Publication 3847 (Rev. 6-2004)

FISCAL YEAR 2003NATIONAL OPERATIONS

ANNUAL BUSINESSREPORT

Internal Revenue ServiceCriminal Investigation

The Criminal Investigation Mission

Criminal Investigation serves the

American public by investigating

potential criminal violations of the

Internal Revenue Code and related

financial crimes in a manner that

fosters confidence in the tax systems

and compliance with the law.

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FISCAL YEAR 2003 / NATIONAL OPERATIONS / ANNUAL BUSINESS REPORT

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Table of Contents

Chief (CI) Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

STRATEGIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Compliance Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Criminal Investigation FY 2003 Annual Business Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ACCOMPLISHMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Annual Strategies and Operational Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

OTHER PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Counterterrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Narcotics Related Financial Crimes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Electronic Crimes and Technology Based Tax Crimes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Employee Satisfaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20EEO and Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

CRIMINAL INVESTIGATION STATISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22FY 2003–By Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22FY 2003–By United States Code, Title, and Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

OPERATIONAL OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Asset Forfeiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Undercover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26National CI Training Academy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Communication and Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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Chief (CI) Message –Nancy J. Jardini

Achieving Many Goals

Boardrooms to Baghdad and everywhere in between!Criminal Investigation (CI) was there! The FY 2003National Operations Annual Business Report showcasesCI’s continued emphasis on tax administration andtraditional support of important national law enforcementpriorities. This report is a tribute to all employees, whoseindividual and collective efforts make CI such a uniqueand dynamic law enforcement agency.

In FY 2003, overall case initiations are up 2 percent fromlast year and prosecution recommendations andindictments rose 19 percent and 11 percent respectively.Criminal Investigation’s highest investigative priority overthe past several years has been not only to increase thenumber of tax case initiations but to concentrate onegregious, high impact investigations. The successfulprosecution of major tax cheats fosters deterrence andenhances voluntary compliance. Criminal Investigationhas partnered with the Small Business/Self Employed(SB/SE), Large and Mid-Sized Business (LMSB), and TaxExempt & Government Entities (TE/GE) operating divisionsto develop quality fraud referrals and joint strategies toidentify and combat non-compliance with all of theenforcement tools available.

Tax evasion is a serious crime. In reviewing CI’s FY 2003Annual Business Report, particularly those sectionsdealing exclusively with tax offenses, I think most willagree the sentences imposed reflect the seriousness of theconduct!

National law enforcement priorities remain an importantcomponent of CI’s work. The unique financial skills of ouragents are in high demand. Criminal Investigationtraditionally has made important contributions to taskforces organized to combat money laundering, narcotics,and health care fraud. More recently, CI agents havebecome an integral part of the Department of Justice’sCorporate Fraud Task Forces. Criminal Investigationcontinues to apply its expertise to help combatinternational and domestic terrorism as a member of the

Federal Bureau of Investigation’s (FBI) Joint Terrorism TaskForces and is playing an important role in tracking downassets looted from Iraq by Saddam Hussein and hisregime.

Commissioner Everson has made enforcement a toppriority, and I am committed to making every effort tomaximize CI’s use of resources. Criminal Investigation isreviewing all aspects of the investigative process to makerecommendations for streamlining administrativeprocedures, and enhancing productivity. These changescoupled with technology upgrades already beingimplemented will enable our employees to work smarterand faster without compromising quality.

In reviewing CI’s current achievements it is important tolook toward the future. Criminal Investigation is on theverge of hiring a significant number of agents to replacethose that retired. The agents hired in recent years areoutstanding and I ask all employees to continue to activelyencourage qualified candidates to apply.

Further, it is important to note that while CI develops andimplements strategies to recruit the best and brightestcandidates available, a strong emphasis will be placed onbuilding a diverse workforce. We are committed toensuring a positive, professional environment that respectsdifferences, values integrity, and capitalizes on the diversetalents of all employees. Diversity improves the quality ofour workforce and offers a higher return on our investmentin human capital.

I also encourage employees who have an interest inmanagement to join the management team. If CI cancontinue to attract talented special agents and managersthere is nothing we can’t accomplish.

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Strategies

IRS, Criminal Investigation FY 2003Compliance Strategy

Achieving Many Goals

IRS Criminal Investigation serves the American public byinvestigating potential criminal violations of the InternalRevenue code and related financial crimes in a mannerthat fosters confidence in the tax system and compliancewith the laws.

The dynamic aspect of CI’s mission is that tax evasion andmoney laundering schemes are limited only by humaningenuity and are constantly evolving. CriminalInvestigation is working closer than ever before with theother IRS operating divisions to maximize the effectivenessof our enforcement tools. A new program titled "AbusiveTax Schemes" has been initiated to counter theproliferation of schemes using various flow-throughentities and offshore financial arrangements.

During this fiscal year, CI also played a critical role inmany important national law enforcement initiatives,especially the war on terrorism. The successful pursuit ofinternational terrorists requires the ability to analyzecomplex domestic and international financial transactions.The skills of our agents have taken them half way aroundthe world where they are assisting other law enforcementagencies and nations in tracking terrorist fundraising,curtailing the abuse of charities and pursuing assetslooted by Saddam Hussein.

This year’s achievements cut across a broad range ofchronic and emerging compliance problems. Manysignificant prosecutions involving the non-filing of returns,employment tax fraud, refund crime, offshore tax evasionschemes and a wide variety of general tax fraud werebrought to a successful conclusion. Theseaccomplishments reflect the high caliber of specializedexpertise and dedication of the IRS CI workforce.

Criminal Investigation FY 2003 Annual Business Plan

The operational priorities for CI’s Compliance Strategywere:• Support of the Non-Filer Strategy• Address non-compliance with employment tax laws• Refund and preparer crimes• Electronic crimes (E-Crimes) and technology-based

tax crimes (domestic and international)• International and domestic terrorism• Promoters of abusive foreign and domestic trusts and

schemes based on frivolous legal arguments• Inform and educate the public and enlist support of

the professional community to counter abusivepromotions

• Money laundering

Other program priorities included:

• Increasing the efficiency of criminal investigations• Improving employee productivity and satisfaction

Criminal Investigation’s Compliance Strategy objective forFY 2003 mandated continued emphasis on legal source

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CI Overall Enforcement Statistics FY 2000 FY 2001 FY 2002 FY 2003

84%82.2%84%80.9%Incarceration Rate

1824192622512249Convictions

2541213323352434Prosecution Recommendations

3766320133403499Completed Investigations

4001390632843372Investigations Initiated

cases and other income tax related investigations.Criminal Investigation sustained the same level of legaland illegal source tax case initiations in FY 2003 that wasachieved in FY 2002.

Criminal Investigation’s overall enforcement statistics(legal, illegal, and narcotics) for FY 2003 are reflected inthe charts below:

Significant increases in prosecution recommendations,indictments, and convictions were also achieved in thefollowing program areas during FY 2003 compared to FY2002:

Accomplishments

Annual Strategies and OperationalPriorities

Fraud Referrals from Other IRS OperatingDivisions

To strengthen the fraud referral program, CI continues toconduct fraud awareness training classes for the SmallBusiness/Self-Employed (SB/SE), Large and Mid-SizeBusiness (LMSB), Wage and Investment (W&I), and Tax-Exempt and Government Entities (TE/GE) operatingdivisions. Fraud awareness training is one method used

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Number of Subject Criminal Investigations Initiated by Category

FY 2001 FY 2002 FY 2003 Decrease1

10.7%960867951Narcotics

3.4%153514851313Illegal Source Tax

(3.1%)150615541020Legal Source Tax

1 Increase/decrease from FY 2002 to FY 2003

ProsecutionRecommendations Indictments Convictions

18.8%655%270%Counter-Terrorism

57.7%65.9%45.4%Abusive Schemes

NA(20%)17.8%Employment Tax

(3.1%)0.4%23.8%Non-Filer

4.7%78.7%89.9%Return Preparer

27%21.6%54.9%Questionable Refund

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by CI to identify and develop legal source taxinvestigations. Like CI, SB/SE has established a LeadDevelopment Center (LDC) to detect and combat abusivescheme promoters and return preparers. Additionally,the SB/SE LDC is a valuable source of fraud referrals. The61 percent fraud referral acceptance rate for FY 2003 isonly 2 percent less than the all-time high acceptance rateof 63 percent achieved in FY 2002.

Focusing on the coordinated enforcement efforts of thecivil and criminal functions at IRS has proven to be apowerful tool in combating tax-related schemes. Thiseffort has resulted in the development of parallel

investigation procedures that maximize the effectiveness ofcivil and criminal sanctions. These parallel investigationspermit the simultaneous investigation and litigation ofseparate criminal and civil cases involving a common setof facts. Today, civil injunctions are used to stop a schemepromoter from continuing to sell his/her scams while acriminal investigation is on-going.

Refund Fraud Program

Criminal Investigation’s efforts to deter refund fraud arecritical to overall tax compliance. Both internal and

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Questionable Refund Program Statistics FY 2000 FY 2001 FY 2002 FY 2003

22191915Average Months to Serve (AllSentence)

24212219Average Months to Serve (w/Prison)

90.6%88.2%88.3%79.4%Incarceration Rate


15212595102Indictment/Information

22314411395Prosecutions Recommended


Return Preparer Program Statistics FY 2000 FY 2001 FY 2002 FY 2003

19231917Average Months to Serve (AllSentence)



67646358Convictions

109617061Indictment/Information



external stakeholders play a valuable role. CriminalInvestigation works with W&I to address the organizationaland systemic issues involved with refund-related crimes.In CI’s efforts to enlist the support of the practitionercommunity, a new fraud alert poster and brochures werepublished and distributed to further community outreach.

Fraud and abuse associated with the Questionable RefundProgram (QRP) and the Return Preparer Program (RPP) areincreasing. A primary contributing factor to this increasein fraud is identity theft. Additionally, the Earned IncomeTax Credit (EITC) program remains subject to widespreadabuse. To more effectively combat fraud, CI is evaluatinga streamlined investigative and report writing process toreduce elapsed time and bring the investigations quicklyto fruition. The use of the Service's Electronic FraudDetection System and the analytical skills of the FraudDetection Centers (FDC) have enabled CI and W&I todevelop effective deterrents to both QRP and RPPschemes.

The following case summaries are excerpts from publicrecord documents on file with the courts in the judicialdistrict in which the cases were prosecuted.

Lubbock Man Sentenced To Serve 30 Months In Prison

Following Federal Tax Conviction

On August 12, 2003, in Dallas, TX, Emilio Chavez, Jr., atax return preparer, was sentenced to 30 months in prisonfollowing his May 2003 guilty plea to one count of false,fictitious or fraudulent claims on income tax returns.Chavez was also ordered to pay $126,315 in restitutionto the IRS.

During the 2001 filing season, Chavez preparedapproximately 100 income tax returns and of those, 25were fraudulent and claimed false income tax refunds.Chavez admitted that he would take basic Form W-2information from clients and then give them a verbalestimate of their tax refund. Unknown to the client, Chavezwould prepare and report a fictitious Schedule C on theirreturn showing the client to be a self-employed long haultrucker. The Schedule C would reflect fictitious amounts ofincome and expenses. Chavez would also prepare afraudulent Form 4136, Credit for Federal Tax Paid onFuels, which reflected that the client was entitled to a fuel

tax credit. Chavez knew he was creating a largefraudulent income tax refund to which the client was notentitled.

Chavez electronically filed these returns and requestedthat the refund be direct-deposited into a RefundAnticipation Loan account. When the refund was received,Chavez would issue a check to the client for the smallerestimated refund he had previously quoted and keep thedifference. The total amount of the fraudulent income taxrefunds claimed by Chavez on the 25 false returns was$318,407.

Three Sentenced For Filing Numerous Bogus TaxReturns

On March 19, 2003, in Los Angeles, CA, Leroy Greenwas sentenced to 30 months in prison and ordered to pay$195,998 in restitution. Green was convicted on tencounts, including one count of conspiracy to defraud theUnited States by filing false refund claims. On January 21,2003, Herman Hill, and his wife Sharon Fields-Hill weresentenced after pleading guilty to filing 30 false incometax returns with the IRS that claimed refunds of $69,529.Hill was sentenced to an 18-month prison term andordered to pay $213,878 in restitution. Fields-Hill wassentenced to six months home detention and ordered topay $43,152 in restitution. Green, Hill, and Fields-Hillprepared tax returns that contained bogus self-employment Schedule C-EZ and Schedule C forms thatresulted in false claims for refunds based upon the EarnedIncome Tax Credit.

Over $2.7 Million in Bogus Refunds Claimed

On October 24, 2002, in Baltimore, Maryland, Mark A.Knight was sentenced to 40 months in prison for aidingand assisting in the preparation and filing of more than1100 fraudulent federal income tax returns seeking over$2.7 million in refunds from the IRS. Knight offeredtaxpayers his services in preparing amended income taxreturns by falsely claiming that he was previouslyemployed with the IRS. Knight charged his clients $100 foreach return prepared. Typically, Knight fraudulentlyclaimed unreimbursed business expenses, false medicaldeductions, and personal property taxes on the returns heprepared.

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Non-filer Program

The IRS has a national non-filer strategy that addressesthis chronic compliance problem. Criminal Investigationplays an important role in this strategy. In addition to itsinvestigative efforts, CI launched a fraud alerts page onthe Internet summarizing recent prosecutions to informtaxpayers about the serious consequences that can resultfrom the failure to file required tax returns. This site is alsolinked to a paper prepared by IRS Chief Counsel thatrefutes the frivolous arguments employed by some non-filers. See www.irs.gov and type in "key word: Fraud" formore information. Non-filer investigations remain animportant investigative priority.


Maximum Sentenced Received

On October 1, 2002, Edward Bruce Baker of AltamonteSprings, Florida was sentenced to 24 months in prison ontwo counts of failure to file federal income tax returns andwas remanded to the custody of the Marshals at that time.During 1994, Baker received gross income ofapproximately $231,339 and in 1995 receivedapproximately $281,824. Baker failed to file returns foreither of these years. Baker was found guilty by a jury onJuly 22, 2002.

Longest Prison Term for Tax Offenses in Alaska

On November 21, 2002 in the District of Alaska, RichardRay Blankenship received the longest sentence everimposed in Alaska for tax-related offenses. Blankenshipwas sentenced to eight years and eight months in prison.

Blankenship renounced his US citizenship and socialsecurity number, claiming he had no obligation to theInternal Revenue Service. Blankenship has not filed alegitimate tax return since 1994. The indictment filed onJune 19, 2002, charged him with willful failure to filereturns for 1996, 1997, 1998, 1999 and 2000. Theindictment also charged Blankenship with several countsof mailing threatening communications and passingfictitious obligations.

On September 12, 2002, a federal trial jury in Anchorageconvicted him of failing to file federal income tax returns,mailing threats to judges and attempting to pay a hospitalbill with a fraudulent Unites States Treasury sight draft.

In imposing sentence, Chief Judge John Sedwickcommented that Blankenship's conduct was among themost selfish he had ever encountered. He likenedBlankenship to a recruit who was always out of step withthe rest of his company and reminded him of hisobligations to pay taxes and obey the law.

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Non-filer Program Statistics FY 2000 FY 2001 FY 2002 FY 2003

40493633Average Months to Serve (allSentence)




234233257265Indictments/Information



Owner of Video Stores Failed to Report $1 Million in

Income

On November 7, 2002, in Mobile, Alabama, DavidEugene Bryan was sentenced to 27 months in prisonfollowed by three years supervised release and ordered topay restitution in the amount of $414,124 to the U.S.Treasury, after pleading guilty to tax evasion. Bryan failedto file federal income tax returns and report his incomefrom the operation of several video stores for the years1996 through 2000. Bryan used eight different bankaccounts for depositing his gross receipts, but he placedfive of those bank accounts in the names of nominees. Inaddition, he failed to deposit all of the cash receipts fromhis businesses into these bank accounts. Bryan admittedthat he dealt extensively in cash, diverted business incomefor personal use, and failed to keep accurate books andrecords of his business. As a result, he intentionally failedto report approximately $1,019,034 in taxable incomeand failed to pay approximately $414,124 in federalincome taxes.

Employment Tax

Ensuring that income and employment taxes are withheldand paid to the government is an important complianceissue. Since 1999 CI has placed increased emphasis oninvestigating a wide variety of employment tax evasionschemes.


Operator of Convenience Stores Evaded $247,000 in

Employment Taxes

On July 25, 2003, in New Haven, CT, Russell Mahler, Sr.,who operated a chain of gasoline/convenience stores,was sentenced to 18 months imprisonment followed bythree years supervised release. Mahler was also orderedto pay a fine of $40,000 and all back taxes, plus interestand penalties. Mahler pleaded guilty on March 11, 2003,to conspiring to impede the functions of the IRS. Mahler'sson, Russell Mahler II, also pleaded guilty to the samecharges in March and had been sentenced in May 2003to one year and one day imprisonment followed by threeyears supervised release. The Mahlers admitted to payinga substantial portion of many of their employee's wages incash and failing to pay over to the IRS payroll taxestotaling an estimated $247,000. In addition, RussellMahler, Sr. admitted evading about $46,000 of hispersonal income taxes.

Small Business Consultant Withdrew Over $1 Millionfrom Client's Payroll Accounts

On July 14, 2002, in Kansas City, KS, Floyd McMillon,owner of Acculine Consulting Group, Inc., was sentencedto 63 months in prison and ordered to pay more than$621,000 in restitution to the small businesses he

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Employment Tax Statistics FY 2000 FY 2001 FY 2002 FY 2003




45413145Sentenced




defrauded. McMillon pleaded guilty on February 10,2003, to one count of filing a false tax return and onecount of failing to pay over taxes to the IRS. McMillon'sbusiness, Acculine Consulting Group, Inc., provided taxreturn preparation, bookkeeping and payroll services forsmall businesses. Acculine calculated employment taxesto be withheld from the paychecks of employees of thebusinesses, withdrew that amount from the businessesbank accounts, deposited the funds into Acculine's bankaccount, and submitted the required employment taxforms to the IRS. However, McMillon admitted that hewithdrew more than $1 million from Acculine's bankaccount which was set up to pay the employment taxes.

Construction Contractor Pleads Guilty in $3.6 Million

Employment Tax Fraud Case

On March 14, 2003, in Memphis, TN, David Cantu Jr.,was sentenced to 48 months in prison, ordered to pay$860,435.13 in restitution to the IRS and pay a forfeitureamount of $10,000,000 to the United States. OnDecember 17, 2002, David Cantu, Jr. and his company,Brother's Construction II, pleaded guilty to conspiracy tocommit money laundering and willful failure to file properpayroll taxes, as well as conspiracy to harbor, encourage,or induce aliens to work at a variety of construction sites.The construction sites included the Adelphia Stadium,home of the Tennessee Titans NFL team, and the FederalExpress World Headquarters. Cantu maintained theworkers were 'independent contractors' and his companywas not responsible for taxes. During a five quarter taxperiod covering January 1, 1999, and ending March 31,2000, Cantu, doing business as Brother's Construction II,paid in excess of $3.6 million in gross wages toemployees, which should have resulted in approximately$631,478 in payroll taxes and federal withholding taxes.

Owner of Temporary Employment Services Businesses

Sentenced

On January 3, 2003, in Boston, MA, Hong Van Lam wassentenced to two years in prison, to be followed by threeyears supervised release and ordered to pay restitution inthe amount of $372,000 to three insurance companies hedefrauded. Lam pleaded guilty to a three-countinformation charging him with filing false personal andemployment tax returns and with mail fraud. Lamestablished a business for the purpose of providing

temporary employment services to contracting companiesin the Boston area. The business operated until the springof 1998 using various names, including New EnglandTemporary Work, New England Temp Work and N. TechTemp Service. Lam, along with others, opened and ranthese businesses in the names of three individuals whoacted as "straws" in order to hide their true ownership.During this time, no income tax returns were filed by anyof the businesses, however, U.S. Quarterly EmploymentTax Returns were filed which underestimated both themaximum number of employees during any quarter, andthe annual payroll. It is estimated that Lam will owe the IRS$575,000 in taxes, plus penalties and interest.

Former Owner of Defunct Security Agency Sentenced

to 32 Months

On December 11, 2002, in Philadelphia, PA, SamuelKuttab, former owner of the now defunct Central SecurityAgency was sentenced to 32 months in prison, to befollowed by 3 years supervised release. In addition, Kuttabwas fined $10,000 and ordered to pay all back taxes, withinterest and penalties. On June 26, 2002, Kuttab pleadedguilty to federal charges of conspiracy and tax fraud.Central Security Agency paid some employees in cash toavoid paying withholding taxes, thus causing the filing offalse Forms 941. Kuttab also admitted to not filing federaltax returns for 1992 to 1999. The estimated tax loss is $2million for both personal and business returns.

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Abusive Trust Schemes

Abusive tax promotions have proliferated in recent years,creating a significant threat to the nation’s revenue.Promoters and return preparers have grown increasinglysophisticated and the Internet provides promotersinstantaneous and inexpensive access to a wide audience.These advantages have permitted tax schemes toproliferate at a phenomenal rate, sometimes faster thanthe IRS has been able to react. Criminal Investigationplays an important role in combating abusive tax schemesby focusing their investigative efforts on the promoters andprominent clients.

Abusive tax schemes have evolved from the abusive trustpromotions that historically were the primary vehicle forcommitting these frauds. The growing complexity of theschemes coupled with the extensive use of various flow-through entities and offshore financial arrangements hasnecessitated expanding the CI Foreign and Domestic TrustFraud Program. Beginning in FY 2004, the newlyrenamed Abusive Tax Schemes Program will encompassall methods used by promoters and preparers to assisttheir clients evade tax.


Millions of Dollars Transferred to Corporations, Trusts,and Bank Accounts in Ireland, the Bahamas, Gibraltar,

and the Isle of Jersey

On August 22, 2003, in Sacramento, CA, Neil R. Brownwas sentenced to 70 months imprisonment to be followedby three years supervised release. In addition, Brown wasordered to pay $4,797,603 in restitution to the victims ofhis crimes. In March 2003, Brown pleaded guilty toconspiracy to defraud the U.S. by impairing the impedingthe IRS in the assessment, and collection of federalincome taxes; aiding or assisting the filing of false taxreturns; conspiracy to commit mail and wire fraud, andmail and wire fraud.

Evidence presented in court, showed that from about July1, 1993, through about November 15, 2000, Brown andhis associates schemed to defraud the U.S. by marketinga program that used foreign corporations and trusts toconceal income and assets from the IRS while giving thefalse appearance of legitimate business expenses. UnderBrown's scheme, clients formed foreign corporations andtrusts in the Bahamas and were advised to transfer moneyand income to these foreign entities. The funds wererepatriated back to the clients without paying taxes on itthrough fictitious loans or through the use of credit cards.

Further, from about January 1, 1996, through aboutNovember 15, 2000, Brown and his associates schemedto defraud the U.S. by counseling their clients to transfer

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Abusive Trust Scheme Statistics FY 2000 FY 2001 FY 2002 FY 2003




41264531Convictions




their rights to employment, money, and income to foreignentities as part of a fictitious "employee leasing" program.The purpose of the program was to give the appearancethat the clients earned substantially less income than theyactually had.

Promoter of Sham Trusts Sentenced 2100 MonthsImprisonment

On September 17, 2003, in Charlotte, NC, Terry W.Stewart was sentenced to 2100 months in federal prisonand ordered to pay approximately $28 million inrestitution for his role in a $56 million "Ponzi" schemeknown as Banyan International Limited ("Banyan"). In thesame case, five other defendants, Phillip Mark Vaughan,Philip B. Greer, Timothy B. Burnham, John Reaser, andHoward T. Prince, III, have already been sentenced.Stewart became involved in various groups whichencourage and assist individuals to evade taxes and otherliabilities by "asset protection" schemes which involvehiding assets, income, and activities in sham or abusivetrusts or other purported entities, but supposedly allow theowner to continue to control the income and assets.Eventually Stewart became a leader in such groups,including National Director of Customer Services andRegional Manager for Commonwealth Trust Company, agroup which provided sham trusts or similararrangements, including their so-called "Pure TrustOrganizations" [PTOs], for persons who wanted to evadetaxes. On November 9, 2001, Stewart was convicted byjury on 27 counts, including conspiracy to commit moneylaundering, bank fraud, and securities fraud. The use ofsham trust arrangements was done to evade federalincome tax obligations. In addition, accounts wereopened in an offshore bank on the island of St. Vincents,which Banyan could control from the United States andwhich would cater to persons using sham trusts or otherdevices to evade taxes.

Abusive Trust Scheme Promoter Goes to Federal

Prison

On August 11, 2003, in Los Angeles, CA, Edward J.Lashlee was sentenced to 36 months imprisonment andfined $12,500. Lashlee pleaded guilty on March 7, 2003,to creating thousands of abusive trusts that helped

hundreds of people hide their income and assets.According to court records, Lashlee promoted trustinvestments into "The Genesis Fund," which claimed to bean unregulated private investment fund based in OrangeCounty that engaged in foreign currency trading throughoffshore brokerage accounts. Lashlee admitted that hehandled the transfer of approximately $24 million ofGenesis investor funds to offshore bank accounts in HongKong and elsewhere.

Lashlee provided clients with offshore bank accounts andVisa debit cards issued by Swiss American National Bankof Antigua. These cards enabled clients to secretly retrieveand spend money that had been transferred from offshoreaccounts. Lashlee also created trusts for business ownersthat improperly deducted the clients' personal expenses,such as loan payments, rent, and personal living costs, asexpenses of the trust. Phony business expenses were alsocreated for the trust, such as bogus debts, so that the trusttax returns would report little or no taxable income for theclients' businesses. In his guilty plea agreement, Lashleealso admitted that, from 1992 through 2000, he failed toreport approximately $3 million in income he earned frompromoting abusive trusts.

Contractor Sentenced for Tax Evasion

On July 14, 2003, in Fresno, CA, Michael Gilbert wassentenced to 24 months imprisonment followed by 36months supervised release. Gilbert pleaded guilty onDecember 23, 2002, to not paying more than a quarter-million dollars in taxes. By entering his plea to five countsof tax evasion, Gilbert admitted to several elaborateschemes to avoid paying over $266,000 in federalincome taxes. The methods used to hide his assetsincluded transferring assets into trusts, using fraudulentbusiness licenses, conducting cash transactions, usingfalse social security numbers, filing inaccurate CurrencyTransaction Reports (CTR's), providing false taxpayeridentification numbers, utilizing a concealed room withinhis residence to store hundreds of thousands of dollars incash, using incorrect identifying information whenopening up bank accounts and failing to file tax returns.

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Golf Course Architect Sentenced to 121 MonthsImprisonment

On July 31, 2003, in West Palm Beach, Florida, TheodoreM. McAnlis, a well-known golf course architect, wassentenced to 121 months imprisonment, followed by threeyears supervised release. In addition, McAnlis wasordered to pay the costs of prosecution and to cooperatewith the IRS to pay back taxes. On April 9, 2003, McAnliswas convicted on eight counts of income tax evasion.Evidence presented during trial showed that McAnlisconcealed his income and assets from the IRS by usingcommon law trusts, a sham church, false social securitynumbers, nominee names, and a Bahamian bankaccount. The estimated loss to the government was over$1.3 million in federal taxes, penalties and interest.

Former CPA Sentenced to 39 Months in Prison for Tax

Fraud Using Abusive Trust Arrangements

On November 24, 2003, in Phoenix, Arizona, Ralph N.Whistler, a certified public accountant, was sentenced to39 months in prison. On July 30, 2003, Whistler wasconvicted of 15 felony counts of aiding and assisting inthe preparation and filing of false 1995 federal incometax returns. According to evidence, Whistler purchased aso-called "trust package" that purported to legally reducehis federal income tax liabilities. Whistler then modifiedthis package which he promoted and sold toapproximately 20 clients for between $5,000 and$10,000 per client. Clients testified that Whistler directedthem to transfer business income to and through a seriesof bank accounts titled in the names of trusts. Whistlerclaimed the amounts placed in these bank accounts asdeductions on the client's federal income tax returns.

Dentist Used Sham Trusts to Evade Payment of Taxes

On December 16, 2002, in Detroit, Michigan, Dr. GeraldT. Mann, a dentist, was sentenced to 28 months in prison,followed by three years supervised release, ordered toperform 300 hours of community service and fined$6,000. Dr. Mann was also ordered to makearrangements with the IRS to file corrected returns and payall back taxes, including interest and penalties.

On April 11, 2002, Dr. Mann, along with his wife, LaurelRose Mann, were indicted on three counts of willfully

failing to file a 1993, 1994, and 1995 income tax returnand three counts of willfully attempting to evade anddefeat a substantial portion of their 1993, 1994, and1995 income tax due and owing. The combined grossincome was approximately $671,000. Dr. Mann pleadedguilty to tax evasion by failing to file a 1994 federal taxreturn, coupled with affirmative acts of evasion by creatingand using sham trusts. Since 1993, Dr. Mann has not filedfederal or state income tax returns and has used nomineebank accounts and sham trusts to evade the payment oftaxes. He put his dental practice into a trust and used atrust with an offshore foreign business address to movemoney from the dental practice to a Swiss bank account.

Other Programs

Counterterrorism

Prior to the events of September 11, 2001, CI’s role incounterterrorism primarily involved the investigation ofdomestic terrorism, typically involving extremist groupsthat espouse anti-government beliefs. CriminalInvestigation was often involved in investigations ofindividuals affiliated with these groups because of theirreluctance to comply with our tax laws. CriminalInvestigation also participated on a limited basis in the FBIJoint Terrorism Task Forces (JTTFs) in accordance with theAttorney General’s counterterrorism plan. However, theevents of September 11th increased CI’s counterterrorismcommitment. Financial investigations are a critical part ofthe total war on terrorism and CI’s expertise continues tobe in high demand.

On a nationwide level, CI is now fully embedded with theFBI’s JTTFs and the Attorney General’s Anti-terrorism TaskForces (ATTFs), concentrating on the financialinfrastructure and the fundraising activities of domesticand international terrorist groups. Criminal Investigationworks diligently with the FBI, other law enforcementagencies, the Department of Treasury, and theDepartment of Justice (DOJ) to disrupt and dismantle thefinancial components of terrorist organizations. Moneylaundering and income tax investigations relating to

terrorist fundraising activities and investigations involvingthe use of tax exempt organizations to finance terroristactivities are a high investigative priority.

Aside from CI’s association with domestic task forces, CI’scounterterrorism program includes direct participation ina multi-agency, multi-government, financial investigativetask force located in Riyadh, Saudi Arabia. At the requestof the Saudi Arabian government, CI has recently agreedto partner with the FBI and Saudi investigators in acooperative arrangement designed to provide access tofinancial information previously considered to beunattainable. Criminal Investigation special agents areadept at conducting sophisticated financial investigationsand their unique statutory jurisdiction over tax, moneylaundering and Bank Secrecy Act offenses should proveextremely useful.

In addition to the increased support to investigative taskforces, CI has recently assumed a new role regarding thewar on terrorism and the international conflicts in theMiddle East. The Department of Treasury, armed withexecutive orders and United Nation resolutions, has beentasked with identifying and tracing assets belonging to theformer Hussein regime for repatriation to the Iraqi people.In this Treasury-directed effort, CI has assumed theleading role and has partnered with the Department ofDefense (DOD), various intelligence agencies, and otherTreasury bureaus to accomplish this mission.

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Counterterrorism Statistics FY 2002 FY 2003

3641Average Months to Serve (all Sentence)


90.5%100.0%Incarceration Rate

1916Convictions




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Benevolence Director Sentenced After Pleading GuiltyTo Racketeering Conspiracy

On August 18, 2003, in Chicago, IL, Enaam M. Arnaout,the executive director of Benevolence InternationalFoundation, Inc. (BIF), a purported charitableorganization based in south suburban Chicago, wassentenced to 136 months in prison after pleading guilty inFebruary 2003 to racketeering conspiracy. Arnaoutadmitted that he fraudulently obtained charitabledonations in order to provide financial assistance topersons engaged in violent activities overseas. Arnaoutwas ordered to pay restitution in the amount of $315,000to the Office of the United Nations High Commissionerfor Refugees. Arnaout admitted that for approximately adecade BIF was defrauding donors by leading them tobelieve that all donations were strictly being used forhumanitarian purposes, while instead a material amountof the funds were diverted to fighters overseas. Arnaoutspecifically admitted providing items for fighters inChechya and Bosnia.

Mohamad Hammoud Sentenced to 155 Years

On February 28, 2003, Mohamad Youssef Hammoud,29, was sentenced to 155 years imprisonment.Hammoud, a native of Lebanon, was convicted by afederal jury in Charlotte, NC, of providing materialsupport to a designated foreign terrorist organization,Hizballah. Mohamad Hammoud and his brother, ChawkiHammoud, were both found guilty on numerous othercriminal counts, including racketeering, conspiracy,cigarette smuggling, money laundering, and immigrationfraud. The guilty verdicts were returned following a five-week jury trial.

Originally code-named "Operation Smokescreen," theinvestigation went on for approximately four years. Trialtestimony revealed the story of a group of young Lebaneseman who came to this country illegally throughfraudulently obtained visas, remained in this countrythrough fraudulent marriages to U.S. citizens, and while

living here conspired to commit a host of crimes (interstatesmuggling of contraband cigarettes, the laundering of theproceeds and bank and credit card fraud) and sent someof the proceeds of their criminal enterprise to Hizballah, adesignated foreign terrorist organization.

Twenty-five individuals had been charged in the case.Eighteen of the 25 entered guilty pleas and only theHammoud brothers requested trial by jury, which resultedin their convictions. Ten individual defendants have beenconvicted of conspiring under the RICO statutes toengage in a series of criminal offenses and sending someof the illegal proceeds to Hizballah. Six people wereindicted for providing material support and resources to adesignated foreign terrorist organization and of the six,one entered a guilty plea and the other, MohamadHammoud, was the first conviction in the country at trialunder the statute. Four defendants charged with materialsupport remain fugitives, including the chief of Hizballah’sprocurement activities, the leader of Hizballah in theBeirut suburbs, and a top Hizballah operative. A fifthfugitive is charged with conspiracy to commit cigarettesmuggling and money laundering.

Prior to September 11, Hizballah was responsible for thedeaths of more Americans than any other terrorist group.Hizballah attacked the Marine barracks in Lebanon in1983 resulting in the deaths of over 250 Americansoldiers. Hizballah also attacked the American Embassyin Lebanon in 1983. Today Hizballah remains very activeand threatens the entire Middle East peace process.

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Money Laundering

Money laundering is a term given to the various methodsby which individuals attempt to make illegally earnedmoney appear legitimate and to facilitate the evasion of avariety of taxes. Since September 11, 2001, the definitionof money laundering has expanded to include themovement of money into or through the United States forthe purpose of supporting terrorist activities.

The ability to launder money is critically important tocriminal organizations because it not only enables them topromote and finance their illegal activities but also toenjoy their ill-gotten gains. The ways money can belaundered are limited only by the imagination and theavailable resources of the individual.

Money laundering is a threat to tax administrationbecause tax and money laundering violations are closelyrelated and involve similar activities. Illicit funds are rarelyreported on tax returns. Money laundering is not onlyused by criminal enterprises to conceal their illegalproceeds but is also an integral part of many tax evasionschemes. Criminal Investigation’s Suspicious ActivityReport (SAR) review teams, in each of the 35 CI fieldoffices, have proven extremely useful in detecting not onlymoney laundering cases, but also legal and illegal sourcetax schemes. To effectively utilize its resources, CI targetshigh-profile money laundering investigations, particularlythose that directly or indirectly enhance tax compliance.

Criminal Investigation is one of the key agenciessupporting the National Money Laundering Strategy. Thisstrategy was designed to coordinate the Federalgovernment’s anti-money laundering efforts. To furtherthe goals of the National Money Laundering Strategy, theDepartment of Treasury has provided $3.1 million peryear to CI to equip and staff task forces located in HighIntensity Financial Crime Areas (HIFCA). These funds arealso used to support other money laundering task forces,SAR review teams, and to develop an electronic BankSecrecy Act (BSA) report filing system for the FinancialCrimes Enforcement Network (FinCEN).


Telemarketing Fraud Promoter Sentenced to 292

Months

On June 6, 2003, in San Diego, California, Marc Levinewas sentenced to 292 months in custody, 3 yearssupervised release and was ordered to pay restitution inthe amount of $49,050,378.00. Levine was the leaddefendant in a 4 1/2-month telemarketing fraud/moneylaundering trial in the Southern District of California.Levine was sentenced following his conviction on multiplecounts including conspiracy, money laundering, mailfraud, and wire fraud charges. The scheme operated byLevine and others involved a series of offerings that were

Money Laundering Statistics FY 2000 FY 2001 FY 2002 FY 2003




667861897884Sentenced




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pitched to investors which included investments inpartnerships that purported to be ongoing businessesabout to begin profitable operations. The businessesinvolved pay-per-call service providers, and "virtualshopping malls" on the Internet, which were similar to"QVC" and the "Home Shopping Network" shows on cabletelevision. The scheme defrauded over 3,000 victims ofnearly $50,000,000.

Leader Of $74 Million Investment Fraud SchemeInvolving More Than 3,200 Victims Sentenced To 30Years' Imprisonment

On July 28, 2003, in Seattle, WA, John W. Zidar theleader of a fraudulent investment program that defraudedmore than 3,200 victims in the United States and Canadaof approximately $74 million was sentenced to 30 yearsimprisonment. Zidar was convicted in August 2002 ofseven counts of mail fraud, seven counts of wire fraud,and nine counts of money laundering. Five additionalpeople, Steven C. Moreland, John W. Matthews, ElizabethAnne Phillips, William H. Cravens, and Larry Hall, eitherentered guilty pleas, or were convicted at trial on chargesof fraud and conspiracy in connection with the samefraudulent investment scheme.

Beginning in 1997 and continuing until 2000, thedefendants induced members of the public to invest in aseries of purported investment funds called VistaInternational (Vista), Oakleaf International (Oakleaf), andRosewood International (Rosewood). Investors were

required to pay $1,028 to purchase a unit in Vista or$1,294 to purchase a unit in Oakleaf or Rosewood. Thedefendants promised investors a return of 120% per yearand told them their principal was assured against loss.Further, investors were told that if they rolled a single unitover for ten years it would be worth millions of dollars. Infact, the defendants were operating a Ponzi scheme, inwhich early investors were paid with later investors' money.The evidence at trial established that the defendantsdiverted millions of dollars for their own use. Thedefendants also laundered millions of dollars throughbank accounts in Samoa, the Bahamas, and Costa Rica.The government has recovered in excess of $20 milliondollars of victims' money from bank accounts controlledby the defendants and assets purchased by the defendantsusing victims' money. The money recovered will bereturned to the victims of the fraud.

Narcotics Related Financial Crimes

Criminal Investigation’s Narcotics Related FinancialCrimes Strategy supports the goals of the National DrugControl Strategy and the National Money LaunderingStrategy by seeking to reduce or eliminate the profit andfinancial gains of narcotics trafficking and moneylaundering organizations.

With its specialized financial investigative expertise, CIplays a unique role in the "war on drugs." CriminalInvestigation’s mission is to disrupt and dismantlesignificant narcotics trafficking and narcotics money

Narcotics Related Financial Crime Statistics FY 2000 FY 2001 FY 2002 FY 2003








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laundering organizations through the financialinvestigation and prosecution of those involved and theseizure and forfeiture of their profits. CriminalInvestigation uses all statutes within its statutory jurisdictionto accomplish this mission.

Criminal Investigation is a participating member of theOrganized Crime Drug Enforcement Task Force(OCDETF) Program, which was established in 1982. Byfocusing on sophisticated cases that meet the highOCDETF designation standards, CI contributes significantvalue to the overall investigative effort.

The High Intensity Drug Trafficking Areas (HIDTA) Programwas established to provide assistance to federal, state,and local agencies operating in areas most adverselyaffected by drug trafficking. Criminal Investigationsupports the HIDTA program with staffing resources.


Seattle Man Sentenced

On May 15, 2003 in Seattle, Washington, Melvin J.Jordan was sentenced to 110 months in prison for his rolein a drug distribution and money laundering conspiracy,which took place between 1999 and 2001. From at least1999 to 2001 Jordan was involved in a marijuanadistribution conspiracy with co-defendant JamesAltenburg and others. Jordan purchased at least 15pounds of marijuana per month. After purchasing themarijuana, which totaled at least 270 pounds, Jordansold the marijuana to other persons at a profit. Jordanspent over $700,000 to purchase the drugs during thecourse of the conspiracy.

Jordan used at least $358,864 of the profits from themarijuana sales to purchase, furnish, sell and/or gift 5real properties and 9 vehicles. Jordan also spent at least$474,914 for various personal items. Jordan’s primarysource of income came from drug dealing. With the helpof others, Jordan concealed his ownership of theproperties and the vehicles.

Omaha man sentenced to eight years

On February 26, 2003, Gary A. Storey was sentenced toeight years and one month in prison, to be followed byfive years supervised release. Storey entered a guilty pleaon October 11, 2002, to drug conspiracy and moneylaundering charges, and agreed to the forfeiture ofcurrency and property totaling over $2,000,000.

Storey admitted that on or about September 6, 1998through November 1, 2001, he conspired with others todistribute more than 100 kilograms of marijuana. On orabout July 22, 2000, Storey purchased a 2001 DodgeRam 1500 Quad Cab pickup truck, knowing that themonies used to make the purchase were derived fromillegal drug activity.

Storey agreed to forfeit several pieces of property derivedfrom the drugs proceeds, including trucks and residentialproperty, $371,920.00 from the sale of motorcycles, lakeproperties and assets in a brokerage account and$902,284.00 in currency that was seized by thegovernment on November 1, 2001. The Judge found thatStorey was a manager or supervisor of at least five peoplein the conspiracy and that factor was taken into accountin determining the sentence.

Federal Tax Evasion Lands Lawyer 42 Months in

Federal Prison

On February 28, 2003, in Gainesville, FL, Henry JohnUscinski, Esq. was sentenced to 42 months in prison, to befollowed by three years of supervised release and wasordered to pay a $250,000 fine. Uscinski pleaded guiltyto evading his taxes by failing to include $1.5 million hereceived from his client Claude DeBoc in 1996. Uscinskiadmitted that he knew the funds he received were drugproceeds. Uscinski is the third lawyer to be prosecuted formisuse of funds received from DuBoc. Previously, F. LeeBailey spent 44 days in federal prison on a contemptconviction and Penelope Shelfer was sentenced to 135months for her part in a money laundering conspiracy withDuBoc.

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Electronic Crimes and Technology Based TaxCrimes

Computers are increasingly used to facilitate or commitsophisticated financial crimes. The records of financialtransactions are moving from the paper ledger to thecomputer, to off-site, online storage. CriminalInvestigation is a leader in developing tools andtechniques to track and find records, wherever they maybe.

The IRS CI Office of Electronic Crimes was formed in2001 to organize and develop CI’s expertise in the criticalarea of computer forensics. In FY 2003, ComputerInvestigative Specialists (CIS) assigned to the ElectronicCrimes program participated in over 800 search warrantsand seized and processed over 85 terabytes of data. Thisrepresents a tenfold increase over FY 2001 and more thana hundred fold increase in five years. CriminalInvestigation set the standard for processing digitalinformation seized during search warrant execution.Electronic Crimes provided training in computer forensicsto federal, state, and local law enforcement and toEuropean revenue collection agencies. In 2003,Electronic Crimes opened the Technology and SupportCenter, a 10,000-sq. ft. laboratory and training facility inSpringfield, Virginia. This state of the art facility will beused to provide technical support and training and willenable CI to conduct research on emerging technologies.

Employee Satisfaction

Criminal Investigation measures employee satisfactionthrough the IRS Employee Satisfaction Survey, which isadministered on a yearly basis. Criminal Investigation’sparticipation rate for Survey 2003 was up approximately3% from Survey 2002. The increase in the participationrate was attributed to a more aggressive communicationand marketing campaign entered into with CICommunication and Education. Survey 2003 was againadministered by the Gallup Organization. The "Q12"questions, which measure those aspects of employeeengagement that link to business outcomes, showedincreased results in both the CI Grand Mean score andthe overall satisfaction rate from Survey 2002 to Survey2003.

The CI function-specific question results and verbatimresponses from Survey 2003 highlighted certain areas ofconcern for employees. These areas included: providingemployees with the resources and support they need to dotheir jobs; balancing workload against employee staffingand improving management effectiveness. The CI SeniorStaff instituted several measures to address these results.A Chief’s Advisory Group, which will have representationfrom field offices across the country, will meet on a regularbasis. Time has been allocated during the Senior Staff’sscheduled FY 2004 managerial meetings to discuss theSurvey 2003 results. Additionally, the CI function-specificquestions for Survey 2004 are being structured to focuson the employees’ areas of concern. The questions willattempt to further define the employees’ issues andidentify the level of management where these concernsoriginate.

EEO and Diversity

Today’s tax evasion schemes are becoming morecomplex, involving a more multi-cultural, diverse group ofindividuals. As a result, it is imperative that CI establishand maintain the technical, financial, and humanresources necessary to counter the latest schemes. Thisincludes the ability to recruit and retain a diverse staff ofskilled, highly trained agents and future leaders to identifycorporate fraud schemes, and support undercoverprograms and surveillance operations. Building a diversegroup of talented agents to support these day to dayoperations requires extensive planning, specializedtraining, and effective recruitment. The Office of EEO andDiversity (EEOD) is committed to supporting CI’s efforts toidentify and recruit qualified, diverse candidates whosupport the Criminal Investigation mission. Ultimately,CI’s goal is to become a model organization, one ofinclusion where differences are valued, employees arerespected, and our workforce is reflective of the public weserve.

The Office of EEO and Diversity is heavily engaged in therecruitment process, working closely with the CI Office ofHuman Resources with respect to identifying andeliminating barriers to minority recruitment, as well as withthe development of strategic recruitment initiatives. The

primary goal of EEOD is to support CI with respect tocreating a workforce that values diversity, is representativeof its customer population, and is in compliance with EEOlaws and regulations.

During FY 2003, EEOD partnered with a group of humanresource officials to develop a CI Recruitment, Hiring, andRetention strategy. The recruitment plan was developed toserve as a tool designed to guide management recruitingactivities, placing an emphasis on identifying andrecruiting a diverse group of qualified candidates. Inconjunction with the plan, EEOD was involved in theprocess which identified the more than thirty highlyqualified college students who were selected to participatein the CI Student Career Experience Program (SpecialAgent Training Program). More than 75% of the studentsselected were minorities.

Addressing workplace conflict and EEO complaintstypically affects productivity, places a drain on resources,and lowers morale. Criminal Investigation is committed totreating employees, applicants for employment, andcustomers fairly in an environment free fromdiscrimination on the basis of race, color, religion,national origin, sex, sexual orientation, parental status,age, protected genetic information, and mental orphysical disability. The Office of EEO and Diversity hasbeen instrumental in providing management with programguidance and direction geared towards resolvingcomplaints at the lowest level possible. The officedevelops and delivers EEO Program training to managers,implements CI specific directives and guidance,participates on executive level interview/award panels,and provides guidance relative to new federal EEO lawsfor implementation within CI.

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100.017681824212825414001TOTAL

1.6RECEIPT OF INFO/ OTHER

15.1568585653684960 TOTAL NARCOTICS

4.7164166187207304 HIDTA/OCDETF

0.7556223 HIDTA

1.22521273046 OTHER

8.5374393433445587 OCDETF

NARCOTICS

12001239147518573041TOTAL SUB-PROGRAMS

0.3534512 EXCISE TAX

1.04647303064 TELEMARKETING

1.63951616162 GAMING

3.052588691141 PUBLIC CORRUPTION

0.62422191721 INSURANCE

1.41411162158 BANKRUPTCY

3.98382108127167 FINANCIAL INSTITUTION

2.445424759103 HEALTH CARE

4.34341738079 ABUSIVE SCHEMES

7.74967109169229 RETURN PREPARERS

6.9128127152223291 QRP

49.96726887709741814 GENERAL FRAUD4

FRAUD SUB-PROGRAMAREAS

83.212001239147518573041 TOTAL FRAUD3

40.872676087410341535 ILLEGAL

42.44744796018231506 LEGAL2

FRAUD

DIT %SENTENCEDCONVICTEDINDICTEDPROS RECSSI1 INITIATED

SUMMARY BY PROGRAM AREA FOR FY 2003

INTERNAL REVENUE SERVICE CRIMINAL INVESTIGATION

1 Subject Criminal Investigation.2 Legal source investigations are defined as those involving taxpayers in legal occupations and industries, being investigated for tax or tax-related violationsonly, with CI as the sole investigating agency. Illegal source investigations involve taxpayers in illegal occupations or industries which are investigated withthe cooperation of other federal or state agencies and may involve currency and/or money laundering violations.3 Includes 0.2% direct enforcement time (DET) - protection, escort, special assignments and FOIA/Privacy Act/PRP.4 The General Fraud sub-program area encompasses a variety of investigations including both legal and illegal source cases. The General Fraud program isthe source of new trends in the area of non-compliance.

C r i m i n a l I n v e s t i g a t i o n S t a t i s t i c s

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C r i m i n a l I n v e s t i g a t i o n S t a t i s t i c s

1768212825414001TOTAL

111000OTHER TITLES

455571122TITLE 31 – Monetary Transactions

1018139815942004TITLE 18 TOTAL

178736577Title 18 – Other

70100981071957 – Money Laundering

49279888612981956 – Money Laundering

10001955 – Illegal Gambling

59991623 – False Declarations

499111001 – False Statements

44433530371M – Conspiracy Title 18

826256371T – Conspiracy Title 31

107168220148371K – Conspiracy Title 26

0333371B – Conspiracy Title 26 or Title 31

567198173287 – False Claims

5398146142286 – Conspiracy False Claims

TITLE 18 SECTION

5946758761875TITLE 26 TOTAL

58284752Title 26 – Other

99417207 – False Document

6649611317203 – Failure to File

54961682437206(2) – Aid or Assist

2342693194237206(1) – False Return

17322427710257201 – Evasion

TITLE 26 SECTION

SENTENCEDINDICTEDPROS RECSSI INITIATED

SUMMARY BY UNITED STATES CODE TITLE AND SECTION FOR FY 2003

INTERNAL REVENUE SERIVCE CRIMINAL INVESTIGATION

Operational Overview

International

Criminal Investigation’s International Program plays animportant role in supporting the national MoneyLaundering Strategy. One of the key roles is to assistforeign governments with money laundering training. Aspart of the State Department’s anti-terrorism workinggroup, CI continues to deliver training and technicalassistance to countries that are developing legislation totrack and combat terrorist financing. CriminalInvestigation also hosts numerous delegations and foreigndignitaries through the CI International Visitor’s Program.

The international demands of large-scale investigationsand CI’s counterterrorism efforts resulted in increasedrequests for assistance from CI’s 35 field offices. Requestsfor information from the Caribbean Basin and Costa Ricaincreased over 100 percent and requests for assistance inthe Middle East have increased significantly. In responseto the ratification of exchange agreements and requestsfor assistance from foreign countries, CI Internationalexpanded its global presence this year by adding a foreignattaché post in Bridgetown, Barbados. Currently, foreignattachés are located in Mexico City, Mexico; Frankfurt,Germany; Hong Kong; Bogota, Colombia; Ottawa,Canada; London, England and Bridgetown, Barbados.

Asset Forfeiture

The Asset Forfeiture Program continues to be one of thefederal government's most effective tools against drugtrafficking, money laundering, and organized crime. Theasset forfeiture statutes are utilized to dismantle criminalenterprises by seizing and forfeiting their assets. Theunderlying investigations associated with forfeiture casesinclude narcotics, money laundering, organized crime,and illegal gaming, as well as a variety of other violations.The equitable sharing and reimbursement provisions ofthe Asset Forfeiture Program allow federal, state, and locallaw enforcement agencies to apply forfeiture proceeds tocritical law enforcement efforts.

Criminal Investigation’s Asset Forfeiture Program hadseizures in FY 2003 of approximately $139 million,consistently making CI the second largest contributor tothe Treasury Forfeiture Fund and the largest net contributorsince FY 2000. Treasury agencies significantly benefitedfrom the contributions made by CI because these netcontributions are available to meet their law enforcementneeds.

Criminal Investigation has Asset Forfeiture Coordinators(AFC) in each of its 35 field offices, who are charged withoversight responsibility for the Asset Forfeiture Program.These coordinators work directly with agents andmanagement to effectively utilize the forfeiture statutes byproviding assistance in identifying cases withseizure/forfeiture potential.


Americable Companies Sentenced and Ordered to Pay

$22 Million

On September 17th, 2003, United States District JudgePatricia Seitz sentenced Americable International, Inc.,Americable International Moffett, Inc., and AmericableInternational New York, Inc. (the "Americable companies")to fines, forfeiture, and restitution in excess of $22 million.

On November 7, 2002, all three Americable companiespleaded guilty to conspiring to defraud the United States.Americable International, Inc. also pleaded guilty toconspiring to launder the proceeds of mail fraud. JudgeSeitz fined Americable International, Inc., $7,500,000and ordered that it forfeit $8,075,445.08 to thegovernment and pay separate restitution of $5,454,720.Judge Seitz also fined Americable International Moffett,Inc., and Americable International New York, Inc.,$500,000 each, which represented the statutorymaximum fines applicable to their offenses. Judge Seitzalso imposed five-year terms of institutional probation onall three Americable companies.

The Americable companies provided cable televisionservice to customers residing at various locations in theUnited States and Japan. The Americable companies

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serviced customers residing in private homes as well ascustomers residing on military bases operated by theUnited States Department of Defense (DOD).

The defendants’ guilty plea to defrauding the UnitedStates stemmed from a scheme in which they attempted todefraud DOD. Starting in the early 1990s, DOD closedmilitary bases in various locations throughout the UnitedStates, including bases that had received cable televisionservice from the Americable companies. In connectionwith these closures, the Americable companies submittedto DOD forms known as "Settlement Proposals" or"Termination Settlement Proposals (TSP)" in order to seekreimbursement from DOD for investments that had beenmade by the defendant companies at closed bases andthat had not been fully depreciated. However, thedefendants submitted TSPs that falsely represented certainexpenditures, based upon approximately $8 million infictitious invoices and supporting documentation withinthe companies’ records.

The money laundering conspiracy stemmed from a six-year scheme in which the Americable companiesdefrauded various cable television networks, such as A&ETelevision Network, Discovery Channel, ESPN, and MTV,as well as other nationally-known and regional networks,out of funds owed to them for providing theirprogramming to Americable customers. Americablecompanies historically under-reported and under-paidamounts owed to the networks. Former company head,Charles C. Hermanowski, would direct employees to writechecks to the victim networks, which he would falselyendorse and deposit into his personal bank account. Thisscheme resulted in over $8 million in fraud proceedssiphoned from the Americable companies intoHermanowski’s personal bank account.

As part of the five-year term of institutional probationimposed on the Americable companies, Judge Seitzprohibited the Americable companies and their affiliatesfrom employing or transacting any business with CharlesC. Hermanowski and that the Americable companiessubmit to a compliance program and hire a complianceofficer to monitor their activities. Judge Seitz furtherordered that Americable International, Inc., hire anindependent auditor to audit the company on behalf of

the Court and file all missing income tax returns within 10months.

The government estimated that the fines, forfeitures, andrestitution imposed by Judge Seitz represented between30-35% of the value of the Americable companies.

Banco Popular de Puerto Rico Forfeits $21.6 Million

On January 16, 2003, a criminal information was filedcharging Banco Popular de Puerto Rico with one count offailing to file Suspicious Activity Reports (SARs) in violationof Title 31 USC 5318(g)(1) and 5322(a). Banco Popularwaived indictment and accepted responsibility. The bankforfeited $21.6 million dollars to the United States.

From approximately June 1995 and June 2000, a numberof unusual or suspicious transactions were conducted inconnection with certain accounts at Banco Popular.Although the bank filed Suspicious Activity Reports (SARs)on these accounts they were not timely or were inaccurate.In one series of the transactions, Roberto Ferrario Pozzideposited approximately $20 million dollars in cash intoa Banco Popular account from June 1995 to March1998. Deposits were made to the account by Ferrarioand employees of "Phone Home" a phone card, longdistance, and money transmission service - often in paperbags or gym bags filled with small denomination bills.Despite the suspicious nature of the deposits, the bank didnot investigate and file timely and complete SARsreporting the activity. These untimely filings, in theabsence of supplementary SARs and the errors in the SARsthat the bank did file hindered law enforcement's ability toinitiate investigations on these accounts in a timelymanner, resulting in the laundering of millions of dollarsof drug proceeds through these accounts. Ferrario wassentenced to 97 months imprisonment for moneylaundering in 2002.

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Undercover

An undercover operation is a law enforcement techniqueused to detect and expose criminal activity by acquiringevidence for criminal prosecution.

Criminal Investigation utilizes undercover operations insignificant financial investigations when it is not possible toobtain evidence through less intrusive means. Justifiably,this technique is not routinely used. Undercoveroperations are extremely sensitive and potentiallydangerous. Careful planning and management is criticalto the success of an undercover operation and to thesafety and security of the undercover special agent.

The IRS CI office of Special Investigative Techniques (SIT)manages the undercover program and processesundercover requests. This office also provides technicalassistance to field offices regarding the proper use ofother specialized investigative techniques, such aselectronic surveillance.

Criminal Investigation undercover operations areclassified as either Group I or Group II. Group Ioperations include the most sensitive undercoverscenarios. The operations are anticipated to last longerthan six (6) months and/or have anticipated costs inexcess of $20,000. Operations not meeting these criteriaare classified as Group II.

National CI Training Academy

The Basic Training Section of the National CriminalInvestigation Training Academy (NCITA) is responsible for

the development and delivery of all new special agenttraining. The Special Agent Basic Training (SABT)program consists of three phases. Phase one is Pre-Basic,a three day class during which agents receive thematerials they need as new IRS employees. The secondphase is Criminal Investigator Training Program (CITP).This phase is approximately 9weeks long and is instructedby the staff of the Federal Law Enforcement TrainingCenter (FLETC). During CITP, agents learn basicmarksmanship, policing skills, defensive tactics,constitutional law and the Federal Rules of CriminalProcedure. The final phase of training, which lasts about14 weeks, is Special Agent Investigative Techniques (SAIT).During this phase, agents acquire the specific knowledgeand practice the techniques which allow them to becomeinvestigators for CI. During FY 2003 115 new specialagents graduated from the Academy. The Basic TrainingSection is also responsible for the development anddelivery of On-the-Job-Instructor (OJI) training.

During the past year, the Advanced Training Section ofNCITA provided audience driven training in leadership,advanced agent, support, and international programareas. During the year approximately 328 participantsbenefited from CI’s domestic training programs while theinternational training program was presented inapproximately 32 countries with over 1,145 inattendance. Advanced Training is at the forefront ofcreating training modules for E-learning and web-basedtraining initiatives. Several task forces were convenedduring the fiscal year to ensure that CI’s domestic andinternational training materials were updated.

The Academy forged and maintained a strong workingrelationship with training council partners, Tax Advisory

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717465Total

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353537Group I

FY 2003FY 2002FY 2001Undercover Operations

Administrative Services, HQ International, Treasury’sExecutive Office of Terrorism, and Financial Crimes topromote quality training programs.

Communication and Education

The CI Communication and Education division developsand delivers key messages to a wide range of audiences,with a primary focus on external communications. Thekey external audiences include the compliant taxpayer, thepractitioner community, and the non-compliant taxpayer.Internal audiences include CI employees, IRS employees,and other federal agencies, including the offices of theUnited States Attorneys.

The compliant taxpayer has been identified as our mostimportant audience as IRS continues its efforts to fostercompliance and ensure the tax system is administered in afair and equitable manner. Working in conjunction withthe other IRS operating divisions, CI Communication andEducation disseminates that message via Internet sites atwww.treas.gov/irs/ci and www.irs.gov through fraud alertsand the publication of the CI enforcement strategy.

By working with the practitioner community, CI is able topromote awareness and solicit information regarding thenumerous tax schemes being promoted across the UnitedStates. This year, CI participated in IRS sponsored taxforums where presentations regarding refund fraud andabusive schemes were made to more than 15,000attendees. As a result of this outreach effort, CI receivednumerous fraud referrals and initiated severalinvestigations.

The community of non-compliant taxpayers is a difficultaudience to reach; however, publicity of criminal tax andfinancial-related fraud efforts can deter others from similarconduct. Criminal Investigation’s publicity efforts, throughthe 35 Special Agent/Public Information Officers, are atan all-time high and have expanded from newsprint tovertical magazine publications, the nightly news and talkradio broadcasts.

Part of the outreach to the external audience is based onthe principle that "IRS does not want this to happen toyou." Statistical information and summaries of

investigations involving individuals who have beenconvicted of tax and other financial related fraud aredeveloped regarding specific market segments. Factsheets regarding fraud in the construction, restaurant,automobile sales, medical, and return preparer industryhave been published and posted on CI and IRS websites.Follow-up articles and interviews within specific groupshave resulted in increased publicity and awareness in thetargeted market segment.

Criminal Investigation Communication and Educationposted a new webpage this year regarding IRS’ significantrole in national and international money launderinginvestigations.

The CI Communication and Education Strategy for FY2003 was developed in conjunction with the IRS and CIstrategic plans. Some of the key elements of this strategyinclude:

• Using the 35 Special Agent/Public InformationOfficers to increase publicity related to localinvestigations and to perform outreach efforts to thetax practitioner community.

• Expanding our web presence by posting criminalenforcement information on www.irs.gov.

• Continuing our institutional commitment to becomemore open and provide more comprehensiveinformation about our enforcement efforts.

• Implementing a press strategy that links individualcases in a systematic way to larger compliance issuesand enforcement programs.

A significant part of CI’s media strategy is located on thewww.irs.gov website (keyword: fraud), which providesinformation about compliance-related enforcementactivities to the public. The website includes fraud alertsrelating to Return Preparers, Employment Tax Fraud, Non-filers, General Tax Fraud, and Abusive Schemes. DuringFY 2003, a Money Laundering section was added. Thewebsite allows CI to target its enforcement efforts tospecific media outlets or other specialized websites toreach key audiences. This entire effort is accomplished incooperation with the United States Attorneys' Offices andDOJ and adheres to the disclosure provisions of theInternal Revenue Code.

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The goal of CI Communication and Education’s externaloutreach strategy is to allow CI to provide the media, thecompliant taxpayer, the tax practitioner and the non-compliant taxpayer with more comprehensive informationabout CI’s enforcement efforts and to place individualprosecutions in the context of a larger complianceinitiative.

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Publication 3847 (Rev. 6-2004)Ca ta l og Numbe r 32206Y

Documents

Publication 3847 (Rev. 6-2004)