Business Structuring Strategies Don’t Always Apply to Asset Forfeiture or Federal Restitution

Business Structuring Strategies Don't Always Apply to Asset Forfeiture or Federal Restitution

Part II: How the Assets of Business Entities and Business Owners are Often Seized

Seizure and Forfeiture of Business Assets and Business Owner Assets

Anyone who owns or manages a business understands that a myriad of considerations regarding taxation and liability go along with a company. Because of this the U.S. Government and each state  recognize many different types of entities that provide different types of liability protection and tax arrangements. For example, full partners within a partnership are subject to much higher liability then members of an LLC (Limited Liability Corporation). Further, ‘C Corporations’ use different tax forms and different tax liability than ‘S Corporations’ which are also different from partnerships and LLCs.

The purpose and aim of liability protection is to shield owners of businesses from lawsuits pertaining to the company. Thus, the companies become individuals under the law. Thus, the company’s assets, not the personal assets of owners or key executives are subject to collection via lawsuit or bankruptcy. [There is a mountain of case law pertaining to when a corporate veil can be pierced and executives become personally liable for the actions of companies. These issues are complex and require significant legal expertise. However, the general result of the formation of a limited liability company or corporation is to shield owners and key executives from liability.]

The IRS has provided basic information about the tax implications of various business entities.

These entities are recognized in every state as well as the federal government. Different states may offer different levels of liability protection dependent upon which type of business entity is formed, nonetheless, the general purpose exists throughout the country.

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Obviously, since state governments and the IRS recognize these entities we can assume that the government condones/tolerates/incentivizes them. However, such forms of acceptance do not provide basic protection when it comes to asset forfeiture.

Anecdotally there are multiple examples of prosecutors seizing bank accounts of businesses pursuant to forfeiture efforts. Obviously, if such businesses are connected to illegal activity then such a seizure makes sense.

Unfortunately, it is the basis of such conclusions that are suspect. In other words, bank accounts are often seized without any real effort to examine the withdrawal or deposit activity of those accounts.

For example it is a violation of law to issue a fraudulent vehicle inspection sticker. That is, a business may not issue a valid inspection sticker (or report of a vehicle’s compliance with state regulations as Texas no longer issues separate stickers for inspections) if a car is not in fact compliant with state law. This is obvious. What may be less obvious is that such activity could be labeled as tampering with a government record or some other form of fraud.

What is probably less well-known is that the owner of that business may have his or her personal bank accounts seized on the basis that the business participated in such activity.

This may seem intuitive until one considers how lackadaisically certain government entities are in their seizure practices. When bank accounts are seized certain threshold legal requirements must be met. For example, does the account contain funds that were acquired by the illegal activity? Do the account owners have some sort of connection to the illegal activity? Have tainted assets already been removed from the account?

[Under 18 USC 984 the government does enjoy a certain amount of leeway regarding fungible property. This means that if the government seizes money within 1 year of its deposit into an account then the government can seize that amount of money regardless of whether the actual proceeds have already been removed from the account.]

Certainly everyone agrees that if illegal vehicle inspections took place that the business should not benefit from those particular inspections. However, looking at the obvious economic factors presents serious issues. The total benefit attributable to the company on the basis of the alleged fraudulent activity would likely add up to less than $30,000. The accusations are based upon records contained within a state database regarding use of improper vehicle identification numbers. This means that the State had very little evidence as to how much was paid for each inspection and where such payments ended up. In fact, there was no showing connecting these accounts to any inspection. Worse, the State merely relied upon this person’s status as a signatory on these private accounts as a basis to seize. The consequences to his employees, family members, and vendors were not at all considered.

In one case, Texas took multiple personal accounts from a business owner. The accounts were worth nearly $1 million dollars and were owned by that person and many others. His brother, father, and others were owners and signatories on most of the accounts. This did not stop the seizure. Unfortunately, he had to retain legal assistance in this matter. Luckily, after attorney intervention, the funds were ultimately returned to the client. Having said that, he paid a high price in terms of anxiety and money.

Put simply, the state government had no compunction taking a personal assets away from a business owner and members of his family regardless of the fact that the cumulative value of those assets far exceeded the alleged infraction.

Take another example, as a result of Warren Jeffs’ convictions for sexual abuse the State of Texas moved to forfeit the entire Mormon compound where Jeffs, his family members, and dozens of people lived. In fact, this compound was funded in part by the collective giving of these residents who gave nearly everything they had to live there.

Obviously, there is very little sympathy for Mr. Jeffs who is sitting in prison as he stands convicted. However, these residents are not alleged to have committed the underlying offenses.

This becomes scary when one thinks about the theory of forfeiture. The State must establish that the compound was either funded with proceeds of crime or was used to facilitate illegal sexual activity. But what crime created the proceeds. The sexual conduct was not shown to produce revenue. In terms of the facilitation theory, is it really appropriate to take a dwelling (or series of dwellings) on the basis of the alleged (and judicially proven) actions of a small number of malevolent leaders?

Take another example, if a person suspected of fraud owns a nursing home or a community outreach center or even a thrift shop would it make sense to freeze such business’ operating account? Even if somehow the account was used to launder criminal proceeds, does the social harm justify the government’s enrichment?

It is important to recognize that these types of seizures occur merely on the basis that these accounts had criminal targets as signatories. The propriety of transaction activity or the effect of the seizure on business activities was of very low import before seizures took place.

In case people think this level of insensitivity is only displayed in state forfeiture cases, consider Suspicious Activity Reporting (SAR) cases. Most federal districts have entire teams of agents who consult SARs to see if suspicious transactions, usually structured transactions, are reported by bank personnel.

Structuring is a federal offense which criminalizes the breaking up of monetary deposits or withdrawals in an effort to evade currency reporting requirement that exists under Chapter 31 of the Code of Federal Regulations (CFR). This activity is criminalized under 31 USC 5324 and 5332.

For example, if the owner of a car dealership were to arrange to have all his daily cash broken up into segments of less than $10,000 for separate deposit he will be suspected of breaking the law. If a federal agent learns of this that agent may acquire bank records and move for a seizure warrant under 18 USC 981 and 983. Let’s say that $375,000 was structured in a 9 month period and the account holds more than $1,200,000, the agents would be allowed to seize the entire account.

Once again, the fact that the owner may have multiple employees and pay day is coming up does not matter. At that point, the owner will need to get a lawyer to begin defending him and the company.

It is also important to recognize that other transaction reporting requirements exist. If someone travels abroad he or he must declare financial instruments he or she possess in excess of $10,000. This is called a Currency and Monetary Instrument Report (CMIR). Failure to do so also violates 18 USC 5324 and 5332. Also, if a business owner fails to file a Form 8300 whenever a customer pays more than $10,000 cash (at once or in the aggregate) then that person has also broken the law.

In terms of restitution cases, business assets are not generally subject to forfeiture collections unless somehow business assets are owned by the convict. As a result, if a federal convict owes a fine or restitution the government has been known to seize assets of the business to satisfy the debt. For example, a brokerage company may get a $300,000 payment for metal goods it arranged to have transported from company A (who is to be paid $282,000) to company B (who paid the broker that $300,000 that was intercepted by the government). Keep in mind that in some circumstances the flow of delivery and payment are fluid. There have been circumstances where the U.S. Government intercepted such a payment leaving the business to come up with funds for the entity that furnished the material (Company A). The legal question will become whether the intercepted money is owned by the business or the convict. These questions can be complex and involve serious litigation. More practically, there is an innocent business (Company A) that’s out a lot of product without payment. That business has employees and obligations to other vendors.

Ultimately, it is important to understand that regardless what a family lawyer, bankruptcy lawyer, or estate planner says, typical strategies to separate business owners or key personnel are typically of no use when trying to shield personal or business assets in forfeiture cases. It should also be remembered that restitution cases may interfere with legitimate business conduct as well.


Benson Varghese

Managing Partner at Varghese Summersett PLLC
Benson Varghese is the founder and Managing Partner of Varghese Summersett PLLC. He is a prolific writer and has authored hundreds of articles about criminal law in Texas and at the Federal level. His articles have been featured in the Wall Street Journal, Above the Law, and have been selected as Top Blogs by the State Bar of Texas. He was named the Young Lawyer of the Year in 2019 by the Tarrant County Bar Association. Benson led the firm to become one of the 500 fastest growing businesses in the United States by Inc 500 Magazine in 2018. In the same year, the firm was named the Best Law Firm in Fort Worth by the Fort Worth Star-Telegram. The lawyers at Varghese Summersett PLLC exclusively handle criminal defense matters.
Benson Varghese