Editor's Note: Yesterday, the federal government announced that it will return $29,500 seized from Maryland dairy farmer Randy Sowers. "This is exactly what we wanted," said Sowers in press release from the Institute for Justice, the public interest law firm that worked with him on the case. "I hope they give other people's money back. And beyond that I just hope they quit taking people's money."
When the Internal Revenue Service (IRS) came to visit Randy Sowers, it had already seized his entire bank account—over $60,000. The IRS agents, two clean-cut types in dark blue jackets, came unannounced to the dairy farm, South Mountain Creamery, that Randy and his wife have run for more than 30 years.
The agents began asking Sowers a series of strange questions: Why did he deposit cash at the bank? Why were so many of his cash deposits in amounts under $10,000? Did he know that cash deposits over $10,000 were reported to the federal government?
Sowers answered the questions as best he could. The farm deposited cash because it sold milk at farmers markets. A bank teller had told them that deposits over $10,000 required additional paperwork, but the Sowers had no idea what that paperwork consisted of. They limited the size of their deposits only because they thought it made life easier for the bank workers. The agents nodded, seemingly satisfied. They said they did not believe he was a criminal. Nonetheless, they finally told him, his bank account had been seized.
Unbeknownst to him, Sowers' bank deposits had landed him at the intersection of a number of disturbing trends in American law: draconian civil forfeiture, the overcriminalization of everyday life, and the government's increasing hostility to cash as a medium of financial exchange.
Like hundreds of other Americans, Sowers was targeted because he had run afoul of a sprawling government surveillance program aimed at the nation's financial system. Federal law requires banks to report all cash transactions over $10,000 to the federal government. Federal law also makes it a crime, called structuring, for bank customers to deposit or withdraw cash in amounts under $10,000 in order to avoid that reporting requirement.
IRS agents across the country, often in cooperation with state and local law enforcement, monitor banking activity for frequent sub-$10,000 cash transactions. The IRS can then use civil forfeiture to seize entire bank accounts that it believes were involved in "structured" transactions.
Because these cases are brought against the property in question—the Sowers' case was captioned United States v. $62,936.04 in U.S. Currency—protections that govern criminal proceedings do not apply. Owners of "guilty" property have no right to counsel. Without ever having to secure a criminal conviction (or even file charges), the federal government is excused from its obligation to prove guilt beyond a reasonable doubt. Officials can seize property based on mere suspicion of a crime and effectively force property owners to prove their own innocence to get it back.
Moreover, when the IRS takes property using civil forfeiture, that property goes into a special federal fund, the Treasury Forfeiture Fund, which allows the IRS to fund its law enforcement activities. That arrangement provides an incentive for the IRS to seize as much property as possible, even when the property owner may have done nothing wrong. In 2014, the net position for the fund (that is, the amount retained after paying obligations) was $1.9 billion, a staggering rise from $69 million in 1993, the year after the fund was created.
In theory, this system is supposed to root out criminals seeking to hide their activities from the government. In practice, its targets are all too often small-business owners guilty of nothing more than doing business in cash.
Many of these stories begin the same way as Sowers': A bank teller, unhappy at having to fill out government paperwork, suggests to a customer that life would be easier if he kept his deposits under $10,000. Neither the teller nor the customer has any idea that evading that paperwork is a federal crime.
Other business owners have similarly innocent reasons for keeping cash deposits under $10,000. For example, the insurance policy for Michigan grocery store owner Terry Dekho only covered cash up to $10,000. Other businesses, such as Mark Zaniewski's gas station near Detroit, simply do not generate more than $10,000 in cash revenue in the time between bank deposits. The IRS seized the bank accounts for both businesses without even asking for an explanation for the pattern of sub-$10,000 deposits.
A 2015 Institute for Justice report found that between 2005 and 2012 the IRS seized more than $242 million for alleged structuring violations in over 2,500 cases. In at least a third of those cases, the IRS reported no suspected criminal activity apart from the mere act of depositing or withdrawing amounts under $10,000.
No More Secrets
This federal surveillance program traces its origins to the Bank Secrecy Act of 1970. For the first time, the federal government required banks to report cash transactions over $10,000. The law was explicit in its aims, stating that Congress believed these reports would have a "high degree of usefulness in criminal, tax, or regulatory investigations or proceedings."
Largely accepted today, the Bank Secrecy Act was controversial when adopted, narrowly surviving a vigorous legal challenge by the American Civil Liberties Union (ACLU), the California Bankers Association, and several individual bank customers. A three-judge district court panel ruled against the law shortly after it was enacted, holding 2–1 that the "domestic reporting provisions" were "repugnant to the Fourth Amendment."
The U.S. Supreme Court reversed, upholding the law in its 1974 decision California Bankers Association v. Shultz. Writing for the majority, Justice William Rehnquist conceded that the act "might well surprise or even shock those who lived in an earlier era" but upheld the law as a necessary response to "the heavy utilization of our domestic banking system by the minions of organized crime."
In an acerbic dissent, Justice William Douglas argued that it was "sheer nonsense" to suggest that "all bank records of every citizen 'have a high degree of usefulness.'" "Suppose Congress passed a law requiring telephone companies to record and retain all telephone calls and make them available to any federal agency on request," he presciently suggested. "Would we hesitate even a moment before striking it down?"
Although the Bank Secrecy Act and its reporting requirements were considered constitutional, structuring was not yet an explicit crime. Until the mid-1980s, people could lawfully skirt federal bank reporting requirements by splitting up transactions to keep them under the $10,000 threshold. Even the Comptroller General conceded in a 1981 report to Congress that "the regulations were silent on the propriety of a customer's conducting multiple transactions to avoid reporting."
Absent explicit law prohibiting structuring, federal prosecutors devised convoluted legal arguments. In one case, a man who bought multiple checks that collectively topped $10,000 was charged and convicted under an aiding and abetting theory. Fortunately for him, the 1st Circuit U.S. Court of Appeals overturned his conviction, citing "ambiguity" with the reporting law. "We cannot engage in unprincipled interpretation of the law, lest we foment lawlessness instead of compliance," the court unanimously ruled in its 1985 decision United States v. Anzalone. Other federal appellate courts soon followed the 1st Circuit's lead in rebuffing criminal liability for structuring.
Congress had other ideas. Partly to "negate the effect" of cases like Anzalone, Congress explicitly prohibited "structuring transactions to evade reporting requirements" as part of the omnibus Anti-Drug Abuse Act of 1986. "The implicit message," one law review article noted, "is that no legitimate reason exists to keep large cash transactions secret."
A Moment of Sanity
In 1994, the Supreme Court tried to rein in structuring laws. This one, short-lived push for privacy began with some staggeringly bad luck during a night of gambling. Waldemar Ratzlaf and his wife, Loretta, were high rollers, with established credit lines at 15 different casinos in Nevada and New Jersey. On October 20, 1988, Waldemar managed to lose $160,000 playing blackjack at the High Sierra Casino in Reno. The casino gave the Ratzlafs one week to pay up.
True to their word, the Ratzlafs returned with cash to settle their debt. Since any transaction above $10,000 would have to be reported to the authorities, a casino official suggested that the casino could accept a cashier's check instead. The High Sierra even offered a limo and a casino employee to help Waldemar purchase checks, each for under $10,000 and all at separate banks.
One year later, a federal grand jury indicted Waldemar on "four counts of structuring currency transactions to evade reporting requirements." He was convicted and sentenced to 15 months imprisonment. Both a federal district court and the U.S. 9th Circuit Court of Appeals upheld his convictions.
Just when it seemed Waldemar's luck couldn't get any worse, the Supreme Court overturned his convictions in Ratzlaf v. United States. The Court was plainly concerned about the anti-structuring provision's potentially broad sweep. Contrary to the government's claim that "structuring is not the kind of activity that an ordinary person would engage in innocently," the Court observed that "currency structuring is not inevitably nefarious." The Court suggested that a small business owner might even reasonably structure cash transactions "to reduce the risk of an IRS audit."
These concerns led the Court to narrowly interpret the structuring statute. At the time, the law contained language requiring that defendants had "willfully" violated the law. For the Supreme Court, that requirement meant the government had to show "both 'knowledge of the reporting requirement' and a 'specific intent to commit the crime,' i.e., 'a purpose to disobey the law.'" In other words, ignorance of the law would be an excuse in a structuring case.
As a result, criminal structuring prosecutions plummeted. A 1995 Journal of Criminal Law and Criminology article reported that "since the Ratzlaf decision, not one defendant has been convicted for structuring currency transactions."
But Congress moved quickly to undo the Supreme Court decision. The Money Laundering Suppression Act eliminated the word "willfully" from the statute and clarified that it "requires only an intent to evade reporting requirements, not proof that the defendant knew that structuring was illegal." In September 1994, a mere eight months after the Supreme Court's decision, President Bill Clinton signed these changes into law.
Since Ratzlaf, the government has continued to ratchet up its data collection and enforcement efforts. More than 15 million currency transaction reports were filed in 2014, or over 41,000 every day. By comparison, in 1975, one year after the Supreme Court upheld the Bank Secrecy Act, a mere 3,418 such reports were filed.
Not surprisingly, those reports have helped law enforcement seize assets. Back in 2008, the Government Accountability Office surveyed local and state agencies that had access to currency transaction report data. More than half said the reports "identified assets that were previously unknown, including those that could be used for forfeiture action."
Today, the scale and scope of data collection under the Bank Secrecy Act has metastasized dramatically. According to a 2015 speech by Jennifer Shasky Calvery, the director of the Treasury Department's Financial Crimes Enforcement Network (FinCEN), data acquired under the Bank Secrecy Act "includes nearly 190 million records." FinCEN also has granted "more than 10,000 agents, analysts, and investigative personnel from over 350 unique agencies across the U.S. Government with direct access to the reporting," Calvery noted.
Yet amid this expanding federal dragnet, one aspect of the structuring law has remained static: the $10,000 reporting threshold. That figure was set in 1970 and has not changed since. Simply adjusting for inflation would mean it would easily top $60,000 in 2016.
As federal bank reporting laws have become more onerous, banks have begun to close accounts of businesses that make frequent deposits over $10,000. Jeff, Richard, and Mitchell Hirsch, three brothers on Long Island who own a convenience store distribution business, had three banks close their accounts in quick succession. To reduce the paperwork burdens for the banks, and hopefully avoid having their accounts closed in the future, their accountant advised them to keep deposits under $10,000. They did so, and in May 2012 the IRS seized their entire account—over $446,000. It took the Hirsch brothers almost three years of litigation to get that money back.
Stuck in Limbo
Despite its size and ubiquity, this government surveillance program operates outside the awareness of most ordinary Americans. Congress designed it that way: Federal law prohibits banks from informing customers that their transactions have been flagged and reported.
When a bank account is targeted for civil forfeiture, the property owner typically learns about it only after the contents have been seized. The IRS does not provide any prior notice or opportunity to offer an innocent explanation for a series of under-$10,000 cash transactions.
Courts instead approve seizures on the basis of one-sided affidavits submitted by law enforcement, frequently in sealed court proceedings. The affidavits are formulaic, containing long, boilerplate recitations describing the structuring laws and a table listing a series of under-$10,000 cash transactions. In Randy Sowers' case, the affidavit concluded that "cash was repeatedly deposited in amounts just below the [currency] reporting requirement threshold (i.e. between $8,000 and $10,000)" and that this bare pattern of deposits demonstrated "a concerted effort to keep cash deposits just below that amount."
After cash has been seized, property owners must wait a minimum of 120 days to get into court, and they must file two separate claims to preserve their right to their property. Even once the property owner is before a judge, litigation can stretch on for months, even years. The Institute for Justice report found that the average structuring case between 2005 and 2012 took almost a year to resolve, with the longest case taking more than six and a half years. Throughout that period, the property remains in possession of the government.
About a third of structuring forfeitures are resolved via "administrative" forfeitures that are not overseen or approved by a federal judge. In the case of North Carolina convenience store owner Ken Quran, for instance, a group of IRS agents and local police went directly to his store after seizing over $150,000 from his bank account, and demanded that Quran sign a form "voluntarily" agreeing to forfeit the seized funds. Intimidated, he agreed to sign. When he later took his case to a local lawyer, the lawyer advised him there would be no point in seeking to contest the forfeiture. "I feel like the United States government stole my money," Ken says. "I did nothing wrong."
Even where a judge is involved, the court's role is often little more than approving a settlement negotiated by federal prosecutors. Against the time and expense of litigation, the government typically offers property owners a tempting proposition: Settle with us, let us keep half of what we seized, and we will return half your money today. Business owners, struggling to keep their businesses running without needed funds, often have little choice but to agree.
After the IRS agents left his farm, Randy Sowers contacted a lawyer. His lawyer, in turn, reached out to the responsible federal prosecutor, Stefan Cassella, who explained right off the bat that the case would be resolved by negotiation. Both sides would propose a number below the total sum seized by the government, and the parties would then agree on a forfeiture amount.
This approach was no accident. Justice Department policies expressly state that "settlements to forfeit property are encouraged."
The Sowers needed the seized money to buy supplies for that year's crops. Their bank had closed the farm's account, and Randy was left explaining to his business partners why scheduled transactions were not going through. Meanwhile, fighting the case could easily end up costing more in legal bills than the amount of money that had been seized.
Sowers also had to consider the consequences if he refused the settlement. The same day that the government seized his account, it served him with a grand jury subpoena, raising the possibility that he could be charged criminally for structuring—and face up to five years in prison. The government's proposed settlement confirmed this implicit threat: In exchange for Sowers giving up his money, the government would agree not to pursue criminal charges.
Frustrated, he gave an interview to the Baltimore City Paper explaining that "we had no idea there was supposedly a law against" making small cash deposits. "Now we just feel like putting [our cash] in a can somewhere," he added.
Amid the settlement negotiations, Sowers' words became a sticking point. Cassella demanded he agree to less favorable terms than the prosecutor had offered in a similar case. When Randy's lawyers asked for an explanation, he wrote in an email that the other property owner "did not give an interview to the press."
Lacking any realistic route to fight the government, in May 2012, three months after the government seized his money, Sowers signed an agreement to forfeit $29,500.
'They Need to Give It Back'
Not long after Sowers agreed to settle, the mainstream media began scrutinizing structuring more, causing the government to start a hasty retreat. A decisive turn appeared to come in October 2014, when the IRS announced a new policy change. Absent proof that the property owner was engaging in some other criminal activity, it would no longer pursue "legal source" structuring cases.
The IRS announced this shift when The New York Times ran a front-page investigation into two structuring cases litigated by the Institute for Justice on behalf of the Hirsch brothers from Long Island and Carole Hinders, who ran a Mexican restaurant in rural Iowa. Five months later, the Justice Department announced a similar shift "restricting civil or criminal forfeiture seizures for structuring until after a defendant has been criminally charged or has been found to have engaged in additional criminal activity."
Yet those policy changes are purely voluntary. Since structuring laws still remain on the books, a future administration could easily reverse course and start seizing Americans' hard-earned money again. Moreover, while the shifts may prevent these types of cases from arising in the future—assuming the new policy is faithfully applied—they do nothing for the victims whose money was seized before the guidelines changed.
Between 2007 and 2013 alone, the IRS seized over $43 million from over 600 property owners in cases involving no allegations of wrongdoing apart from the mere act of evading bank reporting requirements. For those individuals, the government's policy change came too late.
Hoping to establish a precedent that other property owners could follow, the Institute for Justice in July 2015 filed petitions with the government on behalf of Ken Quran and Randy Sowers, seeking the return of their confiscated cash.
A bipartisan coalition in Congress has lined up behind that effort. In August 2015, members of the House Ways and Means Oversight Subcommittee sent a letter to Treasury Secretary Jacob Lew urging the agency to "return funds as appropriate in cases that do not meet the IRS's current policy that the funds must have come from an illegal source."
Fortunately for Quran, in February 2016 the agency agreed to return the entire $153,000 that it had unjustly seized.
Sowers still hasn't heard an answer to his petition. The federal government has never explained why, if it is willing to return the money that it seized from Quran under the structuring laws, it is not willing to do the same for him.
"I'm just waiting for the government to do the right thing," he says. "Not just for me, but for everyone in this same situation. The government shouldn't have taken our money, and they need to give it back."