Scott Michel Comments on Money Laundering Bill's Use in Tax Cases

A proposal under consideration in the Senate is facially targeted at money laundering, with only one overt mention of tax crimes, but it would provide a host of new tax enforcement tools.

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Scott D. Michel of Caplin & Drysdale [ ] said the new nominee crimes would frequently fit the factual situations seen in offshore account tax cases, especially those seen since 2008. “It is, for example, not uncommon for someone who is setting up a foreign bank account for the purposes of hiding money to conceal their American status,” Michel said.

Under current law, the government could potentially charge that sort of concealment as either part of a conspiracy to defraud the government under 18 U.S.C. section 371, or possibly as tax obstruction under section 7212(a), subject to the Supreme Court’s eventual ruling in the appeal of United States v. Marinello, 839 F.3d 209 (2d Cir. 2016), Michel said. The two new provisions would codify specific offenses for misrepresentations connected to either opening financial accounts or ordering transactions, he said.

Michel said the expansion of concealment money laundering from “specified unlawful activity” to “some form of unlawful activity” would go even further than adding international tax evasion to the list of specified unlawful activities. By including any unlawful activity that generated proceeds, the expansion of concealment money laundering could apply to any number of offenses, tax or otherwise, that are now not “predicate acts,” he said.

“It is sort of a bank shot way of turning tax evasion into a predicate act for concealment money laundering, whether or not it has international overtones,” he said.

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New Tools

Michel said the expansion of the correspondent account subpoenas would “overrule traditional international standards of comity that have governed cases like this for decades.” Normally, when the United States issues a Bank of Nova Scotia subpoena to a bank, that bank can raise violation of local law as a defense in a court proceeding to enforce the summons, he said.

So-called Bank of Nova Scotia subpoenas — named for In re Grand Jury Proceedings (Bank of Nova Scotia), 691 F.2d 1384 (11th Cir. 1982) — are served on a U.S. branch of a foreign financial institution to seek documents held at one of the bank's foreign locations.

Though the United States wins nearly all the cases weighing foreign privacy interests against domestic enforcement interests, under the current system “there is at least attention paid to the fact that the law of another sovereign jurisdiction is at issue,” Michel said. The subpoena expansion proposed in the bill would overrule that consideration in a situation in which the bank would face the possible loss of its ability to conduct business in dollars if it does not comply with the subpoena, he added.

While Congress may well decide to adopt the proposal, it should consider the loss of the procedure allowing courts to evaluate the possible conflict between U.S. and foreign law, according to Michel. Without that procedure, “I think the United States can increasingly expect to be on the receiving end of similar legal process in other jurisdictions,” he said.

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Tax Division’s Role

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The Justice Department’s Tax and Criminal divisions would have to coordinate jurisdiction of the new nominee crimes and the money laundering expansions, Michel said. “Tax Division Directive 128 provides that Tax Division authorization is required in any case where a federal prosecutor seeks to charge a money laundering or fraud offense based on conduct constituting a violation of tax law. It would be in the interest of tax administration for the Tax Division to continue to retain this authority even if this bill passes Congress,” he said.

It would be better to avoid a situation in which a large number of nontax prosecutors are bringing money laundering cases based on tax crimes because “the Tax Division exists to ensure uniformity and consistency and a high level of expertise in evaluating criminal tax prosecution,” Michel said. “That system has served tax administration well.”

“It would be a mistake if this new legislation became a mechanism to undermine the Tax Division’s authority by allowing prosecutors, whether in the Criminal Division or the U.S. Attorneys’ offices, to take on these new types of money laundering cases where tax offenses constitute predicate acts without Tax Division review and approval,” Michel said.

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Excerpt taken from the article “New Tools in Money Laundering Bill Could Be Used in Tax Cases” by Nathan J. Richman for Tax Notes.