Wednesday, April 13, 2011

Imposing FBAR Civil Penalties on Foreign Financial Institutions

An anonymous poster alerted me to Lynnley Browning's article, Overseas Banks Could Face Novel Penalty From U.S. (New York Times 4/12/11). The poster suggested that I do a blog on the topic of the article -- whether the U.S. could assert the FBAR penalties against the foreign financial institutions ("FFI") in addition to or in lieu, perhaps, of the U.S. taxpayer having foreign financial accounts. I address that issue today, but caution readers that my answer is based on only limited research -- the statute and some additional research in the types of criminal liability that enablers can draw in the context of tax evasion. I plan to have an article on the latter issue in the near future, but that research informs the discussion I present here.

First, I start with the statute. The penalties are found in 31 USC 5321(a)(5)(A) which provides:

(5) Foreign financial agency transaction violation.
(A) Penalty authorized. The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314 [31 USCS § 5314].
Note the text that I have bold-faced. The language is clear that the statute extends liability to persons other than the person who violates the statute by failing to file the FBAR. As to those persons, the word "causes" must do all the work if the penalty is to apply. Specifically, the FFI could be liable only if the FFI "causes" the U.S. taxpayer's failure to file the FBAR.

Although we are dealing with a civil statute, I think it can only be understood in the context of concepts of causation in the criminal law that result in the causer being held criminally liable for a substantive offense. I simplify for present purposes, at the risk of avoiding the nuances and oversimplifying. Bottom line, for criminal law purposes, a person who "causes" another to commit a criminal offense can be held liable in one of two ways: (i) for the direct commission of the crime (which can occur only if the substantive offense is defined to include the defendant as a person who can commit the crime; and such direct liability can include but does not require the culpability of another person) and (ii), if not within the class of persons who can commit the crime, by causing another innocent person who is within that class to commit the actus reus of the crime (18 USC 2(b)). There are two other ways -- less tied to causality -- that a person can be held criminally liable for a substantive offense the person did not commit -- (i) accomplice / aiding and abetting liability which requires merely some act of aiding and abetting another person (a principal) in committing the crime, but the act need not be causal as to the commission of the crime (18 USC 2(a)); and (ii) Pinkerton liability where a conspirator is criminally culpable for a crime committed by another conspirator within the reasonably foreseeable scope of the crime (derivative from 18 USC 371). I focus here principally on the causal avenues to criminal liability which, of course, is the backdrop to civil penalty provisions discussed here.

I am aware of no principled litmus test for determining what actions -- or elements of actions -- are required for there to be a causal connection sufficient to support either criminal or civil penalty liability. At least in the context of accomplice criminal liability (which, as articulated, requires less connection than causal connection), there is the concept of intervening cause that can render the accomplice not liable. Now, accomplice liability, as I noted, is not rooted in cause except that courts will not find acts of aiding and abetting where the purported acts are too remote from concepts of causation for the crime. While it is true that an accomplice's acts need not be the sole and proximate cause of the crime committed by the principal, an intervening event may render those actions sufficiently remote from the crime that the person is not an aider and abettor of the crime that was committed. Where exactly this line is drawn depends upon the facts and circumstances and, probably, the gut of the person called to draw the line. But, although causation is a stronger concept than aiding and abetting, I do think that a court would have some misgivings about remote actions that might otherwise be viewed in the causal chain.

In this case, the FFI's actions are in the causal chain resulting in the U.S. FFI depositor not filing the FBAR and the actions are not remote. The FFI markets its services on the notion that, by keeping the accounts below the IRS's radar, it can avoid detection and enforcement of the FBAR and related laws (e.g., tax laws). The FFI's actions are too close to the action prohibited by the statute.

So, bottom line, I think that, with good facts and circumstances, the Government probably could prevail in imposing the FBAR civil penalty upon the FFI. But, I have to caveat that this conclusion is based principally upon my reading of the statute and my recent research into the various theories of criminal liability for tax evasion under the substantive offense statute and under the derivative theories of criminal liability.

I have no doubt that some of the readers can speak with greater authority -- correcting my errors where appropriate -- and thereby helping the other readers assess this potential Government initiative.  I hope you will do so.


  1. Jack

    Excellent analysis there. I don't think this is a good idea (not from legal POV, but from overall Treasury mission POV). There is too much of a chance that FFIs might decide that the risk of being hit with massive fines exceeds any potential benefits of access to US capital markets. FATCA has already driven some FFIs away and others could follow.

    With the growth of new financial markets and offshore capital markets in Asian countries, its possible that such US actions could win the battle and lose the war. Its not going to happen today or tomorrow, but maybe 10-15 years from now, capital markets in Mumbai or Hong Kong are attractive enough that FFIs gravitate there.

    So far the banks that the DOJ/IRS have targetted (UBS, HSBC, maybe Credit Suisse) have been clearly guilty of flagrant violations, but there is certainly some potential for prosecutorial overreach.

  2. How can DOJ impose US law on foreign financial institutions ? Do foreign financial institutions have their own law to protect them ? What if a foreign gov impose its law on a US financial institute ? Is the law over the land ? I can understand US impose its law on a US branch of HSBC.

  3. Jack,

    maybe you could pls write up a blog post about the FBAR mitigation guidance and share with us your experiences and thoughts about it? It seems there are a lot confusions. (well i am confused now)

    Pls take a look this:

    BTW Phil recommended you. :)


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