Opinion ID: 2818141
Heading Depth: 3
Heading Rank: 4

Heading: Applying the Required Records Exception to

Text: Section 1010.420 As indicated, in Grosso, the Supreme Court set forth the following three-part test for when the required records exception should be applied to the Fifth Amendment privilege: [F]irst, the purposes of the United States’ inquiry must be essentially regulatory; second, information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept; and third, the records themselves must have assumed ‘public aspects’ which render them at least analogous to public documents. 390 U.S. at 67–68. Although this is an issue of first impression for this Circuit, the Second, Fourth, Fifth, Seventh, Ninth, and Eleventh Circuits previously have applied the required records exception to enforce summonses 11 for the records that 31 C.F.R. § 1010.420 requires accountholders to keep.4 Today we join these circuits in applying the required records exception to this “subset of . . . documents that must be maintained by law.” Doe, 741 F.3d at 344.
The Chabots contend that § 1010.420 is a recordkeeping scheme with an essentially criminal purpose. The first prong of the required records exception asks whether a recordkeeping scheme targets an inherently criminal activity and/or an inherently suspicious class of persons. See Doe, 741 F.3d at 347–48; M.H., 648 F.3d at 1075–76. Therefore, we begin our inquiry by determining what and whom § 1010.420 targets. Section 1010.420 regulates foreign bank account ownership, an activity in which people participate for a myriad of legitimate and legal reasons. As the Chabots’ counsel recognized at oral argument, someone might own an overseas account to ensure convenient access to money when living, working, or even vacationing abroad. Oral Argument at 13:19, 13:48, United States v. Chabot, (No. 14-4465), available at http://www2.ca3.uscourts.gov/oralargument/ audio/14-4465USAv.Chabot,etal.mp3. 4 See In re Grand Jury Subpoena Dated Feb. 2, 2012, 741 F.3d 339 (2d Cir. 2013); United States v. Under Seal, 737 F.3d 330 (4th Cir. 2013); In re Grand Jury Proceedings, 707 F.3d 1262 (11th Cir. 2013); In re Grand Jury Subpoena, 696 F.3d 428 (5th Cir. 2012); In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903 (7th Cir. 2012); In re Grand Jury Investigation M.H., 648 F.3d 1067 (9th Cir. 2011). 12 In a similar vein, the class of persons who own foreign bank accounts is comprised of law-abiding citizens as well as miscreants. Doe, 741 F.3d at 350–51. On this point, we agree with the Fifth Circuit’s conclusion that “the [Bank Secrecy Act]’s record-keeping requirements do not apply exclusively to those engaged in criminal activity.” In re Grand Jury Subpoena, 696 F.3d at 435. Where a recordkeeping scheme exclusively targets those who engage in illegal activities, its purpose is essentially criminal. For example, the Supreme Court held that the statutes at issue in Grosso and Marchetti v. United States were essentially criminal because the regulations at issue exclusively targeted individuals who were engaged in an inherently illegal activity, namely gambling. Grosso, 390 U.S. at 68; Marchetti, 390 U.S. 39, 46–48 (1968). See also Leary v. United States, 395 U.S. 6, 18 (1969) (holding that petitioner’s Fifth Amendment privilege was violated when “compliance with the transfer tax provisions [of the Marihuana Tax Act] would have required petitioner unmistakably to identify himself as a member of this ‘selective’ and ‘suspect’ group [of individuals who failed to comply with the Act’s order form requirement]”); Haynes v. United States, 390 U.S. 85, 96, 100 (1968) (concluding that the registration requirement of the National Firearms Act violated petitioner’s Fifth Amendment privilege where the requirement mainly targeted individuals who possessed a firearm but had failed to comply with the Act’s other requirements, therefore targeting an inherently suspicious class of persons). Conversely, because § 1010.420 does not apply exclusively, or even largely, to criminals, it does not operate simply as a dragnet for criminals by forcing them to maintain self-incriminating records. Instead, § 1010.420 is an essentially regulatory scheme. See also In re Grand Jury Proceedings, 707 F.3d at 1272 (concluding that § 1010.420 has an essentially regulatory purpose because it targets 13 neither “inherently illegal activity” nor an “inherently suspect” group of individuals). The Chabots contend that the Financial Crimes Enforcement Network’s administration of § 1010.420 evidences the regulation’s essentially criminal purpose. The Chabots attempt to bolster their argument by highlighting the fact that the records that § 1010.420 requires accountholders to keep are also useful for potential criminal proceedings against these individuals. As the government asserted at oral argument, “bank records can be very important for . . . a lot of things [that] you might want to investigate about a person.” Oral Argument at 27:29. Just because some of these things have criminal aspects does not mean that § 1010.420’s purpose is essentially criminal. See, e.g., Under Seal, 737 F.3d at 334–36 (explaining that, despite how useful records maintained under § 1010.420 are to criminal prosecutions, this utility does not negate § 1010.420’s other noncriminal purposes). As the government acknowledged at oral argument, one of Congress’s goals in passing the Bank Secrecy Act of 1970 was to reach accountholders who were avoiding U.S. criminal laws. Oral Argument at 27:19. Section 1010.420 was promulgated pursuant to this Act and therefore shares this goal. An equally important objective of both the Act and § 1010.420, however, is to monitor and facilitate compliance with currency regulation and tax laws. Id. at 27:20; see also Under Seal, 737 F.3d at 335 (noting that the Bank Secrecy Act was enacted for “concomitant tax, regulatory, and counterterrorism purposes in addition to its [the Act’s] law enforcement goals”). Accordingly, like our sister circuits that have addressed these arguments, we find the Chabots’ 14 arguments that § 1010.420 is an essentially criminal scheme to be unpersuasive.5
The Chabots argue that holders of overseas accounts customarily would not keep the records that § 1010.420 requires them to maintain. Though the courts have not settled on a formal definition of “customarily kept,” we find instructive the guideline from the Second Circuit that asks whether holders of foreign bank accounts as a general group are likely to keep the records that § 1010.420 requires them to keep, rather than only examining the practices of those individuals who engage in foreign banking solely to avoid U.S. laws. Doe, 741 F.3d at 350–51. As stated succinctly by the Ninth Circuit: “[R]ecords appear to be customarily kept if they would typically be kept in connection with the regulated activity.” M.H., 648 F.3d at 1076. Therefore, we begin our inquiry by examining what records those who lawfully engage in foreign banking ordinarily would retain. Section 1010.420 mandates that owners and beneficiaries of foreign accounts keep the following information accessible for five years: (1) the name on the account, (2) the account number, (3) the name and address of the bank or person with whom the account is maintained, (4) the account type, and (5) the maximum annual account value. 31 C.F.R. § 1010.420. Common sense tells us that this is all information that an accountholder needs in order to access funds located abroad or at home. See M.H., 648 F.3d at 1076 (concluding that the records that § 1010.420 requires individuals to keep contain essential information for accountholders and beneficiaries). Because reasonable 5 See supra note 4. 15 accountholders would retain this information in order to readily access their foreign accounts, we conclude that these are records that accountholders customarily would keep.6 Doe, 741 F.3d at 350; In re Grand Jury Subpoena, 696 F.3d at 435. The Chabots’ additional contention that no accountholder keeps records of the maximum annual values of his overseas accounts is unpersuasive. Maximum annual account values are simply account balances, and account owners typically keep these numbers on record. See Doe, 741 F.3d at 350; M.H., 648 F.3d at 1076. The Chabots further argue that even if there are some accountholders who maintain the records that § 1010.420 requires them to keep, they do not retain these records for the five-year period that § 1010.420 mandates. The Chabots, however, misunderstand the inquiry that this prong of the required records exception entails. The “customarily kept” analysis simply asks whether individuals typically would maintain the information that the law requires them to keep, not the length of time for which they normally would do so 6 Though some courts have found the similarity between the type of information contained in the records that § 1010.420 requires accountholders to keep and the information that these individuals must report to the IRS pursuant to § 1010.350 to be additional proof that accountholders customarily keep this information, we find this reasoning to be circular. See, e.g., In re Grand Jury Proceedings, 707 F.3d at 1273; In re Grand Jury Subpoena, 696 F.3d at 435; M.H., 648 F.3d at 1076. On this point, the Chabots aptly note: “The government and the courts seem to say, well, if the government has a regulation that requires this information . . . it’s regularly kept because we require you to keep it.” Oral Argument at 28:59. 16 absent the requirement. The Chabots fail to cite any case in which the length of time for which someone usually kept a document affected the court’s holding on whether or not the document was customarily kept, and we have been unable to identify any such case. See, e.g., M.H., 648 F.3d at 1076 (explaining that “records appear to be customarily kept if they would typically be kept in connection with the regulated activity”). Furthermore, here, we do not deal with an extraordinarily long time period, but rather one that seems appropriate for taxation and similar purposes. We therefore conclude that prong two is met.
The Chabots contend that their account records do not have public aspects because owning a foreign bank account is not a public activity. It is undeniable that an individual who holds an overseas account normally does not think of his account records as being equivalent to public records. Nevertheless, “[t]he fact that documents have privacy protections elsewhere does not transform those documents into private documents” for all purposes. M.H., 648 F.3d at 1078. We note that several circuits have reasoned that records required to be kept under a valid, civil regulatory scheme (i.e., meet prong one of the Grosso test) automatically have “public aspects” sufficient to meet the third prong. See, e.g., Doe, 741 F.3d at 352; M.H., 648 F.3d at 1076–77. We need not adopt such a broad holding to conclude that the documents requested here have sufficient “public aspects” to meet the third prong of the Grosso test. As discussed earlier under the first prong of the Grosso test, § 1010.420 is a valid, civil regulatory scheme, and the Chabots voluntarily participated in the regulated activity, namely foreign banking. When accountholders such as the 17 Chabots voluntarily engage in foreign banking, they effectively waive their Fifth Amendment privilege to prevent the government’s compelled disclosure of their account records.7 See M.H., 648 F.3d at 1078 (relying on this consent theory in concluding that the appellant’s account records satisfied the public aspects prong of the Grosso test); In re Special Feb. 2011-1 Grand Jury Subpoena, 691 F.3d at 909 (“The voluntary choice to engage in an activity that imposes record-keeping 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.”); cf. Smith v. Richert, 35 F.3d 300, 7 Following oral argument, the Chabots submitted a letter pursuant to Fed. R. App. P. 28(j), citing the Supreme Court’s recent decision in Horne v. Department of Agriculture, No. 14-275 (June 22, 2015). The Chabots cite Horne for the proposition that “while the government may regulate an activity, it may not structure its regulation in a way that abrogates a Constitutional protection, and then point to engagement in such activity as voluntary waiver.” Appellants’ Rule 28(j) Letter 2 (July 14, 2015). The proposition put forward by the Chabots and the language cited for it, which is taken out of context, is far too broad. The Supreme Court clearly indicated that the specific issue addressed related to takings, not the privilege against selfincrimination (or any other constitutional right for that matter), and that the conclusion it was reaching was specific to the facts presented in that case. See Horne, Slip Op. at 12 (“The third question presented asks ‘Whether a governmental mandate to relinquish specific, identifiable property as a “condition” on permission to engage in commerce effects a per se taking.’ The answer, at least in this case, is yes.”). 18 303 (7th Cir. 1994) (holding that production of certain documents necessary to determine personal income tax liability were not within required records exception, because “[t]he decision to become a taxpayer cannot be thought voluntary . . . [as] [a]lmost anyone who works is a taxpayer, along with many who do not”). The government circulates the data from these records to several government agencies, which use this information for a number of important noncriminal purposes. See Under Seal, 737 F.3d at 335, 337 (concluding that the records kept pursuant to § 1010.420 possess public aspects given the Treasury Department’s circulation of this data to other government agencies for the purpose of implementing economic, monetary, and regulatory public policies); In re Grand Jury Subpoena, 696 F.3d at 436 (employing similar reasoning). Through these processes, the Chabots’ account records acquire public aspects. The Chabots contend that the absence of a licensing requirement for foreign banking necessarily means that their account records do not have public aspects. This argument, however, does nothing to advance the Chabots’ case, because private activities that do not require licenses still may be subject to the required records exception. See Under Seal, 737 F.3d at 337 (refusing to accept appellant’s argument that his foreign bank account records were not subject to the required records exception because banking is a private activity which does not require participants to obtain licenses); In re Grand Jury Proceedings, 707 F.3d at 1274 n.8 (same); In re Grand Jury Subpoena, 696 F.3d at 435–36 (same). We conclude that the records sought in this case are sufficiently imbued with “public aspects” to satisfy the third 19 prong of the required records exception.8 Thus all three prongs are met.