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Investigations, prosecutions, and prison sentences for white-collar crimes in America have spiked significantly in recent years, leaving many members of the Orthodox community with the feeling that they are being singled out. Mishpacha questions financial experts to determine if this is fact or fantasy.
Last May, Assistant US Attorney General Lanny Breuer issued a not-so-veiled warning when he labeled our times “a new era of heightened white-collar crime enforcement — an era marked by increased resources, increased information sharing, increased cooperation and coordination, and tough penalties for corporations and individuals alike.”
Since the 1990s, when white-collar crimes took a backseat to violent crime, the former’s prominence in the eyes of law enforcement officials has risen dramatically.
Early in the last decade, after the passage of the Sarbanes-Oxley Act, federal sentencing guidelines were changed to increase jail terms for white-collar criminals. Statistics show that between 1995 and 2008, the average sentence for a federal white-collar crime rose from 18 to 28 months.
“Judges are no longer handing down six-month sentences for these crimes; they’re far harsher that they were even five years ago,” says Chaim H. Leshkowitz, senior partner in the Leshkowitz and Company accounting firm, as well as an attorney specializing in tax and other financial matters. “The criminal justice system is sick and tired of what it sees as white-collar criminals gaining an unfair advantage over law-abiding citizens.”
The frum community’s awareness of the serious consequences of white-collar crime has been significantly heightened in recent years, due in part to several high-profile investigations and even convictions of frum individuals. “I recently visited the prison in Otisville, New York [where there are a number of frum inmates] and the situation is very sad,” says Mr. Leshkowitz. “I saw several people incarcerated there for relatively minor fraud convictions.”
Despite the attention that the investigations and the resulting media coverage have brought to our communities , Mr. Leshkowitz states his unequivocal belief that the law-enforcement officials don’t profile or discriminate against particular communities, and do treat his clients of all ethnicities equally.
Prominent defense attorney and former prosecutor Jacob Laufer concurs, but notes that even the fact that frum Jews attract equal suspicion and treatment under the law represents a stark decline in their image in the eyes of the law-enforcement community. “Years back,” he relates, “if an agent felt the need to question a Yid with a beard and peyos, he’d almost apologetically ask, ‘Rabbi, can you please explain to us this transaction? We’re having some difficulty understanding it.’ This sense of deference no longer exists.”
Legal experts warn that although our community is treated fairly, its members should be especially vigilant in their financial transactions because there are several factors that can unwittingly draw greater scrutiny to frum individuals and institutions.
No More Secrets
Mr. Leshkowitz observes that some actions common within frum communities can raise red flags for the IRS and other agencies, despite the absence of criminal intent or actual illegality.
One major issue is overseas bank accounts in cases where the account holders failed to report their existence to the IRS and pay the necessary taxes.
The IRS has aggressively pursued information from foreign banks in recent years and has offered two amnesty programs for taxpayers who divulge the existence of such assets and pay the necessary back taxes and any penalties owed. Criminal charges could be potentially filed against those who do not, and the eventual fines could even exceed the value of the account. “Some Jews, particularly Holocaust survivors, sought to keep secret money overseas for reasons completely unrelated to taxes,” says Mr. Leshkowitz. “They saw that out-of-the-country money saved some Yidden during the Holocaust, and wanted to have some funds to rely on in case of another Holocaust, chas v’shalom.”
Another IRS enforcement tactic that can impact the frum community harder than others is the periodic targeting of certain types of entities for additional review. After being made aware of cases of abuse by nonprofit organizations, similar institutions may be targeted. With its high concentration of such entities, the frum community often bears a disproportionate brunt of this scrutiny.
Additionally, government officials often randomly scrutinize certain industries that are rife with fraud. These can include cash businesses and mortgage companies — two areas in which frum Jews work in large numbers. In light of the subprime mortgage crisis and the ensuing collapse of the financial system, Mr. Leshkowitz noted that mortgage brokers and homeowners are being closely examined for potential mortgage application fraud, even in cases where the homeowners are keeping up their monthly payments. High tax deductions for charity or other expenses will also be seen as “deviations” by IRS computers and agents, triggering enhanced scrutiny.
Parental support for couples is another phenomenon common in the frum community. An IRS agent would likely be suspicious when encountering a midsize family that owns a home and cars and reports little or no income. Similarly, legitimate, large — and interest-free — gemach (free-loan society) loans to individuals with paltry income, assets, and credit may seem dubious to those not fully familiar with the inner workings and culture of frum communities, where trust between its members often trumps the traditional documentation and collateral used to secure loans in society at large.
In contrast, HSBC Bank subsidiaries HFC and Beneficial loans, the decades-old stalwarts who lent to those with poor credit and collateral, have been the targets of many lawsuits alleging that they charged exorbitant interest.
In addition to the risk of random scrutiny of businesses and individuals, scrutiny of particular individuals, businesses, or nonprofit entities typically result from specific information that government officials have received from other sources.
“Many people are unaware of what information gets passed on to the government, and some have gotten jail time as a result,” Mr. Leshkowitz says.
Under the terms of the Bank Secrecy Act of 1970, banks and other financial institutions are expected to report potentially illegal transactions to the authorities, including the filing of suspicious activity reports (SAR). In most cases, the law forbids the institution to inform the customer that a report has been filed.
Deposits, cash withdrawals, and cashing of checks of $10,000 or more are usually reported by banks, including when large sums appear to be “structured” in multiple smaller transactions to mask their true scope. Bank employees are also trained to report smaller transactions that they consider to be suspicious.
Money services such as check cashers are required to record and report all transactions over $10,000, as well as transactions of $2,000 and up, which they suspect are being done to evade taxes or facilitate another illegal activity. The cashing of business checks at these venues, in particular, is commonly reported to government agencies.
Likewise, individuals, banks, brokerage firms, and all other businesses are required to file W2s or 1099 forms with the IRS, informing them of monies dispensed to an individual that may cause the recipient a tax liability, including for random freelance work. Though the recipient typically receives a copy of the forms sent to the IRS before he files his tax return, he is held liable if he doesn’t report this income, even if the issuer had only sent a copy to the IRS and not to him. Mr. Leshkowitz relates that it is relatively common for those involved in real estate transactions, for instance, not to be aware that the IRS was informed of the proceeds of the sale. Sellers should always ensure that they have clarity from their lawyers as to when a property sale may trigger a taxable event.
Additionally, information regarding questionable activities can also be relayed to government officials by people under investigation who are seeking to plea-bargain, or by spiteful spouses or bitter business partners. These phenomena are more common within our communities than many of us would like to believe.
Government investigations also frequently ensue as a direct result of investigations into other, unrelated parties. For instance, if agents audit one business, they can review all the payments that the business made to individuals and other businesses and match the information with the recipients’ tax returns.
This “domino effect,” says Mr. Laufer, can have an overwhelming effect on frum communities. “Members of frum communities tend to be interconnected,” he explains. “When one person is being investigated for illegal activities, it puts everyone who had any financial interactions with him, or even once deposited a check in the same account, on the radar screen. In most cases, the other individuals now being investigated hail from the same community.”
A Pound of Prevention
Legal experts stress the importance of avoiding even the slightest breach of the law as the surest means of protecting oneself from investigations and potentially devastating consequences. There is no better protection than having nothing to hide if the authorities do, for whatever reason, ring you up. “When you’re the unlucky one who is caught and you’re standing before a sentencing judge, the ‘Everybody does it’ defense gets you nowhere,” says Mr. Leshkowitz. His best advice is that people questioned by the IRS or other law enforcement agencies should never represent themselves, even when dealing with seemingly innocuous issues. “It is critically important to have an articulate, competent professional represent you in any information exchange with the authorities. You need someone who knows all the potential pitfalls and can satisfactorily explain the situation.”
Mr. Laufer contends that this vigilance is part and parcel of who we are. “When you wear the ‘uniform’ of a frum Yid,” he says, “you’re seen as representing certain principles. If you simply follow the Torah’s commands, which prohibit lying, stealing, even geneivas daas deception, you stay out of trouble.”