In a recent decision, the Seventh Circuit Court of Appeals held that the Required Records Doctrine (RRD or the “doctrine”) compelled production of subpoenaed foreign bank account records, which were required to be maintained under the Bank Secrecy Act. The district court had quashed the subpoena, concluding that it would violate the Fifth Amendment privilege against self-incrimination. The government appealed, and the court of appeals reversed the lower court’s order.

Background

In October 2009, the Internal Revenue Service opened an investigation into whether T.W. (referring to “target witness”) had used offshore accounts to evade federal income tax. In 2011, a grand jury issued a subpoena requiring T.W. to produce, for the period October 2006 through present:

Any and all records required to be maintained pursuant to 31 C.F.R. § 103.32 [subsequently relocated to 31 C.F.R. § 1010.420] relating to foreign financial accounts that you had/have a financial interest in, or signature authority over, including records reflecting the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during each specified year.

T.W. is required to keep the requested records under the Bank Secrecy Act of 1970 (to which the regulations cited in the subpoena pertain). T.W. moved to defeat the subpoena on the basis that production of the records would violate his constitutional privilege against self-incrimination. For example, on the one hand, furnishing the records might show that T.W. has not reported accounts that should have been reported. On the other hand, by denying that he has the records, T.W. may incriminate himself under the Bank Secrecy Act. The government argued that the RRD overrides the Fifth Amendment privilege in this case. The district court determined that production of the records would be “testimonial” and would compel T.W. to incriminate himself and, thus, quashed the subpoena.

The Seventh Circuit Decision

The court of appeals began its analysis by framing the issue—whether, when the act of producing subpoenaed records would be incriminating, the RRD applies to override the privilege against self-incrimination.

The RRD originated in Shapiro v. United States, 335 U.S. 1 (1948). In that case, a produce wholesaler invoked the Fifth Amendment in response to an administrative subpoena requesting certain business records, which were required to be kept under the Emergency Price Control Act (EPCA). The EPCA was passed to thwart inflation and price gouging following the start of World War II. Finding that the EPCA was a valid exercise of Congress’ regulatory authority and that the recordkeeping provisions were essential to the EPCA’s objectives, the Supreme Court held that “the privilege which exists as to private papers” did not apply to the records required to be kept by the statute.

In essence, the records were “quasi-public” and thereby subject to compulsory production. The Supreme Court refined the RRD in Grosso v. United States, 390 U.S. 62 (1968), delineating three requirements for applying the doctrine: (1) the purposes of the government inquiry must be essentially regulatory, (2) information is obtained by requiring maintenance of records of a kind that the regulated party customarily keeps and (3) the records themselves have public aspects analogous to public documents. If these requirements are met, a witness cannot overcome a subpoena by invoking Fifth Amendment privilege.

T.W. argued that the RRD is inapplicable to a case where the act of production itself is compelled, testimonial and self-incriminating—that is, where the act of production privilege applies. The government did not dispute the act of production privilege, but contended that the RRD overrides any such privilege. The court of appeals found support for the government’s position and rejected T.W.’s characterization of the doctrine as a “threshold inquiry” as to whether privilege exists. Instead, the court held that the RRD is an exception that may override or supersede the privilege. The court also spurned T.W.’s claim that the RRD is relevant only to facial constitutional challenges to a statutory or regulatory recordkeeping requirement. According to the court, Shapiro not only addressed the constitutionality of the EPCA’s recordkeeping requirements, the case also held that the Fifth Amendment “is not a barrier to the enforcement of a valid civil regulatory scheme.”

The Seventh Circuit cited cases from several courts (including itself and the Supreme Court) that had broadly applied the RRD or its rationale, including in situations where the act of production privilege was invoked. T.W. countered that in those cases, the Fifth Amendment privilege was overcome because one or more of its criteria (testimonial, incriminating and compelled) were lacking. The court stated plainly that T.W. was wrong. Quoting its opinion in Smith v. Richert, 35 F.3d 300 (7th Cir. 1994), the Seventh Circuit clarified that the doctrine was especially handy (to the government) “when the act of production was itself testimonial, that is, when it communicated knowledge possessed by the person making the production and was, therefore—but for the doctrine—protected by the Fifth Amendment from being compelled by the government.” Put simply, the RRD does not come into play unless the government, but for the doctrine, would be compelling self-incrimination.

A main rationale for the RRD, according to the court, is that the government be able to inspect records it requires as a condition of participation in certain regulated activity, despite assertion of Fifth Amendment privilege. If invocation of the act of production privilege precluded the RRD’s application, this objective would be “easily frustrated.” The court further opined that an individual’s voluntary participation in an activity with recordkeeping requirements under a “valid civil regulatory scheme carries consequences, perhaps the most significant of which, is the possibility that those records might have to be turned over upon demand, notwithstanding any Fifth Amendment privilege … whether the privilege arises by virtue of the contents of the documents or by the act of producing them.”

Having decided that the Required Records Doctrine may indeed trump T.W.’s act of production privilege, the court turned to the question of whether the three requirements of the doctrine were met. The court embraced the Ninth Circuit’s recent decision in a “nearly identical case,” M.H. v. United States, 648 F.3d 1067 (9th Cir. 2011), which concluded that records required under the Bank Secrecy Act fall within the scope of the RRD. In M.H., the Ninth Circuit found that the records required to be maintained under the Bank Secrecy Act were essentially regulatory, customarily kept and carried some public aspects. Finding the requirements met, the Seventh Circuit held that T.W. must comply with the subpoena.

Conclusion

The Seventh Circuit opinion and the Ninth Circuit opinion on which it partly relied further establish a broad application for the Required Records Doctrine in general. In particular, these cases hold that the Fifth Amendment will not shield individuals from providing records required to be kept under the Bank Secrecy Act—i.e., information required to be reported in the Report of Foreign Bank and Financial Accounts (FBAR). These decisions create legal risks for those who have not maintained these records and/or have failed to report information (or related income) as required by U.S. law. In addition to measures under the Foreign Account Tax Compliance Act to obtain information directly from foreign financial institutions, or indirectly through foreign governments, these two decisions provide the U.S. government with precedential authority that may encourage its use of the RRD in future enforcement efforts directed at alleged tax evasion through the use of offshore accounts.