Smurfing and OFAC
Originally Published June 10, 2014
How Your Under-$10,000 Transactions Can Actually Raise Your Profile for Investigations by the Feds
Whenever a U.S. financial institution is involved in a transaction and that transaction involved at least $10,000 in cash, bearer instruments, or foreign checks, that financial institution is obligated to file a Currency Transactions Report (CTR) (i.e., FinCEN Form 112) with the Department of the Treasury. Moreover, a similar requirement also requires “all persons engaged in a trade or business,” not just banks, who receive at least $10,000 in cash to file a report with the IRS (i.e., FinCEN Form 8300).
Naturally, people who wanted to avoid having their transactions reported to the federal government began structuring their transactions to avoid triggering these reporting requirements. Effectively they divided their single transactions into smaller transactions of under $10,000 to skirt the requirement. The practice of structuring came to be known as “smurfing,” after the popular children’s cartoon featuring short, blue characters.
In response, Congress closed this loophole by passing 31 U.S.C. § 5324(a). This statute provides that “[n]o person shall for the purpose of evading the reporting requirement . . . structure or assist in structuring, or attempting to structure or assist in structuring, any transaction with one or more financial institutions.”
All violations of this particular statute are punished criminally. In general, whoever violates § 5324 can be imprisoned for up to 5 years. However, if the offense is related to a violation of another law (e.g., tax evasion, economic sanctions, or export controls) or is part of a pattern of illegal activity, the maximum term of imprisonment is increased to 10 years and may include a substantial fine.
Financial institutions, banks, and many businesses have been educated on identifying the signs of smurfing. Such signs include undertaking multiple transactions in a short period of time, structuring transactions at or right below the $10,000 limit, and visiting multiple banks to conduct a single transaction to name a few. If a financial institution notices such signs, it is obligated to file a Suspicious Activity Report (SAR) with FinCEN detailing the transaction and why it thought it was suspicious. This SAR is filed without any notice to the person it targets.
After an SAR is filed, the Government may begin investigating the target. FinCEN, the nation’s financial intelligence unit, will process the SAR and may refer it to the appropriate federal agency for prosecution or investigation. This can include the Department of Justice or OFAC.
In my years of practice I have seen several cases where the Government mistakenly identified a set of financial transactions as smurfing, which then led to protracted criminal investigations of other more serious criminal offenses.
In one such case a young Iranian-American couple was receiving lawful non-commercial remittances from their parents located in Iran. Many of these remittances were right below the $10,000 limit because of financial restrictions in Iran. The Government believed this couple was structuring their transactions to conceal their dealings with Iran. When in fact, such remittances to and from Iran were lawful and there was no reason to conceal them. It took over a year for the Government to cease its investigation.
In another case, a new business owner had made multiple bank deposits right below the $10,000 limit. The business owner had been informed by his insurance carrier that it would insure the first $10,000 of every deposit he made. So naturally, he kept all of his deposits under $10,000 limit. The Government mistakenly identified the deposits as structuring and opened an investigation into both structuring and tax evasion.
Inadvertently structuring your transactions invites Government scrutiny. There are so many federal laws on the books that inviting such scrutiny may in fact lead to the discovery of other inadvertent violations of federal laws. To avoid the headaches, costs, and risks associated with defending against a federal criminal investigation, one should assess whether his or her financial transactions can inadvertently appear as smurfing.
Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes. Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.