1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 NOVEMBER 16, 2011 10 11 12 13 ITEM P OTHER ADMINISTRATIVE MATTERS 14 ITEM P1 EXECUTIVE DIRECTOR'S REPORT 15 1. CALIFORNIA'S UNDERGROUND ECONOMY CENTRALIZED 16 INTELLIGENCE PARTNERSHIP CONCEPT 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per Government Code 13 Section 7.9) 14 Diane G. Olson 15 Chief, Board Proceedings Division 16 17 Randy Silva Acting Chief, 18 Investigations and Special Operations Division 19 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 NOVEMBER 16, 2011 4 ---oOo--- 5 MR. HORTON: Good morning. Let us reconvene 6 the meeting of the Board of Equalization. 7 Members, C4 has been withdrawn. 8 Out of courtesy to staff, we're going to take 9 up P1 first. 10 Ms. Olson. 11 MS. OLSON: Okay. Our first item is P1.1, 12 California's Underground Economy Centralized 13 Intelligence Partnership Concept. 14 MR. SILVA: Good morning, Mr. Chairman, Members 15 of the Board. 16 MR. HORTON: Good morning. 17 MR. SILVA: I'm Randy Silva, Acting Chief of 18 the Investigations and Special Operations Division. I'm 19 here to talk or introduce the concept of establishing a 20 Centralized Intelligence Partnership. 21 Initial research indicates that a 22 collaborative, strategic, targeted and focused effort to 23 combat the underground economy would significantly 24 increase the State's efficiency and effectiveness in 25 recapturing lost revenue to businesses operating 26 illegally in the State of California. 27 To meet this objective, the formation of a 28 Centralized Intelligence Partnership is proposed to be 3 1 made up of state agencies' representatives including, 2 but not limited to, Board of Equalization, the Franchise 3 Tax Board, the Employment Development Department, and 4 the Office of the Attorney General. This effort would 5 involve engaging all major stakeholders, including 6 California industry and labor, particularly those 7 experiencing significant losses in the underground 8 economy. 9 I thought I would start with the definition of 10 what is the underground economy. This is shared by most 11 of the agencies. The underground economy is a term that 12 refers to those individuals and businesses that deal in 13 cash and/or use other schemes to conceal their 14 activities, identities, and their true tax liability 15 from government licensing, regulatory, and taxing 16 agencies. 17 This is a -- a chart that we put together to 18 try to sort of visualize what the underground economy 19 is -- is all about. The bottom half of the chart 20 reflects activities, unlicensed activities and illegal 21 activities that occur. Those businesses that are 22 engaged in those activities take advantage of sort of 23 the middle bar there, which is the government services 24 that are provided as a result of the taxpayers which are 25 on the top bar. 26 What's interesting about this chart is, you 27 know, uh, recently in the news we've heard a lot of 28 about Greece and, um, Italy. Their underground economy 4 1 is running about 20 to 30 percent. In California the 2 latest statistics I have are about eight to nine 3 percent. 4 These are, uh, labor violations. Basically 5 there's some industries that have had some problems 6 with, uh, paying and correctly reporting on their, uh, 7 labor. Forty-seven million represents penalties or 8 assessments on about 300 million worth of, uh, under 9 reporting. 10 This is, uh, another industry that's hard hit. 11 These are their revenues, by the way, that are -- that 12 are lost. Prescription drug industry, 5.13 billion; 13 entertainment, 3.27 billion; entertainment, music, 1.64 14 billion. We did have our economist do an analysis on 15 the music industry and we figure that our tax losses are 16 about 25 million a year. Um, cable/satellite signals. 17 The fashion industry, 615 million. 18 And then other illegal activities that are a 19 part of the underground economy. Drug trafficking, 20 28.14 billion; identity theft; gambling; cigarette and 21 tobacco, 650 million. The 650 million comes from the 22 GAO report. The Board uses, I believe, a conservative 23 figure of about 230 million. 24 These are some general statistics related to 25 the underground economy that were gleaned from public 26 resources. Again, that our -- our, uh, underground 27 economy as a percentage of our Gross Domestic Product is 28 running about eight to nine percent. Our Gross Domestic 5 1 Product in 2009 was $1.9 trillion. 2 Estimated total annual revenue losses, uh, 60 3 to 140 billion. This is according to the Contractors 4 State Licensing Board. 5 Estimated annual loss of income taxes -- this 6 is, uh, from FTB -- 6.5 billion. 7 Unreported taxable wages found through 8 enforcement action, this is 300 million that I was 9 referring to earlier. 10 Amount of assessments, the 47 million that I 11 referred to earlier. 12 I wanted to take a moment to talk about some of 13 the different things that are going on, because there is 14 a lot going on to combat the underground economy. One 15 of them is the Joint Enforcement Strike Force, JESF. 16 The purpose of this organization, which meets 17 approximately quarterly, is to, um, focus primarily on 18 labor violations. It's housed as EDD as part of 19 legislation. It involves the Employment Development 20 Department, Department of Industrial Relations, the 21 Department of Consumer Affairs, Department of Finance, 22 the Franchise Tax Board, and the BOE also participates. 23 Another one is the Economic and Employment 24 Enforcement Coalition. This is geared towards 25 identifying unreported wages and unsafe working 26 conditions. Agencies include the Board, the US 27 Department of Labor, Employment Develop Department -- 28 Excuse me. 6 1 -- Division of Labor Standards Enforcement, 2 Division of Occupational Safety, and the Contractors 3 State Licensing Board. 4 We also, at the Board, participate in HIFCA, 5 which is an organization that is run by the US 6 Attorney's Office. IRS has primary lead in this 7 organization. What they do is they look at financial 8 instruments that are available and ident -- basically 9 money flowing in the underground economy that does make 10 it to the banking system or as -- as, you know, money 11 services or casinos. 12 There're reports generated. They review those 13 reports to identify unlicensed and illegal activities. 14 Currently we've identified 1.8 million in loss since we 15 started in July with additional -- or we billed 1.8 16 million with an additional 4.8 bill -- million, rather, 17 being scheduled for billing. 18 We also have the Statewide Compliance and 19 Outreach Program which is seven compliance teams 20 operating throughout California. They conduct 21 door-to-door visits and telephone contacts to 22 non-residential businesses to verify permitting and 23 licensing. And in 2011 they visited 91,000 businesses. 24 They identified 1400 operating without a license or a 25 permit. They identified an additional 2400 sublocations 26 that were not permitized. They generated approximately 27 50 million in revenue. 28 We also have the AB71 cigarette and tobacco 7 1 licensing program which has 10 five-person inspection 2 teams that operate throughout California, focusing 3 primarily on those selling cigarette and tobacco 4 products or those unlicensed and selling cigarette and 5 tobacco products. They conducted 10,000 inspections in 6 '11; 245 untaxed tobacco seizures were conducted of 7 approximately $370,000 in tobacco; 178 untaxed cigarette 8 seizures or 2.5 million sticks; uh, and there were 406 9 citations written for about 860 violations of the act. 10 That is part of a three-pronged effort, 11 licensing, encrypted stamps, and enforcement. And it 12 recaptures 80 to $120 million a year in tobacco revenue. 13 Uh, we also engage in ad hoc types of, uh, task 14 forces. This is an example of one that I thought I 15 would share; Operation Big Pinch. This is a 16 collaboration with the Alcohol, Tobacco and Firearms, US 17 Department of Justice, the United States Attorney's 18 Office, the California Department of Justice, and the 19 Board of Equalization. Its primary focus was into other 20 tobacco products, smuggling, and untaxed distributions. 21 There's no tobacco stamp on -- on these other types of 22 tobacco products. 23 This was a five-year investigation. On the -- 24 on my right the slide is the organizational structure. 25 It was headed by the United States Attorney's Office of 26 the Eastern District. It involved the use of a Grand 27 Jury, had a DOA -- DOJ, rather, DAG who was 28 cross-designated to do federal as well as state 8 1 prosecutions. There were three permanent BOE 2 investigators assigned to the task force and three ATF 3 investigators, and then both agencies provided ad hoc 4 services as needed. 5 Uh, we did search warrants related to this 6 investigation which we couldn't have done without the 7 involvement of the federal government, some of them, in 8 California, Illinois, Nevada, and Arizona. Twenty-seven 9 businesses were shut down, um, for illegal operations. 10 There were 20 arrests; 12 pled out, one was convicted in 11 trial. Seven are currently pending indict -- or 12 indictments are currently pending. 13 As part of this, we, uh, identified tax loss of 14 103 million when we shut these businesses down, based on 15 221.8 million in measure, sales that they had. Left 16 unchecked, OTP losses to date would have exceeded 179 17 million in taxes lost to the programs that benefit from 18 that revenue. 19 Um, the reason I also use this slide is I 20 wanted to show that, in general, when we work these 21 cases there are more crimes committed than just those on 22 surface. In the case of the OTP investigation, when we 23 did warrants, we did find untaxed cigarettes and untaxed 24 tobacco. We did find counterfeit stamped cigarettes, 25 but we also found a manufacturing facility for 26 manufacturing, um, counterfeit energy drinks. The 27 Department of Health had to be called in to clean it up. 28 It was -- it was not a -- not an energy drink you would 9 1 have wanted to drink, um, basically. 2 We also found assembly lines for counterfeit 3 DVD recorders, counterfeit product labels and packaging, 4 and assembly of counterfeit car speakers, as well as 5 undocumented workers. 6 The Centralized Intelligence Partnership 7 concept is basically to bring investigators together to 8 work in a more formalized, um, arrangement as opposed to 9 the -- the -- the agencies with -- for example, JESF and 10 the EEEC. JESF meets quarterly either bring -- often is 11 managers. Sometimes it's some of the investigators. 12 The EEEC is the same thing, although they meet more 13 frequently. 14 And they come together and they -- they 15 collaborate. There is some collaboration that occurs. 16 But it's not institutionalized. They go back to 17 their -- their individual businesses, their silos, if 18 you will, and deal with the day-to-day issues that -- 19 that are raised -- that just come up as part of an 20 investigative process. 21 This partnership proposes to, uh, have some 22 oversight by the Office of the Attorney General, the 23 Chair of the Franchise Tax Board, the Secretary of 24 Labor, uh, as well as the Chair of the Board of 25 Equalization. The oversight would be over a Centralized 26 Intelligence Partnership, which would just -- the 27 concept is to be staffed by a CEA and four support 28 staff. And then each of the agencies would, on a 10 1 rotational basis, pony up an investigator to also work 2 as part of that partnership. 3 Policy would come from the Economic Employment 4 Enforcement Coalition, as well as the Joint Enforcement 5 Strike Force, to capitalize on some of the lessons that 6 they've learned. And then what I have on the bottom 7 is -- is just some hypothetical, um, participating 8 agencies. 9 Each partnering agency, again, would dedicate 10 human resources, as well as intelligence, the data that 11 they have within their organizations. The way it would 12 work is web-based complaint and evasion fraud call lines 13 would be rerouted from the partnering agencies -- this 14 can all be done fairly easy with minimal costs -- um, 15 directly to this Centralized Intelligence Partnership 16 for evaluation and analysis. 17 Incoming allegations and data would be 18 collaboratively evaluated by each of the investigators, 19 by the team initially, the core group, and then each of 20 the investigators, and directed back to the appropriate 21 agency for appropriate civil or criminal handling after 22 it's had enhanced data provided from each of the 23 agencies that have an interest in it. 24 The CIP would maintain data on referrals and 25 results, as well as ensuring the most egregious felony 26 cases or civil audits are collaboratively worked. 27 Policy makers would have access to more global 28 comprehensive data for gauging and directing resources 11 1 to combat the underground economy. 2 Some of the benefits: 3 It institutionalizes information sharing 4 amongst the member agencies. Collaborative 5 investigations better demonstrate criminal culpability, 6 are streamlined and more attractive to prosecutors. 7 Collaborative investigations provide 8 investigation continuity. Uh, what I mean by this is 9 that generally you may have an investigator working on a 10 case. And if he's working independently, when he goes, 11 you have to start basically from scratch. Somebody has 12 to come in and figure out what was done and pick it up. 13 When you're working collaboratively, everyone 14 in the -- in the group knows what's going on with that 15 particular case and somebody can pick it up and run with 16 it. As well, because you would have investigators, for 17 example, from FTB working with investigators from BOE, 18 there's possibilities that they could just take some 19 general information and create the case, um, from one 20 side or the other. 21 Investigative resources will be more 22 efficiently utilized across agency lines. 23 Um, Centralized Intelligence Partnership 24 investigators, on rotation, will gain greater 25 institutional knowledge of each agency's tools, 26 available resources and data infrastructure, further 27 enhancing the skill and abilities of California's 28 investigative resource pool. 12 1 This is the conceptual diagram. I grabbed this 2 actual -- there was an actual diagram from the office of 3 the Director of National Intelligence. After 9/11, uh, 4 one of the problems was -- that was identified in the 5 Commission on the 9/11 Report was that we had a lot of 6 silos working independently. Uh, one of the outcomes of 7 that was sort of this conceptual design which took 27 8 intelligence agencies and brought them all in, one 9 investigator or an investigative resource as part of the 10 Office of the Director of National Intelligence. 11 So this isn't a completely new concept. It is 12 something that has been, um, done or is being 13 implemented elsewhere. 14 That concludes my presentation. 15 Any questions? 16 MR. HORTON: Thank you, Mr. Silva. 17 Discussion, Members? 18 Member Yee. 19 MS. YEE: Thank you very much, Mr. Chairman. 20 Um, thank you, Mr. Silva, for the, uh, great 21 presentation. And I really appreciate just, uh, kind of 22 getting a, uh, snapshot of the lay of the land with 23 respect to what we're doing relative to the underground 24 economy. 25 Uh, one thing that struck me about the, um, 26 partnership, and I, um, think the, uh, effectiveness of 27 the partnership obviously will be the collaboration and 28 working together with the other affected agencies. 13 1 But, um, it seems to me what's been missing 2 relative to our, uh, efforts currently is a, um, lead 3 agency. And I don't know if that's part of the 4 conversation that we're having with the, uh, partnership 5 agencies. But, um, while we may be able to work 6 collaborative, it seems to me that as we're getting, uh, 7 whether it's leads or additional information or 8 developing initiatives or how we're going to pursue 9 various aspects of the underground economy, that, uh -- 10 and particularly when we're getting leads and -- because 11 we're not going to ever get funded, um, adequately to 12 really be able to, um, have, um, a 24/7 presence out in 13 the field. 14 But as we're getting, um, leads coming into the 15 state, just knowing that there's a place that is 16 centralized where, um, they can be, um, assessed and 17 then assigned out to the appropriate agency, is that 18 part of the discussion that's going on? 19 MR. SILVA: It is part of the discussion that's 20 going on, Ms. Yee. 21 MS. YEE: And what's -- is there any thought 22 contemplated in terms of who could -- 23 MR. SILVA: There hasn't really be a decision 24 as whether or not there will be a designated lead 25 agency. The thought is is that there would be a CEA 26 hired by the partnership who would then be responsive, I 27 think, to all of the participating agencies. 28 MS. YEE: Okay. 14 1 MR. SILVA: But it's still -- there's a lot of 2 discussion going on, and it still hasn't quite been 3 hammered out yet. 4 MS. YEE: Okay. All right. I just don't want 5 to lose that thought because I, um -- as -- one of the 6 experiences I've had is that we -- we have, um, just 7 your average citizens who are out there detecting, you 8 know, some things that may be questionable. And, uh, 9 it's sometimes tough to direct them to the appropriate 10 place to be sure that there's a response back. So, 11 okay. 12 Thank you, Mr. Chairman. 13 MR. HORTON: Thank you. 14 Further discussion. 15 Mr. Runner. 16 MR. RUNNER: Yeah, just a couple observations 17 and some -- and some -- some questions. 18 Um, you know, there's -- I think it's an 19 important effort. And I think, you know, the issue that 20 we have is plenty of resources out there by a lot of 21 different agencies. And, uh -- and yet there is, uh, I 22 think through the collaboration we can get much more 23 accomplished and -- and focus on some -- on some 24 successes. 25 A couple of observations though. And I just 26 wanted to see if this is the case. Because one of the 27 issues that I always -- these are all important and we 28 need to do these things. But the other issue I'm always 15 1 concerned about is sometimes when we might, at times, 2 overstate some issues. And I don't -- I don't think we 3 need to. I don't think we need to overstate in order to 4 make the argument. Uh, the argument should be made on 5 its -- on a -- on the basis of that. 6 And let me just clarify and tell you where -- 7 because I don't know if these are your numbers or if you 8 got them. But I'd like to clarify on some numbers in 9 regards to -- to, uh, areas where we actually are doing 10 some of this, like Scoop, I think was identified, and 11 then the tobacco efforts. 12 And on the slide we have $57 million that we've 13 collected in new revenues through SCOOP program and then 14 tobacco then we have another $80 million. Now, it's my 15 understanding that one of the issues that we often times 16 do is we end up double counting that money. In that -- 17 in that, for instance, uh, if it was a SCOOP team who 18 went out and identified the issues with, uh -- with the 19 tobacco, we end up basically putting those in both 20 columns. 21 Is that what's probably been accomplished here? 22 MR. SILVA: Mr. Runner, I asked the SCOOP 23 program for those numbers. 24 MR. RUNNER: Okay. 25 MR. SILVA: So I would have to defer -- 26 MR. RUNNER: Okay. 27 MR. SILVA: -- that question. 28 MR. RUNNER: Again, I don't mean to diminish 16 1 that. But I just think that at times we just need to be 2 careful that we don't try to inflate numbers in order to 3 get -- make -- make things sound more important. 4 Because they're all important, and they're important on 5 their -- on their stead. 6 MR. SILVA: I -- I can speak to the tobacco 7 numbers. 8 MR. RUNNER: Uh-huh. 9 MR. SILVA: There was an audit done by the 10 Bureau of State Audits that determined that as a result 11 of AB71, 80 to $120 million was being realized. 12 MR. RUNNER: Right. And I -- I don't -- I 13 don't doubt that number. It's just that often times 14 what we do is we'd go ahead and book that then if it was 15 a SCOOP team that went ahead and identified that, then 16 we'd book it in both places. 17 So, that being said, I just think, especially 18 when we start dealing with the underground economy and 19 whatnot, I think we ought -- I think we need to have 20 fair numbers that really show what the new program is 21 actually developing it that way. And there's plenty of 22 opportunity and resource out there or, you know, lost 23 revenue that I think we should be looking. 24 Um, just to clarify on the chart, um -- and 25 maybe it's just the way it's phrased, and that is the 26 relationship that the BOE has there in the partnership 27 co -- co-directors. 28 MR. SILVA: Yes. 17 1 MR. RUNNER: On that -- on that square that 2 says State Board of Equalization, it says "BOE Chair, 3 Tax and Revenues". What -- I'm not sure exactly what 4 that means. 5 MR. SILVA: Let me see if I can go back to that 6 one. 7 Uh, I just -- it's just the Chair of the Board 8 of Equalization. 9 MR. RUNNER: Oh, okay. Okay. That's -- 10 that -- that -- I just -- the tax and revenue portion 11 was the thing that I was not sure exactly what that 12 meant. Okay. 13 So it's the Chair of the Board that actually 14 sits as the director in one of those, one of those 15 directors. 16 MR. SILVA: That's the current -- 17 MR. RUNNER: Okay. 18 MR. SILVA: -- conceptual proposal. 19 MR. RUNNER: Okay. Good. 20 Okay. Thank you. 21 MR. HORTON: Further discussion, Members? 22 MS. MANDEL: Mr. Chair. 23 MR. HORTON: Ms. Mandel. 24 MS. MANDEL: Thank you. 25 Um, I actually had one question on the 26 materials that we had gotten for the meeting. And, you 27 know, the point of a lot of these numbers, at least as 28 the way I always heard it from FTB is, the point of the 18 1 number is just that it's really, really big. 2 Um, but in terms of a revenue estimate, there 3 seemed to have -- there was a conflict in the materials 4 that we got, um, beforehand. The cover memo talked 5 about a billion dollars annually as an anticipated 6 possible revenue estimate. And, uh, Exhibit E, which I 7 think was like one of these charts that you have in here 8 where you have the California State Licensing Board 9 figure of 60 billion, Exhibit E talked about $3 billion 10 annually, um, assuming that five percent of that 60 11 billion was captured annually. 12 And so, um, just as you go forward with it, 13 you'd want to, you know -- I don't know which number 14 is -- is the number you're shopping. But let's make 15 sure whatever number you're shopping has the right basis 16 and that the information's, you know, consistent. 17 Because I noticed that as a difference. 18 MR. SILVA: Okay. I'll take a look at that, 19 Ms. Mandel. 20 MS. MANDEL: Yeah. I had kind of the same 21 question as Mr. Runner on this, um -- uh, policy level 22 at the top on that chart, uh, because I actually read it 23 to mean that the Board of Equalization was the Chair of 24 this, not that the Chair of the Board of Equalization 25 was -- was a member of some organization. 26 Is this going to require legislation to set 27 this up? 28 MR. SILVA: Yes, it would require 19 1 legislation. 2 MS. MANDEL: Okay. And then, um, so then does 3 that contemplate then that JESF and the EEEC, um, get 4 folded in under this somehow? Is that -- 5 MR. SILVA: They -- 6 MS. MANDEL: I mean is this creating some -- 7 some big superstructure for -- 8 MR. SILVA: I don't -- the activities that are 9 currently going on address specific targets within the 10 underground economy. I don't think that those would 11 change. This would just add value. This would be a 12 resource to those particular, uh, entities. 13 MS. MANDEL: Okay. Um, and I guess if 14 you're -- um, again, if you're shopping this chart -- 15 and I know you were just trying to pick up a bunch of 16 participating agencies and -- and -- and not make the 17 bottom probably look too heavy. But you don't have EDD 18 on the bottom. And a tremendous amount of what goes on 19 involves the, um, EDD side of the house, I think. 20 Because a lot of the complaints that we get, uh, with 21 respect to, um, workers -- you know, when we get the 22 complaints when people think it's going to be an FTB 23 issue, it's really an EDD issue. 24 So, uh, if you're using this, um, chart, and 25 certainly EDD is up in the top, but -- I don't know. 26 People might just -- I mean, I looked at it and said, 27 Where's EDD as a participating agency? It's just a 28 cosmetic thing, but you might want to put them there. 20 1 MR. SILVA: Noted. 2 MS. MANDEL: Um -- and then I, uh -- I suppose 3 if it is the Chair of the Board of Equalization, whoever 4 that is at any given point, then, um, there would still 5 be involvement of the Board as a whole. 6 MR. SILVA: That's correct. 7 MS. MANDEL: Through -- that's the plan, right? 8 MR. SILVA: It's -- it's -- the plan is 9 collaboration across -- across the board, so to speak. 10 I mean, you know, it's -- it's getting participation 11 from those industries that are impacted, as well as 12 those agencies that are involved in, um, addressing the 13 underground economy. 14 MS. MANDEL: Right. But I meant the Board at 15 the Board level, the Board Member level, through to 16 the -- 17 MR. SILVA: I -- I guess I would see that 18 happening through the CEA that would be appointed to -- 19 to handle this group. That anyone that wanted to 20 address issues could direct them to that CEA. Or that 21 CEA can come before the Board and talk about what's 22 going on, um, with the efforts and get the input of the 23 Board back. 24 MS. MANDEL: Mm-hmm. 25 MR. RUNNER: Just -- just to follow up, just on 26 that issue just real quick. 27 Um, I -- I -- I would assume that the -- that 28 the member's sitting there representing the Board of 21 1 Equalization and not representing themselves as an 2 individual. Is that -- 3 MR. SILVA: That's correct. 4 MR. RUNNER: That would be correct? 5 And I think that -- I think that's the 6 designation that would have to then be clear at that 7 point. Because, again, you can be on a board 8 representing yourself by your position or you can be on 9 a board representing the group to which you are a part 10 of. 11 And so if that -- the intent there is that I 12 would hope that it would be representing the Board. 13 MR. SILVA: The intent is that it represents 14 the Board. 15 MS. MANDEL: Yeah. 16 MR. RUNNER: Can I follow up real quick on one 17 other item on -- in regards to that? And it's something 18 you had said that you had just mentioned to Member 19 Mandel. 20 You said that legislation would be required. 21 Why can't this be done as an MOU amongst the agencies? 22 I mean, is there new powers being created here, new 23 role -- what -- what is it that requires legislation? 24 MR. SILVA: There exists, within some of the 25 different agencies that would be participating, 26 information sharing barriers. So the legislation would 27 address those barriers as well. 28 MR. RUNNER: Is it -- is it -- those barriers 22 1 are actually in statute at that point? 2 MR. SILVA: There are some in statute, yes, 3 Mr. Runner. And there are some that are perceived that 4 just need to be -- education needs to happen. 5 MR. RUNNER: Can -- can you -- I would be 6 interested in knowing what those are. 7 MR. SILVA: I can get those for you. 8 MR. RUNNER: Because, you know, I get -- I 9 mean, I always feel like we need to do everything we can 10 do without running down the street to go to the 11 legislature, because then we'd lose control of 12 exactly -- exactly what this thing could look like and 13 what happens. 14 Um, so I'd be interested in kind of getting an 15 idea as to, uh, what would be the barriers that we would 16 have to overcome if we did this through an MOU versus 17 going out and getting a piece of legislation. 18 Again, a piece of legislation's going to have 19 costs attached to it. This is not the time that you're 20 going to be able to get a lot of cooperation from the 21 legislature. Now, obviously, you're going -- we're 22 going to put a revenue number on this, uh, which then 23 often times softens the blow. 24 But at least I'd like to know exactly what it 25 is that we truly don't have the ability to do without 26 legislation -- you know, that we have the legislation 27 need for. Okay. 28 MR. SILVA: I'll get that information for 23 1 you. 2 MS. MANDEL: Yeah, because I was -- I was 3 curious, um, you know, because of the setup, making it 4 look like it's an additional Board and because you have, 5 um, these other, uh, entities like JESF that are created 6 by legislation, and they seem to be at some level 7 somehow getting folded in and recommending policy or 8 handling things. And then when you talked about that 9 this -- this group of, what now, the policy group of 10 four, I guess, at the top is the idea hiring a CEA, um, 11 if they weren't their own organization, I wasn't sure 12 where the CEA came from. 13 So that was what prompted me to ask about 14 legislation. 15 MR. SILVA: That was the thought, that the CEA 16 and about five support positions would come through the 17 legislation. And that would be the core or the nucleus 18 of the, um, Centralized Intelligence Partnership. And 19 then each agency would donate or dedicate a, uh, 20 investigative resource. 21 MS. MANDEL: Mm-hmm. Okay. 22 MS. STEEL: So how much cost involved with 23 this? 24 MR. SILVA: I have not costed it, Ms. Steel. 25 But just five positions, roughly about $450,000. 26 MS. STEEL: That's from the BOE side, or that's 27 for a whole? 28 MR. SILVA: For the core. 24 1 MS. STEEL: Okay. Thank you. 2 MR. RUNNER: Again, we wouldn't -- you don't 3 need -- you don't need the legislation in the sense that 4 we already have -- each of those agencies have money 5 available for this kind of effort. So we have the 6 resources already, uh, correct? 7 MR. SILVA: When -- when you start asking 8 agencies to give resources, it becomes very difficult, 9 Mr. Runner. They -- they will -- I mean, even in 10 discussing this with some agencies, they're -- 11 they're -- everyone that I've talked to so far, and I 12 have talked to a number of agencies that are 13 represented, are all for the concept. But when you 14 start talking about ponying up resources, the first 15 thing you start hearing is all the cuts that we've had 16 and -- and the difficult times that the agencies are 17 undergoing. 18 So I'm not -- I'm not sure that they would -- 19 MR. RUNNER: Well, I guess that doesn't make a 20 lot of sense to me in the sense that -- that in doing 21 this we're actually trying to go into and take -- we 22 already have responsibility for some of these -- some of 23 these efforts. We already have staff and we have 24 positions to take care of some of these efforts. 25 So I -- I -- and we're trying to do this in order to 26 create a more efficient, effective way to do it. 27 So I'm trying to struggle, if we're 28 trying to -- why wouldn't we just reallocate resources 25 1 instead of trying to create new resources to do a job 2 that we're already doing that we think this is going to 3 do -- be better at? 4 MR. SILVA: Mr. Runner, I believe that the 5 Board would be on board to do that. I'm not sure that 6 the rest of the agencies would be as -- as 7 accommodating. 8 MR. RUNNER: Okay. 9 MR. HORTON: Um, Member Yee. 10 MS. YEE: Uh, thank you, Mr. Chairman. 11 I, um, agree with Senator Runner to the extent 12 that we don't know legislation. It's probably wise not 13 to have to pursue it. But I think for an effort this 14 large, and even though we're trying to create 15 efficiencies, and with this many partnership agencies 16 that are involved, um, I certainly would be more 17 comfortable having it memorialized in some fashion 18 through legislation. 19 Um, we are talking about, uh, perhaps some, 20 uh -- some different ways of doing business for some of 21 these other agencies. Um, and I do think Mr. Silva -- I 22 think Mr. Silva raises a good point. There have been 23 severe, uh, fiscal constraints for many of these 24 agencies to where, um, you know, the presence of even 25 any kind of enforcement effort has been minimal -- has 26 been minimized over the years. 27 And so, um, I also think that we ought to take 28 some credit for trying to create a more efficient model 26 1 and have the blessing of the legislature, and be 2 completely transparent about what we're trying to do. 3 MOUs aren't necessarily the most transparent, you know, 4 documents. And I think when push comes to shove and 5 agencies start feeling strained that MOU is going to go 6 by the wayside and we're going to be back to where we 7 started. 8 MR. HORTON: Um, further discussion, Members? 9 Members, um -- as the, um, author of Joint 10 Enforcement Task Force, while I was in the -- working 11 for the Board of Equalization, sort of initiated the 12 investigation of the, um, fuel tax evasion, um, years 13 ago. And what I want to draw a distinction here is, is 14 that we're really not talking about businesses that for 15 some reason, uh, failed to get a permit and as an 16 afterthought will eventually get their permit or had -- 17 there's some discrepancy between the law and what's 18 taxable and what's not taxable. 19 In the case of the few tax evasions, cigarette 20 tax evasion and a number of other programs have been 21 initiated, we're talking about organized crime that is 22 international. You're talking about organized crime 23 that is all over the world. And they're, uh, operating 24 here in the State of California and counterfeiting, 25 reproducing products from various different, uh, levels. 26 And it is causing a hardship on California's economy. 27 When you look at $60 billion in revenue, uh, 28 that is significant for the State of California, being 27 1 controlled by organized crime in a criminal element. 2 The -- the, uh, Joint Enforcement Task Force 3 was really never really intended to be a proactive 4 program. It was designed to be more of a reactive 5 program where the various different agencies got 6 together and if they had a lead, they would share that 7 lead at this meeting. And it was the genesis of 8 theoretically forming this Centralized Intelligence 9 Partnership that eventually what evolved out of the 10 Joint Enforcement Task Force would be some centralized 11 effort where the various different organizations would 12 get together and they would intelligently figure out 13 methodically how to go after these various different 14 criminal components in a very proactive manner. 15 And so where we can marshall the resources of 16 various different agencies, many of the agencies that 17 are currently involved in this underground economy 18 activity, they have an entirely different focus. Uh, 19 some of the agencies, they're focused on -- on 20 prosecution and not necessarily tax evasion. Some of 21 the agencies are focused on labor-related issues and not 22 sales and income tax evasion, even though if there's a 23 labor violation, theoretically there's also an income 24 tax and a sales tax violation. And in many case there's 25 a human trafficking violation. 26 And so because of these multiple, uh, 27 violations of the law are not being addressed when you 28 have just a -- an agency that is focused on their 28 1 particular effort, and the challenge that it appears 2 that we're having is that many of those agencies are 3 basically saying, you're asking us to, uh, have a more 4 global vision of -- of our enforcement efforts. 5 So as we go in and look at the prosecution, you 6 also want us to look at the tax evasion; you also want 7 us to look at the human moral issue; you also want us to 8 look at the labor issue and labor violations and so 9 forth. And that's simply not what we do. 10 And so, by the mere fact that we're asking them 11 to dedicate time to be a part of a centralized effort to 12 look at this more holistic, which is the only way we're 13 going to be able to solve this because the global, 14 international criminal element, uh, they operate on a, 15 uh -- on a strategic basis as well. They have a very, 16 uh, complicated system, business model that they're 17 using in order to be able to capitalize on our economy. 18 And so, the efforts here, uh, is to -- and 19 that's the reason, part of the reason for legislation. 20 The other part of the reason is that this will 21 ultimately require funding. Because if we are effective 22 at what we're doing, and if we're right that a strategic 23 approach will accomplish the objectives, there's 24 billions of dollars that are out there and available for 25 us to recapture and bring back to the State of 26 California. If not recapture, to at least level the 27 playing field so the businesses that are having to 28 compete with these illegal operations, if we in fact 29 1 minimize the effect of, uh, an illegal operation, we 2 increase the benefit to the legitimate operators in the 3 State of California because it's a zero sum gain. 4 The customer's going to buy the DVD. They're 5 going to buy the prescription drugs. It's just a 6 question of whether they buy it from a illegal operator 7 or they buy it from a legitimate operator. So I think 8 it's important that we, uh, have legislation to sort of 9 codify this. 10 The other issue of whether or not the 11 authority, the -- the -- exists for us to establish from 12 an MOU perspective, unfortunately, uh, the Board of 13 Equalization has different, uh, authority from the -- 14 from the, um, Franchise Tax Board. The Franchise Tax 15 Board has legal authority to receive certain information 16 that the Board of Equalization doesn't have. And 17 that -- that exists from various different agencies 18 within the, uh -- within the proposed group of 19 individuals that we're proposing to work with. 20 I think it's important also to point out that 21 the goal is to -- part of the goal, as I hear it, is to 22 work with the business community. And many of these 23 numbers have come from the business community. They've 24 identified in their particular industry that they're 25 losing billions of dollars as a result of criminal 26 activity, infiltrating their market. 27 And so to the extent that we can be helpful in 28 leveling the playing field in that area, I think it's 30 1 important, uh, to work with them, as well as the labor 2 groups throughout the State of California. The impact 3 on the labor groups is is that these individuals who are 4 operating illegally, they're utilizing the human 5 trafficking mechanism to -- to -- to -- to -- to bring 6 individuals here to the State of California and to the 7 United States. 8 It's estimated that some 17,000 individuals are 9 brought here to the United States against their will, 10 and they're enslaved. They receive no salary, uh, 11 minimum -- no benefits whatsoever. They're literally 12 slaves. And in my cases, once their -- their, uh, 13 service is done, then their organs are sold, uh, on the 14 open market. 15 So it's devastating, not only economically but 16 also morally devastating to our society. And so we look 17 to have an opportunity to have an impact in that area as 18 well. 19 And those are the things that will 20 ultimately -- that we will need legislation and we will 21 need additional funding. And I would share with my 22 colleagues that I've had an opportunity to talk to the 23 Governor and the Governor's office, the pro temp, the 24 legislature, and I believe they're all on board. I 25 believe they have a sense of the urgency of recapturing 26 these funds, especially given the economic challenges 27 that California faces. 28 So thank you for your presentation. 31 1 MR. RUNNER: Real quick question. I'm looking 2 for the local government aspect of it. Um, you know, 3 since it is basically a lot of issues in regards to law 4 enforcement. Obviously we have law enforcement arms in 5 the State of California. But most of those all take 6 place through local governments, DAs, sheriff's 7 departments and whatnot. 8 How -- how -- how do we -- how do we integrate 9 them within a -- in a structured way? Or what's the 10 intent to do that? 11 MR. HORTON: Um, my experience, Mr. Runner, is 12 is that on the local government level, the DA -- 13 MR. RUNNER: Mm-hmm. 14 MR. HORTON: -- has a tendency to, um -- to -- 15 to want to establish a value, uh, for their efforts. 16 So if they're going to engage in a prosecution 17 because of the budget issues, they want to know that 18 there is a return on their investment of service, 19 typically in the form of -- of dollars. 20 And so once we -- once we attach the, I 21 believe, the tax revenue aspect of the overall 22 prosecution, uh, I think that, uh, the incentive will be 23 there for them to participate. 24 Having them part of a state organization might 25 be a little challenging, only from -- if not from a 26 numerical perspective in that there's so many of them, 27 uh, but it certainly would be incumbent upon us to have 28 them engaged in the process. And I -- and I believe the 32 1 existing system does engage them. And the intent is for 2 that to occur, because they provide a huge value. For 3 example, uh, in a local city, if you have -- each city 4 will issue business tax permits. 5 MR. RUNNER: Mm-hmm. 6 MR. HORTON: And so if we're able to reconcile 7 the business tax permits to the actual sales tax 8 permits, that's a red flag as to whether or not there is 9 an indication of a potential underground economy 10 activity or understatement in -- in -- in taxes. 11 And the existing, um, allocation of revenue and 12 funds is such that, with local tax, any additional sales 13 tax is collected benefits the city, any additional 14 income tax collected benefits the city. So they have a 15 direct interest in the success of this program. 16 And, uh -- and we have -- I mean the program 17 itself would have, um -- it would be important for the 18 success of the operation to engage them. 19 Uh, and so I think that would be innate in the 20 operation. 21 MR. RUNNER: Just through leads then, or -- 22 again, I'm just trying to see the structure of that. 23 MR. SILVA: Well, District Attorneys are 24 engaged when a -- when a prosecution package has been 25 put together. Sometimes they're brought in. 26 MR. RUNNER: But how about the investigation? 27 I mean, how about previous to that? I mean, for 28 instance, the local sheriff's department knows where it 33 1 is that they're selling CDs out of the trunk of a car. 2 Um, you know, and where that takes place and whatnot. 3 I'm just thinking at the front of end of it, not the 4 back end. Not the prosecution side, but on the lead 5 side. 6 MR. SILVA: Uh, if this conceptual pilot comes 7 to be, I would imagine that one of the goals of the 8 group would be much like our current investigations, and 9 that's to do outreach efforts to notify different 10 potential partners of what's available. 11 For example, now, as an investigator, if 12 something like this existed, I would be on the phone in 13 a minute because everything I want is right there. 14 Instead of, well, who do I call? Or potentially, 15 Do you know anyone at EDD? Or do you know anyone at 16 FTB? It's, okay, I can call this location, all the 17 resources are right there. 18 I think that once law enforcement finds out 19 that that resource is available, to the extent that they 20 can, they'll tap into it. And also that the group 21 itself, part of its mission should be to, you know, 22 market its services -- 23 MR. HORTON: I think also -- 24 MR. SILVA: -- what it's doing. I'm sorry. 25 MR. HORTON: If I may. Um, to sort of -- the 26 initial core group is more of an intellectual group, uh, 27 that seeks to identify the problem and develop a 28 methodical, intellectual way about going to approach 34 1 the -- the problem of the underground activity. 2 And so part of that is having the skill sets to 3 be able to marshall the various resources that are 4 available. And so what you will find is, is that, uh, 5 much like in the tobacco and other criminal activities, 6 is not the guy that's selling the CD out of the car. 7 It's the guy that's manufacturing, mass manufacturing 8 the CD in Taiwan. 9 MR. RUNNER: Right. 10 MR. HORTON: And so, uh, the leads will come 11 from the, uh, importing of that product into California. 12 The truck stops, as the trucks are bringing the product 13 in and the Board of Equalization and the Highway Patrol 14 is checking the truck stops for licensing and fuel, uh, 15 to note whether or not we have illegal activity going 16 on, it's that collaboration. 17 But going back to the centralized concept is to 18 have a group of individuals that have the skill sets to 19 be able to create a proactive strategy to deal with the 20 problem. Identifying the problem and then identifying 21 the strategy, developing the strategy to combat the 22 problem, and then marshalling the resources. 23 In the phase of marshalling the resources, that 24 may involve various different counties. And -- and I 25 would hope that the intent would be, uh, for us to 26 engage those counties because that value comes there. 27 And particularly when you're talking about Long Beach 28 and you got the harbor. 35 1 MR. RUNNER: Yeah. 2 MR. HORTON: You've got LA and so forth. 3 MR. RUNNER: Let me -- no, I think it's a 4 great -- a good -- I think it's necessary. And let me 5 just ask, I mean, have we -- have we run this by DAs 6 right now or the DA's Association or some other -- some 7 of those, you know, in terms of getting their input as 8 to how this -- as to how this could be helpful or how 9 they could integrate into it? 10 MR. SILVA: You know, I talked to the US 11 Attorney about it once when I just was having a chat on 12 something else. I have not presented it to the District 13 Attorney's Association or other District Attorneys. 14 MR. RUNNER: I would think that would be 15 helpful to us, to -- to talk to the local law 16 enforcement, DAs, and whatnot. Because, again, I get 17 the fact that we're not after the guy in the trunk, but 18 that's where the lead starts. 19 Um, and -- and so I think that that's -- I 20 think getting buy-off on that and getting them to own 21 and see how they can integrate in, and maybe even have 22 some ideas as to how things happen in their -- I mean, 23 their areas, uh, could be pretty helpful to us. 24 So I would hope that we'd at least, you know, 25 talk to the local governments because I think they're a 26 great resource for us. 27 MR. HORTON: Excellent. 28 Maybe you can share, uh, who you have had a 36 1 discussion with, if you can recall. 2 MR. SILVA: I don't know if I can remember them 3 all, Mr. Horton. 4 MR. HORTON: Okay. Well, a few will do. 5 MR. SILVA: A few. 6 MR. HORTON: The direction that you're going. 7 MR. SILVA: Pardon? 8 MR. HORTON: The direction that you're going. 9 The agencies that you're -- 10 MR. SILVA: I've spoken with EDD. 11 MR. HORTON: -- you've had a dialogue with or 12 participated in the formation of the concept. 13 MR. SILVA: I've spoken with EDD, um, FTB, uh, 14 DOJ, and some of the legislative offices. 15 MR. HORTON: Okay. That's good enough. 16 MR. SILVA: There's probably been others, 17 but -- 18 MR. HORTON: Yeah. I think we -- Mr. Runner's 19 absolutely right. We continue to reach out and to 20 engage, especially as you go through the legislative 21 process. All of this stuff will kind of wash itself 22 out. 23 Further discussion, Members? 24 Thank you very much. 25 MR. SILVA: Thank you. 26 MR. HORTON: Get well soon, by the way. 27 MR. SILVA: Thank you. 28 MR. RUNNER: Just for clarity, will this -- 37 1 MR. HORTON: Wait. You can't leave yet. 2 MR. RUNNER: No, no, no, no. Actually for us. 3 MR. HORTON: Oh, okay. 4 MR. RUNNER: Just for clarify in regards to 5 where this goes now. Does this come back to us? 6 MR. HORTON: Oh, Mr. Silva, could you come back 7 for a second, just in case. 8 MR. RUNNER: Is the intent for this to come 9 back to us then as a piece of legislation, or that we'll 10 be asking to be supportive of? Or what's the -- what's 11 the path? 12 MR. SILVA: We were developing some legislation 13 that we were going bring back to the Board. 14 MR. RUNNER: Okay. Thank you. 15 MR. HORTON: Yeah, I would -- I would also 16 share that, uh -- um, that you solidify the different 17 levels of authority as it relates to the organizational 18 structure. 19 What I heard was is that there's a policy where 20 the Chair of the Board sits. And I'm not necessarily 21 supportive of the Chair of the Board necessarily, only 22 because -- maybe a designee of the entire Board, only 23 because this is -- could be labor intensive. Uh, there 24 probably is quite a bit of activity that we may need to 25 go through as far as interested parties, discussions of 26 that nature. And it may very well be more of a 27 committee activity if it, uh -- if it is as intense as 28 the numbers sort of, uh -- sort of indicate. 38 1 And then the -- the level where you have the 2 actual, um -- I don't want to say agency, but you have 3 the group of individuals that are developing the 4 strategies, marshalling the resources and so forth, that 5 is conceptually to be led by this -- by a CEA person. 6 My experience with the underground economy and, 7 uh -- which is pretty intense. Since I was 22 years 8 old, I've sort of been dealing with this whole notion of 9 the underground economy legislatively, as well as an 10 auditor, supervisor and so forth. 11 It is the effectiveness of being able to, uh, 12 to control the underground economy is in the area of tax 13 evasion. Much like when Eliot Ness was faced with his 14 criminal activity, it was the tax guy who was able to 15 really, tax and the US Postal Service that was able to 16 really bring some control over that activity. 17 And so I would encourage, and I would support 18 Ms. Yee's vision in that regard, that that individual be 19 someone that has the skill sets that are developed here 20 at the Board of Equalization to be able to address those 21 types of issues and to assure that we're actually, um, 22 have a bifurcated -- not bifurcated, but a combined 23 effort of prosecution in tax evasion. And so that we 24 see the effect and the benefit of controlling the tax 25 evasion activity in the prosecution process. 26 And I think that's been a missing component 27 where we go in and we end up prosecuting these 28 individuals and then within months they're open and 39 1 they're operating again. And so the benefit of having 2 the taxing agency engaged is that we have the authority 3 to lien. We have the authority to take their resources 4 away, prior to the adjudication of the civil matter. 5 So I think it's important that we make sure 6 that that's -- that element, that thought process is 7 there. And the way to do that is to embody that in the 8 leadership of the decision-making, decision-makers. 9 Okay. Thank you very much. 10 MR. SILVA: Thank you. 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 40 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 November 16, 2011 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 40 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: December 6, 2011 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 41