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.