On December 13, 2013, the United States Court of Appeals for the Fourth Circuit issued its decision in United States of America v. Under Seal, a copy of which is available here. On December 19, 2013, the U.S. Court of Appeals for the Second Circuit issued its decision in In Re: Grand Jury Subpoena, a copy of which is available here. In both cases, the parties found themselves on the receiving end of grand jury subpoenas demanding the production of, generally, records of his foreign bank accounts, including the names of the account holders, the banks, the account numbers, the type of the account, and the maximum value of the account all information that must by law be reported to the Commissioner of Internal Revenue. In both cases, the parties refused to comply with the subpoenas, and in both cases the government moved to compel production in federal district court.
Before the district court, the recipients of the grand jury subpoenas argued that the Fifth Amendment insulated them from producing the records demanded by the grand jury because, in short, the grand jurys subpoena requires him either to produce documents that might incriminate him or to confirm that he failed to register his foreign bank accounts, which itself could be incriminating. Thus, to the extent that the witnesss simple act of producing the documents could be used against the witness for example, in those cases when the simple fact that the witness possessed the documents would be incriminating the recipients of the subpoenas argued that the Fifth Amendment militated against compelled production. This is commonly referred to as the Fifth Amendment act of production privilege. See Fisher v. United States, 425 U.S. 391 (1976).
The act of production privilege is a serious one, but it is not without its limits. For instance, we have previously discussed the required records exception to the act of production privilege under the 5th Amendment to the U.S. Constitution here and here. As described by the Second Circuit, [t]he required records exception applies only when the Fifth Amendment privilege would otherwise allow a witness to avoid producing incriminating documents. It abrogates the protection of the privilege for a subset of thosedocuments that must be maintained by law. (emphasis added). So, in other words, if a witness receives a subpoena calling for production of documents which must be maintained by law, the witness cannot successfully assert that he is insulated by the act of production privilege. In Grosso v. United States, 390 U.S. 62, 6768 (1968), the Court established a three-factor test to determine whether documents are required records:
First, the purposes of the United States inquiry must be essentially regulatory; second, information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept; and third, the records themselves must have assumed public aspects which render them at least analogous to public documents.
In these two cases, the Second and Fourth Circuits travelled the same analytical course and arrived at virtually identical locations: the regulations under the Bank Secrecy Act require that individuals with foreign bank account maintain those records and produce them to the government upon request. Consequently, statements received from foreign banks are “required records” and the Fifth Amendment act of production privilege does not apply.
As of today, the Second, Fourth, Fifth, Seventh, Ninth and Eleventh Circuits have address the issue and all have sided with the government. Given that there is no decision from a Court of Appeals siding with a taxpayer on this issue, the probability that the United States Supreme Court would take up the matter is remote.
What does this mean for taxpayers? At a minimum, it means that when seeking to enforce a grand jury subpoena calling for records of foreign financial accounts, the Government will be able to proceed with virtually no fear that it will be quashed. Taxpayers who have undisclosed foreign accounts should consult with competent counsel so as to become educated about their options, including the IRS Offshore Voluntary Disclosure Program (which we have discussed inter alia here, here, here, here and here), and avoid criminal prosecution.