.118(2) both on a state and federal level. While the Eleventh Circuit affirmed application of the statutory cap on noneconomic damages, it granted a motion filed by the Petitioners to certify four (4) questions to the Florida Supreme Court regarding Florida’s cap on noneconomic wrongful death damages in medical malpractice actions.  The Florida Supreme Court rephrased the first question as noted above and embarked on a constitutional analysis The court ultimately concluded that the remaining three (3) certified questions need not be addressed..

First, a brush up on the Equal Protection Clause.  Article I, Section 2 of the Florida Constitution states as follows:

Basic rights.—All natural persons, female and male alike, are equal before the law and have inalienable rights, among which are the right to enjoy and defend life and liberty, to pursue happiness, to be rewarded for industry, and to acquire, possess and protect property; except that the ownership, inheritance, disposition and possession of real property by aliens ineligible for citizenship may be regulated or prohibited by law. No person shall be deprived of any right because of race, religion, national origin, or physical disability.

In other words, “everyone is entitled to stand before the law on equal terms, with, to enjoy the same rights as belong to, and to bear the same burden as are imposed upon others in a like situation.”  Caldwall v. Mann, 26 So. 2d 788, 790 (Fla. 1946).

Next, the Court moved its analysis towards the rational basis test. In order to satisfy the rational basis test, a statute must “bear a rational and reasonable relationship to a legitimate state objective, and it cannot be arbitrary or capriciously imposed.”  Dep’t of Corr. v. Florida Nurses Ass’n, 508 So. 2d 317, 319 (Fla. 1987).

Ultimately, the Florida Supreme Court held that the “cap on wrongful death noneconomic damages provided in section 766.118, Florida Statute, violates the Equal Protection Clause of the Florida Constitution.”

In reaching its conclusion, the Court engaged in a detailed analysis of the alleged facts and circumstances which warranted implementation of Fla. Stat. §766.118, namely, the alleged medical malpractice insurance crisis in Florida.  The Court found that the so-called “crisis” was not, in fact, a crisis and that the alleged facts supporting such a crisis were either readily contradicted or questionable, at best. The Court stated that the available evidence failed to establish a rational relationship between a cap on noneconomic damages and the alleviation of the purported crisis.  In other words, the rational basis test had not been satisfied.  Instead, the Court noted that the cap on noneconomic damages served no purpose other than to arbitrarily punish the most grievously injured or their surviving family members.  The result:  Fla. Stat. 766.118 has now been ruled unconstitutional.

Health care providers must remain knowledgeable of the ever-changing landscape of laws and regulations affecting the field of medicine.  Fuerst Ittleman David and Joseph, P.L. has extensive experience not only defending health care providers in negligence lawsuits, but also keeping them apprised of such changes in the law.  If we can be of assistance to you, email us at contact@fuerstlaw.com  or call 305.350.5690.

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Your Expectation of Privacy in Your Cell Phone is Currently Governed by the Law of the State in Which You are Arrested

March 18th, 2014

Last year the Washington State Supreme Court considered two cases addressing the expectation of privacy one has when sending a text message. On February 27, 2014, the Washington State Supreme Court ruled in two parallel 5-4 decisions that text messages are private and that law enforcement agencies must obtain a search warrant prior to reading them. The decisions can be read here and here.

The decisions stem from the arrest of two men in 2009 by Longview police after a third man, Daniel Lee, was arrested for possession of heroin. After his arrest, Police seized Lee’s cell phone and, without consent or a search warrant supported by probable cause, read an incoming text message from Shawn Hilton that read: “Hey whats up dogg can you call me i need to talk to you.” The police detective, pretending to be Lee, replied and arranged a drug deal in a parking lot. When Hilton arrived at the meeting location, police arrested and charged Hilton with attempted possession of heroin.

Police also found old text messages from another man, Jonathan Roden, on Lee’s cell phone. Again, pretending to be Lee, a Longview police detective started a new text message conversation and arranged a drug deal with Roden in a parking lot. When Roden arrived, he was arrested and charged with attempted possession of heroin. Both Hilton and Roden were ultimately convicted.

On appeal, Hilton claimed that the detectives violated his rights under Article I, section 7 of the Washington State Constitution and his Fourth Amendment right against unreasonable searches and seizures. Roden further argued that Washington’s privacy act was violated by his conviction when the police searched the text messages without a warrant. Hilton argued that text messages are the equivalent of letters, which are protected by the Fourth Amendment. In response, the State argued that there is an “inherent risk in a text message” that someone else might read it after the text message is sent. The State continued and exclaimed that privacy ends the moment the letter is delivered””the sender has no control over what happens next. The State further argued that the text messages were in “plain view” of the detective and thus qualified as an exception to Hilton’s Fourth Amendment protections.

The Washington State Supreme Court vacated Hilton’s and Roden’s convictions. Whether individuals have an expectation of privacy in the contents of the text messages under state law was an issue of first impression in Washington. Justice Gonzalez resolved these cases under the Washington State constitution, which provides broader privacy protections than the Fourth Amendment. Specifically, the Washington State Constitution “protects citizens from government intrusion into their private affairs without the authority of law.” Justice Gonzales explained that text messages can enclose the same intimate subjects as phone calls or sealed letters and even though text messages make communication “more vulnerable to invasion, technology advancements do not extinguish privacy interests that Washington citizens are entitled to hold.”

This determination by the Washington State Supreme Court is the latest in a series of rulings that have extended privacy expectations in cell phones and the content stored on them. Courts in Texas, Massachusetts, New Jersey, and Rhode Island, which have been presented with the issue of the right to privacy surrounding technology advancements, have ruled in the same fashion as the Washington State Supreme Court. Moreover, on April 29, 2014, in United States v. Wurie, the Supreme Court of the United States is due to hear arguments about whether police are allowed under the United States Constitution to search a suspect’s cell phone without a warrant while making an arrest or soon thereafter. This is a critical question. Indeed, today’s cell phones have the potential to reveal an unprecedented level of detail about an individual’s “familial, political, professional, religious, and sexual associations” because the cell phone is often carried everywhere, at all times. See United States v. Jones, 132 S. Ct. 945, 955 (2012).

Under current Florida law, during a lawful arrest police are permitted to confiscate and search a suspect’s cell phone. Florida’s Fifth District Court of Appeal held in Florida v. Glasco, 90 So. 3d 905 (Fla. 5th DCA 2012), that a cell phone is the same as a container or piece of property on the suspect, which can be searched incident to a lawful arrest. However, given these recent decisions from other states, Florida judges may reexamine the issue. Like Washington State’s Constitution, the Florida Constitution’s right to privacy provision provides greater protections than the Fourth Amendment. Specifically, Article I, section 23 of the Florida Constitution states in part that “every natural person has the right to be let alone and free from governmental intrusion into the person’s private life except as otherwise provided herein.” The Supreme Court of the United States will soon provide courts a binding answer to whether the Fourth Amendment permits the police, without obtaining a warrant or consent, to search a cell phone found on a person who has been lawfully arrested. But states, like Florida, could always provide greater protections under their respective state laws regardless of the Supreme Court’s decision in United States v. Wurie.

The attorneys at Fuerst Ittleman David & Joseph, PL will continue to monitor developments in this and similar cases. Our attorneys have extensive experience in the areas of tax, tax litigation, administrative law, regulatory compliance, and white collar criminal defense.  If you have any questions, an attorney can be reached by emailing us atcontact@fuerstlaw.com or by calling 305.350.5690.

 

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Complex Litigation Update: SCOTUS Allows Plaintiffs’ State-Law Class Actions Against Law Firms, Financial Firms, and Others to Proceed

March 3rd, 2014

On Wednesday of last week, the Supreme Court of the United States issued a 7-2 decision affirming a Fifth Circuit ruling permitting four state-law class actions to proceed against two New York law firms and others in a matter stemming from a $7 billion Ponzi scheme orchestrated by Allen Stanford. The scheme involved the sale of bogus certificates of deposit by Stanford’s bank, Stanford International Bank, based in Antigua. Stanford was sentenced in 2012 and is serving 110 years in prison.

Investors in this scheme brought suit against two law firms, Chadbourne & Parke LLP and Proskauer Rose LLP, an insurance brokerage, Willis Group Holdings Plc, a financial services firm, SEI Investments Co, and an insurance company, Bowen, Miclette & Britt. The investors, as four sets of plaintiffs, filed civil class actions under state law contending that these defendants assisted Stanford in perpetrating the Ponzi scheme by falsely representing that uncovered securities (the bogus certificates of deposit) that plaintiffs were purchasing were backed by covered securities. The District Court dismissed these four cases under the Securities Litigation Uniform Standards Act of 1998 (the “Litigation Act” or “Act”).

The Litigation Act prohibits plaintiffs from bringing securities class actions under state law in matters in which plaintiffs claim “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” 15 U.S.C. 78bb(f)(1). The Litigation Act defines a “covered security” to mean “only securities traded on a national exchange.” 78bb(f)(5)(E). The District Court held that the “Bank’s misrepresentation that its holdings in covered securities made investments in its uncovered securities more secure provided the requisite ”˜connection’ (under the Litigation Act) between the plaintiffs’ state-law actions and transactions in covered securities.” The Fifth Circuit reversed that decision determining that the connection between the Bank’s misrepresentations regarding its holdings in covered securities and the fraud was too tenuous to trigger the Litigation Act. The Supreme Court agreed with the Fifth Circuit holding that the plaintiffs are not precluded for their state-law class actions under the Litigation Act.

Because the Supreme Court has previously held that “aiding and abetting” claims cannot be made under federal law, the plaintiffs in these class action suits are eager to pursue state law remedies against these law firms and other companies that had secondary roles in their transactions with Stanford. In Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), the Supreme Court held that “Section 10(b) [of the Securities Exchange Act of 1934 (”˜Exchange Act')] does not support aiding and abetting liability stating that the “the statute prohibits only the making of a material misstatement (or omission) or the commission of a manipulative or deceptive act.” The Court would not impose Section 10(b) liability on a third party that did not itself commit a deceptive act. The Court decided that knowing about the primary violation was not enough to turn a third party (like a law firm) into a violator. Further, more recently, in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 153, 155, 166 (2008), the Court held that a private right of action does not apply to suits against “secondary actors” who had no “role in preparing or disseminating” a stock issuers fraudulent “financial statements.” Based on the holdings of Central Bank and Stoneridge, if the defendants in the four class actions were able to block the plaintiffs’ state-law claims, the defendants could not be held liable for their roles in Stanford’s fraudulent transactions.

The Supreme Court’s Conclusion 

Writing for the majority, Justice Breyer stated that the Court based its conclusion on five factors that it deemed supportive of the contention that “misrepresentation of a material in fact in connection with the purchase or sale of a covered security” only extends to misrepresentations that are material to the decision-making of those (other than the fraudsters) to purchase or sell a covered security (as opposed to an uncovered secured). The factors cited by the Supreme Court supporting this conclusion are:

  1. This is “consistent with the Act’s basic focus on transactions in covered, not uncovered securities.” The plain language of the Act supports this conclusion. The Act states a “material fact in connection with the purchase or sale” and the Court interprets that the “connection” here between the material fact and the purchase or sale is a “connection that matters.” There must be an impact on an individual’s choice to buy or sell a covered security, not an uncovered security.
  2. In securities cases where the Supreme Court has found there to be the requisite connection between the fraud and the purchase or sale under the Act, there have been “victims who took, who tried to take, who divested themselves of, who tried to divest themselves of, or who maintained an ownership interest in financial instruments that fall within the relevant statutory definition.”
  3. The Supreme Court viewed the Act in light of the Securities Exchange Act of 1934 and the Securities Act of 1933 regarding those engaged in securities transactions that result in the taking of ownership positions and which make it illegal to deceive an individual when she is doing so. The Court recognized that the purpose of these statutes is to protect investor confidence. Nothing in any of these statutes endeavors to protect those “whose connection with the statutorily defined securities is more remote than buying or selling.”
  4. The Supreme Court expressed wariness in applying a broader statutory interpretation than necessary as such broad interpretation of the “connection” could interfere with the various states’ efforts “to provide remedies for victims of ordinary state-law frauds.” The Court recognizes that the Litigation Act seeks to avoid that outcome, allowing the individual states authority over matters primarily of state concern.

The Defendants’ and Government’s Argument for Broad Interpretation

First, the defendants and the Government staged a precedence argument, pointing out that the Supreme Court has suggested that the phrase “in connection with” be given broad interpretation. However, the Court disagreed stating that in all cases in which the Court found the requisite connection between the misrepresentation and the sale or purchase, the security involved was “a statutorily defined ”˜security” or “covered security.’” The Court states that is could not find any case in which it ruled involving “a fraud ”˜in connection with’ the purchase or sale of a statutorily defined security in which the victims did not fit” into the relevant statutory definition.

Next, the Government expressed concern that narrowly interpreting the Litigation Act would diminish the SEC’s authority under the Securities Exchange Act, which uses the same “in connection with the purchase or sale” language. The Supreme Court disposed of this contention by stating that the authority of the SEC and Department of Justice covers all “securities,” not just those traded on national exchanges. The Court pointed out that the SEC successfully prosecuted Stanford based on his Bank’s fraudulent sales of certificates of deposit, which are “securities” even if they are not “covered securities.”

Two Justices Dissent 

Joined by Justice Alito, Justice Kennedy wrote the dissent, stating that because these investors purchased the certificates of deposit based on the false statements that these certificates of deposit were backed by covered securities there was requisite connection between the misrepresentation and the purchase or sale of a covered security. The dissent stresses that, in light of the precedent, even though those cases dealt with much less complex transactions, if the fraud depends on the purchase or sale of securities or the promise to do so, the connection is made. Therefore, these class actions under state law must be precluded by the Litigation Act. The dissent cautions that the majority opinion creates a new rule that departs from the precedent. Furthermore, agreeing with the Government, Justice Kennedy wrote that the Court’s decision will negatively impact the SEC’s enforcement authority as it is inconsistent with Congress’s intent and “casts doubt on the applicability of federal securities law to cases of serious securities fraud.”

Conclusion and Consequences

The Supreme Court held that the requisite “connection” between the materiality of the misrepresentations and the required “purchase or sale of a covered security” was not made in this case. Therefore the Litigation Act did not preclude the plaintiffs’ class action suits under state law. There is no allegation that the material misrepresentations were “in connection with” the buying or selling of covered securities. The Court held that “at most, they allege misrepresentations about the Bank’s ownership of covered securities. But the Bank is the fraudster, not the fraudster’s victim; nor is it some other person transacting in covered securities.”

The holding of this case allows these class actions based on state law against various law firms and others to go forward, widening the net of those potentially liable for the consequences of Stanford’s Ponzi scheme. Furthermore, this decision leaves questions as to the purported narrowness of the interpretation of the Litigation Act. As Ponzi schemes become more sophisticated and complex, involving varying schemes and players, it will be interesting to see how courts apply the Court’s interpretation.

Fuerst Ittleman David & Joseph, PL will be monitoring this case as it returns to the lower court, as well as the effects of this decision on subsequent cases. Our attorneys are experienced in complex litigation and would be happy to address any questions about these or similar legal issues. Please do not hesitate to contact us via email at contact@fuerstlaw.com or by telephone at (305) 350-5690.

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Marijuana Taxation Update: State Sanctioned Marijuana Industry Must Keep the Federal Anti-Drug Trafficking Tax Code in Mind

March 3rd, 2014

As we have previously reported, despite the growing number of States that have authorized the use of marijuana in various forms, the federal government has continued to crack down on dispensaries. (Our recent articles discussing these efforts can be read here, here, and here.) In addition to direct criminal prosecution for drug trafficking, federal authorities have used various other techniques in an effort to quash the growing marijuana industry. One such technique disallows marijuana dispensaries from taking business deductions on their federal income taxes pursuant to I.R.C. § 280E, and this statute remains in effect in spite of the efforts of numerous states and FinCEN to at least partially legitimize the sale of marijuana.

I.R.C. § 280E states:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

As we have previously explained, because the sale of marijuana remains listed as a controlled substance under the Controlled Substances Act (CSA), state authorized marijuana dispensaries are still deemed by federal authorities to violate federal law. Therefore, pursuant to I.R.C. § 280E, federal income tax deductions for business expenses are not available.  In fact, the United States Supreme Court has concluded that there is no medical necessity defense to the federal law prohibiting cultivation and distribution of marijuana – even in states which have created a medical marijuana exception to a comparable ban under state law. U.S. v. Oakland Cannabis Buyers Co-op., 532 U.S. 483 (2001).

In the District of Columbia and the 20 states that have either decriminalized or legalized marijuana in one form or another, state sanctioned medical marijuana dispensaries have attempted to pay their fair share of taxes to the government – federal, state and local – like any other business. However, because their business primarily involves a product deemed to be criminal under federal law, they are denied deductions for the costs of doing business that any other ordinary business can take.

When it comes to state taxation, an additional problem faced by state sanctioned marijuana dispensaries is that most of the states which have legalized the use of marijuana “piggy-back” their state corporate income tax on the federal income tax. That is, after the federal income tax has been calculated based on federal law, these states will impose a tax of a percentage of the federal corporate income tax (with certain adjustments in most instances). In those cases, not only is the federal government denying the benefits of claiming certain business deductions that any other business would have, but the state governments are equally denying these tax benefits despite the businesses being situated in a state that has legalized the use and sale of marijuana.

As we have previously reported, the effect of I.R.C. § 280E can be drastic on dispensaries. According to a 2013 CNNMoney report, the inability of dispensaries to take business deductions has resulted in dispensaries paying an effective tax rate as high as seventy-five percent (75%). The practical effect of this massive tax burden makes business operations difficult, if not impossible.

However, there is currently some hope for marijuana dispensaries in two respects. First, I.R.C. § 280E is limited to the sale of (or “trafficking in”) marijuana. Thus, if a taxpayer is engaged in selling medical marijuana and also in another business, such as care-giving to health patients, the taxpayer may be able to deduct business expenses in connection with the care-giving function. See Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. 14 (2007). Note, however, that “the taxpayer’s characterization will not be accepted when it appears that the characterization is artificial and cannot be reasonably supported under the facts and circumstances of the case.”Id. Second, while I.R.C. § 280E disallows any business deduction for a marijuana seller’s ordinary and necessary business expenses, costs of goods sold – that is, the carrying value of goods sold during a particular period – are excluded from this rule. To be sure, while marijuana businesses are disallowed ordinary and necessary business expenses deductions, they are allowed a deduction for the costs incurred for the purchase, conversion, materials, labor, and allocated overhead incurred in bringing the marijuana inventories to their present location and condition. Therefore, marijuana businesses have an incentive to capitalize as inventory all costs associated to the purchase of marijuana and then in future years successfully deduct these costs as costs of goods.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax, tax litigation, administrative law, regulatory compliance, and white collar criminal defense.  They will continue to monitor developments in this and similar cases. If you have any questions, an attorney can be reached by emailing us at contact@fuerstlaw.com or by calling 305.350.5690.

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Anti-Money Laundering Compliance Update: FinCEN Guidance Regarding Banking Marijuana-Related Businesses Raises Many Questions, Answers Very Few

March 3rd, 2014

As we reported last Monday, on February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) issued its guidance “BSA Expectations Regarding Marijuana-Related Businesses” in an effort to clarify Bank Secrecy Act (“BSA”) expectations for financial institutions looking to provide services to marijuana-related businesses. As we further noted on Monday, despite the growing number of States that have legalized the use of marijuana in various forms and to various degrees, the federal government has continued its efforts to crack down on dispensaries. For instance, on June 29, 2011, U.S. Department of Justice Deputy Attorney General James M. Cole had issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substances Act (“CSA”). In his memo, Cole reiterated Congress’s determination that marijuana is a dangerous drug and that its illegal distribution and sale is a serious crime.

As we previously explained, because the sale of marijuana remains prohibited under federal law, financial institutions are required to file with FinCEN suspicious activity reports (“SARs”) on activity involving a marijuana-related business (including in those states where medical and/or recreational marijuana is legal). In an effort to explain how a financial institution can provide services to marijuana-related businesses while maintaining its responsibilities under the BSA, FinCEN issued its February 14th guidance. In addition to making clear that prior to providing financial services to a marijuana-related business a financial institution must conduct a thorough customer due diligence, FinCEN has identified a series of red flags that would indicate to a financial services institution that a marijuana-related business may be engaged in activity that implicates one of the Cole Memo priorities or violates state law. The following is a list of the red flags identified by FinCEN:

  • A customer appears to be using a state-licensed marijuana-related business as a front or pretext to launder money derived from other criminal activity (i.e., not related to marijuana) or derived from marijuana-related activity not permitted under state law. Relevant indicia could include:
  • The business receives substantially more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates.
  • The business receives substantially more revenue than its local competitors or than might be expected given the population demographics.
  • The business is depositing more cash than is commensurate with the amount of marijuana-related revenue it is reporting for federal and state tax purposes.
  • The business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law, as opposed to revenue derived from (i) the sale of other illicit drugs, (ii) the sale of marijuana not in compliance with state law, or (iii) other illegal activity.
  • The business makes cash deposits or withdrawals over a short period of time that are excessive relative to local competitors or the expected activity of the business.
  • Deposits apparently structured to avoid Currency Transaction Report (“CTR”) requirements.
  • Rapid movement of funds, such as cash deposits followed by immediate cash withdrawals.
  • Deposits by third parties with no apparent connection to the accountholder.
  • Excessive commingling of funds with the personal account of the business’s owner(s) or manager(s), or with accounts of seemingly unrelated businesses. Individuals conducting transactions for the business appear to be acting on behalf of other, undisclosed parties of interest. Financial statements provided by the business to the financial institution are inconsistent with actual account activity. A surge in activity by third parties offering goods or services to marijuana-related businesses, such as equipment suppliers or shipping services. The business is unable to produce satisfactory documentation or evidence to demonstrate that it is duly licensed and operating consistently with state law. The business is unable to demonstrate the legitimate source of significant outside investments. A customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.
  • Review of publicly available sources and databases about the business, its owner(s), manager(s), or other related parties, reveal negative information, such as a criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity.
  • The business, its owner(s), manager(s), or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering or enforcing marijuana-related laws or regulations.
  • A marijuana-related business engages in international or interstate activity, including by receiving cash deposits from locations outside the state in which the business operates, making or receiving frequent or large interstate transfers, or otherwise transacting with persons or entities located in different states or countries.
  • The owner(s) or manager(s) of a marijuana-related business reside outside the state in which the business is located.
  • A marijuana-related business is located on federal property or the marijuana sold by the business was grown on federal property.
  • A marijuana-related business’s proximity to a school is not compliant with state law.
  • A marijuana-related business purporting to be a “non-profit” is engaged in commercial activity inconsistent with that classification, or is making excessive payments to its manager(s) or employee(s).

FinCEN has made clear that these red flags indicate only possible signs of Cole Memo violations, and thus do not constitute an exhaustive list. Therefore, FinCEN has emphasized the importance of viewing any red flag(s) in the context of other indicators and facts, such as the financial institution’s knowledge about the underlying parties obtained through its customer due diligence.  Further, FinCEN explained that these red flags are based primarily upon schemes and typologies described in SARs or identified by its law enforcement and regulatory partners, and reserved the right to update them in future guidance.

A careful reading of these red flags makes clear that this new FinCEN guidance goes above and beyond the anti-money laundering programs banks are required to keep. Further, these red flags present more of a problem than a solution to financial institutions looking to provide services to marijuana-related businesses and to marijuana-related businesses looking to benefit from basic banking services. Asking a financial institution to dig deep into whether the business is receiving substantially more revenue than may be reasonably expected given the relevant limitations imposed by the state, what its competitors are making or what it reported on its income tax returns is essentially asking financial institutions to turn into a Big 4 auditor of medical marijuana dispensaries.

In effect, these red flags are totally impractical for banks looking to provide basic services to marijuana-related businesses because they raise more questions than they provide answers. A thorough reading of these red flags poses questions such as:

  • How can financial institutions practically implement measures to carry out this additional due diligence?
  • Will financial institutions need to hire new due diligence personnel with expertise in the state sanctioned marijuana industry?
  • Can financial institutions rely on the work of internal and external auditors?
  • What steps will professionals engaged to perform this due diligence have to follow?
  • Is there a practical and effective way to implement a set of internal controls to prevent, detect or monitor these red flags?

These are only a few of the countless questions that these new SAR requirements for marijuana-related businesses raise. Given all these questions, it comes as no surprise that FinCEN received such a lukewarm response from the Colorado Bankers Association and the American Bankers Association. As the American Bankers Association explained it “while we appreciate the efforts by the Department of Justice and FinCEN, guidance or regulation doesn’t alter the underlying challenge for banks. As it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions.” We agree.

Fuerst Ittleman David & Joseph, PL will continue to watch for the latest developments in the regulation of financial services and the marijuana industry. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, food & drug law, tax law and litigation, constitutional law, regulatory compliance, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution or marijuana-related business, or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at contact@fuerstlaw.com or by calling us at 305.350.5690.

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Florida Business Litigation Update: “Confidential” Settlements Really Need to Remain Confidential

February 27th, 2014

The vast majority of bona fide commercial cases end in settlement.  It has become a generally accepted practice in commercial practices to include a confidentiality provision in settlements so as to ensure that the parties will not discuss the contents of the settlement with anyone.  The provision is designed to truly end the dispute, preclude boasting of success, and avoid having competitors or other similarly situated litigants know the extent of the negotiated bargain.

The clauses have become so common that they are sometimes glossed over by a lawyers who then fail to counsel their clients regarding the ramifications of the agreements, or ignored by the clients in their quest to pocket the long-awaited results.  The case of Gulliver Schools, Inc. v. Snay, decided on February 26, 2014 by Florida’s Third District Court of Appeals, demonstrates the catastrophe of such a callous review. A copy of the decision is available here.

Mr. Snay brought an action against Gulliver for wrongful termination due to unlawful age discrimination.  After a year of litigation, the parties settled the dispute whereby Gulliver agreed to pay Mr. Snay back pay and damages in the total amount $90,000, plus pay for his attorneys’ fees.  The settlement agreement included a provision stating:

13. Confidentiality. . . The plaintiff shall not either directly or indirectly, disclose, discuss or communicate to any entity or person, except his attorneys or other professional advisors or spouse any information whatsoever regarding the existence or terms of this Agreement. . . A breach . . .will result in disgorgement of the Plaintiffs portion of the settlement Payments.

Not unexpectedly, Mr. Snay shared with his family that the case had been settled.  Excited for her father and unable to restrain her disdain for Gulliver, Mr. Snay’s daughter turned to Facebook and made the following post:

Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.

Gulliver did not “suck it.”  Instead, Gulliver took the steps to disgorge the payments made to “Papa Snay.”  Mr. Snay defended against the disgorgement claim by asserting that he did not disclose the terms of the agreement, rather, “[m]y conversation with my daughter was that it was settled and we were happy with the results.”  The Third District found that such a “disclosure” was a material breach of the settlement agreement:

The plain, unambiguous meaning of paragraph 13 of the agreement between Snay and the school is that neither Snay nor his wife would “either directly or indirectly” disclose to anyone (other than their lawyers or other professionals) “any information” regarding the existence or the terms of the parties’ agreement.

Gulliver Schools, Inc. v. Snay, 39 Fla. L. Weekly D457a (Fla. 3d DCA Feb. 26, 2014).

The implications of the Gulliver case are far-reaching, and the moral of the story is quite clear.  A settlement agreement will not be treated differently than any other agreement.  Confidentiality clauses should be carefully crafted to include language that the parties will be able to understand and accept.  The inclusion, scope and remedy for such a breach are all negotiated terms, and counsel should not hesitate to strike or edit unacceptable language.  Then, particular attention should be given by counsel to explain the reach of each provision of the settlement agreement.

The lawyers of Fuerst Ittleman David & Joseph, PL stand ready to answer your questions.

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Anti-Money Laundering Compliance Update: FinCEN Issues Guidance For Financial Institutions Providing Services To Marijuana-Related Businesses

February 24th, 2014

On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) issued its guidance “BSA Expectations Regarding Marijuana-Related Businesses” in an effort to clarify Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to marijuana-related businesses. The guidance was issued in response to the growing number of states which have legalized the use of marijuana (recreational and/or medicinal) recent Department of Justice statements regarding marijuana enforcement priorities, and the uncertainty financial institutions in the United States face in providing financial services to this burgeoning industry.

Introduction

As we have previously reported, despite the growing number of States that have sanctioned the use of marijuana in various forms, the federal government has continued its efforts to crack down on dispensaries. (Our recent articles discussing these efforts can be read here, here, here, here, and here.). In addition to direct criminal prosecution for drug trafficking, dispensaries face additional legal barriers which make operation difficult. One such barrier dispensaries face is finding banks, credit card companies, and payment processors to process the proceeds of marijuana sales. As we have previously explained, because the sale of marijuana remains prohibited under federal law, banks are placed in a position where they would be required to report any banking transactions involving proceeds from marijuana dispensaries. Moreover, banks face the realistic possibility of criminal penalties for assisting in money laundering should they knowingly accept and process finds from dispensaries. As a result of these risks and possible penalties, banks have simply refused to do business with marijuana dispensaries.

Financial Institutions’ responsibilities under the BSA

Pursuant to the BSA, 31 U.S.C. §§ 5311-5330, financial institutions are required to create certain reports and records in order to combat fraud, money laundering, and protect against criminal and terrorist activity. For example, financial institutions are required to file with FinCEN suspicious activity reports (“SARs”) reporting any suspicious transaction relevant to a possible violation of law or regulation. More specifically, federal law requires that a financial institution file a SAR if the financial institution “knows, suspects, or has reason to suspect” that an attempted or fully conducted transaction: 1) involves funds derived from illegal activities or is an attempt to disguise or hide such funds; 2) is designed to evade the requirements of the BSA and its implementing regulations; or 3) lacks an apparent lawful or business purpose. See 31 C.F.R. § 1020.320.

As it relates to the proceeds derived from the sale of marijuana, FinCEN explained in its Guidance Document as follows:

Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law), in accordance with this guidance and FinCEN’s suspicious activity reporting requirements and related thresholds.

(emphasis added).

FinCEN’s guidance makes clear that a financial institution’s obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity. Thus, in an effort to explain how a financial institution can provide services to marijuana-related businesses while maintaining its responsibilities under the BSA, FinCEN issued this latest guidance.

Financial Institutions are required to engage in “thorough due diligence” prior to accepting marijuana-related businesses as clients.

FinCEN’s guidance makes clear that prior to providing financial services to a marijuana-related business, a financial institution must conduct a thorough customer due diligence. The guidance notes that this due diligence should include: 1) verifying that the business is licensed and registered with state authorities; 2) a review of the state license application and supporting documentation to operate as a marijuana business; 3) requesting available information about the prospective customer from state licensing and enforcement authorities; 4) obtaining an understanding of the nature of the business including the types of products sold and the customers to be served (recreational v. medical user); 5) monitoring of publicly available sources for adverse information about the potential business customer; and 6) monitoring for suspicious activity, including whether the business implicates one of the DOJ enforcement priorities or violates state law. In addition, FinCEN advises that financial institutions should periodically refresh their due diligence information once a business commences banking.

 

Financial Institutions  new marijuana-related businesses SAR filing responsibilities.

FinCEN’s “BSA Expectations” guidance should be read in conjunction with August 29, 2013 and subsequent February 14, 2014 DOJ memorandums issued by Deputy Attorney General James M. Cole to federal prosecutors regarding DOJ’s enforcement priorities with respect to marijuana. The “Cole Memo” lists out eight priorities that will guide the DOJ in its enforcement of the Controlled Substances Act against marijuana-related conduct. A copy of the DOJ’s August 29, 2013 memorandum can be read here. It is against this backdrop and with these priorities in mind that FinCEN drafted its guidance. FinCEN explains that the new guidance furthers the objectives of the BSA “by assisting financial institutions in determining how to file a SAR that facilitates law enforcement’s access to information pertinent to a [enforcement] priority.”

In describing a financial institution’s SAR filing responsibilities, FinCEN has established three categories: 1) “Marijuana Limited” SAR filings; 2) “Marijuana Priority” SAR filings; and 3) “Marijuana Termination” SAR filings.

In its Guidance, FinCEN explains that financial institutions should file a “Marijuana Limited” SAR when the institution reasonable believes, based on its due diligence, that the potential marijuana-related business customer does not implicate one of the DOJ Memo priorities or violate state law. It is important to note that this SAR filing should state “the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business,” and that no additional suspicious activity has been identified.

Throughout the time that a financial institution provides services to a marijuana-related business, the financial institution must file continuing activity reports which detail the amount of deposits, withdrawals, and transfers from the account since the previous SAR filing. (Guidance for filing timeframes for submitting a continuing activity report can be found at Question #16 of FinCEN’s Frequently Asked Questions Regarding the FinCEN Suspicious Activity Report.). However, FinCEN notes that should a financial institution’s continued due diligence reveal a potential violation of state law or implicate a DOJ Memo priority, the financial institution should file a “Marijuana Priority” SAR.

A “Marijuana Priority” SAR is only to be filed when a violation of state law is suspected or when the activities of a marijuana-related business may implicate DOJ Memo enforcement priorities. A Marijuana Priority SAR will be substantially more detailed should include: 1) identifying information of the subject and related parties; 2) addresses of the subject and related parties; 3) dates, amounts, and relevant details of the financial transactions involved; and 4) “details regarding the enforcement priorities that the financial institution believes have been implicated.”

In order to assist financial institutions in making the determination of whether to file a Marijuana Priority SAR, FinCEN’s Guidance includes two dozen “red flag” examples which may indicate a violation of state law or implicate DOJ Memo priorities. Such red flags include: that the business receives significantly more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates; that the business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law; a customer seeks to conceal or disguise involvement in a marijuana-related business activity; and that a business is unable to demonstrate the legitimate source of significant outside investments.

Additionally, financial institutions must be aware that these filing obligations also apply when the institution provides indirect services to a marijuana-related business such as providing services to a another domestic financial institution who in turn services marijuana-related businesses or to a non-financial customer who provides goods or services to a marijuana-related business (FinCEN uses the example of a commercial landlord who leases its property to a marijuana-related business). This naturally will require that financial institutions perform robust due diligence on all customers with potential indirect ties to marijuana-related businesses. However, FinCEN explains that “[i]n such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between “Marijuana Limited” and “Marijuana Priority.”

The final category of SAR filings is the “Marijuana Termination” SAR. “If a financial institution deems it necessary to terminate a relationship with a marijuana-related business in order to maintain an effective anti-money laundering compliance program, it should file a SAR  and note in the narrative the basis for the termination.”

Analysis and Conclusion

FinCEN’s guidance may in fact be a good faith attempt by the federal government to ease financial institutions anxieties about providing services to marijuana-related businesses. However, the banking industry’s reaction has been lukewarm at best.

As explained by the Colorado Bankers Association:

After a series of red lights, we expected this guidance to be a yellow one. This isn’t close to that. At best, this amounts to ”˜serve these customers at your own risk’ and it emphasizes all of the risks. This light is red.

Bankers had expected the guidance to relieve them of the threat of prosecution should the open accounts for marijuana businesses, but the guidance does not do that. Instead, it reiterates reasons for prosecution and is simply a modified reporting system for banks to use. It imposes a heavy burden on them to know and control their customers’ activities, and those of their customers. No bank can comply.

(emphasis added). A full copy of the Colorado Bankers Association Press Release can be read here.

Likewise, on February 14, 2014, the American Bankers Association commented as follows:

While we appreciate the efforts by the Department of Justice and FinCEN, guidance or regulation doesn’t alter the underlying challenge for banks. As it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions.

These fears are well founded. The FinCEN Guidance is not a regulation, does not amend existing law, and does not have the force and effect of law. Instead, financial institutions which choose to engage in providing services to marijuana-related businesses do so with only the words of FinCEN and the DOJ that it will exercise its prosecutorial discretion and not indict institutions for money laundering violations.

Moreover, regardless of the FinCEN Guidance, marijuana-related businesses also face potential violations of a host of federal laws, ranging from drug trafficking and money laundering to violations of the FDCA and the internal revenue code, for engaging in activities which are otherwise legal under state law.

In reality, the inability to access the banking and financial services industry may be potentially disastrous to the legal marijuana industry. The only true solution for both financial institutions and the marijuana-related businesses which seek their services is a comprehensive overhaul of the manner by which federal law governs marijuana and the businesses engaged in the sale of marijuana. The starting point is the Controlled Substances Act, but changes must also be made to the Banking Code found in Title 12, the bank fraud and money laundering statutes found in Title 18, the Food, Drug, and Cosmetic Act at Title 21, and the Internal Revenue Code found at Title 26. (A comprehensive overview of the most recent proposed amendments to the federal code, the “Marijuana Businesses Access to Banking Act of 2013” can be found in our previous report.). So long as federal law classifies marijuana as a Class I drug and all who deal in it “drug traffickers,” no mere Guidance Document will create the practical changes necessary to allow federally regulated banks to service the burgeoning marijuana industry.

Fuerst Ittleman David & Joseph, PL will continue to watch for the latest developments in the regulation of financial services and the marijuana industry. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, food & drug law, tax law and litigation, constitutional law, regulatory compliance, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution or marijuana-related business, or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at contact@fuerstlaw.com or by calling us at 305.350.5690.

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Tax Litigation Update: Eleventh Circuit Reverses Tax Court in Virgin Islands EDP Residency Cases

February 24th, 2014

Disclosure: Joseph A. DiRuzzo, III of Fuerst Ittleman David & Joseph represents the taxpayers in their Tax Court litigation against the IRS.

We have written extensively about the United States Virgin Islands Economic Development Program (EDP) and the litigation it has spawned between and among the IRS, the Virgin Islands Bureau of Internal Revenue (VIBIR), and the individuals and businesses which have sought to do business in the Virgin Islands and avail themselves of the EDP; see here, here, here and here. Much of this litigation has focused on the issue of whether the various taxpayers have been bona fide residents of the Virgin Islands, which On February 20, 2014, the United States Court of Appeals for the Eleventh Circuit issued its opinion in the consolidated appeals filed by the Government of the United States Virgin Islands (“Virgin Islands”) following the Tax Court’s denial of the Virgin Islands’ motions to intervene in the Tax Court proceedings of three separate taxpayers. The Eleventh Circuit’s precedential decision, Government of the United States Virgin Islands v. Commissioner of IRS, is available here.

The Eleventh Circuit described the background of the Taxpayers’ complex tax proceedings as follows:

The Taxpayers filed returns with the BIR for calendar tax years 2002, 2003, and 2004. The Taxpayers reported their worldwide income, which consisted of income from both United States and Virgin Islands sources, and paid taxes on that income to the Virgin Islands. None of the Taxpayers filed a return with the IRS.  In 2009 and 2010, the IRS issued deficiency notices to the Taxpayers for tax years 2002, 2003, and 2004. The IRS claimed, first, that the Taxpayers were not bona fide Virgin Islands residents during those tax years and, therefore, they should have filed returns with the IRS and paid taxes to the United States on the income they reported from United States sources Second, the IRS claimed that some of the Taxpayers’ income that they classified as Virgin Islands income on their BIR returns was, in fact, United States income and, therefore, the Taxpayers should have paid taxes to the United States on that income too. Rather than crediting the Taxpayers’ federal tax liability with the taxes paid to the Virgin Islands (which the IRS claimed should have been paid to the United States), the IRS issued a deficiency notice for the full amount owed to the United States, plus penalties for failing to file an IRS return and for delinquent payment.

***

The Taxpayers petitioned the Tax Court, challenging the IRS’s deficiency notices as time barred and, in the alternative, as incorrect. The Virgin Islands moved to intervene in the cases, the Tax Court denied its motions, and the Virgin Islands brought these appeals.

Slip op., at 4-5.

The Eleventh Circuit also explained the reasons why the Virgin Islands moved to intervene in the Taxpayers’ Tax Court cases in the first place:

If the Tax Court eventually determines that the Taxpayers were not bona fide residents, one of three things will occur: the IRS may ask the Virgin Islands to transfer over the portion of taxes that should have been paid to the United States; the Virgin Islands may choose to voluntarily refund the “overpaid” taxes as a matter of fairness; or the Virgin Islands may be forced to accept that the Taxpayers paid taxes twice on the same income.9 Thus, the Virgin Islands has an interest in the Tax Court proceedings for the same reason the United States had an interest in the Virgin Islands District Court proceedings in V.I. Derivatives: the court’s findings have practical implications for the Virgin Islands’ taxation of the same individuals.

Slip op., at 16.

In V.I. Derivatives, the IRS moved to intervene in an ongoing tax case proceeding before the District Court of the Virgin Islands. There, the IRS was permitted to intervene, but when the Virgin Islands sought to intervene before the Tax Court on exactly the same grounds, the IRS objected to the intervention. Thus, the Eleventh Circuit slammed the IRS’s position, at one point labeling it “unpersuasive [and] bordering on disingenuous”¦” and at another describing it as a “Monday morning quarterback.”

The Eleventh Circuit also noted that the Third Circuit had already ruled on this issue, reversing the Tax Court and rejecting the same IRS arguments made in the Eleventh Circuit, but recognized that there is a circuit split.  On the one hand, the Third and Eighth Circuits have reversed the Tax Court’s denials of the Virgin Islands’ motions to intervene, but on the other the Fourth Circuit had affirmed. Ultimately, the 11th Circuit held that Federal Rule of Civil Procedure 24(a)(2)applies to the Tax Court and that the Government of the USVI may intervene as a matter of right.

The take away from this decision is that the Government of the USVI may now intervene in cases reviewable by the Third, Eighth and Eleventh Circuits, which includes Florida, Georgia, Alabama, Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, New Jersey, Pennsylvania, Delaware, and the US Virgin Islands.  But the Government of the USVI cannot intervene in the Fourth Circuit which includes Maryland, North Carolina, South Carolina, Virginia, and West Virginia. It remains an open question in other parts of the country where a federal appeals court has not addressed the matter. Additionally, the overtly hostile view the Eleventh Circuit took on the IRS litigation position bodes well for both the taxpayers whom the IRS claims have no protection under the statute of limitations and the Virgin Islands seeking to intervene in further Tax Court disputes arising from the Economic Development Program.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax litigation before the Tax Court, the District Courts, the Court of Claims, and the United States Courts of Appeal.  Additionally, the attorneys at Fuerst Ittleman David & Joseph, PL actively litigate in the United States Virgin Islands and have on-going tax litigation before the District Court of the Virgin Islands against the USVI Bureau of Internal Revenue. For more information about our United States Virgin Islands Tax Law and Litigation practice, click here. If you have any questions, an attorney can be reached by emailing us at contact@fuerstlaw.com or by calling 305.350.5690.

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Florida Criminal Law Update: Florida Appeals Court Declares Strict Liability Statute Unconstitutional

February 24th, 2014

On February 16, 2014, Florida’s Fifth District Court of Appeal issued its opinion in Florida v. Thomas, affirming the decision of the Circuit Court of Orange County declaring a portion of Florida’s “Counterfeiting a Payment Instrument” statute unconstitutional as an improper strict liability statute. A copy of the Court’s decision can be read here.

The Thomas case centered around the constitutionality of a portion of Florida Statute 831.28(2)(a) which makes it a crime to merely possess, without intent, a counterfeit payment instrument. Section 831.28(2)(a) states:

It is unlawful to counterfeit a payment instrument with the intent to defraud a financial institution, account holder, or any other person or organization or for a person to have any counterfeit payment instrument in such person’s possession. Any person who violates this subsection commits a felony of the third degree, punishable as provided in s.  775.082, s. 775.083, or s. 775.084.

As the District Court explained, § 831.28(2)(a) consists of two subparts: “the first makes it unlawful for a person to counterfeit a payment instrument with intent to defraud, but the second makes it unlawful for a person simply to possess any counterfeit payment instrument.” It was this second subpart that Thomas challenged as a facially unconstitutional strict liability statute.

On appeal, the State argued that in creating the “possession” portion of the statute, it was the Legislature’s intent to make it unlawful for a person to possess a counterfeit payment instrument with the intent to defraud. However, the District Court found that such an argument was belied by the plain language of the statute. As explained by the District Court, “it may be true that the Legislature meant to include ”˜intent to defraud’ as an element of the possession offense but did not pay close enough attention to the manner in which the statute was drafted.” The District Court noted that the statute as written not only criminalizes possession with intent to defraud but also the innocent possession of a counterfeit payment instrument. Therefore, the District Court found that “[c]riminalizing the mere possession of counterfeit payment instruments criminalizes behavior that is otherwise inherently innocent and thus violates substantive due process.” However, the District Court concluded its opinion by explaining how the Legislature could correct its error: “Simply by drafting the statute to include an intent to defraud, the Legislature can accomplish its purpose without infringing on innocent or protected conduct.”

While the District Court’s decision will not ring the death knell for all strict liability offenses, the decision did reemphasize the limits placed on the Legislature by the Florida Constitution in interfering with the individual rights of Florida residents. As explained, “[w]here the individual rights at issue are not fundamental rights, the test for the constitutionality of a legislative enactment is whether the means selected by the Legislature have a reasonable and substantial relation to the object sought to be attained and shall not be unreasonable, arbitrary, or capricious.” Citing State v. Saiez, 489 So.2d 1125, 1128 (Fla. 1986). In declaring the possession portion of the statute unconstitutional, the District Court found that criminalization of the mere possession of a counterfeit check regardless of intent was an unreasonable “prohibition of innocent acts in order to reach and secure enforcement of law against evil acts.”

Fuerst Ittleman David & Joseph, PL will continue to watch for the latest developments regarding this matter. Our attorneys have extensive experience in the areas of anti-money laundering, constitutional law, regulatory compliance, and white collar criminal defense. You can reach an attorney by emailing us at contact@fuerstlaw.com or by calling us at 305.350.5690.

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