The Birth of the Anti-Smurfing Statute
Imagine for a moment that you’re back in 1986. “Addicted to Love” by Robert Palmer is playing on the radio. You’re on your way to the movie theater to watch “Aliens” starring Sigourney Weaver. Meanwhile, in Washington, DC, the “War on Drugs” is in full swing. President Ronald Reagan is promoting a new anti-money laundering bill that he believes will help win it.
A small part of this 1986 law contains a little-known section reminiscent of another 1980s icon, the Smurf. These blue, elf-like creatures, only a few inches tall, starred in their own Saturday morning cartoon show. Individually, the tiny Smurfs were helpless, but when they banded together, they could defeat the evil wizard Gargamel, who regularly threatened their forest village.
Structuring: The Crime and Its Consequences
At the same time, drug dealers (and anyone else dealing with large amounts of cash) were using an obvious method to avoid government scrutiny.
Since 1970, federal law has required that cash transactions over $5,000 (later increased to $10,000) be reported to the IRS.
Those dealing in cash quickly realized that if they kept deposits below $10,000, banks didn’t need to file the form.
But if you have millions of dollars in cash to recycle through the banking system, you need many people, each making transactions for under $10,000.
All these cash couriers making their $9,500 deposits reminded Gregory Baldwin, a federal prosecutor in Miami, of the Smurfs’ collective efforts to defeat Gargamel.
The 1986 statute that criminalized this activity became informally known as the “anti-smurfing” statute.
The real term for the crime the anti-smurfing statute criminalized is “structuring.”
What is Structuring?
Structuring, also known as “smurfing”, is the act of breaking up a cash transaction into smaller amounts to avoid the $10,000 cash-reporting rule.
If prosecutors charge you with structuring, you could face a five-year prison sentence and a $250,000 fine.
But the law also lets prosecutors seize every dollar in your bank account, even if they’ve never indicted you. The government can confiscate legally earned, after-tax earnings from your business or any other source without needing to prove the money is “dirty.”
Federal Register Notice and Withdrawn Regulation
On March 11, 1988, a notice in the Federal Register proposed posting an announcement in every US bank stating that “smurfing” was now illegal.
But the proposed regulation was quietly withdrawn.
Predictably, the vast majority of smurfing investigations involved innocent, non-criminal activity.
A 1991 Treasury Department analysis concluded that over 75% of the money seized under the structuring law belonged to people not involved in illegal activity.
A Legacy of Injustice
This practice has continued for 28 years, stripping thousands of law-abiding Americans of their savings and, in many cases, imprisoning them.
A textbook case is that of Daniel Aversa, who was sentenced in 1993 to a mandatory prison term for conspiring with a friend to hide income from his wife. The scheme, which involved smurfing, triggered reports of suspicious transactions in their bank accounts.
After sentencing, Judge Martin Loughlin wrote that Aversa should never have been prosecuted for structuring currency transactions, as the evidence showed he wasn’t attempting to avoid paying tax or disguise the money’s source. The charges were brought because it was easy.
In 1994, the Supreme Court overturned the conviction of another defendant convicted of structuring because prosecutors couldn’t prove the defendant knew it was illegal.
Congress responded in 2000 with a law making structuring punishable even without needing to prove specific knowledge that it was unlawful.
Modern-Day Enforcement
Today, nearly three decades after the original law’s enactment, most structuring investigations still involve legally earned, after-tax funds.
Prosecutors favor the law because winning is easy, and seizing agencies keep a cut of what they’ve confiscated – sometimes up to 80%.
More than 100 multiagency task forces now comb through the 700,000 Suspicious Activity Reports that banks file annually, looking for accounts to seize.
According to a report from the Institute for Justice, the IRS initiated only 114 smurfing seizures in 2005. By 2012, that number had grown to 639. In modern structuring cases, criminal charges are brought only 20% of the time.
Victims of Structuring
The victims’ profile hasn’t changed much since the 1980s:
- A woman who owned a Mexican restaurant lost $33,000 to the IRS after following her mother’s advice to keep deposits under $10,000 to avoid paperwork.
- A grocery store owner in Michigan lost more than $35,000 because his insurance policy only covered losses up to $10,000.
- An army sergeant lost $66,000 after a bank teller suggested keeping deposits below $10,000 to avoid a second round of taxes.
When someone fights back against the seizure, prosecutors usually offer a plea deal: if they don’t contest the confiscation, they won’t go to jail.
This almost always works, and those who fight rack up huge legal bills. A typical retainer for an attorney who handles structuring cases starts around $20,000.
Sometimes the IRS offers a partial settlement, seizing your cash and asking for a ransom to get it back.
IRS Changes Course
For decades, I’ve criticized the IRS’s enforcement of anti-smurfing laws. But finally, the agency has decided to back down – a little.
Last month, The New York Times published an exposé on the anti-smurfing laws, highlighting some recent examples. For the first time since 1986, the anti-smurfing statute was in the spotlight.
Instead of defending the practice, Richard Weber, the chief of the IRS Criminal Investigation Division, announced that the IRS would no longer confiscate funds associated solely with “legal source” structuring. But exceptions remain for “exceptional circumstances,” and the new policy doesn’t apply to past seizures.
International Perspective and Strategies
The anti-smurfing statute is unique to the US. There’s nothing like it internationally, although many countries require reporting large cash transactions to a national anti-money-laundering authority.
Some countries, including Australia and Canada, also ban “parceling” transactions into smaller amounts to avoid reporting, but they target only illicit funds, not legally earned cash.
The US is the only country with anti-smurfing laws explicitly targeting lawful funds.
To avoid structuring penalties, avoid structuring currency transactions in the US.
Despite the new policy, the IRS could revert to the old policy once media attention shifts. Since seizing agencies keep most of the cash they grab, there’s plenty of incentive to do so.
Another strategy is to move your money out of the US to a financial system where the government doesn’t view your legitimate assets as a piggy bank.
5 Reasons to Have an Offshore Bank Account
An offshore bank account is one of the most traditional ways to start your overseas journey. It’s a very useful tool if you plan to invest in another country, buy foreign real estate, or want to move some of your assets out of harm’s way here in the US.
Unfortunately, it is no longer as easy as it once was for US clients. Thanks to laws like the Foreign Account Tax Compliance Act (FATCA), many banks don’t want to work with Americans.
But no longer easy doesn’t necessarily mean impossible.
In this article – Why Have an Offshore Bank Account. – we’re talking about what offshore banking actually is, why it matters, and the ways a US client can open an offshore account.
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