The Long Arm of FBAR Enforcement and Collection by STEVEN TOSCHER, SANDRA BROWN and GARY MARKARIAN
Posted by Hochman Salkin Toscher Perez P.C. 
Posted on Monday, July 12, 2021
Background
Last year, our partner, Robert Horwitz, blogged about United States v. Schwarzbaum[1], and detailed Mr. Schwarzbaum’s willful failure to file FBARs for his Swiss and Costa Rican offshore bank accounts.[2] The Court in that case entered a judgment against Mr. Schwarzbaum of approximately $15.8 million in FBAR penalties, interest, and late-payment penalties. This blog now turns to subsequent proceedings- the effort to collect those penalties from someone who resides outside the United States. We are moving into uncharted waters.
After the Court entered the judgment, Mr. Schwarzbaum sold his Florida residence and moved to Switzerland, or in the words of the government, gave “up on the United States”. Asserting that Mr. Schwarzbaum has de minimis assets remaining in the United States and that he had failed to satisfy the judgment prior to leaving, the government, believing that he has over $49 million deposited in Swiss bank accounts, has taken formal steps to repatriate those foreign assets in collection of Mr. Schwarzbaum’s outstanding FBAR judgment.
Motion to Repatriate Foreign Assets
On June 3, 2021, we saw a new development in the Schwarzbaum case when the U.S. government filed a post-judgment Motion to Repatriate Foreign Assets, specifically, Mr. Schwarzbaum’s Swiss bank accounts.
In its motion, the government referenced the District Court’s “inherent authority to ensure that prevailing parties can enforce money judgements in their favor,” citing Pfizer, Inc. v. Uprichard.[3]
The government also cited to the Federal Debt Collection Procedures Act (“FDCPA”)[4] and the All Writs Act,[5] stating that “the Court can issue a writ or other order requiring Schwarzbaum to bring sufficient assets back onshore to satisfy the judgment.” The government argued that the FDCPA and All Writs Act grants the court “the power to order judgment debtors to repatriate foreign assets … where a judgment debtor maintains large amounts of money or assets abroad and has insufficient money or assets within the United States to satisfy the judgment.” Additionally, the government noted that although many repatriation orders are connected with income tax enforcement and this case involved an FBAR penalty, which is found under Title 31 of the U.S.C., that shouldn’t be a limiting factor in the court’s powers to enforce the judgment like a tax. The judgment sought in this case represents a remedial civil penalty, and thus, the government asserted, this situation is really “a distinction without a difference.”
Mr. Schwarzbaum’s judgment debt, as of as of May 31, 2021, already exceeds $16.5 million. Nonetheless, the government in this post-judgment proceeding is also pursuing a surcharge of 10% of the debt owed for a total repatriation of $18,227,465.89, plus any penalties and interest continuing to accrue.
On June 17, 2021, Mr. Schwarzbaum, through counsel, responded to the United States’ Motion to Repatriate Foreign Assets. The response argued that (1) the government’s motion is a disguised attempt to compel Mr. Schwarzbaum to post an appeal bond and frustrate his appeal; (2 the majority of Mr. Schwarzbaum’ liquid assets were always kept outside of the United States and therefore Mr. Schwarzbaum could not repatriate funds which never left Switzerland to begin with; and (3) repatriation orders are reserved for tax liabilities or disgorgement of ill-gotten gains – neither of which is applicable here. Mr. Schwarzbaum’s response asked the Court to deny or abate the government’s claim pending the results of Mr. Schwarzbaum’s appeal.
On June 24, 2021, the United States submitted its reply to Mr. Schwarzbaum’s response. The government’s introduction stated “Defendant Isac Schwarzbaum’s response can be distilled to ‘I don’t want to pay the judgment, and no one can make me.” The government argued that (1) Mr. Schwarzbaum can pay the judgment voluntarily, post a bond, or face forced collection, but that none of these options will frustrate his appeal because “if he prevails, the Government will return the money collected to the extent required by the appellate decision.”; (2) repatriation can be applied to funds that were not previously in the United States as in United States v. McNulty, 446 F. Supp. 90, 92 (N.D. Cal. 1978); and (3) repatriation orders are not reserved solely for tax liabilities or disgorgement cases. The government also offered to call their requested relief “’bringing in’ foreign assets instead of ‘repatriating’ them” if it would appease Mr. Schwarzbaum. The government’s conclusion told the court that Mr. Schwarzbaum “is snubbing the judicial process and this Court’s authority” and requested he be ordered to repatriate assets sufficient to pay the judgment.
On June 30, 2021, United States Magistrate Judge Bruce Reinhart filed his Report and Recommendation on the government’s repatriation motion and recommended that the government’s motion be granted, and that Mr. Schwarzbaum be ordered to repatriate $18,227,465.89 in addition to any additional interest.
The Government’s Post-Judgment Collection Efforts
Presuming the government prevails in obtaining the relief sought, here is a summary of just a few civil remedies the United States might be considering in its efforts to collect from Mr. Schwarzbaum.
Writ of Ne Exeat Republica
If Mr. Schwarzbaum were to return to the United States, the government could pursue a writ of ne exeat republica. Awrit of ne exeat republica (Latin for “let him not leave the republic”) is a writ issued by a court to restrain a person from leaving the jurisdiction of the court until the person has complied with a court order. If Mr. Schwarzbaum was in the United States, the writ would restrain him from leaving the country until he has fully paid his outstanding liabilities.
We saw the government use this tool in 2010 in United States v. Barrett, when Mr. and Mrs. Barrett, who owed the IRS $326,421, left the United States and moved to Ecuador rather than pay their outstanding liability.[6] The government sought and was granted a writ of ne exeat republica. In 2013, when the Barretts decided to attend their daughter’s wedding in the United States, they were greeted by U.S. Marshals, detained, ordered to turn over their passports, and remain in the country. The writ would not be discharged – meaning the Barretts would be unable to leave the U.S. — unless they paid over $16,000 the IRS knew they had in Ecuador.
However, absent Mr. Schwarzbaum’s presence in the United States, this writ would be ineffective.
Civil Contempt
A U.S. District Court has inherent authority to hold someone in civil contempt for failing to comply with a court order.[7] An aggrieved party, e.g., in this case, the government, may file a motion for civil contempt of court when the other party to the case disobeys a court order. The remedy for civil contempt can include incarceration, in an effort to coerce the disobedient party to do that which the court has ordered him or her to do.
However, a finding of civil contempt would only be effective if Mr. Schwarzbaum were in the United States since a finding of civil contempt is not a criminal offense. It is, therefore, not an extraditable offense under the United States’ extradition treaty with Switzerland.[8]
U.S. Request for Recognition and Enforcement in Switzerland
The U.S. government may also try to seek Switzerland’s assistance to enforce the judgment in this situation.
Enforcement proceedings in Switzerland are subject to the Swiss Debt Collection and Bankruptcy Act (DCBA) and the recognition and enforcement of a U.S. judgment is governed by the Swiss Private International Law Act (PILA).
Under these laws, a creditor who seeks recognition and enforcement of a U.S. judgment against a debtor’s assets in Switzerland must first secure its claim by attaching the debtor’s assets. The attachment proceedings enable the creditor to freeze the debtor’s Swiss assets. To attach the debtor’s assets, the creditor must make a prima facie showing that (1) he or she has a claim against the debtor; (2) one of the statutory grounds for attachment is met; and (3) the debtor has assets in Switzerland.[9] The DCBA provides a list of statutory grounds for attachment. Relevant to this discussion is Article 272 (1) (6) of the DCBA, which states that to qualify as a ground for attachment, the judgment must be enforceable in the country where it was issued.
In the present matter, the U.S. government would need to show that: (1) it has a claim against Mr. Schwarzbaum; (2) the judgment is enforceable in the United States; and (3) the debtor has assets in specified Swiss bank accounts.
If the request for attachment is granted, the Debt Collection Office of the Canton where the assets are located will execute the attachment and freeze the debtor’s property. The debtor will then be informed of the execution and have the right to file an objection. If the Swiss court confirms the attachment, the creditor must then initiate enforcement proceedings within 10 days.
Enforcement proceedings require the creditor show (1) the foreign country had jurisdiction; (2) the decision is final; and (3) there are no grounds for denial as provided in Article 27 of the PILA.[10] Grounds for denial include (1) the debtor did not receive proper service of process;[11] (2) the debtor was not duly notified and given an opportunity to present its defense before the foreign country’s courts;[12] or (3) public policy arguments where the debtor must show a great injustice which reaches the level of being intolerable.[13]
The U.S. government must ensure there are no grounds for denial per Article 27 of PILA and this is where they are likely to run into trouble. It appears that the government will satisfy the requirements for service of process and an opportunity to present a defense before a court in the U.S, but there would appear to be strong public policy arguments against enforcement that would be attractive to a Swiss Court.
The 50% FBAR penalty has punitive elements and reaches the level of being intolerable. Swiss courts have refused to enforce judgments with excessive punitive damages intended to punish an individual for their actions or deter the party from repeating the same behavior and have reasoned that punitive damages must be in reasonable relation to the damage or loss actually suffered.[14]
Additionally, a Swiss Court would also consider whether enforcement violated the so-called Revenue Rule. Although the present matter is an FBAR case, the Swiss Court may liken it to a tax case and apply the principals of the “Revenue Rule.”[15] The Revenue Rule is the rule that prevents revenue authorities of one country from initiating a legal proceeding to claim or enforce its revenue in another country.
Conclusion
We’ll have to wait and see what happens next in the matter of United States v. Schwarzbaum, but one message is clear from the government’s latest motion: The U.S. government is looking to not only continue its FBAR enforcement and that its reach for foreign assets to satisfy FBAR penalty debts continues to expand.
Steven Toscher is a Principal at Hochman Salkin Toscher Perez P.C., and specializes in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies, and tax litigation.
Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C., and former Acting United States Attorney, First Assistant United States Attorney, and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal). Ms. Brown specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court.
Gary Markarian is an Associate Attorney at Hochman Salkin Toscher Perez P.C., and a graduate of the joint JD/LL.M. Taxation program at Loyola Law School, Los Angeles. While in law school, Mr. Markarian served as an intern at the Tax Division of the U.S. Attorney’s Office (C.D. Cal) and Internal Revenue Service Office of Chief Counsel’s Large Business and International Division.
[1] United States v. Schwarzbaum, No. 18-CV-81147, 2020 WL 1316232 (S.D. Fla. Mar. 20, 2020), appeal dismissed (Nov. 25, 2020)
[2] See Robert S. Horwitz, “It Still Lives!! Recent Opinions in Two Willful FBAR Penalty Cases” June 1, 2020 https://taxlitigator.me/2020/06/01/it-still-lives-recent-opinions-in-two-willful-fbar-penalty-cases-by-robert-s-horwitz/
[3] Pfizer, Inc. v. Uprichard, 422 F.3d 124, 131 (3d Cir. 2005).
[4] 28 U.S.C. §§ 3001–3308,
[5] 28 U.S.C. § 1651(a)
[6] United States v. Barrett, Case No. 10-cv-02130 (D. Colo. Aug. 13, 2013).
[7] 28 U.S.C. § 636
[8] See Extradition Treaty Between the Government of the United States of America and The Government of the Swiss Confederation, Article 2 (An offense must be criminal to be an extraditable offense). https://www.congress.gov/104/cdoc/tdoc9/CDOC-104tdoc9.pdf
[9] Article 271 (1) DCBA
[10] Article 25 PILA
[11] Article 27(2)(a) PILA
[12] Id.
[13] Article 27(1) PILA
[14] Martin Bernet & Nicolas C. Ulmer, Recognition and Enforcement of Foreign Civil Judgments in Switzerland, 27 Int’l Law. 317, 328 (1993).
[15] Pasquantino v. United States, 125 S. Ct. 1766, 1768, 161 L. Ed. 2d 619 (2005) (The revenue rule “prohibited the collection of tax obligations of foreign nations.”)
