Federal Tax Crimes

Posted: 24 Sep 2018 08:33 AM PDT

DOJ announced here another sentence related to offshore accounts.  Marc Edward Mani, a prominent Beverly Hills plastic surgeon, was sentenced for one plea count of FBAR violation.  I previously reported his plea:  Another Plea Agreement for Offshore Account (7/29/17; 7/30/17), here.  I also offer the following documents:

§ The Defendant’s Sentencing Memo, here.

§ The Government’s Supplemental Memo re Restitution, here.

§ The Judgment, here.

Excerpts from the sentencing press release:

Mani pleaded guilty In July 2017 to one count of failing to file a foreign bank and financial account report (FBAR) for the 2013 tax year. When he pleaded guilty, Mani admitted failing to file FBARs with the Treasury Department for both the 2012 and 2013 tax years. He also admitted that he failed to report on his federal income tax returns the vast majority of the approximately $1.28 million in foreign income he earned in Dubai for the years 2012, 2013 and 2014.

Mani began to travel to Dubai in 2011 to perform plastic surgery for a foreign medical center. Mani’s accountant, who was aware that Mani was earning foreign income, informed him that he would be required to report to U.S. authorities any foreign bank accounts under his control. In 2012, Mani opened an account with a Dubai-based bank and began depositing income he earned from abroad into this account. He liquidated the account in 2013, when it held more than $400,000 in foreign currency.

JAT Comments:

1.  The Governments Sentencing Recommendation.

Based on a tax loss based on the tax sentencing guidelines of 13 after a 2-level reduction for 5K1.1 substantial assistance.  The indicated range for the sentence at the 13 level is 12-18 months.  The Government recommended a sentence of 14 months.  The Government summarizes its key support for the recommended sentence as follows:

VI. SENTENCING RECOMMENDATION OF THE UNITED STATES OF AMERICA

18 U.S.C. § 3553(a)(1) requires the Court to consider the nature  and circumstances of the offense and the history and characteristics of defendant. The provisions of this section further instruct that federal sentences should reflect the seriousness of the crime, promote respect for the law, and deter others from committing the same crime. 18 U.S.C. § 3553(a). Consideration of these factors together weighs in favor of a substantial term of incarceration for defendant. The government believes that a sentence of fourteen months incarceration comports with these objectives.

Defendant’s conduct is precisely the type of greed-motivated financial offense that warrants incarceration.  Defendant earned hundreds of thousands of dollars in income working in a foreign country, and deposited a large portion of this income in a foreign bank account. Defendant had a clear duty to report this income on his tax returns, and disclose his foreign bank account on an FBAR form. Indeed, defendant was explicitly warned, on multiple occasions and by multiple individuals, that he had a legal duty to correctly report his foreign income and adequately disclose his foreign bank accounts. Defendant willfully ignored this obligation, filing false tax  returns with the IRS and failing to file FBAR forms disclosing his Mashreq Account. As a result, the United States suffered substantial tax losses. Such blatant disregard for the nation’s financial laws and regulations requires significant punishment.

In addition, the government notes that a substantial term of incarceration is supported by pertinent policy statements stressing the need for deterrence in the arena of criminal tax prosecutions. Specifically, the introductory commentary to section 2T1.1. of the Sentencing Guidelines provides as follows:

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation’s tax system. Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws. Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines. Recognition that the sentence for a criminal tax case will be  commensurate with the gravity of the offense should act as a deterrent to would-be violators.

U.S.S.G. 2T1.1 Introductory Commentary, November 2016. This policy has in turn been upheld by the Ninth Circuit. United States v. Orlando, 553 F.3d 1235 (9th Cir. 2009) (affirming an upward variance in a tax evasion case because it found that the guideline range “failed to capture tax crimes particular sensitivity to deterrence.”); United States v. Bragg, 582 F.3d 965 (9th Cir. 2009)(Remanding to the district court a probationary sentence in a tax-crime case where the district court expressed doubt that deterrence works in tax cases and noting that “Congress, in enacting the law, and the Sentencing Commission, in prescribing prison for tax offenses, set out a policy.”)

While the offense to which defendant has pleaded guilty is not a tax offense, defendant has admitted, as part of his plea agreement, to filing false returns for the years 2012, 2013, and 2014. These returns omitted income that defendant earned in a foreign country, and thus believed was beyond the notice of the IRS. Accordingly, the above-mentioned policy statements are clearly applicable to the current circumstances confronted by the Court.

Moreover, policy statements stressing the need for deterrence, apply with particular force in the context of foreign-earned income. Income generated outside of the United States frequently escapes the information reporting processes typically employed by the IRS to identify underreporting. Foreign third-party payors may not generate information returns (W-2, 1099, etc.) or be subject to the information gathering tools employed by the IRS. Accordingly, voluntary self-reporting of foreign income by United States taxpayers is particularly crucial, given the limited ability of the IRS to identify omitted income. Where, as here, a taxpayer makes the conscious decision to underreport his foreign income under the mistaken belief that such income may escape the notice of the IRS, and is subsequently discovered, it is crucial that the Court impose a sentence sufficient to deter others from engaging in similar criminal conduct. A significant sentence of imprisonment is imperative to this objective.

2.  The Defendant’s Sentencing Recommendation:

Mani’s sentencing memo argues for probation.  Early in the memo, the following key points are made (bold face in the original):

● Dr. Mani is a 50-year-old father of a 14-year old daughter (Erica), who, prior to his offense conduct in this case, has led an honest, ethical, productive, law-abiding, and community-oriented life.

● The activities that form the offense conduct in this case involved one foreign bank account opened in Dubai in Dr. Mani’s own name (not in the name of a foreign company or foreign trust or at multiple foreign banks as is typical for these cases), and the account was opened for three years and closed before the government’s investigation begun. While Dr. Mani failed to report all the income earned in Dubai for three years, there is no allegation that he failed to accurately report all of the income earned domestically in his Southern California practice nor committed any other offense related to his practice.

● Dr. Mani has an exceptional lifelong history of service as a surgeon, teacher, mentor, and philanthropist.

● Dr. Mani accepted full responsibility for his actions at the very onset of the investigation, entered into a pre-indictment plea agreement, and fully, truthfully, reliably and timely cooperated with the government’s investigation of his accountant JB.

● Unlike many defendants in criminal tax cases that only start paying their taxes and interest owed after being sentenced, Dr. Mani entered into a closing agreement with the IRS for all years at issue and has paid in full prior to sentencing the entire tax ($437,878) and interest ($128,239) owed. By doing so, Dr. Mani has made the IRS, the victim of his tax offense, completely whole. In addition, unlike many criminal tax defendants, Dr. Mani has paid all the civil fraud and FBAR penalties assessed for his actions — $511,802 – which represents a financial penalty of more than 100% of the taxes originally owed. 

● In addition to this very severe financial penalty, Dr. Mani already has been punished in this case by suffering irreparable damage to a reputation built over a lifetime. Dr. Mani will be a convicted felon for the rest of his  life with all the collateral restrictions that imposes.

● The Recommended Sentence is necessary to avoid unwarranted sentencing disparities with those convicted of similar conduct. In particular, since 2009, the government has very actively prosecuted taxpayers with unreported offshore accounts. The overwhelming majority of those taxpayers used a variety of financial structures to hide their foreign accounts from the U.S. government, including foreign companies and foreign trusts. These taxpayers had multiple accounts in multiple banks under different names, often for over a decade, and transferred their funds often to avoid detection. Many of the taxpayers had foreign accounts with well more than $1 million in them. In contrast, Dr. Mani had one foreign account at one foreign bank in his own name open for three years with approximately $400,000 in it at its height. At sentencing, the majority of the over 70 taxpayers who have been prosecuted in this wave of prosecutions received nonimprisonment sentences including conditions of home detention, community service, and halfway house. The Recommended Sentence would fit squarely within the spectrum of sentencing of similar defendants, particularly given the more egregious conduct many of them engaged in.

● Dr. Mani poses no risk to the public from further criminal conduct; and

● A sentence of imprisonment is not needed to provide specific or general deterrence. With respect to specific deterrence, given that Dr. Mani’s offense was over four years ago and he has done everything in his power to make amends for his misconduct, there is no indication that a sentence of imprisonment beyond the Recommended Sentence is necessary to deter Dr. Mani from committing future crimes. Similarly, with regard to general deterrence, the government’s own IRS study demonstrates that a sentence of imprisonment is not required to promote general deterrence provided that the defendant has been criminally prosecuted and at least receives a probationary sentence.

3.  A Quibble.

Mani’s sentencing memo opens:  “There is an old adage that there are two types of individuals who commit crimes: good people who make mistakes and bad people who get caught.”  I googled (this saying/adage as follows:  “good people who make mistakes and bad people who get caught.”  There were no google results, but some similar sayings came up.  And, taking the statement as made in the opening, it is an odd one.  It creates two categories for people who commit crimes.  The good and the bad.  But, it presents only the bad who get caught.  My experience is that there are many bad who do not get caught.  So, perhaps the saying really ought to be “good people who make mistakes and bad people.”  And, maybe the same expansion can apply to the good people.  But, subject to that quibble, the opening statement is forceful because it projects that Mani’s attorneys are going to make the case that Mani is in the first category.  And, given the spectrum of sentencing urged by the parties–14 months by the Government and 0 months argued by Mani’s attorneys, Mani’s attorneys partially succeeded because the sentence was one year and one day (which is the minimum sentence that can qualify for good time credit), translating into a sentence of 319 days.  See Illustration of Why a 366 Day Sentence is better than 365 Days (2/20/15), here.

4.  Use of Tax Guidelines for FBAR Sentencing.

The parties presented only the tax sentencing calculations under SG 2T1.1 for the Base Offense Level.  This is curious because of the Government’s recently announced position that the 2S1.1 Guidelines applied to FBAR violations.  See Sentencing Guidelines Analysis for FBAR Convictions (Federal Tax Crimes Blog 10/31/17), here; and andAnother FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (Federal Tax Crimes Blog 10/27/17), here.  I could not find the Court’s calculations on Pacer, but since it clearly varied to get to one year and one day, I am not sure the Court would have imposed a different sentence whichever Guidelines calculations applied.

5.  Another Quibble.

One thing that I focused on for the first time is that the press release describes the case as “the product of an investigation by IRS Criminal Investigation.”  I suspect that is standard language, but it strikes me as somewhat odd that a criminal case is a “product” like any other commercial offering.  Merriam-Webster (online here) defines product as:

Definition of Product
1 : the number or expression resulting from the multiplication together of two or more numbers or expressions
2  a  (1) : something produced
especially : COMMODITY sense 1
(2) : something (such as a service) that is marketed or sold as a commodity
b : something resulting from or necessarily following from a set of conditions
a product of his environment
3 : the amount, quantity, or total produced
4 : CONJUNCTION sense 5

(Note that the 1 and 5 used in paragraphs 1 and 4 are linked items to other definitions.)  I think the applicable definition in M-W’s categories is 2.

Posted: 24 Sep 2018 06:58 AM PDT

I have just returned from a foreign trip and have had the opportunity to review the Manafort plea documents.  Those documents are:  (i) the plea agreement, here; (ii) the Statement of Offenses and Other Acts, here; and (iii) the Superseding Criminal Information, here.

Some comments:

1.  The plea agreement (par. 1) requires that Manafort plead to two conspiracy offenses. The first conspiracy offense (Count One) is the type commonly required in major tax crimes conspiracy cases.  Readers will recall that the conspiracy statute describes two types of conspiracy — an offense conspiracy and a defraud conspiracy (commonly called in tax cases a Klein conspiracy).  See 18 USC 371, here (“either to commit any offense against the United States, or to defraud the United States, or any agency thereof”).  The Superseding Criminal Information to which Manafort pled as required by the plea agreement is for both the offense conspiracy (naming the offenses) and a defraud conspiracy, stating the defraud conspiracy first (see Count One, par. 61, “knowingly and intentionally conspired to defraud the United States by impeding, impairing, obstructing, and defeating the lawful governmental functions of a government agency, namely the Department of Justice and the Department of the Treasury.”)  Technically, I think (but have not updated my thoughts on this), the Government might have charged the offense and defraud conspiracies separately, but I have not seen that in tax cases where both were pled, particularly where both offenses are within the same range of conduct.  In many tax cases, only one of the two types of conspiracies is charged even where the indictment could have included both types.  For further nuance, given the Sentencing Guidelines keying the recommended sentence to tax loss and including relevant conduct tax loss, not charging any crime within the scope off the defendant’s conduct may not affect the actual calculations.

2.  Manafort agrees not to appeal the conviction verdicts in the ED VA case (plea agreement par. 1), and the Government agrees not to retry to counts on which the jury hung in the ED VA case.

3.  The convictions in the ED VA case will be sentenced separately.  I have written on sentencing issues in the ED VA case:  See Paul Manafort Verdict – On Relevant Conduct (Federal Tax Crimes Blog 8/21/18), here.  I suspect that, at some level, the sentences will be coordinated so that, between them, they reach an appropriate sentence based on Manafort’s overall conduct.  I note in this regard that all of the counts would have been charged in the DC case except that some crimes required venue in ED VA rather that DC and Manafort refused to waive venue so that all could proceed in a single indictment.  If there had been a single case, the sentencing judge in that case would have been able to insure a sentence based on the overall conduct without any potential differences that might be introduced by having two judges sentencing for various pieces of the conduct.  Importantly, in respect to venue, the Government can pursue the ED VA counts on which the jury hung in DC because, in paragraph 3 of the plea agreement, Manafort agrees to waive venue as to those charges in ED VA should he violate the agreement.  (I suppose that is to permit the Government to have only one more trial rather than two if he violates the plea agreement, but I also wonder whether the Government just did not want to re-try the hung counts before Judge Ellis (see The Manafort Trial – Judging the Judge’s Conduct (Federal Tax Crimes Blog 8/17/18), here).)

4.  Because nontax crimes are the gravamen of the case, the plea agreement (par. 4(a)) makes the sentencing Guidelines Base Offense Level calculations under 2S1.1(a). I have noted before that Base Offense Level calculations under 2S1.1(a) are likely much higher than under the tax Guidelines in SG 2T1.1.  See Sentencing Guidelines Analysis for FBAR Convictions (Federal Tax Crimes Blog 10/31/17), here; and and Another FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (Federal Tax Crimes Blog 10/27/17), here.

5.  The Government agrees (par. 4(b)) to an acceptance of responsibility downward adjustment.

6.  The Criminal History calculation (not usually an issue in most tax crimes cases) must take account of the convictions in ED VA.  (Plea agreement par. 4.C.)  I just quote that in full:

Based upon the information now available to this Office, your client has no criminal convictions, other than in the Eastern District of Virginia. Your client acknowledges that depending on when he is sentenced here and how the Guidelines are interpreted, he may have a criminal history. If additional convictions are discovered during the pre-sentence investigation by the United States Probation Office, your client’s criminal history points may increase.

7.  The estimated applicable guidelines sentencing range is 210 months to 262 months.  (See par. 4.D.)  However, with only two counts of conviction, the maximum sentence is 10 years.  Even as capped, presumably, the sentencing judge might further reduce the sentence for (i) Manafort’s cooperation under SG 5.K.1 or (ii) the Court’s Bookerdiscretion.  The plea agreement says — perhaps without meaningful effect — that “any downward departure or adjustment” from the Guidelines calculations “is not warranted” and Manafort will not seek such except for cooperation  (Par. 4.D.)

8. Manafort must “cooperate fully, truthfully, completely, and forthrightly with the Government and other law enforcement authorities identified by the Government in any and all matters as to which the Government deems the cooperation relevant.”  (Plea agreement par. 8.)  I found this stipulation in this obligation interesting:

Your client acknowledges and understands that, during the course of the cooperation outlined in this Agreement, your client will be interviewed by law enforcement agents and/or Government attorneys. Your client waives any right to have counsel present during these interviews and agrees to meet with law enforcement agents and Government attorneys outside of the presence of counsel. If, at some future point, you or your client desire  to have counsel present during interviews by law enforcement agents and/or Government attorneys, and you communicate this decision in writing to this Office, this Office will honor this request, and this change will have no effect on any other terms and conditions of this Agreement.

I suppose that Manafort is trying to avoid having to pay expensive counsel to prepare and attend such interview.

9.  Manafort waives rights to seek Government information and documents under FOIA and the Privacy Act “for the duration of the Special Counsel’s investigation.”  (Plea agreement par. 10.F.)

10.  The Superseding Criminal Information contains broad allegations.  The following are the ones I found interesting because they relate to the tax violations (but readers should keep in mind that nontax crimes are the gravamen of the indictment):

2.  * * * MANAFORT hid the existence of the foreign companies and bank accounts, falsely and repeatedly reporting to his tax preparers and to the United States that he had no foreign bank accounts.

4. In furtherance of the scheme, MANAFORT used his hidden overseas wealth to enjoy a lavish lifestyle in the United States, without paying taxes on that income. * * * *

5.  * * * MANAFORT cheated the United States out of over $15 million in taxes.

26. * * * In or about 2012 through 2014, MANAFORT directed more than 2 million euros to be wired from at least four of his offshore accounts to pay secretly the Hapsburg Group. To avoid European taxation, the contract with the Hapsburg Group falsely stated that none of its work would take place in Europe.

55. * * * The Bank Secrecy Act requires these reports because they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings. The United States Treasury’s Financial Crimes Enforcement Network (FinCEN) is the custodian for FBAR filings, and FinCEN provides access to its FBAR database to law enforcement entities, including the Federal Bureau of Investigation. The reports filed by individuals and businesses are used by law enforcement to identify, detect, and deter money laundering that furthers criminal enterprise activity, tax evasion, and other unlawful activities.

57. Furthermore, in each of MANAFORT’s tax filings for 2007 through 2014, Manafort represented falsely that he did not have authority over any foreign bank accounts. MANAFORT had repeatedly and falsely represented in writing to MANAFORT’s tax preparer that MANAFORT had no authority over foreign bank accounts, knowing that such false representations would result in false MANAFORT tax filings.

11. The tax and FBAR crimes are discussed in paragraphs 38-42 of the Statement of the Offenses and Other Acts.

12. Consistent with this plea agreement, Manafort filed a Notice that he would not file post-trial relief motions in the ED VA case.  (See Notice here.)

13.  The plea agreement does not mention the potential FBAR penalties which, of course, will be great (presumably the single 50% high amount guideline amount for willful penalty, but that guideline does allow for exceptions (in this case presumably higher amount(s)) in egregious cases.

14. For a good discussion, see Ellen Podgor, Manafort: The Fall of a Domino Can Trigger Others to Fall (White Collar Crime Prof Blog 9/15/18), here.