Check Cashers Provide Mechanism for Tax Evasion
As the Commission approached the conclusion of its three-day hearing, the testimony focused increasingly on specific problems in the check cashing industry and on what reform proposals could best resolve these problems. As emphasized throughout the public hearing, the role of check cashing outlets as a mechanism for tax evasion and other frauds highlighted the Commission's investigative findings. The secretive conversion of checks into cash through such entities particularly interested the U.S. Internal Revenue Service, to which a number of cases uncovered by the SCI's probe had been referred even before the hearing began. The IRS assisted the SCI during the inquiry and not only closely monitored the public proceedings but also assigned a representative to testify about the agency's overall reaction to the litany of fiscal misconduct that had been put into the record. The IRS spokesman, James J. Lane, the north Jersey branch chief in the IRS Criminal Investigation Division and a 25-year IRS veteran, testified that check cashing companies offered unusual opportunities for income tax frauds:
BY MS. GAAL: Q. During your tenure at IRS have you come into contact with check cashers in New Jersey who have violated the law?
A. Yes, we have.
Q. Have you also come in contact with individuals or businesses who utilize New Jersey check cashers to violate the law?
A. Yes. It's a perfect marriage. The check cashers provide the opportunity for legitimate business entities as well as illegal entities to generate cash.
CTR Law Key Monitoring Tool
Lane, testifying from the viewpoint of an IRS enforcement chief for north Jersey, described the importance of compliance with the federal law requiring all financial institutions, including check cashers, to file Currency Transaction Reports (CTRs) when more than $10,000 in cash is involved. He testified that the IRS has made a "concerted effort" to enforce the law since the early 1980s, with such vigor, in fact, that CTR filings in New Jersey alone soared from a mere 13,500 in 1982 to close to 150,000 in 1987. Chief Lane explained that the upward trend for CTR filings is nationwide in scope. He also indicated that, 1) as a result of the increased CTR filings, money laundering probes by the IRS have multiplied to such an extent that his agency now has a "full group involved in money laundering type of investigations," and 2) that increased compliance with the CTR law by banks and other traditional financial institutions has apparently been a factor in the huge rise in check cashing activity at check cashing outlets. Lane expanded on these topics in response to questions by Counsel Gaal:
Q. Sir, our investigation has revealed that with respect to the check cashing industry in New Jersey there is a marked increased in the total number of checks being cashed as well as an increase in the dollar amount of checks cashed at check cashers. Also the average dollar amount of checks is on the rise. To what would you attribute that?
A. Well, I think it's a direct result of the vigilance we've maintained with some of the other financial institutions. As I indicated, we were very aggressive in the early 1980s as far as banks [were concerned]. In May of 1985 the casino industry came on ... and we did have a number of specific instances during that period where money launderers did use banks and the casinos as well as other financial institutions. I think [money launderers are] looking for the type of accommodation that the check cashers provide, and it's not surprising at all that the volume that is going through the check cashers now has increased to that extent.
Q. Will banks typically refuse to cash checks that are made payable to corporations and businesses?
A. Yes.
Q. Do they generally require that those checks be deposited into a business account?
A. That is the normal way of doing business, yes.
Q. Have CTR cases [been] developed either from information obtained from check cashers or because check cashers themselves failed to comply with the CTR requirements?
A. We have initiated investigations on CTR violations involving check cashers but primarily they [are] criminal investigations ... Requirements from the check cashers are minimal, so, by and large, we have penetrated the check cashing industry through our criminal investigations involving tax evasion and/or money laundering.
Q. Are there cases in New Jersey where individuals use check cashers to evade the income tax?
A. Oh, there's no question, yes.
Q. Are there cases where check cashers have been used by people who wish to generate cash for payoffs?
A. Yes.
Q. Are you familiar with any particular political payoffs or payoffs to political officials, elected officials?
A. The specific case I have in mind has that potential, I guess.
Q. Is this something current that you're working on?
A. Well, yes, there is [a] continuing investigation that really has evolved through the check cashing phase. It's my understanding
that-and this is going back a few years-in connection with the Musto case, the former mayor of Union City, that check cashers were involved to generate cash, but it's a natural sequence. To the extent that business checks are diverted and cashed or fictitious checks are used and cashed, the cash loses its identity and the paper trail comes to an end so that the cash can be used for any purpose; for payoffs, for pure tax evasion, to fund an illegal operation, [such as] gambling, to purchase narcotics. Once the cash gets into [an] individual's hand, he can use it for a variety of purposes.
Q. Does [any] past investigation concerning an
unlicensed check casher come to mind?
A. Yes, it does. During the early 1980s we investigated an unlicensed check casher [as well as] factors and note buyers. Basically we determined, once we zeroed in on that check casher, that they had generated approximately 14 million dollars in cash in violation of the currency reporting requirements. As a result of that investigation of the check casher, we were able to identify a contractor who cashed in excess of $600,000 in checks through that check casher.
Organized Crime and Tax Frauds
Chief Lane conceded that organized crime members and associates had figured in a number of IRS inquiries involving check cashers. Responding to Counsel Gaal's questions:
Q. Have you seen or suspected the presence of organized crime in connection with any of your check cashing investigations?
A. Yes. We did have a situation [when] one individual by the name of John Bilotti was involved with check cashing through a bank in North Jersey. Ultimately when the heat was brought on that bank, he utilized the services of [a] check casher and the indication was that the bulk of the checks that he was negotiating were checks from New York City. Ultimately, what our investigation zeroed in on, he was subpoenaed by the Organized Crime Task Force in North Jersey. Unfortunately, before he was brought to the Grand Jury, he was killed and his body was found, I think, a couple of blocks from our office in New York, but the subpoena was still in his pocket.
Q. What can organized crime use check cashers for?
A. Well, basically the primary purpose is to generate untraceable cash. Once they accomplish that, either through diversion of income checks or through fictitious checks or the laundering of small denomination bills, they can use [the cash] for whatever purpose they deem appropriate. In effect, [money] loses its identity. There's no paper trail and they can use [the proceeds] for whatever purpose they want-kickbacks, narcotic trafficking, loansharking, gambling. The sky's the limit.
Disguising Check Casher's Identity
Some clients of check cashers do not, for questionable reasons, want their checks to bear the endorsement of a check casher, as required by the check casher law. Chief Lane described how this requirement is circumvented:
Q. One of the issues that has come up in our investigation involves the use of a stamp that disguises the transaction as having gone through a check casher. In other words, the endorsement stamp does not bear the words 'licensed check casher." Have you seen any instances of that in your investigations by the IRS?
A. Yes, we have, and, in effect, that [violation] provides us with a tremendous problem in trying to follow the paper trail. To the extent that we see the check go through and it has the endorsement, "For Deposit Only" of the check casher, there's an indication to us that the check has been cashed but, you know, that could be legitimate. But if the "For Deposit Only" stamp doesn't indicate it went through the check casher, then it wouldn't raise a suspicion, so when they use that type of a disguise to hide the transaction, it certainly
thwarts the paper trail as far as following through to see what actually happened with the check.
Bankruptcy Fraud, Bust-Outs
Q. One of the other issues that's come up during the hearing is bankruptcy fraud. Can that be facilitated through the use of check casher?
A. Very definitely, to the extent that they're dissipating assets and generating checks to fictitious entities or diverting receivables or income checks, the check casher provides a natural service to provide cash back in the hands of the individuals that are perpetrating the bankruptcy.
Q. Another activity is one which has been described during this hearing, a bust-out. Can a check casher be used to facilitate bust-outs?
A. Very definitely ... [a check casher] provides an excellent vehicle to generate the cash that they can do whatever they want with-to the extent that the reporting requirements are not met. Even beyond that, they can structure transactions in low amounts and get beyond our reporting requirements.
Q. In other words, keep the amount of the transaction under $10,000?
A. Right.
Q. Another scenario that's been described during this hearing is the use of check cashers to avoid tax liens or liens and judgments placed upon bank accounts. Again, could a check casher be utilized to facilitate that?
A. Yes, very definitely, to the extent that we had a lien on the known assets of all the bank accounts, once an individual gets an incoming check, diverts that to a check casher, generates cash which he can put in his pocket as opposed to going into an account that we would have control of, so by all means they can avoid any type of a lien-including federal.
Loansharking and Other Issues
Q. What about the use of check cashers to facilitate loansharking or gambling, and I'm speaking in particular about using checks for payment?
A. Well, again, it's a natural to the extent that they can provide that service to convert the instrument to cash and for loansharking purposes ... in that they can create [a situation] where an individual can, in effect, pay off his personal gambling debts by making a check payable to a fictitious entity, write it off on his books, cash the check and then pay off his gambling debt. It provides a number of opportunities for individuals to generate cash to make illegal payments, either shylock payments or gambling payments.
IRS Chief Suggests Reforms
Chief Lane acknowledged that the increasing use of check casher outlets as an alternative to traditional banking institutions provided opportunities for generating cash that could also promote frauds and other crimes:
Q. What is your opinion concerning the increasing importance, if there is an increasing importance, of check cashers in this state?
A. Well, I feel that with the regulations [governing] other financial institutions and the increased compliance, [required], that check cashers, in effect, have become the only game in town to generate cash-not to say that, from an isolated situation a bank where you had an officer [to permit you to] accomplish the same thing-but they have ready access to the money, they provide a ready means to generate cash for whatever purpose and because of the restrictions on the various other financial institutions check cashers have, in effect, taken on all this additional activity from legitimate business entities that are looking to avoid income, evade income [taxes and] any number of illegal activities [for which it is necessary] to generate cash.
Q. Have you given any thought to some recommendations that you would like to present to the Commission?
A. Yes. We've had a number of discussions regarding the problems that have been created ... with our investigations once they get to that level of the check cashers. Obviously, in New York State they do not cash checks in excess of $2,500. Normally, check cashers ... act as an accommodation for individuals who don't maintain bank accounts so it would seem inappropriate that they would need to cash checks in those ranges over $2,500. That dollar limit is something that, I guess, would have to be looked at. I'm not sure how long that has been in effect in New York ... I think the primary role of the check casher is to accommodate people who don't use the banking industry and that would seem to [require] some maximum on the amount of the check that can be negotiated. Obviously, the cashing of corporate checks creates a tremendous problem for us, particularly to the extent that they use, you know, the bogus [endorsement] stamps. It has all the aura of a real transaction, so I definitely recommend that they be precluded from cashing corporate checks. Realistically, I would say that there should be a positive ID on the payee of the check. They should make every effort to identify that if John Jones comes in with a check made out to him, that he is, in effect, John Jones and not someone else using [a] fictitious identity. I strongly recommend that a positive ID of the individual who is negotiating a check [be obtained].
IRS Reform Proposals Reviewed
As Chief Lane concluded his observations reflecting the IRS reaction to SCI probe findings, the Commission questioned him about his reform proposals:
BY COMMISSIONER DUMONT: Mr. Lane, with respect to corporate checks, apparently in New York the check casher [cannot] cash corporate checks. Is that correct?
WITNESS: That's correct. That's my understanding.
BY COMMISSIONER DUMONT: Are you saying that New Jersey should adopt that same standard?
WITNESS: Yes.
BY COMMISSIONER DUMONT: You also are indicating that New Jersey should put a limit on the amount of the checks cashed so that the check cashing service is still available to lowincome people who do not use banks but not available to the abusers that we've discussed. Is that correct?
WITNESS: That's correct.
BY COMMISSIONER DUMONT: Are there any other regulations in New York that you think New Jersey should adopt?
WITNESS: Basically those are the ones we've been exposed to because, based on our investigations, that [is what] has caused the people from New York to come to New Jersey to negotiate checks. Those are the ones that go to the heart of our investigations and we feel that, to the extent that those same regulations were to be put into effect in New Jersey, it would be a great boon to us in the conduct of our criminal cases.
BY COMMISSIONER DUMONT: I take it, due to the efforts of IRS in the early 1980s with respect to banks, that there has been, as you testified, greater compliance in the banking industry. Has that driven people to check cashers as a means of evading the CTR requirement?
WITNESS: Yes. I think very definitely it has.
BY COMMISSIONER DUMONT: Let me ask you: You referred to the Musto case. Would you tell me how check cashers were used in that case to facilitate the crimes that were involved?
WITNESS: That was in response to a specific request, I guess, about payoffs, and I'm not totally familiar with that investigation but ... bogus checks were cashed through a check casher [which] generated the cash used to make the specific payoffs.
BY COMMISSIONER DUMONT: There were payoffs then to politicians?
WITNESS: Political payoffs, yes.
BY COMMISSIONER DUMONT: But the cash generated through the check cashers was used, as far as you could tell from your review of the file, for illegal payoffs. Is that correct?
WITNESS: That's correct.
BY COMMISSIONER DUMONT: Now, just one final area: You indicated that through the use of check cashers the paper trail is lost. Could you tell me how this is different than through using a bank?
WITNESS: Well, by and large with a bank all checks are deposited and if anybody looks at that check they can see that the check actually went into the bank account both by the endorsement and through the deposits in the account, the account statement, so there is a specific paper trail. If I have expenditures, I deposit the income check ... it's reflected as income and then I generate the checks to make payments for the expenditures. With a check casher that whole system, to the extent that they don't report, goes out of whack because the individual comes in, the check doesn't go through his account. That doesn't necessarily mean it isn't reported but anybody looking at that check would see that the check, in fact, was cashed so it would raise a question. But to the extent that the check casher used the "Deposit Only" stamp and [had] not referenced that it was cashed through him, then it [would] look like a legitimate transaction (as] if the check went into the account of the payee. I guess the real problem is fictitious checks. If we saw a series of income checks going through a check casher, we'd have a serious question ... to the extent that you've got fictitious checks.
BY CHAIRMAN PATTERSON:
Just to make sure the record is clear, I don't believe New York has any regulation against cashing corporate checks through a check casher. What happens is there is one bank in New York City that accepts checks from the check casher but they will not accept corporate checks from the check casher, which effectively blocks the cashing of corporate checks in New York. I point that out because in order
to prevent it in New Jersey you'll have to have a regulation saying you can't-a check cashing company can't accept such a check or can't cash such a check or you'll have to work through the banks in such a way that they won't clear such checks or won't accept such checks.
BY COMMISSIONER EVENCHICK:
I gather, sir, from your testimony that since 1986 the effectiveness of the Federal law on cash transaction reporting has been enhanced by virtue of increased civil and criminal penalties for the failure to make such reports. Is that correct?
WITNESS: That is correct, yes.
COMMISSIONER EVENCHICK: Would you then predict, on the basis of your experience with the federal law as it pertains to the CTRs, that New Jersey's ability to control abuses in the check cashing industry might be enhanced if there were new and more stringent civil and criminal penalties associated with the failure to comply with the regulations?
WITNESS: Yes, by all means. As I indicated, in 1986 the new money laundering law went into effect and criminal as well as civil sanctions were raised substantially and that did certainly increase compliance.
COMMISSIONER EVENCHICK: I understand that at the moment there are no criminal penalties in New Jersey for failure to comply with the regulatory scheme and if that's true, I would not be surprised to find recommendations coming out of these hearings that consideration be given to adopting criminal legislation.
