USA v. Garrity et al
Filing
210
ORDER. For the reasons set forth in the attached, the Government's motion to alter judgment (ECF No. 191) is GRANTED and the Defendants' motion to alter and reduce judgment (ECF No. 190) is DENIED. The Clerk shall enter judgment for the Plaintiff in the total amount of $1,330,460.50, consisting of the civil penalty of $936,691, interest of $56,252.78, and a late payment penalty of $337,516.72. Signed by Judge Michael P. Shea on 2/28/2019. (Guevremont, Nathan)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
UNITED STATES OF AMERICA,
Plaintiff,
No. 3:15-CV-243(MPS)
v.
DIANE M. GARRITY, PAUL G. GARRITY, JR.,
and PAUL M. STERCZALA, as fiduciaries of the
Estate of Paul G. Garrity, Sr.,
Defendants.
MEMORANDUM AND ORDER
The United States of America (“the Government”), filed this suit to reduce to judgment a
civil penalty the Internal Revenue Service assessed against Paul G. Garrity, Sr. under 31 U.S.C. §
5321(a)(5).1 After a six-day trial, a jury found that Mr. Garrity had willfully failed to file a Report
of Foreign Bank and Financial Accounts (commonly known as an FBAR) in 2005, in violation of
31 U.S.C. § 5314. (ECF No. 179.) The jury also found that the Government had established the
assessed civil penalty ($936,691.00) was equal to 50% of the balance in Mr. Garrity’s account in
the year he failed to file the FBAR. (Id.) Before trial, the parties stipulated that, if judgment entered
in favor of the Government, the Defendants would have an opportunity to file “a motion for
remittitur or similar post-verdict motion.” (ECF No. 154 at 2.) Accordingly, the Court entered
judgment without specifying the penalty amount. The Government filed a motion to amend the
judgment to include a civil penalty of $936,691.00 plus interest and a late payment penalty. (ECF
1
Mr. Garrity passed away on February 10, 2008. The Government brought this action against
Diane M. Garrity, Paul G. Garrity, Jr., and Paul M. Sterczala (the Defendants) as fiduciaries of
his estate. I refer to Paul G. Garrity, Sr. as “Mr. Garrity” throughout this opinion.
1
No. 191.) The Defendants filed a motion to alter or reduce judgment. (ECF No. 190.) They assert
that the maximum civil penalty for failure to file an FBAR is $100,000.00. Alternatively, they
argue that the civil penalty must be reduced to “an amount that is proportional to the harm caused
by the failure to file the FBAR, as required under the [Excessive Fines Clause of the] Eighth
Amendment . . . .” (ECF No. 190-1 at 13.)
For the reasons set forth below, the Government’s motion to alter judgment is GRANTED.
The Defendants’ motion to alter or reduce judgment is DENIED. The judgment will be amended
to reflect a civil penalty of $936,691.00 plus statutory interest and a late payment penalty.
DISCUSSION
I.
The Maximum Civil Penalty for Willful FBAR Violations
By statute, the maximum civil penalty for willfully failing to file an FBAR is the greater
of $100,000 or 50 percent of the balance of the account in the year for which the report was due.
31 U.S.C. § 5321(a)(5)(c). At trial, the Government proved that Mr. Garrity willfully failed to file
an FBAR for 2005, and that 50 percent of the account balance in that year was equal to $936,691.
Accordingly, the Government seeks to impose the full penalty available under the statute plus late
fees and interest. The Defendants argue that, although the statute allows for penalties up to 50
percent of an account’s balance even if that amount exceeds $100,000, the Secretary of the
Treasury capped his discretion to impose civil penalties at $100,000 by regulation. See 31 C.F.R.
§ 1010.820(g).2 I agree with the Government and hold that Congress effectively abrogated the
2
Two district courts have issued decisions consistent with the position that the Defendants
advocate. See United States v. Colliot, No. AU-16-CA-01281-SS, 2018 WL 2271381, at *3
(W.D. Tex. May 16, 2018); United States v. Wahdan, 325 F. Supp. 3d 1136, 1139 (D. Colo. Jul
18, 2018). The Court of Federal Claims and one district court more recently issued decisions
consistent with the Government’s position. Norman v. United States, 138 Fed. Cl. 189, 195–96
(2018); Kimble v. United States, No. 17-421, 2018 WL 6816546, at *15 (Fed. Cl. Dec. 27, 2018);
United States v. Horowitz, No. PWG-16-1997, 2019 WL 265107, at *3 (D. Md. Jan. 18, 2019).
2
regulation capping FBAR penalties at $100,000 when it increased the maximum penalty by statute
in 2004.
A. Statutory and Regulatory History of the Willful FBAR Penalty
Congress passed the Bank Secrecy Act (“BSA”) in 1970. Pub. L. No. 91-508, 84 Stat.
1114. The purpose of the BSA was “to require the maintenance of records and the making of
certain reports or records where such reports or records have a high degree of usefulness in
criminal, tax, or regulatory investigations or proceedings.” Id. § 202. The BSA delegated authority
to the Secretary of the Treasury to establish record keeping and reporting requirements consistent
with that purpose. Id. § 204; id. at § 241 (codified as amended at 31 U.S.C. § 5314) (“The Secretary
of the Treasury . . . shall by regulation require any resident or citizen of the United States . . . who
engages in any transaction or maintains any relationship . . . with a foreign financial agency to
maintain records or to file reports, or both, setting forth such of the following information, in such
form and in such detail, as the Secretary may require . . . .”). The Secretary promulgated final
regulations implementing the BSA on July 1, 1972. 37 Fed. Reg. 6912, 6915. One provision
required any person with “a financial interest in, or other authority over, a bank, securities or other
financial account in a foreign country” to file a “special tax form” providing information about the
account. 37 Fed. Reg. 6912, 6913. The form is commonly known as the Foreign Bank Account
Report or “FBAR.”
In 1986, Congress amended the BSA, granting the Secretary authority to assess civil
monetary penalties “on any person who willfully violates any provision of section 5314,” the code
section directing the Secretary to require individuals to file an FBAR. Money Laundering Control
Act of 1986, Pub. L. No. 99–570, Subtitle H, 100 Stat. 3207 (October 27, 1986) (codified as
amended at 31 U.S.C. § 5321(a)). The amended statute limited civil penalties to “the greater of (I)
3
an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation;
or (II) $25,000.” Id. § 1357 (codified as amended at 31 U.S.C. § 5321(a)(5)). Six months later, the
Secretary promulgated a final rule restating the penalty section of the statute nearly verbatim. See
Amendments to Implementing Regulations Under the Bank Secrecy Act, 52 Fed. Reg. 11436,
11446 (Apr. 8, 1987) (stating that the Secretary may impose a civil penalty for willfully failing to
file an FBAR up to “the greater of the amount (not to exceed $100,00) equal to the balance in the
account at the time of the violation, or $25,000.”).3 The penalty portion of the new regulation did
not go through notice and comment procedures, appearing for the first time in the final rule on
April 8, 1987. Indeed, the notice of proposed rulemaking had been published in the Federal
Register in August of 1986—two months before Congress enacted the BSA amendments
authorizing the Secretary to impose civil penalties on account holders. See Notice of Proposed
Rulemaking, 51 Fed. Reg. 30233 (Aug. 25, 1986); Money Laundering Control Act of 1986, Pub.
L. No. 99–570 (October 27, 1986).
In 2004, Congress amended the civil penalties for failing to file an FBAR. See American
Jobs Creation Act of 2004, Pub L. No. 108-357, § 821, 118 Stat. 1418, 1586 (2004) (codified at
31 U.S.C. § 5321(a)(5)). The amendment increased the penalty for willful FBAR violations to the
greater of $100,000 or 50 percent of the balance of the account at the time of the violation. See 31
U.S.C. § 5321(a)(5)(C). It also added a penalty for non-willful violations limited to $10,000. Id. §
3
Treasury subsequently moved all regulations related to the Bank Secrecy Act to a new chapter
in the Code of Federal Regulations. See Transfer and Reorganization of Bank Secrecy Act
Regulations, 75 Fed. Reg. 65806 (Oct. 26, 2010). The regulation parroting the willful FBAR
penalty was re-codified at 31 C.F.R. § 1010.820. See id. at 65808. Although Treasury made
technical corrections along with the renumbering, it explained that any substantive changes were
outside the scope of the final rule. See id. at 65806.
4
5321(a)(5)(B). The Secretary did not promulgate updated regulations to reflect the new non-willful
penalty or the increased willful penalty.
B. The 2004 Statute Abrogated the Civil Penalty Limit in the 1987 Regulation
The Defendants argue that, notwithstanding the statutorily increased penalties, the IRS
remains bound by the Treasury regulation promulgated in 1987 under the pre-2004 version of the
statute. According to this argument, the maximum penalty for willful FBAR violations is therefore
$100,000. See 31 C.F.R. § 1010.820(g)(2). The Defendants assert that the amended statute
establishes a ceiling on civil penalties but not a floor, and that the Secretary of the Treasury has,
by retaining the old regulation, categorically established a lower ceiling for such penalties, limiting
his own authority to the level set by Congress before the amendment. I disagree. The plain
language of the 2004 amendment demonstrates Congress’s intent to authorize the Secretary to
impose higher penalties for willful FBAR violations without the need for additional Treasury
regulations, and, as shown below, the old regulation will not bear the freight the Defendants
attempt to foist upon it.
In the 2004 legislation, Congress specified that the higher penalties for willful FBAR
violations would take effect immediately once the amendments were enacted. See Pub. L. No. 108357, § 821(b) (“The amendment made by this section shall apply to violations occurring after the
date of the enactment of this Act.”) (emphasis added). In contrast, where Congress intended in the
BSA to rely on the Secretary first to flesh out the statutory scheme by regulation, it made that
intention clear. E.g., 31 U.S.C. § 5314 (directing the Secretary to require citizens to either “keep
records, file reports, or keep records and file reports” containing certain information “in the way
and to the extent the Secretary prescribes . . . .”). The Secretary could not override Congress’s
5
clear directive to raise the maximum willful FBAR penalty by declining to act and relying on a
regulation parroting an obsolete version of the statute.
The Defendants contend that the BSA is not self-executing and the Secretary therefore
lacks authority to impose FBAR penalties greater than $100,000 without first promulgating a
regulation raising the limit. (See ECF No. 190-1 at 6.) The Defendants rely on dicta in California
Bankers Ass’n v. Shultz, 416 U.S. 21, 26 (“[W]e think it important to note that the [Bank Secrecy]
Act's civil and criminal penalties attach only upon violation of regulations promulgated by the
Secretary; if the Secretary were to do nothing, the Act itself would impose no penalties on
anyone.”). In that case, the Supreme Court held that the domestic reporting requirements for
financial institutions under the BSA did not violate the Fourth Amendment. 416 U.S. at 66. The
petitioner banks had argued that the BSA authorized the Secretary of the Treasury to impose
reporting requirements that would amount to unreasonable searches. Id. at 64. The Court rejected
their claims, holding that the banks did not have “an unqualified right to conduct their affairs in
secret” and that the reporting requirements were not unreasonable. Id. at 67.
Nothing in California Bankers suggests that the Secretary must take some formal
regulatory action before the penalty provisions of the BSA acquire the force of law. The abovequoted language simply notes that the statute itself does not establish specific reporting
requirements but affords the Secretary discretion to define those requirements for holders of
foreign accounts. See California Bankers Ass’n, 416 U.S. at 26; 31 U.S.C. § 5314. Once the
Secretary establishes reporting requirements under Section 5314, though, the civil penalties in
Section 5321(a)(5) attach whenever the Secretary chooses to impose them for a reporting violation,
as he has in this case. 31 U.S.C. § 5321(a)(5)(A) (“The Secretary of the Treasury may impose a
civil monetary penalty on any person who violates . . . any provision of section 5314.”); Id. §
6
5321(a)(5)(C) (“In the case of any person willfully violating . . . any provision of section 5314—
(i) the maximum penalty . . . shall be increased to the greater of (I) $100,000, or (II) 50 percent of
[the balance in the account at the time of the violation] . . . .”). The language of the statute does
not suggest that additional regulations are necessary before the civil penalties can take effect. The
American Jobs Creation Act made no substantive changes to the FBAR filing requirement and
thus did not create any additional gaps for the Secretary to fill through regulation. See American
Jobs Creation Act, Pub. L. No. 108-357, §§ 801–822 (2004) (modifying the BSA and raising civil
penalties without altering the substantive FBAR requirement). As a result, the higher penalties the
Act established took effect immediately in accordance with its plain language.
C. The Secretary Did Not Reaffirm the Lower FBAR Penalties After Congress
Raised Them by Statute
There is also no reason to conclude that the Secretary intended categorically to limit his
own discretion to impose the higher penalties that Congress authorized. The pre-amble to the 1987
regulation parroting the unamended statute stated that Treasury intended to enforce the BSA “to
the fullest extent possible.” 52 Fed. Reg. 11436, 11440 (Apr. 8, 1987). Further, that regulation,
now codified at 31 C.F.R. § 1010.820(g), was not promulgated after notice and comment, which
means it was, at most, an interpretive rule; it “d[id] not have the force and effect of law,” Perez v.
Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1204 (2015), and it vested no rights in account holders.4
4
Thus, one of the premises of the decision in Colliot, on which the Defendants rely, is incorrect.
There, the court emphasized that Treasury was bound by the 1987 regulation because it had been
promulgated through notice and comment and could only be repealed through notice and
comment. Colliot, 2018 WL 2271381, at *2–3 (W.D. Tex. May 16, 2018). As noted above, the
August 1986 notice of proposed rulemaking in the Federal Register makes no reference to the
civil penalty provision for account holders, which was not authorized by Congress until two
months later. The penalty provision was added to the final rule without notice and comment
procedures. The civil penalty provision in the 1987 regulation was at most an interpretive rule
based on a now-obsolete version of the statute.
7
This suggests that the reference to a civil FBAR penalty in the 1987 regulation was intended only
to express the Secretary’s intent to enforce the BSA with the full authority conferred on him by
Congress. It is untenable to argue that the same regulation now significantly constrains the
Secretary’s ability to enforce the amended statute.
The Defendants assert that Treasury regulations promulgated after Congress raised the
maximum penalties suggest that the Secretary tacitly reaffirmed the limits in the 1987 regulation.
For example, Treasury re-arranged the chapter of the Code of Federal Regulations including the
defunct FBAR penalty in 2010. See 75 Fed. Reg. 65806 (Oct. 26, 2010). Similarly, in 2016,
Treasury amended a nearby code section to note that penalties with definite dollar amounts—
which, by definition, would not include the 50 percent referenced in the 2004 amendment—would
be adjusted for inflation. See 81 Fed. Reg. 42503 (Jun. 30, 2016). At best, these actions imply that
the Secretary knew the obsolete regulation remained on the books. Other regulations in the same
section are also clearly obsolete. For example, 31 C.F.R. § 1010.820(a) establishes penalties for
willful reporting violations by financial institutions before 1984. The statute of limitations on such
penalties—six years—expired in 1990. See 31 U.S.C. § 5321(b). Thus, the first subparagraph in
Section 1010.820 has been defunct for nearly two decades. And in 2008 the IRS explicitly
acknowledged that the earlier civil penalty regulation had not been formally repealed; the agency
warned that the statute overrode the regulation and the higher statutory penalties applied. Internal
Revenue Serv., Internal Revenue Manual § 4.26.16.4.5.1 (Jul. 1, 2008) (“At the time of this
writing, the regulations at 31 C.F.R. § 103.57 [now re-codified at § 1010.820] have not been
revised to reflect the change in the willfulness penalty ceiling. However, the statute is selfexecuting and the new penalty ceilings apply.”); see also id. § 4.26.16.2 (“31 U.S.C. § 5321(a)(5)
establishes civil penalties for violations of the FBAR reporting and recordkeeping requirements.”);
8
id. § 4.26.16.4.5 (“There are two different statutory ceilings for willful penalty violations of the
FBAR requirements, depending on whether or not the violation occurred before October 23,
2004.”)5 I cannot conclude that the Secretary categorically limited his own discretion to enforce
fully the FBAR requirement by implication or inaction, particularly given the IRS’s clear
statements to the contrary.
The Defendants next contend that Treasury Order 180-01, originally promulgated in
October 2002, reaffirmed all FBAR regulations “that were in effect or in use on the date of
enactment of the USA Patriot Act of 2001 . . . .” 67 Fed. Reg. 64697-01. Treasury re-issued Order
180-01 in July 2014. See Treasury Order 180-01: Financial Crimes Enforcement Network (Jul 1.,
2014),
https://www.treasury.gov/about/role-of-treasury/orders-directives/pages/to180-01.aspx.
The Defendants fail to acknowledge, however, that the order also indicates that pre-2001
regulations would remain in effect only “until superseded or revised.” Id. As explained above, the
lower FBAR penalty in 31 C.F.R. § 1010.820(g) was superseded by statute in 2004. As a result,
the general reference to reaffirming earlier regulations in Treasury Order 180-01 does not support
an inference that the Secretary intended to reaffirm the lower penalties in the specific regulation
at issue here.
The Defendants also argue that the FBAR form itself demonstrates the Secretary’s intent
to impose a tighter limit on his own authority to levy civil penalties than the one Congress selected.
The Privacy Act Notification on the FBAR form in effect on the date of Mr. Garrity’s violation
stated
5
The Internal Revenue Manual is not binding authority in this case. Rather, it demonstrates the
IRS’s understanding that Congress had abrogated the 1987 regulation two years before the
Defendants assert the Secretary implicitly reaffirmed that regulation by amending a nearby code
section. See United States v. Boyle, 469 U.S. 241, 243 n.1 (1985) (citing the Internal Revenue
Manual in describing the IRS’s interpretation of a Treasury regulation).
9
Civil and criminal penalties, including in certain circumstances a fine of not more than
$500,000 and imprisonment of not more than five years, are provided for failure to file a
report, supply information, and for filing a false or fraudulent report.
Form TD 90-22.1 (Rev. 2000). But this Privacy Act notification is inaccurate even under the
Defendants’ theory of the available penalties. The IRS may impose a civil monetary penalty for
failing to file an FBAR “notwithstanding the fact that a criminal penalty is imposed with respect
to the same violation.” 31 U.S.C. § 5321(d). If the maximum civil monetary penalty were
$100,000, as the Defendants assert, then the maximum combined civil and criminal penalties
would be $600,000, not $500,000, and the notification still would not provide accurate notice of
the full range of available monetary penalties. See 31 U.S.C. § 5322(b) (authorizing criminal
penalties up to $500,000). As a result, it appears that the form states only the available criminal
penalties. In any event, Treasury revised the form in 2012 to state the correct civil penalties as
well. See Form TDF 90-22.1 (Rev. 2012) (“A person who willfully fails to report an account or
account identifying information may be subject to a civil monetary penalty equal to the greater of
$100,000 or 50 percent of the balance in the account at the time of the violation. See 31 U.S.C.
section 5321(a)(5). Willful violations may also be subject to criminal penalties . . . .”).6
Ultimately, the Defendants’ reliance on these regulatory actions (or inactions) is misplaced.
As noted above, the civil FBAR penalty provision in the 1987 regulation was an interpretive rule
that lacked the “force and effect of law.” See Perez, 135 S. Ct. at 1203–04. It did not create or
expand account holders’ rights, and it merely parroted a statute that has now been amended. No
amount of “reaffirming” references of the sort Defendants point to can make it an operative limit
on the Secretary’s current authority. If the Secretary wanted to categorically limit his discretion to
6
The Defendants do not argue that Mr. Garrity, who never filed the FBAR form, somehow relied
to his detriment on the language regarding a $500,000 fine.
10
impose FBAR penalties above $100,000 after Congress conferred such authority on him by statute,
he could do so, if at all, only through notice and comment rulemaking under the Administrative
Procedure Act, clearly indicating his intent to surrender by regulation some of the authority
Congress has bestowed on him. See id. (“Rules issued through the notice-and-comment process
are often referred to as legislative rules because they have the force and effect of law.”); 5 U.S.C.
§ 553(b) (requiring notice of proposed rulemaking to include “either the terms or substance of the
proposed rule or a description of the subjects and issues involved.”). It is undisputed that he has
not taken such a step.
II.
Eighth Amendment Excessive Fine
The Defendants next argue that the assessed penalty violates the Eighth Amendment’s
prohibition on excessive fines. U.S. Const. amend VIII (“Excessive bail shall not be required, nor
excessive fines imposed, nor cruel and unusual punishments inflicted.”). On balance, I find that
the penalty in this case is does not violate the Eighth Amendment.
A. The Civil FBAR Penalty Must Be Considered Separately from the Foreign
Trust Penalty
As a threshold matter, the Defendants assert that the civil penalty in this case must be
considered together with the penalty assessed in another case related to the same foreign account.
See Stipulation of Dismissal, ECF No. 42, United States v. Garrity, No. 18-cv-0111-MPS (D.
Conn. Jan. 28, 2019) (the “Foreign Trust case”). In that case, the Government alleged that Mr.
Garrity failed to file a Form 3520 to report transfers to and from the Lion Rock Foundation trust
(in whose name the account was held) for 1996 through 1998 and for 2004, in violation of 26
U.S.C. § 6048(a). See Amended Compl. ¶¶ 12–23, United States v. Garrity et al., No. 18-cv-0111.
The penalty for failing to file a Form 3520 is the greater of $10,000 or 35 percent of the transaction
11
that triggered the reporting requirement. 26 U.S.C. § 6677(a). The Government also alleged that
Mr. Garrity failed to cause the trust to file a Form 3520-A from 1997 through 2008, in violation
of 26 U.S.C. § 6048(b). See Amended Compl. ¶¶ 15–18, United States v. Garrity et al., No. 18cv-0111. The penalty for failing to cause the trust to file a Form 3520-A is the greater of $10,000
or 5 percent of the value of the assets held in trust. 26 U.S.C. § 6677(b). In total, the IRS assessed
a penalty of $1,504,388.36 for the four reporting violations with respect to the Form 3520 and the
twelve reporting violations with respect to the Form 3520-A. See Amended Compl. ¶ 28, United
States v. Garrity et al., No. 18-cv-0111. On January 28, 2019, the parties reported the case settled
and the Defendants filed the settlement agreement on the docket in this action. (Supplemental
Information, ECF No. 203-1.) Under that agreement, the Defendants agreed to pay $850,000 and
the IRS agreed to abate the balance of the penalties. (Id. at 1.).
The Defendants contend that, because the Foreign Trust case involved penalties for
reporting violations related to the same foreign account at issue here, the total fine for purposes of
the Eighth Amendment is the sum of the fines across the two cases. I disagree, even assuming that
the amount assessed in the Foreign Trust case constitutes a fine for Eighth Amendment purposes.
The violation here is legally and factually distinct from the violations in the Foreign Trust case.
This case involves a willful failure to file Form 90.22-1 for tax year 2005. The Foreign Trust case
involves failures to file Forms 3520 and 3520-A from 1996 through 2008. In each instance, it was
the failure to file the forms themselves, rather than the mere existence of the underlying bank
account, that triggered civil penalties, and the elements of each violation are different. Further,
only one of Mr. Garrity’s sixteen foreign trust reporting violations related to tax year 2005. See
Amended Compl. ¶ 28, United States v. Garrity et al., No. 18-cv-0111. The Government assessed
a penalty of $111,123.04 for that violation. Id. But the IRS later abated $654,388.36 in penalties,
12
and the parties’ settlement agreement indicated that the Defendants’ payment would be “applied
to whichever of the Foreign Trust Penalty Liabilities the IRS deems in its discretion to be in its
best interests.” (ECF No. 203-1 at 1.) It is unclear, then, whether any of the payment was allocated
to the penalty for tax year 2005. In short, the penalties in the Foreign Trust case relate to different
conduct in different years than the present case. As a result, I decline to consider those penalties
in analyzing the penalty in this case under the Eighth Amendment.
B. The Assessed Penalty Is Not Excessive Under the Eighth Amendment
The Defendants argue that the penalty in this case is “grossly disproportional” to Mr.
Garrity’s violation and must be reduced.7 Courts assessing the proportionality of a fine under the
Eighth Amendment are guided by four factors “distilled” from the Supreme Court’s analysis in
United States v. Bajakajian, 524 U.S. 321 (1998):
[1] the essence of the crime of the defendant and its relation to other criminal activity, [2]
whether the defendant fit[s] into the class of persons for whom the statute was principally
designed, [3] the maximum sentence and fine that could have been imposed, and [4] the
nature of the harm caused by the defendant's conduct.
United States v. Castello, 611 F.3d 116, 120 (2d Cir. 2010). I consider each of these factors below
and conclude that the penalty in this case is not excessive.
1. The Violation and Its Relation to Other Criminal Activity
Defendants challenging a fine under the Eighth Amendment bear the burden of
demonstrating that the fine is unconstitutional. Castello, 611 F.3d at 120 (“The burden rests on the
defendant to show the unconstitutionality of the forfeiture.”) The Defendants have not carried that
burden. They have offered no explanation for why Mr. Garrity opened the foreign account, nor
The Government argues that a willful FBAR penalty is not a “fine” subject to scrutiny under
the Eighth Amendment. Because I conclude that the penalty in this case does not in any event
violate the Eighth Amendment, I do not address the Government’s contention.
7
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have they identified the source of the money in it. Further, although the Government was not
required to prove that Mr. Garrity engaged in other illicit activity related to his foreign account,
there was evidence at the trial that, at the very least, raises serious questions about his and his sons’
activity related to the account. For example, the account was opened in Liechtenstein under the
name of a trust known as a Liechtenstein Stiftung. In 2008, Liechtenstein was one of three
countries identified as tax havens by the Organization for Economic Development and
Cooperation. See Jane G. Gravelle, Cong. Research Serv., R40623, Tax Havens: International Tax
Avoidance and Evasion 5 (2015). The Joint Committee on Taxation reported that U.S. citizens
frequently utilized trust accounts in Liechtenstein to shield their assets from discovery by
authorities and evade taxes. See Joint Committee on Taxation, Tax Compliance and Enforcement
Issues with Respect to Offshore Accounts and Entities 41 (JCX-23-09), March 30, 2009.
There was also evidence that Mr. Garrity and his sons made efforts to keep the account’s
existence a secret. Two of his three sons who testified at trial invoked their Fifth Amendment rights
as to all questions about the account, including questions about a trip to Liechtenstein to make
large cash withdrawals from the account. The third son testified that, upon flying home from that
trip, he gave his cash to his brothers out of concern for U.S. currency transaction reporting
requirements, only to recover the cash once they cleared customs. (See ECF No. 196-1 at 2–5.)
While the jury was not required to make any findings about the suspicious efforts to maintain the
secrecy of the account, the Defendants have not borne their burden of showing that the violation
had nothing to do with criminal activity. Contrast Bajakajian, 524 U.S. at 337–38 (“[Bajakajian’s]
violation was unrelated to any other illegal activities. The money was the proceeds of legal activity
and was to be used to repay a lawful debt.”). The trial evidence also would likely have supported
a finding—had the government sought one—of FBAR violations every year since 1989 when the
14
account was created. See Castello, 611 F.3d at 121–22 (distinguishing Bajakajian on the ground
that “Castello’s crime is far more serious than Bajakajian’s” in part because “Castello failed to file
the required CTRs ‘thousands’ of times . . . , whereas Bajakajian committed a single offense . . .
.”). Mr. Garrity never disclosed the account, and the absence of criminal charges arising from his
violation may owe largely to his success in concealing it during his lifetime. That success also
likely weakened the Government’s ability to investigate and uncover potentially unlawful activity
related to the account.8 All of this suggests that Mr. Garrity’s conduct in this case went to the core
purpose of the FBAR filing requirement under the BSA. See California Bankers Ass’n, 416 U.S.
at 76 (“[T]he recordkeeping and reporting requirements of the Bank Secrecy Act are focused in
large part on the acquisition of information to assist in the enforcement of criminal laws.”).
This case is thus unlike Bajakajian, where, after a bench trial, the district court expressly
“found that the funds were not connected to any other crime and that respondent was transporting
the money to repay a lawful debt.” Id. There was no similar finding in this case about the source
of the money in Mr. Garrity’s account or its intended purpose, and, as suggested above, the
evidence would not have supported such a finding.
2. Whether the Defendant Fits into the Class of Persons for Whom the
Statute was Designed
The purpose of the BSA is “to require certain reports or records where they have a high
degree of usefulness in criminal, tax, or regulatory investigations or proceedings . . . .” 31 U.S.C.A.
§ 5311. The FBAR penalty targets individuals who fail to disclose their interest in foreign
accounts, preventing the Government from identifying and investigating possible tax evasion or
8
Even if the Government found evidence of criminal activity after it learned of the account, it
could not have brought criminal charges against Mr. Garrity after his death. See United States v.
Libous, 858 F.3d 64, 66 (2d Cir. 2017).
15
criminal activity. As explained above, Mr. Garrity fits squarely into the class of persons for whom
the BSA was designed.9
In early 2008, shortly before Mr. Garrity’s interest in the Liechtenstein account was
formally disclosed to the U.S. Government for the first time, the IRS identified Liechtenstein as a
significant haven for tax evaders. Gravelle, supra, at 5. The Joint Committee on Taxation noted
that Liechtenstein account holders had avoided detection for the past decade in part by failing to
comply with the FBAR requirement or file Forms 3520 or 3520-A. See Joint Committee on
Taxation, supra, at 41. In short, Mr. Garrity willfully failed to report his Liechtenstein trust at
precisely the time when the Government was most concerned about tax evasion schemes that used
such accounts. The reporting requirements under the BSA are intended to facilitate the
Government’s ability to gather information and investigate crimes and tax evasion. Mr. Garrity’s
violation frustrated that information-gathering purpose.
3. The Maximum Sentence and Fine that Could Have Been Imposed
The maximum criminal penalty for willfully failing to file an FBAR is a fine of $250,000
and five years’ imprisonment. 31 U.S.C. § 5322(a). If the violation is “part of a pattern of any
illegal activity involving more than $100,000 in a 12-month period,” the penalty increases to a
$500,000 fine and ten years’ imprisonment. 31 U.S.C. § 5322(b). Civil penalties are limited to the
greater of $100,000 or 50 percent of the balance in the account at the time of the violation. 31
U.S.C. § 5321(a)(5). The Defendants argue that the civil penalty assessed in this case was
significantly higher than the maximum criminal penalty available, weighing in favor of a finding
that the civil penalty was excessive. Although they are correct that the civil penalty here exceeds
9
I acknowledge that Mr. Garrity is not himself a defendant in this action. The named Defendants
were sued as fiduciaries of Mr. Garrity’s estate. I treat Mr. Garrity as the defendant for purposes
of this analysis.
16
the maximum available criminal fine, this circumstance does not weigh in their favor when all of
the relevant circumstances are considered.
The Supreme Court in Bajakajian and the Second Circuit in Castello examined the
maximum penalties that could be imposed in order to gain insight into the severity of defendants’
offenses in the eyes of Congress and the Sentencing Commission. In Bajakajian, the Court
compared the maximum criminal penalty available for a substantive reporting violation, 31 U.S.C.
§ 5316, with the total amount the Government sought through a separate criminal forfeiture count.
18 U.S.C. § 982(a)(1). The maximum fine for the substantive violation—and the one imposed by
the sentencing judge—was $5,000 under the then-binding U.S. Sentencing Guidelines—71 times
lower than the amount the Government sought through forfeiture. The Court reasoned that the
relatively low fine for the substantive violation “confirm[ed] a minimal level of culpability.”
Bajakajian, 524 U.S. at 339.
In Castello, the Second Circuit considered the Guidelines penalties as well, noting that
“statutory penalties reflect severity in a general way, but the applicable Guidelines are more
indicative.” Castello, 611 F.3d at 123. There, the court focused on the fact that the Guidelines
imprisonment range exceeded the statutory maximum as an indication that the defendant’s conduct
was quite severe. Id. (“[W]hile the maximum Guidelines fine may not exceed the statutory
maximum, the Guidelines range of imprisonment was far greater.”) Here, by contrast, the parties
have offered no input on the appropriate Guidelines calculation. The applicable Guideline,
U.S.S.G. § 2S1.3, would establish an offense level of 6 (if funds in the account were obtained
legally and were to be used for a lawful purpose) or 24 (if the misconduct was part of a pattern of
unlawful activity). The Guidelines fines at these offense levels could range from $1,000 to
17
$200,000. In the end, though, there is insufficient information in the record for the Guidelines to
provide useful insight into the severity of the offense.
That leaves the applicable statutes, which, as noted, set a maximum fine of $250,000 for a
simple criminal FBAR violation, an amount more than one quarter of the civil penalty sought by
the Government. At least one court has found that a ratio of more than 4:1 between a Guidelines
maximum and a criminal forfeiture did not meet the “grossly disproportional” standard set in
Bajakajian. United States v. Jose, 499 F.3d 105, 112 (1st Cir. 2007) (“[T]he forfeiture at issue here
is less than 4 times the maximum fine allowable under the Guidelines, whereas the forfeiture in
Bajakajian exceeded the then-mandatory Guidelines by a factor of more than 70. This undermines
Jose’s argument that the forfeiture order is grossly out of proportion to the gravity of his offense.”)
Further, unlike the criminal fines in Bajakajian and Castello, the criminal fines for an
FBAR violation do not capture Congress’s full assessment of the severity of the conduct. Here,
Congress explicitly determined that the civil and criminal FBAR penalties may stack. 31 U.S.C. §
5321(d). Congress thus expressly intended that any criminal penalty could be imposed on top of
the assessed civil penalty for identical conduct, and specifically calibrated the amount of the total
available monetary penalty at a high level, i.e., $250,000 plus the greater of $100,000 or 50 percent
of the account’s value. That is a strong indicator that Congress viewed an FBAR violation—
especially one involving an account with a large balance—as severe criminal conduct warranting
heavy sanctions. See Bajakajian, 524 U.S. at 336 (“[J]udgments about the appropriate punishment
for an offense belong in the first instance to the legislature.”). In this case, of course, unlike in
Bajakajian and Castello where the Government sought and obtained criminal fines, the
Government did not utilize the full measure of its combined criminal and civil authority. As noted,
18
that may be because Mr. Garrity passed away before the Government learned of the account. At
least in the eyes of Congress, then, Mr. Garrity’s conduct amounted to serious wrongdoing.
4. The Nature of the Harm Caused by the Defendant’s Conduct
Finally, the Defendants have not carried their burden of demonstrating that the penalty is
excessive given the nature of the harm in this case. The evidence showed that Mr. Garrity opened
the Liechtenstein trust account in 1989. (Gov’t Ex. 60 at 4.) He failed to report his interest in the
account every year for almost two decades. The Defendants argue that a reporting violation is not
sufficiently serious to warrant such a substantial penalty. The Second Circuit has held that full
forfeiture of $12,012,924.31 and defendant’s equity interest in his home did not violate the Eighth
Amendment where the defendant was convicted of a reporting offense. Castello, 611 F.3d at 123–
24. In Castello, the defendant repeatedly failed to file the requisite currency transaction reports for
his check-cashing business. Id. Although he was charged with other crimes, including tax evasion
and money laundering, he was acquitted of all but the reporting violation. The Second Circuit
explained that, although he was only convicted of reporting violations, the harm his misconduct
caused was significant because it prevented the government from uncovering or prosecuting
crimes committed by others. Id. at 124.
Here, Mr. Garrity failed to report his interest in a foreign account for almost two decades
and his violations prevented the government from investigating and prosecuting other potential
crimes. See supra Section II.B.1. His violation was serious and may have helped to conceal other
misconduct. Given the delay in uncovering the violation, the Government may never glean a full
picture of Mr. Garrity’s assets abroad. Given the number of years the undisclosed account
remained open, and the evidence at trial of substantial balances in several of those years, there is
potential that the violation deprived the Government of taxes on a substantial amount of investment
19
gains.10 Again, it is impossible to be sure about this, precisely because Mr. Garrity’s failure to
disclose the account during his lifetime prevented the Government from fully investigating it. As
it was, the Government expended significant resources investigating his foreign account. (See
generally ECF Nos. 121 & 138 (evidentiary motions referencing IRS examinations preceding this
lawsuit); Defs. Proposed Trial Exhibits 549–52 (interviews of Mr. Garrity’s sons during an IRS
examination and deposition of the IRS examiner).)11 Under the circumstances, the Defendants
have not shown “that neither the Government nor anyone else suffered harm” as a result of the
violation, (ECF No. 190-1 at 18), and I cannot find that the civil penalty is “grossly
disproportional” to the harm.
III.
Interest and Late Payment Penalties
The Government also asserts that it is entitled to a late payment penalty and interest. The
Defendants do not contest this or the amount of the late payment penalty and interest sought by
the Government. Federal agencies must assess a late payment penalty “of not more than 6 per cent
per year for failure to pay part of a debt more than 90 days past due.” 31 U.S.C. § 3717(e)(2).
Agencies must also assess interest at a rate fixed by regulation. 31 U.S.C. § 3717(a)-(c); United
States v. Texas, 507 U.S. 529, 536 (1993) (“Section 3717(a) requires federal agencies to collect
prejudgment interest against persons and specifies the interest rate.”) Interest does not compound,
10
Given that the BSA in part targets tax evasion, the relevant marginal income tax rates also help
place the civil FBAR penalty in context and inform the analysis of the severity of Mr. Garrity’s
offense. When the BSA was passed, the highest marginal tax rate was 70%. Tax Pol’y Ctr.,
Historical Highest Marginal Income Tax Rates (Jan. 18, 2019),
https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates. The
highest marginal tax rates between 1986 and 2008 ranged from 28% to 50%.
11
See United States v. Estate of Schoenfeld, 344 F. Supp. 3d 1354, 1373 (M.D. Fla. 2018)
(finding a 50 percent willful FBAR penalty to be remedial, rather than punitive, because it
compensated the Government for the “heavy expense of investigation” and citing cases
upholding 50 percent assessments on the theory that they compensate the Government for
investigation costs).
20
31 C.F.R. § 901.9(b)(2), and it does not accrue on late payment penalties, 31 U.S.C. § 3717(f).
Interest and late payment penalties begin to accrue on the day the assessment is first mailed to the
debtor. See 31 U.S.C. § 3717(d); I.R.M. § 4.26.17.4.3 (May 5, 2008); I.R.M. § 8.11.6.2 (Sep. 27,
2018).
The interest rate in this case is 1 percent. See Rate for Use in Federal Debt Collection and
Discount and Rebate Evaluation, 77 Fed. Reg. 68886-03, 2012 WL 5561505 (Nov. 16, 2012).
Thus, the judgment will include (1) interest of $9,366.91 per year ($25.66 per day) and (2) a late
payment penalty of $56,201.46 per year ($153.98 per day).12 The late payment penalty and interest
will continue to accrue until the FBAR penalty is paid.
CONCLUSION
To summarize, the maximum civil penalty for willfully failing to file an FBAR is the
greater of $100,000 or 50 percent of the account balance at the time of the violation—in this case
$936,691. 31 U.S.C. § 5321(a)(5). This amount is proportional to the harm caused by Mr.
Garrity’s violation. The Government is also entitled to late payment penalties and interest under
31 U.S.C. § 3717. Accordingly, the Government’s motion to alter judgment (ECF No. 191) is
GRANTED and the Defendants’ motion to alter and reduce judgment (ECF No. 190) is
DENIED. The Clerk shall enter judgment for the Plaintiff in the total amount of $1,330,460.50,
consisting of the civil penalty of $936,691, interest of $56,252.78, and a late payment penalty of
$337,516.72.
The IRS assessed the FBAR penalty in this case against Mr. Garrity’s estate on February 26,
2013. (Penalty Assessment Certification, ECF No. 191-2 at 3.) The Defendants admitted that the
IRS sent a notice and demand for payment the same day. (Compl., ECF No. 1 § 28; Answer,
ECF No. 9 § 28.) As of February 28, 2019, six years and two days after notice was mailed, the
total interest due was $56,252.78 and the total late payment penalty was $337,516.72.
12
21
IT IS SO ORDERED.
/s/
Michael P. Shea, U.S.D.J.
Dated:
Hartford, Connecticut
February 28, 2019
22
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