The required records exception includes regulatory foreign banking records but reflects the Fifth Amendment's purpose.

AuthorZodikoff, Alexander
PositionCase note

Fifth Amendment Privilege has guaranteed citizens individual liberties throughout history and that expectation is maintained through the required records exception, which establishes that the production of records to courts or governmental entities that provide regulatory information about businesses is not a violation of the self-incrimination clause. (1) Under 31 C.F.R. section 1010.420 (section 1010.420), the Commissioner of the Internal Revenue Service (IRS) may request records of general account information for those having financial interest in foreign bank accounts. (2) In United States v. Chabot, (3) the United States Court of Appeals for the Third Circuit had to determine whether the respondents had to produce documents under section 1010.420 considering this determination could result in an "abrogation of their Fifth Amendment privilege against self-incrimination." (4) The Court ruled that the account records met the required records exception standard and thus, the records were to be turned over to the IRS. (5)

In April of 2010, the IRS was notified about an undisclosed HSBC bank account, in France, held under the name Pelsa Business Inc. (6) The IRS proceeded to summons Pelsa Business Inc.'s owners, Eli and Renee Chabot (Chabots), requesting they produce documents and give testimony regarding their foreign bank accounts from January 1, 2006 through December 31, 2009. (7) In response, the Chabots asserted their Fifth Amendment privilege against self-incrimination, refusing to produce the requested documents, and the IRS filed a petition to enforce the summons. (8) The district court held that the required records doctrine was applicable, negating the defense of Fifth Amendment privilege, and the district court granted the petition for the summons. (9) The Chabots vehemently appealed that the granting of the IRS summons violated their privilege against self-incrimination because the required records doctrine would lead to the production of records that could subject them to further criminal prosecution. (10) The Third Circuit held that this was not a violation of the Fifth Amendment privilege, but rather an application of the required records exception's intended purpose, and granted the IRS's summons. (11)

The Currency and Foreign Transactions Act of 1970 (the Banking Security Act) established regulations for legal offshore banking and contains a number of record-keeping and inspection provisions regarding tax evasion and money laundering. (12) One regulation within the Banking Security Act is section 1010.420, which establishes that records are to be retained by persons having financial interest in foreign accounts. (13) If privy material is requested through the Banking Security Act, the required records doctrine, an exception to the Fifth Amendment privilege against self-incrimination, grants the federal government access to potentially self-incriminatory documents if they are regulatory by nature and provide benefit to "public aspects." (14)

The required records exception to the Fifth Amendment was established so that governmental entities could regulate otherwise private record-keeping information, to fulfill a governmental entity's legitimate purpose. (15) In order to maintain the integrity of the Fifth Amendment, the Supreme Court of the United States, in Grosso v. United States, (16) established a threeprong test to determine if "the required records exception should be applied" to a defendant who has refused to produce documents. (17) The Grosso test's three prongs are as follows: "(1) the reporting or record keeping scheme must have an essentially regulatory purpose; (2) a person must customarily keep the records that the scheme requires him to keep; and (3) the records must have public aspects." (18) If the required record exception is met, then the subpoenaed documents are required to be produced. (19)

For the account holder, this situation can force self-incrimination by simply acknowledging the missing documents because it would lead to the production of documents that would become a paper trail of their criminal activity. (20) The recording requirements within section 1010.420 do not target "inherently suspicious" groups of people to force self-convictions; rather, the recording requirements are in place to aid the IRS in their normal regulation of foreign banking. (21) Offshore banking is a legal activity and when documents are maintained correctly, no significant link to crime is created. (22) Further, section 1010.420 focuses on information that should be readily available, and "customarily kept," by bank account owners or beneficiaries, based on the standard bank account operator. (23) Moreover, there is a trend amongst circuit courts that offshore banking is inherently a "public activity" because it is a voluntary action that possesses rules, regulations, and procedures. (24)

In United States v. Chabot, the Third Circuit Court held that the required records exception to the Fifth Amendment was applicable because section 1010.420 did not violate the three-prong Grosso test, requiring the Chabots to comply with the IRS's request. (25) In accordance with the first prong, this Court reasoned that the IRS requested the documents in accordance with an "essentially regulatory scheme" and did not target a "suspicious class of persons." (26) Secondly, this Court maintained that the records section 1010.420 requires are those that are "customarily kept." (27) Lastly, this Court agreed with several other circuits that proclaimed civil "regulatory schemes" automatically have "public aspects." (28) It emphasized, however, that the voluntary action of opening a foreign bank account also effectively constitutes a waiving of their Fifth Amendment rights. (29)

This Court was correct to apply the Grosso test to this case to determine whether the required records exception should apply. (30) The Fifth Amendment's required records exception is used to protect a "suspect group of individuals" from the federal government's targeting them; thus, preventing or ceasing alleged 'suspicious' criminal activity. (31) Actively, many circuit courts are hearing cases of this nature and utilizing the Grosso test to determine the applicability of the exception; applying similar tests across circuits provides accurate and consistent results across the country. (32)

The Third Circuit correctly concluded, through use of the Grosso test, that a "regulatory scheme" was established, proving that the Chabots were not targeted as members of a "suspect group." (33) Under the final two prongs, requesting 'customarily kept' information is reasonable for the IRS because it displays that their intent with the records is for governmental entities to benefit, not seek out criminal activity constituting an indisputable "public aspect." (34) Furthermore, this Court's emphasis on the voluntary nature of offshore banking and the acceptance of the terms and conditions it comes with, constitutes a waiver to the Fifth Amendment right vital to the upholding of this decision and was correctly applied. (35)

If the Chabots' contention with the required records exception became good law, the precedent that would follow would instill a loophole within our current system. (36) If a defendant could use this precedent, arguing that the application of the required records exception would be an "abrogation of the Fifth Amendment," then a significant amount of evidence from bank records would become invisible to the law because those records could not be used in court because of a violation of the self-incrimination clause. (37) Had the Chabots' argument held, tax evasion and money laundering could become untraceable by using this newly created loophole of the Fifth Amendment privilege required records exception. (38) Providing the utilization of a Fifth Amendment argument to become excused from regulatory reporting requirements and to hide illegal activity circumvents the purpose of the American legal system. (39)

In United States v. Chabot, the Third Circuit Court of Appeals considered whether the account records, under section 1010.420, that the IRS requested met the standards for the required records exception to the Fifth Amendment. This Court correctly held that the records met the standard of review based on the three-prong Grosso test, and ultimately compelled the Chabots to produce these documents to the IRS. By stipulating that the standard had been met, this Court ultimately cured a potential loophole that could have exempted foreign bank account owners from reporting their records to the IRS. Had the Chabots' defense held, a plethora of white-collar crimes could have been committed under the guise of the Fifth Amendment right to protect oneself from self-incrimination.

(1.) See U.S. Const. amend. V (noting Amendment's overall purpose). The Fifth Amendment to the Constitution of the United States was designed to provide citizens with liberties. See id. See also Kirke D. Weaver, The Clash Between Rights: Can the Fifth Amendment Overcome the Work Product Doctrine?, 73 Temp. L. Rev. 123, 12526 (2000) (tracing history of Fifth Amendment). The Amendment states:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation. U.S. Const. amend. V; see also Weaver, supra. Kirke D. Weaver highlights:

The Fifth Amendment to the United States Constitution, found in the heart of the...

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