Federal and state authorities in Massachusetts have recently targeted several attempts to evade taxes through schemes that involve the illegal resale and cashing of winning lottery tickets.
Perpetrators of “10 percenting” schemes—so named because of the payoff they typically yield—buy winning lottery tickets at a discount from legitimate holders, claim the winnings from the state’s Lottery Commission and offset those earnings by inflating their gambling losses on their annual tax returns, three senior federal and state officials told ACAMS moneylaundering.com.
The actual winners typically use the scheme to avoid back taxes, child support and other debts, while the “10 percenters” themselves are often repeat offenders and the primary target of investigation, said Nathaniel Mendell, acting U.S. attorney for the District of Massachusetts.
“Repeat players have a network of convenience stores or lottery ticket sellers that they visit to offer this kind of illicit transaction,” Mendell told moneylaundering.com. “A wrangler goes to all the agents, and if they accept the proposition, when a customer comes in with a winning ticket, they explain they can negotiate it at a modest discount for cash and avoid all reporting.”
On Aug. 24, federal prosecutors in the District of Massachusetts announced tax fraud and money laundering charges against 62-year-old Watertown resident Ali Jaafar and his two sons—Mohamed Jaafar, 30, and Youseff Jaafar, 28—after the trio allegedly claimed more than 13,000 lottery tickets for a combined $21 million in winnings from 2011 to June 2020.
Ali Jaafar ranked as Massachusetts’ top individual lottery winner in 2019 alone, while Mohamed and Youseff ranked third and fourth respectively. Rather than benefiting from an incredible streak of luck, the trio simply avoided the odds by taking winning tickets off the hands of dozens of winners eager to cash out quickly, federal prosecutors said.
“On or about Oct. 17, 2019, a staff person at a Sommerville, Massachusetts, convenience store purchased a $1,000 winning lottery ticket at a discount,” prosecutors claimed in the indictment. “Over the next several hours, Mohamed Jaafar called a phone number registered to the owner of that Sommerville convenience store six times.”
A day later, Youseff Jaafar allegedly arranged for an unidentified associate to claim the $1,000 ticket before the Lottery Commission.
In a separate case, Clarence Jones, now an octogenarian residing in Lynn, Massachusetts, collected more than $11.3 million in winnings from 7,600 tickets from January 2011 to March 2017, in increments that typically ranged from $600 to $10,000, IRS investigator Elizabeth Bedoya claimed in an affidavit three years ago.
Jones allegedly paid less than $16,000 in federal taxes on an annual income of only $51,500 during those six years, declaring in his returns that he was a professional gambler who had barely broken even.
Federal agents who tailed Jones from July to October 2016 observed that every Friday he would drive to a convenience store with an unidentified associate who would quickly enter and exit the premises, Bedoya claimed in the affidavit. The pair would then visit a Lottery Commission office in Woburn, Massachusetts.
“Shortly thereafter, the van drove to a Santander Bank branch, where bank records demonstrate that Jones cashed a number of checks payable to him that were issued by the Massachusetts Lottery Commission,” Bedoya wrote. “Lottery records for the days on which this surveillance took place show that on each occasion Jones cashed about 20 to 30 lottery tickets.”
Bedoya, who is based in Boston, told moneylaundering.com that she first became aware of lottery-related tax evasion scams a decade ago while pursuing a lead referred to her by the agency’s civil division, and has since become IRS Criminal Investigation’s point-person on 10 percenting.
Ten percenters now frequently charge legitimate ticket holders closer to 25 percent the value of their winning tickets, Bedoya said, adding that suspicious activity reports and other Bank Secrecy Act-related data have repeatedly launched or help advance investigations into the schemes.
“There is a pattern these people develop when they cash this many tickets: it seems like they always do it on a Monday or a Friday, use certain bank branches and come with another individual—it’s almost like a job,” she said. “It’s important to list little details like that [in SARs], to help us identify co-conspirators or the convenience store where the activity was run out of.”
Ten percenting typically functions as a tax evasion scheme, but federal prosecutors have recently begun charging alleged perpetrators with conspiracy to commit money laundering.
“You have state and federal tax evasion, failure to report or fraud in the reporting of the lottery winnings,” said Mendell, the acting U.S. attorney in Massachusetts. “Financial transactions with that money—negotiating a check, depositing a check, concealing the fact that it represents the proceeds of a specified unlawful activity—are classic concealment.”
Most transactions linked to 10 percenting occur in cash, with banknotes quickly changing hands between wranglers, agents and ticket holders. The reliance on cash leaves deposits of lottery-issued checks as the primary and perhaps only touchpoint with the formal financial system.
Financial institutions should consider adding “lottery” to the keyword searches in their transaction-monitoring systems, Mendell told moneylaundering.com.
“If you have a customer who wins the lottery 50, 100, 200 times you should start to think that’s an unusual pattern, especially above the threshold that triggers a SAR [suspicious activity report],” he said. “I suppose you might have a moment’s hesitation if your client is a professional gambler, maybe, but if you look at the Jafaar indictment, the numbers there are pretty excessive.”
The controls surrounding the payment and recordation of gambling winnings and losses in Massachusetts ironically gave rise to the 10 percenting scheme.
Convenience stores and other lottery agents in the state pay out smaller prizes directly but winners of more than $600 must claim their earnings at authorized Lottery Commission locations, where back taxes and past-due child support are automatically withheld.
At the end of the year, the Lottery Commission and casinos, horserace tracks and other gaming establishments in Massachusetts must also provide patrons who claimed individual winnings of more than $600 during the previous 12 months with a W-G2 form to file to the IRS.
Gamblers may book legitimate betting-related losses up to the amount of their winnings and thereby reduce their tax obligations, but 10 percenters either overstate or entirely fabricate their losses in their returns to avoid them altogether, said Michael Sweeney, executive director of the state’s Lottery Commission.
“Someone can just go into a waste basket at a convenience store, and if it’s a busy store there could be 50 discarded instant lottery tickets that they can scoop up, then claim they bought 50 $20 tickets that were all losses,” Sweeney told moneylaundering.com. “Put a plastic band around [your tickets], date them and put them in a box in case you ever get audited.”
An internal review of the Lottery Commission’s various products that Sweeney ordered after becoming executive director in 2015 showed that a “significant” number of individuals had claimed winnings at a rate that suggested mindboggling luck, enormous investments in lottery tickets or something else afoot, he said.
“There was a good grouping of about 70 to 75 that really made up the universe that was readily identifiable,” Sweeney said. “Within that universe, there was a refined galaxy of about 10 to 15 that stood out even more.”
Sweeney’s office now refers suspected 10 percenters to the Massachusetts State Police and Office of the Attorney General, and federally to the IRS and Justice Department, he said.
State prosecutors last month charged 12 individuals and three lottery agents in Chelsea, Boston and North Reading—NT Lucky Variety, Underground Express and Richdale’s, respectively—with running a 10 percenting ring from April 2020 to May 2021 that netted them an undisclosed sum in proceeds of tax evasion.
The case represents one of the first in which the Massachusetts Office of the Attorney General has brought in the three years since the Lottery Commission adopted new procedures for vetting “high-frequency prize winners.”
Under the new procedures, state authorities can now bring individuals who claim 20 or more prizes of at least $1,000 within a calendar year before an administrative hearing to explain how they bought the quantity of tickets necessary to make those winnings statistically plausible.
Those without a reasonable explanation may be barred from cashing out again for varying periods of time.
Clients who repeatedly deposit lottery-issued checks of at least $1,000 may warrant more scrutiny from financial institutions, which should consider raising their suspicions directly with the Lottery Commission, Sweeney said.
“In some cases they might have contacted federal authorities, but I would have hoped they would have also reached out to the lottery, and that never happened,” Sweeney said. “Someone picking up the phone to say, ‘I can’t get into the details or tell you the names of the clients, but we are seeing someone with a lot of lottery payments. Is that really you? Is that normal?”
Contact Valentina Pasquali at firstname.lastname@example.org
|Topics :||Anti-money laundering , Fraud|
|Source:||U.S.: IRS , U.S.: State Attorneys General|
|Document Date:||November 29, 2021|