Monday, March 19, 2012

Recent Discussion of Required Records and Other Foreign Bank Issues (3/19/12)

With the permission of Tax Analysts, I post Marie Sapirie's article titled International Tax Enforcement 3.0, 2012 TNT 48-3 (3/12/12), here.  Ms. Sapirie reviews events at the National Institute of White Collar Crime held in Miami recently.  Here is an extended excerpt from the article:
Speaking in Miami at the annual National Institute on White Collar Crime, sponsored by the American Bar Association Section of Criminal Justice, Downing said that even the Swiss have begun notifying U.S. taxpayers who want to appeal U.S. treaty requests that they must file their opposition request with the U.S. attorney general and, if they are under criminal investigation, provide it to the prosecutor. The Swiss parliament recently amended the resolution ratifying the 2009 protocol to the Switzerland-U.S. income tax treaty to allow the IRS and Treasury to make "behavioral pattern" information requests. * * * * 
Required Records Doctrine 
The DOJ is not relying solely on other countries to make the changes necessary to obtain information on unreported offshore accounts. Downing said that to move cases along more quickly, the government has been serving grand jury subpoenas for offshore bank account records to those under investigation. "That's a big push for us now, because it's very difficult and time consuming . . . to wait for the foreign governments to decide when and where we're going to get information," he said. 
That raises the question whether the Fifth Amendment privilege against self-incrimination includes the production of foreign bank account documents that must be maintained to file a foreign bank account report. That question could be headed to the Supreme Court. At issue is the required records doctrine, an exception to the Fifth Amendment privilege against self-incrimination formulated in Shapiro v. United States, 335 U.S. 1 (1948). 
Whether the exception applies is determined by a three-part test established in Grosso v. United States, 390 U.S. 62 (1968), that requires that (1) the purposes of the government's inquiry must be essentially regulatory; (2) information is to be obtained by requiring preservation of records that the regulated party has customarily kept; and (3) the records must have assumed public aspects that render them "at least analogous to public documents." 
The Ninth Circuit is the only circuit to have addressed the issue so far, and it held for the government. The court determined that the regulatory obligation to keep basic account information fit the second prong of the required records test, because the "heart of the 'essentially regulatory' inquiry is whether the regulation in question targets inherently illegal activity," and having a foreign bank account is not inherently illegal. The Bank Secrecy Act (BSA) regulations require account holders to keep and report the name under which a foreign bank account is maintained, the account number, the name and address of the bank, the type of account, and the account's maximum value during the year. (For M.H. v. United States, 648 F.3d 1067 (9th Cir. 2011), see Doc 2011-17903  or 2011 TNT 162-22 .)
Practitioners have objected to the court's characterization of the record-keeping requirement as essentially regulatory because the BSA is at its core a criminal statute. And the cases that forged the required records doctrine involved industries that require licenses and thus are expressly regulated, said Michael A. Villa Jr., an attorney at Meadows, Collier, Reed, Cousins, Crouch & Ungerman LLP, who spoke with Tax Analysts. 
Regarding the second part of the test, the Ninth Circuit noted that account holders have access to the basic information required under the BSA, even if the bank keeps that information on behalf of the account holder. 
The public aspects prong of the Grosso test is where taxpayers under investigation may have the best chance of asserting the privilege. The defense bar argues that an individual's bank records are quintessential private records. The test to determine when a private record has the requisite public aspects is not clear, and the Ninth Circuit gave a vague explanation: "Where personal information is compelled in furtherance of a valid regulatory scheme, as is the case here, that information assumes a public aspect." 
Formulating a test to determine when a record has assumed public aspects could be challenging. Possible public aspects include a record being subject to an external compliance audit or being part of a regulatory scheme designed to promote public welfare. (For an analysis, see Christopher M. Ferguson, "The Required Records Doctrine: The Fifth Amendment Privilege Under Attack," 115 J. Tax'n 219 (Oct. 2011).) 
The Ninth Circuit's interpretation of the required records doctrine has implications beyond foreign bank account information, because it could carry over to regulations requiring record keeping. "It's a scary proposition from the defense perspective," said Jeffrey A. Neiman, who led the prosecution of Swiss bank UBS as an assistant U.S. attorney in the Southern District of Florida. 
By overriding the production privilege, M.H. gives the government a shortcut in criminal cases. "Now all they have to do is issue a subpoena to that taxpayer and say, 'Produce all these records,'" said Neiman, who is now in private practice. 
Because some banks have refused to send information, taxpayers under investigation may have to go to the foreign jurisdictions where their accounts are located to get the records. The government's job is made easier if the target taxpayer produces records, because the government doesn't have to authenticate them, said Villa. He added that before grand juries subpoenaed bank account information, federal criminal investigations rarely subpoenaed taxpayers under investigation for their personal records. 
Downing said the DOJ chose to pursue FBARs and related records that way, adding, "This was not done on a whim." Before the department went down that path, it vetted the issue, he said. Panelists at the ABA conference estimated that there are about 150 cases around the country in which subpoenas for bank account records have been issued. 
"The government has certainly gone all in here," said Neiman. If the records were produced in violation of the Fifth Amendment, it is likely that the cases would be tainted with improper evidence, he said. Although the government could argue that the information could have been obtained from other sources, such as through a treaty request, Neiman said, "that's going to be pretty hard in a lot of instances to establish." 
A circuit split seems to be brewing. The Fifth Circuit has held that the BSA is a criminal statute. If that holding is applied to subpoenas, it would eliminate the government's argument that the purpose of the inquiry is essentially regulatory, according to Charles M. Meadows Jr., a partner at Meadows, Collier, Reed. 
Meadows said at the ABA conference that he doesn't think the Supreme Court can dodge the question, and Downing agreed. 
Nuts and Bolts of Required Records Cases 
Panelists at the ABA conference said that how attorneys handle cases in which a subpoena for foreign bank account information has been issued is important. Ed Robbins, a principal at Hochman, Salkin, Rettig, Toscher & Perez PC, said, "If you believe that there's a good chance that the Supreme Court is ultimately going to get this thing and that there's a good chance that they're going to reverse it, you want to stage your case to take maximum advantage of that reversal." He said that he requires a court order at every step to preserve arguments but that his clients comply with the orders and produce the bank account information in order not to be held in contempt of court. 
"The endgame is the Supreme Court reverses and the DOJ now has 150 cases that are contaminated with unconstitutional evidence," Robbins said. "That will give you some leverage. To set that endgame up, you need the orders." 
The DOJ issues most grand jury subpoenas, said Robbins. However, once the assistant U.S. attorneys "get wind of this, they're going to be using it in all kinds of stuff," not just tax cases, he said. 
Robbins said there is another tactic attorneys can use. The regulation requires five basic data points, and he redacts all data that do not fall into those. Robbins said that the government doesn't like redacted records, but Meadows said redaction is important, because the records may show a series of back-and-forth transactions that one would associate with a business-skimming operation.
My prior discussion of the M.H. case is 9th Circuit Applies Required Records Doctrine to Defeat 5th Amendment Claim for FBAR Recordkeeping (8/19/11), here.  Also , see the labels to this blog for further relevant links.


  1. Jack, I reiterate the comments I made on August 21, 2011 at 10:24 AM Central Time:

    AnonymousAug 21, 2011 10:24 AM
    I have carefully read this decision. To say that it "strains" the Required Record Exception to the Fifth Amendment Right is putting it very mildly.

    I join Justices Scalia and Thomas in expressing the view that: "A substantial body of evidence suggests that the Fifth Amendment privilege protects against the compelled production not just of incriminating testimony, but of any incriminating evidence. In a future case, I would be willing to reconsider the scope and meaning of the Self-Incrimination Clause." Hubbell. United States v Hubbhell, 530 US at p. 49.

    Using the foregoing logic, there simply is no room for the Required Records Doctrine.

    The instant decision alludes to the US Supreme Court's 1990 decision in Bouknight. My question is: Would the act of production, contents of the underlying records and derivative evidence be admissible against the witness at a future criminal trial given that the witness was compelled to create, keep and produce them as an integral part of a regulatory process?

    Giving due respect to the notion that the 9th Circuit has now characterized the mere act of having an offshore account as voluntarily entering into some kind of regulated activity, it seems to me that the government cannot have it both ways. If there is compulsion to create, keep and produce records for regulatory purposes, such records and derivative evidence should be excluded from evidence at a future criminal trial.

    At a minimum, modern substantive due process jurisprudence would warrant that the government "warn" individuals that opening, maintaining or having any signature authority over a foreign financial account opens the door to being regulated to such as an extreme that they are waiving their Fifth Amendment right.

    Jack, what do you think?


    1. I agree the the required records is on shaky conceptual grounds. However, so is the "foregone conclusion" notion that end runs the act of production doctrine.

      I think that there are instances in the law where at the intersection of public policy and constitutional imperative, there will be some play in the joints for results that are not consistent with the key principle in issue. We see that all the time in First Amendment jurisprudence. And I think that is what is at play in the required records situation.

      I really can't predict what the ultimate conclusion will be as pontificated by the Supreme Court (if it gets to the issue). I think that this issue presents another instance where the Supreme Court can decide either way based on the authority that is out there and the result will determine on the Supreme Court majority's gut (or gut reaction) based on their sense of what type of order the country needs. With a conservative leaning court, it could well be that it sides with the Government on this (but perhaps a libertarian streak will prevail).

      I also agree that perhaps some warning that foreign financial account activity is a regulated activity, at least for some Fifth Amendment required records purposes is appropriate.

      Thanks for your comments.

      Jack Townsend

  2. I also find the following comment made by another Anonymous commentator on August 27, 2011 at 2:50 PM Central Time, quite persuasive:

    AnonymousAug 27, 2011 02:50 PM
    I find this opinion to be problematical. (I will be polite -- I practice in the 9th Circuit.) And I agree with you that the logic used in the opinion, if extended to other situations, will eviscerate the ability of individuals to claim a Fifth Amendment privilege based on the "act of production." The panel's failure to cite to Hubbell is very surprising.

    And what if responding to the subpoena could furnish a link in the chain of evidence needed to prove an obstruction of justice charge? If the person subpoenaed destroyed some -- but not all-- of the evidence sought by the subpoena, does the fact that the destroyed documents are covered by the "required records" doctrine mean that the person subpoenaed can not claim a Fifth Amendment privilege with respect to the act of production in response to the subpoena?

    Also, I've never been comfortable with the notion that, just because something is a "foregone conclusion", the Fifth Amendment just vanishes into the ether. If there are 20 witnesses who will testify that that they saw the defendant kill someone, plus a videotape which ostensibly shows the defendant committing the killing, that does not allow the government to compel a the defendant to get on the stand to testify.

    If the government wants something from the recipient of the subpoena that is "testimonial" in any way, they should be required to grant use immunity with respect to whatever is "testimonial." The government can use whatever else it has to support its "foregone conclusion" argument at trial.


  3. Jack,

    This comment addresses the following portion of your post:

    Ed Robbins, a principal at Hochman, Salkin, Rettig, Toscher & Perez PC, said, "If you believe that there's a good chance that the Supreme Court is ultimately going to get this thing and that there's a good chance that they're going to reverse it, you want to stage your case to take maximum advantage of that reversal." He said that he requires a court order at every step to preserve arguments but that his clients comply with the orders and produce the bank account information in order not to be held in contempt of court.
    With all due respect to Mr. Robbins, I would strongly suggest that his position that "...his clients comply with the [compulsion] orders and produce the bank account information in order not to be held in contempt of court" is, in three words: very badly conceived. See Maness v. Meyers, 419 U.S. 449 (1975) (in a case originating in Texas and raising the clear and distinct possibility that a witness waives his or her 5th amendment right if he or she testifies, even with a compulsion order, without an actual grant of use/derivative use immunity in accordance with applicable federal or state law). (Available at: (Posted on July 28, 2010 at 9:26 AM Central Time) (Last Visited on March 19, 2012).

    See also the Anonymous comment posted on December 22, 2009 at 7:09 PM Central Time (Available at: (Last Visited on March 19, 2012). I would like to especially draw your's and the reader's attention to the following excerpts:

    AnonymousDec 22, 2009 07:09 PM
    I have some additional observations:

    1. In order to uphold, protect and preserve Ms. Elmes' 5th Amendment rights, the applicable jurisprudence requires that she refuse to comply with the Court's order, allow herself to be held in contempt, file a notice of appeal from the Court's contempt order, seek a stay of any fines or incarceration pending direct appellate review, and seek expedition of the appeal pursuant to the recalcitrant witness statute (18 USC Sec. 1826(b)). Anything less could very wel be construed as a waiver of her 5th Amendment right. See Maness v. Meyers, 419 U.S. 419, 461-464 (1975).

    2. I would advance the position that the US Supreme Court's decision in Maness v. Meyers, 419 U.S. at 466, positively stands for the fundamental proposition that a witness who may be compelled to testify over her 5th Amendment right must be afforded the assistance of competent counsel. Id. ("The assertion of a testimonial privilege, as of many other rights, often depends upon legal advice from someone who is trained and skilled in the subject matter, and who may offer a more objective opinion. A layman may not be aware of the precise scope, the nuances, and boundaries of his Fifth Amendment privilege. [Footnote 15] It is not a self-executing mechanism; it can be affirmatively waived, or lost by not asserting it in a timely fashion.").


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