Source: Office of United States Attorneys
Non-Prosecution Agreement Resolves Investigation of the Company’s Sales and Marketing of Wire Products to Help Customers Avoid Paying Taxes
Judy Philips, Acting Attorney for the United States for the Eastern District of New York and Harry T. Chavis, Jr., Special Agent in Charge, Internal Revenue Service Criminal Investigation, New York (IRS-CI), announced today that American Express Company (AMEX) has entered into a non-prosecution agreement (NPA) with the U.S. Attorney’s Office for the Eastern District of New York (the Office), and has agreed to pay more than $138 million for engaging in sales practices that provided inaccurate tax advice to customers and potential customers of AMEX for two wire products, Payroll Rewards and Premium Wire (PR/PW).
Under the terms of the NPA, AMEX agreed to pay a criminal fine of $77,696,000 and forfeit a total of $60,700,000. The NPA requires AMEX to continue to cooperate with and provide information to the Office for at least the 36-month term of the agreement. In the event that AMEX violates the NPA, the Office may prosecute AMEX for any of the conduct that gave rise to the NPA and any newly discovered criminal activity.
Separately, AMEX has entered a civil settlement with the Department of Justice’s Civil Division Fraud Section (Civil Frauds) related to the tax-avoidance scheme, for which AMEX has agreed to pay a $60,700,000 civil penalty. The Office and Civil Frauds have each agreed to credit approximately $30,350,000 of the forfeiture amount and civil fine to their respective resolutions.
“Financial institutions like American Express have no business pitching inaccurate tax avoidance schemes to sell products and turn a quick profit,” stated Acting Attorney for the United States Philips. “This resolution ensures that American Express will be held financially accountable for the unacceptable conduct of its sales employees in misrepresenting the tax benefits of these products.”
Ms. Philips expressed her appreciation to Civil Frauds and the Federal Reserve Board of Governors for their work on the case.
“American Express misled their customers by touting tax breaks that simply didn’t exist. This deceitful marketing campaign that involved hundreds of employees defrauding their customers and the government, resulted in AMEX paying more than $138 million to cover their deceit. Regardless of a company’s size, every business is required to comply with the laws of this nation, including all tax laws,” stated IRS-CI New York Special Agent in Charge Chavis.
The Improper Sales and Marketing of PR/PW
In approximately April 2018, AMEX launched “Payroll Rewards,” a wire product that allowed business customers to pay their payroll via a direct payment from an AMEX account. AMEX charged a percentage-based fee—ranging from 1.77% to 3.5%—based on the size of the wire, even though, at the time, competitors offered wiring services for nominal fees of $0 to $50, irrespective of the size of the wire. In exchange for AMEX’s fee, customers earned one Membership Reward (MR) point for each $1 of the wire, which could be deposited into any personal or business account at AMEX. In May 2019, Payroll Rewards was expanded to include Premium Wire, thereby allowing customers to use the products for wire payments beyond payroll. Whereas Payroll Rewards underwent a compliance and legal review process at AMEX, Premium Wire was determined to be a spin-off product, and only underwent a limited review process.
PR/PW were sold within the AMEX divisions Global Commercial Services, which offered corporate credit cards and financial services, and FX International Payments, which offered foreign and domestic wire transfer services. AMEX’s official marketing material for PR/PW listed benefits of the products as being, chiefly, the ability to earn MR and utilize AMEX’s “white glove service” in connection with customer wiring needs. The official marketing materials also contained the disclaimer: “The value of the [MR] may be taxable income to the Card Member and the Card Member is responsible for any federal or state taxes resulting from the [MR].”
In practice, however, the products were marketed as a means to generate tax savings. The products were primarily marketed to small and mid-size businesses that valued a reduced tax burden over increased profitability. Customers were advised: first, that the fees were tax-deductible as a business expense, and thereby had the effect of lowering their overall profit and taxable income; second, that they otherwise would have paid taxes on the fees, so the true cost of the fees had to be evaluated in the context of their effective tax rate; and, third, that the MR received in exchange for the transaction was earned tax-free (the Pitch). As a result, the value of the MR outweighed the true cost of the fees adjusted to account for the tax savings they generated.
The Pitch relied on incorrect tax advice, namely, that the wiring fee was deductible in its entirety as a business expense. Business expenses must be “ordinary” and “necessary.” Incurring a wiring fee—far in excess of that offered by competitors in the marketplace—for the purpose of generating a personal benefit is not an “ordinary” and “necessary” business expense. AMEX did not consult with tax professionals to verify the tax advice being offered.
In early 2021, as concerns grew regarding the way PR/PW was marketed, an internal investigation commenced, which ultimately resulted in the termination of approximately 200 employees. In the summer of 2021, AMEX stopped enrolling new customers in the products. In September 2021, a cap was instituted of $280,000 per wire sent. In November 2021, the products were discontinued entirely.
The Non-Prosecution Agreement
AMEX has agreed to pay a fine of $77,696,000 and forfeit $60,700,000, which represents the net revenue that could reasonably be attributed to the sale of PR/PW.
The Office reached this resolution with AMEX after carefully weighing all the factors relevant to the appropriate corporate resolution, including the nature and seriousness of the offense. The NPA recognizes that AMEX voluntarily took substantial remedial measures beginning in 2021 to mitigate and correct the sales and marketing practices described above and improving compliance measures, including terminating employees involved in the misconduct, discontinuing PR/PW, and making significant improvements to AMEX’s product approval and internal audit processes. AMEX also has no prior criminal history in the past 18 years. Furthermore, AMEX has cooperated with the Office in its investigation and has agreed to continue to cooperate fully with the Office.
The agreement announced today is the result of an investigation conducted by IRS-CI. The government’s case is being handled by the Office’s Business and Securities Fraud Section in coordination with the Office’s Bank Integrity Task Force, which is charged with investigating and charging corporate and individual actors who launder criminal proceeds using the U.S. banking system and enforcing anti-money laundering controls under the Bank Secrecy Act. Assistant United States Attorneys Hiral D. Mehta, Gillian Kassner and Tara McGrath, and former Assistant U.S. Attorney Brian D. Morris prosecuted the case, with assistance from Paralegal Specialist Timothy Migliaro.
The Defendant:
AMERICAN EXPRESS COMPANY