This Week in AML

The Latest on Gatekeeping, a Look at Tax and Insurance Fraud, and Pursuing Wealthy Tax Evaders

The  American Bar Association House of Delegates has approved changes to strengthen a lawyer’s obligations as a gatekeeper. Also, FinCEN issued a Notice about the increase in worker’s compensation insurance and payroll tax fraud in the construction industry, and the US Treasury Department released information about its efforts pursuing wealthy tax evaders. John and Elliot discuss these developments and how they may shape compliance in the future.



The Latest on Gatekeeping, a Look at Tax and Insurance Fraud, and Pursuing Wealthy Tax Evaders - TRANSCRIPT

Elliot Berman: Hi, John. How are you today?

John Byrne: Morning, Elliot. Doing well, thanks. Even though it's August, a lot going on. A couple of things I know we want to chat about. First everybody by now is clearly aware of the indictments handed down in Georgia, 19 defendants. 40 plus felonies, including use of the RICO statutes at the state level.

And you and I know the RICO statutes are used at the federal level. And it's been certainly something that expands the ability of prosecutors to look at predicate offenses and bring multiple charges so that's an interesting tool, valid tool from my experience of understanding the RICO statutes, but I would urge people, it's a 98 page indictment, I have not read through the entire indictment yet, but it's more legalese than the Jack Smith indictments. And I don't mean that in a pejorative sense, but clearly Fani Willis not only has done her homework, but this is a very detailed series of charges. So it's going to be very interesting to see how all this gets managed, but it is under the category of corruption, which is an issue that we do talk about from time to time on This Week, as well as several of our webinars.

Elliot Berman: Yes it will be very interesting to see it unfold. I agree and to see how the various judges deal with scheduling and with limitation of disclosure of evidence and other complex issues in any one case, but now with multiple cases obviously that much more complicated.

John Byrne: On the good news side we obviously correctly criticize Congress for not getting as much done as we think they can get done. But this is the one year anniversary of the Inflation Reduction Act, and if you go to the Treasury's website, they list a number of things that our colleagues in the Internal Revenue Service have been able to improve in terms of service, which is one of the key reasons for the funding levels there, but I just wanted to focus on a couple.

There's a lot in there, so folks can take a look at the press statement that has been posted on the website, but the category of going after high income taxpayers for taxes that they owed and never paid, they talk about pursuing tax evasion of people with over a million dollars in assets and saying that IRS-CI has closed a lengthy list of cases for tax evasion, money laundering, and filing false tax returns, These tax evaders used their funding for gambling, vacations, luxury goods, that's all has been proven in these cases.

IRS closed about 175 delinquent tax cases for millionaires that generated $38 million in recoveries. So I think that's good. And also they mentioned, relevant to some interviews we've done recently, a hundred high income individuals claiming benefits in Puerto Rico without meeting the residence and source rules involving US possessions. And those wealthy individuals were attempting to avoid US taxation.

And I mentioned Puerto Rico specifically because one of the several interviews that we've done was with the current special agent in charge of Homeland Security in Puerto Rico, Rebecca Gonzalez-Ramos, and some of the work that she's doing.

So a lot in this press statement, it's on the Treasury's website, but again, it talks specifically about what's happened in 12 months, which is pretty impressive.

Elliot Berman: Yes. Actual action, which often when we talk about what's going on in Congress, as you mentioned there's motion, but not a lot of action.

John Byrne: And you've identified something that FinCEN just issued that I know you're working on a longer piece. What happened there?

Elliot Berman: Yes. Again, in collaboration with our law enforcement partners at IRS-CI and HSI, FinCEN issued a Notice and we'll put the link to the Notice in the description of this week's session, but it's a notice regarding, and I'm quoting the title here, FinCEN calls attention to payroll tax evasion and workers compensation fraud in the construction sector.

And it's a detailed discussion of the use of shell companies to create both an insurance fraud by having a shell company buy a workers compensation insurance policy for a very small number of workers and then through the shell company a very large number of workers get hired. Then money is funnelled through the shell company to pay those employees in cash and avoid both federal and state and local payroll related taxes.

Red flags and all of those things. It's another kind of fraud. But you can also see how in some ways, and we've talked about this and written about this in the past, that fraud and money laundering are quite often directly connected. So we will be posting a more detailed analysis next week as a blog post, so you can watch for that on our website. Worth taking a look at and like many of these notices and pieces of guidance that come out of FinCEN and other regulators when they have red flags and other topology explanations, it's useful as a way to check your own program, training, those kinds of things.

John Byrne: So the other item that's come up that's, was reported by the Wall Street Journal and other trade papers we mentioned last week, that Attorney General Garland spoke to the American Bar Association and some of the comments he made regarding Ukraine and going after Oligarchs funds and that sort of issue.

But in addition, one of the things that the House of Delegates did, they took a vote on a resolution and that amends one of their model rules. The Model Rule of Declining and Terminating Representation in the ABA Model Rules of Professional Conduct. That sounds pretty dry, but basically this is an attempt to address the ongoing both fact and concern about some lawyers that work with clients that many would suggest are clearly engaged in financial crime.

And we know FATF has talked about gatekeepers being included under some version of whatever the BSA or AML infrastructure is in a particular country. We know that there was an attempt two years ago, to include those gatekeepers in the National Defense Authorization Act section on AML, but that was stripped out.

So there's been a lot of pressure on the legal profession to address this. And as an attempt to address this what they have done is for a 216 to 102 vote, they approved that resolution. And the change is a measure that says, quote, reasonable and appropriate, unquote, federal government efforts aimed at combating money laundering is what they were addressing.

That was the effort, but this would require lawyers to assess, again, quote, the facts and circumstances, unquote, of potentially representing a client. So under those new rules, lawyers would be required to stop working for any client that wishes to use their services to commit a crime.

It passed, not overwhelmingly, but by over 100 votes. But clearly, some of the folks there were opposed to this, and they believe that it's going to be harmful to the ability of lawyers to represent clients. But others have said, if we don't do this, we're going to get regulation.

They may still get regulation, but that's another reason to put that together. So what was your take on that? Because you and I have talked about this for a long time.

Elliot Berman: Yeah. So one additional fact that I want to throw in the mix, and then I'll answer your question. And that is a couple of years ago when AMLA was coming together and a provision related to gatekeepers was, as you mentioned, In the original proposal, the American Bar Association, actively lobbied against the bill.

This is clearly not something they would prefer to do. And in several of the accounts that talked about various speeches that were given in favor or against, it was clear that many of the speakers in favor, at least those reported about, were saying we need to take some affirmative action or we're going to get regulation, as you mentioned.

That's not a ringing endorsement for the concept. That's maybe I'll take a few bricks out of the wall, but I don't want to take down the wall. One of the continuing arguments by the legal profession about this issue is that any kind of reporting obligation is very concerning because of their obligation related to confidentiality of client information. But it seems to me there has to be some limited exceptions where really bad things are happening.

In the same way that in many states medical professionals who have an obligation of confidentiality have an exception for reporting abuse or an announcement by a patient that they intend to create great bodily harm. So it seems to me that the idea that lawyers should have an unlimited confidentiality obligation, even when bad things are happening shouldn't carry the day. Gatekeepers is a tough issue.

And while lawyers are front and center, we know that accountants trustees of trusts, there's lots of gatekeepers. I think that gatekeeper rules have to get put in place in some way. You mentioned that FATF considers it important. I've been doing some reading, at how are different countries handling it and I think this is one where, again we're slowly falling further and further behind in the US. It's important if we want to really have a fully successful anti-money laundering regime in place we have to deal with this. And I don't think it can just be voluntary disclosure.

John Byrne: Now, so two things. The business law section, litigation section opposed it. That tells you a little bit right there. And our colleagues at Transparency International said in effect that These new rules are, quote, window dressing, unquote, and would have little effect.

Much more to come on this. I've never felt that voluntary standards, guidance, whatever, is a substitute for regulation. It never works. It just doesn't work in the art industry. It's not going to work here. But, it's important to note that obviously some, in good faith, said we have to take a stand and make a statement. We'll see where this leaves everybody going forward.

Elliot Berman: Yeah, I expect you and I will hear from some of our colleagues who are in the criminal defence side, but also who do corporate work about why regulation isn't appropriate or isn't necessary. But I fully agree with you. I think there are clearly places where you need regulation and this is one of them.

John Byrne: All right. Good stuff. As I mentioned two interviews, one was done in Spanish by our advisory board member, Marilu Jimenez, and one that I was able to do both with Rebecca Gonzalez- Ramos, who, again, as I mentioned, is the special agent in charge down in Puerto Rico for Homeland Security. So take a listen to that.

We also recently interviewed Saskia Rietbroek from the Association of Certified Sanction Specialists on the sanctions challenges that we're all well aware of and how she's trying to deal with that. So those are a couple things coming up. What else Elliot?

Elliot Berman: Next week is our webinar on AML best practices. You can still register for that on our website and we encourage you to do that. And just a sneak peek of next month we're going to have a webinar looking at fraud programs that our colleague Chuck Taylor is going to moderate. Great panel there. You'll be able to register for that starting after the 24th of this month. So good things in the pipeline for the webinar program.

As you mentioned, some good new things in the podcast program. And as we have said every week, if you have ideas for topics for either this podcast or our other content, please let us know. We've had a few interesting things roll in and we are going to put them into the production queue and you'll see some of those pop up over the next month or two.

John Byrne: Yeah, and please write a review. We, that would help us as well. We want to make sure people are out there paying attention. We get some really decent feedback.

So Elliot, thanks so much. Have yourself a great rest of the week.

Elliot Berman: You too. And I know you're getting in the car and driving to a conference drive carefully.

John Byrne: Take care. Thanks.

Elliot Berman: You too. Bye bye.