When it comes to combatting tax evasion, the IRS has many weapons in its arsenal. One of the most potent and least discussed is the use of Nova Scotia subpoenas. While the world slowly moves towards greater financial transparency, many countries cling to bank secrecy. If a bank or other financial institution does business here, the use of a Nova Scotia subpoena may trump the secrecy laws of the bank’s home jurisdiction.
U.S. law allows the IRS and other law enforcement agencies to use the grand jury process to obtain foreign financial records even if production of those records violates the privacy laws of the country where those records are kept. Congress didn’t create this law, the courts did.
In a case called In Re Grand Jury Proceedings – Bank of Nova Scotia, a federal appeals court ruled that the information gathering powers of a criminal grand jury might supersede foreign privacy laws. The courts have identified several factors in deciding whether to enforce a so-called Nova Scotia subpoena. Those include:
- the national interests at stake,
- how much misconduct took place in each nation, and
- the nationality of the target of the subpoena,
The court ruled that generally criminal investigations outweigh bank secrecy laws. Even though some countries such as Switzerland claim bank secrecy as a national interest, the court said that such secrecy can’t be absolute if such secrecy would aid the commission of a crime.
The court also said that any hardship on the bank is a cost of doing business of doing business in foreign jurisdictions. (Note that if a bank does not do business in the United States it is likely beyond the reach of a Nova Scotia subpoena.)
The court further stated that even though the records might be located outside the United States, the location of the disclosure is the U.S. where the grand jury is located.
Americans and people doing business here have a lower expectation of privacy according to the court. That means even though a banker in the Caymans or Switzerland may have promised your account would be kept confidential, those promises have little weight if you are living or doing business here. Said the court, “The interest of American citizens in the privacy of their bank records is substantially reduced when balanced against the interests of their own government engaged in a criminal investigation.”
By the very nature of a Nova Scotia subpoena, banks and financial firms are placed in a Catch-22 situation when asked to produce records. Complying with the grand jury may require them to violate foreign law. Because of those concerns, the Department of Justice has created procedures before the IRS can obtain one.
Nova Scotia subpoenas are limited to criminal investigations. That means the subpoena request must come from the IRS’ Criminal Investigations division. The special agent needing a Nova Scotia subpoena must first request issuance from a Justice Department attorney. The request is then forwarded to the Justice Department’s Office of International Affairs (“OIA”).
The OIA is required to consider alternate means of getting the records and the importance of the investigation.
As noted earlier, Nova Scotia subpoenas are only effective if the foreign financial institution has a presence within the United States. Although the courts have allowed the IRS and other law enforcement agencies to obtain foreign bank records, the grand jury process only works if the court obtains jurisdiction over the bank. That isn’t easy without physical presence here.
Nova Scotia subpoenas are just one of many tools available to the IRS in offshore reporting cases.
What does all this mean for taxpayers? Plenty.
Many foreign countries have strict bank secrecy laws. Although those might work to prevent private parties from accessing confidential financial information, they won’t stop the IRS from gathering information from these countries if the IRS believes a crime has been committed.
Willful failure to report a foreign account and file an FBAR (Foreign Bank Account Report) is a felony. So is filing a false return (holders of foreign accounts must also report those accounts on Schedule B of their tax return. If the IRS thinks you committed a crime using offshore accounts, they can use a Nova Scotia subpoena to access the records.
The IRS tax lawyers at Mahany & Ertl represent individuals and businesses with foreign reporting concerns. We also help banks with their US compliance obligations. Have questions? Our initial consultations are free and always confidential. Need more information? Contact attorney Bethany Canfield at or by telephone at (414) 223-0464.
Mahany & Ertl – America’s Tax Lawyers