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Monday, May 02, 2011

Keeping a White Collar Clean (Full Text Article)

With thanks to Mishpacha Magazine and staff, I am able to bring my readers the entire article from Mishpacha.

Keeping a White Collar Clean

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.

By Shimmy Blum

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.

Tattletale Gray

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.”


Anonymous said...

Having delt with a large number of dishonest Orthodox Jews, I have come to believe that there is something about their culture that allows for dishonesty in business dealing. I have been told by several members of our local community that ethical constraints against dishonesty in the Torah do not apply to business relations with non-Jews and Jews who are non religious. I have also observed that many of the Orthodox tend to value ritual laws over laws that relate to how they treat their fellow human beings.

Miami Al said...

Perhaps, but it's new to Orthodox culture.

Before we trained every 14 - 19 year old boy in the loopholes of ethical behavior in the Gemara, the methodology by which one takes "wrong" behavior and makes it legally permitted, one didn't find Orthodox Jews to be so permitting of unethical behavior.

This is a relatively new phenomenon in American Orthodoxy.

It is a few generations old in Hassidism, but in Orthodox Judaism, this is QUITE new.

Anonymous said...

Another area that will eventually trigger a land slide will be: pay cash or pay sales tax. I was in Borough Park buying a new Borsalino (black hat) the merchant gave me "both" prices. Just wait until the undercover IRS agent gets wind of that one. Also paying cash for salaries. "Off the books" isn't a new phenomenon there either. PS: I paid by CC.

JS said...

I could be wrong, but I think it's on the store to pay the sales tax. So, if they want to give you a "discount" I don't know if you, as a consumer, have done anything illegal if the store then doesn't report the purchase.

Anyone know more?

tesyaa said...

JS, the "Ethicist" column in the NYT Sunday magazine had a question about this exact topic this week and agreed with you. While that column is opinion and not definitive or legal, the columnist gave several legit reasons why a merchant would prefer cash.

Anonymous said...

I run a large private counseling center that serves a very diverse population. Most of the clients pay on time with many orthodox families being the exception. They very often keep insurance checks that are they are supposed to turned over the the clinic, and complain later, when asked for payment that they used the money on a simcha, usually a trip to Israel or an expensive Bar Mitzvah party. This has happened so often that we typically refer these people elsewhere when they call, as we are already owed over $12000 in copay and insurance payments for 2010/2011.

Anonymous said...

Of course charging a lower price for cash and higher price for credit is a Ribbis problem, even if the reasons for doing so are completely legitimate from a tax perspective (transactions being reported ansd ttax paid).

tesyaa said...

Anon 8:52 - it's only a ribbis problem if merchant credit is extended, correct? If a buyer pays by check, the seller gets the money essentially immediately. I don't know how credit card transactions are processed, but I'd assume that the merchant gets paid immediately as well.

Anonymous said...

Tesyaa - I am fairly certain (although I have no personal experience with it) that the merchant does not receive cash from the credit card company immediately at the point of sale, but rather at some later point in time. As such, the merchant is extending credit to the customer until the credit card company pays the merchant, leading to the ribbis problem.

Purchases by check are considered credit transactions as the merchant is not paid until he cashes the check.

Both of the above points are from the the Artscroll "The Laws of Ribbis" by R' Yisroel Reisman, citing Bris Yehudah, among others.

Miami Al said...

And purchases in cash were considered credit back when the US was on the gold standard. In fact, all purchases NOT in precious metals are purchases on credit by that logic.

You think that the paper in your wallet is money? Nope, the US Government is authorized to mint coins (which is why coins are produced by the treasury), paper money is NOT done by the government.

Until relatively recently, banks simply issued demand bank notes, which were redeemable for value (gold), but it was more convenient to swap the notes. As you got further from the issuing bank, the notes would trade at a discount.

The Federal Reserve Bank (chartered by Congress, but not part of the government) issues bank notes, called Federal Reserve Notes, that are exchangeable for coinage. Until the end of the gold standard, they were redeemable for gold, like all bank notes were.

There is no reason to consider a Federal Reserve note any more of money than a Bank of America note with your signature on it, both are fiat money, both are convertible into US Dollars at my bank of the issuing bank, and both are exchangeable for whatever I can get for it.

The ONLY significance of the Federal Reserve note is the line on it "valid for debts public and private," if you owe someone $500, they HAVE to accept $500 in Federal Reserve notes in payment, they don't have to accept other monetary instruments. They can't demand 2000 quarters from you.

Somewhat Anonymous said...

Miami Al -

"There is no reason to consider a Federal Reserve note any more of money than a Bank of America note with your signature on it" - Two words: Lehman Brothers

Without getting into a detailed discussion of the nature of and differences between money, currency and legal tender, I will point out that there is a huge gap between my writing a check or charging something to a Credit Card, both of which can be stopped by me before the merchant ever receives payment (which adds to the argument that the merchant is only receiving my promise to pay, i.e. credit) on the one hand and and a US banknote on the other hand.

Somewhat Anonymous said...

Miami Al -

Without getting into a detailed discussion of the differences between money, currency and legal tender and their possible halachic ramifications (largely because I'm not an expert on the subject), I will note that both a payment by Credit Card and by check can be stopped by the purchaser before the seller receives any cash. As such, the pruchaser is actually taking the credit of the purchaser until the credit card company has paid or the check has been cashed.

Miami Al said...

Anonymous 11:02,

Actually, on the check, that isn't true. If you give me a check, you can't stop payment until the next day, and a stop payment is NOT required to be honored, it's a bank courtesy. One reason that this is significant, if I take the check to a check cashing store, they'll give me cash (discounted of course, like traditional bank notes), and if you stop payment, they have recourse to sue you and collect including garnishments. A check does NOT become invalid with a stop payment, the bank as a courtesy makes a best effort to stop it.

Regarding the credit card, when I run a credit card, my merchant account is credited IMMEDIATELY. Every business day, my checking account is credited based upon the balance in my merchant account.

I have NOT extended you ANY credit by accepting your credit card. Once Visa/Mastercard/American Express have authorized the transaction, your credit has zero bearing on my getting paid. If I run your debit card as a credit card OR debit card, and the charge goes through, I get paid. If you run out of money, the bank CANNOT retroactively NSF me.

Do I get the "cash" immediately from a credit card transaction? When I ran retail ones, normally it was credited that night in a transfer, especially if the bank I had a checking account with was also my merchant bank. For a high risk one I run now, my transfer comes 2 business days later, so cleared on my bank on day 3.

However, in ALL cases, the transaction with the customer is FINAL.

The only "risk" with a credit card is if the customer reports a fraudulent charge. In that case, you have a charge back fight. Too many charge backs and your merchant account fees go up, but again, this isn't credit extended to the customer. This is between myself, the processing business (Visa/Mastercard), and the merchant bank and their bank, the customer is NOT given credit by me.

I don't know the Halachic implications and rulings on this, but if they are based on an assumption that I don't get money immediately on a Credit Card/Check, it is based on a pre-Check 21 Act view of the banking world.

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