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Manafort Indictment Alleges High-End International Money Laundering and Tax Fraud Involving Offshore Accounts

As the world now knows, an indictment against Paul Manafort, Jr., a former campaign chairperson for now-President Donald Trump, and Manafort’s associate, Richard Gates III, was unsealed yesterday.  Brought by Special Counsel Robert S. Mueller, the indictment alleges that Manafort and Gates, while working as political consultants and lobbyists, acted as agents of the Government of Ukraine and other foreign entities; failed to properly register and report as such agents; generated tens of millions of dollars from this work; laundered these earnings through various U.S. and foreign entities and bank accounts; and hid these same earnings from the Internal Revenue Service (“IRS”) and the Financial Crimes Enforcement Network (“FinCEN”).

This post will discuss some legal aspects of the specific charges. This post will not delve into any potential political ramifications of the indictment, or speculate as to what the indictment may or may not supposedly reveal regarding the work of the Special Counsel in general.  Standing alone, the indictment is a fascinating document for those interested in money laundering and international tax evasion issues, and highlights the potentially powerful overlap of money laundering charges, tax fraud charges, and alleged violations of the Bank Secrecy Act (“BSA”).

In particular, we will discuss:

  • The charges involving the “international” prong of the money laundering statute, a rarely used charge;
  • The charges under the BSA alleging failures to file Reports of Foreign Bank and Financial Account, or FBARs – a charge which has become a staple in the government’s decade-long enforcement campaign against international tax evasion and undisclosed foreign accounts held by all sorts of U.S. taxpayers; and
  • How the indictment’s allegations conform with the recent regulatory emphasis on the alleged use of high-end real estate in the U.S. to launder illicit funds earned abroad.

The “International” Prong of the Money Laundering Statute: Unusual Breadth

Count Two of the indictment charges conspiracy to launder money, in violation of 18 U.S.C. § 1956(h). This is the only money laundering charge in the indictment. County Two alleges two alternative methods of laundering by the conspiracy: a more traditional theory of purely “domestic” money laundering, resting on alleged efforts to further a tax crime or conceal the source of the illicit proceeds at issue; and a less common theory of “international” money laundering, under 18 U.S.C. § 1956(a)(2).  It is upon this latter theory that we will focus, because it is a provision of the money laundering statutes that is rarely charged in practice (often because money laundering schemes involving foreign conduct almost invariably have some nexus with the U.S. which permits the use of more traditional money laundering theories).

Count Two specifically alleges that that the “Specified Unlawful Activity,” or “SUA,” which the the “international” money laundering scheme sought to promote is a violation by Manafort and Gates of the Foreign Agents Registration Act, or FARA, at 22 U.S.C. §§ 612 and 618. Stated otherwise, the international transactions sought to further an illegal scheme to not register and report lobbying and public relations work performed in the U.S. on behalf of foreign principles.

Section 1956(a)(2) applies to the international transportation or transfer of funds, and states in part that “[w]hoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States . . . with the intent to promote the carrying on of specified unlawful activity . . . shall be [guilty of a felony].”

This provision differs from the other money laundering provisions set forth in Section 1956(a) in that it requires the defendant to transport, transmit, or transfer funds either into or out of the United States, or attempt to do so. This provision also differs from the other money laundering provisions set forth in Section 1956(a) in this important respect: the crime apparently does not require the transaction of funds which previously were obtained through the SUA.  To that extent, it is much broader than the other provisions in the money laundering statute, which typically require the use of proceeds from a previously-completed SUA offense.

The statute requires parsing and careful reading. However, apparently none of the alternative intent requirements of Section 1956(a)(2) require the funds involved in the transaction to actually be SUA funds (although, as a practical matter, they often will be).  Indeed, Section 1956(a)(2)(A) does not even require the funds to represent the proceeds of any illegal activity; a transaction involving only funds derived from entirely legal sources can sustain a Section 1956(a)(2)(A) conviction.  Accordingly, courts have recognized that a Section 1956(a)(2)(A) charge can rest on the use of legitimately-earned funds, so long as the purpose of the transaction is to promote a SUA. See Cuellar v. United States, 553 U.S. 550, 128 S. Ct. 1994, 2001 n.3 (2008) (Section 1956(a)(2)(A) “punishes the mere transportation of lawfully derived funds”); United States v. Piervinanzi, 23 F.3d 670, 679-83 (2d Cir. 1994)(no “merger problem” under Section 1956(a)(2)(A) where wire transfer out of U.S. constituted both charged money laundering transaction and bank fraud being promoted because Section 1956(a)(2)(A) does not have a proceeds requirement); United States v. Hamilton, 931 F.2d 1046, 1052 (5th Cir. 1991) (drug cartel could violate Section 1956(a)(2)(A) by transferring legitimately-earned funds into the U.S. to provide working capital for drug business in the U.S.); United States v. O’Connor, 158 F. Supp. 2d 697, 726 n.52 (E.D. Va. 2001) (no merger problem under Section 1956(a)(2)(A) because the provision does not contain a proceeds requirement); BCCI, S.A. v. Khalil, 56 F. Supp. 2d 14, 54 (D.D.C. 1999) (Section 1956(a)(2)(A) has no proceeds requirement).

Section 1956(a)(2) is therefore a unique money laundering provision, and its versatility for the government is not always recognized. Count Two of the Manafort indictment appears to track this analysis, and does not allege that the underlying funds at issue actually represented SUA proceeds.  Although the above analysis may seem like a rarified distinction between the various money laundering provisions from which the government may select, the ease of the government’s proof could become important at trial, because the government will not be required under Section 1956(a)(2) to prove that specific transactions in fact flowed from a specific SUA — merely that the transactions were intended to help the overall scheme, regardless of the particular source of the funds at issue.

BSA Charges Involving the FBAR and Foreign Accounts: Undisclosed Assets and High-End Purchases

The indictment against Manafort and Gates does not depend entirely upon the money laundering conspiracy or the alleged underlying FARA violations. Even if the government fails to prove that the FARA was violated, or that the alleged money laundering transactions sought to promote FARA offenses or involved proceeds derived from FARA violations, the government still can turn to less esoteric allegations that represent relatively standard, albeit substantial, tax and BSA violations. Specifically, Count One alleges in part a conspiracy to defraud the U.S. Department of the Treasury, in violation of 18 U.S.C. § 371, and other counts allege various failures to disclose foreign bank accounts, in violation of in violation of 31 U.S.C. §§ 5314 and 5322(b).  The charges, and the detailed allegations of high-end personal expenditures which underlie them, could prove to be particularly helpful for the government at any trial.

Maintaining a foreign bank or other financial account is not inherently illegal. However, under the BSA, U.S taxpayers with certain foreign accounts are required to file a Form 114, Report of Foreign Bank and Financial Accounts, known as the FBAR.  Generally, the FBAR is an annual report required under the BSA that must be filed by U.S. taxpayers – whether individuals or entities – with an interest in, or signatory authority over, offshore accounts with a value above $10,000 at any point in the year. This form must be filed electronically through FinCEN.  A willful failure to file a required FBAR can be a felony.  Even if a foreign account did not generate any taxable income which had to be reported as income on a U.S. tax return, the account itself still needs to be reported on an FBAR if the amount held in the account during the reporting year exceeds $10,000.

These reporting requirements for U.S. taxpayers’ foreign financial accounts have been the subject of a historic and sustained enforcement campaign coordinated by the IRS and the U.S. Department of Justice.  This enforcement campaign, which began in earnest with the 2009 deferred prosecution agreement with Swiss banking giant UBS that required UBS to disclose certain client names, has involved numerous other prosecutions of taxpayers, professionals, and financial institutions, and has led to an extensive program involving many Swiss banks entering into non-prosecution agreements in exchange for paying heavy monetary penalties and cooperation with the U.S. government regarding their former U.S. clients.

In this way, the indictment against Manafort is akin to many charging documents which have been brought over the last several years against lesser-known defendants, and which allege, in one way or another, a sometimes lurid but fundamentally common tale of tax fraud and personal enrichment using nominee accounts and corporate structures.

The Manafort indictment reflects the potential impact of stand-alone BSA and tax charges, which – unlike most money laundering charges under Title 18 – never require proof of underlying criminality. The money at issue can be entirely “clean” because the charged BSA or tax crime turns on a lack of reporting of assets or income, however earned.  Thus these so-called “lesser” charges may be particularly difficult to defend against.  Moreover, the indictment devotes several pages to describe in detail numerous alleged wire transfers from abroad to make various high-end purchases within the U.S., totaling approximately $18 million. Regardless of whether these alleged purchases were made with “dirty” or “clean” money, many jurors may take a dim view of (for example) allegations that almost $1 million in expenditures occurred at an antique rug store using income which never was reported on a U.S. tax return, through a foreign account maintained on behalf of a shell company which never was reported on an FBAR by the U.S. person who controlled the account and the company. The indictment sets forth similar allegations regarding substantial expenditures on clothes, cars, etc. In this way, the indictment against Manafort is akin to many charging documents which have been brought over the last several years against lesser-known defendants, and which allege, in one way or another, a sometimes lurid but fundamentally common tale of tax fraud and personal enrichment using nominee accounts and corporate structures.

High-End Real Estate Transactions – Again

Finally, the indictment alleges that Manafort used Cyprus bank accounts which he controlled to wire millions of dollars in order to acquire properties in New York City and Arlington, Virginia (and, allegedly, spend millions of dollars more on related home improvements, landscaping and furnishings). Although these alleged transactions occurred years ago, they represent the exact sort of transactions which currently are the focus of intense government scrutiny: the potential use of high-end real estate transactions in the U.S. to launder illicit funds earned abroad (an evergreen topic about which we repeatedly have blogged herehereherehereherehere, and here).  It is this very same sort of alleged activity which is more recently the potential subject of special AML reporting duties for title insurance companies, due to Geographic Targeting Orders, or GTOs, issued by FinCEN regarding certain all-cash real estate purchases in specified markets.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VII, Number 304

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About this Author

 Peter D. Hardy, Ballard Spahr, Philadelphia lawyer, White Collar Defense lawyer, Internal Investigations, Consumer Financial Services, Privacy and Data Security, Tax
Partner

Peter Hardy advises corporations and individuals in a range of industries against allegations of misconduct—including tax fraud, money laundering, Bank Secrecy Act, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breach.

Mr. Hardy has extensive trial and appellate court experience. He oversees internal investigations, advises in potential disclosures to the Internal Revenue Service, and has litigated complex criminal matters at the trial and appellate levels. He...

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Marjoree Peerce Litigator  Criminal Defense Ballard Law FIrm
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Marjorie J. Peerce is a litigator, with a practice focus on white collar criminal defense, regulatory matters, and complex civil litigation. In her more than 30 years of practice, she has handled matters across the criminal and regulatory spectrum. She is Co-Managing Partner of the firm's New York Office.

Ms. Peerce appears in New York state and federal courts, as well as in federal districts around the country. She has handled criminal and regulatory investigations concerning, for example, violations of the Internal Revenue Code, securities fraud (including Bitcoins), the Foreign Corrupt Practices Act (FCPA), the Bank Secrecy Act, government contract procurement and subsidy fraud, mail fraud, bribery, accounting fraud, immigration fraud, health care fraud, environmental matters, commodities fraud, computer fraud and hacking, and criminal customs investigations. Ms. Peerce has handled a significant number of matters with the SEC, as well as with FINRA and the CFTC. She has handled numerous matters with the New York Attorney General in a variety of areas. She also regularly represents individuals in myriad matters in the Criminal and Supreme Courts in New York City.

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