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Jail for failing to report taxable income received from illegal enterprise

Editorial Staff
Tax fraud / evasion
Case Summary: 

Carl A Kemp described himself as a "lobbyist". The 43 year old lived in Long Beach California where he once stood for the city council. He ran a consultancy which promoted the interests of "head shops," that is illegal suppliers of marijuana who have public premises and don't do deals on street corners or stinky toilets at festivals. Many of them claim there is a constitutional right to consume marijuana and therefore there can be no offence of supply, others claim medicinal purposes. The reality under the law is simple: in California, the trade is illegal. Therefore the profits are illegal. And from there a chain of illegality begins.

Case Facts: 

Although all of Kemp's clients were in Long Beach and, therefore, there was no inter-state or international element which would have facilitated the involvement of federal investigators, Kemp filed fraudulent tax returns for federal taxes. From 2007 until 2012, he failed to report an admitted total of USD754,783.

It should be noted that his conviction was for tax evasion, not for money laundering or wire fraud, the usual excuses that federal authorities use to bring financial crime within their jurisdiction. Because the evasion was in federal taxes, the federal authorities had automatic jurisdiction.

Case Judgment: 

In July 2016, Kemp pleaded guilty to one count of filing a false tax return for the year 2012. In that year, he claimed, his business had no taxable income but, in fact, it brought in USD180,000, mostly in receipts from illegal marijuana outlets. In his plea agreement, he admitted under-declaring a total of USD754,783. Accordingly, he agreed, and was ordered, to pay arrears of tax of USD210,661.

He was sentenced a one year plus one day in jail. Under US law, the additional day carries future risk in the event of another conviction for a felony.

Case Commentary: 

It is notable that there was no money laundering charge. It is also notable that the plea agreement related to offences that were taken into consideration but for which no conviction is recorded. Even so, compensation takes into account those unrecorded offences.

However, even if the federal authorities did not proceed with money laundering charges, the Californian authorities are, if they choose, able to do so. The source of funds was illegal and therefore so was his acceptance and spending of the money: it is, on the facts, inconceivable that Kemp did not know that his clients were engaged in an illegal enterprise - indeed, the whole purpose of the work he did for them was to try to get the law changed.




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