On January 24, 2017, the United States District Court for the Southern District of New York held that a taxpayer, designated Respondent Subject E (“Respondent”), violated a compulsion order, was in civil contempt of court, and ordered that she must comply with a grand jury subpoena seeking records of foreign bank accounts.[1] The court imposed a sanction on Respondent of $1,000 per day if she did not produce the bank records by February 13, 2017. The district court rejected Respondent’s assertion that the act of production violated her Fifth Amendment privilege against self-incrimination.

Background

The contempt proceeding arose from Respondent’s refusal to comply with a grand jury subpoena dated October 4, 2010, seeking “[a]ny and all records created, obtained, and or maintained from October 5, 2005, to the present that are in [Respondent’s] care, custody, or control relating to foreign bank accounts in which she maintained a financial interest.”[2] In 2013, the district court had issued a compulsion order which directed Respondent to produce records related to foreign bank accounts consistent with the Bank Secrecy Act’s recordkeeping requirements. In response, Respondent made a single production consisting of two documents. In December 2015, a year following Respondent’s production, the Government received documents from the Liechtenstein government in connection with its ongoing investigation. The Liechtenstein documents revealed that the Respondent “held foreign bank accounts with millions of dollars in assets through a sham foreign entity” through the time period covered by the 2010 Subpoena.[3] Respondent failed to produce any of the Liechtenstein documents in response to the 2010 Subpoena. In addition, the Government alleged that Respondent failed to produce records relating to other foreign accounts: (i) a joint account with her husband at Credit Suisse, (ii) an account at HSBC in France, and (iii) an account held by a foundation in Liechtenstein. In response, the Government filed a motion for contempt and sought an order to impose on Respondent a sanction of $5,000 per day for failure to produce the bank records. A month later, in July 2016, the Government indicted Respondent, charging her with (1) obstructing and impeding the due administration of the internal revenue laws, and (2) subscribing to a false and fraudulent U.S. individual income tax return.

District Court’s Analysis

In deciding whether to impose sanctions against Respondent, the district court noted that it must consider the following: “(1) the character and magnitude of the harm threatened by continued contempt; (2) the probable effectiveness of the proposed sanction; and (3) the financial consequence of the sanction on the contemnor.”[4] The determination falls within the informed discretion of the district court.

Respondent argued that she was required only to produce documents in her immediate physical possession. The 2010 Subpoena called for the production of documents that were in her “care, custody, or control.” Respondent construed her obligation narrowly, arguing that “[r]ecords which are not in [her] possession cannot be produced.”[5] Looking to precedents in the Second Circuit, the district court rejected Respondent’s argument and concluded that the test for “care, custody, and control” is not the location of the documents. Rather, control is defined as “the legal right, authority, or practical ability to obtain the materials sought upon demand.” [6] Applying this test to Respondent, the court concluded that she had control of the foreign accounts and thus must undertake to produce them. Specifically, as to the joint account with her husband at Credit Suisse, Respondent had a power of attorney over the account for 13 years and during that time, she specifically directed the bank to transfer funds to other accounts. As for her account at HSBC France, the Respondent maintained care, custody, and control of the account, but failed to produce records because the bank imposed a processing fee of $430, which Respondent sought to shift to the Government. The court refused to shift the cost to the Government and ordered Respondent to produce the records. As for the foundation account, the court found that Respondent “directed the creation of the Foundation to manage a sizable inheritance from her father” and received “distributions from certain of the accounts linked to the Foundation.”[7] The court found that Respondent’s tax return and the Liechtenstein documents sufficiently established the associational relationship between Respondent and the foundation account, and held that Respondent should produce the records because “she had the legal authority and practical ability to obtain them.” [8]

Respondent further argued that in view of the pending indictment against her, enforcement of the 2010 Subpoena at this time would improperly aid the Government in its criminal trial preparation. The court noted that a grand jury’s wide-ranging investigative power “does not end when it indicts a defendant.”[9] Post-indictment activities are permitted, and Respondent had the burden to rebut the presumption of regularity that attaches to grand jury proceedings and prove that the “Government’s use of the grand jury was improperly motivated.”[10] The court found that Respondent failed to offer any evidence of irregularity. In addition, the court rejected Respondent’s claim that evidence obtained by the grand jury pending the indictment will be used against her in violation of her Fifth and Sixth Amendment rights. The court narrowed the universe of documents to “required records” which bear no “independent communicative element and therefore do not present the risk of self-incriminations under the Fifth Amendment.”[11]

Finally, as to the request for sanctions, the court held that because Respondent had not produced all records within her care, custody, or control, she was in violation of the compulsion order issued in 2013. The court found that the character and magnitude of the harm threatened by Respondent’s continued contempt of the compulsion order was significant. The court concluded that the Government’s request to impose a fine of $5,000 per day was excessive, and concluded that a fine of $1,000 should be sufficient to coerce Respondent to conform her conduct to the court’s order and was reasonable in relation to the facts underlying Respondent’s “contumacious conduct.”[12]