In many criminal investigations, evidence of criminally derived proceeds becomes apparent to investigators, but subsequent comingling with legitimately obtained wealth makes future financial transactions more ambiguous and difficult to charge as substantive offenses. The following situation will illustrate practical methods of obtaining evidence to support money laundering and related financial offenses for federal or state investigators.
As an example, we could use any of the hundreds of Specified Unlawful Activities (SUA) in Title 18 U.S.C. § 1956 (c)(7) as a predicate offense. Let's say that an investigator has a statement provided by a reliable confidential informant that leads to an open cocaine trafficking investigation of a suspect who also operates a night club. The investigator has evidence that the suspect purchases cocaine from a Mexican drug trafficking organization and has a network of local drug dealers who distribute the drugs and return cash to the suspect. The investigator issued a subpoena for the night club's bank statements, which produced statements with withdrawal and deposit items consisting primarily of cash transactions. Dozens of Currency Transaction Reports are on file with FINCEN. Surveillance indicated the nightclub was busy with most patrons paying in cash and some of the funds in the account are certainly legitimate. Shortly after filing for bankruptcy protection, the suspect acquired a new home and luxury cars. Additionally, the suspect is named in a Suspicious Activity Report (SAR) filed by a Money Service Business for presenting amounts of cash to be wired to a series of unknown names in Mexico. Investigators are confident that the houses and luxury cars were purchased with drug trafficking proceeds in violation of Title 18 U.S.C. § 1957, but have been unable to establish the criminal element that the proceeds were, in fact, derived from a SUA.
This is the kind of situation where investigators could establish Title 18 U.S.C. § 1957 Monetary Transaction Offenses (or similar violations) by circumstantially proving that the suspect must have exceeded his known legal sources of funds to acquire the assets. The challenge is to prove that the funds being spent were derived from drug trafficking and not the legal operation of a night club. Several methods of proof could be employed to help establish that the assets were purchased illegally, such as the sources and applications of funds or the net worth and expenditures method. These methods can be simple and investigators need not be intimidated if they have never conducted a thorough financial investigation. In simplest form, the idea is for the investigator to add up known sources of income (night club income, etc.) and the uses of his funds (houses, cars, etc.). If an investigator already has evidence of the suspect's purchases the only remaining hurdles are determining known sources of funds and perhaps a wealth starting point. Templates for such methods of proof can be obtained from the Department of Justice Asset Forfeiture and Money Laundering Section.
It is common knowledge among law enforcement and the financial services industry that Congress has given the Internal Revenue Service strict statutes to protect taxpayer information. However, there are still methods available to establish known legal sources of income. If the investigation becomes overt at any point and the suspect is contacted, I recommend asking the suspect to complete IRS Form 8821, Tax Information Authorization. IRS Form 8821 is commonly used by mortgage lenders, individuals with power of attorney or others with a need to verify the tax filing history of another person. In my experience most suspects completed Form 8821 without objection. In fact, most attorneys have allowed their clients to complete Form 8821 following arrests. I believe that most suspects and their attorneys are aware that whether or not they provide consent to share tax information, law enforcement has other options; therefore, consenting to share tax information is viewed as a method of cooperation. Form 8821 can be completed to cover a number of tax years and any tax matter specifically noted, such as Forms 1040, Individual Income Tax Returns. Speaking with an IRS employee in your area may be helpful before completing Form 8821 for the first time, after that just continue your own best practices. I usually list "any and all" in Box 3(d) under Specific Tax Matters. The requesting investigator should place his or her name in Box 2 to be the Appointee of the taxpayer, along with any other known parties to use the information; for example, Special Agent Alan Cornett and any employee of FBI, or any employee of the U.S. Attorney's Office. Filing instructions are provided on the back of Form 8821 or you may be able to take the signed form directly to an IRS Taxpayer Service Office, depending on your geographic area and the individual IRS office. Form 8821 can be used by anyone, including state and local law enforcement officers or even financial institution investigators if the taxpayer consents.
Another method of obtaining federal tax information is from bank loan files. Many lenders require borrowers to present income tax returns to substantiate their wherewithal to pay. While such tax returns are not as valuable for evidentiary purposes (because the defendant could claim to have lied to the lender, but told the IRS the truth on different tax returns), they are still evidence that could be cited to force the defendant to make an affirmative defense or offer something to refute the tax returns. Bank investigators can assist law enforcement by mentioning loan files and supporting documents such as tax returns in SARs if appropriate.
Similarly, tax information can be found during validly executed search warrants, subpoenaed from an accountant or in some states obtained from Departments of Revenue. Such tax information would not be protected under the Internal Revenue Code § 6103 and would be useful in the absence of federal tax information directly from the IRS.
Another option would be to contact the IRS Criminal Investigation Division to invite Special Agents into an existing grand jury investigation. Upon the request of the U.S. Attorney's Office, the IRS Criminal Investigation Division may investigate potential tax crimes and related offenses along with other agencies; in this situation tax information may be shared with other federal law enforcement officers to the extent necessary to investigate criminal tax allegations. In this respect an agent of ATF or Secret Service could be effectively acting for the advancement of tax administration, just as the IRS CID Special Agent would be assisting in the investigation of gun trafficking or counterfeiting.
Form 8821 can be completed to cover a number of tax years and any tax matter specifically noted
Lastly, the most common method of obtaining tax information for a federal investigation or hearing is the use of a court order signed by a Federal District Judge or Magistrate. This order, authorized under Title 26 § 6103(i)(1), may be referred to as an Ex Parte Order, i Order or Disclosure Order, depending on the judicial district in which it is sought. After receiving the order the IRS Disclosure Office will produce certified copies of any information requested, which are the best evidence for proving reported income because federal tax returns filed with the IRS are signed under penalty of perjury. This option is only available for federal investigations. In the absence of a criminal investigation, Title 26
§ 6103(i)(4) provides for a method of obtaining tax information to support certain civil and administrative functions, such as a civil asset forfeiture action.
After obtaining tax information to establish known legal sources of funds, investigators should be close to completing a method of proof to support the offenses charged. Investigators should make efforts to identify the beginning net worth and cash on hand of individuals if using a net nworth and expenditures analysis. Specific requirements of this method are beyond the scope of this paper, but are available from the Department of Justice.
Many defendants will begin cooperating at some point during an investigation
To continue the investigative example, consider the following: the suspect reported $100,000 in net business profit to the IRS with no other income for 2009 and 2010. It was further determined that the suspect's bankruptcy filing was adjudicated on December 30th, 2008. A sample net worth and expenditures analysis could indicate:
Investigators could move forward with prosecution and asset forfeiture because although the suspect could have legitimately acquired the Bentley, or bought the Maserati, or wired funds to Mexico, he could not have done all three given his level of night club income. Therefore, either he lied to the IRS on federal income tax returns or he spent funds derived from his drug trafficking, assuming we have other facts to establish that pattern.
Net Worth and Expenditures Analysis for Suspect #1
|Net Worth (Assets – Liabilities)||$0.00||$600,000.00||$725,000.00|
|Change in Net Worth||$600,000.00||$125,000.00|
|Expenditures: Wires to Mexico||$100,000.00||$50,000.00|
|Change in Net Worth + Expenditures||$700,000.00||$175,000.00|
|Less: Known Sources of Income (IRS)||($100,000.00)||($100,000.00)|
|Funds from Unknown Sources||$600,000.00||$75,000.00|
To successfully prosecute counts in this sample investigation under Title 18 U.S.C. § 1957 investigators would need to prove the following four elements:
- The defendant must knowingly engage or attempt to engage in a monetary transaction. For this element investigators could introduce the closing statement for the house, purchase agreements and Forms 8300 for the Maserati and Bentley, and cash receipts from the wiring service to Mexico. Title 18 U.S.C. § 1957 requires that transactions involve "A Financial Institution," which includes many types of businesses such as entities and individuals involved in real estate sales, automobile sales and money transmitting; therefore, the transactions in this example would qualify.
- The defendant must know that the transaction involved criminally derived property. Investigators will be able to show that the suspect knew of his night club's profitability as reported to IRS and could not have conducted the transactions without additional funds from unknown sources.
- The criminally derived property must be of a value greater than $10,000. The counts chosen for this sample all meet this element.
- The criminally derived property must also, in fact, have been derived from a specified unlawful activity. To establish this element the tax information is especially valuable because it made it possible for investigators to complete a financial analysis and establish that the suspect spent $675,000 that could not have been from his night club.
This sample investigation illustrates tools that are not beyond the reach of investigators across the country. The IRS Criminal Investigation Division always has an interest in money laundering investigations, but in cases where Special Agents are unavailable or where state prosecution is being sought, investigators can accomplish these goals and serve the public interest.
Many defendants will begin cooperating at some point during an investigation; use those times to approach them with IRS Form 8821 to obtain tax information, which may be used to support any number of offenses. Instead of prosecution there may be some situations in which prosecutors may choose to pursue only civil asset forfeiture of the house and automobiles. In forfeiture actions, the tax information would have been just as useful because the same financial analysis could be used to prove, by the preponderance of evidence, that the suspect purchased those assets with criminally derived proceeds and that the assets were property involved in money laundering and thereby forfeitable.