International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Saturday, February 16, 2019

Former U.S. Counterintelligence Agent Charged With Espionage on Behalf of Iran; Four Iranians Charged With a Cyber Campaign Targeting Her Former Colleagues

Indictment Unsealed as U.S. Treasury Department Announces Economic Sanctions

Monica Elfriede Witt, 39, a former U.S. service member and counterintelligence agent, has been indicted by a federal grand jury in the District of Columbia for conspiracy to deliver and delivering national defense information to representatives of the Iranian government.  Witt, who defected to Iran in 2013, is alleged to have assisted Iranian intelligence services in targeting her former fellow agents in the U.S. Intelligence Community (USIC).  Witt is also alleged to have disclosed the code name and classified mission of a U.S. Department of Defense Special Access Program. An arrest warrant has been issued for Witt, who remains at large.

The same indictment charges four Iranian nationals, Mojtaba Masoumpour, Behzad Mesri, Hossein Parvar and Mohamad Paryar (the “Cyber Conspirators”), with conspiracy, attempts to commit computer intrusion and aggravated identity theft, for conduct in 2014 and 2015 targeting former co-workers and colleagues of Witt in the U.S. Intelligence Community.  The Cyber Conspirators, using fictional and imposter social media accounts and working on behalf of the Iranian Revolutionary Guard Corps (IRGC), sought to deploy malware that would provide them covert access to the targets’ computers and networks.  Arrest warrants have been issued for the Cyber Conspirators, who also remain at large.

The announcement was made by Assistant Attorney General for National Security John Demers, U.S. Attorney Jessie K. Liu for the District of Columbia, Executive Assistant Director for National Security Jay Tabb of the FBI, U.S. Treasury Secretary Steven Mnuchin, Special Agent Terry Phillips of the Air Force Office of Special Investigations, and Assistant Director in Charge Nancy McNamara of the FBI’s Washington Field Office.

“Monica Witt is charged with revealing to the Iranian regime a highly classified intelligence program and the identity of a U.S. Intelligence Officer, all in violation of the law, her solemn oath to protect and defend our country, and the bounds of human decency,” said Assistant Attorney General Demers.  “Four Iranian cyber hackers are also charged with various computer crimes targeting members of the U.S. intelligence community who were Ms. Witt’s former colleagues. This case underscores the dangers to our intelligence professionals and the lengths our adversaries will go to identify them, expose them, target them, and, in a few rare cases, ultimately turn them against the nation they swore to protect.  When our intelligence professionals are targeted or betrayed, the National Security Division will relentlessly pursue justice against the wrong-doers.” 

“This case reflects our firm resolve to hold accountable any individual who betrays the public trust by compromising our national security,” said U.S. Attorney Liu.  “Today’s announcement also highlights our commitment to vigorously pursue those who threaten U.S. security through state-sponsored hacking campaigns.”

“The charges unsealed today are the result of years of investigative work by the FBI to uncover Monica Witt’s betrayal of the oath she swore to safeguard America’s intelligence and defense secrets” said Executive Assistant Director for National Security Tabb.  “This case also highlights the FBI’s commitment to disrupting those who engage in malicious cyber activity to undermine our country’s national security. The FBI is grateful to the Department of Treasury and the United States Air Force for their continued partnership and assistance in this case.”

Treasury is taking action against malicious Iranian cyber actors and covert operations that have targeted Americans at home and overseas as part of our ongoing efforts to counter the Iranian regime’s cyber-attacks,” said Treasury Secretary Steven Mnuchin.  “Treasury is sanctioning New Horizon Organization for its support to the IRGC-QF.  New Horizon hosts international conferences that have provided Iranian intelligence officers a platform to recruit and collect damaging information from attendees, while propagating anti-Semitism and Holocaust denial.  We are also sanctioning an Iran-based company that has attempted to install malware to compromise the computers of U.S. personnel.”

“The alleged actions of Monica Witt in assisting a hostile nation are a betrayal of our nation’s security, our military, and the American people,” said Special Agent Phillips. “While violations like this are extremely rare, her actions as alleged are an affront to all who have served our great nation.”  

“This investigation exemplifies the tireless work the agents and analysts of the FBI do each and every day to bring a complex case like this to fruition,’ said Assistant Director in Charge McNamara.  “Witt's betrayal of her country and the actions of the cyber criminals - at the behest of the IRGC - could have brought serious damage to the United States, and we will not stand by and allow that to happen.  The efforts by the Iranian government to target and harm the U.S. will not be taken lightly, and the FBI will continue our work to hold those individuals or groups accountable for their actions.”

According to the allegations contained in the indictment unsealed today:

Monica Witt’s Espionage

Monica Witt, a U.S. citizen, was an active duty U.S. Air Force Intelligence Specialist and Special Agent of the Air Force Office of Special Investigations, who entered on duty in 1997 and left the U.S. government in 2008.  Monica Witt separated from the Air Force in 2008 and ended work with DOD as a contractor in 2010.  During her tenure with the U.S. government, Witt was granted high-level security clearances and was deployed overseas to conduct classified counterintelligence missions.

In Feb. 2012, Witt traveled to Iran to attend the Iranian New Horizon Organization’s “Hollywoodism” conference, an IRGC-sponsored event aimed at, among other things, condemning American moral standards and promoting anti-U.S. propaganda.  Through subsequent interactions and communications with a dual United States-Iranian citizen referred to in the indictment as Individual A, Witt successfully arranged to re-enter Iran in Aug. 2013.  Thereafter, Iranian government officials provided Witt with a housing and computer equipment.  She went on to disclose U.S. classified information to the Iranian government official.  As part of her work on behalf of the Iranian government, she conducted research about USIC personnel that she had known and worked with, and used that information to draft “target packages” against these U.S. agents.   

Iranian Hacking Efforts Targeting Witt’s Former Colleagues

Beginning in late 2014, the Cyber Conspirators began a malicious campaign targeting Witt’s former co-workers and colleagues.  Specifically, Mesri registered and helped manage an Iranian company, the identity of which is known to the United States, which conducted computer intrusions against targets inside and outside the United States on behalf of the IRGC.  Using computer and online infrastructure, in some cases procured by Mesri, the conspiracy tested its malware and gathered information from target computers or networks, and sent spearphishing messages to its targets.  Specifically, between Jan. and May 2015, the Cyber Conspirators, using fictitious and imposter accounts, attempted to trick their targets into clicking links or opening files that would allow the conspirators to deploy malware on the target’s computer.  In one such instance, the Cyber Conspirators created a Facebook account that purported to belong to a USIC employee and former colleague of Witt, and which utilized legitimate information and photos from the USIC employee’s actual Facebook account. This particular fake account caused several of Witt’s former colleagues to accept “friend” requests.

*          *          *

The case is being investigated by the FBI’s Washington Field Office with assistance from the Air Force Office of Special Investigations.  The prosecution is being handled by Assistant U.S. Attorneys Deborah Curtis, Jocelyn Ballantine and Luke Jones of the U.S. Attorney’s Office for the District of Columbia with assistance from Trial Attorney Evan N. Turgeon of the National Security Division’s Counterintelligence and Export Control Section.

February 16, 2019 in AML | Permalink | Comments (0)

Friday, February 15, 2019

Six Convicted for Roles in Multi-Million Dollar Black Market Peso Exchange Money-Laundering Scheme

A federal jury in Laredo, Texas found four men and two women guilty for their roles in a two-year multi-million dollar black market peso exchange money-laundering scheme, the Justice Department announced.

Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, U.S. Attorney Ryan Patrick of the Southern District of Texas, Special Agent in Charge Will R. Glaspy of the U.S. Drug Enforcement Administration (DEA) and Special Agent in Charge D. Richard Goss of the IRS Criminal Investigation (IRS-CI) made the announcement.

Adrian Arciniega-Hernandez, 36, of Nuevo Laredo, Mexico; Adriana Alejandra Galvan-Constantini, 36, and Luis Montes-Patino, 57, both of Irving, Texas, and Ravinder Reddy Gudipati, 61; Harsh Jaggi, 54; and Neeru Jaggi, 51, all of Laredo, Texas, were each convicted of a money laundering conspiracy following a five-week jury trial.  In addition, Harsh Jaggi and Adrian Arcinieg-Hernandez were each convicted of two counts of money laundering and Neeru Jaggi was convicted of one count of money laundering.  Gudipati was convicted of two counts of money laundering, two counts of causing a trade or business to fail to file a Form 8300, and one count of causing a trade or business to file a Form 8300 containing a material omission and misstatement of facts. Arciniega-Hernandez was found not guilty of a third count of money laundering.  Sentencing before U.S. District Judge Marina Garcia Marmalejo of the Southern District of Texas, Laredo Division, who presided over the trial, has not yet been scheduled.

Arciniega-Hernandez, Galvan-Constantini, Montes-Patino, Gudipati, Harsh Jaggi, and Neeru Jaggi were part of a complex money laundering scheme whereby money derived from the sale of drugs in the United States were laundered through businesses in Laredo, in order to return these proceeds to Mexican drug dealers. 

According to the evidence presented at trial, from 2011 through 2013, Galvan-Constantini, Montes-Patino and other co-conspirators helped to move millions of dollars derived from the sale of drugs throughout the United States, including New York, Kentucky, North Carolina, Illinois, Mississippi, and multiple cities in Texas to Laredo, Texas.  The U.S. currency was moved by couriers, including Galvan-Constantini and Montes-Patino, via cars, commercial buses, commercial planes, and a private plane in bulk cash amounts of up to hundreds of thousands of dollars at a time.  The money, in heat sealed packs, uneven rubber-banded money stacks, or loose U.S. currency, arrived in plastic bags, cloth bags, suitcases, backpacks, and even cereal boxes.  The money was then distributed among downtown Laredo, Texas perfume stores, including El Reino International Inc., and NYSA Impex LLC.  The owner of NYSA Impex LLC, Gudipati, and the owners of El Reino International Inc., Harsh Jaggi, and Neeru Jaggi, accepted loose bulk-cash, even after being told it was “narco dinero.”  The store owners also failed to file Form 8300s which are required when more than $10,000 in cash is received by a business, or filed Form 8300s which omitted pertinent information such as the name of the courier who brought the bulk cash.    

Co-defendant Carlos Velasaquez, 55, of Laredo, pleaded guilty to conspiracy to launder money on Nov. 7, 2018, and is pending sentencing. 

February 15, 2019 in AML | Permalink | Comments (0)

Treasury Statement on European Commission List of Jurisdictions with Strategic AML/CFT Deficiencies

The European Commission issued a list of purportedly high-risk jurisdictions “posing significant threats” to the European Union’s financial system as a result of strategic deficiencies in their Anti-Money Laundering and Countering the Financing of Terror (AML/CFT) regimes.  The U.S. Department of the Treasury has significant concerns about the substance of the list and the flawed process by which it was developed. 

The Financial Action Task Force (FATF) is the global standard-setting body for combating money laundering, terrorist financing, and proliferation financing.  The FATF, which includes the United States, the European Commission, 15 EU member states, and 20 other jurisdictions, already develops a list of high-risk jurisdictions with AML/CFT deficiencies as part of a careful and comprehensive process.  Because of the FATF’s work, virtually all countries around the world are subject to a rigorous peer-review methodology that examines the legal frameworks to counter illicit finance as well as how effectively jurisdictions implement them.  These reviews are an intensive process involving careful review of the legal framework, extensive fact-gathering, and onsite visits in which assessors engage in robust, iterative dialogues with assessed jurisdictions. 

The European Commission’s process for developing its list contrasts starkly with FATF’s thorough methodology.  First, the Commission’s process did not include a sufficiently in-depth review necessary to conduct an assessment related to such a serious and consequential issue.  Second, the Commission provided affected jurisdictions with only a cursory basis for its determination.  Third, the Commission notified affected jurisdictions that they would be included on the list only days before issuance.  Fourth, the Commission failed to provide affected jurisdictions with any meaningful opportunity to challenge their inclusion or otherwise address issues identified by the Commission.  As a result, the European Commission produced a list that diverges from the FATF list without reasonable support.

Beyond our concerns with the listing methodology, the Treasury Department rejects the inclusion of American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands on the list.  The commitments and actions of the United States in implementing the FATF standards extend to all U.S. territories.  The same AML/CFT legal framework that applies to the continental United States also generally applies to U.S. territories.  Moreover, the Treasury Department was not provided any meaningful opportunity to discuss with the European Commission its basis for including the listed U.S. territories.

The Treasury Department does not expect U.S financial institutions to take the European Commission’s list into account in their AML/CFT policies and procedures. 

U.S. Official Treasury Response here

February 15, 2019 in AML | Permalink | Comments (0)

Thursday, February 14, 2019

EU Commission blacklists 4 USA territories for weak money laundering and terrorist financing prevention

On 13 Feb 2019 the EU Commission adopted a new black list of 23 third countries with strategic deficiencies in their anti-money laundering and counter-terrorist financing frameworks.

The aim of this list is to protect the EU financial system by better preventing money laundering and terrorist financing risks. As a result of the listing, banks and other entities covered by EU anti-money laundering rules will be required to apply increased checks (due diligence) on financial operations involving customers and financial institutions from these high-risk third countries to better identify any suspicious money flows. On the basis of a new methodology, which reflects the stricter criteria of the 5th anti-money laundering directive in force since July 2018, the list has been established following an in-depth analysis.  

Věra Jourová, Commissioner for Justice, Consumers and Gender Equality said: “We have established the strongest anti-money laundering standards in the world, but we have to make sure that dirty money from other countries does not find its way to our financial system. Dirty money is the lifeblood of organised crime and terrorism. I invite the countries listed to remedy their deficiencies swiftly. The Commission stands ready to work closely with them to address these issues in our mutual interest. "   

The Commission is mandated to carry out an autonomous assessment and identify the high-risk third countries under the Fourth and Fifth Anti-Money Laundering Directives.

The list has been established on the basis of an analysis of 54 priority jurisdictions, which was prepared by the Commission in consultation with the Member States and made public on 13 November 2018. The countries assessed meet at least one of the following criteria:

  •          they have systemic impact on the integrity of the EU financial system,
  •          they are reviewed by the International Monetary Fund as international offshore financial centres;
  •          they have economic relevance and strong economic ties with the EU.

For each country, the Commission assessed the level of existing threat, the legal framework and controls put in place to prevent money laundering and terrorist financing risks and their effective implementation. The Commission also took into account the work of the Financial Action Task Force (FATF), the international standard-setter in this field.

The Commission concluded that 23 countries have strategic deficiencies in their anti-money laundering/ counter terrorist financing regimes. This includes 12 countries listed by the Financial Action Task Force and 11 additional jurisdictions. Some of the countries listed today are already on the current EU list, which includes 16 countries.

Next steps

The Commission adopted the list in the form of a Delegated Regulation. It will now be submitted to the European Parliament and Council for approval within one month (with a possible one-month extension). Once approved, the Delegated Regulation will be published in the Official Journal and will enter into force 20 days after its publication.

The Commission will continue its engagement with the countries identified as having strategic deficiencies in the present Delegated Regulation and will further engage especially on the delisting criteria. This list enables the countries concerned to better identify the areas for improvement in order to pave the way for a possible delisting once strategic deficiencies are addressed.

The Commission will follow up on progress made by listed countries, continue monitoring those reviewed and start assessing additional countries, in line with its published methodology. The Commission will update this list accordingly. It will also reflect on further strengthening its methodology where needed in light of experience gained, with a view to ensuring effective identification of high-risk third countries and the necessary follow-up.

Background 

The fight against money laundering and terrorist financing is a priority for the Juncker Commission. The adoption of the Fourth – in force since June 2015- and the Fifth Anti-Money Laundering Directives – in force since 9 July 2018 - has considerably strengthened the EU regulatory framework.

Following the entry into force of the Fourth Anti-Money Laundering Directive in 2015, the Commission published a first EU list of high-risk third countries based on the assessment of the Financial Action Task Force. The Fifth Anti-Money Laundering Directive broadened the criteria for the identification of high-risk third countries, including notably the availability of information on the beneficial owners of companies and legal arrangements. This will help better address risks stemming from the setting up of shell companies and opaque structures which may be used by criminals and terrorists to hide the real beneficiaries of a transaction (including for tax evasion purposes). The Commission developed its own methodology to identify high-risk countries, which relies on information from the Financial Action Task Force, complemented by its own expertise and other sources such as Europol. The result is a more ambitious approach for identifying countries with deficiencies posing risks to the EU financial system. The decision to list any previously unlisted country reflects the current assessment of the risks in accordance with the new methodology. It does not mean the situation has deteriorated since the list was last updated.

The new list published today replaces the one currently in place since July 2018. 

For more information                                                                  

Delegated Regulation: EU list of high-risk third countries

Q&A

Methodology for identifying high-risk third countries

Fourth Anti-Money Laundering Directive

Fifth Anti-Money Laundering Directive 

 

ANNEX 

The 23 jurisdictions are:

(1)            Afghanistan,

(2)            American Samoa,

(3)            The Bahamas,

(4)            Botswana,

(5)            Democratic People's Republic of Korea,

(6)            Ethiopia,

(7)            Ghana,

(8)            Guam,

(9)            Iran,

(10)          Iraq,

(11)          Libya,

(12)          Nigeria,

(13)          Pakistan,

(14)          Panama,

(15)          Puerto Rico,

(16)          Samoa,

(17)          Saudi Arabia,

(18)          Sri Lanka,

(19)          Syria,

(20)          Trinidad and Tobago,

(21)          Tunisia,

(22)          US Virgin Islands,

(23)          Yemen.

February 14, 2019 in AML | Permalink | Comments (0)

EU Court of Justice Overrules EU Commission on State Aid (Decision Below)

Loyens and Loeff summary -

The General Court then turned to assessing whether the Belgian rules and the related rulings effectively constituted a scheme and found that the criteria were not met:

  • Implementing measures were needed and the tax authorities had a genuine margin of discretion in deciding whether it was appropriate to grant the downward adjustment to the Belgian company’s taxable profits.
  • The beneficiaries could not be identified on the sole basis of the tax provision in the law without further implementing measures.
  • The Commission’s analysis of a limited sample of rulings did not meet the requisite standard of proof to establish a systematic approach. Deficiencies in the contested decision could not be remedied by additional information provided during the proceedings.

Case Below ...

APPLICATION pursuant to Article 263 TFEU for annulment of Commission Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium (OJ 2016 L 260, p. 61), THE GENERAL COURT (Seventh Chamber, Extended Composition), composed of M. van der Woude, President, V. Tomljenović (Rapporteur), E. Bieliūnas, A. Marcoulli and A. Kornezov, Judges, Registrar: S. Spyropoulos, Administrator, having regard to the written part of the procedure and further to the hearing on 28 June 2018.

The contested decision may be found here

15      By Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium (OJ 2016 L 260, p. 61, ‘the contested decision’), the European Commission found that the exemptions granted by the Kingdom of Belgium, by means of advance rulings under Article 185(2)(b) of the CIR 92, constituted an aid scheme within the meaning of Article 107(1) TFEU that was incompatible with the internal market and had been put into effect in breach of Article 108(3) TFEU.

16      Furthermore, the Commission ordered that the aid granted be recovered from the beneficiaries, a definitive list of which was to be drawn up by the Kingdom of Belgium following the decision. The annex to the contested decision contained an indicative list of 55 beneficiaries – including Magnetrol International, the applicant in Case T‑263/16 – identified on the basis of information provided by the Kingdom of Belgium in the course of the administrative procedure.

28      The operative part of the contested decision is worded as follows:

‘Article 1

The Excess Profit exemption scheme, based on Article 185(2)(b) of the [CIR 92], pursuant to which [the Kingdom of] Belgium granted tax rulings to Belgian entities of multinational corporate groups authorising those entities to exempt part of their profit from corporate income taxation constitutes aid within the meaning of Article 107(1) [TFEU] that is incompatible with the internal market and that was unlawfully put into effect by Belgium in breach of Article 108(3) [TFEU].

Article 2

(1) [The Kingdom of] Belgium shall recover all incompatible and unlawful aid referred to in Article 1 from the recipients of that aid.

(2) Any sums that remain unrecoverable from the recipients of the aid, following the recovery described in the paragraph 1, shall be recovered from the corporate group to which the recipient belongs.

(3) The sums to be recovered shall bear interest from the date on which they were put at the disposal of the beneficiaries until their actual recovery.

(4) The interest on the sums to be recovered shall be calculated on a compound basis in accordance with Chapter V of Regulation (EC) No 794/2004.

(5) [The Kingdom of] Belgium shall stop granting the aid referred to in Article 1 and shall cancel all outstanding payments of such aid with effect from the date of adoption of this decision.

(6) [The Kingdom of] Belgium shall also reject all requests for an advance ruling concerning the aid referred to in Article 1 submitted to the Ruling Commission and pending on the date of the adoption of this decision.

Article 3

(1) Recovery of the aid granted referred to in Article 1 shall be immediate and effective.

(2) [The Kingdom of] Belgium shall ensure that this Decision is fully implemented within four months following the date of notification of this Decision.

Article 4

(1) Within two months following notification of this Decision, [the Kingdom of] Belgium shall submit the following information:

(a)      the list of beneficiaries that have received the aid referred to in Article 1 and the total amount of aid received by each of them;

(b)      the total amount (principal and recovery interests) to be recovered from each beneficiary;

(c)      a detailed description of the measures already taken and planned to comply with this Decision;

(d)      documents demonstrating that the beneficiaries have been ordered to repay the aid.

(2) [The Kingdom of] Belgium shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid referred to in Article 1 has been completed. It shall immediately submit, on simple request by the Commission, information on the measures already taken and planned to comply with this Decision. It shall also provide detailed information concerning the amounts of aid and recovery interest already recovered from the beneficiaries.

Article 5

This Decision is addressed to the Kingdom of Belgium.’

 Procedure and forms of order sought

 Procedure and forms of order sought by the parties in Case T131/16

29      By application lodged at the Court Registry on 22 March 2016, the Kingdom of Belgium brought an action seeking the annulment of the contested decision.

30      By a separate document, lodged at the Court Registry on 26 April 2016, the Kingdom of Belgium brought an application for interim measures, in which it claimed that the President of the General Court should suspend the operation of Articles 2 to 4 of the contested decision until the General Court has delivered its judgment on the main action. By order of 19 July 2016, the President of the General Court dismissed the application for interim measures and reserved the costs.

31      On 11 July 2016, the Court requested the Kingdom of Belgium to reply to a question. The Kingdom of Belgium complied with that request by letter of 19 July 2016.

32      By document lodged at the Court Registry on 11 July 2016, Ireland applied for leave to intervene in support of the form of order sought by the Kingdom of Belgium. By decision of 25 August 2016, the President of the Fifth Chamber of the General Court granted Ireland’s application to intervene. Ireland lodged its written submissions and the main parties lodged their observations on those submissions within the prescribed periods.

33      Following a change in the composition of the Chambers of the General Court on 21 September 2016, pursuant to Article 27(5) of the Rules of Procedure of the General Court, the Judge Rapporteur was assigned to the Seventh Chamber, to which the present case was accordingly allocated.

34      By document lodged at the Court Registry on 26 January 2017, the Kingdom of Belgium requested that the case be decided by a Chamber sitting in extended composition. On 15 February 2017, the Court took formal note, in accordance with Article 28(5) of the Rules of Procedure, of the fact that the case had been allocated to the Seventh Chamber, Extended Composition.

35      As a Member of the Seventh Chamber, Extended Composition, was unable to sit in the present case, by decision of 28 March 2017, the President of the General Court designated the Vice-President of the General Court to complete the Chamber.

36      Acting on a proposal from the Judge-Rapporteur, the President of the Seventh Chamber, Extended Composition, decided, on 12 December 2017, pursuant to Article 67(2) of the Rules of Procedure, to give the present case priority over others.

37      Acting on a proposal from the Judge-Rapporteur, the General Court (Seventh Chamber, Extended Composition) decided to open the oral part of the procedure and, by way of measures of organisation of procedure pursuant to Article 64 of the Rules of Procedure, requested the Kingdom of Belgium and the Commission to reply to a number of questions in writing. The parties complied with those requests within the prescribed periods.

38      By order of 17 May 2018, after hearing the parties, the President of the Seventh Chamber, Extended Composition, of the General Court decided to join Cases T‑131/16, Belgium v Commission, and T‑263/16, Magnetrol International v Commission, for the purposes of the oral part of the procedure, pursuant to Article 68(2) of the Rules of Procedure, and granted Magnetrol International’s request for confidential treatment vis-à-vis Ireland.

39      The parties presented oral argument and answered questions put to them by the Court at the hearing on 28 June 2018.

40      The Kingdom of Belgium claims that the Court should:

–        annul the contested decision;

–        in the alternative, annul Articles 1 and 2 of the operative part of the contested decision;

–        order the Commission to pay the costs.

41      Ireland requests the General Court to annul the contested decision, as specified in the form of order sought by the Kingdom of Belgium.

42      The Commission contends that the General Court should:

–        dismiss the action;

–        order the Kingdom of Belgium to pay the costs.

 Procedure and forms of order sought by the parties in Case T263/16

43      By application lodged at the Court Registry on 25 May 2016, Magnetrol International brought an action seeking the annulment of the contested decision.

44      On 20 June 2016, the Commission applied for proceedings to be stayed pending judgment in Case T‑131/16, Belgium v Commission, to which the applicant objected on 26 July 2016. By decision notified to the main parties on 9 August 2016, the President of the Fifth Chamber of the General Court rejected the Commission’s request for the proceedings to be stayed.

45      Following a change in the composition of the Chambers of the General Court on 21 September 2016, pursuant to Article 27(5) of the Rules of Procedure of the General Court, the Judge Rapporteur was assigned to the Seventh Chamber, to which the present case was accordingly allocated.

46      Acting on a proposal from the Seventh Chamber, the General Court decided, on 12 March 2018, pursuant to Article 28(3) of the Rules of Procedure, to assign the case to a Chamber sitting in extended composition.

47      As a Member of the Seventh Chamber, Extended Composition, was unable to sit in the present case, by decision of 15 March 2018, the President of the General Court designated the Vice-President of the General Court to complete the Chamber.

48      Acting on a proposal from the Judge-Rapporteur, the President of the Seventh Chamber, Extended Composition, decided, on 16 April 2018, pursuant to Article 67(2) of the Rules of Procedure, to give the present case priority over others.

49      Acting on a proposal from the Judge-Rapporteur, the General Court (Seventh Chamber, Extended Composition) decided to open the oral part of the procedure and, by way of measures of organisation of procedure pursuant to Article 64 of the Rules of Procedure, requested Magnetrol International and the Commission to reply to a number of questions in writing. The parties complied with those requests within the prescribed periods.

50      By order of 17 May 2018, after hearing the parties, the President of the Seventh Chamber, Extended Composition, of the General Court decided to join Cases T‑131/16, Belgium v Commission, and T‑263/16, Magnetrol International v Commission, for the purposes of the oral part of the procedure, pursuant to Article 68(2) of the Rules of Procedure, and granted Magnetrol International’s request for confidential treatment vis-à-vis Ireland.

51      As noted in paragraph 39 above, the parties presented oral argument and answered questions put to them by the Court at the hearing on 28 June 2018.

52      Magnetrol International contends that the General Court should:

–        annul the contested decision;

–        in the alternative, annul Articles 2 to 4 of the contested decision;

–        in any event, annul Articles 2 to 4 of the contested decision in so far as those articles, first, require any recovery from entities other than the entities that have been issued an advance ruling and, secondly, require the recovery of an amount equal to the beneficiary’s tax savings, without allowing the Kingdom of Belgium to take into account an actual upwards adjustment by another tax administration;

–        order the Commission to pay the costs.

53      The Commission claims that the General Court should:

–        dismiss the action;

–        order Magnetrol International to pay the costs.

 Law

54      After hearing the views of the parties in that regard at the hearing, the Court has decided to join the present cases for the purposes of the judgment also, in accordance with Article 68 of the Rules of Procedure.

 Preliminary observations

55      In support of its action, the Kingdom of Belgium raises five pleas in law. The first plea alleges a breach of Article 2(6) TFEU and of Article 5(1) and (2) TEU, in that the Commission encroached upon the tax jurisdiction of the Kingdom of Belgium. The second plea alleges an error of law and a manifest error of assessment, in that the Commission classified the measures as an aid scheme. It is divided into two parts disputing, first, the identification of the acts on which the alleged aid scheme at issue is based and, secondly, the finding relating to the lack of further implementing measures. The third plea alleges a breach of Article 107 TFEU, in that the Commission considered that the excess profit ruling system constituted a State aid measure. The fourth plea alleges that the Commission made a manifest error of assessment regarding the identification of the beneficiaries of the alleged aid. The fifth plea, raised ‘in the alternative’, alleges infringement of the general principle of legality and of Article 16(1) of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 [TFEU] (OJ 2015, L 248, p. 9), in that the contested decision orders recovery from the multinational groups to which the Belgian entities that were issued an advance ruling belong.

56      In support of its action, Magnetrol International raises four pleas in law. The first plea alleges a manifest error of assessment, excess of power and failure to provide adequate reasoning in so far as the contested decision alleges the existence of an aid scheme. The second plea alleges a breach of Article 107 TFEU and of the duty to state reasons and a manifest error of assessment in so far as the contested decision classifies the purported scheme as a selective measure. The third plea alleges a breach of Article 107 TFEU and of the duty to state reasons and a manifest error of assessment in so far as the contested decision asserts that the purported scheme gives rise to an advantage. The fourth plea, raised ‘in the alternative’, alleges a breach of Article 107 TFEU, infringement of the principle of the protection of legitimate expectations, a manifest error of assessment, excess of power, and failure to provide adequate reasoning, as regards the recovery of the aid ordered in the contested decision, the identification of the beneficiaries and the amount to be recovered.

57      It follows from the presentation of all of the above pleas that the Kingdom of Belgium and Magnetrol International raise, albeit in a different order, pleas in law alleging, in essence:

–        first, that the Commission exceeded its powers in relation to State aid by encroaching upon the exclusive tax jurisdiction of the Kingdom of Belgium in the field of direct taxation (first plea in Case T‑131/16 and first part of the third plea in Case T‑263/16);

–        secondly, that the Commission erred in finding a State aid scheme in the present case, within the meaning of Article 1(d) of Regulation 2015/1589, inter alia because of the incorrect identification of the acts on which the alleged scheme was said to be based and the erroneous finding that the aid scheme did not require further implementing measures (second plea in Case T‑131/16 and the first plea in Case T‑263/16);

–        thirdly, that the Commission erred in regarding advance rulings in relation to excess profit as State aid, given inter alia the lack of an advantage and the lack of selectivity (third plea in law in Case T‑131/16 and third plea in law in Case T‑263/16);

–        fourthly, that the Commission infringed, inter alia, the principles of legality and of the protection of legitimate expectations in that it erroneously ordered the recovery of the alleged aid, including from the groups to which the beneficiaries of that aid belong (fourth and fifth pleas in law in Case T‑131/16 and the fourth plea in law in Case T‑263/16).

58      The General Court will examine the pleas in law in the order set out in paragraph 57 above.

 The Commission’s alleged encroachment upon the Kingdom of Belgium’s exclusive jurisdiction in the field of direct taxation

59      The Kingdom of Belgium and Magnetrol International submit, in essence, that the Commission exceeded its powers by using the State aid rules of EU law in order to determine unilaterally matters falling within the exclusive tax jurisdiction of a Member State. The determination of taxable income remains an exclusive competence of the Member States, as does the manner of taxing profits generated by cross-border transactions within groups of undertakings, even if it leads to double non-taxation. The Commission’s position of regarding advance rulings on excess profit as State aid because they are not in line with what the Commission considers to be the correct application of the arm’s length principle is tantamount to forced harmonisation of rules relating to the determination of taxable income, which does not fall within the competences of the European Union.

60      Ireland submits, in essence, that the contested decision seriously disturbs the balance of competences between the European Union and the Member States established, inter alia, by Article 3(6) TEU and Article 5(1) and (2) TEU, and confirmed by settled case-law.

61      The Commission contends, in essence, that although the Member States enjoy fiscal autonomy in the field of direct taxation, any fiscal measure a Member State adopts must comply with the State aid rules of EU law.

62      In that respect, it must be noted that, according to settled case-law, while direct taxation, as EU law currently stands, falls within the competence of the Member States, they must nonetheless exercise that competence consistently with EU law (see judgment of 12 July 2012, Commission v Spain, C‑269/09, EU:C:2012:439, paragraph 47 and the case-law cited). On the other hand, it is undisputed that the Commission is competent to ensure compliance with Article 107 TFEU.

63      Thus, interventions by Member States in areas which have not been harmonised in the European Union, such as direct taxation, are not excluded from the scope of the State aid rules. Accordingly, the Commission may find that a tax measure constitutes State aid provided that the conditions for making such a finding are met (see, to that effect, judgments of 2 July 1974, Italy v Commission, 173/73, EU:C:1974:71, paragraph 13; of 22 June 2006, Belgium and Forum 187 v Commission, C‑182/03 and C‑217/03, EU:C:2006:416, paragraph 81; and of 25 March 2015, Belgium v Commission, T‑538/11, EU:T:2015:188, paragraphs 65 and 66). The Member States must therefore exercise their competence in the field of taxation consistently with EU law (judgment of 3 June 2010, Commission v Spain, C‑487/08, EU:C:2010:310, paragraph 37). Accordingly, they must refrain from adopting any measure, in that context, liable to constitute State aid incompatible with the internal market.

64      It is true that, in the absence of EU rules governing the matter, it falls within the competence of the Member States to designate tax bases and to spread the tax burden across the different factors of production and economic sectors (see, to that effect, judgment of 15 November 2011, Commission and Spain v Government of Gibraltar and United Kingdom, C‑106/09 P and C‑107/09 P, EU:C:2011:732, paragraph 97).

65      However, that does not mean that every tax measure which affects inter alia the tax base taken into account by the tax authorities falls outside the scope of Article 107 TFEU. If such a measure in practice discriminates between companies that are in a comparable situation with regard to the objective of the measure in question and thereby grants the beneficiaries of the measure selective advantages which favour ‘certain’ undertakings or the production of ‘certain’ goods, it may be regarded as State aid for the purpose of Article 107(1) TFEU (see, to that effect, judgment of 15 November 2011, Commission and Spain v Government of Gibraltar and United Kingdom, C‑106/09 P and C‑107/09 P, EU:C:2011:732, paragraph 104).

66      In addition, a measure by which the public authorities grant certain undertakings advantageous tax treatment which – although it does not involve the transfer of State resources – places the beneficiaries in a more favourable position than other taxpayers is capable of constituting State aid for the purpose of Article 107(1) TFEU. On the other hand, advantages resulting from a general measure applicable without distinction to all economic operators do not constitute State aid for the purpose of Article 107(1) TFEU (see judgment of 21 December 2016, Commission v World Duty Free Group and Others, C‑20/15 P and C‑21/15 P, EU:C:2016:981, paragraph 56 and the case-law cited).

67      It follows from the foregoing that, since the Commission is competent to ensure compliance with Article 107 TFEU, it cannot be accused of having exceeded its powers by examining the measures comprising the alleged scheme at issue in order to determine whether they constituted State aid and, if they did, whether they were compatible with the internal market, within the meaning of Article 107(1) TFEU.

68      That conclusion is not called into question by the Kingdom of Belgium’s arguments concerning, first, its lack of tax jurisdiction in respect of the taxation of the excess profits and, secondly, its own competence to adopt measures to avoid double taxation.

69      The Kingdom of Belgium submits that, since the excess profits cannot be attributed to Belgian entities subject to tax in Belgium, those profits do not fall within the Belgian tax jurisdiction. Accordingly, the Commission cannot question the non-taxation of those profits in Belgium.

70      In so far as those arguments are to be understood as challenging the Commission’s competence to examine the measures in question, it should be noted that those measures concern advance rulings, issued by the Belgian tax authorities in the context of their competence in the field of direct taxation. In that respect, the case-law cited in paragraph 65 above should be borne in mind, according to which any tax measure that meets the conditions for the application of Article 107(1) TFEU constitutes State aid. It follows that the Commission, in the exercise of its competence relating to the application of Article 107(1) TFEU, must be able to examine the measures in question in order to determine whether they meet those conditions.

71      As regards the arguments concerning the Kingdom of Belgium’s competence to adopt measures in order to avoid double taxation, it indeed follows from the case-law that it is for the Member States to take the measures necessary to prevent situations of double taxation, by applying, in particular, the apportionment criteria followed in international tax practice (see, to that effect, judgment of 14 November 2006, Kerckhaert and Morres, C‑513/04, EU:C:2006:713, paragraph 23). However, as noted in paragraph 63 above, the Member States must exercise their tax competences in accordance with EU law and refrain from adopting any measure liable to constitute State aid incompatible with the internal market. Accordingly, the Kingdom of Belgium cannot invoke the need to avoid double taxation as an objective pursued by the Belgian tax authorities’ practice as regards excess profit, in order to justify an exclusive competence in that respect, the exercise of which would fall outside the scope of the Commission’s power to verify compliance with Article 107 TFEU.

72      Moreover, and in any event, it must be noted that, in the present case, it does not appear that the non-taxation of excess profit, as applied by the Belgian tax authorities, pursued the objective of avoiding double taxation. The application of the measures at issue was not subject to the condition that it be demonstrated that the excess profit in question had been included in the profit of another company. Nor was it necessary to demonstrate that that excess profit had actually been taxed in another country.

73      Article 185(2)(b) of the CIR 92 provides for a downward adjustment of a company’s profit only if that profit has been included in the profit of another company. However, the Kingdom of Belgium has not denied the findings made by the Commission in recitals 173 to 181 of the contested decision concerning the practice of the Belgian tax authorities – as explained, inter alia, by the Minister for Finance’s replies, mentioned in paragraphs 12 to 14 above – according to which the downward adjustment of the tax base of a company requesting an advance ruling was carried out without it being verified whether the profit deducted from that company’s tax base, as excess profit, was actually included in the profit of another company.

74      In the light of the foregoing considerations, the plea alleging that the Commission encroached upon the tax jurisdiction of the Kingdom of Belgium must be rejected as unfounded.

 The existence of an aid scheme, within the meaning of Article 1(d) of Regulation 2015/1589

75      The Kingdom of Belgium and Magnetrol International submit, in essence, that the Commission incorrectly identified the acts on the basis of which the excess profit system allegedly constituted an aid scheme and wrongly found that those acts did not require further implementing measures, within the meaning of Article 1(d) of Regulation 2015/1589. They also submit that the conclusion concerning the existence of an aid scheme is based on contradictory reasoning.

76      The Commission contends, in essence, that it followed a consistent line of reasoning throughout the contested decision, in that it considered that the excess profit scheme was based on Article 185(2)(b) of the CIR 92, as applied by the Ruling Commission, in the light of the interpretation given by the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of that provision. Those acts show a systematic and consistent approach by which the Belgian tax authorities exempted so-called excess profit from tax, without further implementing measures being required.

77      Under Article 1(d) of Regulation 2015/1589, ‘aid scheme’ means any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time or for an indefinite amount.

78      It follows from the case-law that, in the case of an aid scheme, the Commission may confine itself to examining the characteristics of the scheme at issue in order to assess, in the grounds for its decision, whether, by reason of the arrangements provided for under the scheme, the latter gives an appreciable advantage to beneficiaries in relation to their competitors and is likely to benefit in particular undertakings engaged in trade between Member States. Thus, in a decision which concerns such a scheme, the Commission is not required to carry out an analysis of the aid granted in individual cases under the scheme. It is only at the stage of recovery of the aid that it is necessary to look at the individual situation of each undertaking concerned (see judgment of 9 June 2011, Comitato ‘Venezia vuole vivere’ and Others v Commission, C‑71/09 P, C‑73/09 P and C‑76/09 P, EU:C:2011:368, paragraph 63 and the case-law cited).

79      In addition, it has been held that, in examining an aid scheme, where no legal act establishing that scheme is identified, the Commission may rely on a set of circumstances which taken as a whole indicate the de facto existence of an aid scheme (see, to that effect, judgment of 13 April 1994, Germany and Pleuger Worthington v Commission, C‑324/90 and C‑342/90, EU:C:1994:129, paragraphs 14 and 15).

80      It must be borne in mind that, in the contested decision, first of all, in recital 97 thereof, it is indicated that the excess profit exemption was granted on the basis of Article 185(2)(b) of the CIR 92. Next, in recital 98 of that decision, it is indicated that the application of Article 185(2)(b) of the CIR 92 by the Belgian tax administration is explained in the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of that provision. Lastly, in recital 99 of the contested decision, the Commission concluded that Article 185(2)(b) of the CIR 92, the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92 constitute the acts on the basis of which the excess profit exemption is granted.

81      However, in recital 125 of the contested decision, it is indicated that no provision of the CIR 92 provides for an abstract unilateral exemption of a fixed part or percentage of the profit actually recorded by a Belgian entity forming part of a group. It is also indicated that Article 185(2)(b) of the CIR 92 allows downward transfer pricing adjustments subject to the condition that the profit to be exempted, generated by the international transaction or arrangement in question, has been included in the profit of the foreign counterparty to that transaction or arrangement.

82      It is true that the Commission’s reasoning appears somewhat ambivalent, since, on the one hand, it refers to all of the acts listed in recital 99 of the contested decision as the acts on which the scheme at issue is based, whereas, on the other hand, in its analysis of the reference system, in the course of examining whether there is a selective advantage, it states that no provision of the CIR 92 prescribes an exemption such as that applied by the Belgian tax authorities.

83      However, it follows from a reading of the contested decision in its entirety that Article 185(2)(b) of the CIR 92, as applied by the Belgian tax authorities, constitutes the basis for the alleged aid scheme at issue and that the application of that provision may be deduced from the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of that provision.

84      Accordingly, it must be examined whether the alleged aid scheme, based on the acts identified by the Commission, requires further implementing measures within the meaning of Article 1(d) of Regulation 2015/1589.

85      The following observations may be made on the basis of the definition of an aid scheme in Article 1(d) of Regulation 2015/1589, set out in paragraph 77 above, as interpreted by the case-law.

86      First, if individual aid awards are made without further implementing measures being adopted, the essential elements of the aid scheme in question must necessarily emerge from the provisions identified as the basis for the scheme.

87      Secondly, where the national authorities apply that scheme, those authorities cannot have any margin of discretion as regards the determination of the essential elements of the aid in question and whether it should be awarded. For the existence of such implementing measures to be precluded, the national authorities’ power should be limited to the technical application of the provisions that allegedly constitute the scheme in question, if necessary after verifying that the applicants meet the pre-conditions for benefiting from that scheme.

88      Thirdly, it follows from Article 1(d) of Regulation 2015/1589 that the acts on which the aid scheme is based must define the beneficiaries in a general and abstract manner, even if the aid granted to them remains indefinite.

89      It is therefore necessary to assess the extent to which the elements highlighted above emerge from the acts identified by the Commission as the basis for the aid scheme at issue, so that the alleged aid measures, namely the excess profit exemptions, could be granted on the basis of those acts without it being necessary to adopt further implementing measures.

 The essential elements of the aid scheme at issue

90      In recitals 13 to 22 of the contested decision, the Commission describes the aid scheme at issue as consisting of an exemption of excess profit and sets out the elements which, in essence, constitute the essential elements for the grant of that exemption, which are summarised in recital 102 of the contested decision. Thus, first, the fact that the Belgian entities concerned are entities of a multinational group is taken into account. Secondly, account is taken of the fact that the entities concerned have obtained an advance ruling by the Ruling Commission, which is linked to a new situation, such as a reorganisation leading to the relocation of a central entrepreneur to Belgium, the creation of jobs, or investments. Thirdly, the existence of profit in excess of the profit that would have been made by comparable standalone entities operating in similar circumstances is taken into consideration. Fourthly, on the other hand, no account is taken of whether a primary upward adjustment was carried out in another Member State.

91      In that respect, it must be examined whether the essential elements of the alleged aid scheme, indicated above, emerge from the acts that the Commission referred to as the basis of the excess profit exemption system.

92      At the outset, it must be underlined that the Commission stated, in recitals 101 and 139 of the contested decision, that the essential elements of the alleged aid had been identified on the basis of an analysis of a sample of advance rulings. Thus, the Commission itself acknowledged that those essential elements did not emerge from the acts on which it considered the scheme was based, but from the advance rulings themselves or, rather, from a sample of those rulings.

93      In any event, although some of the essential elements of the scheme identified by the Commission may emerge from the acts identified in recitals 97 to 99 of the contested decision, that is not the case however for all of those essential elements.

94      As the Kingdom of Belgium and Magnetrol International have rightly submitted, neither the two-step methodology for calculating the excess profit nor the requirement of investments, the creation of jobs or the centralisation or increase of activities in Belgium follow, even implicitly, from the acts referred to by the Commission in recitals 97 to 99 of the contested decision as the basis of the scheme at issue. If those elements which, according to the Commission itself, constitute essential elements of the alleged aid scheme do not feature in the acts that supposedly constitute the basis of the scheme, the implementation of those acts and thus the grant of the alleged aid necessarily depends on the adoption of further implementing measures, with the result that there is no aid scheme within the meaning of Article 1(d) of Regulation 2015/1589.

95      First, the acts identified in recitals 97 to 99 of the contested decision, set out in paragraph 80 above, do not mention the two-step methodology, including the TNMM, for the calculation of excess profit. It follows from the contested decision, in particular from Section 6.3.2 thereof (recitals 133, 144 and 152 to 168 of that decision), that that methodology was applied systematically and constitutes an essential element of the scheme, since it is precisely the application of that methodology that makes the scheme selective.

96      Accordingly, without prejudging the question as to whether the determination of the excess profit using the two-step methodology, described in the contested decision, could lead to a selective advantage, it must be held that that constituent element of the scheme at issue nevertheless does not stem from the acts on which that scheme is based and could not therefore be applied without further implementing measures.

97      Secondly, as regards investments, the creation of jobs or the centralisation or increase of activities in Belgium by applicants for advance rulings, it should be noted that, in Section 6.3.2.1 of the contested decision, the Commission stated that, even though those elements were not listed as conditions for the grant of the excess profit exemption under Article 185(2)(b) of the CIR 92, they were essential in order to be eligible for an advance ruling, which was compulsory for the application of the exemption in question.

98      As the Commission itself recognised, inter alia in recital 139 of the contested decision, those elements do not emerge from the acts on which the scheme at issue is based, but from the advance rulings themselves, according to the sample that the Commission examined. Accordingly, as the Kingdom of Belgium and Magnetrol International rightly submit, if those elements do not emerge from the acts which, according to the Commission, constitute the basis of the aid scheme, those acts must necessarily be the object of further implementing measures. If, as the Commission submits, such investments are taken into account by the Belgian tax authorities for the purpose of granting the excess profit exemption, that will necessarily entail an analysis and a specific evaluation of the investments proposed by the Belgian entities concerned, as regards inter alia the nature and amount of those investments, or other details concerning the manner in which they would be made. Such an analysis could be carried out only on a case-by-case basis and would therefore require further implementing measures.

 The margin of discretion of the Belgian tax authorities

99      As the Commission rightly noted, in recital 100 of the contested decision, the existence of further implementing measures, within the meaning of Article 1(d) of Regulation 2015/1589, entails a degree of discretion on the part of the tax authority adopting the measures in question, allowing it to influence the amount or the characteristics of the aid or the conditions under which it is granted. The Commission considers, by contrast, that the mere technical application of the act providing for the grant of the aid in question does not constitute a further implementing measure within the meaning of Article 1(d) of Regulation 2015/1589.

100    It should be noted that the fact that a prior request for approval must be submitted to the competent tax authorities in order to benefit from an aid does not imply that those authorities have a margin of discretion, when they merely verify whether the applicant meets the requisite criteria in order to benefit from the aid in question (see, to that effect and by analogy, judgment of 17 September 2009, Commission v Koninklijke FrieslandCampina, C‑519/07 P, EU:C:2009:556, paragraph 57).

101    In the present case, it is undisputed that the non-taxation of excess profit is subject to the grant of an advance ruling. In that respect, it must be noted that Article 20 of the Law of 24 December 2002 defines an ‘advance ruling’ as the legal act by which the Federal Public Service for Finance determines, in accordance with the applicable provisions, how the law will apply to a particular situation or transaction that has not yet had tax consequences.

102    It must therefore be examined whether, in issuing such advance rulings, that service had a margin of discretion allowing it to influence the amount and the essential elements of the excess profit exemption and the conditions under which it was granted.

103    First, it is apparent from the explanatory memorandum to the Law of 21 June 2004 amending the CIR 92 (as summarised in paragraph 7 above) and from the Circular of 4 July 2006 (as described in paragraphs 9 to 11 above) that the downward adjustment provided for in Article 185(2)(b) of the CIR 92 must be carried out on a case-by-case basis in the light of the available information provided, in particular, by the taxpayer. In addition, it is indicated that no criteria may be established in respect of that adjustment, since the latter must be carried out on a case-by-case basis. However, it is stated that a correlative adjustment should be made only if the tax administration or the Ruling Commission considers both the principle and the amount of the primary adjustment to be justified. Furthermore, the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92 (as summarised in paragraphs 12 to 14 above) merely refer in general terms to the position of the Belgian tax administration as regards excess profit and the arm’s length principle.

104    It may be inferred from a combined reading of the acts mentioned in paragraph 103 above that, when the Belgian tax authorities issued advance rulings on excess profit, they did not carry out a technical application of the applicable regulatory framework, but, rather, carried out a qualitative and quantitative assessment of each request on a ‘case-by-case’ basis, in the light of the reports and evidence provided by the entity concerned, in order to decide whether it was justified to grant the downward adjustment provided for in Article 185(2)(b) of the CIR 92. Accordingly, contrary to the Commission’s assertions, inter alia in recital 106 of the contested decision, and in the absence of any other instructions that would limit the decision-making power of the Belgian tax administration, that administration necessarily enjoyed a genuine margin of discretion in deciding whether it was appropriate to grant such downward adjustments.

105    Secondly, as indicated in paragraph 73 above, Article 185(2)(b) of the CIR 92 provides for a downward adjustment of a company’s profit only if that profit has been included in the profit of another company. In practice however, as explained, inter alia, by the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92, the downward adjustment was carried out by the Ruling Commission without it having been determined to which foreign companies the excess profit should be attributed.

106    In addition, it follows from recitals 67 and 68 of the contested decision that the scheme at issue does not cover all the advance rulings issued on the basis of Article 185(2)(b) of the CIR 92. It concerns only advance rulings which granted downward adjustments without the administration having verified whether the profit concerned had been included in the profit of another company of the group established in another jurisdiction. By contrast, advance rulings which, in accordance with the wording of Article 185(2)(b) of the CIR 92, grant a downward adjustment corresponding to an upward adjustment of the taxable profit of another company of the group established in another jurisdiction do not form part of the aid scheme at issue.

107    Accordingly, as the Kingdom of Belgium and Magnetrol International rightly submit, if, on the basis of that provision, the Belgian tax administration may adopt both decisions which, according to the Commission, grant State aid and decisions which do not grant such aid, it cannot reasonably be maintained that the role of that administration is limited to the technical application of the scheme at issue.

108    Thirdly, on the basis of the information provided by the Kingdom of Belgium to the Commission concerning the operation of the Ruling Commission, it is necessary to examine how the Ruling Commission determined, in its individual examination of requests for advance rulings, whether there was a situation giving rise to excess profit, whether a downward adjustment should be carried out under Article 185(2)(b) of the CIR 92 and what the characteristics, the amount and the conditions of that adjustment should be.

109    As regards the characteristics of the excess profit exemption and the conditions in which it is granted, it suffices to recall the considerations set out in paragraphs 90 to 98 above, according to which certain essential elements of the alleged scheme do not emerge from the acts on which, according to the Commission, that scheme is based.

110    As regards the amount to be exempted, it should be noted that the percentage of profit considered to be excess profit is not defined in the acts on which the alleged aid scheme is based. Indeed, it is not possible to deduce from those acts a specific percentage, a range or even a ceiling, and no specific element is provided concerning the method of calculation to be applied. On the contrary, it can be seen from the contested decision (recital 103 thereof) that the individual facts, the amounts involved and the transactions to be taken into account differ from one advance ruling to another. Likewise, the description of excess profit, in recital 15 of the contested decision, shows that determining that profit requires an assessment, on a case-by-case basis, of studies submitted by the tax payer as regards, first, the company’s residual profit, generated from transactions with companies in the same group, and, secondly, the excess profit generated because of that company’s membership of a group, which is deducted from the residual profit, as calculated in the first step.

111    More specifically, as the Kingdom of Belgium and Magnetrol International rightly submit, the parameters for calculating the excess profit and the instructions necessary for the purpose of taking account, when issuing advance rulings, of synergies, investments, the centralisation of activities and the creation of jobs in Belgium are not set out in the acts on which, according to the Commission, the scheme at issue is based. It is therefore the Ruling Commission which (i) determined the essential elements that were required in order to obtain a downward adjustment and (ii) verified whether that requirement was met where it agreed to grant that adjustment. It cannot therefore be maintained that the margin of discretion of the Belgian tax authorities was limited to the mere technical application of the provisions identified in recital 99 of the contested decision.

112    Fourthly, it must be noted that the procedure before the Ruling Commission includes a preliminary phase during which the requests for an advance ruling are analysed and at the end of which some of the requests are officially taken into account. It is apparent from the annual reports of the Ruling Commission identified by the Kingdom of Belgium, in particular the 2014 report, that only around half of open files at the pre-notification stage result in an advance ruling. That is an indication that, contrary to the Commission’s submissions, the Ruling Commission has a margin of discretion which it actually exercises when granting or rejecting requests relating to excess profit, including at the pre-notification stage.

113    Lastly, it should be noted that, in recital 106 of the contested decision, the Commission indicates that the Ruling Commission has a limited margin of discretion to agree the exact percentage of the downward adjustment. However, it follows from the considerations set out in paragraphs 101 to 112 above that, in the present case, the Belgian tax authorities had a margin of discretion over all of the essential elements of the alleged aid scheme.

 Definition of the beneficiaries

114    As regards the definition of the beneficiaries, it should be noted that, in recital 109 of the contested decision, the Commission refers to Article 185(2)(b) of the CIR 92. That article, the wording of which is set out in paragraph 8 above, provides that it applies to companies which are part of a multinational group, as regards their reciprocal cross-border relationships.

115    It could indeed be considered that Article 185(2)(b) of the CIR 92 covers a general and abstract category of entities, namely companies forming part of a multinational group in the context of their reciprocal cross-border relationships. However, the beneficiaries of the scheme, as referred to in the contested decision, cannot be identified on the sole basis of that provision, without further implementing measures.

116    In the present case, the beneficiaries of the scheme, as the latter is found to exist by the Commission, correspond to a much more specific category than that of companies forming part of a multinational group in the context of their reciprocal cross-border relationships. According to the Commission’s assessments, inter alia in recital 102 of the contested decision, relating to the essential elements of the aid scheme at issue, that scheme applies to companies forming part of a multinational group which, on the basis of transfer pricing reports and the existence of excess profit calculated using those reports, seek the exemption of that profit by a request for an advance ruling and which, moreover, make investments, create jobs or centralise activities in Belgium.

117    In addition, it should be noted that the other acts on which the Commission found the scheme was based do not provide any additional details as regards the definition of the beneficiaries of the scheme at issue.

118    As regards, specifically, the Law of 24 December 2002, although Article 20 thereof sets out the requirement for a particular situation or transaction that has not yet had tax consequences, that law does not contain provisions intended to define the beneficiaries of the alleged scheme. Nor do the Circular of 4 July 2006 or the Minister for Finance’s replies of 13 April 2005, 11 April 2007 and 6 January 2015 provide details concerning the beneficiaries of the alleged scheme. Moreover, it must be noted that the latter acts were adopted after 2004, the year from which, according to the Commission, the scheme in question was applied.

119    Accordingly, it cannot be concluded that the beneficiaries of the alleged aid scheme are defined in a general and abstract manner by the acts on which the Commission found the scheme was based. Further implementing measures therefore necessarily have to be taken in order to define such beneficiaries.

120    It follows from the foregoing considerations that the Commission wrongly concluded that the excess profit exemption scheme, as defined by the Commission in the contested decision, did not require further implementing measures and therefore constituted an aid scheme, within the meaning of Article 1(d) of Regulation 2015/1589.

 The existence of a systematic approach

121    The conclusion in paragraph 120 above cannot be called into question by the Commission’s arguments alleging the existence of a systematic approach, which it identified by examining a sample of 22 of the 66 existing advance rulings.

122    It is necessary to bear in mind the case-law, cited in paragraph 79 above, according to which, in examining an aid scheme, where no legal act establishing that scheme is identified, the Commission may rely on a set of circumstances which taken as a whole indicate the de facto existence of an aid scheme (see, to that effect, judgment of 13 April 1994, Germany and Pleuger Worthington v Commission, C‑324/90 and C‑342/90, EU:C:1994:129, paragraphs 14 and 15).

123    Accordingly, it cannot be ruled out that the Commission may conclude that there is an aid scheme where it is able to demonstrate, to the requisite legal standard, a systematic approach, the characteristics of which meet the requirements set out in Article 1(d) of Regulation 2015/1589.

124    However, the Commission has not succeeded in demonstrating that the approach that it had identified met the requirements set out in Article 1(d) of Regulation 2015/1589.

125    In the first place, as regards the arguments put forward by the Commission inter alia at the hearing, according to which a systematic approach may constitute the very basis of the aid scheme, it suffices to note that it is not the basis of the scheme relied on in the contested decision. As noted in paragraph 80 above, in recitals 97 to 99 of the contested decision, the Commission stated that Article 185(2)(b) of the CIR 92, as applied by the Belgian tax administration, formed the basis of the alleged aid scheme at issue and that that application could be deduced from the explanatory Memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions concerning the application of that provision.

126    In the second place, even if the Commission’s arguments are to be understood as meaning that the essential elements of the aid scheme emerge from a systematic approach which, in turn, is said to emerge from the sample of advance rulings that it examined, it must be pointed out that, in the contested decision, the Commission was not able to demonstrate to the requisite legal standard the existence of such a systematic approach.

127    First of all, it must be noted that, in recitals 65 and 103 of the contested decision, the Commission acknowledged that it examined a sample of 22 of the 66 advance rulings concerned. As the Kingdom of Belgium and Magnetrol International rightly submit, the Commission did not explain, in the contested decision, either the choice of that sample or why it had been considered to be representative of all of the advance rulings. In response inter alia to a written question from the Court, which response was also clarified at the hearing, the Commission indicated that it had requested the advance rulings issued in 2005 (no ruling having been issued in 2004), 2007, 2010 and 2013 so that its examination would cover rulings issued at the beginning, middle and end of the period during which the Ruling Commission had issued such rulings.

128    In addition, the contested decision contains, in recitals 62 to 64 and footnote 80, references to 6 of the 66 advance rulings concerned, which are described briefly and referred to as examples capable of illustrating all of the advance rulings. However, no explanation is given in the contested decision as to why those 6 examples were chosen, why those examined advance rulings are sufficiently representative of all 66 advance rulings or why those 6 examples are sufficient to justify the Commission’s conclusion regarding the existence of a systematic approach by the Belgian tax authorities.

129    Next, it is necessary to recall the considerations set out in paragraphs 103 to 112 above, according to which the Belgian tax authorities examined each request on a case-by-case basis and had a margin of discretion that went well beyond a mere technical application of the provisions identified in recital 99 of the contested decision, when they issued each advance ruling following that examination, which, in itself, undermines the systematic nature of the approach allegedly followed by the Belgian tax authorities. In addition, the existence of a systematic approach is called into question by the finding made in paragraph 98 above, concerning the further implementing measures necessary in order to implement the excess profit exemption system at issue in the present case.

130    Lastly, the Kingdom of Belgium and Magnetrol International submit that several advance rulings did not incorporate the essential elements of the alleged aid scheme identified by the Commission in the contested decision, in particular because the advance rulings did not all concern the role of central entrepreneur as taken into consideration by the Commission, a centralisation or recentralisation of activities did not take place in every case and the calculation of the excess profit was carried out on a case-by-case basis and not always according to the two-step calculation methodology criticised by the Commission.

131    In that respect, it must be noted that the deficiencies identified in paragraphs 127 and 128 above cannot be remedied by the additional information provided by the Commission in response to the Court’s questions, mentioned in paragraph 49 above, concerning the sample of advance rulings that it had analysed. The Court cannot, without exceeding the limits of its power to review the legality of the contested decision, rely, in order to reject a plea for annulment submitted to it, on grounds which did not form part of that decision (see, to that effect, judgment of 22 April 2016, Ireland and Aughinish Alumina v Commission, T‑50/06 RENV II and T‑69/06 RENV II, EU:T:2016:227, paragraph 145).

132    In any event, and as the Kingdom of Belgium and Magnetrol International rightly submit, it follows from the additional information submitted by the Commission in response to the Court’s questions that the advance rulings in the sample examined by the Commission show individual responses given by the Belgian tax authorities to various situations before them. The information provided concerning the 22 rulings show that those rulings were issued in different situations, such as the merger or restructuring of production activities, the construction of new facilities, the increase of the production capacity of existing facilities or the internalisation of supply activities. Thus, contrary to recital 15 of the contested decision and to the reasoning followed by the Commission in order to prove that the alleged scheme granted the beneficiaries a selective advantage (Section 6.3.2.2 of the contested decision), the advance rulings in the sample examined do not all concern situations in which the Belgian entity concerned operated as a ‘central entrepreneur’.

133    In addition, it follows from the information provided by the Commission in its reply to the Court’s questions, referred to in paragraph 49 above, that the two-step approach to calculating the excess profit –– identified by the Commission as one of the essential elements of the alleged aid scheme and described by the Commission in recital 15 of the contested decision –– involving inter alia the use of transfer pricing reports and the TNMM, was not followed systematically.

134    Accordingly, apart from the deficiencies identified in paragraphs 127 and 128 above, which would undermine the arguments concerning the existence of a systematic approach on the part of the Belgian tax authorities, the sample to which the Commission refers in the contested decision cannot necessarily prove that such a systematic approach actually existed and that it was followed in all of the advance rulings concerned.

 Conclusion on the classification of the measures in question as an aid scheme

135    It follows from the foregoing considerations that the Commission erroneously considered that the Belgian excess profit system at issue, as presented in the contested decision, constituted an aid scheme.

136    Accordingly, it is necessary to uphold the pleas raised by the Kingdom of Belgium and Magnetrol International, alleging the infringement of Article 1(d) of Regulation 2015/1589, as regards the conclusion set out in the contested decision regarding the existence of an aid scheme. Consequently, without it being necessary to examine the other pleas raised against the contested decision, that decision must be annulled in its entirety, inasmuch as it is based on the erroneous conclusion concerning the existence of such a scheme.

 Costs

137    Under Article 134(1) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the Commission has been unsuccessful, it must be ordered to pay, in addition to its own costs, those incurred by the Kingdom of Belgium, including those relating to the proceedings for interim measures, and by Magnetrol International, in accordance with the forms of order sought by them.

138    Under Article 138(1) of the Rules of Procedure, the Member States which have intervened in the proceedings are to bear their own costs. Ireland must therefore bear its own costs.

On those grounds,

THE GENERAL COURT (Seventh Chamber, Extended Composition)

hereby:

1.      Joins Cases T‑131/16 and T‑263/16 for the purposes of the present judgment;

2.      Annuls Commission Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium;

3.      Orders the European Commission to pay, in addition to its own costs, those incurred by the Kingdom of Belgium, including those relating to the proceedings for interim measures, and by Magnetrol International;

4.      Orders Ireland to bear its own costs.

17      In the first place, as regards the assessment of the aid measure (recitals 94 to 110 of the contested decision), the Commission considered that the measure in question constituted an aid scheme, based on Article 185(2)(b) of the CIR 92, as applied by the Belgian tax administration. That application is explained in the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92. According to the Commission, those acts constitute the basis on which the exemptions in question were granted. In addition, the Commission considered that those exemptions were granted without further implementing measures being required, since the advance rulings were merely technical applications of the scheme at issue. Furthermore, the Commission stated that the beneficiaries of the exemptions were defined in a general and abstract manner by the acts on which the scheme was based. Those acts referred to entities that form part of a multinational group of companies.

18      In the second place, as regards the conditions for applying Article 107(1) TFEU (recitals 111 to 117 of the contested decision), first, the Commission indicated that the excess profit exemption constituted an intervention by the State, imputable to it, and gave rise to a loss of State resources, since it resulted in a reduction of the tax liability in Belgium of undertakings benefiting from the scheme. Secondly, it considered that the scheme at issue was liable to affect intra-Union trade, since the undertakings that benefited from the scheme were multinational companies operating in several Member States. Thirdly, the Commission underlined that the scheme at issue relieved the undertakings benefiting from it from a burden they would otherwise be obliged to bear and that, consequently, that scheme distorted or threatened to distort competition by strengthening the financial position of those undertakings. Fourthly, the Commission considered that the scheme at issue conferred a selective advantage on Belgian entities and thus benefited only the multinational groups to which those entities belonged.

19      As regards, specifically, the existence of a selective advantage, the Commission considered that the excess profit exemption was a derogation from the reference system, identified as the Belgian corporate income tax system, since the tax was not applied to the total profit actually recorded by the company concerned but to an adjusted arm’s length profit (recitals 118 to 134 of the contested decision).

20      In that regard and primarily (recitals 135 to 143 of the contested decision), the Commission considered that the scheme at issue was selective, first of all, because it was available only to entities that were part of a multinational group, not to standalone entities or entities forming part of domestic corporate groups. Next, the scheme at issue resulted in selectivity between, on the one hand, multinational groups that amended their business model by establishing new operations in Belgium and, on the other hand, any other economic operators that continued to operate under existing business models in Belgium. Lastly, the scheme at issue was de facto selective since only Belgian entities forming part of a large or medium-sized multinational group could effectively benefit from the excess profit exemption, not entities that were part of a small multinational group.

21      As a secondary point (recitals 144 to 170 of the contested decision), the Commission stated that, even if it were accepted that the Belgian corporate income tax system contained a rule according to which the profit recorded by multinational group entities that exceeded an arm’s length profit should not be taxed, which the Commission disputed, the excess profit exemption constituted a derogation from the reference system, since both the rationale for that exemption and the methodology used to establish the excess profit contravened the arm’s length principle. That methodology comprised two steps.

22      In the first step, the arm’s length prices charged in transactions between the Belgian entity of a group and the companies with which it is associated were fixed based on a transfer pricing report provided by the taxpayer. Those transfer prices were determined by applying the transactional net margin method (TNMM). A residual or arm’s length profit was thus established, which, according to the Commission, corresponded to the profit actually recorded by the Belgian entity.

23      In the second step, on the basis of a second report submitted by the taxpayer, the Belgian entity’s adjusted arm’s length profit was established by determining the profit that a comparable standalone company would have made in comparable circumstances. The difference between the profit arrived at following the first and second steps (namely the residual profit minus the adjusted arm’s length profit) constituted the amount of excess profit which the Belgian tax authorities regarded as being the result of synergies or economies of scale arising from membership of a corporate group and which, accordingly, could not be attributed to the Belgian entity.

24      Under the scheme at issue, that excess profit was not taxed. According to the Commission, that non-taxation granted the beneficiaries of the scheme a selective advantage, particularly since the methodology for determining the excess profit departed from a methodology that leads to a reliable approximation of a market-based outcome and thus from the arm’s length principle.

25      In addition, the Commission considered that the scheme at issue could not be justified by the nature and the general scheme of the Belgian tax system (recitals 173 to 181 of the contested decision). Contrary to the assertions of the Kingdom of Belgium, the scheme at issue did not pursue the objective of avoiding double taxation, since it was not necessary, in order to benefit from the excess profit exemption, to demonstrate that that profit was included in the tax base of another company.

26      In the third place, the Commission considered that the measures in question constituted operating aid and were therefore incompatible with the internal market. Furthermore, since those measures were not notified to the Commission pursuant to Article 108(3) TFEU, they constituted unlawful aid (recitals 189 to 194 of the contested decision).

27      As regards the recovery of the aid (recitals 195 to 211 of the contested decision), the Commission stated that the Kingdom of Belgium could not rely on the principle of the protection of the beneficiaries’ legitimate expectations or on the principle of legal certainty in order to justify a failure to fulfil its obligation to recover the incompatible aid unlawfully granted and that the amounts to be recovered from each beneficiary could be calculated on the basis of the difference between the tax that would have been due, based on the profit actually recorded, and the tax actually paid as a result of the advance ruling.

Loyens and Loeff Commentary can be read here.

February 14, 2019 in BEPS, Tax Compliance | Permalink | Comments (0)

Three Individuals Sentenced to Prison for Their Roles in Bribery Schemes Involving VA Program for Disabled Military Veterans

Two owners and an employee of for-profit, non-accredited schools were sentenced during the last two days for bribing a public official at the U.S. Department of Veterans Affairs (VA) in exchange for the public official’s facilitation of over $2 million in payments that were supposed to be dedicated to providing vocational training for military veterans with service-connected disabilities. 

Albert Poawui, 41, of Laurel, Maryland, was the owner of Atius Technology Institute (“Atius”), a school purporting to specialize in information technology courses.  Sombo Kanneh, 29, of McLean, Virginia, was Poawui’s employee at Atius.  Michelle Stevens, 57, of Waldorf, Maryland, was the owner of Eelon Training Academy, a school purporting to specialize in digital media courses.

Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, U.S. Attorney Jessie K. Liu for the District of Columbia, Assistant Director in Charge Nancy McNamara of FBI’s Washington Field Office and Special Agent in Charge Kim Lampkins of U.S. Department of Veterans Affairs Office of Inspector General (OIG) Mid-Atlantic Field Office made the announcement.

All three defendants were sentenced by U.S. District Judge John D. Bates of the District of  Columbia.  Poawui was sentenced to serve 70 months in prison followed by three years of supervised release and ordered to pay $1.5 million in restitution to the VA.  Kanneh was sentenced to serve 20 months in prison followed by three years of supervised release and was ordered to pay $113,227.30 in restitution to the VA and to forfeit $1.5 million.  Stevens was sentenced to serve 30 months in prison followed by three years of supervised release and ordered to pay $83,000 in restitution to the VA and to forfeit $83,000.

James King, the VA official who all three defendants bribed, has pleaded guilty to bribery, wire fraud, and falsification of documents, and will be sentenced on Friday, Feb. 15. 

The Vocational Rehabilitation and Employment (VR&E) program is a VA program that provides disabled U.S. military veterans with education and employment-related services.  VR&E program counselors advise veterans under their supervision which schools to attend and facilitate payments to those schools for veterans’ tuition and necessary supplies.

According to admissions made in connection with Poawui and Kanneh’s pleas, in or about August 2015, Poawui and King agreed that Poawui would pay King a seven percent cash kickback of all payments made by the VA to Atius.  In exchange, King steered VR&E program veterans to Atius regardless of the veterans’ educational needs or interests and notwithstanding their repeated complaints about the poor quality of education at Atius.

Between Aug. 2015 and Dec. 2017, Poawui, King, and the scheme’s other participants caused the VA to pay Atius approximately $2,217,259.44.  Poawui paid King over $155,000 as part of the illicit bribery scheme.  These bribery payments were hand-delivered by Poawui or Kanneh to King or King’s assistant, who was a veteran enrolled in the VR&E program.  Kanneh admitted that she routinely moved money between Atius’s bank accounts to facilitate bribe payments to King.

Poawui also admitted that he made numerous false representations to the VA to enhance the scheme’s profits.  For example, Poawui certified to the VA that veterans attending Atius were enrolled in up to 32 hours of class per week, when in fact he knew that Atius offered a maximum of six weekly class hours.  After the VA initiated an administrative audit of Atius, Poawui and King took steps to conceal the truth about earlier misrepresentations they had made to the VA.

According to admissions made in connection with Stevens’ plea, she created Eelon Training Academy after learning about the VR&E program from King.  In or about Sept. 2016, King facilitated the first tuition payment from the VA to Eelon.  Shortly after receiving this payment, King told Stevens that she should give him seven percent of the monies paid by the VA to Eelon.  King proceeded to steer veterans under his supervision to Eelon regardless of their resistance to attending Stevens’ school.

Stevens admitted to later making two cash payments of $1,500 to King in furtherance of her scheme to bribe King in exchange for King sending veterans under his supervision to Eelon and facilitating the VA’s payments to Stevens.  In total, Stevens received approximately $83,000 from the VA for education that she purported to provide to veteran students.  Stevens submitted invoices to the VA amounting to no less than $300,000 for the tuition and equipment of seven students, but was not paid the balance of the invoice amount due to the VA’s ongoing investigation into Eelon following complaints by students about the poor quality of education. 

In an effort to procure the outstanding payments from the VA, Stevens made numerous fraudulent misrepresentations to the VA, and maintained fraudulent student files in the event of an audit by the VA.  For example, Stevens emailed to the VA an “attendance” sheet for eight students.  The attendance sheet was created by Stevens and included handwritten check marks purporting to represent the dates that the students attended class.  In fact, as Stevens well knew, the students had not attended class on many of those dates nor was class even held on many of those dates. 

February 14, 2019 in AML | Permalink | Comments (0)

FATCA - Do taxpayers need a right to know foreign government will receive their private financial information from IRS?

INTERGOVERNMENTAL AGREEMENTS (IGAS): Amend Internal Revenue Code § 1474 to Allow a Period of Notice and Comment on New Intergovernmental Agreements (IGAs) and to Require That the IRS Notify Taxpayers Before Their Data Is Transferred to a Foreign Jurisdiction Pursuant to These IGAs, Unless Unique and Compelling Circumstances Exist

EXAMPLE

Taxpayer is a citizen of the U.S. but is currently a resident of a foreign country. The U.S. and the foreign country enter into an IGA, which contemplates the reciprocal sharing of  axpayert information. Once the IGA is in force and the U.S. has done as much as it can to confirm that the cybersecurity measures of the foreign country are satisfactory, the reciprocal exchange of information begins. As part of that exchange, Taxpayer’s personal information is provided to the foreign country without Taxpayer’s specific knowledge. Once the information arrives in the foreign country and is beyond the continuing oversight of the IRS, a data breach occurs. As a result, Taxpayer’s personal information is exposed and taxpayer becomes the victim of identity theft.

Unlike in the U.S., the foreign country does not follow the practice of alerting taxpayers when data breaches occur. Thus, the identity theft results in substantial economic damage to Taxpayer in part because Taxpayer remains unaware of the data breach until unauthorized account activity begins to appear. Moreover, Taxpayer’s risk for subsequent damage has effectively been doubled by the circumstance that Taxpayer’s personal information now is maintained in two different jurisdictions, thereby increasing exposure to unauthorized disclosure or improper use of that information.

Read the proposal at Download ARC18_Volume1_LR_06_IGAS

February 14, 2019 in GATCA | Permalink | Comments (0)

Wednesday, February 13, 2019

NATIONAL TAXPAYER ADVOCATE ANNUAL REPORT TO CONGRESS & 2019 PURPLE BOOK OF TAX POLICY RECOMMENDATIONS

Learn more about the Annual Report to Congress


VOLUME 1

PREFACE: Introductory Remarks by the National Taxpayer Advocate, Including an Analysis of the Initial Effects of the Government Shutdown

TAXPAYER RIGHTS ASSESSMENT: IRS Performance Measures and Data Relating to Taxpayer Rights

The Most Serious Problems Encountered by Taxpayers: The Taxpayer’s Journey

Introduction

The Taxpayer’s Journey:  Roadmaps of the Taxpayer’s Path Through the Tax System

The Prefiling Stage:  Taxpayer Access to Information

  1. TAX LAW QUESTIONS: The IRS’s Failure to Answer the Right Tax Law Questions at the Right Time Harms Taxpayers, Erodes Taxpayer Rights, and Undermines Confidence in the IRS
  2. TRANSPARENCY OF THE OFFICE OF CHIEF COUNSEL: Counsel Is Keeping More of Its Analysis Secret, Just When Taxpayers Need Guidance More than Ever 
  3. NAVIGATING THE IRS: Taxpayers Have Difficulty Navigating the IRS, Reaching the Right Personnel to Resolve Their Tax Issues, and Holding IRS Employees Accountable

The Return Filing Process: Balancing Ease and Efficiency with Revenue Protection

  1. FREE FILE: The IRS’s Free File Offerings Are Underutilized, and the IRS Has Failed to Set Standards for Improvement
  2. FALSE POSITIVE RATES: The IRS's Fraud Detection Systems Are Marred by High False Positive Rates, Long Processing Times, and Unwieldy Processes Which Continue to Plague the IRS and Harm Legitimate Taxpayers
  3. IMPROPER EARNED INCOME TAX CREDIT PAYMENTS: Measures the IRS Takes to Reduce Improper Earned Income Tax Credit Payments Are Not Sufficiently Proactive and May Unnecessarily Burden Taxpayers
  4. RETURN PREPARER OVERSIGHT: The IRS Lacks a Coordinated Approach to Its Oversight of Return Preparers and Does Not Analyze the Impact of Penalties Imposed on Preparers

The Examination Process: Minimizing Taxpayer Burden in the Selection and Conduct of Audits

INTRODUCTION TO THE EXAMINATION PROCESS: Promoting Voluntary Compliance and Minimizing Taxpayer Burden in the Selection and Conduct of Audits

  1. CORRESPONDENCE EXAMINATION:  The IRS’s Correspondence Examination Procedures Burden Taxpayers and are Not Effective in Educating the Taxpayer and Promoting Future Voluntary Compliance
  2. FIELD EXAMINATION:  The IRS’s Field Examination Program Burdens Taxpayers and Yields High No-Change Rates, Which Waste IRS Resources and May Discourage Voluntary Compliance
  3. OFFICE EXAMINATION: The IRS Does Not Know Whether Its Office Examination Program Increases Voluntary Compliance or Educates the Audited Taxpayers About How to Comply in the Future
  4. POST-PROCESSING MATH ERROR AUTHORITY: The IRS Has Failed to Exercise Self-Restraint in Its Use of Math Error Authority, Thereby Harming Taxpayers

The Notice Function:  IRS Written Communication with Taxpayers

INTRODUCTION TO NOTICES: Notices Are Necessary to Inform Taxpayers of Their Rights and Obligations, Yet Many IRS Notices Fail to Adequately Inform Taxpayers, Leading to the Loss of Taxpayer Rights

  1. MATH ERROR NOTICES: Although the IRS Has Made Some Improvements, Math Error Notices Continue to Be Unclear and Confusing, Thereby Undermining Taxpayer Rights and Increasing Taxpayer Burden
  2. STATUTORY NOTICES OF DEFICIENCY:  The IRS Fails to Clearly Convey Critical Information in Statutory Notices of Deficiency, Making it Difficult for Taxpayers to Understand and Exercise Their Rights, Thereby Diminishing Customer Service Quality, Eroding Voluntary Compliance, and Impeding Case Resolution
  3. COLLECTION DUE PROCESS NOTICES: Despite Recent Changes to Collection Due Process Notices, Taxpayers Are Still at Risk for Not Understanding Important Procedures and Deadlines, Thereby Missing Their Right to an Independent Hearing and Tax Court Review

The IRS Collection Function: Minimizing Taxpayer Burden and Addressing Taxpayers’ Ability to Pay

INTRODUCTION TO COLLECTION: A Roadmap to the IRS Collection Process

  1. ECONOMIC HARDSHIP: The IRS Does Not Proactively Use Internal Data to Identify Taxpayers at Risk of Economic Hardship Throughout the Collection Process
  2. FIELD COLLECTION: The IRS Has Not Appropriately Staffed and Trained Its Field Collection Function to Minimize Taxpayer Burden and Ensure Taxpayer Rights Are Protected
  3. IRS’S AUTOMATED COLLECTION SYSTEM (ACS): ACS Lacks a Taxpayer-Centered Approach, Resulting in a Challenging Taxpayer Experience and Generating Less Than Optimal Collection Outcomes for the IRS
  4. OFFER IN COMPROMISE: Policy Changes Made by the IRS to the Offer in Compromise Program Make It More Difficult for Taxpayers to Submit Acceptable Offers
  5. Private Debt Collection: The IRS’s Expanding Private Debt Collection Program Continues to Burden Taxpayers Who Are Likely Experiencing Economic Hardship While Inactive PCA Inventory Accumulates

The Litigation Stage:  Access to Representation:

  1. PRE-TRIAL SETTLEMENTS IN THE U.S. TAX COURT:  Insufficient Access to Available Pro Bono Assistance Resources Impedes Unrepresented Taxpayers from Reaching a Pre-trial Settlement and Achieving a Favorable Outcome.

Status Update:

  1. APPEALS: Appeals Has Taken Important Steps Toward Increasing Campus Taxpayers’ Access to In-Person, Quality Appeals, But Additional Progress is Required. 

Legislative Recommendations

Introduction

National Taxpayer Advocate Legislative Recommendations With Congressional Action

  1. IT MODERNIZATION:  Provide the IRS with Additional Dedicated, Multi-Year Funding to Replace Its Antiquated Core IT Systems Pursuant to a Plan that Sets Forth Specific Goals and Metrics and Is Evaluated Annually by an Independent Third Party
  2. ADMINISTRATIVE APPEAL RIGHTS: Amend Internal Revenue Code Section 7803(a) to Provide Taxpayers With a Legally Enforceable Administrative Appeal Right Within the IRS Unless Specifically Barred by Regulations
  3. FIX THE FLORA RULE: Give Taxpayers Who Cannot Pay the Same Access to Judicial Review as Those Who Can
  4. INNOCENT SPOUSE RELIEF: Clarify That Taxpayers May Raise Innocent Spouse Relief In Refund Suits
  5. TAX COURT JURISDICTION: Fix the Donut Hole in the Tax Court’s Jurisdiction to Determine Overpayments by Non-Filers with Filing Extensions 
  6. INTERGOVERNMENTAL AGREEMENTS (IGAS): Amend Internal Revenue Code § 1474 to Allow a Period of Notice and Comment on New IGAs and to Require That the IRS Notify Taxpayers Before Their Data Is Transferred to a Foreign Jurisdiction Pursuant to These IGAs, Unless Unique and Compelling Circumstances Exist
  7. FOREIGN ACCOUNT REPORTING: Authorize the IRS to Compromise Assessed FBAR Penalties It Administers
  8. TAX WITHHOLDING AND REPORTING: Improve the Processes and Tools for Determining the Proper Amount of Withholding and Reporting of Tax Liabilities
  9. INDIAN EMPLOYMENT CREDIT: Amend IRC § 45A to Make the Indian Employment Credit an Elective Credit for Employers Who Hire Native Americans 
  10. CHILD TAX CREDIT: Amend Internal Revenue Code § 24(c)(1) to Conform With § 152(c)(3)(B) for Permanently and Totally Disabled People Age 17 and Older

The Most Litigated Issues

Introduction

Significant Cases

  1. Accuracy-Related Penalty Under IRC § 6662(b)(1) and (2)
  2. Trade or Business Expenses Under IRC § 162 and Related Sections
  3. Summons Enforcement Under IRC §§ 7602, 7604, and 7609
  4. Gross Income Under IRC § 61 and Related Sections
  5. Appeals From Collection Due Process (CDP) Hearings Under IRC §§ 6320 and 6330
  6. Failure to File Penalty Under IRC § 6651(a)(1), Failure to Pay an Amount Shown As Tax on Return Under IRC § 6651(a)(2), and Failure to Pay Estimated Tax Penalty Under IRC § 6654
  7. Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax Under IRC § 7403
  8. Charitable Contribution Deductions Under IRC § 170
  9. Itemized Deductions Reported on Schedule A (Form 1040)
  10. Frivolous Issues Penalty Under IRC § 6673 and Related Appellate-Level Sanctions

TAS Case Advocacy


Appendices


Volume Two: TAS Research and Related Studies

  1. A Conceptual Analysis of Pay-As-You-Earn (PAYE) Withholding Systems As a Mechanism for Simplifying and Improving U.S. Tax Administration
  2. A Study of the IRS’s Use of the Allowable Living Expense Standards
  3. Do Taxpayers Respond to the Substantial Understatement Penalty? Analysis of Bunching Below the Substantial Understatement Penalty Threshold
  4. What Influence do IRS Audits Have on Taxpayer Attitudes and Perceptions? Evidence from a National Survey
  5. A Study of the IRS Offer in Compromise Program for Business Taxpayers
  6. Further Analyses of “Federal Tax Liens and Letters: Effectiveness of the Notice of Federal Tax Liens and Alternative IRS Letters on Individual Tax Debt Resolution”

Literature Review

  1. Improving Notices Using Psychological, Cognitive, and Behavioral Science Insights

National Taxpayer Advocate 2019 Purple Book: Compilation of Legislative Recommendations to Strengthen Taxpayer Rights and Improve Tax Administration

INTRODUCTION

STRENGTHEN TAXPAYER RIGHTS

  1. Codify the Taxpayer Bill of Rights, a Taxpayer Rights Training Requirement, and the IRS Mission Statement as Section 1 of the Internal Revenue Code
  2. Require the IRS to Provide Taxpayers with a “Receipt” Showing How Their Tax Dollars Are Being Spent

IMPROVE THE FILING PROCESS

  1. Authorize the Volunteer Income Tax Assistance Grant Program
  2. Authorize the IRS to Establish Minimum Competency Standards for Federal Tax Return Preparers
  3. Require That Electronically Prepared Paper Tax Returns Include a Scannable Code
  4. Clarify That IRS Employees May Help Taxpayers Locate a Specific Low Income Taxpayer Clinic
  5. Extend the Time for Small Businesses to Make Subchapter S Elections
  6. Require Employers Filing More than Five Forms W-2, 1099-MISC, and 941 to Submit Them Electronically
  7. Authorize the Treasury Department to Recover Misdirected Deposits of Tax Refunds and Pay Them to the Correct Taxpayers
  8. Treat Electronically Submitted Tax Payments as Timely if Submitted Before the Applicable Deadline
  9. Adjust Estimated Tax Payment Deadlines to Occur Quarterly
  10. Harmonize Reporting Requirements for Taxpayers Subject to Both FBAR and FATCA By Eliminating Duplication and Excluding Accounts a U.S. Person Maintains in the Country Where He or She Is a Bona Fide Resident

IMPROVE ASSESSMENT AND COLLECTION PROCEDURES

  1. Continue to Limit the IRS’s Use of “Math Error Authority” to Clear-Cut Categories Specified by Statute
  2. Provide Additional Time for Taxpayers Outside the United States to Request Abatement of a Math Error Assessment Equal to the Time Extension Allowed in Responding to a Notice of Deficiency
  3. Require the IRS to Waive User Fees for Taxpayers Who Enter into Low-Cost Installment Agreements and Evaluate the Potential Revenue and Compliance Costs of Other User Fee Increases
  4. Improve Offer in Compromise Program Accessibility by Repealing the Partial Payment Requirement
  5. Modify the Requirement That the Office of Chief Counsel Review Certain Offers-in-Compromise
  6. Require the IRS to Mail Notices at Least Quarterly to Taxpayers with Delinquent Tax Liabilities
  7. Protect Retirement Funds from IRS Levies in the Absence of “Flagrant Conduct” By a Taxpayer
  8. Toll the Time Periods for Requesting the Return of Levy Proceeds While the Taxpayer or a Pertinent Third Party Is Financially Disabled
  9. Authorize the IRS to Release Levies That Cause Economic Hardship for Business Taxpayers
  10. Strengthen Taxpayer Protections in the Filing of Notices of Federal Tax Lien
  11. Provide Taxpayer Protections Before the IRS Recommends the Filing of a Lien Foreclosure Suit on a Principal Residence
  12. Provide Collection Due Process Rights to Third Parties Holding Legal Title to Property Subject to IRS Collection Actions
  13. Extend the Time Limit for Taxpayers to Sue for Damages for Improper Collection Actions
  14. Codify the Rule That Taxpayers Can Request Equitable Relief Under IRC § 6015(f) Any Time Before Expiration of the Period of Limitations on Collection
  15. Direct the IRS to Study the Feasibility of Using an Automated Formula to Identify Taxpayers at Risk of Economic Hardship
  16. Amend IRC § 6306(d) to Exclude the Debts of Taxpayers Whose Incomes Are Less Than Their Allowable Living Expenses From Assignment to Private Collection Agencies or, If That Is Not Feasible, Exclude the Debts of Taxpayers Whose Incomes Are Less Than 250 Percent of the Federal Poverty Level

REFORM PENALTY AND INTEREST PROVISIONS

  1. Convert the Estimated Tax Penalty into an Interest Provision for Individuals, Trusts, and Estates 
  2. Apply One Interest Rate Per Estimated Tax Underpayment Period for Individuals, Estates, and Trusts
  3. Reduce the Federal Tax Deposit Penalty Imposed on Certain Taxpayers Who Make Timely Tax Deposits
  4. Authorize a Penalty for Tax Return Preparers Who Engage in Fraud or Misconduct by Altering a Taxpayer’s Tax Return
  5. Require Written Managerial Approval Before Assessing the Accuracy-Related Penalty for “Negligence”
  6. Compensate Taxpayers for “No Change” National Research Program Audits

STRENGTHEN TAXPAYER RIGHTS BEFORE THE OFFICE OF APPEALS

  1. Provide Taxpayers with a Legally Enforceable Right to an Administrative Appeal within the IRS, Except if Specifically Barred by Regulations
  2. Require That at Least One Appeals Officer and One Settlement Officer Be Located and Permanently Available in Each State, the District of Columbia, and Puerto Rico
  3. Require Taxpayers’ Consent Before Allowing IRS Counsel or Compliance Personnel to Participate in Appeals Conferences

ENHANCE CONFIDENTIALITY AND DISCLOSURE PROTECTIONS

  1. Limit Redisclosures and Unauthorized Uses of Tax Returns and Tax Return Information Obtained Through Section 6103-Based “Consent” Disclosures
  2. Authorize the Treasury Department to Issue Guidance Specific to IRC § 6713 Regarding the Disclosure or Use of Tax Return Information by Preparers
  3. Allow a Period of Notice and Comment on New Intergovernmental Agreements and Require That the IRS Notify Taxpayers Before Their Data Is Transferred to a Foreign Jurisdiction

STRENGTHEN THE OFFICE OF THE TAXPAYER ADVOCATE

  1. Clarify That the National Taxpayer Advocate May Hire Legal Counsel to Enable Her to Advocate More Effectively For Taxpayers
  2. Clarify the Authority of the National Taxpayer Advocate to Make Personnel Decisions to Protect the Independence of the Office of the Taxpayer Advocate
  3. Codify the National Taxpayer Advocate’s Authority to Issue Taxpayer Advocate Directives
  4. Clarify the Taxpayer Advocate Service’s Access to Files, Meetings, and Other Information
  5. Authorize the National Taxpayer Advocate to File Amicus Briefs
  6. Require the IRS to Address the National Taxpayer Advocate’s Comments in Final Rules
  7. Authorize the Office of the Taxpayer Advocate to Assist Certain Taxpayers During a Lapse in Appropriations
  8. Repeal Statute Suspension Under IRC § 7811(d) for Taxpayers Seeking Assistance from the Taxpayer Advocate Service
  9. Establish the Compensation of the National Taxpayer Advocate by Statute and Eliminate Eligibility for Cash Bonuses

STRENGTHEN TAXPAYER RIGHTS IN JUDICIAL PROCEEDINGS

  1. Repeal Flora: Give Taxpayers Who Cannot Pay the Same Access to Judicial Review as Those Who Can
  2. Provide That the Time Limits for Bringing Tax Litigation Are Subject to the Judicial Doctrines of Forfeiture, Waiver, Estoppel and Equitable Tolling
  3. Clarify That the Scope and Standard of Judicial Review of Determinations Under IRC § 6015 Are De Novo
  4. Clarify That Taxpayers May Raise Innocent Spouse Relief as a Defense in Collection Proceedings and in Bankruptcy Cases
  5. Clarify That Taxpayers May Seek Innocent Spouse Relief in Refund Suits
  6. Fix the Donut Hole in the Tax Court's Jurisdiction to Determine Overpayments by Non-Filers with Filing Extensions

MISCELLANEOUS RECOMMENDATIONS

  1. Establish the Position of IRS Historian Within the Internal Revenue Service to Record and Publish Its History
  2. Amend the Combat-Injured Veterans Tax Fairness Act Of 2016 to Allow Veterans of the Coast Guard to File Claims for Credit or Refund for Taxes Improperly Withheld from Disability Severance Pay
  3. Authorize Independent Contractors and Service Recipients to Enter into Voluntary Withholding Agreements Without Risk That the Agreements Will Be Used to Challenge Worker Classification Determinations 

ADDITIONAL REFERENCE MATERIALS

February 13, 2019 in Tax Compliance | Permalink | Comments (0)

Micronesian Government Official Arrested in Money Laundering Scheme Involving Foreign Bribery

Charges were unsealed yesterday against a Micronesian government official for his alleged participation in a money laundering scheme involving bribes made to corruptly secure engineering and project management contracts from the government of the Federated States of Micronesia (FSM).  In a related matter, on Jan. 22, a U.S. executive pleaded guilty for his role in a scheme to, among other things, bribe the Micronesian official in violation of the Foreign Corrupt Practices Act (FCPA).  

Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division and Special Agent in Charge Sean Kaul of the FBI’s Honolulu Field Office made the announcement.

Master Halbert, 44, a Micronesian citizen, was charged in a criminal complaint filed in the District of Hawaii with one count of conspiracy to commit money laundering.  Halbert was arrested yesterday in Honolulu, Hawaii, and had his initial court appearance before U.S. Magistrate Judge Richard L. Puglisi of the District of Hawaii.  Halbert is scheduled to have a pretrial detention hearing on Feb. 13 and a preliminary hearing on Feb. 22.

According to the criminal complaint, Halbert was a government official in the FSM Department of Transportation, Communications and Infrastructure who administered FSM’s aviation programs, including the management of its airports.  The complaint alleges that between 2006 and 2016, a Hawaii-based engineering and consulting company owned by Frank James Lyon paid bribes to FSM officials, including Halbert, to obtain and retain contracts with the FSM government valued at nearly $8 million.  According to the complaint, Lyon entered into an agreement with Halbert to bribe Halbert in exchange for Halbert’s assistance in securing contracts for Lyon and his company.  Lyon and Halbert allegedly agreed that these bribes would be transported from the United States to FSM.

The charges contained in the complaint are merely allegations and the defendant is presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

In the related matter, Lyon, 53, of Honolulu, Hawaii, pleaded guilty on Jan. 22 to a one-count information filed in the District of Hawaii charging him with conspiracy to violate the anti-bribery provisions of the FCPA and to commit federal program fraud.  Lyon is scheduled to be sentenced on May 13.

February 13, 2019 in AML | Permalink | Comments (0)

Joaquin 'El Chapo’ Guzman, Sinaloa Cartel Leader, Convicted of Running a Continuing Criminal Enterprise and Other Drug-Related Charges

Joaquin Archivaldo Guzman Loera, known by various aliases, including “El Chapo” and “El Rapido,” was convicted today by a federal jury in Brooklyn, New York of being a principal operator of a continuing criminal enterprise – the Mexican organized crime syndicate known as the Sinaloa Cartel – a charge that includes 26 drug-related violations and one murder conspiracy.  Guzman Loera was convicted of all 10 counts of a superseding indictment, including narcotics trafficking, using a firearm in furtherance of his drug crimes and participating in a money laundering conspiracy.  The verdict followed a 12-week trial before U.S. District Judge Brian M. Cogan.  Guzman Loera faces a mandatory sentence of life imprisonment at his sentencing scheduled on June 25.

Acting Attorney General Matthew G. Whitaker, U.S. Department of Homeland Security Secretary Kirstjen Nielsen, Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, U.S. Attorney Richard P. Donoghue for the Eastern District of New York, U.S. Attorney Ariana Fajardo Orshan for the Southern District of Florida, Acting Administrator Uttam Dhillon of the U.S. Drug Enforcement Administration (DEA), FBI Director Christopher Wray, Executive Associate Director Derek Benner of U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI) and Acting U.S. Marshal Bryan T. Mullee of the Eastern District of New York, announced the verdict.

The Evidence at Trial:

As proven at trial, Guzman Loera was a principal leader of the Sinaloa Cartel, a Mexico-based international drug trafficking organization responsible for importing and distributing vast quantities of cocaine, marijuana, methamphetamine and heroin into the United States.  The evidence at trial, including testimony from 14 cooperating witnesses; narcotics seizures totaling over 130,000 kilograms of cocaine and heroin; weapons, including AK-47s and a rocket-propelled grenade launcher; ledgers; text messages; videos; photographs and intercepted recordings, detailed the drug trafficking activity of Guzman Loera and his co-conspirators over a 25-year period from January 1989 until December 2014.  Guzman Loera was repeatedly referred to by witnesses as one of the leaders of the Sinaloa Cartel.

Guzman Loera oversaw the smuggling of narcotics to wholesale distributors in Arizona, Atlanta, Chicago, Los Angeles, Miami, New York, and elsewhere.  The billions of illicit dollars generated from drug sales in the United States were then clandestinely transported back to Mexico.  Guzman Loera also used “sicarios,” or hit men, who carried out hundreds of acts of violence in Mexico to enforce Sinaloa’s control of territories and to eliminate those who posed a threat to the Sinaloa Cartel.

Drug Trafficking

In the course of the decades-long drug trafficking conspiracy, the Sinaloa Cartel transported tens of thousands of kilograms of narcotics from Central and South America for distribution in the United States.  Guzman Loera used various methods to transport the cartel’s narcotics into the United States, including submarines, carbon fiber airplanes, trains with secret compartments and transnational underground tunnels.  Multiple witnesses testified about seizures by law enforcement officers of massive amounts of cocaine, heroin and marijuana linked to the Sinaloa Cartel.  One of the largest seizures of drugs bound for the United States involved over seven tons of cocaine concealed in jalapeño cans. 

The jury also heard recordings of Guzman Loera’s own damning words discussing his drug trafficking, corruption and violence.  The calls included Guzman Loera discussing sending “ice,” meaning methamphetamine, to Los Angeles, California; Minneapolis, Minnesota; Ohio and Tucson, Arizona. 

Communications Network

Guzman Loera also utilized a sophisticated encrypted communications network to operate the global narcotics trafficking operation.  As an information technology engineer testified at trial, Guzman Loera paid him one million dollars to purchase and set up a network to enable the defendant to communicate via the internet with his drug trafficking associates in Colombia, Ecuador, Canada and the United States without fear of being intercepted by law enforcement or his rivals.  The witness devised a secret and secure system, consisting of encrypted cell phones and encrypted apps.

Cartel Violence

The success of the Sinaloa Cartel relied upon the use of violence to maintain their power throughout the region and beyond.  Numerous co-conspirators testified that Guzman Loera directed his hitmen to kidnap, interrogate, torture and shoot members of rival drug organizations, at times carrying out acts of violence himself.  A former hitman testified that Guzman Loera beat two men with a tree branch until their bodies “were completely like rag dolls,” before shooting the men and ordering their bodies be tossed into a bonfire.  The former hitman also testified that Guzman Loera interrogated a rival drug cartel member, shot him and ordered that he be buried alive.  In an intercepted call, the jury heard Guzman Loera order one of his sicarios to kidnap rival cartel members, but not to kill them without first checking with him.

Weapons

The Sinaloa Cartel had unfettered access to weapons.  A law enforcement witness showed the jury over 40 AK-47s that were seized in El Paso, Texas before they could be delivered to Guzman Loera in Mexico.  Additionally, witnesses identifed photographs of various weapons, including grenades and a rocket-propelled grenade launcher utilized by the Sinaloa Cartel.  Guzman Loera’s personal arsenal included a gold plated AK-47 and three diamond-encrusted .38 caliber handguns, one emblazoned with his initials, “JGL.” 

Corruption

The evidence presented at trial demonstrated that to further the interests of the Sinaloa Cartel, Guzman Loera and his organization took advantage of a vast network of corrupt government officials.  These officials ranged from local law enforcement officers, prison guards, state officials, high ranking members of the armed forces, as well as politicians.  These corrupt officials assisted Guzman Loera and his organization in exchange for millions of dollars’ worth of bribery payments.  For example, according to the testimony of several witnesses, in many instances, Guzman Loera and his workers were warned of pending law enforcement operations which allowed Guzman Loera to avoid capture on multiple occasions.  In other instances, Guzman Loera, through his employees, paid officials to turn a blind eye to trafficking activities in an effort to facilitate the shipment of drugs, weapons, and bulk cash. 

Money Laundering

Guzman Loera’s lucrative drug trafficking business generated billions of dollars in illicit proceeds.  Guzman Loera used various methods to launder money including bulk cash smuggling from the United States to Mexico.  One of the largest seizures was of $1.26 million seized from hidden compartments in a truck driven by Guzman Loera’s brother in Douglas, Arizona in 1989.  In addition to the bulk cash smuggling, Guzman Loera oversaw numerous shell companies, including a juice company and a fish flour company to launder the cartel’s narcotics trafficking proceeds.

“I am pleased that the Department has brought Joaquin Guzman Loera (El Chapo) to justice by securing a conviction against this drug kingpin, who was a principal leader of the Sinaloa Cartel,” said Acting Attorney General Whitaker.  “As was clear to the jury, Guzman Loera’s massive, multi-billion dollar criminal enterprise was responsible for flooding the streets of the United States with hundreds of tons of cocaine, as well as enormous quantities of other dangerous drugs such as heroin and methamphetamine.  The trial evidence also overwhelmingly showed that Guzman’s unceasing efforts to expand his cartel’s control and consolidate its power left a wake of corruption and violence in communities in both Mexico and the United States.  This case demonstrated the extraordinary reach of the U.S. government, our tenacity and commitment to pursuing kingpins like Guzman whom — if their power is unchecked — will, like Guzman, develop what for 25 years was an almost unstoppable capacity to move massive quantities of drugs into our country.  Guzman had the capital to absorb huge losses and run his enterprise with impunity; the enormous power to corrupt; and the capability to employ violence on a massive scale.  This case, and more importantly, this conviction serves as an irrefutable message to the kingpins that remain in Mexico, and those that aspire to be the next Chapo Guzman, that eventually you will be apprehended and prosecuted.  Finally, this verdict demonstrates that the United States, working in close partnership with the Mexican government, will continue to bring all possible resources to bear in its fight against international drug traffickers and their violent organizations.”

“The guilty verdict against Joaquin Guzman Loera, one of the most violent and feared drug kingpins of our time, is a testament to the hard work and courage of America’s frontline law enforcement personnel, including ICE’s Homeland Security Investigations,” said DHS Secretary Nielsen.  “They gathered substantial evidence over multiple investigations, which made his extradition to the United States and a successful prosecution possible.  Today’s verdict sends an unmistakable message to transnational criminals: you cannot hide, you are not beyond our reach, and we will find you and bring you to face justice.  Like Guzman, you will suffer the consequences of your criminal behavior.  I applaud the brave men and women at DHS who helped make this conviction possible and thank our interagency and international partners for their exceptional work.”

“Guzman Loera’s bloody reign atop the Sinaloa Cartel has come to an end, and the myth that he could not be brought to justice has been laid to rest,” said U.S. Attorney Donoghue.  “Today, Guzman Loera has been held accountable for the tons of illegal narcotics he trafficked for more than two decades, the murders he ordered and committed, and the billions of dollars he reaped while causing incalculable pain and suffering to those devastated by his drugs.  Today’s verdict is the culmination of the tireless work of countless brave members of law enforcement, here and abroad, and we congratulate them.  The Department of Justice is committed to eradicating criminal organizations that fuel America’s drug epidemic, and our mission will continue until it is completed.”

“The conviction of former Sinaloa Cartel leader Joaquin Guzman Loera strips the power from a man who employed horrific acts of violence to infect communities, throughout the United States and abroad, with the venom of illicit drugs,” said U.S. Attorney Fajardo Orshan.  “Today’s verdict is a reminder to all, that our international borders do not protect narco-traffickers and the cartels’ criminal enterprises from federal prosecution.  U.S. Attorney’s Offices across the nation stand united with our domestic and foreign law enforcement partners, as we continue our fight against transnational criminal organizations.”

“The reign of Joaquin Guzman Loera’s crime and violence has come to an end,” said FBI Director Wray.  “As leader of the Sinaloa Cartel, Guzman Loera carried out and directed acts of brazen violence as he oversaw the import and distribution of vast amounts of illegal drugs throughout the United States.  But today, through the steadfast determination and collective efforts of the FBI and our law enforcement partners both domestic and abroad, and due to our continuing partnership with the Government of Mexico, justice has been served.”

 “Today’s conviction of Joaquin “El Chapo” Guzman demonstrates the dedication and determination of the men and women of DEA to bring the world’s most dangerous and prolific drug trafficker to justice,” said DEA Acting Administrator Dhillon.  “Those who bring drugs and violence into the United States that destroy lives and communities will not be tolerated, nor evade our reach. The success of this case is a testament to the strength of our relationship with our Mexican counterparts. DEA will continue to pursue justice worldwide and protect Americans.”

“HSI is committed to using our unique border authority to target and dismantle transnational criminal organizations responsible for trafficking narcotics and bringing violence into the United States,” said HSI Executive Associate Director Benner.  “Through collaboration with local, federal and international law enforcement partners, HSI special agents were able to bring an end to Joaquin Guzman Loera’s criminal activities, and help ensure he was brought to justice.”

“The conviction of Joaquin “El Chapo” Guzman demonstrates what is possible when law enforcement works collectively and coordinates their efforts,” said Acting U.S. Marshal Mullee.  “The U.S. Marshals Service ensured the integrity of the judicial process in this case.  From providing safe and secure detention and transportation of the world’s most notorious drug kingpin to ensuring the anonymity of the jury, protecting the judge, attorneys, witnesses and the public, the Marshals Service proudly played its important role in the process.  I would like to express my gratitude to all of our law enforcement partners who worked tirelessly in support of our mission.  They are the talented men and women of the New York City Police Department, Federal Protective Service, 24th Civil Support Team of the New York National Guard, and the Federal Bureau of Prisons.  The U.S. Marshals take our responsibility of protecting the federal judicial process very seriously.  We must anticipate and deter threats, while continuously developing and employing innovative protective tactics.  We carry out these responsibilities with precision every day across the country.  The successful prosecution of Joaquin “El Chapo” Guzman stands as a shining example of our mission.”

When sentenced by Judge Cogan, Guzman Loera faces a mandatory life sentence without the possibility of parole for leading a continuing criminal enterprise, and a sentence of up to life imprisonment on the seven remaining drug counts.  After the verdict, the government will seek a forfeiture money judgment for billions of dollars constituting the cartel’s illegal drug-trafficking proceeds.

The government’s case is being prosecuted by U.S. Department of Justice Trial Attorneys Amanda Liskamm, Anthony Nardozzi, Michael Lang and Brett Reynolds of the Criminal Division’s Narcotic and Dangerous Drug Section, Assistant U.S. Attorneys Gina Parlovecchio, Andrea Goldbarg, Michael Robotti, Patricia Notopoulos and Hiral Mehta of the Eastern District of New York and Assistant U.S. Attorneys Adam Fels and Lynn Kirkpatrick of the Southern District of Florida.

The case was investigated by the DEA, HSI and the FBI, in cooperation with Mexican, Ecuadorian, Netherlands, Dominican, and Colombian law enforcement authorities. Substantial assistance was provided by the U.S. Attorneys’ Offices in the Northern District of Illinois, the Western District of Texas, the Southern District of New York, the Southern District of California and the District of New Hampshire.  The Department of Justice’s Office of International Affairs also played an integral role in securing the extradition of Guzman Loera to the United States, in cooperation with authorities of the Mexican government, without which his extradition and prosecution would not have been possible.  The investigative efforts in this case were coordinated with the Department of Justice’s Special Operations Division, comprising of agents, analysts and attorneys from the Criminal Division’s Narcotic and Dangerous Drug Section; DEA New York, DEA Miami, FBI Washington Field Office, FBI New York Field Office, FBI Miami Field Office; HSI New York, HSI Nogales; Bureau of Alcohol, Tobacco, Firearms and Explosives; U.S. Marshals Service; IRS Criminal Investigation; U.S. Bureau of Prisons, NYPD and New York State Police.

This case is the result of the ongoing efforts by the Organized Crime Drug Enforcement Task Force (OCDETF), a partnership that brings together the combined expertise and unique abilities of federal, state and local law enforcement agencies. The principal mission of the OCDETF program is to identify, disrupt, dismantle and prosecute high level members of drug trafficking, weapons trafficking and money laundering organizations and enterprises.

February 13, 2019 in AML | Permalink | Comments (0)

Tuesday, February 12, 2019

Malta Financial Services Authority Publishes New AML Strategy Addressing EU Concerns

"As the country’s recent National Risk Assessment highlighted, money laundering and terrorist financing represent a threat to the stability, profitability and safety of this industry and of the country as whole. Notably, the sector attracts foreign investment, segments of which carry a higher degree of financial crime risk. Similarly, Malta is establishing itself as one of the world’s leading jurisdictions for remote gaming, e-money and digital currencies, sectors which may be more vulnerable to risks of financial crime hence exposing the financial structures that support them to that risk as well. " 

Joseph Cuschieri, Chief Executive Officer, Malta Financial Services Authority

Download MFSA-AML_CFT-Strategy

February 12, 2019 in AML | Permalink | Comments (0)

Monday, February 11, 2019

Jersey Financial Services Commission Releases Business Plan for the Island, Addresses Reputation Issues

Unveiling its Business Plan for 2019, the Jersey Financial Services Commission (JFSC) has reemphasised its commitment to maintaining the Island’s reputation as a first class international finance centre. Download Jfsc-business-plan-2019

More than 300 members of Jersey’s financial services industry, politicians and civil servants attended the presentation this morning which outlined the regulator’s responsibilities and objectives for the coming year.

Mitigating the greatest perceived risks, improving interactions with Industry and the general public,  facilitating market access for Jersey, and ensuring the JFSC remains independent and efficient are all key priorities for the organisation in 2019.

In particular, the regulator will be focusing its efforts on maintaining its anti-money laundering supervisory capacity to meet global best practise standards, and delivering strategic and legislative developments in the Companies Registry - both of which are critically linked to upholding the Island’s reputation.

February 11, 2019 in AML | Permalink | Comments (0)

Sunday, February 10, 2019

TaxFacts Intelligence Weekly (Feb 7, 2019)

William H. Byrnes, J.D., LL.M. and Robert Bloink, J.D., LL.M.

TAX REFORM DEVELOPMENTS

IRS Provides New 199A Safe Harbor for Rental Real Estate Activities
Since the introduction of Section 199A, business owners engaged in real estate activities have been confused by the new 20 percent deduction for qualified business income of certain pass-through entities. IRS proposed Revenue Procedure 2019-07 provide a safe harbor so that rental real estate businesses will qualify as "trades or businesses" if it: (1) maintains separate books and records for each rental enterprise, (2) involves the performance of at least 250 hours of rental real estate activities, and (3) maintains contemporaneous records regarding the rental real estate services. The safe harbor is effective for tax years ending after December 31, 2017. For more information, visit Tax Facts Online and Read More.

Final 199A Guidance on Tracking W-2 Wages Provides Guidance for Short Tax Years
The IRS has recently finalized the methods that a business owner can use to track W-2 wages for calculating the Section 199A deduction. The new guidance clarifies that, in the case of short taxable years, the business owner is required to use the "tracking wages method" with certain modifications. The total amount of wages subject to income tax withholding and reported on Form W-2 can only include amounts that are actually or constructively paid to the employee during the short tax year and reported on a Form W-2 for the calendar year with or within that short tax year. For more information on the methods available for calculating W-2 wages for Section 199A purposes, visit Tax Facts Online and Read More.

LITIGATION WATCH

Court Requires Employer to Pay Dependent Life Insurance Benefits After Failure to Provide SPD
A court recently ruled that an employer was required to pay life insurance benefits to an employee under a life insurance policy insuring her former spouse, which was offered by the employer as a dependent life insurance benefit. When the employee's former husband died within three months' of their divorce, her claim for benefits under the policy was denied because she was not an "eligible dependent" because of the divorce. The employee made several claims, including one that the she was not provided a summary plan description (SPD) with respect to the policy. The court agreed with the plaintiff's claim that failure to provide the SPD was a breach of fiduciary duty under ERISA. For more information on employer-sponsored life insurance, visit Tax Facts Online and Read More.

2019's Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

February 10, 2019 | Permalink | Comments (0)

Saturday, February 9, 2019

International Trade in Goods and Services

The U.S. monthly international trade deficit decreased in November 2018 according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit decreased from $55.7 billion in October (revised) to $49.3 billion in November, as imports decreased more than exports. The previously published October deficit was $55.5 billion. The goods deficit decreased $6.7 billion in November to $71.6 billion. The services surplus decreased $0.3 billion in November to $22.3 billion.

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $49.3 billion in November, down $6.4 billion from $55.7 billion in October, revised.

U.S. International Trade in Goods and Services Deficit
Deficit: $49.3 Billion -11.5%°
Exports: $209.9 Billion -0.6%°
Imports: $259.2 Billion -2.9%°

Next release: To be determined. Report delayed due to recent lapse in federal funding.

(°) Statistical significance is not applicable or not measurable.

Data adjusted for seasonality but not price changes

Source: U.S. Census Bureau, U.S. Bureau of Economic Analysis; U.S. International Trade in Goods and Services, February 6, 2019.

Goods and Services Trade Deficit, November 2018

Exports, Imports, and Balance (exhibit 1)

November exports were $209.9 billion, $1.3 billion less than October exports. November imports were $259.2 billion, $7.7 billion less than October imports.

The November decrease in the goods and services deficit reflected a decrease in the goods deficit of $6.7 billion to $71.6 billion and a decrease in the services surplus of $0.3 billion to $22.3 billion.

Year-to-date, the goods and services deficit increased $51.9 billion, or 10.4 percent, from the same period in 2017. Exports increased $157.1 billion or 7.3 percent. Imports increased $208.9 billion or 7.9 percent.

Three-Month Moving Averages (exhibit 2)

The average goods and services deficit decreased $1.5 billion to $53.2 billion for the three months ending in November.

  • Average exports increased $0.5 billion to $210.8 billion in November.
  • Average imports decreased $0.9 billion to $264.0 billion in November.

Year-over-year, the average goods and services deficit increased $6.4 billion from the three months ending in November 2017.

  • Average exports increased $11.0 billion from November 2017.
  • Average imports increased $17.5 billion from November 2017.

Exports (exhibits 3, 6, and 7)

Exports of goods decreased $1.2 billion to $140.3 billion in November.

  Exports of goods on a Census basis decreased $1.2 billion.

  • Industrial supplies and materials decreased $1.4 billion.
    • Other petroleum products decreased $0.6 billion.
    • Nonmonetary gold decreased $0.5 billion.
  • Consumer goods decreased $0.9 billion.
    • Gem diamonds decreased $0.5 billion.
    • Pharmaceutical preparations decreased $0.4 billion.
  • Capital goods increased $1.4 billion.
    • Civilian aircraft increased $1.0 billion.

  Net balance of payments adjustments increased less than $0.1 billion.

Exports of services decreased $0.1 billion to $69.5 billion in November.

  • Financial services decreased $0.1 billion.

Imports (exhibits 4, 6, and 8)

Imports of goods decreased $7.9 billion to $211.9 billion in November.

  Imports of goods on a Census basis decreased $7.9 billion.

  • Consumer goods decreased $4.3 billion.
    • Cell phones and other household goods decreased $2.3 billion.
    • Artwork, antiques, stamps, and other collectibles decreased $0.4 billion.
  • Industrial supplies and materials decreased $3.4 billion.
    • Other petroleum products decreased $1.4 billion.
    • Fuel oil decreased $0.8 billion.
    • Crude oil decreased $0.7 billion.

  Net balance of payments adjustments increased less than $0.1 billion.

Imports of services increased $0.2 billion to $47.3 billion in November.

  • Travel (for all purposes including education) increased $0.3 billion.
  • Insurance services decreased $0.1 billion.

Real Goods in 2012 Dollars – Census Basis (exhibit 11)

The real goods deficit decreased $7.5 billion to $80.8 billion in November.

  • Real exports of goods increased $0.4 billion to $150.0 billion.
  • Real imports of goods decreased $7.1 billion to $230.8 billion.

Revisions

Revisions to October exports

  • Exports of goods were revised up less than $0.1 billion.
  • Exports of services were revised up $0.1 billion.

Revisions to October imports

  • Imports of goods were revised up $0.2 billion.
  • Imports of services were revised up $0.2 billion.

Goods by Selected Countries and Areas: Monthly – Census Basis (exhibit 19)

The November figures show surpluses, in billions of dollars, with South and Central America ($4.8), Hong Kong ($2.6), United Kingdom ($0.9), Singapore ($0.8), and Brazil ($0.7). Deficits were recorded, in billions of dollars, with China ($35.4), European Union ($13.8), Mexico ($6.8), Japan ($5.7), Germany ($5.6), Italy ($2.7), South Korea ($1.9), India ($1.7), Taiwan ($1.6), Saudi Arabia ($1.5), France ($1.3), OPEC ($1.2), and Canada ($0.8).

  • The deficit with China decreased $2.8 billion to $35.4 billion in November. Exports decreased $0.1 billion to $7.4 billion and imports decreased $2.9 billion to $42.8 billion.
  • The deficit with Canada decreased $1.3 billion to $0.8 billion in November. Exports decreased $0.4 billion to $24.5 billion and imports decreased $1.7 billion to $25.3 billion.
  • The deficit with Taiwan increased $0.4 billion to $1.6 billion in November. Exports decreased $0.3 billion to $2.5 billion and imports increased $0.1 billion to $4.1 billion.

February 9, 2019 in Economics | Permalink | Comments (1)

Friday, February 8, 2019

United States and International Law Enforcement Dismantle Online Organized Crime Ring Operating out of Romania that Victimized Thousands of U.S. Residents

Twelve Foreign Nationals Extradited to the United States

According to court documents unsealed today, 20 people, including 16 foreign nationals, have been charged for their roles in an international organized crime group that defrauded American victims through online auction fraud causing millions of dollars in losses.

Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, U.S. Attorney Robert M. Duncan, Jr. of the Eastern District of Kentucky, Director Randolph D. Alles of the U.S. Secret Service (USSS), Commissioner Richard W. Sanders of the Kentucky State Police, Chief of Police Lawrence Weathers of the Lexington Police Department, Chief Don Fort of IRS Criminal Investigation and Inspector in Charge Tommy Coke of the U.S. Postal Inspection Service Pittsburgh Division made the announcement.

“The defendants allegedly orchestrated a highly organized and sophisticated scheme to steal money from unsuspecting victims in America and then launder their funds using cryptocurrency,” said Assistant Attorney General Benczkowski.  “As the charges and arrests announced today demonstrate, the Criminal Division and our law enforcement partners will vigorously pursue cybercriminals who defraud the American public, regardless of where those criminals may reside.”

“This prosecution stems from a multi-year investigation initiated in Kentucky led by the U.S. Secret Service, in cooperation with several local, state, federal, and international law enforcement partners,” said U.S. Attorney Duncan.  “Cooperation of this kind is essential, if we are to be effective in disrupting organized cybercrime, which costs victims from across the United States millions of dollars and has become an increasingly prevalent means for criminals to prey on the public.  I commend the exceptional work done by our law enforcement partners, and we are proud to join this cooperative effort to combat cyber fraud schemes.”

“Today’s announcement demonstrates the success of the collaborative efforts of our worldwide network of law enforcement partners.  It sends a powerful message and demonstrates the transnational investigative capabilities of the Secret Service,” said Secret Service Director Randolph “Tex” Alles.  “This is a shared win for law enforcement across the globe.  I would like to thank the more than a dozen law enforcement agencies worldwide who helped us investigate this case, each played a vital role in its success.”

On July 5, 2018, a federal grand jury in Lexington, Kentucky returned a 24-count indictment charging 15 foreign nationals with RICO conspiracy, wire fraud conspiracy, money laundering conspiracy, and aggravated identity theft.  Those charged include Andrei-Cătălin Stoica, 28, of Romania; Victor-Aurel Grama, 29, of Romania; Liviu-Sorin Nedelcu, 33, of Romania; Ionuţ Ciobanu, 28, of Romania; Marius-Dorin Cernat, 35, of Romania; Alexandru Ion, 30, of Romania; Ştefan-Alexandru Păiuşi, 33, of Romania; Eugen-Alin Badea, 34, of Romania; Cristişor Olteanu, 31, of Romania; Adrian Mitan, 34, of Romania; Bogdan-Ştefan Popescu, 29, of Romania; Florin Arvat, 24, of Romania; Alin-Ionuţ Dobrică, 26, of Romania; Vlad-Călin Nistor, 31, of Romania, and Rossen Iossifov, 51, of Bulgaria.  On Feb. 6, a federal grand jury in Lexington returned an 11-count indictment charging an additional foreign national and four Americans for their roles in the criminal enterprise.  Those charged include Beniamin-Filip Ologeanu, 29, of Alexandria, Romania; Austin Edward Nedved, 27, of Northborough, Massachusetts; Dimitrious Antoine Brown, 37, of Macon, Georgia and Rashawd Lamar Tulloch, 30, of Newnan, Georgia.  Andrew Gilbert Ybarra II, 25, of Patterson, California, was also charged with conspiracy to commit money laundering.  In all, 15 Romanian nationals and one Bulgarian national were charged in these two indictments.  Of these, 12 have been extradited to the United States and are awaiting trials, which are currently set for June 18, 2019 and Aug. 7, 2019.

The indictment alleges that these defendants participated in a criminal conspiracy primarily located in Alexandria, Romania that engaged in a large-scale scheme of online auction fraud.  Specifically, Romania-based members of the conspiracy and their associates posted false advertisements to popular online auction and sales websites—such as Craigslist and eBay—for high-cost goods (typically vehicles) that did not actually exist.  According to the indictment, these members would convince American victims to send money for the advertised goods by crafting persuasive narratives, for example, by impersonating a military member who needed to sell the advertised item before deployment.  The members of the conspiracy are alleged to have created fictitious online accounts to post these advertisements and communicate with victims, often using the stolen identities of Americans to do so.  They are alleged to have delivered invoices to the victims bearing trademarks of reputable companies in order to make the transactions appear legitimate.  Once victims were convinced to send payment, the indictment alleges that the conspiracy engaged in a complicated money laundering scheme wherein domestic associates would accept victim funds, convert these funds to cryptocurrency, and transfer proceeds in the form of cryptocurrency to foreign-based associates.  The indictment alleges that these foreign-based money launderers include Vlad-Călin Nistor, who owns Coinflux Services SRL, and Rossen Iossifov, who owns R G Coins.  According to the indictment, Nistor and Iossifov exchanged cryptocurrency into local fiat currency on behalf of the Romania-based members of the conspiracy, knowing that they were exchanging bitcoin that represented the proceeds of fraud.

Some of the fraud schemes alleged in the indictments include:

  • Nedelcu persuaded victims to send money for the advertised goods by creating fictitious but legitimate sounding entities through which he purported to sell vehicles.  For example, he used email address, foiaol2015@gmail.com, belonging to Aol Autos, to communicate with victims by email with subject lines like, “America Online Autos Financial Department [Order # 099106592090].”  The email would contain messages appearing to be legitimate invoices for payment for the advertised item purported to be sold.
  • Ciobanu and his coconspirators used the email address judithlane82@gmail.com to communicate with victims about the sale of vehicles, signing the emails as “Sgt. Judith Lane,” and created a Facebook profile for Judith Lane, who was depicted as a member of the Air Force. Ciobanu, acting as “Judith Lane,” also posted two Facebook advertisements for the sale of automobiles.
  • Cernat and his coconspirators sent victims invoices that appeared to be from eBay Motors and provided an eBay Motors Support Department phone number and email address of ebay@processing-secure.com.  These invoices provided instructions for payment and included reassuring language for secure transactions, such as, “Through OneVanilla Prepaid Visa services we can guarantee you 100 percent protection and insurance in this transaction.  eBay Payments will secure the payment until the buyer receives, inspects, and accepts the item.  Or, if it will be the case, eBay will refund the payment to the buyer.”
  • Păiuşi also convinced victims to send money for the advertised goods by sending them invoices for payment that appeared legitimate. … [One such] invoice appeared to be sent from “eBayTM Buyer Protection,” provided the victim with an email address for questions, described the seller as a “certified eBayTM  third-party seller,” and explained that the buyer will be refunded if he or she refuses the merchandise.
  • The coconspirators then communicated with the victims via email, often signing their emails by posing as a member of the military, like “Sgt. Logan Burdick.”  Other emails purported to be from the online auction company, like eBay.  The emails often communicated convincing information about the item being sold and the reason payment was required before shipping or viewing the item. 

Adrian Mitan, who was charged in the July 5, 2018 indictment, was also charged in a separate indictment unsealed today with money laundering offenses arising from a credit card phishing and brute-force attack scheme, likewise designed to steal money from Americans.  The indictment explains that phishing is an attempt to acquire personal information by masquerading as a trustworthy entity through electronic communications, and brute force is a cryptological trial-and-error methodology used to obtain information such as personal identification numbers for credit cards.  Mitan allegedly phished for credit/debit card information of U.S. customers, hacked into the electronic systems of American businesses, and then conducted a brute force attack on their point-of-sale systems for the purpose of stealing the remaining credit/debit card information.  According to the indictment, Mitan then directed American money launderers to create “dummy” credit/debit cards with the stolen information, which were used to extract money from the customers’ accounts.  These fraudulent proceeds were then returned to Mitan in the form of bitcoin.

The investigation was conducted by the U.S. Secret Service, Kentucky State Police, Lexington Police Department, IRS Criminal Investigation and U.S. Postal Inspection Service, and supported by the Justice Department’s Organized Crime Drug Enforcement Task Forces (OCDETF) and the International Organized Crime Intelligence and Operations Center (IOC-2).  Assistance was provided by the Romanian National Police (Service for Combating Cybercrime) and the Romanian Directorate for Investigating Organized Crime and Terrorism (Agency for Prosecuting Organized Crime).  The Justice Department’s Office of International Affairs provided significant support with the defendants’ extradition.  This case is being prosecuted by Assistant U.S. Attorneys Kathryn M. Anderson and Kenneth R. Taylor of the Eastern District of Kentucky and Senior Trial Attorney Timothy Flowers and Senior Counsel Frank Lin of the Criminal Division’s Computer Crime and Intellectual Property Section with assistance from the Criminal Division’s Money Laundering and Asset Recovery Section. 

Individuals believing they may be victims of the advanced fee and online auction fraud or brute-force attack schemes described herein are encouraged to visit the following website to obtain more information: https://justice.gov/usao-edky/information-victims-large-cases.  Tips to avoid becoming a victim of online auction fraud can be found here on the U.S. Secret Service’s website. 

For the RICO conspiracy and wire fraud conspiracy charges, each defendant faces up to 20 years in prison, a fine of $250,000, and three years of supervised release.  The same penalties apply to the money laundering conspiracy charges, except that the fine may be up to $500,000.  Additionally, if convicted of identity theft, Brown faces a term of 15 years in prison, a fine of $250,000, and three years of supervised release, and if convicted of aggravated identity theft, those charged face a mandatory-minimum sentence of two years in prison, to be served consecutive to any term of imprisonment ordered for the other counts of conviction.  However, any sentence following a conviction would be imposed by the Court, after its consideration of the U.S. Sentencing Guidelines and the federal statutes.

The charges in the indictment are merely allegations, and the defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

February 8, 2019 in AML | Permalink | Comments (0)

Consumer Financial Protection Bureau Settles with USAA Federal Savings Bank

Bank Failed to Stop Payments or Resolve Errors, Must Pay $12 Million in Restitution, $3.5 Million Fine

The Consumer Financial Protection Bureau (Bureau) today announced a settlement with USAA Federal Savings Bank, a federally chartered savings association headquartered in San Antonio, Texas.

As described in the consent order, the Bureau found that USAA violated the Electronic Fund Transfer Act and Regulation E by failing to properly honor consumers’ stop payment requests on preauthorized electronic fund transfers, and by failing to initiate and complete reasonable error resolution investigations. USAA also violated the Consumer Financial Protection Act of 2010 by reopening deposit accounts consumers had previously closed without seeking prior authorization or providing adequate notice.

Under the terms of the consent order, USAA must, among other provisions, provide approximately $12 million in restitution to certain consumers who were denied a reasonable error resolution investigation, and pay a $3.5 million civil money penalty.

The consent order is available at: https://files.consumerfinance.gov/f/documents/bcfp_usaa-federal-savings-bank_consent-order.pdf 

February 8, 2019 in Financial Regulation | Permalink | Comments (0)

What Happens When Crypto Currency Banker Dies With The Passwords for $190 Million?

Gerald Cotten, 30, was the only person with passwords to access customers' money ... read the story here

February 8, 2019 in AML | Permalink | Comments (0)

Thursday, February 7, 2019

Two Men Convicted for Multimillion Dollar Investment Fraud Scheme for Non-Existent Electric Car Company Niyato Industries

A federal jury in Charlotte, North Carolina found two men guilty for their roles in a five-year multi-million dollar high-yield investment fraud, the Justice Department announced today.

Robert Leslie Stencil, 61, of Charlotte, North Carolina, and Michael Allen Duke, 50, of Richardson, Texas, were each convicted of one count of conspiracy to commit mail and wire fraud, following a three-week trial.  In addition, Stencil was convicted of 13 counts of mail fraud, 13 counts of wire fraud and four counts of money laundering.  Duke was also convicted of three counts of mail fraud, one count of wire fraud and one count of money laundering.  Sentencing before U.S. District Judge Max O. Cogburn Jr. of the Western District of North Carolina, who presided over the trial, has not yet been scheduled.

“Robert Stencil and Michael Duke shamelessly stole millions of dollars from unwitting investors, including the elderly, to line their own pockets,” said Assistant Attorney General Benczkowski.  “These convictions hopefully provide some consolation to the many innocent victims of this criminal scheme.”

According to the evidence presented at trial, from 2012 through 2016, Stencil, Duke and their co-conspirators sold millions of dollars of worthless stock in a sham company named Niyato Industries Inc. (“Niyato”).  Stencil played the role of Niyato’s Chief Executive Officer.  Duke was Stencil’s top salesperson.  Together with their co-conspirators, Stencil and Duke portrayed Niyato as a leader in its field, manufacturing electric vehicles and converting gasoline vehicles to run on compressed natural gas.  Stencil, Duke and their co-conspirators told victims that Niyato was run by a team of high-profile executives, and that Niyato had patented technology, state-of-the-art facilities, and valuable contracts.  Further, they told victims that Niyato would use 97 percent of the money it raised selling stock to grow its business and expand operations.  Stencil, Duke and their co-conspirators used high-pressure tactics when pitching Niyato stock to victims.  Among other things, they sold victims on the opportunity to get in on the ground floor, offering them a portion of a supposedly limited supply of pre-IPO stock at $.50 per share and promising them a 10- to 16-fold return when Niyato went public.  From 2012 to 2016, Stencil, Duke and their co-conspirators repeatedly told victims that an IPO was imminent.

In reality, the evidence showed that Niyato had no patents, facilities, products, or plans to commence an IPO.  Niyato’s true business was the sale of worthless stock.  Stencil, Duke and their co-conspirators used nearly all of the money raised by selling Niyato stock for their own personal benefit, with Stencil paying salespeople – like Duke – half or nearly half of the money they solicited from each investor on behalf of Niyato.  Moreover, Stencil used Niyato’s bank account as his own personal piggybank.  The evidence further established that Stencil, Duke and their co-conspirators sold approximately $2.8 million in stock to around 140 victims, many of whom were elderly.  Duke was Stencil’s top salesperson, selling over $1.4 million of worthless Niyato stock to around 70 victims.  For his role in the fraudulent scheme, Duke received over $700,000.    

Four other defendants pleaded guilty and are awaiting sentencing, including Nicholas Fleming, 63, of Northridge, California; Martin Delaine Lewis, 52, of Frisco, Texas; Paula Saccomanno, 61, of Boca Raton, Florida; and Dennis Swerdlen, 64, of Boca Raton, Florida.  Kristian F. Sierp, 47, of Costa Rica, pleaded guilty on Feb. 2, 2017 and received a sentence of 102 months in prison in connection with his role in this case and in an unrelated Costa Rican sweepstakes fraud.  Daniel Thomas Broyles, Sr., 61, of Beverly Hills, California, was also charged and remains a fugitive.  An indictment is merely an allegation and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.   

This case was investigated by the U.S. Postal Inspection Service.  Fraud Section Trial Attorneys William Bowne and Christopher Fenton are prosecuting the case. 

February 7, 2019 in AML | Permalink | Comments (0)

Wednesday, February 6, 2019

How Serious is Brazil's New Government to Root Out Corruption? Will The President Prosecute His Son?

Brazil Judge Reopens Bolsonaro Probe

“If by chance he erred and it were proven, I regret it as a father, but he’ll have to pay the price for those actions we can’t accept," Bolsonaro told Bloomberg in January."

Read the full story on Organized Crime and Corruption Reporting Project (OCCRP)

“Should any evidence become available against my son, he will be punished like anyone else and serve his penalty,” Jair Bolsonaro told the Washington Post in an interview last month."

Reuters story here.

February 6, 2019 in AML | Permalink | Comments (0)

Sterling Jewelers Pays $11 Million in Fines for Opening Store Credit-card Accounts Without Customer Consent; Agrees to Injunction Against Illegal Conduct

Jewelry Retailer Enrolled Customers in Credit Cards and Related Products Without Their Consent

The Consumer Financial Protection Bureau (Bureau) and the People of the State of New York settled claims against Sterling Jewelers Inc.

The Bureau’s and the State’s parallel investigations found that Sterling violated the Consumer Financial Protection Act of 2010 by opening store credit-card accounts without customer consent; enrolling customers in payment-protection insurance without their consent; and misrepresenting to consumers the financing terms associated with the credit-card accounts. The Bureau also found that Sterling violated the Truth in Lending Act by signing customers up for credit-card accounts without having received an oral or written request or application from them. The State of New York found that Sterling violated several provisions of state law.

Under the settlement, Sterling will pay a $10 million civil money penalty to the Bureau and a $1 million civil money penalty to the State of New York. Sterling has also agreed to injunctive relief designed to prevent the continuation of the claimed illegal conduct.

Sterling is headquartered in Akron, Ohio, and does business throughout the United States. Sterling operates over 1,500 jewelry stores under several names, including Kay Jewelers, Jared The Galleria of Jewelry, JB Robinson Jewelers, Marks & Morgan Jewelers, Belden Jewelers, Goodman Jewelers, LeRoy’s Jewelers, Osterman Jewelers, Rogers Jewelers, Shaw’s Jewelers, and Weisfield Jewelers. Sterling is a wholly owned subsidiary of Signet Jewelers Limited, the largest specialty-jewelry retailer in the United States, Canada, and the United Kingdom.

Copies of the complaint and the proposed consent order filed in federal district court in the Southern District of New York are available at: https://files.consumerfinance.gov/f/documents/bcfp_sterling-jewelers_complaint.pdf and https://files.consumerfinance.gov/f/documents/bcfp_sterling-jewelers_proposed-consent-order.pdf

February 6, 2019 in Financial Regulation | Permalink | Comments (0)