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.

In Summons Enforcement Proceeding, Court Rejects Taxpayer's Lack of Possession Defense For Foreign Account Documents (12/2/15)

When the IRS or a grand jury has reason to believe that a taxpayer has a foreign account, it may issue compulsory process for the account documents.  The compulsory process will be an IRS summons or a grand jury subpoena.  As I have discussed earlier in this blog, many taxpayers have unsuccessfully asserted the Fifth Amendment privilege (via act of production).  The Courts have held that the required records doctrine overcomes the assertion of the Fifth Amendment privilege.

In United States v. Malhas, 2015 U.S. Dist. LEXIS 151990 (N.D. Ill. Nov. 10, 2015), here, the taxpayer attempted another tack -- the lack of possession defense.  In summary, the defense is that the a party subject to compulsory process cannot produce documents that he does not possess or, if he doesn't possess, have sufficient control over that he could possess the documents.  In Malhas, a summons enforcement proceeding, the Court ruled that, once the IRS has proved it likely that the taxpayer does have the possession or control, the summons can be enforced.

Some interesting features of the opinion are:

1.  "Malhas argued that his control over the bank account at issue [apparently then at UBS] was cancelled on August 3, 2004 when a third party he has never met, Ms. Moosleeithner-Batliner, became an authorized signator and cancelled 'the authorized signatory of Dr. Malhas.'" The opinion does not explain why someone Malhas had never met took over the signatory authority.  Apparently, the Court did not credit this cryptic claim.

2.  "Further, Malhas alleged that the bank transferred all assets from the account at issue [with UBS] to 'Banque Baring Brothers Sturdaza' on September 24, 2008, rendering any attempt to contact 'UBS for account documents . . . useless.'"  The opinion does not indicate how Malhas knew about that transfer if he had nothing to do with the account after 2004.  Apparently, the summons sought records.

3.  Also, the transferee bank -- Banque Baring Brothers Sturdaza -- is one I have not seen surface in the Swiss bank brouhaha.  The US TAX PROGRAM list of Swiss banks participating the U.S. DOJ Swiss Bank Program, here, does list the bank, but assigns no program category to it.  Yet, the timing of the transfer from UBS to Banque Baring Brothers suggests that the bank should perhaps be in the Category 2 program.   In this regard, all category 2 banks have not yet been identified.  The bank's website is here, indicating that the spelling of the last word is "Sturdza."  Googling turns up some interesting stuff, such as the indication in a BloombergBusiness article that it is "Swiss private bank overseeing the wealth of tennis players, soccer stars and other athletes."  See Giles Broom, Baring Swiss Bank for Rich Athletes Buys Asset Manager Coges (BloombergBusiness 2/4/13), here.

4.  Malhas dithered but finally indicated to the Court that, if it would just wait, he "'intend[ed] to issue written requests to both the Union Bank of Switzerland (UBS) and Banque Baring Brothers Sturdaza to forward to him, with a copy to the IRS, all records, statements and documents regarding any and all non-U.S. accounts, pertaining to Dr. Malhas . . . for the calendar years 2006, 2007, and 2008.'"  Yet, he admitted that "despite being approached by the IRS as early as early 2012 and learning of the November 5 evidentiary hearing on October 8, he had yet to make such contact with the banks at issue."  The Court was not pleased and denied any further time before ruling on the summons enforcement petition, noting "its surprise that Malhas had not previously sought these documents from the banks at issue."

5.  The IRS presented "numerous documents [showing] that Malhas was connected to the banks at issue during the relevant time period."  The court later referred in the quote below to this as a "plethora of documents and records illustrating Malhas's connections with the international banks and the accounts at issue."

6.  In enforcing the summons, the Court has a good discussion of the law relating to the lack of possession defense and the burden on the summonsed party to prove the defense of lack of possession.  Here are the critical paragraphs from the discussion:

A number of Circuit Courts of Appeals have detailed what the taxpayer must show at this hearing to successfully illustrate that he "lacks possession" of the relevant documents. Some have held that it is within the district court's discretion to simply determine whether the facts show that the taxpayer does, or does not, possess the relevant documents. See Barth, 745 F.2d at 187-88 (directing the lower court to "rule explicitly on [the defendant's] defense of nonpossession based on the present record and on any additional evidence the parties may wish to present" and concluding that if the lower court "finds that [the defendant] possesses the [documents], then enforcement may be granted; if [the court] determines that [the defendant] does not possess them, then enforcement should be denied"); see also Gippetti, 153 F. App'x. at 868, citing Barth, 745 F.2d at 187. Others have established the standard in more detail. Specifically, they have stated that, "the party resisting enforcement bears the burden of producing credible evidence that he does not possess or control the documents sought." United States v. Billie, 611 Fed. App'x. 608, 610 (11th Cir. 2015), quoting United States v. Huckaby, 776 F.2d 564, 567 (5th Cir. 1985). Importantly, this "credible evidence" standard operates on a sliding scale: the more the government's evidence suggests the defendant possesses the documents at issue, the heavier the defendant's burden to successfully demonstrate that he does not. Id. at 610-11 ("[T]he burden would be heavy in the present circumstances -- [the defendant's] prior production of materials and his title as Custodian of Records strongly suggest he maintains control and possession."). 

Here, Malhas has failed to satisfy his burden regardless of what standard the Court applies. Specifically, Malhas did not present any evidence at the November 5 evidentiary hearing, let alone "credible evidence" that he did not possess the documents at issue. Huckaby, 775 F.2d at 567. As the government noted, the Court has already found that the IRS's petition was valid under Powell, rendering Malhas's eleventh hour argument otherwise, moot. Further, the IRS's plethora of documents and records illustrating Malhas's connections with the international banks and the accounts at issue overshadowed Malhas's cursory references to the signatory and asset-transfer documents. Specifically, the IRS undercut the importance by pointing out Malhas's "password" that enabled him to access the accounts at issue without a signature. Thus, Malhas's utter lack of evidence left him unable to convince the Court that he does not have possession or custody of the documents. Indeed, even Malhas implied just the opposite. In his November 3 emergency motion, Malhas suggested the banks at issue may possess the summonsed documents, admitting that "[i]f the banks produce documents sought by Petitioner in response to Dr. Malhas' request, compliance would presumably no longer be an issue, and enforcement will be moot." (R. 29 at 2.) Similarly, when asked by the Court at the November 4 emergency motion hearing what he expected to receive from the banks, Malhas admitted that he expected the institutions could produce relevant documents that may go toward compliance with the IRS's summons. These admissions cut against any argument that Malhas does not possess the documents, and it certainly does not satisfy his heavy burden at this stage. See Kis, 658 F.2d at 544. Accordingly, the Court concludes that Malhas has failed to meet his heavy burden, and the IRS has presented compelling evidence that he possesses or has custody of the documents and records the IRS seeks. The Court, therefore, orders him to comply with the IRS's summons by January 12, 2016.

5.  The summons enforcement order gives Malhas until January 12, 2016, to comply.  If he pulled out all stops immediately after the order was issued, he may be able to retrieve the summonsed documents.