In The Courts

As to the district court's jury instruction on the willfulness requirement for criminal liability under the Embargo, the Second Circuit held that the district court properly instructed the jury that the government must prove Gavidel acted with knowledge that his conduct was unlawful. Moreover, there was sufficient evidence of willfulness where 1) on two occasions, Gavidel's bank declined transfer requests involving his account because it suspected Gavidel of attempting to funnel money into Iran; 2) on both occasions, the Treasury Department's Office of Foreign Assets Control issued a letter to Gavidel inquiring about his business relations with Iran and referencing Treasury Department regulations relating to the Embargo; and 3) Gavidel conducted his business operations in stealth, using code words for his transactions.

Element of Materiality for Charge of Failure to Disclose

In United States v. McLaughlin, 2004 WL 2348181 (3d Cir. Oct. 20, 2004), the Third Circuit considered whether the jury was required to determine the element of materiality for a charge of failure to disclosure a material fact in a report to the Secretary of the Department of Labor, in violation of 29 U.S.C. ' 439(b). Section 439(b) provides penalties for “Any person … who knowingly fails to disclose a material fact, in any document or report … required under … this subchapter” (emphasis added). The subchapter details the reporting requirements of labor organizations, officers and employees of labor organizations, and employers.

Steven McLaughlin, president of a local labor union, was convicted for violating ' 439(b) for failing to disclose a material fact in an LM2 report. In an LM2 report, a labor union must disclose, among other things, disbursements it has made to its officers. McLaughlin allegedly prepared and filed on behalf of the union the LM2 report but failed to disclose his receipt of certain benefits and reimbursements from the union. With respect to this charge, the district court instructed the jury that as a matter of law the government satisfied the requirement of materiality under ' 439(b).

Adopting precedent interpreting other federal statutes with a materiality requirement, the Third Circuit held that materiality was an element of the offense under ' 439(b) and therefore had to be determined by the jury. The Third Circuit, however, affirmed the conviction finding that the erroneous instruction was a harmless error.

Jury Instructions Establishing Good-Faith Defense to Criminal Tax Evasion Were Proper

In United States v. Pensyl, 2004 WL 2309965 (6th Cir. Oct. 15, 2004), the Sixth Circuit considered jury instructions relating to the defendant's good-faith defense. A jury convicted Jon Pensyl of three counts of attempted tax evasion under 26 U.S.C. ' 7201 for not filing personal state or federal income tax returns and for failing to withhold payroll taxes for his employees of his dental practice. Pensyl presented a good-faith defense claiming that he did not know he was liable for income taxes, because his independent research into the tax code did not establish to his satisfaction that he was obliged to pay income tax. As a result, he argued that his failure to pay taxes was not a willful failure as required by ' 7201. At trial, Pensyl objected to jury instructions that allowed the jury to consider the reasonableness of his belief in determining whether his actions were willful. He also objected to portions of the jury instructions that he claimed confused the jury by establishing good faith as a defense to criminal tax evasion while simultaneously reminding the jury that ignorance of the law is traditionally not a bar to a criminal conviction.

On appeal, the Sixth Circuit affirmed the conviction after finding that the jury instructions at issue were not erroneous. First, the court held that the instructions allowing the jury to consider the reasonableness of Pensyl's beliefs in their deliberations of willfulness accurately stated the law. The court distinguished Cheek v. United States, 498 U.S. 192, 201 (1991), where the Supreme Court held that a jury instruction was improper for instructing the jury that an unreasonable belief does not negate willfulness. In contrast, the district court in Pensyl instructed the jury that it could consider reasonableness in their evaluation of Pensyl's good-faith defense, but the court did not decide the issue for the jury.

Second, the court held that the jury instructions providing for a good-faith defense to criminal tax evasion while simultaneously reminding the jury that ignorance of the law is traditionally not a bar to a criminal conviction did not confuse the jury. According to the court, another instruction linked the concepts of good faith, ignorance of the law, and willfulness in a clear and straightforward manner so as not to cause confusion. This instruction provided: “A defendant does not act willfully if he believes in good faith that he is acting within the law or that his actions comply with the law. This is so even if the defendant's belief was not reasonable as long as he held the belief in good faith.”

'Services' Prohibited By Embargo

In United States v. Homa International Trading Corp., 2004 WL 2367821 (2d Cir. Oct. 22, 2004) (per curiam), the Second Circuit held that “services” prohibited by the trade embargo against Iran (the Embargo) included transferring a customer's money to Iran for a fee. A jury convicted Mazyar Gavidel and Homa International Trading Corp., a business owned and operated by Gavidel, for violating the Embargo by transferring $277,045 from the United States to Iran, in violation of 50 U.S.C. ” 1702, 1705(b); Executive Order 12959; and 31 C.F.R. ” 560.203, 560.204, and 560.406(b). The Embargo prohibits the “exportation … directly or indirectly from the United States … of any goods, technology, or services to Iran.” 31 C.F.R. 260.204 (emphasis added). At trial, the government established that Gavidel transferred funds on behalf of customers from the United States to bank accounts in Iran via Dubai, U.A.E. On appeal, Gavidel argued that 1) there was insufficient evidence to demonstrate that the money-transfer services were “services” prohibited by the Embargo; and 2) that the district court's jury instruction on the element of willfulness, as it related to Gavidel's breach of the Embargo, was erroneous.

The Second Circuit interpreted “services” to refer to the performance of something useful for a fee. The Second Circuit then noted that the Embargo prohibited exportation of services where the benefit of such services was received in Iran if the actual services were performed in the United States. Putting these two principles together, the Second Circuit held that Gavidel's activities of transferring a customer's money to Iran for a fee were violated the Embargo.

As to the district court's jury instruction on the willfulness requirement for criminal liability under the Embargo, the Second Circuit held that the district court properly instructed the jury that the government must prove Gavidel acted with knowledge that his conduct was unlawful. Moreover, there was sufficient evidence of willfulness where 1) on two occasions, Gavidel's bank declined transfer requests involving his account because it suspected Gavidel of attempting to funnel money into Iran; 2) on both occasions, the Treasury Department's Office of Foreign Assets Control issued a letter to Gavidel inquiring about his business relations with Iran and referencing Treasury Department regulations relating to the Embargo; and 3) Gavidel conducted his business operations in stealth, using code words for his transactions.

Element of Materiality for Charge of Failure to Disclose

In United States v. McLaughlin, 2004 WL 2348181 (3d Cir. Oct. 20, 2004), the Third Circuit considered whether the jury was required to determine the element of materiality for a charge of failure to disclosure a material fact in a report to the Secretary of the Department of Labor, in violation of 29 U.S.C. ' 439(b). Section 439(b) provides penalties for “Any person … who knowingly fails to disclose a material fact, in any document or report … required under … this subchapter” (emphasis added). The subchapter details the reporting requirements of labor organizations, officers and employees of labor organizations, and employers.

Steven McLaughlin, president of a local labor union, was convicted for violating ' 439(b) for failing to disclose a material fact in an LM2 report. In an LM2 report, a labor union must disclose, among other things, disbursements it has made to its officers. McLaughlin allegedly prepared and filed on behalf of the union the LM2 report but failed to disclose his receipt of certain benefits and reimbursements from the union. With respect to this charge, the district court instructed the jury that as a matter of law the government satisfied the requirement of materiality under ' 439(b).

Adopting precedent interpreting other federal statutes with a materiality requirement, the Third Circuit held that materiality was an element of the offense under ' 439(b) and therefore had to be determined by the jury. The Third Circuit, however, affirmed the conviction finding that the erroneous instruction was a harmless error.

Jury Instructions Establishing Good-Faith Defense to Criminal Tax Evasion Were Proper

In United States v. Pensyl, 2004 WL 2309965 (6th Cir. Oct. 15, 2004), the Sixth Circuit considered jury instructions relating to the defendant's good-faith defense. A jury convicted Jon Pensyl of three counts of attempted tax evasion under 26 U.S.C. ' 7201 for not filing personal state or federal income tax returns and for failing to withhold payroll taxes for his employees of his dental practice. Pensyl presented a good-faith defense claiming that he did not know he was liable for income taxes, because his independent research into the tax code did not establish to his satisfaction that he was obliged to pay income tax. As a result, he argued that his failure to pay taxes was not a willful failure as required by ' 7201. At trial, Pensyl objected to jury instructions that allowed the jury to consider the reasonableness of his belief in determining whether his actions were willful. He also objected to portions of the jury instructions that he claimed confused the jury by establishing good faith as a defense to criminal tax evasion while simultaneously reminding the jury that ignorance of the law is traditionally not a bar to a criminal conviction.

On appeal, the Sixth Circuit affirmed the conviction after finding that the jury instructions at issue were not erroneous. First, the court held that the instructions allowing the jury to consider the reasonableness of Pensyl's beliefs in their deliberations of willfulness accurately stated the law. The court distinguished Cheek v. United States , 498 U.S. 192, 201 (1991), where the Supreme Court held that a jury instruction was improper for instructing the jury that an unreasonable belief does not negate willfulness. In contrast, the district court in Pensyl instructed the jury that it could consider reasonableness in their evaluation of Pensyl's good-faith defense, but the court did not decide the issue for the jury.

Second, the court held that the jury instructions providing for a good-faith defense to criminal tax evasion while simultaneously reminding the jury that ignorance of the law is traditionally not a bar to a criminal conviction did not confuse the jury. According to the court, another instruction linked the concepts of good faith, ignorance of the law, and willfulness in a clear and straightforward manner so as not to cause confusion. This instruction provided: “A defendant does not act willfully if he believes in good faith that he is acting within the law or that his actions comply with the law. This is so even if the defendant's belief was not reasonable as long as he held the belief in good faith.”