The Strange World of Structured Transactions and Civil Forfeiture

By Tony Mankus

 

On November 14, 2011, a small businessman, a third-generation wholesale meat supplier, was approached by a Special Agent of the IRS and served with a Subpoena Duces Tecum. It commanded him to appear before a Federal Grand Jury on November 23, 2011 at the Dirksen Federal Building in Chicago. In lieu of his personal appearance, the subpoena gave him the option of providing voluminous amounts of accounting and bank records to the Special Agent.

 

The next day, November 15, 2011, the small businessman (we’ll call him Mr. Smith), received another unpleasant surprise. His bank informed him that the $127,000.00 he had in his operating account had been seized and was frozen pursuant to a Seizure Warrant issued by a Magistrate Judge of the U. S. District Court, Northern District of Illinois.

 

Besides the shock of what had just happened, Mr. Smith was faced with an immediate emergency. Since he could not access his funds in the checking account, he could not buy the necessary products to service his customers (such as restaurants) which had placed orders with him. He faced an imminent threat of going out of business.

 

He was hurriedly referred to our office by another law firm and we scrambled to find out what was going on. After making some inquiries, we discovered that Mr. Smith’s bank account was seized pursuant to the federal forfeiture statutes [31 U.S.C. § 5317(c)(2) and 18 U.S.C. § 981(a)(1)(A)]. The allegation was that Mr. Smith engaged in “structured transactions” in violation of 31 U.S.C. §§ 5313(a) and 5324(a)(1) and (3).

 

We did some research on the related statutes and found the following:

 

31 U.S.C. § 5317(c)(2) states the following:

 

(2) Civil forfeiture.— Any property involved in a violation of section 5313, 5316, or 5324 of this title, or any conspiracy to commit any such violation, and any property traceable to any such violation or conspiracy, may be seized and forfeited to the United States in accordance with the procedures governing civil forfeitures in money laundering cases pursuant to section 981 (a)(1)(A) of title 18, United States Code.

 

31 U.S.C. § 5313 requires domestic currency transactions over $10,000.00 to be reported to the IRS on Form 8300. 31 U.S.C. § 5324 prohibits structuring the cash transactions in such a way as to evade the reporting requirements under Sec. 5313. 18 U.S.C. § 981(a)(1)(A) authorizes the federal government to seize (forfeit) “property, real or personal, involved in a transaction or attempted transaction in violation of section 1956, 1957 or 1960 of this title, or any property traceable to such property.”

 

18 U.S.C. § 1956 prohibits money laundering, 18 U.S.C. § 1957 prohibits engaging in monetary transactions in property derived from certain specified unlawful activity, and so on.

 

The reference to these federal statutes certainly seemed onerous. It was evident from the related case law and the legislative history of these statutes that they were enacted to catch the “bad guys,” such as drug dealers, money launderers, etc. Our in-depth discussions with Mr. Smith, however, as well as his accountant, revealed that our client was neither a drug dealer, nor a money launderer; nor did he seem to be engaged in some nefarious criminal activity of the type envisioned by Congress. His recordkeeping, accounting, and tax filing were in good order and carefully managed by a reputable CPA.

 

The one troubling problem, though, was the allegation of “structured transactions.” We did additional research and found the following:

 

31 U.S.C. § 5324 states, in relevant part, the following:

 

(a) Domestic Coin and Currency Transactions Involving Financial Institutions.— No person shall, for the purpose of evading the reporting requirements of section 5313 (a) or 5325 or any regulation prescribed under any such section, the reporting or recordkeeping requirements imposed by any order issued under section 5326, or the recordkeeping requirements imposed by any regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508—

 

  1. cause or attempt to cause a domestic financial institution to fail to file a report required under section 5313 (a) or 5325 or any regulation prescribed under any such section, to file a report or to maintain a record required by an order issued under section 5326, or to maintain a record required pursuant to any regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508;
  2. cause or attempt to cause a domestic financial institution to file a report required under section 5313 (a) or 5325 or any regulation prescribed under any such section, to file a report or to maintain a record required by any order issued under section 5326, or to maintain a record required pursuant to any regulation prescribed under section 5326, or to maintain a record required pursuant to any regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, that contains a material omission or misstatement of fact; or
  3. structure or assist in structuring, or attempt to structure or assist in structuring, any transaction with one or more domestic financial institutions.

 

When we contacted the U.S. Attorney’s office to obtain more information about the allegations, we discovered that IRS Special Agents had tracked Mr. Smith’s deposits to his business operating account for almost two years. Their records showed that Mr. Smith made regular bank deposits during this period, at least three or four times a week, sometimes twice in the same day, and that all the cash deposits, except one, were under $10,000.00. The total amount deposited into the operating account during this period was in excess of $931,000.00.

 

We asked Mr. Smith to explain his operating procedures, especially as to how he handled the payments he received from his clients. Mr. Smith replied that his clients paid him either in cash or with checks, sometimes a combination of the two. As to the cash he received, he said he usually deposited less than $10,000.00 in order to avoid having to fill out the burdensome IRS Form 8300. He said he worked 12 to 14 hours a day in his business and was too busy to be bothered with this paperwork. Mr. Smith went on to explain that whenever he had more than $10,000.00 in receipts for the day, he simply kept the excess in his safe. He then deposited the excess money into the bank account when the receipts for the day were smaller. Mr. Smith assured us, however, that he kept good records of his cash receipts and always reported ALL of his income on his tax returns.

 

Regarding the issue of “structured transactions,” Mr. Smith said he had never heard of the term, nor was he aware of the fact that he could have requested his bank to exempt him from the reporting requirements whenever he had cash in excess of $10,000.00 (FinCEN Form 110). When asked if he had ever discussed his depositing procedures with his bank, or with his CPA, Mr. Smith recollected that several such meetings or discussions were held with both, but his recollections were fuzzy. He could not recall precisely the details of what was discussed, or the outcome of such meetings or discussions. He had the impression, however, that he did not have to worry about any such issue, since he thought that the bank would “take care of it.”

 

We explained the above to the Assistant U. S. Attorney handling the case and asked him to release the funds. We argued that Mr. Smith made some technical mistakes, but that he was neither a criminal nor a tax evader, as contemplated by the federal statutes relevant to this case. We assured him that Mr. Smith’s accounting records were in good order and that the CPA would provide him with complete copies of everything required by the subpoena.

 

The Assistant U. S. Attorney refused to release the funds and asked us to bring Mr. Smith to his office for an interview. We agreed to the interview in hopes that they would see that, while the client made some technical mistakes, he was not a criminal, or drug dealer, or money launderer.

 

The interview did not go as we had hoped. The focus was more on getting Mr. Smith to admit that he had structured the cash deposits to avoid the reporting requirement rather than on the larger context of his legitimate business. It appears, however, that we were able to convince the Assistant U.S. Attorney that there was no larger criminal scheme involved in Mr. Smith’s business operation.

 

Following procedures under 18 U.S.C. § 983(a)(2), and IRM 9.7.2.8.7, we filed a Seized Asset Claim Form, as well as a request for the immediate release of the seized bank account, based on hardship, pursuant to 18 U.S.C. § 983(f) and IRM 9.7.7.3.

 

The claim for immediate release of the seizure was denied. Per 18 U.S.C. § 983(a)(3)(A), the Government then had 90 days after our property claim was filed to either return the property to us, or file a civil complaint for forfeiture. Alternatively, the Government could seek to obtain a criminal indictment under 18 U.S.C. § 983(a)(3)(B)(I) within the 90 day period.

 

During this 90 day interim period, we tried to convince the Assistant U.S. Attorney to release the seized bank account. He again refused stating that we were lucky he did not seek a criminal indictment against Mr. Smith. We then proposed to settle the matter for a nominal fine, a slap on the wrist, so to speak, in order to punish Mr. Smith for his technical transgression. Our suggested fine of $10,000.00 was rejected out of hand. He stated, finally, that the Government would seek the forfeiture of the entire $127,000.00. He felt that this was a concession since he could have sought recovery of $931,000.00, the amount that was structured during the two year period monitored by the IRS.

 

This was not pleasant news to Mr. Smith. After the Government filed the civil forfeiture complaint, we did some additional research to see what our client’s chances were of recovering at least some of the seized funds. While there was some forfeiture case law against our client’s position [United States of America v. Jadwiga Malewicka, U.S. Court of Appeals, Seventh Circuit, No. 10-3967 (2011)], a U.S. Supreme Court decision [United States v. Bajakajian, No. 96-1487 (1998)] held that a forfeiture fine must be commensurate with the transgression pursuant to the Excessive Fines Clause of the Eighth Amendment of the U.S. Constitution.

 

We encouraged Mr. Smith to file a response to the forfeiture complaint, but he decided against it. Besides the cost of litigation, his main concern was losing his clients. His business depended on the relationships he had developed over the years with his major clients. If they found out that he was involved in litigation with the U.S. Government, he feared that they would drop him because of the negative publicity. He decided to accept the loss of the entire amount of seized funds. Fortunately, he was able to salvage his business by mortgaging some real estate he owned.

 

We felt terrible about what happened to Mr. Smith, but took a philosophical approach. On the one hand, we understood that, after 9/11, the Government was particularly aggressive, as it should be, in pursuing individuals and/or business entities that fall within the parameters of the Bank Secrecy Act, 31 USC 1051, et sec., and that clients should be well advised to be cautious in their financial transactions and should not be cavalier about following regulations. On the other hand, it was also unfortunate that the Government could be so inflexible, as it was in this case. The Government has enormous resources and should use discretion in choosing to use them against “mom and pop” businesses. Even when it is technically in the right, it should take into account the larger context of the situation and be sensitive to the potential of unintended consequences.

 

Ironically, that was not the end of the story. In 2014 we spotted a case in North Carolina with many similarities to Mr. Smith’s (USA v. $107,702.66, Case No. 7:14-CV295-F). Lyndon McLellan, the owner and President of L&M Convenient Mart, Inc., allegedly structured about $2,000,000.00 in bank cash deposits between 2011 and 2014 in order to avoid having to file the required bank reports. The IRS sought and obtained a warrant to seize the business bank account with $108,000.00 and refused to release it, even though Mr. McLellan was able to demonstrate that none of the funds were illegally obtained. Unlike Mr. Smith, however, Mr. McLellan filed a claim for the money in the U.S. District Court of North Carolina, Southern Division.

 

Fortunately for Mr. McLellan, there was another twist to the story. Due, in part, to the negative publicity surrounding this case, as well as many other similar ones across the country, IRS’ Criminal Investigation Division issued new guidance on October 17, 2014 regarding structured transaction cases. It instructed its agents not to conduct seizures and forfeitures in what it called “legal source” structuring cases. The U.S. Department of Justice followed suit and issued Policy Directive 15-3 on March 31, 2015 with similar changes to its prosecutorial procedures. On May 31, 2015, the USDOJ filed a voluntary motion to dismiss the McLellan case without prejudice and returned the seized money to Mr. McLellan.

 

We contacted Mr. Smith with this positive development and informed him that there was a chance now to recover his money. We thought Mr. Smith would be very happy and encouraged to hear that.

 

We were wrong.

 

Mr. Smith thought about going forward with our suggestion, but ultimately declined. Maybe he was too busy with his business and didn’t want to take on another problem. Maybe he still felt there was a risk that he would lose his big clients due to the negative publicity. Maybe he had simply reconciled to the loss of his money and didn’t want to revisit a very painful chapter of his life. We didn’t ask. We respected his decision.

 

Ultimately, the moral of this unfortunate story may be FinCEN Form 110. In March of 2015, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury released a booklet explaining the electronic filing requirements for the designation of exempt persons through the BSA (Bank Secrecy Act) E-Filing System. The filing web site is located at: https://www.fincen.gov/resources/filing-information For information about the E-Filing system check the website at: https://bsaefiling.fincen.treas.gov/main.html. Business owners who deal in cash, their accountants, and/or their bankers, who want to avoid the hassle of multiple IRS Forms 8300, or getting caught up in the strange world of structured transactions, would be well-advised to review this site.