$73 billion penalty? Or $18.25 million penalty? Or $118.25 million?

The Supreme Court of the United States will soon decide …

The US Supreme Court has taken up a very interesting case involving an anti-money laundering penalty provision in the Bank Secrecy Act. It could have some interesting ramifications.

The case is Bittner v. United States. Alexandru Bittner is a dual US/Romanian citizen who was living in Romania. From 2007 through 2011 (five years) he failed to report as many as 25 accounts he had in foreign (non-US) banks. Section 5314 of title 31 of the US Code (the so-called Bank Secrecy Act) requires that US persons report all foreign accounts with balances of more than $10,000. That reporting is done once a year on a form known as an “FBAR”. Failure to report can result in a civil monetary penalty up to $10,000 on any person who violates that requirement.

The IRS caught onto Alexandru’s failures and fined him $2.72 million – $10,000 for each account for every year. Alexandru disagreed, and they went to court. The District Court in the Eastern District of Texas, in a summary judgment, sided with Alexandru: the proper penalty is $10,000 for each report, not each account in every report, for a total of $50,000. The government appealed. The Fifth Circuit Court of Appeals sided with the government: the proper penalty is $10,000 for each account for every year. Alexandru appealed to the US Supreme Court.

Why would the Supreme Court take this case on? Because a different Court of Appeals – the Ninth Circuit – came to the opposite conclusion in a case that had substantially the same facts.

In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the Ninth Circuit adopted the opposite position to the Fifth Circuit in Bittner. In a split decision, the majority concluded “that § 5321(a)(5)(A) authorizes the IRS to impose only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.”

The Boyd court confronted facts that were materially indistinguishable from Bittner. In Boyd, the taxpayer had 13 qualifying foreign accounts, and failed to file a timely FBAR. The IRS characterized Boyd’s failure to submit a single FBAR as thirteen separate violations – one for each account – rather than a single violation of Section 5314’s reporting requirement. The IRS accordingly sought 13 penalties.

Here is where the facts in the two cases diverge, but not in a legally material way. In Bittner, the IRS sought the maximum $10,000 penalty for all the accounts over five years of failed FBARs. In Boyd, the IRS didn’t seek a $1.3 million fine (13 accounts at $10,000 per account), but assessed a total penalty of $47,279: much less than the maximum but still more than the $10,000 maximum, if the maximum is based on the number of FBARs rather than number of accounts.

The District Court sided with the IRS. The Appeals Court sided with the taxpayer. The majority relied on the seminal BSA case, California Bankers Association v Schultz, 416 US 21 (1974), where the Court relied on the regulations rather than the statute. In Schultz, the Supreme Court confirmed that the Act’s penalties “attach only upon violation of [the Secretary’s] regulations; if the Secretary were to do nothing, the Act itself would impose no penalties on anyone.’” Shultz, 416 U.S. at 26. So the Ninth Circuit majority relied on the Schultz focus on the regulations. And the FBAR regulations impose a single duty on qualifying taxpayers – filing a single annual FBAR in which the taxpayer was required to list all qualifying foreign accounts to satisfy that single filing obligation. The Boyd majority used that logic and concluded that each missing account does not constitute its own violation.

Which is the opposite conclusion the Fifth Circuit reached. With that conflict, the Supreme Court took up the case. The Supreme Court set out the issues in the docket’s “question presented” summary as follows:

This case presents a direct and acknowledged conflict regarding an important question of statutory construction under the Bank Secrecy Act, 31 U.S.C. 5311 et seq., which generally requires taxpayers to report their interests in foreign bank accounts.

Under the Act, Congress instructed the Treasury Secretary to ”require a resident or citizen of the United States … to keep records, file reports, or keep records and file reports, when the … person makes a transaction or maintains a relation for any person with a foreign financial agency.” 31 U.S.C. 5314(a). The Secretary’s corresponding regulations require filing a single annual report (called an “FBAR”) for anyone with an aggregate balance over $10,000 in foreign accounts. 31 C.F.R. 1010.350(a), 1010.306(c). The Act authorizes a $10,000 maximum penalty for any non-willful violation of Section 5314. See 31 U.S.C. 5321(a)(5)(A)-(B).

The Fifth Circuit held that there is a separate violation (with its own $10,000 penalty) for each foreign account not timely reported on an annual FBAR; it thus authorized a penalty on “a per-account, not a per-form, basis.” In so holding, the Fifth Circuit expressly rejected a contrary decision of the Ninth Circuit, which held the failure to file an annual FBAR constitutes a single violation, “no matter the number of accounts.” This critical issue arises all the time, and the Act’s penalties for identically situated parties will now turn on whether the taxpayer is from California or Texas.

The question presented is: Whether a “violation” under the Act is the failure to file an annual FBAR (no matter the number of foreign accounts), or whether there is a separate violation for each individual account that was not properly reported

A decision upholding the Ninth Circuit’s “one report, one penalty” interpretation could impact other BSA penalties. For example, the failure to implement and maintain an effective AML program is $25,000 “each day the violation continues and at each office, branch, or place of business at which a violation occurs or continues.” (31 USC section 5321).

Take a large bank with 4,000 branches that is found to have a deficient AML program for a two-year period. Is the penalty based on the number of days the violation continues ($25,000 x 730 days = $18.25 million)? Is the penalty based on the number of branches multiplied by the number of days ($25,000 x 4,000 branches x 730 days = $73 billion)? Or is the penalty based on the number of days plus the number of branches (($25,000 x 730) + ($25,000 x 4,000) = $118,250,000)?

We’ll soon find out. And for a detailed look at the 52-year legislative and regulatory history of the FBAR and its penalty provisions, see the next post, BSA, Bittner, and FBARs: the United States Supreme Court will soon decide