Forfeiture actions by Internal Revenue Service Criminal Investigation (IRS CI) based on alleged structuring activity have come under fire, yet again. Specifically, the Treasury Inspector General for Tax Administration (TIGTA) issued on March 30, 2017 a detailed report (Report) which evaluates IRS CI’s use of seizures for property owners suspected of structuring financial transactions. The Report sets forth detailed criticisms of past practices, as well as nine pointed recommendations for future forfeiture actions, which received a mixed response from IRS CI. This report was followed very shortly by the bipartisan re-introduction on April 3, 2017 of the “Restraining Excessive Seizure of Property through the Exploitation of Civil Asset Forfeiture Tools Act,” or RESPECT Act, which seeks to limit the ability of the IRS to conduct civil forfeitures based on structuring activity without underlying criminal activity.

We previously have discussed the growing resistance to IRS forfeiture actions based on the structuring of “legal source” funds, and the initial introduction of the RESPECT Act. In this two-part blog entry, we discuss in detail immediately below the new TIGTA Report and the mixed reaction to it by IRS CI.

However, it is not just IRS CI that is undergoing criticism. We will follow up tomorrow with a related post on the recent report by the Office of the Inspector General for the Department of Justice (DOJ). The DOJ report provides some similar critiques of the entire landscape of federal forfeiture, and makes additional recommendations on asset seizure and forfeiture in general.

These two Inspector General reports set forth some common criticisms of forfeiture enforcement. They also can be interpreted as suggesting that law enforcement agents could minimize some of the criticisms of civil forfeiture by reducing the total amount of forfeiture cases undertaken, while simultaneously increasing the amount of time and effort spent on investigating the remaining cases which are pursued. This is because the reports suggest that additional investigation – which often seems to be scant – may produce in many cases facts supporting forfeiture that could satisfy even some critics of civil forfeiture.

IRS Forfeiture Relating to Structuring

First, a brief review of structuring law and related forfeiture by IRS CI. Under the BSA, financial institutions are required to file a Currency Transaction Report (CTR) for any deposit of more than $10,000. Attempting to avoid filing a CTR or preventing a bank from acquiring the duty to file a CTR, by breaking up a larger deposit into a series of deposits under the $10,000 threshold, is known as “structuring.” Structuring, when done to evade the reporting requirement, is a felony punishable by prison. It also can lead to civil or criminal forfeiture of the structured funds under 31 U.S.C. §5317(c).

The CTR requirement and anti-structuring provision are designed to identify criminal conduct as well as “illegal source deposits,” funds involved in or derived from criminal activity. Of course, structuring is not limited to illegal source deposits. It also can involve funds from legal activities, such as ordinary business operations. For this reason, the anti-structuring provision can and does ensnare people who are not involved in underlying criminal conduct, such as ordinary business owners or banking customers whose behavior can either represent actual structuring (i.e., the conduct occurs with the requisite mental state, perhaps to further a tax crime) or merely resembles structuring but otherwise is innocent.

Concerns have arisen about the use of the forfeiture power by IRS CI in situations involving legal source deposits where there is no indication that the person is otherwise engaged in criminal activity. In response, IRS CI issued a statement in October 2014, explaining that it was modifying its policy on administrative forfeiture—the process by which property may be forfeited by the seizing investigative agency without judicial involvement—in “legal source” structuring cases. Under the modified policy, IRS CI no longer will pursue the forfeiture of funds associated solely with “legal source” structuring cases unless there are “exceptional circumstances” justifying the action and the case has been approved by the director of field operations. However, IRS CI special agents still will view structuring as indicating that further illegal activity may be occurring. Further, the policy involving seizure and forfeiture in “illegal source” structuring cases was not changed. Nonetheless, and as illustrated below, the amount of civil forfeiture actions pursued by IRS CI has plummeted since the time of its policy amendment.

Congressional Reform: The RESPECT Act

Members of Congress are seeking to codify the IRS’s internal policy of restraint. On April 3, 2017, U.S. Representatives Peter J. Roskam (R-IL) and Joseph Crowley (D-NY) re-introduced the RESPECT Act. The Act would amend the civil asset forfeiture provision of the BSA, Section 5317(c)(2), to provide that the IRS may pursue civil forfeiture on the basis of structuring violations only “if the property to be seized was derived from an illegal source or the funds were structured for the purpose of concealing the violation of a criminal law or regulation other than section 5324.” Accordingly, the IRS would be unable to pursue civil forfeiture based upon “pure” structuring activity not involving other criminal conduct. In addition, it would create a new post-seizure hearing where the government would have the burden of showing that there is probable cause to believe that there is a violation of section 5324 involving such property and to believe that the property to be seized was derived from an illegal source or the funds were structured for the purpose of concealing the violation of a criminal law or regulation other than section 5324. The court would have 30 days to rule, with a 30-day extension available at the request of either party.

The RESPECT Act also states that forfeiture is permissible when “the funds were structured for the purpose of concealing the violation of a criminal law[,]” even if the funds themselves are not tainted. This language still provides the IRS with a potentially broad theory for forfeiture because the history of structuring enforcement suggests that a significant amount of structuring activity is undertaken to further tax fraud – this is arguably even more true as the use of large amounts of cash becomes less and less common in our digitized economy. Thus, the ability of the IRS to administratively forfeit “clean” funds used in structuring may come down to the institutional willingness of the IRS to pursue forfeiture in cases involving “only” alleged tax fraud—which might be legal but still controversial.

One potential approach for IRS CI if the RESPECT Act is passed is to focus on fewer forfeiture cases – which already is occurring – but also to increase the amount of investigative resources devoted to each case. To date, the approach of the government often seems to have been to maximize the amount of civil forfeiture actions, without digging into the details of a particular case or making it part of an overall tax fraud investigation, comfortable in the expectation that a property owner rarely will contest an action and both parties will attain a negotiated civil settlement and simply move on. One place for IRS CI to start building its case would be during interviews of property owners. As we will see below, IRS CI has been very effective at eliciting inculpatory admissions from property owners during interviews regarding their apparent intent to avoid a CTR; although it may seem counter-intuitive, IRS CI likely would have similar success in eliciting from many property owners the third and final piece of the mental state puzzle: an admission that the structuring sought to conceal or further a tax scheme.

Inspector General Criticisms of Forfeiture Enforcement

The re-introduction of the RESPECT Act followed closely upon the heels of TIGTA’s March 30, 2017 Report evaluating IRS CI’s use of seizures for property owners suspected of structuring transactions. TIGTA analyzed data provided to it by IRS CI regarding asset seizures during Fiscal Years 2012 to 2015.

The TIGTA Report summarizes one of its most salient finding as follows:

Most of the seizures for structuring violations involved legal source funds from businesses. While current law does not require that the funds have an illegal source (e.g., money laundering or criminal activity other than structuring), the purpose of CI’s civil forfeiture program is to interdict criminal enterprises. As a result, $17.1 million was seized and forfeited to the Government in 231 legal source cases.   CI primarily relied on patterns of banking transactions to establish probable cause to seize assets for structuring violations.

The TIGTA Report reiterates the above point, more bluntly, in subsequent language that arguably could apply to AML/BSA enforcement actions beyond just the context of structuring: “The history of the BSA requirements are long and complex, but the purpose of the BSA reporting requirement is focused on detecting and deterring criminal behavior. In order words, the BSA reporting requirements were not put in place just so that the Government could enforce the reporting requirements. They were put in place to give the Government tools to address criminal behavior.”

Acknowledging the 2014 change in policy by IRS CI, the TIGTA Report sets forth this graphic, which illustrates the clear effect of the policy change. The Report explains that this data illustrates a subset of a total of 1,997 asset seizures with a total value of $193.1 million in 736 criminal investigations for which structuring was the primary statutory basis for seizure under either a civil or criminal forfeiture process:

The above chart illustrates that, even before the October 2014 policy change, the number of criminal investigations and the amount of assets seized were dropping already. However, once the policy was amended, the drop was dramatic: the number of investigations between FY 2014 and FY 2015 dropped approximately 87%, and the number and dollar amount of assets seized dropped by a similar percentage.

To make the point more visually, we summarize the data set forth in Figure 1 here:

Percentage Change Year Over Year: Before the October 2014 Policy Change

Percentage Change Year Over Year: After the October 2014 Policy Change

Of these criminal investigations involving civil forfeiture, TIGTA states that it randomly selected and reviewed documents underlying 301 cases in FY 2012 through 2014 (before the change in IRS CI policy; TIGTA did not review the details of investigations undertaken in FY 2015 after the policy change) and found that 252 investigations involved legal source funds and that only 26 investigations involved illegal activity or an illegal source of funds (in the remaining 23 investigations, TIGTA could not determine whether the sources of funds or structuring activity involved other illegal activity). Of the 252 legal source cases, IRS CI identified tax law violations in 21 cases. Further, 210 out of the 252 legal source cases involved businesses that deal with currency, including retail, wholesale, service, automobile, restaurants, and gas stations. In the 231 legal source cases not involving established facts of tax fraud, $17.1 million was seized and forfeited, typically based solely on the pattern of transactions.

This data is summarized here:

Thus, the majority of the investigations reviewed by TIGTA involved legal source funds and did not involve facts suggesting that the structuring was a component of other, more traditional illegal activity, such as a tax fraud scheme. It is not clear what criteria TIGTA employed to make these determinations, but they flow directly from the information made available to TIGTA by IRS CI. If IRS CI never tried to obtain facts to show a tax evasion scheme, that does not mean that such a scheme did not actually exist.

Indeed, according to TIGTA, “[o]ne of the reasons why the legal source cases were pursued may have been that some [Offices of the U.S. Attorney] promoted the use of the ‘quick hit’ seizure after the identification of structuring activity. Under this approach, the Government recognized the benefit of quickly identifying the criminal activity, seizing funds, and reaching a negotiated resolution of these types of matters and using its resources on other investigations.” Stated another way, the government used the vehicle of civil forfeiture in structuring cases labeled as criminal investigations – although the substantial majority of such cases involved only legal-source funds and no other clearly identified criminal activity – to obtain speedy agreements from property owners to not contest civil forfeiture. The government then often elected not to pursue the investigation any further. Of course, it is possible that many cases in fact contained indicia of other illegality, such as tax fraud. Historically, structuring large amounts of currency has been recognized as a classic method of attempting to hide income from the IRS, and attempted tax fraud is one of the few reasons on the very short list of rational explanations – guilty or innocent – for going to the trouble of making repeated large cash transactions. Regardless, the practical reality is that the files reviewed by TIGTA rarely contained facts demonstrating such other criminality – which simply may have been a function of the paucity of the investigations pursued by IRS CI. To that end, the TITGA Report is likely a useful reminder to IRS CI and the Department of Justice that if they want to enforce forfeiture penalties, they can do so, but they first must pursue a proper investigation, rather than seizing property based simply on the pattern of transactions and assuming that the case will settle.

Recommendations Made by TIGTA

The TIGTA Report made nine recommendations to IRS CI, which agreed with the following five:

• Establish controls to ensure that CI personnel working on Suspicious Activity Report Review Teams or Financial Crime Task Forces are selecting cases and conducting investigations consistently in such a manner as to best meet organization goals and policies as well as foster confidence in the tax system.
• In structuring forfeiture cases that were resolved administratively, return all funds forfeited from legal sources for which there was no illegal activity (other than the alleged structuring) or tax evasion to the property owners. In structuring forfeiture cases that were resolved judicially, recommend to the Department of Justice that all funds forfeited from legal sources for which there was no illegal activity . . . be returned to the property owners.
• Ensure that relevant CI procedures are communicated and emphasized to all CI agents and task force partners regarding the requirement to fully investigate all reasonable explanations provided in interviews conducted during the investigations .
• The Chief, CI, should establish proper oversight and controls to prevent Consents to Forfeiture from being used by field offices as a general practice.
• The Chief, CI, should ensure that referrals of potential civil tax matters derived from Title 31 structuring leads are referred to the appropriate IRS business unit.

However, IRS CI disagreed with four recommendations from TIGTA. Two disputed recommendations pertained to, respectively, increased consistency in forfeiture investigation outcomes and the accurate designation of government information as restricted under the grand jury secrecy rules. The other two disputed recommendations, noted below, pertained to communications between property owners and IRS CI and will be discussed in greater detail.

• Consider revising the [Internal Revenue Manual] to require a clear explanation for the purpose of interviews at the outset and the reading of noncustodial advice of rights to all subjects under investigation during the interviews.
• [D]evelop guidance or training for special agents stating that it is not appropriate to bargain nonprosecution as a means of encouraging settlement of a civil forfeiture case.

As to the first contested recommendation, TIGTA received and reviewed interview documents for 229 investigations. Of these, TIGTA founds that in 141 cases, the property owner admitted during an interview both to knowledge that some type of form was required to be filed when a currency transaction exceeded $10,000, and to intentionally keeping transactions under $10,000. Thus, in apparently almost half of all investigations reviewed by TIGTA, the property owner admitted to facts which would allow one to conclude that the property owner possessed the mental state requisite for a structuring violation. This outcome is consistent with the counter-intuitive phenomenon, known to practitioners in criminal law, that people talk and make admissions to law enforcement agents with surprising regularity. Presumably, IRS CI could get many of these interviewees to also admit that the point of the structuring was to conceal income from the IRS. Such evidence would be a simple and major step towards satisfying the requirement under the RESPECT Act that the government show that legal-source funds are properly subject to forfeiture because the structuring had the purpose of concealing another criminal violation.

However, TIGTA also found that special agents conducting the investigations frequently failed to properly identify themselves to property owners, or state the purpose of the interviews. Further, TIGTA found that IRS CI generally ignored or did not try to verify innocent and realistic explanations elicited during certain interviews. Although IRS CI agreed with TIGTA that subjects of administrative investigations should be informed of their rights when interviewed, even in non-custodial situations, IRS CI disagreed that subjects of a grand jury investigation should be advised of their rights when interviewed and not in custody, explaining that the DOJ directs the conduct of IRS CI agents in criminal grand jury investigations. The DOJ rarely will instruct IRS CI agents to read individuals their rights in non-custodial settings, because the Fifth Amendment simply does not require such warnings.

As to the second contested recommendation, although IRS CI accurately responded that special agents do not participate in settlements with property owners (only a prosecutor has authority to bargain criminal liability), TIGTA noted that this response failed to consider that special agents nonetheless can make de facto comments to property owners, beyond the context of formal negotiation or settlement, about the possibility of minimizing or risking criminal prosecution which may chill the owners’ willingness to pursue their rights during the civil forfeiture process. This response by TIGTA is consistent with the Report’s concern that property owners have been talked out of attempting to pursue their civil remedies. This response also highlights one of the observations we previously made: the TIGTA Report may not prove necessarily that most structuring cases do not involve other illegality, but the Report does strongly suggest that the government needs to do additional investigation to support the cases it does bring, rather than rely on the expectation, born from experience, that property owners simply will agree to forfeiture.

Tomorrow we will discuss a similar report by the Office of the Inspector General for the DOJ. That report leads to similar conclusions about data collection and investigations surrounding forfeiture, with a particular focus on seizures and forfeitures in drug interdiction operations. As with TIGTA’s review, the DOJ Office of Inspector General found that in many cases, property was forfeited without conclusive information about whether a crime was involved. Although the circumstances surrounding those forfeitures were highly suggestive of criminal activity, the forfeitures were neither linked to existing criminal investigations nor did they result in new indictments or investigations. Stay tuned for more.