Bank Secrecy Act, Currency Reporting Requirements & Responding to Governmental Inquiries - Meadows Villa Waymen - Slides.PPT

Two Common Reporting Requirements for Business OwnersWe will focus our attention on two common currency reports that account for many potential violations for small business owners: Form

The Bank Secrecy Act (“BSA”), Currency Reporting Requirements & Responding to

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Two Common Reporting Requirements for Business Owners

We will focus our attention on two common currency reports that account for many potential violations for small business owners:

Form 104, and

Non-financial Trade or Business, FinCEN/IRS Form 8300

Why do the BSA Regulations Matter to

• If you are advising a client who is forming or operates a

business entity that handles “currency”, or a client who is

expecting cash gifts, you are in an ideal position to advise your client of the general reporting requirements and

consequences for failing to report properly

• Many of the examples we will discuss could have been

avoided if these individuals had been advised prior to the

alleged BSA violations

• In addition, some of your clients may be entitled to an

exemption from the reporting requirements and should be advised on these issues upon forming their business entity.

BSA Enforcement

Amendments to the BSA by the U.S Patriot Act in

2001 increased reporting requirements Therefore, enforcement of alleged BSA violations has increased

Suspicious Activity Report Filing Trend for the State of Texas For

the Period April 1, 1996 through December 31, 2009

Note: The pie chart represents the top nine characterizations plus additional characterizations in total An

Characterizations of Suspicious Activity for the State of TexasFor the Period April 1, 1996 through December 31, 2009

Additional Characterizations

32,370 9%

Other 30,717 9%

False Statement 19,701 6%

Consumer Loan Fraud 17,258 5%

Counterfeit Check 15,879 4%

Mortgage Loan Fraud 15,866 4%

Check Kiting

10,954 3%

Identity Theft

9,444

3%

5,927 5,852 4,222 3,263 3,085 2,618 2,374 2,195 1,423 576 458 202 175

0 2,000 4,000 6,000 8,000 Wire Transfer Fraud

Defalcation/Embezzlement Credit Card Fraud Debit Card Fraud Misuse of Position or Self - Dealing Mysterious Disappearance

Unknown/Blank Commercial Loan Fraud Counterfeit Instrument (Other)

Computer Intrusion Counterfeit Credit/Debit Card

Bribery/Gratuity Terrorist Financing

Examples of Unexpected Recent

Enforcement of the BSA

• Increased enforcement ensnares unwitting bank customers

and results in parallel civil and criminal investigations

– Young couple received $40,000 in cash at their Greek wedding

and deposited in sums under $10,000

– The IRS seized $400,000 from bank accounts belonging to New

York restaurant owners

– IRS seized $330,000 from three Dallas taxi cab companies on

Currency Transaction Reports, FinCEN

Form 104

• Under 31 U.S.C § 5313, “financial institutions” must file a

FinCEN Form 104 Currency Transaction Report (“CTR”) with the IRS reporting any deposit or withdrawal which involves a

“transaction” in “currency” in excess of $10,000

• “Financial institution” includes, among others, banks, brokers

and dealers in securities, and money service businesses

• “Transaction in currency” means the physical transfer of

currency from one person to another.

• “Currency” includes coin and paper money of the U.S or of

any other country.

Prohibition on Avoiding the Currency Reports

31 U.S.C § 5324 provides that no person shall, for the purpose of evading the reporting requirements of § 5313:

(1) Cause or attempt to cause a financial

institution not to file a CTR;

(2) Cause a financial institution to file a CTR that

contains a material omission or misstatement; or (3) Structure or attempt to structure a transaction to

avoid a reporting requirement.

Civil & Criminal Penalties for Avoiding Form 104 Currency Reports

• A civil penalty of up to the amount of currency involved in the transaction is imposed on anyone who causes or attempts to cause a bank to fail to file a CTR 31 U.S.C § 5321(a)(4)

• A criminal fine of not more than $250,000 and/or

imprisonment of not more than 5 years may also be imposed

31 U.S.C § 5324(d)(1)

• The criminal fine can be increased to $500,000 and/or

imprisonment of 10 years in cases involving the violation of other laws or a pattern of activity involving more than

$100,000 in a 12 month period 31 U.S.C § 5324(d)(2)

Criminal Prosecutions

• For criminal prosecutions under § 5324, the government only has to prove that the

defendant:

– knowingly structured a currency transaction

– knew of the reporting requirement

– structured the transaction to evade the report

• Post 1994, the government does not have to prove that the defendant knew that structuring was illegal

• Circumstantial evidence can be sufficient to establish that the defendant intended to evade

reporting requirements U.S v MacPherson, 424 F.3d 183, 191 (2d Cir 2005)

• “The fact of structuring may well support the inference that the defendant acted purposefully

to avoid the bank’s CTR obligations”

Cassano, 372 F.3d 868, 879 (7th Cir 2004), vacated on other grounds by Cassano v U.S., 543

U.S 1109 (2005)

• What do these cases mean?

– Currency depositors could possibly be convicted simply if the government demonstrates a

consistent pattern of deposits under the reporting requirement which by itself may demonstrate that

General Rules on Exemption

• In an effort to reduce the number of CTR filings, Treasury has created

exemptions from CTR filing requirements for transactions that have no real use to law enforcement agencies 31 U.S.C § 5313(d)-(e) and 31 CFR

§103.22(d)

• Generally, no bank is required to file a CTR with respect to any transaction

in currency between an “exempt person” and such bank 31 CFR

§103.22(d)(1).

– FinCEN Form 110 (Designation of Exempt Person)

• Exempt transactions may include:

– Transactions between two separate banks

– Transactions between banks and ordinary retail businesses, such as:

 Restaurants

 Grocery stores

 Department stores

 Gas stations

Exempt Person

31 CFR § 103.22 (d)(2)

• “Exempt person” includes, among others, banks, agencies of the U.S., states and political subdivisions

• There is also a “catch all” definition for commercial enterprises and payroll

customers under 31 CFR § 103.22(d)(2)(vi), (vii).

• Any other commercial enterprise to the extent of its domestic operations, if the following requirements are satisfied:

 Maintained a transaction account at the bank for at least 12 months

 Frequently engaged in transactions in currency in excess of $10,000, and

 Must be incorporated in or licensed to do business in the United States

– Ineligible businesses:

– Sale of motor vehicles of any kind – Practice of law, accountancy, or medicine – Auctioning of goods

– Real estate brokerage 31 CFR § 103.22(d)(6)(viii)

Initial Designation

of Exempt Person

exempt person status

that treats the person in question as an exempt person

Form 8300: Reports of Currency Received in a

Non-financial Trade or Business

31 U.S.C § 5331 requires that:

(1) Any person who is engaged in a trade or business,

and

(2) Who, in the course of such business, receives more

than $10,000 in coins or currency in 1 transaction (or 2 or more related transactions), shall file a

report with respect to such transaction(s) with the FinCEN.

 26 U.S.C § 6050I contains an identical reporting requirement

 31 U.S.C § 5331 and 26 U.S.C § 6050I can both be satisfied by

filing the FinCEN / IRS Form 8300 31 CFR § 103.30(a)(1)(ii);

§103.30(e).

Definitions Related to Form 8300

• “Currency” includes the coin and currency of the U.S or of any other country which are customarily used and accepted as money in the other country.

• Solely for purposes of 31 U.S.C § 5331 and 26 U.S.C § 6050I,

“currency” also includes:

– A cashier’s check, bank draft, traveler’s check or money order having a

face amount of less than $10,000 that is:

(a) received in a “designated reporting transaction”, or (b) received in any other transaction in which the recipient knows that the

instrument is being used in an attempt to avoid reporting the transaction 31 CFR § 103.30(c)(1); 26 CFR § 1.6050I-1(c)

– A “designated reporting transaction” is a retail sale of a consumer

Definitions Related to Form 8300

under 26 U.S.C § 162 If the receipt of currency is not

in the course of the person’s trade or business, a Form

8300 is not required

―31 CFR § 103.30(c)(11), (d)(2)

(a) goods or services, (b) real or personal property, and (c) intangible property

– 31 CFR § 103.30(c)(12)(i)

Related Transactions

“Related transactions” means any transaction conducted between a payer (or its agent) and a recipient of

currency in a 24-hour period

• In addition, transactions conducted between a payer (or its

agent) and a currency recipient during a period of more than 24 hours are related if the recipient knows or has

reason to know that each transaction is one of a series of connected transactions.

• 31 CFR § 103.30(c)(12)(ii)

Filing Requirements

• Form 8300 must be filed within 15 days after currency is

received in the reportable transaction 26 CFR § 6050I-1(e) (1).

• Receipt of multiple payments:

– The Form 8300 must be filed within 15 days of the date on which the total payments received exceeds $10,000

• If the initial payment is $10,000 or less, then the recipient must aggregate the initial payment and all subsequent payments made within one year and the report must be filed within 15 days of the date on which the payment that causes the total aggregate payment

to exceed $10,000 is received.

– 31 CFR § 103.30(b)

Form 8300 Requirements

• Name, address, and taxpayer identification number of the

person who paid with currency.

• Identical information is required regarding the person on

whose behalf the transaction was conducted (if this person is different from the payer) 31 U.S.C § 5331(b)(2); 26 CFR § 6050I-1(e)(2).

• The filing business must verify the identity of the person.

• Retained for five years after the date of the filing 31 CFR §

103.30(e)(3).

Who Files Form 8300?

• The business that receives the currency.

• Any person who is collecting money for the account of another, then the person collecting the money must file a Form 8300.

– For example, a person who collects delinquent accounts receivable for a car dealership must file a Form 8300 even though the money must be turned over and credited to the car dealership 31 CFR § 103.30(a)(2)

• A person who is acting as an agent for another person and receives more than $10,000 from

a principal 31 CFR § 103.30(a)(3)(i).

– The agent does not have to file Form 8300 if he uses all of the currency within 15 days in a

currency transaction that is otherwise reportable by the ultimate recipient of the money

– Example: Charlie Client gives Andrew Attorney $75,000 in currency to purchase real estate for Mr Client Within 15 days, Mr Attorney purchases the property for currency from a third party seller

 Mr Attorney must disclose the name, address, and taxpayer identification number of the principal, Charlie Client, to the third party recipient of the currency so that the recipient can complete Form 8300.

– 31 CFR § 103.30(a)(3)(iii)

Anti-Structuring Laws Related to Form 8300

No person shall for the purpose of evading the return

requirements of this section:

(A) cause or attempt to cause a trade or business to fail to file a

Form 8300;

(B) cause or attempt to cause a trade or business to file a Form

8300 that contains a material omission or misstatement of fact; or

(C) structure or assist in structuring, or attempt to structure or

assist in structuring, any transaction with one or more trades

or businesses, to avoid the Form 8300 reporting requirement.

 26 U.S.C § 6050I(f)(1)

Civil Penalties Relating to Form 8300

• $50 per form for failure to file a timely and/or correct Form 8300

Maximum fine of $250,000 per calendar year for all transactions 26 U.S.C § 6721(a).

• Negligent violations: Civil penalty of not more than $500.

– If there is a “pattern of negligent activity”, an additional fine of up to

$50,000 may be imposed 31 U.S.C § 5321(a)(6).

• Willful failure to file: Civil penalty of not more than the greater of the

amount (not to exceed $100,000) involved in the transaction (if any)

or $25,000 31 U.S.C § 5321(a)(1).

• Intentional disregard: The greater of (a)$25,000 or (b) the amount of cash received up to $100,000 26 U.S.C § 6721(e)(2)(C)

Criminal Penalties Relating to Form 8300

Criminal penalties:

• Willful failure to file a Form 8300 is a felony punishable by a maximum of 5 years in prison and/or a fine of $25,000 ($100,000 in the case of a

corporation) may be imposed 26 U.S.C § 7203.

• Filing a false Form 8300 or assisting in the filing of a false Form 8300 are felonies punishable by a maximum of 3 years in prison and/or a fine of

$100,000 ($500,000 for a corporation) may be imposed 26 U.S.C § 7206.

• Title 31 carries separate penalties for willfully violating Form 8300 reporting requirements and can result in:

– A criminal fine up to $250,000 and/or imprisonment of 5 years, or

– A fine up to $500,000 and/or imprisonment of up to 10 years in aggravated cases involving the violation of other laws or a pattern of activity involving more than

Return Preparer

• Tax Return Preparer

– Any person who prepares for compensation, or who employs one or

more persons to prepare for compensation, any return of tax imposed

by this title or any claim for refund of tax imposed by this title 26

U.S.C § 7701(a)(36)(A)

– What should a tax return preparer be mindful of when receiving a

governmental inquiry via summons or subpoena?

• Circular 230 Consideration When Responding to the IRS

– Section 10.22 Diligence as to Accuracy:

 A practitioner must exercise due diligence in determining the correctness of oral or written representations made to Treasury

Summons Authority

• The IRS may issue a summons for the purpose of:

(1) Ascertaining the correctness of any return;

(2) Making a return where none has been made;

(3) Determining tax liability;

(4) Determining the liability of any transferee or fiduciary; and

(5) Collecting such tax liability.

• The IRS may use a summons to:

– Require the appearance of the taxpayers or witnesses to testify; and– Examine books, papers, records or other data.

“Relevant or Material”

• Does the material sought “throw light upon” the correctness of the

returns?

– Liberally and broadly construed.

• Is the summons overbroad?

– Requests for all records or documents may be overbroad and enforcement

might be limited to specifically itemized requests U.S v Darwin Constr

Co., 632 F Supp 1426 (D Md 1986).

• Applicability of § 7525 (tax practitioner privilege) to summons response:

– Does not apply in criminal proceedings.

– Courts have limited its application.

 Does not cover documents written in conjunction with the preparation of a tax

Grand Jury Subpoena

summons power

of witnesses and the production of documents

– Grand juries are given broad subpoena power.

– Still must be reasonable in time, breadth, and particularize

the documents it seeks See In re Grand Jury Subpoena

on Allied Auto Sales, 606 F Supp 7 (DRI 1983).