Corporate Asset Forfeitures
In August of 2011, U.S. Government agents, armed with guns and bulletproof vests, raided a private factory in Tennessee. The federal agents busted into the factory, shut down operations, sent employees home, and confiscated materials. This is the kind of raid we can expect when the D.O.J. targets terrorist organizations, drug rings, illegal gambling rings, arms dealers, or even major white-collar criminals. What was the target of this particular raid? Wood.
Under the Lacey Act, which is designed to protect endangered species, it is illegal to trade certain plants and animals, including an ebony wood harvested in Madagascar. As a result of finding supplies of this ebony wood during its raid, the D.O.J. charged Gibson Guitars Corporation with violating the Lacey Act. Gibson ended up settling with the D.O.J. by paying a penalty of $300,000, forfeiting about $262,000 worth of wood sized by the federal agents, and donating $50,000 to the National Fish and Wildlife Foundation, totaling over $600,000 for using an “endangered” wood in manufacturing their guitars.
What is the moral of the story? Do not assume that the government is overlooking the acts of companies, corporations, or agents where there is seemingly no victim or serious danger to society. Not only is the government targeting the drug dealers, the arms traders, and the fraud schemers, but they are also going after far less egregious offenders and seizing their assets under forfeiture proceedings.
What is Corporate Asset Forfeiture?
Forfeiture is a proceeding that allows the government to seize and retain assets alleged to have been used to accomplish crime, and in some cases, assets alleged to have been involved with an offense. Most federal criminal prosecutions include efforts to forfeit property. This tool has become quite lucrative for both state and federal authorities as a means to raise revenue. In fact, forfeiture efforts by the government have raised billions of dollars. The Marshals Service manages various types of assets such as cash, financial instruments, commercial businesses, real estate, vehicles, jewelry and collectibles. According to the U.S. Marshals website as of September of 2013, forfeited assets on hand were totaled at 22,468 and valued at $2 billion. In 2013, $517 million was distributed among the participating state and local law enforcement agencies while $200 million was distributed to claimants and victims. Since 1985, $6.4 billion was distributed in equitable sharing proceeds.
The fact that the government has been so successful in achieving these results may be credited to their informational advantage in this particular area of law. Unless specifically trained and experienced in this area, most attorneys are generally unfamiliar with the practice of government forfeitures.
For companies and corporations that want to protect themselves in the event of a forfeiture proceeding, it is important for the general counsel to understand both the statutes or acts underlying the offense as well as the forfeiture theories that justify the government’s seizure of company assets.
Corporate Asset Forfeiture Theory
Both civil and criminal forfeiture proceedings are based on the underlying theory that once an actor (organization, corporation, or agent) has committed a crime, the government has the right to seize and keep the assets used to accomplish the crime and/or the proceeds resulting from the crime.
In some situations, the government may be able to seize even legitimate assets that were merely involved with assets associated with criminal activity. For example, if the government alleges that a company committed money laundering, the government can take any assets “involved in” the offense. When legitimate assets are commingled with assets that were involved in the criminal transaction, the legitimate assets are also subject to forfeiture. In other words, if laundered proceeds are deposited into an account and only constitute a small percentage of the entire account balance, the government can still seize the entire account balance on this theory.
Types of Corporate Asset Forfeiture: Civil and Criminal Forfeitures
Forfeiture procedures can occur as a criminal case as well as a civil case. In a civil forfeiture case, the property itself is a party to the proceeding and the government is seeking to own that property. In a criminal forfeiture case, an indictment is filed against an actor or entity and a forfeiture notice is attached to the indictment to allow the government to take the relevant assets.
However, even before criminal or civil proceedings are initiated, the government can still seize property using a seizure warrant. The process begins with law enforcement officers and requires very little from the prosecutors. Judges decide on the seizure warrant based on their discussions with case agents and affidavits. This one-sided process is designed to prevent targets from dissipating assets before they can be properly seized. Unfortunately, the result is that the target loses its assets before it is given a chance to tell its side of the story.
Additionally, not only does the federal government have the authority to initiate a forfeiture proceeding, but so do state authorities. Further, forfeiture proceedings can be initiated as against the individuals but also the company itself.
Asset Forfeiture’s Effect on the Corporation
Once a company discovers that it is the subject of a criminal investigation, it should be prepared for the consequences both immediate and in the long term. Being the subject of such an investigation may damage the company’s reputation in the community as well as its capacity to keep key personnel. An investigation can lead to the imprisonment of important leaders and employees of the company as well as the deprivation of critical company assets. Consequently, shareholders in the company may begin to lose confidence, which in turn, would jeopardize the earning capacity of the company in the long term. Asset forfeiture proceedings can severely damage or even destroy the company altogether.
Role of the General Counsel in Corporate Asset Forfeitures:
As a general counsel of a company, there are steps that can be taken to prevent civil, criminal, and forfeiture liability. Once there is an investigation underway, the general counsel may take steps to protect the immediate interests of the company upfront. Finally, once the initial steps are taken, the general counsel can treat the problem by distinguishing between the target of the investigation and the company itself. The key is to take these proceedings seriously and to act promptly.
Prevention of Corporate Asset Forfeitures:
As with any compliance strategy, companies should take steps to avoid liability before the government even has reason to investigate.
- Provide extensive training to employees at all levels. By establishing and enforcing a training program for all employees to follow rules, regulations, and relevant laws, the company may demonstrate to the government that it is actively trying to avoid any illegal activity within the company. Teaching each and every employee how to follow the appropriate protocol for all foreseeable situations may actually curtail prosecution and forfeiture efforts by the government. Some of the areas that management can focus on include accurate accounting, reporting of suspicious activity, and avoidance of foreign corrupt practices. By the company demonstrating sincere and reasonable efforts to avoid misconduct, the government would have more reason to be more lenient in its decision to pursue forfeiture.
- Retain email correspondence. Companies must manage and maintain all correspondence. By retaining, organizing, and storing emails, the company arms itself with evidence demonstrating its efforts to follow the law and avoid illegal activity. For every incriminating email discovered, the company should have scores of emails showing proper and legal conduct. By documenting the routine good practices of the company, the alleged misconduct should be perceived as an isolated incident rather than a deliberate practice of the company.
Triage of Corporate Asset Forfeitures:
Just as a medical emergency room would first evaluate the various problems and prioritize based on time-sensitive urgencies, the general counsel should similarly evaluate the situation and address the time-sensitive issues accordingly. Once the company learns that an investigation has been initiated, the general counsel must act swiftly.
- Make claims of ownership. Under 18 U.S.C. 983(a)(2) and (4), a claimant must assert a claim of ownership within a short window of time after receiving notice of forfeiture. Civil forfeiture can either be administrative or judicial. If the company receives notice of an administrative forfeiture, then it has 35 days to file claim of ownership interest and to request a judicial determination. If such a claim is made, then the agency (normally FBI or IRS) handling the forfeiture can send the case to the U.S. Attorney’s office for a judicial forfeiture. If the U.S. Attorney files a complaint, then the company has 30 days to assert a second claim of ownership over the property. If the company fails to make such a claim, then the government keeps the company property by default judgment. In fact, over 85% of seizures end up in forfeiture by default due to the inaction of the company during this critical stage. To avoid this result, know your deadlines and make your claims accordingly. Further, notice of an investigation may be sent directly to the target(s) or published on the D.O.J. website. However, the U.S. Attorney might only send notice to individual targets rather than to the company itself. Therefore, the general counsel should not wait to receive a direct notice before filing an ownership claim to the property. The company should make ownership claims as soon as possible, regardless of whether it received notice.
- Prepare documentation of company finances. The company should use its accountants to sort, organize, and prepare financial records. By providing clear documentation as to the financial transactions and status of the company, the general manager will be more equipped to analyze and trace any and all assets in question. The documentation can demonstrate the legitimacy of certain assets and/or distinguish between the actions of the targeted individuals from the actions of the company. The vast data available may influence the prosecutor to distinguish between the legitimate assets and the targeted assets.
- Consider non-target claimants of company assets. In addition to the company and actual title owners, persons with equitable interests can also make claims under 18 U.S.C. 983. For example, secured lenders to the company may also make ownership claims on the assets over which they have an interest in, such as a loan. Such non-targeted persons might be more sympathetic claimants for the prosecutor to take into consideration. Assuming the persons with equitable interests are bona fide purchasers under 18 U.S.C. 983(d), these claimants would be in line to receive the proceeds in the event of a bankruptcy. Policy suggests that it is more sensible to pay the secured creditors what they are entitled to rather than to enrich the government as a result of the forfeiture.
- Make contact with the prosecutor on the case. Communicating with the prosecutor regarding the investigation may lead to more clarity in forming a plan of action. The prosecutor is typically able to discuss a case in generality. Most likely, the prosecutor is interested in hearing from the company regarding the case. Contacting the prosecutor and scheduling a meeting can benefit everyone involved.
By meeting with the prosecutor, the general counsel can determine whether or not the company is being investigated and to what extent. A general counsel should convey to the prosecutor that the general counsel simply wants to gather enough information to properly advise the company rather than to discover sensitive information about the prosecutor’s case. The general counsel would be wise to prepare and review the company financial records prior to the meeting in order to convey the facts and shape the prosecutor’s view of those facts. Otherwise, if the prosecutor does not hear from the general counsel or company representative, then the prosecutor’s position may be influenced and solidified by the case agents.
Business Asset Seizures and Forfeitures
The state and federal government both have the power to seize individual assets and business assets. Typically, when a person hears the term in a legal context an image of captured property comes to mind. For most asset forfeiture cases, whether it be a Texas state case under Article 59 of the Texas Code of Criminal Procedure or Title 18 of the United States Code, particularly under 18 USC981, 982, 983, or 924, a law enforcement seizure of property is a triggering event. For example, if a person is pulled over on a state highway for speeding, or some other traffic infraction, and the officer develops probable cause to search the car, he probably will do so. If during such a search a large amount of money is found in the trunk, the officer may conclude that such money is meant to facilitate a future drug deal or is proceeds of a past drug transaction, he may seize it.
Another common seizure example is if a Federal Bureau of Investigation (FBI) agent concludes that a certain bank account has been funded with proceeds of Medicare Fraud or some other crime, she may seek a seizure warrant to either seize or freeze that account. While the money itself may not be moved, it is still considered seized.
These two examples refer to seizure in the asset forfeiture context.
Recently, the term “government seizure” has been used to describe efforts made by the Texas Department of Insurance to halt the business activities of a title company. As used in this context, the seizure refers to a regulatory action to shut a business down much like when the Federal Deposit Insurance Corporation (FDIC) shuts down a bank for improprieties by bank executives.
Regulatory Seizures vs. Forfeitures
How is a regulatory seizure different from forfeiture exactly? Simple, most asset forfeiture cases stem from a government contention that an asset is connected to a crime. On the other hand, a regulatory action can be done to impose a monetary sanction on the basis that a regulation has been broken. By comparison, a person charged with wire fraud (someone who breaks 18 USC 1343) who buys a mansion with proceeds of his fraud is subject to forfeiture whereas a brokerage house that fails to file Suspicious Activity Reports (SARs) may be fined by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) may impose a fine.
It is also interesting, however, to see how regulatory actions are similar to asset forfeiture actions. First, both penalties can be sought even if no crime is ever formally alleged in a court of law. Second, both actions can be used to shut down a business. It is important to understand that, to shut down a business via an asset forfeiture action, an Assistant United States Attorney would likely need special permission from a superior or even from a reviewing body in Washington, D.C. to do so.
When the government takes a person’s property, the concept of “eminent domain” is often brought up. Asset forfeitures, despite the fact they allow the government to take private property, are not assertions of the eminent domain precepts and protections are not afforded to citizens.
Ultimately, asset forfeitures are legal actions based upon an asset’s connection to a crime whereas regulatory actions and eminent domain actions are not based upon connection to criminal activity. They penalize infractions on other grounds.
If your corporation would like guidance on developing training for employees to prevent corporate asset forfeitures, or if you are already under investigation, contact Varghese Summersett PLLC immediately. Call us at 817-203-2220.