CALIFORNIA’S TRaCE THE MONEY PROGRAM
Deputy Attorney General, Financial Fraud and Special Prosecution Unit, California Department of Justice
California loses billions of dollars to the underground economy. Fighting fraud and tax evasion is a difficult, multidisciplinary problem requiring many resources. One answer to this problem came in California Assembly Bill 576, which created a pilot program: the Tax Recovery and Criminal Enforcement (TRaCE) Task Force.
The mission of the TRaCE Task Force is to combat organized elements of the underground economy engaged in economic crimes resulting in evasion of business, payroll, and income taxes. This includes the manufacture, importation, distribution, and sale of counterfeit and pirated intellectual property.
The Task Force is comprised of investigators, special agents, and prosecutors from multiple agencies. This team works together to investigate, prosecute, and recover revenue lost to the underground economy. TRaCE partners include the California Department of Justice, the Board of Equalization (BOE), Department of Motor Vehicles (DMV), Employment Development Department (EDD), Franchise Tax Board (FTB), Federal Bureau of Investigations, Internal Revenue Service, and Homeland Security Investigations. The Task Force has an advisory Executive Board.
The Task Force has existed only since 2014, yet has already had some successes. Its initial work led to seven warrants and later seizure of thousands of illegal, foreign, gray market pharmaceuticals and articles of counterfeit clothing in the Sacramento area. In another case, TRaCE investigated and recovered hundreds of counterfeit Viagra pills. Just recently, a search warrant yielded hundreds of counterfeit luxury items sold at a market in the California Bay Area.
At least once monthly, the Task Force meets to review all leads received. These leads come from the TRaCE website depository where people can anonymously post an issue or suspected crime. Leads are also generated through local and federal law enforcement, independent investigative groups, trade associations, and industry partners.
Once a lead is received and distributed on lead day, the Task Force delves into various databases to investigate. Through memorandums of understanding, member agencies are allowed to share intelligence with each other without violating privacy protections and related statutes.
By researching the problem together in a fusion center environment, Task Force members can quickly sketch a preliminary financial picture. This allows it to evaluate the strength and severity of a case and determine whether to keep it or triage it to another agency for civil or criminal enforcement.
The Task Force identifies various red flags for counterfeiting activity. These may include, for example, taxable personal income not matching with taxable business revenues for a sole proprietor selling both counterfeit clothing and legitimate merchandise. No one clue is conclusive but is simply one piece of the puzzle.
Because of its multiagency approach, the TRaCE Task Force can capitalize on pooled investigative resources and coordinate with multiple jurisdictions. It can take down larger counterfeit rings because the Task Force looks not just at counterfeiting under California Penal Code 350 (counterfeiting) and 653a (piracy), but also at tax evasion, money laundering, labor code violations, and other white-collar offenses.
By working with taxing agencies, TRaCE can quickly follow the money in ways other agencies cannot. Auditors from the taxing agencies can efficiently point out anomalies in a particular taxing year, or determine that further analysis is unnecessary because the suspect is actually in compliance with tax law. The Task Force can cull and compare credit card and cash receipts and compare them to common ratios for an industry. Many times, a lead that looks suspicious will turn out to have a good explanation after minimal investigation.
In other cases, investigators find anomalies that add to a probable cause determination. Whatever the case may be, there are so many frauds out there, it takes a team to figure out which one – if not many – is being employed. The key is to have the experts from different fields in the room as we investigate. A BOE auditor can scour receipts quickly, while an FTB agent compares personal income to the profit and loss sheet of a partnership.
A SWEET SPOT
Some cases are too big and complicated for county district attorney offices, but too small for Assistant United States Attorneys. These cases fall in a sweet spot for TRaCE to take. Most of our counterfeit cases originate with goods arriving at a single point of entry such as a port, and then becoming distributed through the State of California, creating jurisdictional challenges. Discovering cross-jurisdictional patterns and working with our federal partners is generally not something that local law enforcement can handle. TRaCE is uniquely suited to break down cases crossing jurisdictions within the state and get to their root cause.
TRaCE does not have a threshold amount of counterfeit items, or an amount of money that must be lost or collected when deciding whether to refer a case for prosecution. Instead, it looks at the actions and history of the defendant, the severity of the harm, and the deterrent affect that prosecution will bring.
Given the success that TRaCE has enjoyed in the anti-counterfeiting arena, other states should look into adopting its model to combat this pervasive threat to our economy. The taxes lost, the potential public harm that faulty counterfeit products pose, and the theft of intellectual rights should not be ignored. More robust task forces in state-federal partnerships can make a lasting impact in reducing criminal counterfeiting.
THE BRAND PROTECTION PROFESSIONAL | SEPTEMBER 2017 | VOLUME 2 NUMBER 3
2017 COPYRIGHT MICHIGAN STATE UNIVERSITY BOARD OF TRUSTEES