A New Federal Enforcement Perspective by Tony Haynes
 
January 22, 2002
 

In 1998, ATF dramatically reorganized its field offices. Historically, ATF had been organized under separate regulatory and criminal enforcement functions that operated under separate planning and implementing structures. This, according to ATF, hampered its ability to use all it's authorities for maximum benefit. Beginning in October 1998, all ATF field offices (regulatory and criminal) were merged under its law enforcement umbrella headed by a Division Director/Special Agent in Charge.

For the most part, the Agency is still industry friendly. It does a remarkable job in collecting excise taxes and regulating the distribution of alcoholic beverages in a highly competitive, ever-changing industry. It is largely fair in its dealings with the legal industries; nevertheless, industry members need to be cognizant of this restructuring and how it may impact its relationships at the federal level. ATF expects the legal alcohol industry to self regulate and uses the publicity of their adverse action settlements-either Offers in Compromise or permit actions-to act as a deterrent to noncompliance.

New Tax Audit Division

Over the past few years, ATF's resource allocation for revenue protection (excise tax collection) and trade practice compliance under the Federal Alcohol Administration Act has been decreased to accommodate ATF's increased assumption of responsibility in the enforcement of firearms and explosives laws and regulations. This decreased government presence over the long term has created a ripe environment for a lackadaisical attitude by the alcohol industry toward their regulatory responsibilities.

To address the concerns over this decline in field audit activities, ATF announced in its November Newsletter the establishment of a new "Tax Audit Division" within the Office of Alcohol and Tobacco. The new division will assume responsibility for field audits of excise taxpayers with annual tax liability over $250,000. This organizational change ensures strict adherence to audit standards and increases the Agency's confidence that it is fulfilling its obligation to collect all of the tax that is due.

The new division will be staffed by employees who have the requisite accounting qualifications for "auditor" positions. This is a significant change because past audits have been performed by Inspectors who are generalists in all phases of ATF responsibilities but often lack extensive tax audit training. A division chief will exercise management oversight from the Bureau Headquarters' office in Washington, D.C., with field offices located throughout the country.

Various manufacturing industry members (distilleries, breweries, wineries, and tobacco products manufacturers) should expect more frequent, in-depth excise tax audits and the distribution side of the industry (bottlers, wholesalers, and importers) should be aware of recent compliance initiatives by the Agency resulting in several large settlements for labeling violations.

Now is the time for industry members to be proactive in their internal reviews to ensure the absence of regulatory violations and to monitor the effectiveness of their compliance programs. Internal investigations are invaluable to companies both in dealing with problems and in seeking to prevent them.

Renewed Emphasis On Industry Oversight

The national media has carried numerous reports about increased enforcement efforts by the ATF. After years of relative quiet on the alcohol side of its responsibilities, ATF appears poised to move on a number of alcohol compliance fronts. For example,

Labeling. Recent announced settlements ranging from $35,000 to $750,000 involved mislabeling, relabeling, false labeling and the omission of the Government Health Warning Statement. Alcoholic labeling is a serious matter to the ATF. It involves consumer health, consumer deception and highly competitive marketing practices. The regulator's job in this arena is without question extremely difficult. Absent a multitude of field inspectors and label examiners, the most cost-effective method of regulation is the deterrence of harsh administrative action. Regrettably, it seems that the days of "no blood, no foul" are over. Your mistakes (innocent or not) in labeling and distributing your products may be costly.

Tax and Records Compliance. The above-announced creation of a new Audit Division should alert all industry members to review their internal procedures. Failure to timely file returns or pay excise tax liability or failure to follow regulatory procedures can result in significant tax penalties and monetary fines. If you are required to file by electronic funds transfer, in addition to failure to file and pay penalties, there is an additional 10-percent penalty. An employee's absence or oversight could cost you hundreds of thousands of dollars in penalties and interest.

Exportation. Within the past two years, many exporters of beer, wine, and distilled spirits were advised that their export documentation procedures were faulty and that, collectively, the industry potentially owed several hundred million dollars in taxes and penalties. Most of this potential liability was resolved when ATF allowed the use of alternative records to document exports. Subsequent to this action, ATF published an ATF Circular Number 2000-2, titled "Exportation of Distilled Spirits, Wine, Beer and Tobacco Products Without Payment of Tax." This nine-page clarification on how to document exports free of tax puts the industry on notice. Accordingly, you should be meticulous in your export procedures so as not to lose the tax-free status of your products. Another area of concern in your export activities involves tax fraud. Do not assist your foreign customers with schemes to evade any tax or duties by manipulation of your required records. Your knowledge and participation in these schemes may put you in jeopardy even though you are in compliance with all export procedures.

Permits. Your permits are subject to suspension or revocation or you may be required to pay sizeable offers in compromise for failure to report changes in personnel, business structure, control, premises and operations. Most corporations experience legal entity changes over their lifetime due to stock manipulations and legal tax restructuring. If not properly reported to the ATF, the federal permits are voided and the industry member could be accumulating considerable penalties for operating without requisite permits. ATF recently announced acceptance of Offers in Compromise in the amounts of $300,000 and $225,000 for hidden ownership and $50,000 for operating without the required permit.

Trade Practices under the Federal Alcohol Administration Act. While not very active in this area of the marketplace over the past few years, ATF has recently completed an investigation into slotting fees. Slotting fees are payments by industry members to retailers for the purchase of display, shelf, storage or warehouse space. If such payments place the retailer's independence at risk and influences their purchasing practices, a violation of the "Tied-House" provisions of the FAA Act may occur. The industry should not be surprised if these investigations result in criminal charges and/or significant administrative sanctions.

The Risks Are Real

In today's highly regulated world, even the most careful and ethical companies can come under governmental investigation. Improper or unauthorized actions by employees, disclosures by current or past disgruntled employees, and even simple mistakes can result in lengthy and costly investigations. Many general counsel and senior executives recognize that steps should be taken to avoid such risks. The best preventive action to such unforeseeable troubles is to institute an effective compliance program.

Internal compliance programs are crucial in keeping government regulators and civil litigants at bay. They also give management the ability to forestall many potential problems before they occur or get out of control. An effective compliance program demonstrates good corporate citizenship, and may persuade a regulator that errors were innocent mistakes rather than intentional fraud.

Industry members must recognize that the requisite cost of a comprehensive compliance plan pales in comparison to that visited by documented federal violations. Recent ATF investigations concluded with felony charges against a business entity and its executives. A few resources spent before a company comes under government investigation could help a company avoid administrative sanctions or criminal prosecution, could make a significant difference in any financial settlement, and may save the reputation of the company or its executives.

Tony Haynes is a Governmental Consultant in the Alcohol Beverage group. For more information, contact Tony Haynes at 888-688-8500 or thaynes@hklaw.com.