Banking and Finance Law Daily Wrap Up, BANK SECRECY ACT—9th Cir.: Court rejects defendant’s arguments about civil ‘willfulness,’ affirms $238K judgment for FBAR violations, (Aug 22, 2024)

By Justin Marcus Smith, J.D.

The Ninth Circuit rejected the defendant’s attempt to distinguish Safeco and “buck the consensus” of federal appellate courts about the meaning of “willfulness” in the context of foreign bank account reporting requirements.

A federal district court correctly applied an objective “recklessness” standard when it ruled, at conclusion of a bench trial, that civil defendant Timberly Hughes willfully failed to report foreign bank accounts, affirmed the United States Court of Appeals for the Ninth Circuit. The Ninth Circuit noted how the U.S. Supreme Court distinguished between “willfulness” in the civil and criminal contexts in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007). Hughes waived her challenge here, but the court applied its discretion to review it anyway, to clarify the law in the circuit. The appellate court rejected Hughes’ challenge that the foreign bank account reporting requirement was inherently punitive. Other circuits had expressly stated that civil recklessness requires more than mere negligence, and there was no reason to think that any court opinions on-point had conflated mere negligence with recklessness. The district court certainly did not engage in any conflation, given that it found no willful failure to file in two of the four possible filing years tried to conclusion (U.S. v. Hughes, Nos. 23-15712 and 23-15713 (9th Cir. Aug. 21, 2024)).

Background. Defendant Timberly Hughes appealed the district court’s determination that she willfully failed to report foreign bank accounts, in violation of the Report of Foreign Bank and Financial Accounts (FBAR)” statute (31 U.S.C. §§ 5314 and 5321), and the entry of a final judgment against her for $238,125.19 in substantive penalties. Separately, and not decided in this opinion, the U.S. Govt. appealed the federal district court’s determination that “the United States is not entitled to prejudgment interest or late payment penalties under 31 U.S.C. § 3717(a)(1), (e)(2).”

According to the court’s review and account of the facts, Hughes had owned a New Zealand limited company to operate a New Zealand winery since 2001, and then she formed another limited company in 2013 to operate a wine bar there. Hughes was the sole owner of both companies with a financial interest and signature authority over the company accounts at ANZ Bank New Zealand Limited. Hughes did not file FBARs for the years 2010 through 2013.

At a bench trial in late 2021, the district court decided that Hughes’ failure to file in 2012 and 2013 was “willful” for FBAR statutory purposes based on “recklessness or willful blindness” per certain district court and Third and Fourth Circuit opinions as well as Safeco.

Among other challenges on appeal, Hughes argued that the federal district court applied the wrong legal standard for its determination that her failure to file was “willful.” The district court reasoned that proof of objective recklessness could satisfy “willfulness” for civil penalty purposes in connection with the failure to file a pertinent report under the FBAR statute, as implemented under 31 C.F.R. § 1010.350(a). The district court relied on Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007). The court applied de novo review to the statutory legal question Hughes posed.

Correct standard. The Ninth Circuit affirmed the district court’s application of the objective recklessness standard. The Ninth Circuit said it agreed with the district court’s reliance on Safeco and every other court of appeals that considered this question. Apart from the appropriate legal standard, the district court explained that Hughes had “plainly” seen the basic FBAR instructions because she checked the accompanying box on her 2012 return that she was required to file an FBAR. She failed to file an FBAR that year. She answered the same question on her 2013 return, albeit “differently (and inaccurately).” There was no evidence that Hughes was aware of the FBAR filing requirement as to 2010 and 2011. The court accordingly found Hughes’ failure to file was willful in 2012 and 2013 but not in 2010 or 2011.

Challenge waived. Moreover, Hughes failed to preserve her challenge here. This was so because the Ninth Circuit found Hughes conceded before the district court that the government could show “willfulness” based on objective recklessness for purposes of civil FBAR penalties.

Discretionary consideration. The Ninth Circuit continued that it could nonetheless consider Hughes’ waived challenge on a purely legal question that did not depend on the factual record, as here, and especially where a pro se party, as here, raised the challenge. The court said it decided to address the issue to “clarify the law in our circuit[.]”

“Willfully” distinguished. The Ninth Circuit held the Safeco reasoning, in the context of the Fair Credit Reporting Act (FCRA), applied equally to civil FBAR penalties under the Bank Secrecy Act. Both statutes provided for civil as well as criminal penalties, and both applied a willfulness standard, where the Supreme Court essentially held that “willfully” can have different contextual meanings. Safeco distinguished the meaning of “willfully” in the civil and criminal contexts. The Ninth Circuit noted that it was joining every other circuit court of appeals in holding that the usual civil standard of willfulness applies, in the absence of any contrary Supreme Court holding, to assessing civil penalties under the FBAR statute.

Not punitive. Hughes urged that the FBAR statute was inherently punitive, while the FCRA, as considered in Safeco, was distinguishable as not inherently punitive. She suggested that following Safeco would mean that nearly every FBAR violation, including negligent violations, would be willful, making the non-willful provisions superfluous.

The Ninth Circuit disagreed. It observed first that Hughes did not show how any other courts, including the district court below, had conflated mere negligence with recklessness. The Ninth Circuit said the other circuits had expressly stated that civil recklessness requires more than mere negligence, and all other Courts of Appeals correctly require a finding of (1) knowledge of grave risk that the FBAR requirement was not being met; and (2) the required filer was in an easy position to ascertain that circumstance for certain. Here, the district court did not “simply conclude” that Hughes failed to file but specifically noted she (1) held a foreign account; (2) was required to file an FBAR; and (3) her explanations for not filing in 2012 and 2013 were “inconsistent” and “not credible.” Hughes’ line of reasoning also did not square with the district court’s finding that she was merely negligent, i.e., not willful, in failing to file FBARs in 2010 and 2011.

Last, Hughes’ argument that the Third Circuit improperly imported a “strict liability” standard from a separate tax statute, even assuming such analogy was flawed, could not overcome Safeco’s clear articulation of the various meanings of “willfully.”

The consolidated cases are Nos. 23-15712 and 23-15713.

Judge: Koh, L.

Attorneys: David A. Hubbert, U.S. Department of Justice, and Paul A. Allulis, Arthur T. Catterall, Ty Halasz, and Ismail J. Ramsey for the United States of America.

Companies: ANZ Bank New Zealand Limited

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