Prologue
In 2024 the Eleventh Circuit (contrary to the First Circuit in Toth) ruled that FBAR penalties are subject to the “Excessive Fines Clause”. I wrote about the Schwarzbaum decision here. The decision was a small win for Mr. Schwarzbaum but a large win for U.S. citizens and those “U.S. residents” subject to the FBAR rules.
Isac Schwarzbaum’s contribution to the understanding of Mr. FBAR continues …
Isac Schwarzbaum should be awarded the "Presidential Medal Of Freedom" for his contributions to the development of the law of @InFBARWeTrust. His latest contribution began on November 4, 2024. The Government seeks clarification that civil and criminal #FBAR penalties are… pic.twitter.com/wv2P1BYwSX
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) November 12, 2024
Two kinds of “willful” FBAR penalties:
Generally both “civil” and “criminal” FBAR penalties can be asserted. Conviction of a “criminal FBAR penalty” may result in incarceration.
Willful FBAR Penalty 1 – The Civil Willful Penalty – 31 U.S.C. 5321(a)(5)(c)
31 U.S. Code § 5321 – Civil penalties
(C) Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
(I) $100,000, or
(II) 50 percent of the amount determined under subparagraph (D), and
(ii) subparagraph (B)(ii) shall not apply.
Willful FBAR Penalty 2 – The Criminal Willful Penalty – 31 U.S.C. 5322
31 U.S. Code § 5322 – Criminal penalties
(a) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315, 5324, or 5336 of this title or a regulation prescribed under section 5315, 5324, or 5336), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, shall be fined not more than $250,000, or imprisoned for not more than five years, or both.
JR Commentary: Notice that both the civil and criminal penalty sections are triggered by “willfully violating”. The issue is whether the words “willfully violating” have the same meaning in the civil and criminal context. The Government (rightfully) argues they have different/separate meanings in each context. (The meaning of “willfully violating” has one meaning in the civil context and a different meaning in the criminal context.) The Government appeal of the Eleventh Circuit decision in Schwarzbaum includes this issue.
November 5, 2024 – Introduction – From The U.S. Government Lawyers
The petition includes:
The United States seeks panel rehearing, not to change the Court’s judgment in this case, but to correct for the benefit of future litigants two errors of law in the Court’s opinion. The Court held, in relevant part, that civil FBAR penalties are “fines” subject to the Excessive Fines Clause of the Eighth Amendment, but that none of the civil FBAR penalties assessed against Isac Schwarzbaum were “excessive” except for three penalties of $100,000 each. In reaching those holdings, the Court made two mistakes that merit correction.
First, the Court relied in part on a mistaken belief that the “willfulness” mens rea for civil FBAR penalties is the same as the “willfulness” mens rea for criminal FBAR penalties. Although the Court correctly recognized that civil willfulness includes recklessness, the Supreme Court has held that the standard for criminal willfulness is higher and requires a knowing violation. This Court should therefore revise its opinion to omit or correct the statements that mistakenly conflate the civil and criminal willfulness standards.
Second, the Court set aside entirely the three penalties that it deemed excessive, without considering whether they should instead be reduced to a non-excessive amount or be remanded for further consideration of an appropriate amount. Although the United States does not object to that outcome in this case, the Court should revise its opinion to clarify that the usual remedy for an “excessive fine” is a reduction of the fine to an amount that is not unconstitutionally excessive.
The purpose of this post is to focus on, identify and suggest why the Government has identified the “First” issue (the meaning of “willfully violating”) as a ground for appeal:
From the Government’s “PETITION FOR PANEL REHEARING”:
First, the Court relied in part on a mistaken belief that the “willfulness” mens rea for civil FBAR penalties is the same as the “willfulness” mens rea for criminal FBAR penalties. Although the Court correctly recognized that civil willfulness includes recklessness, the Supreme Court has held that the standard for criminal willfulness is higher and requires a knowing violation. This Court should therefore revise its opinion to omit or correct the statements that mistakenly conflate the civil and criminal willfulness standards.
In “people talk” the Government is concerned that the 11th Circuit decision in Schwarzbaum will be interpreted to mean that the test for wilfullness is the same for the civil willful FBAR penalty as it is for the criminal willful FBAR penalty. The Supreme Court of the United States has ruled that “willful” in a criminal context, requires the “willful disregard of a known legal duty”. If this standard were adopted in the civil context, it would mean that willful FBAR penalties could be asserted in the civil context only if the Government could prove the “the willful disregard of a known legal duty” to file an FBAR.
The Government’s petition for appeal says that the 11th Circuit “conflated” the meaning of willfulness for “civil” and “criminal” willfulness. If the standard of willfulness were the same for both civil willful FBAR penalties and for criminal willful penalties it would either:
A. Make it more difficult to successfully assert the willful FBAR penalty in the civil context; and/or
B. Make it possible for one to be convicted for the criminal FBAR penalty on the standard of only “recklessness” permitted under the civil FBAR penalty.
It is more likely that the Government is concerned about an unreasonably high threshold of willfulness required to assert the civil willful FBAR penalty.
Bottom line: This is an important issue.
From the Government’s petition – a summary of the argument:
ARGUMENT
A. The Court should revise its opinion to omit or correct the statements that mistakenly conflate the civil and criminal willfulness standards
As shown in the bulleted points above (at pp. 5-6), the Court’s opinion in this appeal states repeatedly that the “willfulness” mens rea for civil FBAR penalties is the same as the “willfulness” mens rea for criminal FBAR penalties. (Op. 20, 22, 24, 40.) Those statements are incorrect and wrongly imply that the standard for criminal willfulness is lower than both the Supreme Court and this Court have held it to be. It is true, of course, that the FBAR statutes use the words “willful” and “willfully” to describe the requisite mens rea for both the criminal penalties (31 U.S.C. §5322(a)-(b)) and the heightened civil penalties for willful violations (31 U.S.C. §5321(a)(5)(C)). And as this Court’s opinion correctly recognized (Op. 2, 40), Schwarzbaum’s “reckless” violations of the FBAR requirements satisfied the “willfulness” requirement for the civil penalties assessed against him. See United States v. Schwarzbaum (Schwarzbaum I), 24 F.4th 1355, 1358 (11th Cir. 2022) (“Willful conduct in the FBAR context includes [both] knowing [conduct] and reckless conduct.”); United States v. Rum, 995 F.3d 882, 889 (11th Cir. 2021) (“[W]e hold that willfulness in §5321 [i.e., the civil FBAR penalty statute] includes reckless disregard of a known or obvious risk.”).
But the standard for criminal willfulness is higher. It requires a “knowing” violation; mere recklessness is not enough. See Ratzlaf v. United States, 510 U.S. 135, 137 (1994) (holding that criminal willfulness under 31 U.S.C. §5322(a) requires “pro[of] that the defendant acted with knowledge that his conduct was unlawful”).1 Thus, as the Supreme Court explained in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), willfulness “is different in the criminal law.” Id. at 57 n.9. The Court stated that “where willfulness is a statutory condition of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” Id. at 57. But “[w]hen the term ‘willful’ or ‘willfully’ has been used in a criminal statute, we have regularly read the modifier as limiting liability to knowing violations.” Id. at 57 n.9 (citing, inter alia, Ratzlaf, 510 U.S. at 137). Accordingly, this Court and its sister circuits have uniformly applied that distinction to reject defendants’ arguments that willfulness in civil FBAR-penalty cases requires a knowing violation, “which is the standard used in criminal cases,” and to hold instead that a reckless violation is sufficient to establish civil liability. Rum, 995 F.3d at 888-89; see Schwarzbaum I, 24 F.4th at 1358, 1363; United States v. Kelly, 92 F.4th 598, 603 (6th Cir. 2024); Kimble v. United States, 991 F.3d 1238, 1242 (Fed. Cir. 2021); United States v. Horowitz, 978 F.3d 80, 88 (4th Cir. 2020); Bedrosian v. United States, 912 F.3d 144, 152-53 (3d Cir. 2018).
Thus, “willfulness” does not require the same mens rea for civil FBAR penalties as for criminal FBAR penalties. A defendant’s violation of the FBAR requirements can be civilly willful without also being criminally willful. By suggesting otherwise — while correctly acknowledging that recklessness is sufficient for civil FBAR penalties — the Court’s opinion in this case mistakenly conflates the civil and criminal willfulness standards and implies, incorrectly, that criminal willfulness includes recklessness.
I will follow the result of this petition and report on its progress.
John Richardson – Follow me on X.com @Expatriationlaw