H. Jacob Lager

Planning on “pleading the Fifth”? Not when it comes to offshore banking

In Court decisions, Offshore Accounts, Uncategorized on September 7, 2012 at 12:45 pm

I have never actually heard someone take the Fifth.  Not as an advocate.  Not as opposing counsel.  Heck, not even as a juror.

Three years of law school and nearly 15 years of practice and I’ve never actually heard those magic words: “on advice of counsel, I respectfully refuse to answer on the grounds that to do so might incriminate myself.”

See.  I even know them by heart.

Sadly, On August 27, the Seventh Circuit made it even more unlikely that I’d hear them anytime soon.  The panel ruled that the Fifth Amendment privilege against self-incrimination does not apply to a taxpayer’s offshore banking records and that the taxpayer may not invoke the privilege to resist compliance with a subpoena seeking records kept pursuant to the Bank Secrecy Act.

In so ruling, the Seventh Circuit joined the Ninth Circuit in holding that the so-called “required records” exception to the Fifth Amendment privilege against self-incrimination applies to records of foreign bank accounts.

So, what is this exception and why haven’t they mentioned it on Law & Order?  According to the Ninth Circuit, the doctrine exists because “the Supreme Court has recognized that . . . the privilege does not extend to records required to be kept as a result of an individual’s voluntary participation in a regulated activity.”

What this essentially means is that if you voluntarily (remember that word – it’s important later) enter into a regulated activity that requires you to keep records, you can’t later prevent those records from being disclosed.

So how does this exception work?

Under the required records doctrine, a government inquiry does not impact your Fifth Amendment rights if:

(1) The government’s inquiry is essentially regulatory; [hmm… ok, but aren’t they all?]

(2) The information is a preserved record of a kind customarily retained; and

(3) The records have taken on public aspects making them analogous to a public document.

Ok, wait a minute!  If you’re wondering why your banking records are considered analogous to a “public document,” then you’ve been paying attention.  According to the Ninth Circuit, where “personal information is compelled in furtherance of a valid regulatory scheme, as is the case here, that information assumes a public aspect….  Similarly, disclosure of basic account information is an ‘essentially neutral’ act necessary for effective regulation of offshore banking.”

Does this mean if there is a regulation requiring that you maintain information, that information is automatically exempt from Fifth Amendment protection?  Doesn’t that exception swallow the entire rule?  Not exactly.

The trick here is that you must voluntarily enter into the activity itself in the first place.  Your individual tax returns remain protected in most respects because simply being a taxpayer does not involve a voluntary choice.  However, according to the Ninth Circuit, “no one is required to participate in the activity of offshore banking.”  Thus, the required records doctrine applies to offshore banking records because the taxpayer “enters upon a regulated activity knowing that the maintenance of extensive records available for inspection by the regulatory agency is one of the conditions of engaging in the activity….”

In short, if you bank offshore, you cede any Fifth Amendment protections related to that account.

Bet you didn’t see that in the application.


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