The use of foreign bank accounts by US taxpayers to hide undeclared funds and assets has been a highly publicised topic since the US government’s attack on UBS tested the fortification of Swiss bank secrecy in early 2009. Once vaguely known to most laymen, the foreign bank account reporting (FBAR) requirement has come to be common knowledge in the international community. Given that a single wilful violation of the FBAR requirement can carry a penalty of the greater of USD100,000 or 50 per cent of the account balance, the FBAR requirement has also become the ‘stick’ used by the US government to encourage US taxpayers with undeclared offshore funds to voluntarily come clean and disclose their undeclared assets via the Internal Revenue Service’s (IRS’s) Offshore Voluntary Disclosure Initiative (OVDI).

Politically speaking, in light of the growing US deficit and need for additional revenues, the push for international financial transparency and recoupment of income tax revenues from undeclared offshore assets is one of the few issues these days that receives bipartisan support. Legislatively, this is enforced by the 2010 enactment of the Foreign Account Tax Compliance Act (FATCA) within the Hiring Incentives to Restore Employment Act, and the intergovernmental agreements stemming from the legislature. Even during the recent US presidential elections, the issue of undisclosed offshore assets provided ammunition for one of the presidential candidates (and, of course, political pundits).

In addition to the attention that undisclosed offshore assets have received by the legislative and executive branches of the US government, the politicisation of this issue may be trickling down to the judiciary. Specifically, two recent cases relating to the assessment of civil penalties for the wilful violation of the FBAR requirement have applied a standard of wilfulness contrary to previous judicial interpretations, and even the government’s own interpretation, under Title 31. In United States v Williams, No 10-2230, 2012 US App LEXIS 15017, at *1 (4th Cir 20 July 2012), the Fourth Circuit Court of Appeals, in an unpublished decision, reversed the district court’s denial of civil penalties for the alleged wilful violation of failing to file an FBAR under Title 31.

In 2010, the US District Court for the Eastern District of Virginia, in a detailed opinion that fully explained the evidence supporting its findings, held that the government failed to meet its burden to establish by a preponderance of the evidence that J Bryan Williams wilfully violated his obligation to file his 2000 FBAR form, therein denying the federal government’s attempt to recover civil FBAR penalties from Williams.¹

Admittedly, the facts did not weigh heavily in the taxpayer’s favour. In 2000, there was no dispute that Williams had an interest in two Swiss bank accounts that were held through a foreign entity, and failed to report the income earned from those accounts on his 2000 federal tax return. More specifically, he checked the ‘No’ box in response to the question of whether he had an interest in any foreign financial accounts on Schedule B of that tax return, and failed to file the required FBAR, reporting his interest in the accounts, on time. In 2002, Williams disclosed the two accounts to the IRS, and in 2003, pleaded guilty to conspiracy to defraud the IRS and criminal tax evasion. As part of his guilty plea, Williams allocuted to all of the essential elements of the charged crimes, including that he unlawfully, wilfully and knowingly evaded taxes by filing false and fraudulent tax returns on which he failed to disclose his interest in two accounts.

The government argued that the ‘No’ box checked in his tax return, combined with the failure to file the FBAR, was sufficient to establish a wilful violation of the FBAR requirement under Title 31. In response to Williams’ testimony that he was ignorant of the question and directions in Schedule B, the government asserted that his signature on his 2000 federal tax return was prima facie evidence that he knew the contents of his tax return.

On examination of the surrounding facts and circumstances presented at trial, the district court was ‘not persuaded that Williams was lying about his ignorance to the contents’ of his 2000 tax return because the court concluded that Williams’ testimony that he was ignorant of the written contents of his return, and otherwise relied on his accountants to fill in the remainder of the return, was credible and should be given more weight than the mere fact that Williams checked the ‘No’ box. More specifically, the district court found that there was evidence that ‘strongly indicated’ to the court that Williams lacked the motivation to wilfully conceal the accounts, and concluded that Williams’ failure was ‘not an act undertaken intentionally or in deliberate disregard for the law,’ but rather an understandable omission given the circumstances.

Despite the district court’s detailed explanation of the evidence and reasoning supporting its findings, the Fourth Circuit Court of Appeals, in an unpublished, split-decision opinion, found that the district court was erroneous in finding that wilfulness had not been established. The majority focused on Williams’ signed 2000 federal tax return as prima facie evidence that he knew the contents of his return and that, at a minimum, the question contained in Schedule B and its directions ‘put Williams on inquiry notice of the FBAR filing requirement’. The majority took Williams’ testimony that he did not read such a question or pay attention to the written words on his return as evidence that Williams made a ‘conscious effort to avoid learning about reporting requirements’. Moreover, his false answers on his year 2000 tax organiser, provided by his accountant, and return, evidenced conduct ‘meant to conceal or mislead sources of income or other financial information’, which the majority concluded constitutes ‘wilful blindness to the FBAR requirement’.

While the majority could have rested here and concluded that the record established wilful blindness and reversed the district court’s holding on that basis, they decided to go one step further and concluded that they ‘are convinced that, at a minimum, Williams’s undisputed actions establish reckless conduct, which satisfied the proof requirement under [the FBAR Penalty Provision]’ (emphasis added). In support of their conclusion, they said that ‘in cases where wilfulness is a statutory condition of civil liability, [courts] have generally taken [wilfulness] to cover not only knowing violations of a standard, but reckless ones as well’.

In the Tenth Circuit, the US District Court for the District of Utah, Central Division, applied a similar standard in United States v McBride, Case No 2:09-cv-378 DN, 2012 US Dist LEXIS 161206, at *1 (D Utah, C Div, 8 November 2012), and found that Jon McBride’s failure to satisfy his FBAR requirement to report his interest in certain foreign accounts was wilful. Like the court in Williams, the district court stated that: ‘Where wilfulness is a statutory condition of civil liability, it covers not only knowing violations of a standard, but reckless ones as well. Therefore, “wilfulness” may be satisfied by establishing the individual’s reckless disregard of a statutory duty, as opposed to acts that are known to violate the statutory duty at issue. An improper motive or bad purpose is not necessary to establish wilfulness in the civil context.’

The courts in Williams and McBride both applied a standard of wilfulness contrary to the government’s own interpretation, and judicial precedence, under Title 31. In IRS CCA 200603026, the IRS stated that the FBAR provisions providing for civil penalties and criminal penalties contain a similar ‘wilfulness’ requirement, and concluded that the phrase ‘wilful violation (or wilfully causes any violation)’ has the same definition and interpretation. The IRS cited the Supreme Court in Ratzlaf v United States, 510 US 135 (1994), addressing the standard for wilfulness in the context of a criminal violation of a structuring provision of the Bank Secrecy Act (Title 31), which found ‘wilfulness’ to be ‘a voluntary, intentional violation of a known legal duty’. In other words, the government had to prove that the defendant had acted with knowledge that his conduct was unlawful in order to establish that he had wilfully violated the anti-structuring law in Title 31.

The IRS clarified that ‘in the case of the FBAR penalty, in order for there to be a voluntary intentional violation of a known legal duty, the accountholder would just have to have knowledge that he had a duty to file an FBAR, since knowledge of the duty to file an FBAR would entail knowledge that it is illegal to not file the FBAR’. The corollary of this principle being that ‘there is no wilfulness if the accountholder has no knowledge of the duty to file the FBAR’. The IRS concluded that wilfulness can be inferred where an entire course of conduct establishes the necessary intent.

If read literally, the Williams and McBride cases appear to eviscerate the non-wilful and reasonable cause provisions of Title 31, and the Williams case appears to come close to establishing a ‘strict liability standard’ for incorrectly answering the question in Schedule B of an individual’s US federal tax return, because the majority in Williams found that Williams signing his tax return in which the Schedule B question regarding foreign bank accounts was checked ‘No’ constitutes ‘prima facie evidence that he knew the contents of the return’, and therefore knowledge of the FBAR filing requirement. Either way, both cases might ultimately prove the age-old dictum that ‘bad facts make bad law’.

While debate continues over whether the standard of wilfulness is edging lower, in three circuits there seems to be little debate that foreign bank account records may be subject to the ‘Required Records Doctrine’ and thus discoverable in a criminal proceeding. Most recently, in the case of In re Grand Jury Subpoena, 696 F3d 428 (5th Cir 2012), the Fifth Circuit Court of Appeals ordered the production of foreign bank account records that are required to be under Treasury Department regulations by a witness who was a target of a grand jury investigation of allegations that he was using Swiss bank accounts to avoid US income tax. The witness refused to produce the records, relying on his Fifth Amendment privilege against self-incrimination. The Fifth Circuit, in reversing the district court, found that the privilege did not apply because the record-keeping requirement under the Bank Secrecy Act (Title 31) falls within the Required Records Doctrine, which applies when three premises are met:

The court concluded that all three premises had been met. It found that the requirement to maintain and produce foreign bank account records is ‘essentially regulatory’ in nature because there is nothing inherently illegal about having a foreign bank account (as opposed to a completely illegal activity such as narcotics or human trafficking ). It was uncontested that the bank records sought are of a kind that are ‘customarily kept’ by a reasonable accountholder. Finally, although the court acknowledged that bank account records are usually viewed as private, it nevertheless found that there were sufficient ‘public aspects’ to satisfy the Required Records Doctrine. In so finding, the court focused on the fact that the Treasury Department shares the information it collects pursuant to the Bank Secrecy Act’s record-keeping and reporting requirements with various other agencies, and such data-sharing is designed to serve an important public purpose (e.g. federal economic and financial analysis and planning), which is ‘sufficient to imbue otherwise private foreign bank account records’ with ‘public aspects’ sufficient to satisfy the third prong of the Required Records Doctrine.

The Seventh Circuit, in In re Special February 2011-1 Grand Jury Subpoena Dated 12 September 2011, 691 F3d 903 (7th Cir 2012), and the Ninth Circuit, in In re Grand Jury Investigation MH, 648 F3d 1067 (9th Cir 2011), have reached the same results in those jurisdictions.

Irrespective of the bad facts in each of the cases above, these cases may illustrate that the politicisation of undeclared offshore assets has trickled down to the judiciary, and maybe even created a slight bias in favour of the US government. In any event, at the least, the aforementioned cases should be considered when giving advice on undeclared offshore assets.