Wednesday, January 19, 2011

Foreign Bank Account Records and the Required Records Exception to the Act of Production Doctrine

For those exposed on foreign accounts (i.e., no FBARs and no income tax reporting), the Government is brandishing a weapon that some taxpayers may not anticipate -- end-runs around the Fifth Amendment that would otherwise apply to avoid incriminating oneself. The end-runs are the "required records" exception to the Fifth Amendment and possibly the "foregone conclusion" exception to a Fifth Amendment act of production claim. I have previously blogged on the foregone conclusion exception here and focus here on the required records exception.

Just for background, there is now no Fifth Amendment privilege for the contents of documents (not even diaries which are, after all, not made under compulsion), but there is a Fifth Amendment privilege under the "act of production" doctrine relating to the testimonial aspects of compulsory production of documents (i.e., identifying documents, acknowledging their existence, etc.). So, the Fifth Amendment privilege is alive and well for compulsory document production in many cases. Hence, the Government needs end-runs such as the required records exception and the foregone conclusion exception.

Now, of course, in the foreign financial account context, the Government would love to be able to get the account statements as well as all account related documents (such opening documents showing who the real owner of the account is). We understand that the Government has already issued a subpoena to a taxpayer identified as having one or more foreign accounts. That taxpayer is only one of many who have not joined the voluntary disclosure program. The subpoena seeks (in its document description):

You must also bring with you the following documents, electronically stored information, or objects:

FOR THE YEARS: 2003 - present. Any and all records required to be maintained pursuant to 31 C.F.R. § 103.32 relating to foreign financial accounts that you had/have a financial interest in, or signature authority over, including records reflecting the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during each specified year.
Since the taxpayer is a potential target and targets are not generally forced into the grand jury, the subpoena permits compliance by delivering the documents, electronically if possible, to an IRS agent assisting the grand jury.

The FBAR requirements are in Title 31. One of the Regulations underlying the FBAR requirement is 31 C.F.R. § 103.32 which the Government cites in the subpoena. That regulation provides:

§ 103.32 Records to be made and retained by persons having financial interests in foreign financial accounts. Records of accounts required by § 103.24 to be reported to the Commissioner of Internal Revenue shall be retained by each person having a financial interest in or signature or other authority over any such account. Such records shall contain the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during the reporting period. Such records shall be retained for a period of 5 years and shall be kept at all times available for inspection as authorized by law. In the computation of the period of 5 years, there shall be disregarded any period beginning with a date on which the taxpayer is indicted or information instituted on account of the filing of a false or fraudulent Federal income tax return or failing to file a Federal income tax return, and ending with the date on which final disposition is made of the criminal proceeding.
103.24, in turn provides:

103.24 - Reports of foreign financial accounts.  (a) Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the Commissioner of the Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons. Persons having a financial interest in 25 or more foreign financial accounts need only note that fact on the form. Such persons will be required to provide detailed information concerning each account when so requested by the Secretary or his delegate.
OK, so there it is the regulatory framework for the records that are being subpoenaed. The taxpayer's first line of defense is, of course, the act of production doctrine. The Government's comeback is as follows:

1. The documents subpoenaed are required records, citing United States v. Grosso, 390 U.S. 62, 67-68 (1968) Shapiro v. United States, 335 U.S. 1, 32 (1948); Grand Jury Proceedings, 601 F.2d 162, 168 (5th Cir. 1979); In re Grand Jury Subpoena, 21 F.3d 226 (8th Cir. 1994). The claim is that the regulatory scheme for the FBARs and document requirements is type of valid administrative system making the underlying documentation required to be maintained required records. The Government does seem to overstate its support for that required record argument with cases such as United States v. Sturman, 951 F.2d 1466, 1486-87 (6th Cir. 1992), that do not deal with the records but the Bank Secrecy Reporting Act reporting provisions, holding that the requirement to report does not implicate the Fifth Amendment. That is a different issue, I think.

2. The documents' existence and possession (or availability to possess) are a "foregone conclusion" so as to mitigate any testimonial aspects of the act of production, citing See Fisher v. United States, 425 U.S. 391, 411 (1976); United States v. Bright, 596 F.3d 683, 692 (9th Cir. 2010); United States v. Norwood, 420 F.3d 888, 891 (8th Cir. 2005).

Since I have dealt previously with the foregone conclusion issues (although readers might also want to look at the Bright case cited by the Government), the purpose of this blog today is just to alert practitioners where the Government is headed with respect to the required records exception. I have only done a little research on the issue of the required records exception. I do, however, put out the following quote for practitioners' further thought. The quote is from Akhil Reed Amar and Renee B. Lettow, Fifth Amendment First Principles: The Self-Incrimination Clause, 93 Mich. L. Rev. 857, 872-873 (1995), which contains a good summary of the law to the date of the article (I don't think much that is fundamental has happened since), concluding that there is little principled articulation of the exception. The authors' concluding thoughts are:

The inconsistency of these cases is striking and revealing. The Court hems and haws and then often holds that the privilege does not apply at all: the government often needs information for nonpenal purposes and should not be forced to let criminals go free to get it, the Court intuits. The Court is understandably reluctant to apply the privilege in a heinous crime such as child abuse; granting use plus use-fruits immunity would make it difficult, and in some cases (including the hit-and-run) almost impossible, to prosecute. But that is what Kastigar [Kastigar v. United States, 406 U.S. 441 (1972)] currently demands. Unable to live with that result, the Court zigs, zags, and balances, ad hoc. But the language of the Self-Incrimination Clause does not balance: it states a bright-line rule. Is it possible that if immunity were narrower than Kastigar indicates, judges could indeed live with the logic of the bright-line rule?
In any event, the takeaway from this is that those taxpayers with offshore financial accounts who do not cave when the Government comes knocking are likely to face a subpoena of the type quoted above. I think the outcome of the ensuing fights is now to close to call.


  1. Jack - the real end run will be subpoena to attorney of the subject of the investigation who has casually revealed to the agent he/she has seen or has copies of the client's offshore records. There is no Fifth Amendment issue, act of production or otherwise, in such circumstances. See US v. Authement an old and cold (1979, I believe) 5th Circuit case involving a cop and his brass knuckles taken from his attorney.

  2. Steve and I disagree about the potential scope of United States v. Authement, 607 F.2d 1129(5th Cir. 1979). I think that the proper analysis in today's environment (after much intervening 5th Amendment developments) would be to test whether the client had a 5th Amendment privilege. Assuming that the client could mount a colorable act of production privilege, the prosecutor would have to find an exception -- either the foregone conclusion or the required records. And, as to the lawyer, there would be an additional privilege implicated -- the attorney-client privilege -- could the lawyer even identify the items summonsed without the benefit of that privileged communication. (This would not be an issue if the subpoena were issued to the client rather than the attorney.)

    I think that even the Court in Authement recognized this analysis in fn 1:

    n1 In this case, production of the brass knuckles was sought not from Authement but from his attorney. Fisher v. United States, 425 U.S. 391, 96 S. Ct. 1569, 48 L. Ed. 2d 39 (1976) held that compelled production of documents by way of subpoena from a client's attorney does not implicate the client's fifth amendment privilege because it does not compel the client to do anything. 425 U.S. at 396-401, 96 S. Ct. 1569. Fisher makes clear, however, that as long as the material to be produced would be privileged in the hands of the client, it is also privileged in the hands of the attorney by means of the attorney-client privilege where the transfer was made for the purpose of obtaining legal advice. 425 U.S. at 402-05, 96 S. Ct. 1569. The proper inquiry when material has been transferred to an attorney for the purpose of legal advice and the subpoena is directed to the attorney, then, is whether the subpoena, if directed to the client himself, would require (1) compulsion of a (2) testimonial communication that is (3) incriminating.

    After this footnote, in the next paragraph, the court said that anything incriminating in the response to the subpoena was never used against the defendant. I think the gravamen of the case is no harm, no foul. But I think the Fifth Amendment analysis is correct – it is the client’s Fifth Amendment that gets tested on something the client has delivered to the attorney in connection with his request for legal services. Then, of course, the end-runs would be the required records exception and the foregone conclusion exception.

  3. Jack - how about this oddball argument: Since the person is compelled by law to keep the offshore account records, and the failure to do so is a criminal offense, unlike a diary, the old Fifth Amendment concepts apply as to existence and contents, not just the act of production. I thought that was why required records is seldom argued.

  4. Steve, I will have to think about this, but I wonder whether the Marchetti - Grosso issue is presented here. My recollection is that they held that the taxpayer had a Fifth Amendment privilege not to file a wagering tax form because, at the time, the activity was generally illegal and thus the form was targeted to an audience who would have to essentially admit their crime by filing the form. And there may be some relationship that I will have to research later because Grosso is cited in the required records cases.

    But, back to the thought on the inherently suspect activity, I recall that there is some legislative history for the FBAR (and maybe other similar types of information reports) that they are geared toward law enforcement (money laundering, drug trafficking and tax crimes). Maybe that is a hook into the Marchetti / Grosso type analysis that would say that the requirement to keep records is not to enforce the FBAR regime but to catch the persons who engage in crimes who are the typical persons at whom the requirement is targeted. FINCEN really does not care is ExxonMobil reports hundreds of offshore accounts and probably has no intention of doing anything with that information. But they would love to get the information for more suspect characters and, better still, to put those suspect characters in jail for FBAR violations, including the record keeping violations, if they can't nail them another way.

    And perhaps that is the precise goal -- at least one of the goals -- of the recordkeeping requirement, as well as giving the prosecutor the argument that there is no Fifth Amendment with respect to offshore accounts.

    But, this is off the top of my head. I'll have to think more about it.


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