Offshore Accountholders Beware: New DOJ Sentencing Policy For FBAR Cases Is A Game-Changer

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The Justice Department’s Tax Division has recently announced a major policy shift that will invariably result in longer jail sentences for individuals convicted of failing to report their offshore bank accounts on the FBAR form. Since 2009, the Justice Department and Internal Revenue Service have aggressively prosecuted individuals with secret offshore bank accounts, and the defendants in those cases are typically charged with one of two felonies (or both): (1) a tax offense (due to the unreported income generated in the foreign bank account); and/or (2) failure to file the FBAR form (a separate felony).

At sentencing in offshore bank account cases, the Justice Department has for nearly a decade consistently taken the position that the provision of the Sentencing Guidelines applicable to tax crimes should apply, rather than the harsher guideline applicable to FBAR offenses. In the overwhelming majority of these cases, judges have imposed relatively lenient sentences, oftentimes varying below the advisory Sentencing Guidelines range, and in many cases, imposing a sentence of probation only. In October 2017, the Justice Department surreptitiously announced that it was changing its sentencing policy for FBAR cases, and in December publicly confirmed that it would seek to have courts utilize the FBAR sentencing guideline in future cases. The government’s policy change was no doubt motivated by its desire to see longer jail sentences imposed in these types of cases, and this decision will have an immediate, and long-lasting impact in FBAR cases.

United States v. Hyung Kwon Kim

To illustrate the potentially significant sentencing disparities that can result from using the FBAR guideline instead of the tax guideline, we will focus on the facts of United States v. Kim, the very case in which the Justice Department announced its policy change. Kim is a citizen of South Korea who, since 1998, resided in the United States with a green card. Kim inherited millions of dollars that he deposited in secret Swiss bank accounts held at Credit Suisse, UBS, and other institutions. Kim utilized the services of numerous foreign “enablers” to set up and maintain his offshore bank accounts, including the creation of sham corporate entities to hold certain accounts. Among the individuals that Kim worked with was Dr. Edgar H. Palzer, a Swiss attorney who pleaded guilty in 2013 in the United States to conspiracy to defraud the United States government. By 2004, Kim had amassed more than $28 million in his Swiss accounts.

Last fall, the Justice Department announced that Kim had pleaded guilty to failing to report his Swiss bank accounts on the FBAR form. According to documents filed with the Court, however, it appears that Kim agreed to plead guilty five years earlier, shortly after he was contacted by government investigators, and thereafter provided extensive cooperation to the government in its investigation of himself and others. On October 26, 2017, Kim appeared in court and pleaded guilty to a single count of willfully failing to file an FBAR. He was not charged with, nor did he plead guilty to, any tax offense. As part of his plea agreement, Kim agreed to pay a civil FBAR penalty of over $14 million, representing one-half of the highest account balance in his Swiss bank accounts.

Sentencing Guidelines Analysis for Tax Cases

In the federal criminal justice system, sentencing decisions are driven in part by Sentencing Guidelines which are enacted by the United States Sentencing Commission. Although no longer mandatory, many federal judges still rely upon the Sentencing Guidelines calculation as a starting point in fashioning an appropriate sentence.

In tax cases, the Sentencing Guidelines calculation is based upon the “tax loss,” which is a monetary calculation of the unpaid federal taxes. The larger the amount of the “tax loss,” the longer the resulting Sentencing Guidelines calculation. The Sentencing Guidelines contain a “tax table,” which assigns an offense level based upon the amount of the tax loss. As the following tax table demonstrates, the offense level increases as the tax loss increases:

In the Kim case, the parties agreed that the tax loss was approximately $104,699 based upon the defendant’s failure to report income from his undeclared Swiss accounts on his 2007 federal income tax return, resulting in a base offense level of 16. As part of the plea, the parties also stipulated to a 2-level increase because the offense involved “sophisticated means,” a commonly employed sentencing adjustment in tax cases. The defendant’s resulting base offense level was 18. With a 3-level reduction for pleading guilty, the total offense level was 15, which corresponded to an advisory sentencing range of 18 to 24 months of imprisonment.

Sentencing Guidelines Analysis for FBAR Cases

In contrast to the tax guideline, the sentencing guideline applicable to FBAR violations – U.S.S.G. § 2S1.3 – is generally based upon the dollar amount of the funds in the unreported foreign account(s). In virtually every case, that amount will far exceed the tax loss amount. The U.S.S.G. § 2S1.3 guideline contains a cross-reference to the guideline applicable to theft and fraud (§ 2B1.1), and sets the base offense as 6 plus the applicable number of offense levels from the following table based upon the account balances:

The guideline also provides for an upward adjustment if two conditions are satisfied. First, the defendant must be convicted of certain offenses under Title 31 of the United States Code, which includes FBAR charges. Second, the defendant must have “committed the offense as part of a pattern of unlawful activity involving more than $100,000 in a 12-month period.” The Application Note to this guideline defines a “pattern of illegal activity” as “at least two separate occasions of unlawful activity involving a total amount of $100,000 in a 12-month period, without regard to whether any such occasion occurred during the course of the offense or resulted in a conviction for the conduct that occurred on that occasion.” The government should be able to establish that this adjustment applies relatively easily if the defendant files a false tax return with a false FBAR (or fails to file an FBAR).

Of critical importance, the FBAR guideline contains another cross-reference, which provides that “[i]f the offense was committed for purposes of violating the Internal Revenue laws, apply the most appropriate guideline from Chapter Two, Part T (Offenses Involving Taxation) if the resulting offense level is greater than that determined above.” It is this cross-reference that the government has historically relied upon to support its view that the tax guideline, not the FBAR guideline, applies in offshore bank account cases.

In the Kim case, the defendant’s offshore bank accounts had a maximum value of $28 million. If the FBAR guideline applied, the base offense level would be 28 (starting at level 6 with an increase of 22 levels based upon the value of the funds). Two additional levels would be added because the defendant engaged in a pattern of unlawful activity which, according to the government, consisted of filing two false FBARs (for 2006 and 2008) and a false tax return (for 2007) within a 12-month period. The defendant’s resulting base offense level under this scenario is 30. With a 3-level reduction for pleading guilty, the total offense level is 27, which corresponds to an advisory sentencing range of 70 to 87 months of imprisonment.

When comparing the sentencing range applicable to the tax guideline as opposed to the FBAR guideline in the Kim case, the disparity is readily apparent:

Advisory sentencing range per tax guideline:           18 to 24 months

Advisory sentencing range per FBAR guideline:      70 to 87 months

Kim’s Plea Agreement Foretells Policy Shift

The Justice Department issued a press release on October 27, 2017 announcing Kim’s guilty plea. Kim had appeared in federal court in the Eastern District of Virginia one day earlier and formally entered his guilty plea. Buried in Kim’s written guilty plea agreement is a provision revealing – for the first time – that the government was changing its sentencing policy in FBAR cases. The agreement first provides that the government contends that the applicable sentencing guideline for the single offense of conviction – willful failure to file the FBAR form – is the FBAR guideline. The agreement next provides that at the time the defendant agreed to plead guilty (five years earlier), the government had consistently taken the position in similar cases that the tax guideline applied. The agreement then concludes that in order to ensure equitable treatment of the defendant, the parties agreed that the tax guideline should nonetheless apply.

The full text of this highly unusual provision follows:

The Government contends that the applicable Guideline in this matter should be U.S.S.G. § 2S1.3(a)(2), § 2B1.1, and § 2S1.3(b)(2) because the defendant filed two false FBARs and a false U.S. Individual Income Tax Return, Form 1040, within a 12-month period. However, at the time that the defendant agreed to plead guilty, the Government consistently took the position with similarly situated defendants that the applicable Guideline was U.S.S.G. § 2T1.1 and § 2T1.4 due to the cross reference in 2S1.3(c)(1).

Therefore, in order to ensure that the defendant receives equitable treatment, and in accordance with Federal Rule of Criminal Procedure 11(c)(1)(13), the United States and the defendant will recommend to the Court that the following provisions of the Sentencing Guidelines apply:

          a.  The base offense level for this offense is 16 pursuant to U.S.S.G. § 2T1.1(a)(1) and § 2T4.1(F), because the tax loss exceeded $100,000;

          b.  The base offense level is increased by 2 levels pursuant to U.S.S.G. § 2T1.1(b)(2) because the offense involved sophisticated means; and

          c.  the parties agree that they are free to argue other provisions of the Sentencing Guidelines not referenced herein or the sentencing factors under 18 U.S.C. § 3553(a).

Justice Department Publicly Confirms Policy Shift

In December 2017, at the American Bar Association’s National Institute on Criminal Tax Fraud, the Justice Department confirmed publicly what had been revealed in the Kim plea agreement – that it would now seek to have defendants in offshore bank account cases sentenced under the FBAR guideline, rather than the tax guideline that had been used for years.

One month later, in January 2018, the government filed its sentencing memorandum in United States v. Kim. In that filing, the government noted that in the Presentence Investigation Report, the Probation Office calculated the advisory Sentencing Guidelines range using the FBAR guideline. The government asserted that the FBAR guideline, U.S.S.G. § 2S1.3, was “the proper Guideline,” but acknowledged that Kim had agreed to plead guilty five years earlier, at a time when the Justice Department employed the tax guideline “in virtually every other FBAR case”:

While 2S1.3 may be the proper Guideline, the government respectfully requests that the Court sentence the defendant under U.S.S.G. § 2T, the Tax Guidelines. As stated in the Plea Agreement, “at the time that the defendant agreed to plead guilty, the Government consistently took the position with similarly situated defendants that the applicable Guideline was U.S.S.G. § 2T1.1 and § 2T1.4 due to the cross reference in § 2S1.3(c)(1).”2 Plea Agreement, Dkt. # 10, pp. 3-4.

In 2012, Kim and the government commenced plea negotiations with the defendant’s counsel. At that time, the government had entered into plea agreements with a number of several other legal permanent residents that required those individuals to plead guilty to FBAR charges, and not tax charges. In each of those cases, the plea agreements specifically set forth a Guidelines calculation using the Tax Guidelines and not § 2S1.3. After Kim and the government had reached an agreement in principle, the government continued to employ the Tax Guidelines in virtually every other FBAR case. In order to ensure that this defendant receives equitable treatment, the government believes that the appropriate Guidelines which should be applied in this case are the alternative calculation under § 2S1.3(c)(1).

Kim’s Sentencing

Kim was sentenced by January 25, 2018. With the parties in agreement that the tax guideline should apply, Kim faced an advisory Sentencing Guidelines range of 18 to 24 months of imprisonment. For its part, the government advocated for a jail sentence of 9 months, an evident acknowledgment that Kim had provided substantial assistance to the government in its investigation of offshore tax evasion by U.S. citizens using Swiss accounts. The defense argued for a sentence of probation based upon numerous factors, including Kim’s acceptance of responsibility; extensive cooperation over a five-year period; and that fact that as a green-card holder, Kim was subject to deportation as a result of his felony conviction.

After taking account of the advisory Sentencing Guidelines range as well as the other sentencing factors, the Court imposed a jail sentence of 6 months, a substantial reduction from the advisory range under the tax guideline (18 to 24 months) and a colossal variance from the range had the FBAR guideline been employed (70 to 87 months).

Impact of the Justice Department’s New Policy

The government’s decision to no longer request that judges utilize the tax guideline for sentencing will have an immediate, and profound, impact on defendants in FBAR cases. As the Kim case demonstrates, the tax loss in FBAR cases is almost always substantially less than the value of the funds in the offshore accounts. As a consequence, shifting to a sentencing regime based upon the FBAR guideline, rather than the tax guideline, will result in dramatically increased sentences in these cases. In addition, the government will oftentimes be able to seek a 2-level increase under the FBAR guideline for a “pattern of illegal activity” if the defendant filed a false tax return and either filed a false FBAR or failed to file an FBAR.

Individuals with offshore bank accounts who are still non-compliant with their U.S. tax obligations would be well-advised to take immediate remedial action so as to avoid being subjected to a significantly harsher sentencing regime for FBAR violations if they are charged. The Internal Revenue Service continues to offer a number of voluntary disclosure options for non-compliant taxpayers, including the well-publicized Offshore Voluntary Disclosure Program which provides participating taxpayers with protection from criminal prosecution.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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