International Financial Law Prof Blog

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

Monday, September 30, 2019

New Leak of its "Bribery Department" Documents Sparks Questions Over Odebrecht’s U.S. Plea Deal

  • New leak reveals hundreds of millions of dollars in secret payments by an Odebrecht division created primarily to manage the company’s bribes
  • More than $39 million in hidden payments linked to the massive Punta Catalina coal power plant in the Dominican Republic, despite two official investigations finding no irregularities
  • More than $3 million in hidden payments linked to the Gasoducto Sur pipeline in Peru, including payments to a company owned by the Vice-Governor of the region of Callao
  • Hidden payments connected to other major infrastructure projects including the subway systems in Quito, Ecuador; Panama City, Panama; and Caracas, Venezuela

Read all about it on ICIJ

Odebrecht has admitted that it started to systematically bribe officials around 2001.  Five years later, it created an entire division – the Division of Structured Operations –  primarily dedicated to making corrupt payments.  Prosecution statements and court documents show that the division functioned as a stand-alone bribery unit within Odebrecht. The division reported to the company’s highest levels. To conceal its activities, it used an entirely separate and off-book communications and payment system called Drousys. Operators and co-conspirators discussed bribes using secure emails, code names and passwords. read this ICIJ story here

Who are some of the big names implicated in the Odebrecht scandal?

  • Currently jailed, former Brazilian President Luiz Inácio Lula da Silva has been convicted twice of taking Odebrecht bribes. Dozens of Brazilian politicians have been investigated because of the scandal.
  • Former Salvadoran President Mauricio Funes is suspected of embezzling $351 million.
  • Former Panamanian President Ricardo Martinelli and several people close to him are suspected of receiving Odebrecht bribes.
  • Former Ecuadorian Vice President Jorge Glas is in jail because of his links to Odebrecht corruption.
  • Former Peruvian President Alan Garcia committed suicide in April when police went to his home to arrest him on charges related to Odebrecht. Peruvian President Martin Vizcarra and three former presidents, Pedro Pablo Kuczynski, Ollanta Humala and Alejandro Toledo, are all under investigation in connection with the Odebrecht scandal. Humala has been indicted on corruption charges.
  • Politicians in Guatemala and Colombia have been engulfed, too.

Read all about it here

September 30, 2019 in AML | Permalink | Comments (0)

Sunday, September 29, 2019

Relief Procedures for Certain Former Citizens: Six Years Tax Filing BUT No Need to Actually Pay the Tax


The IRS announced procedures for certain persons who have relinquished, or intend to relinquish, their United States (U.S.) citizenship and who wish to come into compliance with their U.S. income tax and reporting obligations and avoid being taxed as a “covered expatriate” under section 877A of the U.S. Internal Revenue Code (IRC).  Please read all information for these procedures including the Frequently Asked Questions and Answers (FAQs) to determine eligibility. Relinquishing U.S. citizenship and the tax impacts of relinquishing U.S. citizenship are serious matters that involve irrevocable decisions. Consider consulting legal counsel before making any decisions about relinquishing U.S. citizenship.

The Department of the Treasury, the Department of State, the Internal Revenue Service, and the Social Security Administration have prepared a brief “frequently asked questions” document on obtaining social security numbers, expatriation, and tax implications of expatriation.

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The 14th Amendment to the United States Constitution provides that “all persons born or naturalized in the United States” are citizens of the United States.  With very limited exceptions for individuals born in the United States with diplomatic agent level immunity, all persons born in the United States acquire U.S. citizenship at birth. A person born abroad to a U.S. citizen parent or parents acquires U.S. citizenship at birth if the parent or parents meet conditions specified in the U.S. Immigration and Nationality Act (Section 301 and following sections).

Some U.S. citizens, born in the United States to foreign parents or born outside the United States to U.S. citizen parents, may be unaware of their status as U.S. citizens or the consequences of such status.  By law, U.S. citizens, regardless of whether they live in the United States or abroad, are required to report and pay to the Internal Revenue Service (IRS) all applicable taxes on their worldwide income, including on their income from foreign financial assets.

With the passage of the Foreign Account Tax Compliance Act (FATCA) on March 18, 2010, foreign financial institutions are generally required to determine whether their customers are U.S. citizens and, if so, report certain information about the customer’s account. Depending on when the account is opened, the customer may be identified by the financial institution as a U.S. citizen based on certain indicia, such as a place of birth in the United States. A customer who is identified as a U.S. citizen based on U.S. indicia must provide to the financial institution either his or her Social Security Number (SSN), or if the customer is no longer a U.S. citizen, documentation to rebut the determination, such as proof of loss of U.S. citizenship. A customer opening a new account with a foreign financial institution is generally required to provide a self-certification upon account opening, which includes the customer’s name, address, and SSN.

An adult U.S. citizen may relinquish U.S. citizenship consistent with requirements under Section 349 of the Immigration and Nationality Act, 8 U.S.C. 1481. See U.S. Citizenship laws and policies. The process of relinquishing U.S. citizenship abroad is administered by the Department of State. Citizens wishing to relinquish their U.S. citizenship abroad must commit one of the potentially expatriating acts, listed at 8 U.S.C. 1481(a)(1)-(5), voluntarily and with intent to relinquish U.S. citizenship.  One such expatriating act is taking an oath of renunciation of U.S. citizenship under 8 U.S.C. 1481(a)(5).  In accordance with the relevant statutes and regulations, such persons must appear in person before a U.S. diplomatic or consular officer at a U.S. Embassy or Consulate in a foreign country to complete the required steps.  The persons renouncing their U.S. citizenship must then take the prescribed oath of renunciation before the U.S. diplomatic or consular officer. See Renunciation of U.S. Nationality Abroad.

Set by the Department of State, the U.S. consular fee for “Administrative Processing of Request for Certificate of Loss of Nationality” is $2,350, and the fee cannot be waived.  Compliance with all U.S. income tax filings or obtaining a Social Security number is not a pre-condition to relinquishing citizenship under the Immigration and Nationality Act.

Individuals who seek to renounce or relinquish U.S. citizenship should be aware that expatriating may have U.S. tax consequences. To comply with existing tax law and to avoid significant tax liability under the U.S. Internal Revenue Code, U.S. citizens who renounce or otherwise relinquish their citizenship must comply with Federal tax requirements for the year of expatriation and for the five tax years prior to their expatriation, which includes using their SSN as their identification number on Federal Tax Returns.  IRC 877A contains a special set of rules for U.S. citizens who relinquish their U.S. citizenship, whether by taking an oath of renunciation or otherwise.  Under IRC 877A, individuals who are “covered expatriates” are treated as having disposed of all worldwide assets on the day before their expatriation date, are required to pay a mark-to-market exit tax on the gain (subject to an exclusion amount) resulting from the deemed disposition of their worldwide assets, and are subject to additional tax consequences with respect to certain deferred compensation items and trust distributions. With some exceptions that are not applicable in the context of these procedures, IRC 877(a)(2) will treat an individual as a “covered expatriate” if:

  1. The individual has an average annual net income tax liability of the five years preceding the year of expatriation that exceeds a specified amount adjusted for inflation (for example, $161,000 for 2016, $162,000 for 2017, $165,000 for 2018, and $168,000 for 2019) (“average income tax liability test”),
  2. The individual has a net worth of $2 million or more as of the expatriation date (“net worth test”), or
  3. The individual cannot certify, under penalties of perjury, on Form 8854, Initial and Annual Expatriation Statement, that the individual is compliant with all Federal tax obligations for the five tax years preceding the tax year that includes the expatriation date (“certification test”). 

To meet the requirements of the certification test, individuals must file a Form 8854, Initial and Annual Expatriation Statement, with their tax return for the year of expatriation and certify compliance for the prior five tax years. Certifying compliance for the prior five tax years requires that all Federal tax returns for the five tax years before the year of expatriation were properly filed, complete, and accurate. For more information, see Expatriation Tax and Instructions for Form 8854.

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Relief Procedures

Under the Relief Procedures for Certain Former Citizens (“these procedures”), the IRS is providing an alternative means for satisfying the tax compliance certification process for citizens who expatriate after March 18, 2010. These procedures are only available to U.S. citizens with a net worth of less than $2 million (at the time of expatriation and at the time of making their submission under these procedures), and an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years.  If these individuals submit the information set forth below and meet the requirements of these procedures, they will not be “covered expatriates” under IRC 877A, nor will they be liable for any unpaid taxes and penalties for these years or any previous years.

These procedures may only be used by taxpayers whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns (including Form 8938, Statement of Foreign Financial Assets), and Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1)) and pay taxes and penalties for the years at issue was due to non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

September 29, 2019 | Permalink | Comments (0)

Saturday, September 28, 2019

Belizean Bank to Pay $23 Million and Cease Operations to Settle FTC Charges It Provided Substantial Assistance to the Sanctuary Belize Real Estate Scam

Under a proposed consent order, Belize’s Atlantic International Bank Limited (AIBL) will pay $23 million, representing approximately all of its U.S.-based assets, to settle Federal Trade Commission charges that it assisted various related entities (the Sanctuary Belize Enterprise, or SBE) in deceiving U.S. consumers as part of a scheme to sell property in Sanctuary Belize.

Sanctuary Belize (also known as Sanctuary Bay and The Reserve) is a massive planned community approximately the size of Manhattan located in remote southern Belize. The FTC will use the money to provide redress to more than 1,000 consumers injured by the Sanctuary Belize scheme.

In November 2018, the Commission announced that it obtained a federal court order temporarily halting the massive real estate scam. According to the FTC, the scheme took in more than $100 million, mostly from American consumers, marketing lots in Sanctuary Belize. The Sanctuary Belize Enterprise duped consumers into buying Sanctuary Belize lots by making false promises, including that the development would have luxury amenities and be completed soon, and that the lots would rapidly appreciate and serve as low-risk investments. Following a two-week hearing, the district court found the FTC was likely to prevail on its claims against various defendants involved with SBE.

With respect to AIBL, the FTC’s amended complaint alleged that AIBL illegally assisted and facilitated the Sanctuary Belize scheme SBE perpetrated. AIBL representatives visited SBE’s California offices and coached SBE’s telemarketers about the services the bank could provide U.S. consumers interested in Sanctuary Belize lots, including lower interest rates and relaxed underwriting for buyers wishing to finance Sanctuary Belize home construction. AIBL urged the telemarketers to sell its banking services to American consumers as part of the Sanctuary Belize sales pitch.

Based on this conduct, the amended complaint charges AIBL with participating in deceptive acts or practices in violation of the FTC Act, as well the agency’s Telemarketing Sales Rule (TSR), by providing “substantial assistance or support” to the Sanctuary Belize scam, while knowing—or consciously avoiding knowing—that SBE was violating the TSR.

Notably, AIBL filed multiple unsuccessful motions to dismiss the FTC’s case based on alleged lack of personal jurisdiction because, like many offshore banks that assist and facilitate domestic deceptive practices, AIBL had no offices, employees, or operations within the United States. The FTC responded with evidence that SBE and AIBL jointly marketed both AIBL’s banking services and SBE’s Sanctuary Belize lots to U.S.-based consumers.

For instance, SBE principal Luke Chadwick filmed a marketing video endorsing AIBL at the bank’s request, and the bank provided financial services to SBE. Similarly, AIBL’s logo appeared on SBE marketing materials provided to U.S. consumers. AIBL representatives also marketed to consumers directly during Sanctuary Belize tours, lending support and legitimacy to the sales process, while offering banking services to U.S.-based consumers.

Additionally, the FTC presented evidence that AIBL assisted SBE by providing Belizean banking services both for SBE itself and for U.S consumers the scheme targeted, all with knowledge that U.S.-based consumers were SBE’s primary targets. Furthermore, AIBL provided many of these banking services through correspondent banks in the United States.

The proposed court order, to which the defendant has agreed, settles the FTC’s charges against AIBL. The order requires AIBL to cease all business activities permanently, aside from those involved with its liquidation. In addition, after the bank is liquidated, the order prohibits the liquidator or anyone else from seeking to re-license and operate AIBL’s business.

The order also imposes a $23 million judgment against AIBL and details how AIBL must transfer the money to the FTC. It explains that the FTC will use the money to provide equitable relief, including consumer redress, to consumers injured by AIBL’s illegal conduct. Finally, the order appoints a receiver to collect the financial judgment from the bank, and assigns to the receiver AIBL’s rights in certain property (also to be used for consumer redress).

Serial scammer Andris Pukke, others charged with deceiving Americans out of more than $100 million by deceptively marketing property in Belize

Map of Belize showing location of Sanctuary Belize on the coast, just north of Placencia and Placencia International Airport. Belmopan is to the northwest, and Belize City is to the north.

(NOTE TO MEDIA: Please see related press kit with maps, video, and audio.)

At the Federal Trade Commission’s request, a federal district court in Maryland issued an order temporarily shutting down the largest overseas real estate investment scam the FTC has ever targeted.

According to the FTC, the scam was established by Andris Pukke, a recidivist scammer currently living in California, and he perpetuated it even while serving a prison sentence for obstruction of justice.

The alleged scheme took in more than $100 million, marketing lots in what supposedly would become a luxury development in Central America known by several names, including Sanctuary Belize, Sanctuary Bay, and The Reserve. According to the FTC, the defendants duped consumers into buying Sanctuary Belize lots by falsely promising that the development would include luxury amenities and be completed soon, and that the value of the lots would rapidly appreciate.

In filing the complaint against Pukke and a range of other defendants, the FTC is seeking to permanently stop the scheme and obtain a court order requiring them to turn over hundreds of millions of dollars to compensate deceived U.S. investors.

“The defendants in this case operated a sophisticated international real estate investment scheme that cheated consumers out of millions of dollars of their hard-earned retirement savings,” said FTC Chairman Joe Simons. “The FTC is committed to stopping this outrageous behavior and compensating the hundreds of victims.”

The Sanctuary Belize Scheme

According to the FTC, the defendants operated a set of interrelated businesses (the Sanctuary Belize Enterprise or SBE) and ran commercials on Fox News and Bloomberg News advertising parcels of land that were part of a luxury development in Belize. They also advertised the property through infomercials. Consumers who expressed interest in buying property would receive a call from California-based telemarketers who identified themselves as “property consultants” or “investment consultants.”

These telemarketers allegedly made six false claims in their pitches to sell lots in the development, including that:

  • SBE uses a “no-debt” business model, which makes buying a lot in Sanctuary Belize less-risky than a real estate investment in which the developer must make payments to creditors like banks;
  • Every dollar SBE collects from lot sales goes back into the development;
  • This continual funding stream means that SBE will finish development quickly -- within two to five years;
  • The development will include impressive amenities, such as a hospital staffed with American doctors, an emergency medical center near the downtown “Marina Village,” a championship-caliber golf course, an airstrip, and a new international airport with direct flights to the United States;
  • These amenities will ensure that property values will double or even triple in two to three years; and
  • It will be easy for buyers to resell their lots.

The FTC alleges that SBE representatives in Belize made the same deceptive claims when they met with prospective buyers visiting the property before purchasing lots.

The FTC also contends that relying on the defendants’ deceptive claims, consumers purchased lots that typically cost between $150,000 and $500,000 outright, or made large down payments followed by sizeable monthly payments, in addition to paying monthly homeowners association (HOA) fees. However, because the defendants’ claims are not true, consumers either have lost, or will lose, some or all of their investments.

According to the FTC, a no-debt model actually increases risk for purchasers, and the defendants used consumers’ payments to fund their own high-end lifestyles instead of investing the money in the development. The FTC contends that the development and the amenities will not be completed in the promised timeline, the value of the lots has not appreciated, and there is no resale market for the lots.

Based on these claims, the FTC charges the defendants with violating the FTC Act and the Telemarketing Sales Rule. In addition, the FTC charges Belize’s Atlantic International Bank with assisting and facilitating the Sanctuary Belize scam.

The complaint also names Angela Chittenden, Beach Bunny Holdings, LLC, The Estate of John Pukke (Andris Pukke’s late father), John Vipulis, and Deborah Connelly as relief defendants who received funds from SBE’s deceptive and illegal conduct.

Related Contempt Motions Announced Today

In addition to the Sanctuary Belize complaint announced today, the FTC has filed three contempt motions against several of the individual defendants, including Andris Pukke, who has a long history with the Commission. In 2003, the FTC sued Pukke, AmeriDebt, and DebtWorks, alleging they deceptively sold financially strapped consumers debt management plans while pretending to be a “non-profit” credit counseling organization. Pukke and DebtWorks agreed to an order settling the FTC’s complaint in 2006.

The 2006 order barred Pukke from violating the Telemarketing Sales Rule and imposed a $172 million judgment, of which $137 million would be suspended if Pukke cooperated in efforts to recover another $35 million. The order also required Pukke to turn over certain assets, including the Sanctuary Belize parcel. In 2007, however, the court held Pukke and co-defendant Peter Baker in contempt for refusing to turn over the assets, including the land parcel in Belize.

In 2010, Pukke pleaded guilty to obstructing justice after he admitted obstructing the AmeriDebt receivership the order put in place and refusing to turn over the required assets. As a result, the court sentenced him to 18 months in prison. Between 2008 and 2014, the FTC returned nearly $7 million to consumers deceived through the AmeriDebt scheme. Pukke and Baker never relinquished control of the land parcel, however, and allegedly continued marketing it as part of the Sanctuary Belize scheme in the same way they had since 2005, even while Pukke was in jail.

The FTC has now filed a contempt motion against Pukke, Baker, and defendant John Usher related to Sanctuary Belize; a second contempt motion against Pukke and relief defendant John Vipulis seeking money Pukke owes the Commission; and a third contempt motion against Pukke, Baker, and Usher seeking to unwind a prior real estate transfer to enable the FTC to secure the unsold portions of the Belize land parcel.

FTC Seeking Information from Affected Consumers

To aid its lawsuit, the FTC is seeking information from consumers who have done business with the defendants or bought property in Sanctuary Belize. Over the course of the alleged scheme, the defendants have used other names in marketing the development, including Global Property Alliance, Buy Belize, Buy International, Eco Futures, Sittee River Wildlife Reserve, Sanctuary Bay, The Reserve, and The Marina at the Reserve.

The Commission has set up a website where consumers are urged to submit any information related to their dealings with the defendants, including documents, videos, photographs, audio recordings, or any other type of file related to the allegations in the complaint.

The FTC will encrypt all information it collects, and will take steps to ensure that it does not disclose consumers’ personal information. The FTC also may follow up with consumers who submit information relevant to its case.

The Commission voted 5-0 to authorize staff to file: 1) the complaint seeking a temporary restraining order and preliminary injunction against the Sanctuary Belize defendants; 2) a contempt motion against Andris Pukke, Peter Baker, and John Usher; 3) a contempt motion against Pukke and John Vipulis; and 4) a contempt motion against Pukke, Baker, and Usher seeking to unwind a real estate transfer.

The documents were filed in the U.S. District Court for the District of Maryland under seal, and the seal has now been lifted in part. A complete list of the 23 individual and corporate defendants named in the case can be found in the Commission’s complaint.

September 28, 2019 in AML | Permalink | Comments (0)

Friday, September 27, 2019

Iranian Citizen Sentenced for Conspiring to Facilitate the Illegal Export of Technology to Iran

According to the defendant’s guilty plea, Ghodskani assisted in establishing and operating Green Wave Telecommunication, Sdn Bhn, (Green Wave) a Malaysian company located in Kuala Lumpur, Malaysia. Since its incorporation in 2009, Green Wave operated as a front company for Fanavar Moj Khavar (Fana Moj), an Iran-based company that specializes in both broadcast communications, microwave communications as well as in the production of digital video broadcasting equipment. Fana Moj supplies microwave radio systems and wireless broadband access in Iran. Fana Moj’s principal customer was the Islamic Republic of Iran Broadcasting (IRIB), which is owned by the Government of Iran.

According to the defendant’s guilty plea and documents filed in court, from 2008 until 2011, Ghodskani, who was based in Tehran, falsely represented herself as an employee of Green Wave to U.S. Companies in order to acquire unlawfully sensitive export controlled technology from the United States on behalf of Fana Moj. In order to accomplish these acquisitions, Ghodskani and her co-conspirators concealed the ultimate unlawful destination and end users of the exported technology through false statements, unlawful financial transactions, and other means. Further, as part of the conspiracy, the defendant’s co-conspirators would contact producers and distributors of the sought-after technology, solicit purchase agreements, and negotiate the purchase and delivery of the goods with the seller.

Both the IRIB and Fana Moj have been designated by the United States Department of the Treasury as a Specially Designated National for providing financial, material, technological or other support for, or goods or services in support of, the Islamic Republic of Iran Broadcasting (IRGC).    

September 27, 2019 | Permalink | Comments (0)

Thursday, September 26, 2019

Former Intelligence Officer Convicted of Attempted Espionage Sentenced to 10 Years in Federal Prison

A former Defense Intelligence Agency (DIA) officer, who pleaded guilty in March to attempting to communicate, deliver, or transmit information involving the national defense of the United States to the People’s Republic of China, will serve 10 years in federal prison.  U.S. District Judge Dee Benson imposed the sentence Tuesday afternoon in Salt Lake City.

Ron Rockwell Hansen, 60, of Syracuse, Utah, was arrested June 2, 2018, on his way to the Seattle-Tacoma International Airport in Seattle, Washington, as he was preparing to board a flight to China while in possession of SECRET military information. 

“One of three ex-US intelligence officers recently convicted of acting on behalf of the People’s Republic of China, Ron Rockwell Hansen received hundreds of thousands of dollars for betraying his country and former colleagues,” said Assistant Attorney General of National Security John C. Demers.  “These cases show the breadth of the Chinese government’s espionage efforts and the threat they pose to our national security.  Our intelligence professionals swear an oath to protect our country’s most closely held secrets and the National Security Division will continue to relentlessly pursue justice against those who violate this oath.”

“The Chinese government continues to attempt to identify and recruit current and former members of the United States intelligence community.  This is a very troubling trend. These individuals must remain vigilant and immediately report any suspicious activity. The Hansen case is an example of what will happen to those who violate the public’s trust and risk our national security by disclosing classified information,” said U.S. Attorney John W. Huber for the District of Utah.

“Ron Hansen was willing to betray his oath and his country for financial gain,” said Special Agent in Charge Paul Haertel of the FBI’s Salt Lake City Field Office.  "This case brings to light that not all spies are foreign adversaries.  Insider threats pose a significant national security risk, and the FBI will continue to aggressively investigate those who put our country and citizens at risk.”

Hansen retired from the U.S. Army as a Warrant Officer with a background in signals intelligence and human intelligence.  He speaks fluent Mandarin-Chinese and Russian, according to court documents. Upon retiring from active duty, DIA hired Hansen as a civilian intelligence case officer in 2006. Hansen held a Top Secret clearance for many years, and signed several non-disclosure agreements during his tenure at DIA and as a government contractor. 

As Hansen admitted in the plea agreement, in early 2014, agents of a Chinese intelligence service targeted him for recruitment, and he began meeting with them regularly in China.  During these meetings, the agents described to Hansen the type of information that would interest Chinese intelligence.  Hansen stipulated that during the course of his relationship with Chinese intelligence, he received hundreds of thousands of dollars in compensation for information he provided them.

Between May 24, 2016, and June 2, 2018, Hansen admitted he solicited national security information from an intelligence case officer working for the DIA.  Hansen admitted knowing that the Chinese intelligence services would find the information valuable, and he agreed to act as a conduit to sell that information to the Chinese.  He advised the DIA case officer how to record and transmit classified information without detection, and how to hide and launder any funds received as payment for classified information.  He admitted he now understands that the DIA case officer reported his conduct to the DIA and subsequently acted as a confidential human source for the FBI.

Hansen admitted meeting with the DIA case officer on June 2, 2018, and receiving individual documents containing national defense information that he had previously solicited.  The documents he received were classified. The documents included national security information related to U.S. military readiness in a particular region -- information closely held by the federal government. Hansen did not possess a security clearance nor did he possess a need to know the information contained in the materials. 

As a part of his plea agreement, Hansen admitted he reviewed the documents, queried the case officer about their contents, and took written notes which contained information determined to be classified.  He advised the DIA case officer that he would remember most of the details about the documents he received that day and would conceal notes about the material in the text of an electronic document he would prepare at the airport before leaving for China.  He admitted he intended to provide the information he received to the agents of the Chinese Intelligence Service with whom he had been meeting.  He also admitted knowing that the information was to be used to the injury of the United States and to the advantage of a foreign nation.

As a part of the plea agreement, Hansen has agreed to forfeit property acquired from or traceable to his offense, including property used to facilitate the crime.

September 26, 2019 | Permalink | Comments (0)

Wednesday, September 25, 2019

Starbucks and Netherlands APA Upheld by European Court of Justice

The General Court annuls the Commission’s decision on the aid measure implemented by the Netherlands in favor of Starbucks (released by the Court)

For William Byrnes analysis of this State Aid controversy, see    

The Commission was unable to demonstrate the existence of an advantage in favor of Starbucks

In 2008, the Netherlands tax authorities concluded an advance pricing arrangement (APA) with Starbucks Manufacturing EMEA BV (SMBV), part of the Starbucks group, which, inter alia, roasts coffees. The objective of that arrangement was to determine SMBV’s remuneration for its production and distribution activities within the group. Thereafter, SMBV’s remuneration served to determine annually its taxable profit on the basis of Netherlands corporate income tax. In addition, the APA endorsed the amount of the royalty paid by SMBV to Alki, another entity of the same group, for the use of Starbucks’ roasting IP. More specifically, the APA provided that the amount of the royalty to be paid to Alki corresponded to SMBV’s residual profit. The amount was determined by deducting SMBV’s remuneration, calculated in accordance with the APA, from SMBV’s operating profit.

In 2015, the Commission found that the APA constituted aid incompatible with the internal market and ordered the recovery of that aid.

The Netherlands and Starbucks brought an action before the General Court for annulment of the Commission’s decision. They principally dispute the finding that the APA conferred a selective advantage on SMBV.

More specifically, they criticize the Commission for (1) having used an erroneous reference system for the examination of the selectivity of the APA; (2) having erroneously examined whether there was an advantage in relation to an arm’s length principle particular to EU law and thereby violated the Member States’ fiscal autonomy; (3) having erroneously considered the choice of the transactional net margin method (TNMM) for determining SMBV’s remuneration to constitute an advantage; and (4) having erroneously considered the detailed rules for the application of that method as validated in the APA to confer an advantage on SMBV.

In today’s judgment, the General Court annuls the Commission’s decision.

First, the Court examined whether, for a finding of an advantage, the Commission was entitled to analyze the tax ruling at issue in the light of the arm’s length principle as described by the Commission in the contested decision.

In that regard, the Court notes in particular that, in the case of tax measures, the very existence of an advantage may be established only when compared with ‘normal’ taxation and that, in order to determine whether there is a tax advantage, the position of the recipient as a result of the application of the measure at issue must be compared with his position in the absence of the measure at issue and under the normal rules of taxation.

The Court goes on to note that the pricing of intra-group transactions is not determined under market conditions. It states that where national tax law does not make a distinction between integrated undertakings and stand-alone undertakings for the purposes of their liability to corporate income tax, that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices. The Court holds that, in those circumstances, when examining, pursuant to the power conferred on it by Article 107(1) TFEU, a fiscal measure granted to such an integrated company, the Commission may compare the fiscal burden of such an integrated undertaking  resulting from the application of that fiscal measure with the fiscal burden resulting from the application of the normal rules of taxation under the national law of an undertaking placed in a comparable factual situation, carrying on its activities under market conditions.

The Court makes clear that the arm’s length principle as described by the Commission in the contested decision is a tool that allows it to check that intra-group transactions are remunerated as if they had been negotiated between independent companies. Thus, in the light of Netherlands tax law, that tool falls within the exercise of the Commission’s powers under Article 107 TFEU. The Commission was therefore, in the present case, in a position to verify whether the pricing for intragroup transactions accepted by the APA corresponds to prices that would have been negotiated under market conditions.

The Court therefore rejects the claim that the Commission erred in identifying an arm’s length principle as a criterion for assessing the existence of State aid.

Second, the Court reviewed the merits of the various lines of reasoning set out in the contested decision to demonstrate that, by endorsing a method for determining transfer pricing that did not result in an arm’s length outcome, the APA conferred an advantage on SMBV.

The Court began by examining the dispute as to the Commission’s principal reasoning. It notes that, in the context of its principal reasoning, the Commission found that the APA had erroneously endorsed the use of the TNMM. The Commission first stated that the transfer pricing report on the basis of which the APA had been concluded did not contain an analysis of the royalty which SMBV paid to Alki or of the price of coffee beans purchased by SMBV from SCTC, another entity of the group. Next, in examining the arm’s length nature of the royalty, the Commission applied the comparable uncontrolled price method (CUP method). As a result of that analysis, the Commission considered that the amount of the royalty should have been zero. Last, the Commission considered, on the basis of SCTC’s financial data, that SMBV had overpaid for the coffee beans in the period between 2011 and 2014.

The Court holds that mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden and that the Commission would have had to demonstrate that the methodological errors identified in the APA did not allow a reliable approximation of an arm’s length outcome to be reached and that they led to a reduction of the tax burden.

As regards the error identified by the Commission in respect of the choice of the TNMM and not of the CUP method, the Court finds that the Commission did not invoke any element to support as such the conclusion that that choice had necessarily led to a result that was too low, without a comparison being carried out with the result that would have been obtained using the CUP method. The Commission therefore wrongly found that the mere choice of the TNMM, in the present case, conferred an advantage on SMBV.

Likewise, the Court states that the mere finding by the Commission that the APA did not analyze the royalty does not suffice to demonstrate that that royalty was not actually in conformity with the arm’s length principle.

As regards the amount of the royalty paid by SMBV to Alki, according to an analysis of SMBV’s functions in relation to the royalty and an analysis of comparable roasting agreements considered by the Commission in the contested decision, the Court finds that the Commission failed to demonstrate that the level of the royalty should have been zero or that it resulted in an advantage within the meaning of the Treaty.

As regards the price of green coffee beans, the Court notes that the price of those beans was an element of SMBV’s costs that was outside the scope of the APA and that, in any event, the Commission’s findings did not suffice to demonstrate the existence of an advantage within the meaning of Article 107 TFEU. The Court notes, in particular, that the Commission was not entitled to rely on matters subsequent to the conclusion of the APA.

The Court then examined the dispute as to the Commission’s subsidiary reasoning whereby the APA allegedly conferred an advantage on SMBV because the detailed rules for the application of the TNMM, as endorsed by the APA, were erroneous.

It finds that the Commission did not demonstrate that the various errors it identified in the detailed rules for the application of the TNMM conferred an advantage on SMBV, whether as regards the validation by the APA of the identification of SMBV as the tested entity for the purposes of the application of the TNMM, the choice of profit level indicator or the working capital adjustment and the exclusion of the costs of the unaffiliated manufacturing company.

Consequently, according to the Court, the Commission has not managed to demonstrate the existence of an economic advantage within the meaning of Article 107 TFEU.

For William Byrnes analysis of this State Aid controversy, see    

September 25, 2019 in BEPS | Permalink | Comments (0)

Tuesday, September 17, 2019

Houston Attorney Convicted of Offshore Tax Evasion Scheme

Conspired to Repatriate More Than $18 Million in Untaxed Money Held in Foreign Banks

A Houston, Texas, attorney was convicted today of one count of conspiracy to defraud the United States and three counts of tax evasion, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Department of Justice’s Tax Division and U.S. Attorney Ryan K. Patrick for the Southern District of Texas.

According to the evidence presented at trial, Jack Stephen Pursley, also known as Steve Pursley, conspired with a former client to repatriate more than $18 million in untaxed income that the client had earned through his company, Southeastern Shipping. Knowing that his client had never paid taxes on these funds, Pursley designed and implemented a scheme whereby the untaxed funds were transferred from Southeastern Shipping’s business bank account, located in the Isle of Man, to the United States. Pursley helped to conceal the movement of funds from the Internal Revenue Service (IRS) by disguising the transfers as stock purchases in United States corporations owned and controlled by Pursley and his client.

At trial, the government proved that Pursley received more than $4.8 million and a 25% ownership interest in the co-conspirator’s ongoing business for his role in the fraudulent scheme. For tax years 2009 and 2010, Pursley evaded the assessment of and failed to pay the income taxes he owed on these payments by, among other means, withdrawing the funds as purported non-taxable loans and returns of capital. The government showed at trial that Pursley used the money he garnered from the fraudulent scheme for personal investments, and to purchase assets for himself, including a vacation home in Vail, Colorado and property in Houston, Texas.

September 17, 2019 in GATCA | Permalink | Comments (0)

Monday, September 16, 2019

Current and Former Precious Metals Traders Charged with Multi-Year Market Manipulation Racketeering Conspiracy

Two current precious metals traders and one former trader in the New York offices of a U.S. bank (Bank A) were charged in an indictment unsealed today for their alleged participation in a racketeering conspiracy and other federal crimes in connection with the manipulation of the markets for precious metals futures contracts, which spanned over eight years and involved thousands of unlawful trading sequences.

Charged in the indictment are:

  • Gregg Smith, 55, of Scarsdale, New York.  Smith was an executive director and trader on Bank A’s precious metals desk in New York.  He joined Bank A in May 2008 after it acquired another U.S. bank (Bank B).
  • Michael Nowak, 45, of Montclair, New Jersey.  Nowak was a managing director and ran Bank A’s global precious metals desk.  He joined Bank A in July 1996.
  • Christopher Jordan, 47, of Mountainside, New Jersey.  Jordan joined Bank A in March 2006 and was an executive director and trader on Bank A’s precious metals desk in New York.  Jordan left Bank A in December 2009 and worked as a precious metals trader at a Swiss bank (Bank C) in New York from March 2010 until August 2010.  From June 2011 until October 2011, Jordan traded precious metals futures contracts as an employee of a financial service company (Company D) in New York.

“The defendants and others allegedly engaged in a massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants,” said Assistant Attorney General Brian A. Benczkowski.  “These charges should leave no doubt that the Department is committed to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets.”

“Smith, Nowak, Jordan, and their co-conspirators allegedly engaged in a complex scheme to trade precious metals in a way that negatively affected the natural balance of supply-and-demand,” said FBI Assistant Director in Charge William F. Sweeney Jr. of the FBI’s New York Field Office. “Not only did their alleged behavior affect the markets for precious metals, but also correlated markets and the clients of the bank they represented. For as long as we continue to see this type of illegal activity in the marketplace, we’ll remain dedicated to investigating and bringing to justice those who perpetrate these crimes.”  

Each of the three defendants was charged with one count of conspiracy to conduct the affairs of an enterprise involved in interstate or foreign commerce through a pattern of racketeering activity (more commonly referred to as RICO conspiracy); one count of conspiracy to commit wire fraud affecting a financial institution, bank fraud, commodities fraud, price manipulation and spoofing; one count of bank fraud and one count of wire fraud affecting a financial institution.  In addition, Smith and Nowak were each charged with one count of attempted price manipulation, one count of commodities fraud and one count of spoofing.

Smith is expected to make an initial appearance in the Southern District of New York before U.S. Magistrate Judge Judith C. McCarthy, and Nowak and Jordan are expected to make their initial appearances in the District of New Jersey before U.S. Magistrate Judge Michael A. Hammer.  The case was indicted in the Northern District of Illinois and has been assigned to U.S. District Judge Edmond E. Chang.

As alleged in the indictment, between approximately May 2008 and August 2016, the defendants and their co-conspirators were members of Bank A’s global precious metals trading desk in New York, London and Singapore with varying degrees of seniority and supervisory responsibility over others on the desk.  As it relates to the RICO conspiracy, the defendants and their co-conspirators were allegedly members of an enterprise—namely, the precious metals desk at Bank A—and conducted the affairs of the desk through a pattern of racketeering activity, specifically, wire fraud affecting a financial institution and bank fraud.

The indictment alleges that the defendants engaged in widespread spoofing, market manipulation and fraud while working on the precious metals desk at Bank A through the placement of orders they intended to cancel before execution (Deceptive Orders) in an effort to create liquidity and drive prices toward orders they wanted to execute on the opposite side of the market.  In thousands of sequences, the defendants and their co-conspirators allegedly placed Deceptive Orders for gold, silver, platinum and palladium futures contracts traded on the New York Mercantile Exchange Inc. (NYMEX) and Commodity Exchange Inc. (COMEX), which are commodities exchanges operated by CME Group Inc.  By placing Deceptive Orders, the defendants and their co-conspirators allegedly intended to inject false and misleading information about the genuine supply and demand for precious metals futures contracts into the markets, and to deceive other participants in those markets into believing something untrue, namely that the visible order book accurately reflected market-based forces of supply and demand.  This false and misleading information was intended to, and at times did, trick other market participants into reacting to the apparent change and imbalance in supply and demand by buying and selling precious metals futures contracts at quantities, prices and times that they otherwise likely would not have traded, the indictment alleges.

As also alleged in the indictment, the defendants and their co-conspirators defrauded Bank A’s clients who had bought or sold “barrier options” by trading precious metals futures contracts in a manner that attempted to push the price towards a price level at which Bank A would make money on the option (barrier-running), or away from a price level at which Bank A would lose money on the option (barrier-defending).  Namely, when barrier-running, the defendants and their co-conspirators would allegedly place orders for precious metals futures contracts in a way that was intended to deliberately trigger the barrier option held by Bank A.  Conversely, when barrier-defending, the defendants and their co-conspirators would allegedly place orders for precious metals futures contracts in a way that was intended to deliberately avoid triggering the barrier option held by clients of Bank A.

The indictment also identifies two former Bank A precious metals traders, John Edmonds and Christian Trunz, as being among the defendant’s co-conspirators.  Edmonds worked at Bank A from 2004 to 2017 and was a trader on Bank A’s precious metals desk, leaving as a vice president.  On Oct. 9, 2018, Edmonds pleaded guilty in the District of Connecticut to an information charging him with one count of commodities fraud and one count of conspiracy to commit wire fraud, commodities fraud, price manipulation and spoofing.  Trunz is a former precious metals trader at Bank A who worked at the bank from 2007 to August 20, 2019, leaving as an executive director.  On Aug. 20, 2019, Trunz pleaded guilty in the Eastern District of New York to an information charging him with one count of conspiracy to engage in spoofing and one count of spoofing.

This case is the result of an ongoing investigation by the FBI’s New York Field Office. The Commodity Futures Trading Commission’s Division of Enforcement provided assistance in this case.  Trial Attorneys Avi Perry and Matthew F. Sullivan of the Criminal Division’s Fraud Section are prosecuting the case.

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

Sunday, September 15, 2019

U.S. International Trade in Goods and Services, July 2019

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $54.0 billion in July, down $1.5 billion from $55.5 billion in June, revised.

U.S. International Trade in Goods and Services Deficit
Deficit: $54.0 Billion -2.7%°
Exports: $207.4 Billion +0.6%°
Imports: $261.4 Billion -0.1%°

Next release: October 4, 2019

(°) 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, September 4, 2019

Goods and Services Trade Deficit, Seasonally Adjusted

Exports, Imports, and Balance (exhibit 1)

July exports were $207.4 billion, $1.2 billion more than June exports. July imports were $261.4 billion, $0.4 billion less than June imports.

The July decrease in the goods and services deficit reflected a decrease in the goods deficit of $1.6 billion to $73.7 billion and a decrease in the services surplus of $0.1 billion to $19.7 billion.

Year-to-date, the goods and services deficit increased $28.2 billion, or 8.2 percent, from the same period in 2018. Exports decreased $3.4 billion or 0.2 percent. Imports increased $24.9 billion or 1.4 percent.

Three-Month Moving Averages (exhibit 2)

The average goods and services deficit increased $0.7 billion to $55.1 billion for the three months ending in July.

  • Average exports increased $0.5 billion to $208.0 billion in July.
  • Average imports increased $1.2 billion to $263.1 billion in July.

Year-over-year, the average goods and services deficit increased $7.0 billion from the three months ending in July 2018.

  • Average exports decreased $3.0 billion from July 2018.
  • Average imports increased $4.0 billion from July 2018.

Exports (exhibits 3, 6, and 7)

Exports of goods increased $1.2 billion to $138.2 billion in July.

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

  • Consumer goods increased $1.5 billion.
    • Pharmaceutical preparations increased $1.2 billion.
  • Capital goods increased $0.8 billion.
  • Automotive vehicles, parts, and engines increased $0.6 billion.
  • Industrial supplies and materials decreased $1.7 billion.
    • Crude oil decreased $0.5 billion.
    • Metallurgical grade coal decreased $0.2 billion.
    • Fuel oil decreased $0.2 billion.
    • Other petroleum products decreased $0.2 billion.

   Net balance of payments adjustments increased $0.1 billion.

Exports of services decreased $0.1 billion to $69.2 billion in July.

  • Transport decreased $0.1 billion.
  • Charges for the use of intellectual property decreased $0.1 billion.
  • Other business services, which includes research and development services; professional and management services; and technical, trade-related, and other services, increased $0.1 billion.

Imports (exhibits 4, 6, and 8)

Imports of goods decreased $0.4 billion to $211.8 billion in July.

   Imports of goods on a Census basis decreased $0.6 billion.

  • Capital goods decreased $1.5 billion.
    • Computers decreased $1.4 billion.
  • Industrial supplies and materials increased $0.9 billion.
    • Other petroleum products increased $1.0 billion.

   Net balance of payments adjustments increased $0.1 billion.

Imports of services increased $0.1 billion to $49.6 billion in July.

  • Insurance services increased $0.1 billion.
  • Other business services increased $0.1 billion.
  • Transport decreased $0.1 billion.

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

The real goods deficit decreased $0.7 billion to $85.5 billion in July.

  • Real exports of goods increased $0.6 billion to $148.7 billion.
  • Real imports of goods decreased $0.1 billion to $234.2 billion

September 15, 2019 in Economics | Permalink | Comments (0)