Yet Another Appeals Court Enforcement of Summons for FBAR Required Foreign Bank Account Records (3/4/16)

In United States v. Chen, 2016 U.S. App. LEXIS ____ (1st Cir. 2016), here, the First Circuit enforced an FBAR required records summons, following the unbroken line of cases in the other circuits.  The opinion is well researched and well-written.  Because this holding is now routine in the circuits, I offer only certain items from the opinion that caught my interest.

1. One of the judges on the panel was former Supreme Court Justice David Souter.  He did not write the opinion.

2. In the statement of facts, the Court notes that, in its petition to enforce, the agent's supporting affidavit advised that:

"[t]here is no 'Justice Department referral[ ]' . . . in effect with respect to Chu H. Ng and Zhong H. Chen for the year under examination." n1
   n1 This statement meant that the taxpayers were not then referred for criminal prosecution by the Department of Justice. "A Justice Department referral is in effect with respect to any person if -- (i) the Secretary has recommended to the Attorney General a grand jury investigation of, or the criminal prosecution of, such person for any offense connected with the administration or enforcement of the internal revenue laws, or (ii) any request is made under section 6103(h)(3)(B) for the disclosure of any return or return information (within the meaning of section 6103(b)) relating to such person." 26 U.S.C. § 7602(d)(2)(A).

The Court returns to this key fact later in the opinion:

Additionally, the IRS may not issue a summons "with respect to any person if a Justice Department referral is in effect with respect to such person." 26 U.S.C. § 7602(d)(1). The government here submitted an affidavit executed by the IRS revenue agent stating that the summons was issued for the purpose of determining the 2008 tax liability of Chen and Ng, and that the IRS had not referred Chen or Ng to the Department of Justice for criminal prosecution. The agent acknowledged that the government had some documents pointing to the existence of Chen's foreign bank accounts, but not enough documents to know whether there was underpayment of taxes. this key fact later in the opinion:

3.  The court lists of the unbroken string of circuit court holdings::

We agree with seven of our sister circuits that the claim fails on the grounds that BSA records are subject to the Required Records Doctrine. See United States v. Chabot, 793 F.3d 338 (3d Cir.), cert. denied, 136 S. Ct. 559 (2015); In re Grand Jury Subpoena Dated Feb. 2, 2012, 741 F.3d 339 (2d Cir. 2013); United States v. Under Seal, 737 F.3d 330 (4th Cir. 2013); In re Grand Jury Proceedings, No. 4-10, 707 F.3d 1262 (11th Cir.), cert. denied, 134 S. Ct. 129 (2013); In re Grand Jury Subpoena, 696 F.3d428 (5th Cir. 2012); In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903 (7th Cir. 2012), cert. denied,133 S. Ct. 2338 (2013); In re Grand Jury Investigation M.H., 648 F.3d 1067 (9th Cir. 2011), cert. denied, 133 S. Ct. 26 (2012).

4. The Court somewhat succinctly summarizes the required records doctrine generally and with respect to foreign account records under the BSA(on footnote omitted):

The Required Records Doctrine prevents an individual from resisting, in the name of the Fifth Amendment, the production of records whose creation and maintenance is required as a condition of voluntarily engaging in a highly regulated activity. See Baltimore City Dep't of Soc. Servs. v. Bouknight, 493 U.S.549, 556 (1990); see also In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d at 908-09. In a nutshell, it is commonly accepted that courts should apply the following three-part test for determining whether the Required Records Doctrine applies to a particular recordkeeping scheme. "[F]irst, the purposes of the United States' inquiry must be essentially regulatory[.]" Grosso v. United States, 390 U.S. 62, 67-68 (1968) (citing Shapiro v. United States, 335 U.S. 1 (1948)). "[S]econd, information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept[.]" Id. at 68. "[T]hird, the records themselves must have assumed 'public aspects' which render them at least analogous to public documents." Id.; see Marchetti v. United States, 390 U.S. 39, 56-57 (1968). n7
   n7 Chen questions whether this test is relevant to an act-of-production privilege claim, noting that the Required Records Doctrine was developed before the Supreme Court recognized the act-of-production privilege in Fisher, 425 U.S. at 410. This argument is foreclosed by Supreme Court precedent. In 1990, well after both lines of doctrine had been developed, the Supreme Court applied the Required Records Doctrine to an act-of-production privilege claim asserted by a mother, acting as custodian of her child pursuant to court order, who was resisting an order of a juvenile court to produce the child. Bouknight, 493 U.S. at 551, 554-61. 

The government presents the analysis as occurring within two distinct analytical steps. First, the initial question is whether the government is authorized to regulate the activity in question, as the doctrine was originally articulated by the Supreme Court in Shapiro. There is no doubt that is true here. See U.S. Const. art. 1, § 8, cl. 3 (granting Congress power "[t]o regulate commerce with foreign nations"); Shultz, 416 U.S. at 59. But second, the government recognizes that the Court later narrowed the doctrine in three criminal cases, where the government was targeting activity that is criminal or almost always criminal. See Haynes v. United States, 390 U.S. 85, 95-100, 88 S. Ct. 722, 19 L. Ed. 2d 923, 1968-1 C.B. 615 (1968); Grosso, 390 U.S. at 64-69; Marchetti, 390 U.S. at 55-57. Chen unsuccessfully tries to fit himself into the limitations set by those cases. The government correctly does not contend that just because it has the power to regulate in an area that it also has the power to compel disclosure of required records. It acknowledges that it is not taking the position that it can simply criminalize an act and require records to be kept, which would indicate performance or non-performance of that criminal act, and that the records would then be admissible over a Fifth Amendment objection. The government also agrees that it could not by statute regulate an activity that is essentially or almost entirely criminal, mandate recordkeeping conditions on the activity, tell the criminal to self-report, and then prosecute him for failing to do so. Neither situation is occurring here.

By contrast, Chen's keeping an offshore bank account is not inherently criminal. The focus of the Required Records Doctrine is on "the characteristics of the activities about which information is sought" and "the composition of the group to which the inquiries are made." Grosso, 390 U.S. at 68. Offshore banking clearly has inherently civil aspects, and one can comply with the Act's recordkeeping requirement without being a criminal. In fact, the Act covers a great many people who are not engaged in any criminal activity. Simply put, the Act cannot fairly be viewed as a backdoor attempt to get at a selected group engaged in illegal activities, through recordkeeping requirements and disclosure, for criminal prosecution. Compare Haynes, 390 U.S. at 95-97, with Varitimos, 404 F.2d at 1033-34.

To be sure, Congress contemplated that the records required to be kept under the BSA would be useful in criminal prosecutions. Any fair reading of the legislative history reveals as much. But "[w]hile Congress clearly intended the Act's disclosure requirements to be of some use in criminal proceedings, we regard [the] non-prosecutorial interests as substantial." United States v. Dichne, 612 F.2d 632, 640 (2d Cir. 1979) (upholding, over a Fifth Amendment challenge, a requirement under the BSA that individuals "report[ ] . . . the transportation of over $5,000 in monetary instruments into or out of the United States," id. at 639; see 31 U.S.C. § 5316 (previously codified at 31 U.S.C. § 1101) (now applicable to transportation of over $10,000 in monetary instruments)). 

Chen maintains, however, that despite the Act's civil applications, compliance with its recordkeeping provision has "criminal implications." That may be so for some people covered by the Act, but "criminal implications" are not enough to render the Required Records Doctrine inapplicable. 

5. The Court said that Chen had waived the argument that he be given some form of "use restriction on the testimonial communications inherent in the act of producing the records."  This might be a form of use immunity and request for suppression for overriding his assertion of the act of production doctrine under the Fifth Amendment privilege.  In addition, the Court said that the argument was premature because such use was entirely speculative.  When and if the Government attempts to use the testimonial consideration in a criminal proceeding, the issue can be raised.

6. Finally, the Court remanded for the district court to articulate the basis for its ordering production of personal and corporate domestic financial records.