FBAR Penalties and Excessive Fines (3/5/10)

A commenter requested further discussion as to the possibility of an excessive fines problem for the FBAR penalties. In an earlier blog here, I had advised readers of this article on the subject: Steven Toscher and Barbara Lubin, When Penalties Are Excessive -- The Excessive Fines Clause as a Limitation on the Imposition of the Willful FBAR Penalty (J. Tax Prac. & Proc. Dec. 2009-Jan. 2010), here. The commenter said:

Could you share your thoughts in a new thread on the third article here, Steven Toscher and Barbara Lubin, When Penalties Are Excessive -- The Excessive Fines Clause as a Limitation on the Imposition of the Willful FBAR Penalty. The article seems to conclude that the 50% FBAR penalty is an unconstitutional punishment. But no one appears to have contested the constitutionality of it in the plea deals brought so far, because those individuals could face greater criminal charges if they do not accept the proposed civil punishment. Your thoughts on the legality of the 50% FBAR penalty?

Now, usually, someone does not have to ask for my thoughts. I usually give them before someone asks for them (and, sometimes, before I even think them). My thoughts are not really different and certainly not better that Steve's and Barbara's. But here goes, since you asked:

1. We need to keep in mind that the framework for this discussion is the Bajakajian case discussed in the article. In that case, the 100% penalty on the amount that should have been reported in the CMIR was deemed excessive under the facts of the case (just a footfault, albeit intentional and important, as to reporting, but no other illegality involved). By contrast the fines we are talking about here are 50% fines per incident, rather than the 100% fine per incident involved in Bajakajian and other illegality (income tax misconduct) is involved. That does not mean the Eight Amendment concerns are not involved, but the facts and amounts are materially different.

2. The conduct punished in the extant criminal cases is multiple incidents (years in the case of the FBARs) with the 50% applying to a single year, albeit the highest year. The Government could have gotten to the same number by applying a lesser penalty rate to each of the years.

3. For this reason, the effective penalty rate over all incidents (years) is much less than 50% unless you assume the unlikely case that only one year was involved. Let me illustrate, assume that 6 years are involved, with the highest year being $1,000,000 and all others years having $500,000 each and that the penalty is thus 50% of the highest year or $500,000. The penalty is thus 14%, hardly an excessive penalty in my mind. (I must resist the temptation to think that the The framers of the constitution (or Bible or what have you) must have had my mind in mind when drafting the respective tome.)

4. While I have not gone through all possible iterations, my gut (perhaps the same as my mind, but in any event also not the framer's gauge) tells me that conceivable iterations where the Government would make its discretionary call to prosecute are unlikely to dramatically affect the conclusion, at least in terms of the Eighth Amendment's Excessive Fines Clause as discussed in Bajakajian. Where it would dramatically affect the percentage forfeited because one of the years (the highest year) is dramatically out of sync with the other years or only 1 or 2 years are involved, then I question whether DOJ Tax would prosecute or insist on an out of whack penalty.

5. And, beyond that, the 50% penalty for the highest year is being extracted as a plea agreement in which the Government is giving up a number of other criminal charges that even could affect sentencing in some of the cases. It is just a deal that the defendants find acceptable regardless of whether they might have some outlier argument to make against any particular term of the deal considered in isolation.

6. I cannot wholly discount the possibility that DOJ Tax would prosecute a single year. Maybe the Government believes a drug dealer is involved and can't nail the defendant for that, so it takes what it can. But, in the run of the mine tax motivated FBAR failure to file case, one year is unlikely to make the prosecutorial discretion cut. And even then, to go back to Bajakajian, the penalty is one-half (50% rather than 100%) and other illegality is involved (at least one tax offense since, as of now, the Government is not prosecuting except where there is a tax crime and the hypothesized drug dealer will have almost certainly committed a tax crime). My same gut tells me that this may not offend the sensibilities of the Supreme Court in the same way the Bajakajian facts did.

To paraphrase the saying, my gut is often wrong but never in doubt (or turmoil). There you have it for what it is worth.

Addendum 3/5/10


After preparing the foregoing discussion, I read the following article:  Courtney J. Linn, Redefining the Bank Secrecy Act, Currency Reporting and the Crime of Structuring, 50 Santa Clara L. Rev. 407 (2010).  The author at pp. 501 - 507 discusses the implications of Bajakajian to BSA reporting requirements and related criminal provisions for structuring in the context of United States v. Ahmad, 213 F.3d 805, 815 (4th Cir. 2000), a structuring case.   In Ahmad, the court determined that the $85,000 was subject to civil forfeiture and then turned to whether the forfeiture of the entire amount subject to civil forfeiture was an excessive fine under Bajakajian concepts.  The Ahmad court found Bajakajian distinguishable because it involved a single incident whereas the violations in Ahmad involved more than one incident.  Further, "Ahmad's structuring constituted part of a complicated larger scheme related to customs fraud violations."  Whereas Bajakajian involved only the loss of information to the Government, "Ahmad's deposit structuring activities not only caused the government to lose information, but also implicated an intermediary actor ... and affected its legal duty to report certain transactions [to Customs]."  In praising this aspect of Ahmad, the author reasons (footnotes omitted and emphasis supplied):

More compelling was the fact that Ahmad's structuring conduct related to a larger scheme involving the evasion of custom tax duties. In Bajakajian, the defendant did not "fit into the class of persons for whom the statute was principally designed: He is not a money launderer, a drug trafficker, or a tax evader." The funds were lawfully derived and the defendant intended to use the money to repay a legitimate debt. In contrast, Ahmad acknowledged that he transferred some of the funds from his illegally structured deposits into an account used to further a customs fraud scheme. Congress enacted the CTR requirement precisely out of concern that large unreported currency transactions enabled tax evasion and similar crimes. This fact, more than the other marshaled by the Ahmad court, distinguishes Ahmad from Bajakajian. Indeed, the handful of post-Bajakajian decisions involving forfeitures for reporting violations can largely be synthesized on this ground. Courts tend to uphold the forfeiture against excessive fines challenges when the reporting violation relates to a central purpose of the BSA and tend to mitigate it when it does not.

Hope this helps move the discussion forward.