Conduct Performed Without Knowledge Still Can Lead to the Most Serious Penalties
Under the Bank Secrecy Act (“BSA”), the most onerous civil penalties will be applied for “willful” violations. That mental state standard might sound hard for the government to prove. For example, in criminal and civil tax fraud cases under the Internal Revenue Code, “willfulness” is defined to mean a voluntary and intentional violation of a known legal duty – a very demanding showing. But as we will discuss, two very new court opinions discussing a required BSA filing – a Form TD F 90-22.1, or Report of Foreign Bank and Financial Accounts, otherwise know as a FBAR – remind us that, under the BSA, a “willful” violation does not require proof of actual knowledge. A “willful” BSA violation only needs to be reckless, and the government can prove it through the doctrine of “willful blindness” or “conscious avoidance.”
The fact that courts in civil FBAR cases have been holding that “willfulness” can mean “just recklessness” is not a new development, and it is well known to those practicing in the tax fraud and tax controversy space. This blog post will not attempt to delve into the long-running offshore account enforcement campaign that has been waged by the IRS and the DOJ; the related case decisions; or the related voluntary disclosure programs for offshore accounts (for those interested in this fascinating but complicated topic, the Federal Tax Crimes blog is one of many excellent resources). Rather, the point of this post is that the case law now being made in the FBAR and offshore account context will have direct application to more traditional Anti-Money Laundering (“AML”)/BSA enforcement actions, because the civil penalty statute being interpreted in the FBAR cases is the same provision which applies to claimed failures to maintain an adequate AML program and other violations of the BSA. Thus, the target audience of this post is not people involved in undisclosed offshore bank account cases, but rather people involved in day-to-day AML compliance for financial institutions, who may not realize that some missteps may be branded as “willful” and entail very serious monetary penalties, even if they were done without actual knowledge. This may be news to some, and it underscores in particular the risks presented by one the topics that this blog frequently has discussed: the potential AML liability of individuals.
BSA Penalties for “Willful” vs. “Negligent” Conduct
The difference between a civil BSA penalty for “willful” conduct and a civil BSA penalty for “negligent” conduct can be stark.
The relevant statute, 31 U.S.C. § 5321, generally provides in Section 5321(a)(6) for a civil penalty of no more than $500 for each negligent BSA violation by a business, with a higher potential penalty of up to $50,000 for a “pattern of negligent violations” by a business.
Contrast these penalties with those imposed for civil BSA violations deemed to be “willful.” For example, under Section 5321(a)(1), a willful civil violation of the requirement to implemment and maintain an effective AML policy, imposed under 31 U.S.C. §§ 5318(a)(2) and (h), can result in a penalty of $100,000 being imposed upon either a business or an individual, per each day of the alleged violation:
A domestic financial institution or nonfinancial trade or business, and a partner, director, officer, or employee of a domestic financial institution or nonfinancial trade or business, willfully violating this subchapter or a regulation prescribed or order issued under this subchapter . . . , is liable to the United States Government for a civil penalty of not more than the greater of the amount (not to exceed $100,000) involved in the transaction (if any) or $25,000. For a violation of section 5318(a)(2) of this title or a regulation prescribed under section 5318(a)(2), a separate violation occurs for each day the violation continues and at each office, branch, or place of business at which a violation occurs or continues.
Likewise, under 31 U.S.C. § 5318(a)(7), any violation of 31 U.S.C. § 5318(i) (requiring due diligence efforts with regard to private and correspondent bank accounts involving foreign persons); 31 U.S.C. § 5318(j) (requiring reasonable steps to prevent the maintenance of correspondent accounts with foreign shell banks; record keeping related to AML programs); or 31 U.S.C. § 5318A (pertaining to special measures for jurisdictions, financial institutions, and international transactions of primary money laundering concern, as determined by the Secretary of the Treasury), can result in a civil penalty in an amount equal to but not less than twice the amount of the transaction at issue, up to $1 million.
Presumably, such severe penalties, even though they are “only” civil, should accompany only the most egregrious violations. However, court decisions involving the FBAR filing requirement – a requirement typically associated with tax compliance, rather than classic AML/BSA compliance – have been steadily eroding the mental state requirement for willful violations under Section 5321. Although the scenarios of an individual failing to file a FBAR regarding his Swiss bank account and a bank maintaining its complex AML policies and procedures may be far apart in the real world, the legal decisions in the first scenario nonetheless can affect enforcement in the second scenario.
The FBAR Cases
As noted, the new FBAR opinions (United States v. Markus, from the District of New Jersey, and Norman v. United States, from the U.S. Court of Federal Claims) are merely the latest opinions issued in an ongoing battle between the government and the tax controversy and white collar defense bar regarding the proper definition of “willfulness” for the purposes of the civil FBAR penalty – a penalty which can be very severe (half the value of the undisclosed offshore account, for each year of the violation), and a battle which the government, with some wrinkles, has been winning. True to this trend, both Markus and Norman find that the IRS properly assessed a willfulness penalty against the taxpayers who previously had undisclosed foreign accounts. What is important for our purposes here is how they describe the willfulness standard.
For some context, the Markus court explains the FBAR filing requirement as follows:
The BSA instructs the Secretary of the Treasury to require any U.S. citizen “to keep records and file reports” whenever he or she “makes a transaction or maintains a relation for any person with a foreign financial agency.” 31 U.S.C. § 5314(a). Treasury regulations explain further that any citizen “having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country” must report certain details about the account to the Treasury Department. 31 C.F.R. § 1010.350(a). This report must be made each year by filing a . . . FBAR. Id. § 1010.306(c).
. . . .
The Secretary of the Treasury may impose a civil penalty for the willful failure to file an FBAR if (1) the person is a U.S. citizen, see 31 C.F.R. § 1010.350(b); (2) the person had an interest in or authority over a foreign financial account; (3) the financial account had a balance exceeding $10,000 at some point during the reporting period; and (4) the person willfully failed to disclose the account or file an FBAR form for the account. See 31 U.S.C. § 5321; Bedrosian [v. United States Dep’t of Treasury, Internal Revenue Serv., No. CV 15-5853, 2017 WL 4946433], at *3–4 [(E.D. Pa. Sept. 20, 2017)] (citing cases). Furthermore, where the [FBAR-related] failure is “willful,” the amount of this penalty cannot exceed the greater of either $100,000 or 50 percent of the balance of the account at the time of the violation. 31 U.S.C. § 5321(a)(5). There is no reasonable cause exception for a willful violation. 31 U.S.C. § 5321(a)(5)(C)(ii).
The FBAR filing requirement used to be obscure, but it has become a prominent weapon in the government’s enforcement arsenal. For example, Paul Manafort, the former manager of the President’s political campaign, is currently on trial in the Eastern District of Virginia for criminal charges involving in part an alleged failure to file FBARs for foreign accounts that he controlled.
“Willfulness” – Sort Of
Turning now to the willfulness standard, here is what the Norman court says about how to interpret that standard:
The term “willful” is not defined under the statute. See generally, 31 U.S.C. § 5321. However, the Bank Secrecy Act specifically defines penalties under § 5321 as “civil money penalties.” § 5321(a)(5)(A). Where, as here, “willfulness is a condition for civil liability,” it is “generally taken  to cover not only knowing violations of a standard, but reckless ones as well.” Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007) (citing McLaughlin v. Richland Shoe Co., 486 U.S. 128, 133), quoted in United States v. Williams, 489 Fed. App’x. 655, 658 (4th Cir. 2012). “While the term recklessness is not self-defining, the common law has generally understood it in the sphere of civil liability as conduct violating an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Safeco, 551 U.S. at 68 (internal quotation omitted).
Likewise, the Markus court states as follows:
Section 5321 authorizes a penalty for willful violations of the reporting requirement but fails to define the term “willful.” 31 U.S.C. § 5321. Those cases that have taken up the issue have concluded that the term includes all conduct that is voluntary, but not conduct that is merely accidental or unconscious. See [United States v.] McBride, 908 F. Supp. 2d [1186,] at 1205 [(D. Utah 2012)]; Bedrosian, 2017 WL 4946433, at *4. This comports with the Supreme Court’s instruction that the “standard civil usage . . . counsels reading the phrase ‘willfully fails to comply’” as including within its scope recklessness. Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2007).
The Norman court also notes that willfulness in the context of FBAR violations may be inferred from conduct meant to conceal or mislead, and it “can be inferred from a conscious effort to avoid learning about reporting requirements.” Thus, an already relatively low standard for mental state – recklessness – can be proven by the even more elastic concept of willful blindness.
Although the standard of willfulness as defined above is not toothless – purely accidental conduct obviously will not qualify (nor, apparently, if the person is “unconscious”) – it is broad enough to encompass potentially a great deal of conduct. Further, and according to the IRS and courts which recently have addressed the issue, the standard of proof for civil willfulness is only a preponderance of the evidence – as opposed to the standard of proof requiring clear and convincing evidence, which applies to a showing of willfulness for the purposes of a civil tax fraud penalty.
Although the court decisions upholding the imposition of the civil willfulness penalty for FBAR violations typically involve conduct described by the court and the government as deceitful or misleading, their holdings regarding the legal standard – which will be quoted and cited in the future by the government in the abstract, and untethered to the facts at hand in the particular cases – nonetheless have potential implications for AML compliance. Maintaining an effective AML program and filing appropriate Suspicious Activity Reports can be a difficult process, and often involve subjective judgments that must be made in the context of imperfect information. Maintaining an effective AML program also involves satisfying a host of reporting, identification, and record-keeping requirements, all according to “risk based” assessments – a standard that is routinely articulated but which can be incredibly imprecise to apply in practice.
When pursuing a civil or criminal enforcement action involving any kind of statute with a relatively low mental statement requirement (the classic examples are statutes involving public safety, such as regulations pertaining to the U.S. Food and Drug Administration), the government often will argue that, regardless of the thin statutory requirements, the facts at hand demonstrate actual knowledge and some sort of nefarious conduct. That may well be true in particular cases, and it should give comfort to AML professionals to the extent that it is true, because it suggests that the government will not pursue “willful” penalties unless the actual facts are sufficiently egregious and such a penalty is deserved (in the view of the government). Nonetheless, AML requirements sometimes can be as amorphous as they are sprawling. As the FBAR cases reflect, the BSA presents the real-world possibility that severe civil penalties can be imposed in the absence of actual subjective knowledge. This is a potentially sobering reminder to financial institutions and their Boards, executives, compliance officers and shareholders.