United States v. Chen

• Decision Date: 29 February 2016
• Docket Number: No. 14–2003.,14–2003.
• Citation: 815 F.3d 72
• Parties: UNITED STATES of America, Petitioner, Appellee, v. ZHONG H. CHEN, Respondent, Appellant.
• Court: U.S. Court of Appeals — First Circuit

815 F.3d 72

UNITED STATES of America, Petitioner, Appellee,

v.ZHONG H. CHEN, Respondent, Appellant.

No. 14–2003.

United States Court of Appeals, First Circuit.

Feb. 29, 2016.

William J. Lovett, with whom Melissa S. Baldwin and Collora LLP were on brief, for appellant.

Alexander P. Robbins, Attorney, Tax Division, Department of Justice, with whom Robert J. Branman, Attorney, Tax Division, Department of Justice, Caroline D. Ciraolo, Acting Assistant Attorney General, Diana L. Erbsen, Deputy Assistant Attorney General, Gilbert S. Rothenberg, Robert W. Metzler, Attorneys, Tax Division, Department of Justice, and Carmen M. Ortiz, United States Attorney, were on brief, for appellee.

Before LYNCH, Circuit Judge, SOUTER,^* Associate Justice, and STAHL, Circuit Judge.

LYNCH

, Circuit Judge.

Tensions between taxpayers and the Internal Revenue Service ("IRS") over forced disclosure of foreign bank account information implicate both statutory and constitutional rights. Taxpayers have Fifth Amendment rights not to be forced to incriminate themselves by the compelled act of production. But where the documents are required to be kept under the regulatory scheme of the Bank Secrecy Act ("BSA" or "the Act"), see Currency and Foreign Transactions Reporting Act, Pub. L. No. 91–508, tit. II, 84 Stat. 1118 (1970) (codified as amended at 31 U.S.C. § 5311 et seq.

), the question arises whether the Required Records Doctrine under the Fifth Amendment trumps those Fifth Amendment rights. The Supreme Court has not directly answered this question.

We now join the unanimous view of the circuit courts that have faced the question, all of which hold that the taxpayer must comply with an IRS summons for documents he or she is required to keep under the Act, where the IRS is investigating civilly the failure to pay taxes and the matter has not been referred for criminal prosecution. And so we affirm the district court's enforcement of the summons as to documents required to be kept under the BSA. See United States v. Chen, 952 F.Supp.2d 321, 333 (D.Mass.2013)

. As to enforcement of the summons for documents not subject to the BSA, we vacate and remand to the district court for further explanation.

I.

As part of an investigation into the 2008 tax liability of Zhong H. Chen and his wife, Chu H. Ng, the IRS served a summons on Chen on September 12, 2011, requiring him to appear for an interview with an IRS revenue agent and to produce various financial and banking records. Chen appeared for the interview, but he refused to answer any questions—invoking the Fifth Amendment—and did not provide the requested documents. On May 31, 2012, the government filed in the Massachusetts federal district court a petition to enforce the portion of the summons seeking the production of documents. In support of its petition, the government submitted an affidavit executed by an IRS revenue agent stating that "[i]t is necessary to obtain the records sought by the Summons in order to determine the federal tax liabilities of Chu H. Ng and Zhong H. Chen for the taxable period ending December 31, 2008." Importantly, it also stated that "[t]here is no ‘Justice Department referral [ ]’ ... in effect with respect to Chu H. Ng and Zhong H. Chen for the year under examination."¹ In response, Chen asserted a Fifth Amendment claim of privilege, not over the documents themselves, but over his compelled act of producing the documents. See Fisher v. United States, 425 U.S. 391, 410, 96 S.Ct. 1569, 48 L.Ed.2d 39 (1976)

(describing compelled act of production privilege); see also In re Grand Jury Subpoena (Mr. S.), 662 F.3d 65, 72–73 (1st Cir.2011).

The district court granted, in part, the government's petition to enforce the summons on July 3, 2013. See Chen, 952 F.Supp.2d at 334

. It granted the petition "insofar as it relates to those documents implicated by the recordkeeping requirements of the Bank Secrecy Act" because it concluded that those documents fall within the scope of the Required Records Doctrine. Id. at 333. On September 11, 2014, after reviewing in camera the documents not covered by the BSA's recordkeeping provision, as well as an in camera argumentative submission in support of Chen's privilege claim, the district court issued a brief order directing Chen, without explanation, also to produce the documents not covered by the BSA. This appeal followed.²

II.

Our holding requires an understanding of the Bank Secrecy Act and its purposes.

The BSA was first enacted in 1970. Its preamble states its four purposes as follows: "to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism."³ 31 U.S.C. § 5311

. Enforcement of criminal laws is a direct purpose, but not the sole purpose.

The Act requires individuals engaged in foreign banking to maintain certain records:

[T]he Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.

Id. § 5314(a).

The Secretary of the Treasury has promulgated regulations specifying reporting and recordkeeping requirements. The reporting requirement provides:

Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314

to be filed by such persons.

31 C.F.R. § 1010.350(a)

. Those individuals who are subject to the § 1010.350 reporting requirement are also subject to recordkeeping requirements:

Records of accounts required by § 1010.350

to be reported to the Commissioner of Internal Revenue shall be retained by each person having a financial interest in or signature or other authority over any such account. Such records shall contain [1] the name in which each such account is maintained, [2] the number or other designation of such account, [3] the name and address of the foreign bank or other person with whom such account is maintained, [4] the type of such account, and [5] the maximum value of each such account during the reporting period. Such records shall be retained for a period of 5 years and shall be kept at all times available for inspection as authorized by law.

Id. § 1010.420

. This recordkeeping regulation is at the heart of this appeal.

Congress, when it adopted the BSA, was deeply concerned about the proliferation of white-collar criminals using secret foreign bank accounts, and Congress emphasized the benefits that the reporting and recordkeeping requirements of the BSA would have for criminal investigations. The Senate Committee on Banking and Currency noted that "[t]estimony before the committee and other evidence indicates that secret foreign bank accounts have been put to a number of illegal purposes." S. Rep. No. 91–1139, at 3

(1970). It stated that "[t]he purpose of the bill is to provide law enforcement authorities with greater evidence of financial transactions in order to reduce the incidence of white-collar crime." Id. at 1; see id. at 1–4, 8–9; H.R. Rep. No. 91–975, at 10, 12–13, 19–20 (1970), reprinted in 1970 U.S.C.C.A.N. 4394, 4395, 4397–98, 4404. Nonetheless, rooting out criminal activity was not Congress's only interest, and the justifications for the BSA's reporting and recordkeeping requirements extend far beyond the criminal context. Merely looking at the text of the statute proves that its purposes are diverse. The text itself points to the utility of the required records in the tax, regulatory, and counterterrorism contexts. See 31 U.S.C. § 5311. And to the extent one looks at legislative history, it confirms this view.

The Supreme Court, in reviewing a series of constitutional challenges to the BSA, stated that while "concern for the enforcement of the criminal law was undoubtedly prominent in the minds of the legislators who considered the Act," "Congress seems to have been equally concerned with civil liability which might go undetected by reason of transactions of the type required to be recorded or reported." California Bankers Ass'n v. Shultz, 416 U.S. 21, 76–77, 94 S.Ct. 1494, 39 L.Ed.2d 812 (1974)

. Indeed, the Court emphasized that "the fact that a legislative enactment manifests a concern for the enforcement of the criminal law does not cast any generalized pall of constitutional suspicion over it." Id. at 77, 94 S.Ct. 1494

.⁴

The BSA manifestly has non-criminal purposes. A properly functioning system of foreign commerce cannot operate without reporting and recordkeeping of the kind mandated by the BSA and its implementing regulations. As the House Report explains:

The debilitating effects of the use of ... secret institutions [in foreign jurisdictions] on Americans and the American economy are vast. It has been estimated that hundreds of millions in tax revenues have been lost. Unwarranted and unwanted credit is being pumped into our markets. There have been some cases of corporation directors, officers and employees who, through deceit and violation of law, enriched themselves or endangered the financial soundness of their companies to the detriment of their stockholders....

One of the most damaging effects of an American's use of secret foreign financial facilities is its undermining of the fairness of our tax laws. Secret foreign financial facilities, particularly in Switzerland, are available only to the wealthy.... [I]t is grossly unfair to leave the secret foreign bank account open as a convenient avenue of tax

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