Excessive Fines -- Forfeiture and FBAR Penalties (7/8/10)

On July 7, the Second Circuit rendered a significant forfeiture decision (United States v. Castello, 611 F.3d 116 (2d Cir. 2010)), that bears upon the previous discussion of whether the FBAR penalty (maximum of 50% of the highest amount in the account per year, but in practice only, at most, 50% of the highest amount in a single year). (See prior blog discussion here.) In Castello, the defendant ran a check-cashing business through which he cashed more than $600 million in checks over the period of the indictment. Castello failed to file the required CTRs for checks exceeding $10,000. See 31 U.S.C. § 5313(a) and 31 C.F.R. § 103.22(b).

Castello was indicted and tried for

conspiracy to launder money (18 U.S.C. § 1956(h)); failure to file CTRs (31 U.S.C. § 5313(a)); unlawfully structuring financial transactions (31 U.S.C. § 5324); conspiracy to impair, impede, obstruct, and defeat the Internal Revenue Service (18 U.S.C. § 371); tax evasion (26 U.S.C. § 7201); and obstruction of justice (18 U.S.C. § 1512).

He was convicted only of the failure to file CTRs.

The issue on this appeal was the amount of forfeiture, if any. The statute required that "The court in imposing sentence for any violation of section 5313 shall order the defendant to forfeit all property, real or personal, involved in the offense and any property traceable thereto." 31 U.S.C. § 5317(c)(1)(A). The Government sought to forfeit $9,341,051.81, consisting of (i) 4% of the amount of checks in excess of $10,000 for which no CTRs were filed, (ii) $;2,671,872.50 in his wife's account, and (iii) the equity in a family home. On this appeal, the parties did not dispute that the statute required the amount of forfeiture sought by the Government, so the Court moved to whether forfeiture in that amount violated the Excessive Fines Clause. In essence, on this second round appeal, the Second Circuit affirmed the full forfeiture.

The backdrop for consideration is United States v. Bajakajian, 524 U.S. 321 (1998), the essence of which the Second Circuit summarized:

Putting § 5317(c)(1)(A) and Bajakajian together: The proper amount of forfeiture following a § 5313(a) conviction is the total forfeitable amount required by the statute, discounted by whatever amount is necessary to render the total amount not "grossly disproportional" to the offense of conviction. Four factors, distilled from Bajakajian, guide our analysis:

[1] the essence of the crime of the defendant and its relation to other criminal activity, [2] whether the defendant fit[s] into the class of persons for whom the statute was principally designed, [3] the maximum sentence and fine that could have been imposed, and [4] the nature of the harm caused by the defendant's conduct.

(For the wikipedia summary of Bajakajian, see here.)  Applying these factors, after further discussing Bajakajian, the Court concluded that the forfeiture requested by the Government in Castello was constitutional.

I encourage readers of the blog to read the both the Bajakajian and Castello opinions and shall not try to further summarize either here. Suffice it to say that, if put on a spectrum, where Bajakajian is at one end (the end of light forfeiture tolerance under Excessive Fines Clause) and Castello (and some of the cases cited in Castello) at the other end, FBAR violations are clearly in between, although drifting toward the Bajakajian side. Bajakajian involved no illegal activity other than failure to file the report, so a light forfeiture was compelled. So too, in the current FBAR environment, where there is no other illegal activity (to wit, in this context, no unreported and untaxed income), then there is no penalty under the IRS voluntary disclosure program and even at best a light penalty under audit guidelines. So, where there is a failure to report and pay tax on the income, the FBAR violation is clearly not at the Bajakajian end of the spectrum. On the other hand, it is also not at the Castello end either, for Castello's failure to file CTRs effectively hid the likelihood of multiple illegal incidents of the type that the CTR requirements were designed to flush out.

As Castello suggests, fine tuning the location on the spectrum (including either end) requires detailed analysis of the facts and circumstances of a particular case. But, focusing on what the Government has done in the FBAR area, it appears that the maximum fine it is obtaining in the plea deals to date is 50% of the highest amount in a single year in a context of multi-year violations and failure to report income. I don't think Bajakajian or Castello on their face suggest that these fines violate the Excessive Fines Clause.

Addendum #1:

As I reflected on this further, perhaps a better way of comparing the FBAR situation to Castello at least in legal income situations (a la Bajakajian) is to look at the tax that the taxpayer failed to pay from the offshore accounts.  After all, at least in legal income situations, the only purpose of the FBAR filing requirement is to flush out the tax that might otherwise go untaxed.  So, perhaps, the amount of the tax should set the upper limit on the fine.  Thus, in the Zaltsberg case I discussed yesterday (see here), the "claimed" tax loss was $60,000 but the FBAR penalty is $1.3 million.  (See also my discussion of the claimed amount of the tax loss.)

There are other ways of looking at it as well.  I invite readers of this blog to weigh in on the issue.

Addendum #2:

The bare facts of Zaltsberg do, I think, create a potential Excessive Fines Issue (which, of course, Zaltsberg may have negotiated away in his plea agreement (assuming you can negotiate away such a constitutional issue)).  But, going beyond Zaltsberg, I was working with a related issue today in trying to help a U.S. taxpayer decide whether to get into the post 10/15 voluntary disclosure program.  I am going to use illustrative facts (not the exact facts I am dealing with but illustrative and every a fancy variation of the facts).  Assume that a U.S. taxpayer, Joe Shmoe has a foreign corporation conducting an active trade or business in a foreign country (FC).  The business is such that the margins are thin, but it is all about volume and careful cash flow management.  The cash flow management results in the foreign bank account having very high balances (but most of it is float between the receipt of revenue and the outflow for costs of conducting the business).  The voluntary disclosure program prior to 10/15 required a 20% in lieu of FBAR penalty and post 10/15 requires God know what (perhaps, say 35% to split the baby between 10/15 and the 50% penalty being demanded in the criminal cases to date, of which Zaltsberg is illustrative).  So, for purposes of analysis, some good lawyers might just say that Joe Schmoe might want to model the economic cost of disclosure by assuming a 35% in lieu of FBAR penalty.  But, Joe Schmoe says that 35% of the highest balance for the highest year actually exceeds his profits over all the years (assume also that he entered the business in 2003).  On this basis, Joe Schmoe is getting a worse result than did Castello and he really did not avoid payment of that much tax (let's say his 35% penalty is $1 million and his tax avoided is just $50,000, all on wholly legal income).  Is that fair?  Is it excessive in the Bajakajian sense?  Should the Government only apply the in lieu of FBAR penalty to the real equity in the foreign bank account, not the gross amounts?  I hope that the readers can scope out a lot of variations on this theme that raise the same issue in greater or lesser degrees.  But, the fear among practitioners is that the IRS has a one size fits all, with no thought of nuance even when Excessive Fines concerns are present.