According to the Department of Justice, the couple, both of whom work as physicians in the Sarasota area, conspired with a Swiss citizen currently under indictment in the Southern District of New York, and a banker from the United Bank of Switzerland (“UBS”) to defraud the IRS. The indictment goes on to describe that the couple used nominee entities and undeclared bank accounts in their names and the names of the nominee entities at several foreign banks, including UBS, for the purposes of illegal tax evasion. It is further alleged that the couples’ assets and income, including proceeds from real estate sales for more than $33 million, were deposited into undeclared foreign bank accounts. The Department of Justice claims the couple instructed Swiss bankers via email, telephone, and in-person meetings to make investments and funds transfers to undeclared accounts at UBS. Those undeclared funds were then allegedly used to purchase an airplane, several homes in North Carolina, a Florida condominium, and funds transfers of over $1 million to relatives.

The couple was additionally charged with falsifying tax returns between 2005 and 2008 by substantially underestimating their income and failing to report their foreign accounts. A trial date has yet to be set, but the charges carry the possibility of imprisonment for up to five years for the conspiracy charges and three years for each false tax return filing. The charges also carry penalties of $250,000 for each count.

This indictment offers a real world example of the severe consequences that U.S. taxpayers can face for the non-disclosure of foreign accounts to the IRS. Individuals who believe that they may be in violation of foreign account disclosure requirements under United States tax law should take a moment to read our discussion regarding the mitigation of possible criminal culpability, penalties, and fines under the IRS’s Offshore Voluntary Disclosure Program (“ODVP”) which can be found in Part II of our discussion of the IRS’s initiatives to curb offshore tax evasion in the Caribbean.

Furthermore, as noted in the Department of Justice’s press release, U.S. citizens, resident aliens, and legal permanent residents alike should be aware of their obligations to report their financial interest in, or signatory authority over, a foreign account in a particular year on Schedule B of the U.S. Individual Tax Return, Form 1040, when filing their tax returns.

This issue is a critical one for U.S. taxpayers holding foreign accounts, as well as the professionals advising them. The IRS is continuing to ensure that offshore tax evasion is eradicated and, based on recent history, it appears to have no intentions of leaving any stone unturned.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and have availed themselves of the IRS’s voluntary disclosure program. We also have considerable experience litigating against the Department of Justice and the IRS in civil and criminal tax matters. We will continue to monitor the development of this issue, and we will update this blog with relevant information as this issue continues to develop. You can reach an attorney by calling us at 305-350-5690 or emailing us at contact@fuerstlaw.com.

The FDA, the federal agency primarily responsible for the safety of the nation’s food supply, has specific regulations regarding the manufacture, quality, and labeling of food products. Under 21 U.S.C. § 321(f) of the federal Food, Drug, and Cosmetics Act (“FDCA”), a “food” is loosely defined as “an article used for food or drink.” Products that are intended to be consumed as foods or are otherwise labeled or represented as food products must comport with the FDA’s regulations. Pursuant to the FDA’s regulations, food manufacturers must register their establishments with the FDA and operate in accordance with current good manufacturing practices (“cGMPs”). (Generally speaking, cGMPs are a series of regulations, found at 21 C.F.R. Part 110, designed to ensure that food products are prepared, packaged, and stored in sanitary conditions.).

In addition, food manufacturers must also ensure that food products do not contain any unapproved substances or additives and that the ingredients contained in food products are generally recognized as safe (“GRAS”). As described by the FDA:

GRAS is an acronym for the phrase Generally Recognized As Safe. Under sections 201(s) and 409 of the Federal Food, Drug, and Cosmetic Act (the Act), any substance that is intentionally added to food is a food additive, that is subject to premarket review and approval by FDA, unless the substance is generally recognized, among qualified experts, as having been adequately shown to be safe under the conditions of its intended use, or unless the use of the substance is otherwise excluded from the definition of a food additive.

More information on GRAS requirements can be found on the FDA’s website here.

Moreover, food products must bear correct food labeling, including a Nutrition Facts panel and appropriate food claims. Manufacturers that fail to meet cGMPs or use ingredients that are not GRAS in their food products could be subject to enforcement action under the misbranding or adulterated food provisions of the FDCA.

With marijuana legalization, commercial retailers in Colorado and Washington have started developing various “medible” products. However, as of now these manufacturers have been operating in a void of regulations because marijuana remains illegal under federal law. As a result, FDA has not developed GRAS regulations for marijuana and has not publicly commented on the applicability of cGMPs to medible manufacturers.

Although the FDA has not released an official position on whether or how it intends to regulate medible products, medibles likely could trigger heightened FDA scrutiny. An initial question which must be evaluated by the FDA is whether medibles qualify as foods at all, or whether their intended uses would qualify these products as drugs under the FDCA. (21 U.S.C. § 321(g) defines the term “drug” in part to mean “articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals.”).

If the FDA deems medibles to be foods, medibles would then be required to be manufactured using good manufacturing practices and product labeling compliant with FDCA regulation of foods. However, even if cGMPs and labeling requirements are satisfied, manufacturers, distributors, and sellers of marijuana medibles could still face liability under the FDCA because the FDA has not approved marijuana as a food ingredient or food additive and has not deemed marijuana to be GRAS. Generally speaking, products which contain food additives and ingredients that are not GRAS are considered adulterated under the FDCA. Thus, if the FDA were to assert jurisdiction and begin regulating medibles as foods, under the current regulatory regime FDA would likely allege that medibles are adulterated.

Manufacturers and distributors of marijuana medibles face the possibility of several FDCA violations should marijuana medibles be considered adulterated food products. These include: 1) the adulteration of a food product in interstate commerce; 2) introduction or delivery for introduction into interstate commerce of an adulterated food product; and 3) the receipt in interstate commerce of any food that is adulterated, and the delivery or proffered delivery thereof for pay or otherwise. See 21 U.S.C. § 331 (a), (c). The penalties and punishments associated with these crimes are governed by 21 U.S.C. § 333 and depend on whether the government charges the defendant with committing a violation “with the intent to defraud or mislead.” Each of these penalties is available regardless of whether marijuana is legal under State law.

Regardless of how FDA regulates medibles, the federal government has made clear that marijuana is still classified as a Schedule I drug under the Controlled Substances Act (“CSA”). Accordingly, distributors face the risk of additional criminal penalties beyond those prescribed within the FDCA.  21 U.S.C. § 841 prohibits the manufacture and distribution of a controlled substance expect as permitted under the CSA. Unlike the FDCA where first offenders convicted of adulteration violations face a maximum of three years imprisonment, first time offenders under the CSA face a minimum of five with a possibility of a maximum of forty years imprisonment. Because the production of medibles is not permitted under the CSA, criminal indictments under this separate regulatory regime are still possible.  Such indictments would be similar to those of three medicinal marijuana dispensary operators late in 2012. (More information on those indictments can be read in our previous report here.).

Due to the federal government’s apparently unwavering position on marijuana products, some Congressional lawmakers have introduced legislation that restricts federal involvement in regulating the sale and use of marijuana. On March 7, 2013, Representative Dana Rohrabacher proposed a new bill to Congress entitled the “Respect State Marijuana Laws Act of 2013″ (H.R. 1523). The proposed bill protects both marijuana businesses and individual marijuana users from federal or criminal prosecution so long as their acts comply with existing state laws. Specifically, the Respect State Marijuana Laws Act of 2013 proposes to add the following language to the Controlled Substances Act (21 USC 801 et seq.): “Notwithstanding any other provision of law, the provisions of this subchapter related to marihuana shall not apply to any person acting in compliance with State laws relating to the production, possession, distribution, dispensation, administration, or delivery of marihuana.” Congress has yet to vote on this bill.

Unless and until the federal government begins to respect state laws governing marijuana, marijuana growers and commercial manufacturers should be aware of the potential issues that will continually arise due to the conflict between state and federal law.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, constitutional law, regulatory compliance, white collar criminal defense and litigating 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.

The landmark decision in Raymond James affects arbitration provisions in every type of agreement or business contract in Florida and elsewhere governed by Florida law.

Specifically, in Raymond James, a financial services investment firm, like Florida businesses in many other commercial contexts, required its clients to sign an agreement to arbitrate all disputes arising under the agreement. After the clients’ investments subsequently lost significant value, the disappointed investors filed a joint claim for arbitration against the investment firm, asserting numerous commercial-based claims, including breach of contract, negligence, breaches of fiduciary duty, and various state and federal violations. The investment firm moved to dismiss the claims, maintaining that all of the claims were time-barred by Florida’s statute of limitations.

An arbitration panel was appointed, and a hearing on the motion to dismiss was scheduled.

However, before the hearing, the investors filed a separate lawsuit in state trial court, seeking a declaratory judgment that, in relevant part, Florida’s statue of limitations does not apply to arbitrations, but applies only to judicial actions. See Fla. Stat. § 95.011 (limiting the applicability of Florida’s statute of limitations to a “civil action or proceeding”), available here.

The trial court agreed with the investors. On appeal, Florida’s Second District Court of Appeals disagreed with the trial court, but certified the question as to the applicability of Florida’s statute of limitations to arbitration agreements to be of great public importance.

The Florida Supreme Court in Raymond James began its substantive analysis with the actual language of Florida’s statute of limitations, noting that the statue is limited to a “civil action or proceeding.” The Court then turned to the “ordinary” definition of those terms and concluded that the “broad” terms do include an arbitration proceeding. The Court in Raymond James also noted as a matter of statutory construction that, while “civil actions” may be limited to court cases, the term “proceeding” in the statute is clearly broader in scope. Thus, the Court concluded that limiting the term “proceeding” to apply to only judicial proceedings would construe the term in a manner inconsistent to the language of the statute of limitations and the Florida Legislature’s intent in drafting such language.

The Florida Supreme Court in Raymond James also found that any contrary interpretation would defeat the purpose of a related statute, section 95.03, Florida Statutes, which renders void any contract provision attempting to shorten the applicable limitations period. See Fla. Stat. § 95.03, available here.

Further, the Court in Raymond James deemed its interpretation of Florida’s statute of limitations to be consistent with the interpretation of the term “arbitration” in other statutory provisions, including the Florida Arbitration Code, set forth in chapter 682, Florida Statutes, referring to arbitration in various provisions as an “arbitration proceeding.” The Court likewise observed that its broad interpretation of the terms “action or proceeding” to include arbitration was consistent with the history of the statute of limitations and the purpose behind its enactment, i.e., to discourage stale claims and to avoid parties waiting to bring claims until documents or witnesses are difficult to locate.

A slip copy of the Florida Supreme Court’s opinion in Raymond James Financial Services, Inc. v. Phillips is available here.

At bottom, the recent opinion affects the claims and defenses available to every individual or corporation in a Florida civil action or proceeding, including FINRA and other arbitration proceedings, that conducts business in Florida and/or enters into contracts governed by Florida law containing arbitration provisions. Accordingly, business owners and decision makers with commercial operations in Florida would be well advised to review the arbitration provisions in existing agreements so as to better understand rights and obligations in light of Raymond James, and to tailor all future agreements as necessary.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in all areas of complex civil and criminal litigation, including international and domestic business matters and contract disputes. Please contact us by email at contact@fuerstlaw.com or telephone at 305.350.5690 with any questions.

Tragically for this upstart currency, the mainstream will learn of Bitcoin for the first time as a fringe currency under attack by the federal government. Whether Bitcoin will survive this attack and shed itself of the stigma associated with this seizure is a matter for another day and another article. We certainly hope that it does.

On Thursday, Kim Dotcom (@kimdotcom) tweeted a question that seems to be on everyone’s mind in the wake of the warrant: “Is the U.S. govt trying to destroy Bitcoin?” While we are absolutely sensitive to Mr. Dotcom’s perspective on the issue, we won’t speculate on the answer to his question. However, we will say that – given the statement of facts included in the affidavit attached the warrant – the attack should come as no surprise.

Let’s start with the regulatory background. Between the time of its birth and this past March, Bitcoin existed in an area of the law where there was no law. That is not to say that Bitcoin issuers and users were not subject to the money laundering provisions of federal law if they used Bitcoin for unlawful purposes, but up until March of this year the federal government had not decided how to regulate Bitcoin as a thing. Then, on March 18, the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury issued its Guidance entitled, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.” This was a watershed moment for the regulation of Bitcoin, but sadly it seems that Mt. Gox either never knew about it or chose to disregard it. In FinCEN’s Guidance, FinCEN does not mention Bitcoin by name, but does include a discussion of “De-Centralized Virtual Currencies” which explains as follows:

A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.

A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.

So, before March, whether FinCEN would ever regulate Bitcoin – and if so, how – was a mystery. However, after March 18, things became much more clear: if an entity is in the business of exchanging Bitcoin for “real currency” or vice versa, or accepts Bitcoin from one person and transmits the real currency equivalent to another person, that entity is a money transmitter and will be regulated as such in the United States, and will be subject to the criminal provisions of 18 USC 1960 for failing to register with the federal government as a money transmitter or being licensed in any state that would require a money transmitting license.

Next, FinCEN’s recently crafted regulatory scheme for Bitcoin dealers is unquestionably applicable for dealers operating outside of the United States. Thus, even assuming that Mt. Gox did not have the physical nexus in the United States which Special Agent McFarland described in his Affidavit, so long as Mt. Gox was servicing people located in the United States, Mt. Gox would be regulated as a money transmitter. As FinCEN explained on July 18, 2011, and as we blogged shortly thereafter, FinCEN’s rules make foreign-located businesses engaging in MSB activities within the U.S. subject to U.S. law:

As a result, even foreign based MSBs with no physical presence in the US can be classified as an MSB and thus subject to the rigorous requirements of the BSA. However, foreign banks as well as foreign financial agencies that engage in activities that if conducted in the US would require them to be registered with the SEC or CFTC are excluded from the definition of an MSB. As noted in the rule, “To permit foreign-located persons to engage in MSB activities within the United States and not subject such persons to the BSA would be unfair to MSBs physically located in the United States and would also undermine FinCEN˜s efforts to protect the U.S. financial system from abuse.”

Finally, third, as we have repeatedly explained (and as we deal with over and over for clients), opening a bank account under false pretenses is never a good idea. Indeed, just this week we explained how state sanctioned marijuana dispensaries could face criminal liability for opening bank accounts in the name of shell companies or straw owners:

Generally speaking, the use of shell companies or other accounts to mask the profits derived from the sale of marijuana could subject the owner of a dispensary to a wide variety of federal criminal penalties, including bank fraud 18 U.S.C. § 1344, wire fraud 18 U.S.C. § 1343, and money laundering 18 U.S.C. § 1956. Additionally, those who assist in such actions, for example the friend or family member who allowed for money to be transferred through his or her account, would also face similar criminal charges. Moreover, should such fraud occur, the payment processors and banks who process this money can still be held liable for money laundering and face criminal and civil fines and penalties. Each of these penalties is available regardless of whether marijuana is legal under State law. Put simply, if a company lies for the purpose of opening a bank account, the consequences are severe.

Based on the contents of the Seizure Warrant and its accompanying Affidavit, the Mt. Gox case hits on all of these points. First, as the affidavit describes, Mt. Gox is a Japanese company which operates in the United States under a subsidiary named Mutum Sigillum LLC. Second, the Affidavit explains that neither Mt. Gox nor Mutum Sigillum had registered with the federal government as a money transmitting business. Finally, when Mt. Gox d/b/a Mutum Sigillum approached Wells Fargo for purposes of opening a bank account, the affidavit describes that Mark Karpeles, operating on behalf of Mt. Gox d/b/a Mutum Sigillum, told Wells Fargo that the account would not be used for purposes of exchanging currency or transmitting money. In all likelihood, when Wells Fargo saw on the one hand that the Mutum Sigillum account’s activity resembled that of a money services business, but that Karpeles had previously told the bank that Mutum Sigillum was not engaged in that business, Wells Fargo filed a Suspicious Activity Report which called in the federal government, and then the government made short work of the asset seizure. Unfortunately, while this is new to the Bitcoin industry, this is a common occurrence in the United States.

In conclusion, we cannot and will not comment on whether the government is simply attacking Bitcoin in an effort to eradicate it. What we will say though is that everything included in the government’s seizure warrant has been well known for some time, and it is unfortunate that Mt. Gox did not heed these warnings. Based on the contents of the government’s Seizure Warrant and Affidavit, this incident was totally avoidable.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the area of anti-money laundering compliance with a focus on non-bank financial institutions, including all varieties of money services businesses and Bitcoin dealers and exchangers, as well as 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.

Mr. Herrera’s complaint alleges that Monster, the nation’s largest energy drink manufacturer, “promotes consumption of its drinks in an excessive and unsafe manner” and “has failed to adequately warn consumers of the dangers of consuming Monster Energy Drinks.” (To read the full complaint for People of the State of California ex rel. Dennis Herrera v. Monster Beverage Corporation, please click here.) The complaint states that Monster “promotes excessive consumption of its drinks” with statements such as: “bigger is always better,” “chug it down,” “throw [it] back,” a “smooth flavor you can really pound down,” and “the biggest chugger friendly wide mouth we could make.” Furthermore, in describing Monster’s “targeted advertising” toward children and adolescents, Mr. Herrera explicitly refers to Monster’s various social media pages, including Facebook, Twitter, YouTube, and a “Monster Army” social networking site. Mr. Herrera also alleges that Monster advertises to teenage boys by creating a “lifestyle” featuring “extreme sports, music, gaming, military themes, and the scantily-clad ‘Monster Girls.’” (For more information regarding the litigation between Monster and San Francisco City Attorney Herrera, please read the Los Angeles Times article here.)

To support its allegations that Monster is unsafe for consumption by children and adolescents, Mr. Herrera relies heavily on scientific research that claims there is “a strong correlation between consumption of caffeine at levels found in Monster’s products and adverse health and safety consequences.” The scientific research Mr. Herrera refers to throughout the complaint is the same information contained in a letter from health law experts to the FDA sent in March of this year, which we discussed previously here. The complaint goes on to allege that the despite this scientific evidence, Monster “aggressively markets its products to children and teenagers,” and that its targeted advertising efforts are responsible for the product’s popularity with and frequent consumption by youth.

The complaint against Monster also alleges that Monster’s energy drink products are misbranded and adulterated foods under California law. Although Mr. Herrera acknowledges Monster’s move earlier this year to label its products as conventional beverages instead of dietary supplements, he nevertheless alleges that Monster’s products are misbranded because “Monster’s packaging, labeling, serving size, recommended conditions of use, and advertising statements demonstrate that Monster Energy Drinks are, and have long been, conventional beverages.” Further, the complaint states that Monster’s product are adulterated because they contain levels of added caffeine that “do not satisfy the GRAS [generally recognized as safe] standard because there is no scientific consensus concerning the safety of the caffeine levels in [its] products.”

If this lawsuit is successful, Monster Energy could be enjoined from continuing to engage in conduct the state deems harmful to consumers and competitors, and forced to pay significant civil penalties and restitution. The outcome of this lawsuit could have major repercussions for the energy drink industry, not only in California but across the country.

Fuerst Ittleman David & Joseph, PL will continue to track the progress of this lawsuit and any other developments in the regulation of energy drink products. For more information, please contact us via email at contact@fuerstlaw.com or via telephone at (305) 350-5690.

The Colorado Task Force Report on the Implementation of Amendment 64 (which legalized marijuana use) summarized the problems associated with banking marijuana dispensaries as follows:

Financial institutions that are federally licensed or insured are required to comply with federal regulations. Since marijuana is a controlled substance under federal law, banks must either refuse to hold accounts for legal marijuana businesses…or risk prosecution.

The Task Force’s report can be read here.

As a result of marijuana remaining a Class I substance under the Federal Controlled Substances Act, banks face increased anti-money laundering (“AML”) risks when seeking to bank even those dispensaries which are fully compliant with state law. Pursuant to the Bank Secrecy Act, 31 U.S.C. §§ 5311-5330, as part of a bank’s anti-money laundering program, banks are required to create certain reports and records in order to combat fraud, money laundering, and protect against criminal and terrorist activity. More specifically, 12 C.F.R. § 21.11 requires national banks to file Suspicious Activity Reports (“SAR”) when the bank knows, suspects, or has reason to suspect that a transaction involves funds from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities as part of a plan to violate or evade any law or regulation or to avoid any transaction reporting requirement under Federal law. (More information on bank AML requirements under the BSA can be found on the Office of the Comptroller of the Currency’s website.)

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 federal criminal penalties for assisting in money laundering should they knowingly accept and process funds from dispensaries. As a result of these risks and possible penalties, banks have simply refused to allow marijuana dispensaries to maintain accounts or conduct business with them.

Banks’ refusal to allow dispensaries to maintain accounts has made it extremely difficult for dispensaries to operate. As a result, many legal marijuana businesses have resorted to all cash operations. With the bank prohibition in place, dispensaries are looking for “creative” ways to engage in banking including: 1) establishing shell companies to disguise marijuana proceeds; 2) funneling marijuana derived profits into accounts of other legitimate businesses; and 3) placing marijuana derived profits into bank accounts of family members or personal accounts.

These alternative banking methods were the subject of a recent Bloomberg article, entitled “Pot Shops Can’t Take American Express or Deposit in Banks.” In the article, Bloomberg quotes Dale Gieringer, director of the California office of the National Organization for the Reform of Marijuana Laws, as saying “[a]s long as the bank doesn’t find out, you should be safe.” A copy of Bloomberg’s article can be read here. Despite Mr. Gieringer’s contentions, each of these methods could expose dispensary owners to criminal and civil liability.

Unfortunately, Bloomberg’s article never mentions the potential criminal and civil liabilities faced by dispensary owners should they use any of the above-referenced methods to open bank accounts. Generally speaking, the use of shell companies or other accounts to mask the profits derived from the sale of marijuana could subject the owner of a dispensary to a wide variety of federal criminal penalties, including bank fraud 18 U.S.C. § 1344, wire fraud 18 U.S.C. § 1343, and money laundering 18 U.S.C. § 1956. Additionally, those who assist in such actions, for example the friend or family member who allowed for money to be transferred through his or her account, would also face similar criminal charges. Moreover, should such fraud occur, the payment processors and banks who process this money can still be held liable for money laundering and face criminal and civil fines and penalties. Each of these penalties is available regardless of whether marijuana is legal under State law. Put simply, if a company lies for the purpose of opening a bank account, the consequences are severe.

The online poker industry has already experienced just how severe the consequences can be. There, several online poker companies, such as Full Tilt Poker and PokerStars, established shell companies in order to facilitate payment of gambling winnings to their members. The companies used third party payment processors to disguise financial transactions between the companies and U.S. players so that the transactions would appear to be unrelated to online gambling. The third party payment processors would then lie to U.S. financial institutions about the source of the funds, often facilitated by the creation of nonexistent online companies and phony websites. The ultimate conclusion of that case resulted in $731 million in civil monetary penalties as well as criminal convictions for executives of the payment processing companies that facilitated the fraud. (A full recount of the online poker saga can be read in our previous reports here, here, here, here, and here).

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, constitutional law, regulatory compliance, white collar criminal defense and litigating 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.

The IRS’s Criminal Manual has encouraged the voluntary disclosure of hidden offshore accounts for many years preceding the establishment of the OVDP. However, prior to the 2009 OVDP, the IRS had no formalized method for determining penalties. This lack of uniformity in making penalty determinations resulted in non-compliant taxpayers being reluctant to disclose information that would expose them to unpredictable financial liability. In response to these concerns and to promote transparency and uniformity, the IRS established the OVDP as a centralized means of processing voluntary disclosures that offered a uniform penalty structure, consistency, and predictability for taxpayers; see IRS discussion of OVDP objectives here.

The IRS’s efforts to increase offshore account transparency through the OVDP have been extremely successful. Since the establishment of the OVDP, the IRS and Tax Division of the Department of Justice have collected a wealth of data regarding previously undisclosed accounts and used this information to aggressively pursue U.S. taxpayers attempting to evade U.S. taxes and violate the Bank Secrecy Act.

Most notably, in February 2009, the Union Bank of Switzerland (“UBS AG”), Switzerland’s then largest bank, entered into a deferred prosecution agreement with the Department of Justice on charges of conspiring to defraud the United States by impeding the IRS. As part of this agreement, UBS AG paid the U.S. $780 million and surrendered data for nearly 5,000 U.S. clients who held United States securities in UBS AG accounts. Due to the intense pressure from U.S. law enforcement, most Swiss banks appear to have abandoned the practice.

Wegelin & Co. (“Wegelin”), the oldest Swiss private bank, saw this as an opportunity to capture market share and allegedly, at the direction of senior management, made efforts to attract old UBS AG clients. Under the assumption that there was no nexus between itself and the U.S. and its compliance with Swiss laws, Wegelin believed itself to be safe from exposure to U.S. prosecution. However, as noted in our previous discussion on this topic, when foreign banks assist U.S. taxpayers in committing tax evasion, a lack of physical nexus is irrelevant.

Wegelin guessed wrong and paid the ultimate price. In January 2013 the bank plead guilty to facilitating U.S. tax evasion by helping over 100 U.S. taxpayers hide more than $1.2 Billion in undeclared assets between 2002 and 2011. In total, Wegelin was required to pay the U.S. about $74 million in restitution, fees, and penalties and was ultimately forced to close. We previously reported on Wegelin’s indictment here and the final penalty issued to Wegelin here.

The success of the OVDP is unquestionably influencing the IRS’s continued focus on tracking down individuals involved in illegal offshore tax evasion. Following UBS AG’s deferred prosecution agreement, the flood gates opened for voluntary disclosure, resulting in the IRS collecting a treasure trove of information and forcing approximately 38,000 disclosures and well over $5 billion in taxes, interest, and penalties. Undoubtedly, the huge volumes of information and disclosures in the wake of the UBS AG indictment are leading to increased identification of key players and institutions that facilitate illegal offshore account activity for U.S. taxpayers.

The continued success of this program has clearly led the IRS to keep the OVDP active indefinitely; see the IRS’s announcement regarding the program remaining open indefinitely here. The IRS’s commitment to the initiative is clear; it seems to have found a formula for promoting disclosure of hidden foreign accounts that is working and it has no intentions of easing up.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who have availed themselves of the IRSs voluntary disclosure program. We will continue to monitor the development of this issue, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at contact@fuerstlaw.com.

If finalized, this proposed order would reclassify sunlamp devices from a class I (low risk) device to a class II (moderate risk) device requiring premarket notification and stricter controls. FDA’s authority to reclassify a device is based on section 513(e) of the Food, Drug, and Cosmetic Act (“FDCA”) which allows FDA to reclassify a device based upon “new information” through an administrative order. As the proposed order explains, “new information” includes information developed as a result of reevaluation of the data before FDA when the device was originally classified. If finalized, this order will heighten the regulatory requirements for tanning bed manufacturers and distributors doing business in the United States.

I. Regulatory History of Sunlamps

The proposed order takes us through the regulatory history of sunlamps. In 1977, the review panels evaluating sunlamp devices recommended that dermatologic UV lamps (intended for use in treatment of dermatologic disorders or for tanning) be deemed class II devices. The reason for this classification being that the panels perceived there to be risks that could not be mitigated with general controls. The identified risks included burns to skin and eyes, aging of skin, skin cancer, and photosensitivity. FDA agreed with the panels’ recommendation. However, in FDA’s final rule, published June 24, 1988 (53 Fed Reg 23856), FDA separated UV lamps for dermatological disorders and UV lamps for tanning. At that time, FDA classified the lamps for dermatological disorders as class II and postponed classification of tanning lamps to consider issuing a proposal classifying them as class I. FDA eventually finalized that classification in November of 1990 (55 Fed Reg 48436). In 1994, FDA amended that classification and published a final rule exempting 148 class I devices from premarket notifications with some limitations, including UV lamps for tanning (59 Fed Reg 63005).

Classifying sunlamp products for tanning as class I devices meant FDA determined that manufacturer premarket notifications for these devices were necessary to protect the public health at that time. In its new proposed order, FDA notes that “[p]rior to the issuance of the 1994 exempting UV lamps for tanning from premarket notification submission, some manufacturers of UV lamps for tanning had already submitted 510(k)s and received clearance for their devices.” Should this proposed order be finalized, device manufacturers may use those devices as predicate devices for future 510(k) submissions.

II. Stricter Classification – 510(k) Process

FDA requires a premarket notification submission (a “510(k)”) for class II medical devices, i.e. devices that are moderate risk and require special controls. Class I, or low risk devices, only require general controls and are not required to submit anything to FDA to begin marketing. During the 510(k) process, FDA reviews technological characteristics, performance, intended use, and labeling of medical devices to ensure the devices are “substantially equivalent” to legally marketed predicate devices before they enter the market. The 510(k) process can be described as a “piggybacking” system with one device piggybacking on the FDA clearance of another, similar device. As FDA explains in the proposed order:

Substantial equivalence requires that a new device must have (1) the same intended use as legally marketed predicates, and (2) either the same technological characteristics as a legally marketed predicate, or if there are significant differences, the differences must not raise new questions of safety and effectiveness and the performance data must demonstrate that the new device is at least as safe and effective as the legally marketed predicate device. (See section 513(i) of the [FDCA].) This assures that new devices that differ significantly in terms of safety and effectiveness from devices already legally on the market will be subject to the more rigorous premarket approval requirement.

In its proposed order, FDA is proposing this heightened classification because it has identified several risks related to UV lamps for tanning. These risks are similar to those identified in 1977 and include increased skin cancer risk, ocular risk, burns to the skin, skin damage, transmission of infectious disease due to improper cleaning, and others. FDA cites a growing body of literature on the association of skin cancer with use of sunlamp devices.

III. Proposed Reclassification and Special Controls, Including Labeling Requirements

FDA is proposing that sunlamp products be reclassified from class I (general controls) to class II (special controls). FDA reasons that general controls alone are insufficient to provide reasonable assurance of safety and effectiveness. FDA has identified special controls it believes will be sufficient to ensure safety and effectiveness for these devices. These special controls include, among others, performance testing, demonstration of mechanical safety, demonstration of electrical safety and electromagnetic compatibility, and specific product labeling.

The proposed labeling requirement includes several warnings. First, it would discourage use of sunlamp devices to those under the age of 18 and those with a personal history or family history of skin cancer. Additionally, the labeling would include a warning that regular users of these types of devices be regulatory evaluated for skin cancer. FDA’s proposed order also suggests that labeling requirements include warnings related to transmission of infectious disease through improper cleaning would mitigate that risk. Furthermore, FDA proposes that a warning be included that these devices should not be used by those with skin lesions or open wounds. Should this proposed order take affect and these warnings be required on tanning beds, it will be interesting to see if there is actually a decrease in tanning bed use by young people. With these warnings, FDA is merely discouraging sunlamp use by young people and not prohibiting their use by anyone under the age of 18. The efficacy of these warnings is called into question even by the proposed order. The FDA cites a study in its proposed order that reported “47 percent of college student had reported using a sunlamp product during the last year because it improved their appearance, despite 92 percent being aware of potential health risk.” (Emphasis added.) That study alone indicates that young people will likely continue the use of tanning beds despite warnings regarding health risks.

IV. Potential Effects on Industry

FDA will take comments on this proposed order for the next 90 days. Any member of the industry or general public may comment on it. Should FDA move forward with finalization of this order, there will be major changes to the regulatory framework governing the tanning bed industry. Upon finalization of this order, FDA has expressed that it expects sunlamp manufacturers to submit a 510(k) and comply with the special controls within one year of the date of the final order or cease marketing their devices. This expectation will apply to sunlamp devices already on the market, meaning that manufacturers of sunlamp devices currently sold in the United States without 510(k) clearance would be expected to obtain 510(k) clearance before continuing sales. Due to the protracted time periods the 510(k) process can take, tanning bed manufacturers should be prepared to move forward with a 510(k) submission if finalization of this rule occurs in order to avoid delays in distribution.

Fuerst, Ittleman, David & Joseph, PL will continue to track and report on FDA’s position related to these types of devices. For more information, please contact us via e-mail at contact@fuerstlaw.com or via telephone at (305) 350-5690.

On April 30, 2013, the United States Department of Justice issued a “John Doe Internal Revenue Code” summons to Wells Fargo Bank, as a provider of correspondent bank services for Canadian Imperial Bank of Commerce’s First Caribbean International Bank (“FCIB”), requiring it to turn over records relating to accounts held at FCIB by United States Taxpayers between 2004 through 2012.  The issuance of this summons is one of the aftershocks of the UBS AG debacle that destroyed Switzerland’s bank secrecy laws. [A discussion on this issue can be found here]. You can read more about the Department of Justice’s John Doe summons to Wells Fargo here.

Because First Caribbean operates in 18 Caribbean countries, it is inevitable that the issuance of the Department of Justice’s summons will reveal thousands upon thousands of U.S. account holders who reside in the United States, and particularly South Florida.  It is also inevitable that some of these U.S. account holders will be prosecuted for failing to disclose their accounts overseas.  Additionally, it is virtually certain that the Department of Justice will start issuing John Doe summonses to other banking institutions that maintain correspondent accounts.

Because of the urgent nature of this issue for holders of foreign accounts who may be unaware of their reporting requirements, and the consequences of failing to report their foreign accounts, over the course of several articles we will present a comprehensive overview of the IRS’s most recent efforts to thwart offshore tax evasion and raise money for the government through tax collection efforts. Additionally, we will explore the intricacies of this issue attempt to explain exactly what the IRS is doing here.

In this article, Part I includes a discussion of what exactly a “John Doe Summons” is and what effects the summons issued to FCIB may have on foreign account holders. Part II of this article focuses on immediate actions expected “violators” can/should take to insulate themselves from prosecution.

Part I:
The John Doe Summons: Who is John Doe?

So what exactly is a John Doe Summons and why is it particularly dangerous for US taxpayers with accounts abroad?

First, “[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, [or] determining the liability of any person for any internal revenue tax…”, the Internal Revenue Code empowers the Secretary of the Treasury, or its delegate, “[t]o summon the person liable for tax or required to perform the act…or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper…to produce such books, papers, records, or other data, and to give such testimony…as may be relevant or material to such inquiry.” 26 U.S.C. §§ 7602(a), 7701(11). The IRS power to summon extends even to those situations in which the identity of the taxpayer is unknown. 26 U.S.C. § 7609(f). Where the IRS seeks to summon information that pertains to an unknown taxpayer and is in the custody of a third party, the United States must first make a showing to a court that: 1) its investigation relates to an ascertainable class of persons; 2) a reasonable basis exists for the belief that these unknown taxpayers may have failed to comply with Internal Revenue Laws; and 3) the United States cannot obtain the information sought from another readily available source. Id.

The unknown or unspecified name of the target taxpayer gives rise to the notion of “John Doe.” The IRS defines a John Doe Summons as “any summons where the name of the individual taxpayer under investigation is unknown and therefore not specifically identified.” John Doe summonses are utilized by the IRS primarily to identify individuals participating in activities that would violate internal revenue laws or the Bank Secrecy Act and have most recently been utilized to uncover information regarding foreign accountholders who are illegally failing to report their offshore assets under U.S. tax law. Because the summons allows the IRS to seek information about unspecified taxpayers, the IRS commonly uses them as a means to collect information on an extraordinarily broad scale from financial institutions wherever located.

Although maintaining an offshore account is perfectly legal, United States tax law requires that a Foreign Bank Account Report or (“FBAR”) be filed with the United States Treasury for any citizens holding foreign accounts with balances exceeding $10,000.00 at any time during the calendar year. Under the FBAR regulations, deliberate failure to report a foreign account with a value that exceeds the threshold amount can result in penalties up to 50 percent of the amount in the account at the time of the violation. Of late, the IRS has been making concerted efforts to ensure that taxpayer who evade these reporting requirements are punished and John Doe Summonses have been the IRS’s weapon of choice.

In this most recent summons, IRS served Wells Fargo’s San Francisco branch which maintains correspondent accounts for the Barbados-based FCIB. Correspondent accounts are bank deposit accounts maintained by one bank for another. Typically, correspondent accounts are held by foreign banks without branch offices in the U.S. that do business in U.S. dollars. The United States Department of Justice is expecting that this summons will produce significant information about the account holders as well as the amount of money moved through their accounts. Beyond the identification of tax evaders, the John Doe summons also requires Wells Fargo to produce its own internal anti-money laundering compliance reports.

In a U.S. Department of Justice Press release found here, Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division, stated as follows: “The Department of Justice and the IRS are committed to global enforcement to stop the use of foreign bank accounts to evade U.S. taxes…This John Doe summons is a visible indication of how we are using the many tools available to us to purse this activity wherever it is occurring. Those who are still hiding should get right with their country and fellow taxpayers before it’s too late.” IRS Acting Commissioner Steven T. Miller went on to say that “[t]his summons marks another milestone in international tax enforcement…our work here shows our resolve to pursue these case in all parts of the world regardless of whether  the person hiding the money overseas chooses a bank with no offices on U.S. soil.”

The summons to Wells Fargo naturally begs the question of whether the U.S. government can assert jurisdiction over foreign banks that have no branches or employees within the United States. In response, the U.S. government maintains that despite a bank employee never stepping foot on U.S. soil, if a foreign bank’s employees knowingly assist a U.S. taxpayer evade tax filing obligations, the bank itself can and will be held criminally liable. The way the U.S. Department of Justice sees it, if there is any conspiracy to violate U.S. tax law, the fact that the conduct took place overseas is irrelevant. IRS’s success in pursing illegal offshore account activity in Switzerland which led to the closure of the historic Swiss bank Wegelin & Co., which we previous discussed here and here, is instructive on this point. What is even more damning for FCIB is that its correspondent accounts held at Wells Fargo’s San-Francisco branch further established the nexus – however limited – between it and the U.S. 

This John Doe summons will result in significant exposure to prosecution for foreign account holders, banks, bankers, and account facilitators such as insurance companies, lawyers, accounts and investment advisors who the IRS has suspected of facilitating tax evasion in the United States. Given the nature of the new international information sharing agreements, the disclosure of account names and information is becoming more frequent and intrusive. For example, the Foreign Account Tax Compliance Act  (“FATCA”) was implemented in 2010 to encourage non-U.S. financial institutions to “voluntarily” disclose their U.S. account holders to the IRS and requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest directly to the IRS. [See IRS press release here.]

These IRS initiatives to identify individuals evading taxes are moving forward, and as such, foreign account holders and those associated with facilitating those accounts both domestically and abroad will need to prepare themselves to quickly become compliant with U.S. tax laws or prepare for a legal battle with the IRS.

Part II:
The Offshore Voluntary Disclosure Program

We now look more closely at the IRS’s Offshore Voluntary Disclosure Program and what steps suspected holders of unreported offshore accounts can immediately take to mitigate penalties, fines, and possible criminal prosecution.

In 2009, as a means of encouraging U.S. taxpayers to report previously undisclosed income, the IRS created the first offshore disclosure initiative. This initiative was coined the Offshore Voluntary Disclosure Program (“OVDP”) and was a response to the IRS prosecution of wealthy Americans who evaded taxes with the help of UBS AG (located in Switzerland) along with information obtained from disclosures of former UBS AG banker Bradley Birkenfeld in 2008.[ We have previously blogged on the OVDP here, here, and here] This program was considered a success, reportedly collecting over $4 Billion between its inception in 2009 and 2011 and nearly $5 Billion to date. Furthermore, the OVDP has resulted in over 34,500 disclosures and led to information that has assisted the IRS in furthering its investigation into other offshore tax jurisdictions. [See IRS press release on OVDP success here.] Consequently, in 2012, the IRS decided to eliminate any deadlines and kept the program as an open ended vehicle for investigating tax evasion and collecting tax revenue.

The OVDP currently focuses on the main vehicles of offshore tax evasion – unreported foreign financial accounts and unreported foreign entities, examples of which include depositing unreported and untaxed income into foreign accounts and/or omitting investment income earned from the foreign account on tax returns.  Under the OVDP, current tax evaders are encouraged to report previously undisclosed foreign accounts through reduced penalties and elimination of criminal prosecution risks for evasion.

For example, by entering into the OVDP, the IRS will waive FBAR non-compliance penalties. Foreign Bank Account Report (“FBAR”) violations range from $10,000 per account per year of unreported foreign bank accounts exceeding $10,000 during any point in a calendar year to the greater of $100,000 or 50 percent (50%) of the maximum balance of the foreign account exceeding $10,000. In contrast, the ODVP rates general degrees of willful tax evasion, and penalizes tax evaders based upon the underlying severity of the evasive acts. The threshold limits are a respective 27.5%, 10%, and 5% of the maximum foreign account balance based on the three different levels of willfulness.

Beyond its focus on FBAR violations, OVDP also looks to unreported foreign entities. Tax evasion schemes created through sophisticated foreign trusts, corporations, and partnerships that do not report this foreign entity to IRS on annual tax returns are susceptible to between $10,000 and $50,000 in penalties. OVDP however, affords the same 27.5%, 10%, and 5% mitigated penalties for disclosures of foreign business entities.

Individuals and businesses fearful of being identified of illegally evading taxes through undisclosed foreign financial accounts must ultimately assess the prospective risk of penalties and/or criminal prosecution when reviewing their foreign accounts and should consider whether the OVDP is their best option for solving their tax issues. When making this assessment, foreign account holders should be mindful of the following rules under OVDP:

• The 27.5%, 10%, and 5% penalties apply to all assets related to tax evasion.
• The OVDP only covers the most recent 8 tax years.
• The OVDP penalties apply to all tax evasion-related assets that may be both directly and indirectly owned by the tax payer. i.e. the beneficiary of a foreign trust account  that maintains $500,000 will be applied under OVDP the same as a $50,000 car purchased with funds from a non-compliant FBAR account.

When making this final decision we suggest that foreign accountholders contact a competent professional with specialization in offshore disclosures, FBAR compliance, and asset protection to ensure that the accountholder is making the decision that is best suited for his or her specific financial situation.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who have availed themselves of the IRSs voluntary disclosure program. We will continue to monitor the development of this issue, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at  contact@fuerstlaw.com.