DOJ Steps up Financial Crimes Investigation Efforts – IRS Cracks Down on Overseas Accounts

December 4, 2009

On Nov. 17, 2009, Attorney General Eric Holder announced President Obama’s Executive Order creating the Financial Fraud Enforcement Task Force. He was joined by the Secretary of the Treasury Department, the Secretary of the Department of Housing and Urban Development and the Director of the SEC’s Enforcement Division.

As a result of this new task force, businesses and business executives can expect to see more types of financial fraud cases – especially cases related to the current economic crisis such as mortgage, health and securities fraud – as well as increased volume and intensity in standard financial fraud enforcement areas including accounting fraud and money laundering. Additionally, investigations that would have previously led only to fines, will now lead more frequently to criminal investigations and possible prison sentences.

Holder stated that the task force “will wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes” and “will be relentless in [the] investigation of corporate and financial wrongdoing, and will not hesitate to bring charges, where appropriate, for criminal misconduct on the part of businesses and business executives.” He also indicated that the task force’s mission “is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening.”

The task force will step up the intensity in fighting all financial crimes, but will strongly focus on violations relating to the current financial crisis and economic recovery efforts, specifically:

  • Mortgage Fraud
  • Healthcare Fraud
  • Securities Fraud
  • Recovery Act & Rescue Fund Fraud
  • Discrimination in Lending & Financial Markets

Significantly, the FBI, DOJ and SEC have already increased their efforts to prosecute financial fraud. The FBI has more than doubled the number of agents investigating mortgage scams, and its financial crimes program currently has more than 14,000 pending investigations. The DOJ has deployed 50 new full-time employees dedicated to combating mortgage fraud; and as compared to last year, the SEC has increased disgorgement orders by 170 percent, penalty orders by 35 percent, emergency restraining orders by 82 percent and asset freezes by 78 percent. SEC Director Rob Khuzami said “[o]ne of the vital aspects of the task force will be to better coordinate criminal- and civil-enforcement efforts.” He indicated that, already in 2009, more than 150 of the SEC’s enforcement cases were filed in coordination with criminal charges filed by the DOJ and others – an increase of 30 percent over 2008.

While the DOJ will lead the task force, its membership will also include senior level officials from 23 federal departments and agencies, accompanied by participation from state and local law enforcement bodies, including the Department of the Treasury, Department of Commerce, Department of Labor, SEC, FTC, FBI and Criminal Investigations Division of the IRS.

The ability of the task force to achieve its goals will certainly be enhanced by the Fraud Enforcement and Recovery Act, enacted by Congress last spring. The act authorizes $245 million annually in 2010 and 2011 for the recruitment and hiring of hundreds of new prosecutors and agents. This money will no doubt be quickly put to use.

President Bush’s “Financial Crimes SWAT Team” Replaced

President Obama’s Executive Order terminated the Corporate Fraud Task Force (CFTF), created by President Bush in 2002 in response to the Enron and WorldCom scandals. While the two task forces are arguably very similar, the new task force is geared toward the financial crimes that helped to bring about our current financial crisis – e.g., mortgage, health and securities fraud.

Furthermore, the scope of the new task force is significantly more expansive than that of the CFTF, which primarily included the DOJ, FBI and state level attorneys general. The task force’s inclusion of senior level officials from 23 federal departments and agencies will allow the DOJ to utilize the expertise of these agencies in its investigation and prosecution of financial crimes. It will also provide the DOJ a more direct and convenient way to access the information they hold.

Inclusion of IRS Criminal Investigations Division – Prosecution of Overseas Tax Evasion Cases

One of the new additions to the task force is the Criminal Investigations Division of the IRS. This is especially important considering the amount of detailed financial information of individuals and businesses the IRS has in its possession. Additionally, the inclusion of the IRS is noteworthy given its current focus on discovering and prosecuting holders of undisclosed overseas bank accounts.

It may not be a mere coincidence that IRS Commissioner Doug Shulman announced in a separate press conference on the same day as the task force announcement that more than 14,700 Americans have come forward to disclose overseas bank accounts in response to the voluntary disclosure program announced by the IRS on March 26, 2009.

The program provided that anyone who voluntarily disclosed overseas bank accounts before the Oct. 15, 2009, deadline would likely avoid criminal prosecution; but would still have to pay tax, interest and penalties, including a 20 percent penalty for failure to file FBAR (Report of Foreign Bank and Financial Accounts) forms with the Treasury Department. Deputy Attorney General David Ogden said at the same press conference that “[t]he message to the taxpayers is clear: the era of bank secrecy and hidden assets is over.”

Voluntary disclosures picked up significantly when the IRS announced that UBS – a Swiss bank long-known as a major offshore tax haven – and the Swiss government agreed to provide information, including names, on 4,450 UBS accounts held by Americans. The Swiss Justice Department indicated that about 250 of the 4,450 names to be handed over to the IRS are suspected of committing serious financial fraud, and the rest are suspected of straightforward tax evasion. Examples of such fraud include “use of false documents, related entities to repatriate funds in the offshore accounts, calling cards to disguise the source of trading, sham entities and debit or credit cards to repatriate funds for the payment of personal expenses.”

The DOJ has indicated that, as a result of the UBS disclosures, it has already successfully prosecuted six UBS customers and is conducting investigations of dozens more. Given the IRS drive to uncover and prosecute holders of undisclosed overseas accounts and the newly formed task force, it is important for businesses and executives to recognize that tax violations will no longer result in only fines. Now, many will lead to criminal investigations with corresponding criminal prosecutions and penalties. Also, even though the voluntary disclosure program is over, it is still better to voluntarily disclose any violations than for the IRS to find out on its own.

What the Financial Fraud Enforcement Task Force Means for Businesses and Business Executives

The Executive Order, the press conference, the Fraud Enforcement and Recovery Act and all of the pre-existing efforts by federal agencies and departments to ramp up their enforcement and prosecution efforts, are all part of a response to widespread public frustration with the government’s failure to prevent the recent financial crisis.

So what does this mean for Corporate America? For businesses and their executives, it means a lot. What was once a simple inquiry by a regulator may now mean a grand jury subpoena, and an offense that may have once led to a monetary fine could now result in a set of handcuffs.

Accordingly, businesses and their executives would be well-advised to perform their own internal investigations of these matters to ensure that no violations exist and that compliance programs are in place and working effectively.

McGuireWoods’ Business Tax Department and its Government, Regulatory and Criminal Investigations Department (which includes the SEC Enforcement Defense and White Collar Defense Groups) have attorneys with extensive experience in developing appropriate compliance programs and handling the types of investigations and prosecutions that will result from this new task force.

For more about the capabilities of our Business Tax and our Government, Regulatory and Criminal Investigations Departments in these or other areas, please contact the authors.