United States v. James Kelly, Jr.United States v. James Kelly, Jr.
COUNSEL
ON BRIEF: Charles A. Haas, Livonia, Michigan, for Appellant. Jennifer M. Rubin, Pooja A. Boisture, UNITED STATES DEPARTMENT OF JUSTICE Washington, D.C., for Appellee.
MATHIS, Circuit Judge. Under the Bank Secrecy Act, individuals with foreign bank accounts containing $10,000 or more must annuаlly file a Report of Foreign Bank and Financial Accounts ( “FBAR” ) with the U.S. Department of the Treasury. An individual who fails to file an FBAR by the deadline risks civil penalties. If the failure to file was accidental, the government can assess a penalty of up to $10,000. If, however, the failure to file was willful, the civil penalty grows exponentially.
The government sued James Kelly to recover civil penalties, claiming that Kelly willfully failed to timely file FBARs for 2013, 2014, and 2015. The district court granted summary judgment to the government. Because Kelly‘s failure to file was a willful violation of the Bank Secrecy Act, we affirm.
I.
Kelly is a U.S. citizen. In 2008, Kelly closed his domestic bank accounts and opened an interest-beаring account at Finter Bank in Zurich, Switzerland. He designated the Finter account as “numbered” so that his name would not appear on the statements. R. 48-4, PageID 466. He also requested that Finter retain, rather than mail him, any account-related correspondence. Kelly completed a “Tax Form U.S. Withholding/Individual” when he opened this аccount, which informed him that “persons liable to U.S. taxation can only continue to invest in U.S. securities if they disclose their identity to the IRS by filing a form W-9.” R. 48-8, PageID 518. Instead of providing an IRS Form W-9 and disclosing the account to the IRS, Kelly chose to divest from U.S. securities.
Kelly‘s actions, or lack thereof, after he opened the account аre important. He never sought professional or legal advice about “federal reporting obligations or requirements in regard to the Finter account” or “potential tax implications,” and he never confirmed with Finter whether it was reporting his account to the federal government. R. 48-4, PageID 476–77. He did, though, ask the bank whether it wоuld respond to IRS requests, and Finter told Kelly that the “IRS [would] have to go via Swiss Authorities.” R. 48-9, PageID 520. Between 2013 and 2015, Kelly maintained a balance of around $1.5 million in the Finter account.
In July 2012, Finter closed Kelly‘s account after he failed to provide it with U.S. tax-compliance documentation. The bank reopened his account a few months later but designated it as “Mandatory High Risk” and blocked any incoming and outgoing transactions. Id. at 522. Internal bank documents suggest that “US authorities most probably are not aware of these assets . . . since the client is not properly documented for US tax purposes.” Id. In December 2013, Finter sent Kelly a letter again requesting proof of Kelly‘s compliance with U.S. tax laws, including copies of his FBAR forms “for all years during which the account has been open from January 1, 2008 onwards.” R. 48-10, PageID 523, 525. The bank warned Kelly that it:
will be required to provide to the U.S. Justice Department information concerning your account, which will likely result in the disclosure of your identity to U.S. authorities. . . . [I]f your account with the Bank has not been reported to the IRS on a timely basis, we strongly suggest you consider participating in the IRS Offshore Voluntary Disclosure Program [(“OVDP”)].
Id. at 523. It also “strongly urge[d him] to promptly contact a qualified U.S. tax specialist” if Kelly was unable to consent to
In April 2014, a few months after receiving the December 2013 letter from Finter, Kelly requested to participate in the OVDP for the years 2008 through 2013. Kelly admitted that he was aware of his FBAR reporting obligations at that time.
The OVDP aims “to bring taxpayers that have used undisclosed foreign accounts and assets, including thosе held through undisclosed foreign entities, to avoid or evade tax into compliance with United States tax and related laws.” R. 48-33, PageID 646. In becoming compliant, these taxpayers can avoid civil and criminal penalties.
The Treasury Department “preliminarily accepted” Kelly‘s voluntary disclosure as timely. R. 48-13, PageID 533–34. But it informed Kelly that acceptance of his disclosure depended on him making truthful disclosures, cooperating with the IRS, and trying, in good faith, to satisfy his tax obligations. Around this same time, Kelly closed his Finter account. With the help of a Swiss advisor, Kelly opened a new account with Bank Alpinum in Liechtenstein and transferred all of the Finter funds there.
In Decеmber 2016, more than two years after he became aware of his FBAR obligations, Kelly filed delinquent FBARs for the years 2008 through 2013. He did not file any FBARs, though, for 2014 or 2015.
In 2018, Kelly submitted a Form 433-A, Collection Information Statement1 to the IRS under penalty of perjury. The form asked him to list his personal bank accounts; he did not include his account with Bank Alpinum. Later that yeаr, the IRS removed Kelly from the OVDP, in part because he failed to provide information about his foreign assets.
The IRS then began investigating Kelly‘s compliance with FBAR requirements. It determined that he failed to meet the requirements of
The government initiatеd an action against Kelly after he failed to pay the FBAR penalties assessed against him. The parties filed cross-motions for summary judgment. The district court granted the government‘s motion and denied Kelly‘s. Kelly timely appealed.
II.
We review a district court‘s grant of summary judgment de novo. See Puskas v. Delaware Cnty., 56 F.4th 1088, 1093 (6th Cir. 2023). Summary judgment is appropriate “if the movаnt shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
III.
The Bank Secrecy Act allows the Treasury Secretary to require American citizens
The Treasury Secretary “may impose a civil money penalty” on an individual who fails to file an FBAR by the deadline.
A.
We must first determine what it means to “willfully” violate the FBAR requirements. As mentioned above, a willful violation can lead to criminal and civil penalties. The type of penalty sought dictates how we interpret “willfully.” See Bryan v. United States, 524 U.S. 184, 191 (1998) (“The word ‘willfully’ is sometimes said to be ‘a word of many meanings’ whose construction is often dependent on the context in which it appears.” (quoting Spies v. United States, 317 U.S. 492, 497 (1943))).
What does “willfully” mean in the context of a criminal violation of the FBAR requirements? We have previously examined this issue and determined that “statutory willfulness is ‘voluntary, intentional violation of a known legal duty.‘” United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (quoting Cheek v. United States, 498 U.S. 192, 201 (1991)).
This type of сriminally willful violation of the FBAR requirements, we explained, “may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information.” Id. (citation omitted); see also Ratzlaf v. United States, 510 U.S. 135, 137 (1994) (“To establish that a defendant ‘willfully violat[ed]’ [reporting obligations], the Government must prove that the defendant acted with knowledge that his conduct was unlawful.” (first alteration in original)).
But we have yet to address what “willfully” connotes when the IRS seeks to impose a civil penalty for an FBAR violation. In Safeco Insurance Company of America v. Burr, the Supreme Court held that “where willfulness is a statutory condition of civil liability,” it encompasses “not only knowing violations of a standard, but reckless ones as well.” 551 U.S. 47, 57 (2007). As such, the Court fоund that civil liability under the Fair Credit Reporting Act
Safeco considered the term “willfully” as it appeared in the FCRA‘s civil and criminal statutory provisions. The FCRA‘s criminal-enforcement provisions require an offender to have acted “knowingly and willfully”2 similar to the criminal-penalty provisions of the Bank Secrecy Act. The Court highlighted the different requirements needed to establish willful criminal and civil liability under the FCRA, stating that “in the criminal law ‘willfully’ typically narrows the otherwise sufficient intent, making the government prove something extra, in contrast to its civil law usage, giving a plaintiff a choice of mental states to show in making a case for liability.” Id. at 60.
Based on the above authorities, we hold that, for purposes of an FBAR civil penalty, a willful violation of the FBAR reporting requirements includes both knowing and rеckless violations. In so holding, we join every other circuit to have addressed this issue. See United States v. Rum, 995 F.3d 882, 889 (11th Cir. 2021) (per curiam); Kimble v. United States, 991 F.3d 1237, 1242 (Fed. Cir. 2021); United States v. Horowitz, 978 F.3d 80, 88 (4th Cir. 2020); Bedrosian v. United States, 912 F.3d 144, 153 (3d Cir. 2018).
B.
Having determined that civil liability for willful violations of the Bank Secrecy Act‘s FBAR requirements encompasses both knowing and reckless conduct, we next consider if a genuine dispute of fact exists as to whether Kelly, at a minimum, acted recklessly in fаiling to adhere to his FBAR obligations. A reasonable factfinder could reach only one conclusion—Kelly‘s conduct in failing to comply with his FBAR obligations was reckless, if not knowing.
Reckless conduct in the civil context involves conduct that violates “an objective standard: action entailing ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.‘” Safeco, 551 U.S. at 68 (citing Farmer v. Brennan, 511 U.S. 825, 836 (1994)); see also Brawner v. Scott Cnty., 14 F.4th 585, 594 (6th Cir. 2021). As the Fourth Circuit has noted, “civil recklessness contrasts with criminal recklessness and willful blindness” because “both of those concepts incorporate a subjective standard.” Horowitz, 978 F.3d at 89 (citing Farmer, 511 U.S. at 836–37). Still, civil recklessness requires proof of more than negligence. Brawner, 14 F.4th at 596–97 (citations omitted). Thus, in the context of a civil FBAR penalty, the government can establish a willful violation “based on recklessness” by proving that “the defendant (1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed and [that] (3) he was in a position to find out for certain very easily.” Horowitz, 978 F.3d at 89 (internal quotation marks omitted); see also Bedrosian, 912 F.3d at 153; Rum, 995 F.3d at 889–90.
Kelly does not dispute that he failed to timely file FBARs for 2013, 2014, and 2015. He argues, however, that he did nоt act knowingly or recklessly. To support his argument, he relies primarily on his participation in the OVDP prior to the due date for the 2013 FBAR and his conduct after being terminated from the program, including ordering annual reports from Bank Alpinum—which he believed were sent to the government—and hiring a Swiss account manager.
But the record cоntains ample undisputed evidence that shows Kelly willfully failed to timely file FBARs for 2013 through 2015. For one, he took steps to intentionally evade his legal duties. Cf. Sturman, 951 F.2d at 1476. Kelly designated his Finter account as “numbered” so that his name would not appear on the statements, and he requested that the bank retain any account-related correspondence. These efforts, which allowed him to shield his considerable assets from U.S. authorities, “evince[] more than mere negligence.” Horowitz, 978 F.3d at 90. Kelly also shielded his account from U.S. authorities by opting out of investing in U.S. securities, which would have required him to file a Form W-9 with the IRS. Only after Finter told Kelly that it would disclose his account to U.S. authorities did Kelly takе steps to comply with his reporting obligations by requesting to participate in the OVDP. Yet, even after that point, he did not meet the 2013 FBAR filing deadline. And his subsequent statements to the IRS about his foreign assets were found to be false and incomplete.
At any rate, Kelly‘s conduct was objectively reckless. He opened a Swiss bank acсount, into which he immediately deposited over $1.8 million. He did not, however, seek professional advice about his reporting obligations or the potential tax implications of those assets. Kelly also did not confirm with Finter whether it would report his assets to U.S. authorities. Finter closed his account, warned Kelly that it was required to report to U.S. authorities, and urged him to seek professional tax advice. After all of this, Kelly applied to participate in the OVDP and, by his own admission, became aware of his reporting requirements. Kelly knew he had failed to report in the past and that this was an ongoing obligation. But he still failed to inquire whether his FBARs were being preрared and filed—and indeed, he never submitted the 2014 and 2015 FBARS. And he never consulted a tax advisor or an attorney. Given that he ought to have known about the risk of noncompliance, and could have found out by simply asking, his failure to disclose was, at the very least, reckless.
Kelly‘s excuses do not hold water. First, Kelly‘s argument that he is entitled to a penalty under the “non-willful standard” because he participated in the OVDP falls short. Although the Treasury Department initially allowed Kelly to participate in the OVDP, Kelly failed to provide the government with information about his foreign assets and he was ultimately removed from the program for his noncompliance. Cf. United States v. Collins, 36 F.4th 487, 493 (3d Cir. 2022). Kelly claims that hе was working to cure his FBAR deficiencies at the time of his termination from the OVDP. He points to cases where individuals withdrew from the OVDP, suggesting that although those withdrawals negate the intent to remedy, a removal from the program does not. See Id. at 490–91; Kimble, 991 F.3d at 1241; United States v. Ott, 441 F. Supp. 3d 521, 526–27 (E.D. Mich. 2020). But in two of the cases he cites, the findings of willfulness did not hinge on
Second, Kelly‘s decision to engage a Swiss account manager does not excuse his noncompliance. Kelly hired the account manager in 2014, when he instructed the manager to transfer all his assets to another foreign bank acсount in a different country. But Kelly could not recall this advisor ever telling him that the 2014 or 2015 FBARs had been filed. See Horowitz, 978 F.3d at 90 (“Despite numerous red flags, they neither made a simple inquiry to their accountant nor gave even the minimal effort necessary to render meaningful their sworn declaration that their tax returns were accurate.”). And he never asked anyone else to prepare these forms.
The undisputed facts show that Kelly knew about his foreign account, undertook considerable efforts to keep it secret, did not consult with any professionals about his tax obligations, and then failed to ensure that the FBARs were submitted after learning he had not met these reporting requirements in the past. Given all of this, Kelly‘s failure to satisfy his FBAR requirements for the years 2013, 2014, and 2015 was a willful violation of the Bank Secrecy Act.
IV.
For the reasons set forth above, we AFFIRM the judgment of the district court.