Tax Evasion Is Most Serious Charge in Indictment of Manafort, Gates
Posted on: November 10, 2017 | By: Stephen Dunn | Bank Secrecy Act, Criminal Tax Prosecutions, FBARs, Foreign Agents Registration Act (FARA), Voluntary Disclosures
MnaBy Stephen J. Dunn
Tax evasion is the most serious charge in the recent Indictment of Paul J. Manafort, Jr. and Richard W. Gates III. The Indictment avers that Manafort and Gates engaged in a multi-million dollar lobbying campaign for Victor Yanukovych, then-President of Ukraine, before he fled to Russia, and the Government of Ukraine. The Indictment alleges that over $18 million was wire-transferred from banks in Cyprus, the Grenadines, and the United Kingdom to third parties in the United States, for the benefit of Manafort and his family. The alleged transfers include $5,434,793 to a home improvement company in the Hamptons, New York; $1,319,281 to a home automation, lighting, and home entertainment company in Florida; $934,350 to an antique rug store in Alexandria, Virginia; $849,215 to a men’s clothing store in New York; $655,500 to a landscaper in the Hamptons, New York; $623,910 to an antique dealer in New York; $520,440 to a clothing store in Beverly Hills, California; $500,000 to an investment company; $432,487 to a contractor in Florida; $164,740 to a landscaper in the Hamptons, New York; $163,705 in payments for three Range Rovers; $125,650 to a contractor in Virginia; $112,825 to a home audio, video, and control company in the Hamptons, New York; $62,750 for purchase of a Mercedes Benz; $47,000 for purchase of another Range Rover; $46,000 to a property management company in South Carolina; $31,000 to an art gallery in Florida; and $20,000 for housekeeping in New York. The alleged transfers also include $1,500,000 for purchase of a condominium in New York; $3,000,000 for purchase of a brownstone in New York; and $1,900,000 for purchase of a house in Arlington, Virginia. None of the alleged transfers was reported as income on Manafort’s income tax returns.
These facts, if proved, are bad for Manafort. They evince deceit, as the alleged payments were made not to Manafort but to third parties for the benefit of Manafort and his family. They also betray a lavish lifestyle. If Manafort realized such income, how could he have not reported it on his income tax returns?
Assuming a tax rate of 25 percent, $18 million of underreported income translates to $4.5 million of underreported tax. The Federal guideline sentence for evasion of $4.5 million in tax is 51-63 months’ imprisonment. A downward departure for voluntary disclosure might have been available for cooperation with the Federal authorities, and may still be available.
Manafort should have been advised to file amended income tax returns correctly reporting his income. The amended income tax returns should have been filed as early as possible in the investigation. This would have diffused the understatement of tax and especially the willfulness elements of the tax offenses now charged against Manafort.
The Indictment further charges that Manafort and Gates acted as agents for a foreign principal without registering with the U.S. Department of Justice, in violation of the Foreign Agents Registration Act (FARA), 22 USC §§ 612, 618. This offense is almost never prosecuted.
The Indictment further charges that Manafort and Gates conspired to—
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transfer money from places outside of the United States to places into the United States with intent to promote the carrying on of specified unlawful activity, namely, a violation of FARA (the “Specified Unlawful Activity), in violation of 18 USC § 1956(A)(2)(a); and
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conduct financial transactions, affecting interstate and foreign commerce, knowing that the property involved in the financial transactions would represent the proceeds of some form of unlawful activity, and that the transactions in fact would involve the proceeds of Specified Unlawful Activity, knowing that such financial transactions were designed (i) to engage in conduct constituting tax evasion in violation of 26 USC § 7201 or the filing of a false tax return in violation of 26 USC § 7206, and (ii) to conceal and disguise the nature, location, source, ownership, and control of the proceeds of the Specified Unlawful Activity, in violation of 18 USC §§ 1956(a)(1)(A)(ii) and 1956 (a)(1)(B)(i).
These money-laundering allegations are a reach. It is far from clear that a violation of FARA is “specified unlawful activity” within the meaning of 18 USC § 1956(c)(7). Moreover, to prove that Manafort and Gates conducted transactions designed to engage in conduct constituting tax evasion or the filing of a false tax return, the government must prove that the defendants knew and understood the elements of tax evasion, or that they knew and understood the income, deductions, and tax required to be reported on the tax return.
Congress imposes the requirement of filing FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, “FBARs,” to curb the evasion of U.S. income tax by the use of foreign financial accounts. A person must file an FBAR for a calendar year if they had a financial interest in, or signature authority over, foreign financial accounts with an aggregate balance exceeding $10,000 at any time during the calendar year. A person is subject to a penalty of $10,000 for failing to file an FBAR. The penalty rises to the greater of 50 percent of the high aggregate balance of the person’s foreign financial accounts during the year or $100,000 if the failure to file an FBAR was “willful.” A failure to file an FBAR is willful if it was done with intent to evade U.S. income tax. There is no penalty if the failure to file an FBAR was due to reasonable cause and not willful neglect. Willful failure to file an FBAR can also be the subject of a criminal prosecution, though I have never seen such a prosecution, until now.
The Indictment alleges that Manafort and Gates controlled millions of dollars in foreign bank accounts, with which they engaged in lobbying activities in the U.S. on behalf of Ukranian principals. The Indictment further avers that Manafort and Gates failed to file FBARs reporting the accounts. These allegations, if true, are astonishing given the U.S. government’s well-publicized pursuit of information on U.S. persons’ foreign financial accounts in recent years.
Even more astonishing is that Manafort and Gates could have avoided any penalty, civil or criminal, with respect to FBARs by simply filing their FBARs for the last six years before the government detected their delinquency. The penalties are for failure to file an FBAR, not late filing of an FBAR. Here, Manafort and Gates appear not willful but ignorant.
Apparently the U.S. Department of Justice posed written questions to Manafort and Gates. The questions inquired about lobbying activities in the United States on behalf of foreign governments. Manafort and Gates responded to the questions in letters sent by their attorneys “approved by MANAFORT and GATES before they were submitted.”
Manafort and Gates were not required to respond to USDOJ’s questions; it is unclear what they were hoping to accomplish by responding. Their responses could help the government prove the specific intent elements of the FARA, tax evasion, and money laundering offenses charged against Manafort and Gates. Their response letters could also open the door to waiver of the attorney-client privilege. The responses resulted in counts in the Indictment for false statements made to Federal agents. The responses could provide a foundation for criminal forfeiture of Manafort’s and Gates’ property.
If Manafort and Gates did not sign the letters under oath, they can claim that the letters did not accurately reflect their statements. Moreover, the allegedly false statements are somewhat convoluted, obscuring their meaning.
Finally, the Indictment seeks forfeiture of any property, real or personal, involved in the alleged money laundering, or traceable to such property. The Indictment serves notice that, upon conviction of the defendants, the government will seek a judgment against each defendant for a sum of money “representing” the forfeitable property. Legal authority for such a judgment is far from clear.
Specifically, the Indictment seeks forfeiture of four parcels of real property and a life insurance policy allegedly purchased with, or traceable to, laundered money. Forfeited assets will not be available to pay tax liabilities.
The Special Prosecutor could not ignore the evidence of tax evasion. The balance of the Indictment is aggressive overcharge. The Indictment does not connect the Trump administration to any crime. The making of a bad hire is no crime.
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