In brief
The Second Circuit recently held that “willful” failure to report a foreign bank account under the Bank Secrecy Act includes reckless as well as intentional conduct. While other circuits have reached the same conclusion on the issue, the Second Circuit had never ruled on the definition of the “willfulness standard” with regard to filing a Report of Foreign Bank and Financial Accounts (FBAR).
In more detail
In the case United States v. Reyes, the defendants-appellants had appealed from a decision of the United States District Court for the Eastern District of New York granting summary judgment to the United States on the grounds that the statute encompassed reckless in addition to intentional conduct. The Reyeses also appealed the six percent penalty imposed by the Treasury Department. The Second Circuit affirmed the lower court’s grant of summary judgment for the United States, agreeing with the Internal Revenue Service (IRS) that “reckless” conduct would constitute a “willful” violation of the statute, and also agreed that the assessed penalty was appropriate.
Dr. Reyes, the defendant-appellant, is a surgeon who is a citizen of both Nicaragua and the United States, where he has lived since 1960. He held a bank account in Nicaragua which his parents had settled for him. He never contributed additional money to the account but withdrew a few thousand dollars a month from it. After the Nicaraguan bank was purchased by Lloyds, the account was transferred to London and later to Switzerland. Dr. Reyes paid an additional fee for the bank to send no mail about the account to his US address. In 2000, both Dr. Reyes and his wife signed declarations with the bank stating that they did not authorize the bank to make disclosures in conjunction with US withholding taxes. They arranged for the credit cards they used to spend the money in the account to be registered and picked up in Spain, a country which they visited only occasionally.
From 2010 through 2012, Dr. and Mrs. Reyes reported to the IRS that they had no interest in any foreign bank accounts. They did not report the existence of the account to the accountant who prepared their tax returns and signed multiple returns that did not include the Swiss account. By the time of the years in question, over USD 2 million was held in the account, and the Reyeses spent a few thousand dollars a month from its funds. While the Reyeses considered participating in the IRS’ Voluntary Disclosure Program (VDP), they decided that the penalty was too high and ultimately did not go through with regularizing their accounts through the VDP. When they did not voluntarily regularize the account, the IRS informed the Reyeses that they were in “willful” violation of the Bank Secrecy Act by failing to report the account.
Dr. Reyes testified that based on reading he had done, he believed that Nicaraguan citizens were not required to report foreign bank accounts to the US government. In addition to his testimony, Dr. Reyes argued that he did not know about the requirement to file the FBAR until he moved money to his US bank account and that he was not a sophisticated businessperson. The court rejected both arguments. The court did not discuss whether the Reyes’ actions crossed the threshold of intentionality, rather than mere reckless willful blindness about the proper law, but it seems clear that a reasonable person would likely have realized that the actions the Reyeses took actively prevented their foreign account from being reported to the Financial Crimes Enforcement Network (FinCEN). The Reyeses paid their bank to keep information out of the United States and willingly lied to their accountant. If the Reyeses were not subjectively intending to violate the statute, it seems clear that their failure to inform themselves adequately was at least a reckless disregard for the actual law (they never spoke to a US lawyer about the foreign bank account, even as they hid it from their accountant). Consulting with a US expert would have had only one outcome – that the account had to be reported – so the implication seems to be that the Reyeses chose not to do so.
On appeal, the Reyeses argued (with little substance) that the district court was incorrect in holding that “willfulness” under the Bank Secrecy Act included their reckless failure to inform the IRS about the existence of the bank account and that subjective intentionality was in fact required. The appellate court disagreed, holding that recklessness in civil law is typically included within the category of “willful” conduct, citing the Fair Credit Reporting Act as an example, and explained that the Third, Fourth, Sixth, Ninth, Eleventh, and Federal circuits have come to the same conclusion when considering the same issue. The court also explained that a reasonable person in the Reyes’ situation would have realized the account, which was used frequently to cover the couple’s US expenses, needed to be reported to the IRS (rather than actively hidden), rejecting Dr. Reyes’ argument that he and his wife were not sophisticated businesspeople.
Finally, the court rejected the Reyes’ argument that the district court had erred in adopting the penalty of 6% per year imposed by the IRS. The court held that the “contrivance” of not paying and waiting for a lawsuit did not permit the Reyeses, who had negotiated the penalty with the IRS, to challenge the penalty because they were unhappy with the amount. The couple had initially considered participating in the VDP but chose not to because the assessed penalties would have been too high. They were not allowed to then negotiate a penalty, refuse to pay, and sue to have the penalty lowered.
After the court’s decision, it is explicitly clear in the Second Circuit that reckless conduct is included in the definition of “willfulness” under the Bank Secrecy Act.