Targets of Investigations Can't Plead Fifth to Protect BSA Data, Courts Say

By Colby Adams

U.S. Fifth Amendment protections cannot shield Bank Secrecy Act reports from grand jury and other subpoenas, two appellate courts have ruled in tax evasion-related cases.

On Monday, the Seventh Circuit Court of Appeals said that Bank Secrecy Act (BSA) data, including certain information maintained for tax purposes, must be turned over when legally subpoenaed even if doing so is tantamount to self-incrimination. The decision is the second appellate ruling of its kind, after the Ninth Circuit Court of Appeals reached a similar conclusion in August 2011.

The decisions are "an important and significant development that bolsters government power," said Bryan Skarlatos, an attorney with New York-based Kostelanetz & Fink, LLP. "This gives a lot of momentum to the government's position that the Fifth Amendment doesn't apply to the Required Records Doctrine, and definitely weakens" similar cases, he said.

Taken together, the rulings constitute an "unmitigated disaster" for Americans with offshore bank accounts facing legal scrutiny, said Dennis Brager, a former trial attorney with the IRS Office of Chief Counsel. Such investigations could involve clients at dozens of high-profile banks, including UBS AG, Credit Suisse AG and others, he said.

Monday's ruling further diminishes the chances that the Supreme Court will weigh in on the matter, said Brager. In June, U.S. Justices declined to hear an appeal of the Ninth Circuit decision, effectively settling the matter unless other appellate courts reach different conclusions in similar cases, he said.

The Seventh Circuit ruling stems from a tax evasion investigation, launched in October 2009, against an unnamed individual suspected of hiding assets in offshore bank accounts. When a grand jury asked that the suspect to turn over "any and all" records related to foreign financial accounts, the individual claimed that doing so would violate protections against self-incrimination under the Fifth Amendment.

On Monday, the appellate court reversed a prior district court decision in favor of the suspect, arguing instead that, under the Required Records Doctrine, individuals who voluntarily participate in a regulated activity effectively waive their Fifth Amendment privileges to withhold related information from investigators.

"The ruling probably secures and affirms one more tool for the government while hobbling similar protections claimed in other cases," said Jim Mastracchio, an attorney with Baker & Hostetler, LLP, in Washington, D.C.

The BSA information impacted by the decision includes bank account opening statements, transactional activity and foreign investment earnings statements, among other documentation, he said.

In its earlier decision, the Ninth Circuit Court of Appeals ruled for identical reasons against an appeal by an accountholder at Zurich-based UBS AG. In that case, the court agreed with the lower court's opinion that, because the government requires taxpayers to keep records related to foreign bank accounts, the Constitution does not bar their production.

"If another court down the road rules that the government is requiring people to keep and submit records of their illegal activity, then that is a Fifth Amendment issue," said Skarlatos. "But this hurts a lot of cases brought by foreign bank account holders right now." Similar cases have been brought in Florida and Texas, among other states, he said.

Since the disclosure of UBS AG's $780 million deferred prosecution agreement in August 2009, U.S. and other officials have privately and publicly accused over half of a dozen banks of helping wealthy Americans avoid paying the IRS. As part of its agreement with U.S. officials, UBS turned over data on nearly 5,000 of its American clients.

In February, Wegelin & Co., Switzerland's oldest bank, was indicted by a Manhattan federal court on similar charges. American officials seized $16 million from the bank's correspondent accounts as a result. Credit Suisse, Basler Kantonalbank, Zuercher Kantonalbank, Julius Baer Group, Bank Leumi Le-Israel BM, Bank Hapoalim BM and NZB AG are reportedly negotiating settlements with the United States.

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