United States v. Kelly: Conduct that Appears “Willful” Under the Bank Secrecy Act (BSA) and Can Lead to High Penalties

United States v. Kelly, __ F. 4th__ (6th Cir. 2024): Conduct that Appears “Willful” Under the Bank Secrecy Act (BSA) and Can Lead to High Penalties (or, just because you participate in an IRS amnesty program and hire an account manager, that’s not necessarily going to make your problems go away).

The question of a defendant’s mental state is hugely important when assessing culpability under the Bank Secrecy Act (BSA). Huge financial penalties and possible criminal liability are dependent on it.

This recent case from the 6th Circuit Court of Appeals revolves around Kelly’s failure to file a Report of Foreign Bank and Financial Accounts (FBAR). The court ruled that a “willful” violation of FBAR reporting requirements includes both knowing and reckless violations. The district court found that Kelly’s failure to file the FBAR was willful, based on evidence that he attempted to conceal his foreign bank account and did not disclose it to U.S. authorities until he threatened by the bank. The court of appeals affirmed the district court’s summary judgment in favor of the United States. Here is what happened:

Kelly opened an account with Finter Bank in Zurich, Switzerland in 2008. He designated the account as “numbered” to conceal his identity and requested that the bank retain all correspondence. Kelly was informed by the bank of his obligation to disclose the account to the IRS but chose to divest from U.S. securities instead. Kelly never sought advice about his reporting obligations or tax implications but did inquire about the bank’s response to IRS requests. Finter Bank subsequently closed and reopened Kelly’s account, designating it as “Mandatory High Risk” and blocking transactions. It warned Kelly that it would disclose his account to U.S. authorities if he did not provide proof of compliance with U.S. tax laws.

While he had the bank account in Switzerland, Kelly requested to participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP) in 2014, admitting that he was aware of his FBAR reporting obligations. The Treasury Department initially accepted Kelly’s disclosure but required him to make truthful disclosures and cooperate with the IRS. During all this, he closed his Finter account and transferred the funds to Bank Alpinum in Liechtenstein. Kelly failed to file FBARs for 2014 and 2015 and did not disclose his Bank Alpinum account to the IRS. The IRS subsequently removed Kelly from the OVDP for noncompliance and began investigating his compliance with FBAR requirements. The IRS determined that Kelly willfully failed to file FBARs and proposed penalties totaling $769,126.

The key issue here was whether Kelly’s conduct was “willful” or not. If willful, then the government can seek up to $250,000 in penalties and 5 years in prison so much depends on this finding. Here, the Court determined that for civil BSA violations, “willful” encompasses both knowing and reckless conduct and that, at the very least, Kelly’s conduct was reckless even though he participated in the OVDP and his decision to, at one point, engage a Swiss account manager. The Court held the Government can establish a willful violation of FBAR reporting requirements by proving that the defendant (1) clearly ought to have known that (2) there was a grave risk that accurate FBAR was not being filed and if ((3) he was in a position to find out for certain very easily. 31 U.S.C.A. §5321(a)(5)(C)-(D). The court also pointed out that Kelly’s efforts to conceal his foreign assets from U.S. authorities demonstrate more than mere negligence. So, important point here—a half-hearted attempt to comply with the IRS’s amnesty program or the mere retaining of an account manager is not going to preclude a finding of willfulness. The obligation is robust for the taxpayer who keeps assets abroad to properly file the required FBAR disclosures.