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CA-4: Required Records Doctrine compels production of foreign bank records

December 20, 2013

U.S. v. Under Seal, (CA 4 12/13/2013) 112 AFTR 2d ¶2013-5643

The Court of Appeals for the Fourth Circuit, affirming a district court, has held that two U.S. individuals were required to produce their foreign account bank records pursuant to an IRS subpoena. The Fourth Circuit concluded, similar to decisions of its sister Circuits, that the Required Records Doctrine exception applied to the Fifth Amendment and required production of financial records otherwise subject to the Bank Secrecy Act (BSA).

Background on the Fifth Amendment. In Shapiro v. U.S., (S.Ct. 1948) 335 U.S. 1, a fruit merchant attempted to invoke his Fifth Amendment privilege to avoid producing certain business records required to be maintained under the Emergency Price Control Act (EPCA). The Supreme Court found that the record-keeping provisions of the EPCA were essential to the administration of the statute’s objectives and observed that the records had attained “public aspects” that rendered them quasi-public records. The documentations’ quasi-public status permitted compulsory production.

Twenty years later, in Marchetti v. U.S., (S.Ct. 1968) 21 AFTR 2d 539, and Grosso v. U.S., (S.Ct. 1968) 21 AFTR 2d 554, the Supreme Court established three prerequisites on when the Required Records Doctrine may be invoked:

 

1. the government’s inquiry must be essentially regulatory;
2. the information sought is required to be a preserved record of a kind that the regulated party has customarily kept; and
3. the records must have assumed public aspects rendering them analogous to a public document.

 

Once the requirements for the Required Records Doctrine have been satisfied, a witness may not avoid production by invoking the Fifth Amendment privilege.

Background on FBAR. The Report of Foreign Bank and Financial Accounts (FBAR) is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries. No report is required if the aggregate value of the accounts does not exceed $10,000. When filed, FBARs become part of the BSA database. The BSA, in general, regulates offshore banking and contains a number of recordkeeping and inspection provisions.

Facts. The government sought to determine whether two unnamed U.S. taxpayers (Jane and John Doe) used undisclosed Swiss bank accounts to conceal assets and income from IRS and Treasury. A grand jury received evidence that in 2008, John Doe opened an account at investment bank Clariden Leu (now Credit Suisse) with a value in excess of $2.3 million. The account was subsequently closed in January 2009 and $1.5 million was transferred to a different Swiss private bank, Bank Sarasin.

On May 18, 2012, the Does were served grand jury subpoenas requesting that they provide all foreign bank-related records and account information from the past five years. The Does, however, moved to quash the subpoenas, citing their Fifth Amendment privilege against self-incrimination.

The district court denied the Does’ motion to quash, concluding that the required records doctrine trumped the Fifth Amendment privilege against self-incrimination. The Does nevertheless refused to comply with the subpoenas and the district court held the Does in civil contempt. The Does appealed.

Fourth Circuit affirms. In affirming the district court’s order compelling production of the taxpayer’s records, the Fourth Circuit said that the recordkeeping requirements of the BSA are essentially regulatory in nature as they do not target inherently illegal activity or a group of persons inherently suspect of criminal activity. The Court also found that the taxpayers’ account records were “customarily kept,” not only for tax and Treasury Department reporting, but also for the taxpayers to access their accounts with their financial institution. Finally, the Court said the taxpayers’ records had “public aspects,” thereby satisfying all three prongs of the Required Records Exception. Thus, the Fourth Circuit affirmed the district court’s order granting the government’s motion to compel the taxpayers to comply with the subpoenas.

RIA observation: Taxpayers seeking to avoid the production of their foreign bank records by invoking the Fifth Amendment have generally had a hard time overcoming the Required Records Doctrine. In 2011, in M.H. v. U.S., (CA 9 8/18/2011) 108 AFTR 2d 2011-5880 (see Weekly Alert ¶  11  08/25/2011), the Ninth Circuit concluded that the Fifth Amendment privilege against self-incrimination couldn’t be used by a taxpayer under grand jury investigation for the use of his undisclosed Swiss bank accounts. In In re Special February 2011-1 Grand Jury Subpoena (CA 7 8/27/2012) No. 11-3799 (see Weekly Alert ¶  11  09/06/2012), the Seventh Circuit found that the Required Records Doctrine was applicable and an individual was required to provide his foreign bank account records in a government investigation on potential tax evasion. Then, in Grand Jury Proceedings, (CA 11 2/7/2013) 111 AFTR 2d 2013-794, the Eleventh Circuit similarly concluded that the Required Records exception applied to the Fifth Amendment and required production of financial records otherwise subject to the BSA (see Weekly Alert ¶  13  02/21/2013).