Most of our readers know that various penalties may be imposed for failure to file returns or information statements on a timely basis with either the IRS or the Department of Labor (DOL), the principal regulators of retirement and welfare benefit plans. But what about potential criminal liability for the unscrupulous – those who not only are remiss, but who willfully take advantage of plan participants and their retirement plans? Thankfully, we don't hear a lot about cases of pillaging retirement plans on a daily basis. There are unfortunate cases, however, and there are criminal sanctions in both federal and state law to deter and punish malfeasance, fraud, deception and other defined misdeeds.
The criminal penalties for mishandling employment plans are statutorily spelled out in the Employee Retirement Income Security Act of 1974 (ERISA), and a 1984 amendment to the Act. In sum, Title I of ERISA defines and proscribes criminal acts relating to (i) reporting and disclosure violations; (ii) coercive interference with plan and statutory rights; and (iii) prohibits persons convicted of specified crimes from working with, or serving as trustees of plans.
In addition to ERISA, other provisions found in Title 18 of the Federal Criminal Code proscribe certain conduct related to ERISA-covered pension or welfare benefit plans. Finally, although ERISA preempts or supersedes state laws relating to pension plans, it generally does not preempt state criminal laws as they may be applied to the act of fraud, embezzlement or otherwise interfering with a participant's rights or benefits. Only state statutes that are written to apply specifically to crimes against pension plans or welfare benefit plans risk preemption. As a result, an individual misusing or embezzling plan assets may be subject to prosecution by state or federal authorities, or both.
On the federal side, criminal violations of ERISA and of Title 18 of the Federal Criminal Code are investigated by the DOL in the course of their normal investigations of ERISA-covered plans. Crimes, uncovered in the investigation, are turned over to the office of U.S. Attorney who has exclusive authority to prosecute criminal violations under ERISA.
Let's now consider the ERISA criminal violations and the Title 18 violations.
Theft, Embezzlement, Or "Conversion"
In short, Title 18 makes it a crime for any person to embezzle, steal, or unlawfully and willfully abstract or convert to personal use, or to the use of another, any assets of an employee benefit plan covered by ERISA. The legislative purpose of this provision is obvious: to preserve welfare and pension funds and protect those entitled to benefits.
Most readers intuitively understand the terms theft and embezzlement. However, "conversion," a favorite law school term, is less known to lay readers. Essentially, it encompasses the use of property, placed in one's custody for a limited purpose, in an unauthorized manner or to an unauthorized extent, if accompanied by criminal intent. Whew! What that means, simply, is that a party can be guilty of an offense under section 664 of Title 18 if they steal or simply misuse plan assets with criminal intent.
Furthermore, section 664 applies to any person in a position to affect plan assets, not just plan trustees or fiduciaries. It is possible for plan service providers to be found guilty of violating this federal law. In most cases under this section though, the defendants have a fiduciary relationship to the assets of the plan. Courts will apply accepted criminal definitions of the crimes in the statute, to determine whether there is, for example, theft. If the intent to commit the crime can't be proven directly, it usually must be inferred from circumstantial evidence. It is possible in most pension or benefit crimes to infer this intent from the fact that the actions were unauthorized or without benefit to the plan. For example, evidence might show that the transfers of assets resulted in personal profit to the defendant. Personal profit, however, is not strictly required under this criminal section. It may be sufficient to merely establish that the defendant acted in "reckless disregard" of the interests of the plan. In one case, a jury instruction of "deliberate indifference" was upheld.
Contrast this with what might be an appropriate defense. A defense of "good faith" does constitute a complete defense to a section 664 charge even if the act was unauthorized. To prove this, however, a defendant would have to show a good faith belief of authorization and a good faith belief that the expenditure was for the benefit of the plan.
Reporting And Disclosure Violations
This is an area that is covered by both ERISA and the Federal Criminal Code. At the heart of the seemingly mundane tasks of compliance and reporting for ERISA covered plans, section 1027 of Title 18 makes it a crime to knowingly falsify documents or conceal or misrepresent facts required to be disclosed, published, filed, kept, or certified under ERISA Title I. It also covers documents and facts that are necessary to verify, explain, clarify or check for accuracy of any such report or document.
In turn, ERISA section 501 makes it a crime for any person to willfully violate any of the reporting, disclosure, and record keeping provisions of ERISA Title I or any regulation or order issued under any such provisions. Looking at the plain language of the statutes, all that is required is that the party willfully violate or ignore one of ERISA's provisions where they are subject to a reporting obligation (i.e., where they are a plan administrator or other responsible fiduciary) or to willfully mislead, by any of the noted methods, in virtually any ERISA related disclosure, document communication or filing.
Although it is beyond the scope of this article, ERISA has numerous reporting, disclosure, and record keeping obligations. Among others, plan administrators must provide participants and beneficiaries with summary plan descriptions, summaries of material modifications, summary annual reports and, in certain circumstances, a statement of total benefits accrued (nonforfeitable or otherwise). A plan administrator also must file with the DOL annual reports and terminal and supplemental reports. Prior to recent law changes, plan administrators were required to file with the DOL a copy of each ERISA plan's summary plan description as well. Finally, in certain cases, plan administrators must have the financial statements for the plan audited by an independent, qualified public accountant and, in some cases, must obtain a complete actuarial statement and opinion by an enrolled actuary.
There is little case law reporting prosecutions and convictions under ERISA section 501. There are more cases reported under section 1027 of Title 18. Plan administrators and others have been convicted for failure to file the Form 5500, Annual Return/Reports, or to provide participants with summary plan descriptions, summary annual reports and accrued benefits statements. The Title 18 cases usually also involve section 664 fraud violations. The two just seem to go hand-in-hand.
Another issue to bear in mind is that ERISA reporting and disclosure obligations also are imposed on those who provide the underlying information to plan administrators, such as insurance companies, employees, banks, accountants, actuaries and others. All of these are within the statutory definition of "person" as used in ERISA section 501 and, therefore, all could fall within the class of potential defendants. Once again, "good faith" is available as a defense. This defense requires the defendant to show that the act or omission was in good faith and conformed with, and is in reliance on, regulation or written ruling by the DOL. The penalty for a violation of ERISA section 501 is a fine of not more than $5,000 and a prison term of not more than one year, or both. If the violation is by a person who is not an individual, the fine can be up to $100,000.
When might a failure to comply with ERISA's reporting and disclosure obligations rise to the level of a criminal act that draws not only the attention of plan participants but the ire of the DOL and the U.S. Attorney's Office? Well, consider Bugsy's situation. In an attempt to deceive participants into believing that their plan assets and benefits were secure, he apparently willfully prepared false statements of benefits that did not communicate the financial condition of the plans. This seems to get to the heart of ERISA's objectives of protecting plan assets and benefits for participants and their beneficiaries.
There have also been cases where plan officials have failed to disclose party-in-interest transactions on a plan's Form 5500. Under the language of the statute, however, liability would not be restricted to plan officials. The term "whoever" in the statute is as broad a term as you will find in the law. It is a boundless definition of potential defendants. Plan service providers therefore are not beyond prosecution under this statute. The penalty for violation of this section of the Federal Criminal Code is a fine of not more than $10,000 or a prison term of not more than five years, or both.
Coercion Or Interference With ERISA And Plan Rights
Bugsy's threats against employees are obvious violations of the law. Specifically, ERISA section 511 acts as the criminal analog to the civil penalties of ERISA section 510, which generally provide civil recovery for interference with the exercise of rights under a plan (e.g., retaliatory discharge, fine, suspension, expulsion, discipline or discrimination). ERISA section 511 imposes criminal liability if the use of force, violence, or threat of force of violence, results in coercion, intimidation, or an attempt to restrain any participant or beneficiary from exercising rights to which they may be entitled under ERISA. Section 511, like the other criminal provisions, also requires that these acts be willful acts.
Completing the similarity to section 510 of ERISA, a number of courts have held that there is no private cause of action available to participants or other individuals to enjoin violations of ERISA section 511. That is, only the U.S. Attorney is permitted to enforce this section of the law.
Willfulness And Intent
Lawyers are taught in school that there are two kinds of intent relating to crimes. There is general intent and specific intent. In the former, the person intends simply to do the act. In the latter circumstance, the person also intends to bring about the criminal consequences of his action. The crimes under section 1027 and ERISA section 511 described above are examples of general intent crimes. That is, the parties, including Bugsy and his attorneys and advisors, merely need to intend to falsify the participant statements or reports. In turn, the act of simply backdating the plan documents that were adopted is an example of a general intent crime. They do not need to have the intent to mislead or defraud in order to violate section 1027 of Title 18. On the other hand, in order to commit the crime of fraud under section 664 of Title 18, they must intend, with specific intent, to defraud.
In order to convict a person of these crimes under section 1027, the government need only prove that with regard to a false statement (such as a date on a backdated plan document), that the defendant acted "knowingly" and not because of an innocent mistake. Regarding an omission or failure to file a document, the government must also show that the defendant did not have any reason to believe that his actions were lawful. However, the government does not need to show that the defendant was acting with the intent to defraud or mislead under section 1027. They don't even need to prove that he knew that he was violating any particular law. Do you remember the adage, ignorance of the law is no excuse?
Backdating...The Insidious Offense
What is "backdating" and what is its relevance? In relationship to the fraud under section 664, and other specific intent crimes, the backdating serves as evidence of those crimes from which criminal intent can be inferred. But is backdating in and of itself a crime? Yes it is, and can be prosecuted under section 1027 of Title 18.
As a practical matter, it's difficult to think of an instance where a document would be falsified without the individual having the intent to commit some form of fraud or deception. It's also difficult to fathom prosecution (for example, just because someone backdated a promissory note) if everything else about the document was proper. Regardless, section 1027 can have devastating consequences.
What does this mean then in the context of the real world and every day concerns regarding client actions and potential violations of the law? Even if such an action does not appear to be a "crime," backdating documents can have serious repercussions for plan sponsors and their advisors. Backdating may be not only a commission of the above mentioned crimes, it may also be civil or criminal tax fraud.
Backdating could also result in those individuals being liable for preparer penalties for civil tax fraud under Internal Revenue Code section 6701. Penalties for each violation of this section can reach $10,000 per year and per return that is affected. The rationale for this IRS penalty is that the Form 5300 preparer knows the form will be used by the IRS to determine the qualification of the retirement plan. A false Form 5300 would result in an erroneous determination of the plan's qualified status for a particular year. Therefore, a Form 5300 preparer knows, or has reason to know, that the false plan document and Form 5300 will be used in connection with a "material matter" for purposes of the Code section 6701 penalty rules. Assuming that the Form 5300 is a falsehood, it would result in a tax liability understatement if used by the corporate sponsor to claim deductions for the tax return. Thus, the preparer of the Form 5300 could be liable for preparer penalties of $10,000 relating to the corporation's tax return for each year of deduction!
Boy Scout Approach
Due to the prohibitions in ERISA, the Federal Criminal Code, the Internal Revenue Code, not to mention state law, both plan sponsors and their advisors really must take a "just say no" approach to the notion of backdating or replacing old documents with new and better documents. Beyond the actions of the employer, sponsor, fiduciary, or other responsible party, any assertion by a benefits professional (attorney or otherwise) that he is ignorant of certain facts known only by the client, such as what the client intended to use the document for or what the underlying facts of the plan or the sponsor were, can be overcome in prosecution by the government with a showing that there was a "willful blindness" or a "conscious avoidance" by the advisor of the issues at hand. In fact, this is the language that is used in jury instructions when advisor conduct is being prosecuted. For example, an attorney or advisor may not be able to escape criminal liability by asserting that he relied on his client's unsubstantiated representations as to the underlying facts or the use to which the documents are going to be put. Not only are we seeing the notion of a "scrivener's defense" disappearing in the civil cases, such a defense does not work in the criminal context.
When approached by plan sponsors with questionable situations, advisors must beware. When a client says they invested 100% of a plan's assets in pork bellies, it's not necessarily a crime. Hiding it or committing a crime to cover it up is another story. If they say they hid 100% of the assets offshore to exempt the plan from the reporting requirements of the U.S. tax system (yes, we've heard of this), it's obviously a crime. The majority of situations unfortunately fall into the "pork belly" category of questionable situations. Often times, however, it is not clear what type of situation will develop. There are those insidious situations where the client asks for a document that they will sign and then they don't return it until after year end, claiming they adopted (or amended, etc.) it in a timely fashion. This is where advisors run the most common risk of committing a crime by becoming co-conspirators or by committing their own violations of Title 18, section 1027, by furthering the technically "criminal" act of false statements (dating of documents). This is the slippery slope of backdating or creative document production. You can almost hear characters say "Gee, I'm entitled to get the deductions, since I can contribute before my tax return is due, so what if I sign it a few days late (or a few months?)" or "Gee, I should only have to pay the benefit I can afford, so what if we post date the amendment notice or the amendment itself, we're only trying to fix a little timing problem." Fortunately, these situations and individuals don't walk in the door every day.
What To Do?
Advisors, consultants, banks and other service providers need to be vigilant and wary of the actions and intentions of the clients and the plans they service. Plan sponsors, in turn, must exercise care in the appointment of fiduciaries and in the checks and balances they put in place in operating and maintaining a plan.
Although it is common knowledge in the benefits world that plan documents have effective dates and various "retroactive" deadlines by which they may be amended, all of the ramifications of effective dates and dates of execution of plan documents, amendments and other returns and filings can only be appreciated by a full and thorough understanding of ERISA, the Internal Revenue Code and, heaven forbid, the Federal Criminal Code. Finally, for those who are not of good heart, make no mistake, there are crimes and there are punishments to be avoided.