 Aloha, and welcome to Business in Hawaii with Reg Baker. We're a show that focuses on business success stories in Hawaii, broadcasting out of downtown studios of Think Tech Hawaii in Hololulu, Hawaii. Our success stories in Hawaii are many, they're plentiful. We've got a lot of successful individuals, and we have individuals that assist companies in staying out of trouble and being successful in the long run. We've got a recurring guest today, Attorney Steve Pangry. He's going to be spending a little bit of time with us today talking about general topics. It's my quarterly commentary. He's got a very interesting background, not only in the legal field, but also as a real estate broker and agent and in a lot of international experience. Steve, welcome back to the show. Thanks, Reg. It's always my pleasure. It's always a pleasure to have you here. Last time you were here, we talked a little bit about some of the issues in foreign bank accounting and reporting and a lot of changes that have been happening over the years. A lot of people don't realize how big and important that is and what the penalties might be. We've got people that are getting close to the deadline of filing their returns. We're about a month out from that. Any updates or changes you wanted to let us know about? There's not any specific changes with the F-bar, which is the reporting of foreign bank accounts. That, every taxpayer on their 1040 schedule B, Section 3, has to check whether or not they have an interest in a foreign financial bank account or business. You have to check no or yes, and their accountant, of course, should be walking. I've got a question for you. Every year, you're required to say yes or no, whether you've got access or you own or whatever a foreign bank account. I've seen a lot of clients not even answer that. They just skip right over it. What's the implications of that? That's an audit trigger, potentially. The returns, as you know, when they first file, they go through a computerized scanning, and it's triggered to recognize certain omissions, and that very well could trigger an audit if someone did not answer the question whether or not they had a foreign bank account. If they do have a foreign bank account, they have to report that? That's correct. If you have the equivalent of US $10,000 or more in that bank account at any one time during the year, I mean, you may have 20,000 at one time and 2,000 at the end of the year, but you have to report that bank account, the bank, the overseas bank, the account number, and the highest balance during the year. There's no penalty. I mean, there's no additional tax as long as the income, if you have interest income, for example, is reported. But there is a very high penalty ranging anywhere from $10,000 up to $500,000 for not reporting the foreign bank account. Yeah, and it's a fairly simple process. As a matter of fact, you used to have to go online and do this all as a separate. Some of the tax programs now are actually incorporating that foreign bank account reporting sheet or form right in the tax software. So it's not that difficult to do anymore. That's true, and you actually have to file it separately. It's a form 114, which is what you're talking about, but it does have to be filed online separately with FinCEN, which is the Financial Crimes Enforcement Network or the Department of Treasury. But they have redone the form, and it's not that difficult. I did mine, for example, a couple weeks ago, and it wasn't that difficult. Well, and a lot of times I think the form will have the instructions on where you need to mail it separately. There's no excuse not to do it. It's a fairly simple process, and if you get caught not doing it, there could be some pretty significant fines. I actually am representing a client now who's under federal grand jury investigation for failing to report two offshore bank accounts with well over a couple of million dollars in those accounts. Ouch. Yeah, he's in potentially some serious trouble, but it's a situation that could be handled. The general takeaway from all of this that people need to understand is that the IRS has upgraded its enforcement priority to foreign income and foreign offshore bank accounts but income that's not being reported. So they're definitely looking for this. They are, and they're starting to get more foreign banks cooperating with some disclosures, aren't they? That's correct. A term called FACTA, which is Foreign Account Tax Compliance Agreement, but basically the IRS has gone around the world to every single bank and all of its hundreds of branches and required these banks to report to the IRS any account holder that it's a U.S. citizen or has a green card as a U.S. taxpayer, if you will. And probably over 200, 250 banks around the world now are reporting to the IRS. And if any people have a foreign bank account or they live or do business in foreign countries, they're finding that their banks that they're dealing with are bringing them in and asking for a lot of specific information. And sometimes closing their accounts, say, we don't want to deal with U.S. citizens. Well, if you've got one of these foreign bank accounts and you haven't been caught yet, consider yourself lucky because it looks like they're tightening things up. That's correct. Very good. Well, let's move on to another very taxing topic, the rail. Yeah, that's a non-again-off-again topic. I'm sure people are starting to get tired of it. But we've had some recent discussions recently that you brought up about in audit. What's your thoughts? What are you thinking about in audit? From my point of view, as a financial crimes defense attorney, it's inconceivable that the legislation that was passed did not call for a forensic audit. A forensic audit is a audit that specifically looks for fraud. And it's very detailed and very specific, as you were explaining to me. There's a tremendous amount of money that's been spent on the rail and is being requested and proposed to be spent in the future. And to allow that kind of funding from the taxpayers without some type of accountability is mind-boggling. I mean, it's really absolutely... Well, especially when they keep changing their forecasts. It's like every few weeks, every month, they have to make revisions. And these are not small revisions. These are significant dollars. And wherever you see this frequency in changing the costs involved in a project over and over and over again, you can't help but suspect that there's something not right in the process. Well, that's certainly by suspicion, and I think that's shared by many people. I mean, people have been asking a lot. In the legislature last year, I remember there was a big boo-ha-ha when the mayor came asking for money and the state legislature even said, well, show us why you need it or show us how you've been spending it. And Mayor Caldwell didn't do it. Well, he didn't or he couldn't. Well, I don't know about that. But maybe you might want to explain the difference between a general audit and a forensic audit. Well, you know, from my experience and having worked in the audit world for probably about eight years, you know, and I would assume that the rail has a similar requirement is that a financial statement audit is that they look at the financial results of whatever that entity or project or company, business, government agency is. And the auditors will bless whether or not it's reasonably stated according to some generally accepted accounting practices they use, generally accepted auditing standards. It's a very specific type of process. It's got materiality issues and they do internal control checks to make sure that the process of balancing and reconciling and approvals are all in place and functional. If an entity passes all of that and the numbers are, you know, reasonably accurate, they'll say that, you know, in their opinion that it's, you know, it's a reasonable reflection of the operations in a balance sheet of a company. Now, when you start getting into different types of audits, one of which would be a forensic audit, then you're starting to look at fraud. And there can be fraud at almost every level of an organization potentially. I mean, are we talking about a fraud of wasting paper clips for school operations or are we talking about approving a $5 million contract without a competitive bidding requirement? So there's a whole range of different types of fraud that can happen. You need to have a very specific scope in what you're looking for in a forensic audit. And it's primarily looking, as you mentioned, actual fraud. And we have to define what that means. Well, how about change orders, for example, as an example in a construction business? It's an area that is usually strife with fraudulent type activities. And one of the most common examples is that they have a change order requirement that you can make a change to a contract for no more than, say, $250,000. If you've got a million dollar change, it has to happen. What you do is you just have five change orders for $200,000 a piece and bang, you can get it done without all the proper approvals or without legislative action on it. And so change orders is always an area that people need to look at if they're looking for fraud. And it's pretty common to find something there. I'm not saying that there is any there. But that would be an area that you'd want to look at. But even then, you'd want to scope it down and define exactly what it is that you're looking for. And if you do find it, then they have to report it and let you know what their findings are of that particular step. There are other types of audits, one of which I thought might be a good one to explore with the rail is an efficiency audit. Looking to see, there might be fraud and you might detect fraud going through an efficiency audit. But the primary intent of the efficiency audit is to try to determine whether or not things are being done in the most efficient way. Is it being planned properly? Is it being executed properly? Are all the stakeholders being involved in the process? We were talking a little bit earlier about having the pillars of the rail all set up and having the power requirements to run the rail and then having the stations that are big power requirements and users. And having all of this planned and construction beginning and work already being done. And then they decide to bring Hawaiian Electric into the mix and say, oh, does this make sense? And of course, Hawaiian Electric is going to say, well, we're kind of late to the game here. We can provide power over there, but not over here. And now all of a sudden, they've got to go back and redo things. That's not efficient. Anybody can understand that. Well, but that's the kind of things you would be looking for an efficiency audit is just poor management decisions or decisions that are being made out of sequence. What if we stopped the rail? What are the consequences? And is it a case of throwing good money after bad? Or is it a case of just prudently cutting your losses and diverting the funds to more productive uses? You know, that's a very interesting question and one that might take a few minutes to answer, maybe even longer, but we have to go on break right now. So let's, we'll leave everybody in suspense about stopping the rail. But this is business in Hawaii. We broadcast every Thursday from 2 to 2.30. We're going to go on a short break and we're going to come right back right now to just in about 60 seconds to discuss what happens if we shut down the rail. This is Think Tech Hawaii, raising public awareness. 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Welcome back. This is Business in Hawaii with Reg Baker. My guest today is Steve Penguin, an attorney and commercial broker. We were just talking a little bit about the rail, and the question was raised. Can we stop it? I think that was the question. And the short answer is, of course we can. We can have control over our own destiny here. There's nobody dictating to us what we can and cannot do. There are issues, though, about how much of that federal funding would have to be repaid. Now, I would be very interested to see that if we did shut down the rail, what would be the cost of shutting it down and not having any future operating costs? And what would it cost to go ahead and finish and continuing operating it? There's very little doubt in my mind that if we shut it down, and even if we had to pay back the feds, a couple billion dollars, that shutting it down and not spending any more of our money, and even if we had to pay another two billion over the next five or ten years, that's going to be less costly than trying to fix the rail for an unknown completion cost and operating it at a loss of half a billion a year. To me, I think it'd be interesting to see how much it's really going to save us by just shutting it down. Nobody's willing to do that study. Well, just from my layman's point of view, I'm not too concerned about paying the federal government back, because that could certainly be negotiated. Spoken like an attorney. But I think it's true, you know, it's either the amount would be reduced or you can pay it back over 20 years or something like that, so that's free money, basically. The other thing is, I think it has to be taken into account, how much money of this four or five billion dollars that's already been spent has already gone into the economy. You know, there's been a tremendous amount of jobs created by the rail, and a lot of people have been working, and a lot of companies have been making money, not just in the physical, concrete part of the rail, but all the ancillary businesses throughout. So those types of benefits that have already been received, I think, have to be taken into account when you're talking about how much is it going to cost to shut it down. And those might even continue even after we shut it, even if we don't shut it down, those benefits will continue, but we can divert the money into other things. Well, that's my pet project. I think that the, frankly, that kind of money, the four or five billion dollars, if you think about what it could be used for in this city, in Honolulu, to build the roads. Other than rail, right? No, other than rail. There's a lot of other projects. There's a lot of other projects, infrastructure projects, homeless shelters, hospitals, transportation. Wait, wait, wait, wait, these are all going to benefit people. Oh. Is that what we want to do? Well, they might not benefit a few specific interests that are benefiting greatly from the rail. You know, my pet peeve is about the roads and the condition of the roads. In September 5th, the Pacific Businesses reported a study saying that Hawaii was the worst, number one worst state in the union for the condition of the roads and other infrastructure. And that costs people millions every year in auto repairs and physical injuries that, you know, don't get statistically reportedly. It really tracks that. Exactly. Exactly. So, it's really a matter of priorities. You know, the city seems to be able to think they could find billions of dollars to build the rail, but they can't find 100,000 or 200,000 or a million dollars to build the roads and take care of some projects for the people. Yeah, and that's something that most of us have to deal with every day, even when you're living out in Hawaii, Kai, or Kanoi, or Kailua, and you don't have all the benefits of the rail, you still have to deal with these inferior infrastructure. That's right. You know, and I think you'd find a lot of people very interested in diverting some of that money. Well, I think certainly the Outer Islands have a right to be upset about the increase in the transient accommodation tax or the TAT. There's no logical, rational reason why the Outer Island folks should be paying, you know, the businesses should be paying the extra tax. And I think you'll find most of the people and the elected official on those Neighbor Islands in total agreement with you. Didn't seem to help in the state legislature. Well, there wasn't enough of them. Maybe we need to get more Neighbor Island representation here on Hawaii, on Oahu, so we can't always dictate what goes on out there. I want to ask you a question. I know you're on the National Small Business Association Board, and you just came back from Washington, D.C., from several big meetings and so on, and you have some thoughts that you were telling me about, about regulatory measures that are being taken. You know, it was a very interesting meeting. I was there for about a week. I was the SBA, the Small Business Administration's Regulatory Fairness Board hearing, and I'm the chair of the Ninth Region, which is the Western United States. I got to represent this region. We made some reports. We did some neat stuff. I was able to communicate directly with some of the different agency heads that actually sit on the cabinet with the president, OSHA, Department of Labor, CSM. There was a lot of representation there that we had a good dialogue going. We found out, and we already knew this, President Trump had announced that he's very focused on reducing rules and regulations that have a negative impact on mostly small business, and we had been told that there's over 300 of those rules and regulations already identified, and so we're trying to chip away at that and try to make them a little bit more logical and less strenuous for small businesses to be in compliance with. Are these federal rules now? Does it apply to the state? Yep, all federal. We do have a state agency here that's the Hawaii Small Business Regulatory View Board that does something similar in Hawaii, and I work closely with them, and together we're able to address both state and federal rules and regulations. Some of them just need to be tweaked a little bit. Some of them need to be made consistent with each other because sometimes OSHA and DOL and they have inconsistent, similar type rules to achieve similar results, but different ways to stay in compliance, and it gets very confusing. And multiple forms for different agencies and that type of thing. So, you know, we've got 300 plus, we're trying to add to that. Adding to that list is very simple. It's a one-page form, fill out some information on the front name, address, you know, who to contact, and then a brief narrative on the back of what the rule is and what you want to do to make it better. And so it's a simple process. Anybody want to have any of that information, let me know. I'll be happy to send it out. Just drop me a line at regitredgebaker.com, and I'll send a form and work with you to get it done. But part of the discussion that we had in D.C. while I was here was not only the regulatory form, but also tax reform, which is kind of overlapping with the regulatory issues, and then also infrastructure projects, you know. And, you know, although the rail we were just talking about is a big infrastructure project, there are a lot of smaller infrastructure projects that might even be more beneficial that we could get funding for here as well. And they're looking to do this across the country. So, if we do lose any employment related to the rail, there's plenty of opportunity for full employment in other areas. So, you know, one of the arguments I heard about the rails that keeps everybody busy for the next five or 10 years, which is good for the economy, can't argue with that. But there are other ways to keep them busy that make more sense. Other construction generally related projects, right? Yep. We were talking earlier also about DECA. Yes. You know, the DREAM Act and the pros and the cons. Well, you know, the whole immigration issue is kind of a double-edged sword. I can certainly understand the desire for border security. But, you know, for example, NAFTA and DECA falls kind of in that same category. But, you know, we've relied on talent from across our borders for a long time. And some of this talent is very talented. You know, our economy depends on them. Hardworking, tax-paying people should be allowed to stay. And I think when we're looking at unemployment in the two to three percent range, that by definition is full employment. We can't take on more infrastructure work as a country, which the president is wanting to do. But at the same time, reduce our workforce because we won't have anybody to build and do the infrastructure. And so it doesn't quite make sense to me. But I think what he's done with the DECA is to push it over to Congress and say, hey, this is broken. Let's take a look at it and see what we can do to fix it. And we've got about six months to do it. Right. But my specific argument for approving the DREAM Act or making it permanent, if you will, is that if you take a look at the president's recent immigration new set of criteria for immigrants, they want to speak English. They want to be younger. They want to be self-reliant. They want these people to be educated. They don't want them to come into this country and be on public services and that type of thing. Well, if you look at the roughly 800 million young folks that are within the DREAM Act criteria, they fit that profile. Why in the world would we want, as you say, to eliminate them from our country? And they're already here. Exactly. And they're working. They're paying taxes. I think if you pulled and I don't know how many of them are working or how many of them are still in school or what the mix is, but you can't take 800,000 people and just pull them out of the workforce. There's got to be a way to keep them in there, particularly if you want to keep everybody fully employed with these infrastructure projects and other options. And so I'm just hoping that Congress will decide to get a little bit more cooperative and finally push something through that's going to be workable. What seems to be a bipartisan issue? Hopefully, this could be either a win-win or a lose-lose. So hopefully they're going to be smart enough to make it a win-win. If you don't mind, I wanted to interject a thought I've been having about the disaster and the reconstruction that's going to be necessary from Hurricane Harvey, Hurricane Irma, Hurricane Marie, Maria that's gone through and decimated the southeastern part of the United States, the southwestern part of the United States, and of course all throughout the Caribbean and Puerto Rico and even Cuba. But the thought I've had is that there is money available. You listen to the politicians talk about, are we going to get all this money to do disaster relief and all that kind of stuff. The fact of the matter is the money is in the federal government. It has the money available. It's just a shift required in the paradigm of how you think about what our priorities are. And I'm basically suggesting that one missile which costs a million dollars could go a long way towards building a hospital or buy a whole lot of generators and keeping a troop in Afghanistan which costs apparently $2.4 million per year times the 5,000 or so troops that are in Afghanistan. And that's about $12 billion. That could go a long way. It's up quick. It does. So the money's here. It's just we need to change our priorities about where to spend it. And by the way, this applies to Europe too. You know, the European countries have territories throughout the Caribbean, the United Kingdom, France, the Netherlands, and so on. So they are also involved. They've got stakeholders over there. They've got people that they're responsible for. They need to take care of them. And I think historically they've always kind of backed off a little bit and let the U.S. take more of a lead on that. And we need to get more cooperation. But we've got probably about 60 seconds or so. I just want to make one pitch, believe it or not, for President Trump's idea about rebuilding the infrastructure. He's been saying this for a long time. Yes. About rebuilding the infrastructure in the U.S. in particular. Well, these disasters have presented the perfect opportunity to switch the priority for funding because a lot of infrastructure is going to have to be rebuilt pretty close to 100%. Well, yeah, it's an opportunity. We just need to be smart enough to take advantage of it. I agree. All right. Well, very good. Thank you, Steve, for being on the show today. This is Business in Hawaii with Reg Baker. This was our quarterly commentary. We covered a lot of different ground. You may or may not agree with what we've talked about, but it's refreshing to get it out there and hear different perspectives. We broadcast live every Thursday from 2 to 2.30 from the Downtown Studios at Think Tech, Hawaii. Hope to see you again next week. Until then, aloha.