Basler Kantonalbank Enters DPA Regarding U..S. Undeclared Accounts; To Pay $60.4 Million (8/29/18)

DOJ Tax Announced here that Basler Kantonalbank ("BKB") entered a deferred prosecution agreement ("DPA") approved by the district court for SD Florida.  As part of the agreement, BKB agreed to pay "$60.4 million in total penalties."  (As noted below, the aggregate $60.4 million is broken down as follows:

Restitution to the IRS for Unpaid Tax on the Undeclared Accounts - $17.2 million

Forfeiture - $29.7 million

Fines - $13.5 million

Federal law provides for three primary types of financial penalties — fines, restitution, and special assessments — which can be imposed in addition to imprisonment or probation.86

Other key excerpts:

Basler Kantonalbank (BKB), a bank headquartered in Basel, Switzerland, entered into a deferred prosecution agreement (DPA) that was approved today by the U.S. District Court for the Southern District of Florida, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Department of Justice’s Tax Division, United States Attorney Benjamin G. Greenberg, and Chief Don Fort for Internal Revenue Service-Criminal Investigation.  As part of the agreement, Basler Kantonalbank will pay $60.4 million in total penalties.   

* * * * 

In the DPA and related court documents, BKB admits that between 2002 and 2012 it conspired with its employees, external asset managers, and clients to: 1) defraud the United States with respect to taxes; 2) commit tax evasion; and 3) file false federal tax returns.  At its peak in 2010, the bank held approximately 1,144 accounts for U.S. customers, with an aggregate value of approximately $813.2 million (many, but not all of which, were undeclared accounts that were part of the conspiracy).   According to the terms of the DPA approved today, BKB will cooperate fully, subject to applicable laws and regulations, with the United States, the Internal Revenue Service (IRS), and other U.S. authorities.  The DPA also requires BKB to affirmatively disclose certain material information it may later uncover regarding U.S.-related accounts, as well as to disclose certain information consistent with the Department’s Swiss Bank Program with respect to accounts closed between January 1, 2009, and December 31, 2017.  Under the DPA, prosecution against the bank for conspiracy will be deferred for an initial period of three years to allow BKB to demonstrate good conduct.  

The $60.4 million penalty against BKB has three parts.  First, BKB agreed to pay $17,200,000 in restitution to the IRS, which represents the unpaid taxes resulting from BKB’s participation in the conspiracy.  Second, BKB agreed to forfeit $29,700,000 to the United States, which represents gross fees (not profits) that the bank earned on its undeclared accounts between 2002 and 2012.  Finally, BKB agreed to pay a fine of $13,500,000.  This penalty amount reflects BKB’s thorough internal investigation and cooperation with the United States, as well as the bank’s extensive efforts at remediation, and its waiver of any claim of foreign sovereign immunity.  Among other remedial efforts, BKB implemented measures to require all U.S.-related accounts be tax compliant, closed a branch office responsible for much of the tax fraud and fired the employees involved in the offense, and conducted extensive outreach to former clients to encourage them to participate in IRS-sponsored voluntary disclosure programs.  

According to court documents filed as part of the DPA, BKB is a bank incorporated by the Parliament of the Basel City Canton.  From 1997 to 2014, BKB had a private-banking branch that operated from Zurich.  The bank assisted certain U.S. clients in concealing their offshore assets and income from U.S. taxing authorities.  By 2010, when BKB’s U.S.-related business was at its peak, the bank held approximately 1,144 accounts for U.S. customers, with an aggregate value of approximately $813.2 million.  Many, but not all, of these accounts were undeclared and part of the conspiracy to defraud the United States.

BKB employees met directly with clients, but the bank primarily dealt with its undeclared U.S. customers through external asset managers.  Among these external asset managers was Martin Lack.  (Lack was later charged and pleaded guilty to a tax-fraud conspiracy charge.)  In or around 2003, Lack left Swiss bank UBS AG, where he had been a Team Head on the North America desk, and brought over 20 undeclared U.S. clients to BKB.  Lack met directly with the management of the Zurich branch, including the executive who headed the branch and served on BKB’s Extended Executive Board, and discussed bringing his clients to the bank.  With the knowledge and encouragement of the leadership of BKB’s Zurich branch, Lack traveled to the United States to meet with clients with undeclared accounts.  The head of the Zurich branch was also aware that Lack had new clients sign opening forms for BKB while in the United States. In some instances, the forms falsely reported that they were signed in Zurich.  During his trips to the United States, Lack also provided clients with cash services.  He accepted cash from clients wanting to make deposits to their Swiss accounts, and used those funds to provide cash to other clients wanting to make withdrawals.  When he returned to Switzerland, Lack provided BKB with receipts for the transactions so that the clients’ accounts could be reconciled.  BKB recorded the cash transactions as having occurred in Switzerland as normal withdrawals and deposits.  The Zurich branch’s management was aware of these practices.  The bank also provided Lack with office space in Zurich for several months after Lack was released by an external asset management firm for whom he initially worked.  

In March 2008, BKB became aware that UBS was considering closing its cross-border business servicing U.S. persons.  Soon after, in May 2008, it became public that UBS’s cross-border business was under criminal investigation by U.S. authorities.  BKB’s Zurich branch saw this as a business opportunity and sought to attract clients leaving UBS.  A bank document prepared as part of the Zurich branch’s 2009 budgeting process and shared with the Executive Board describes this outlook: As “competitor banks partially withdraw from U.S. business,” BKB should “seize [U.S. customer] market opportunities immediately” as this opportunity was “not leveraged enough.”  The Bank was aware that many of the clients it sought to attract wanted to continue to conceal their accounts.  For example, in one email, BKB employees discussed how a prospective client “received a letter from UBS stating that they either have to tax their assets held with UBS . . . or that, otherwise, they would have to look for a new bank.”  The email made clear that the funds to be transferred to the Bank “were never taxed in the U.S.A.”  

To attract new clients, the Bank signed up several new external asset managers and offered them finder’s fees.  For example, in 2008 the bank reached an agreement with a Swiss financial advisor (who was later indicted in the United States for conspiring with U.S. taxpayers to defraud the United States) who brought ten clients, with over $73 million in assets to the bank from UBS and Credit Suisse AG.  Another adviser brought several U.S. clients to the bank, including a family from New York that transferred over $100 million in undeclared assets from a bank in Liechtenstein.  

During this process, BKB and the external asset managers working with the bank promoted BKB as a safe haven because it lacked a U.S. presence and supposedly would not be subject to a U.S. criminal investigation.  Between July 2008 and March 2009, BKB opened 398 new accounts for U.S. customers, with a resulting inflow of approximately $441.6 million in new assets. 

Throughout the conspiracy, BKB took a number of steps and provided a number of services to its undeclared clients.  These services included promoting Swiss bank secrecy as a means of concealing assets and income from taxation in the United States, providing hold-mail services and “assumed name” and “numbered” accounts, and allowing accounts to be established through nominee entities set up in tax-haven jurisdictions such as the British Virgin Islands, Liechtenstein, and Panama.      

In response to prosecutions brought by the Justice Department, BKB took a number of steps to gradually wind down its undeclared business.  Only in late 2011, however, following the indictment of Lack in the United States, did the bank make a decision to exit the business of servicing U.S.-domiciled clients.  Afterward, however, the bank began a thorough process of remediation and cooperation (within the bounds of Swiss law).

BKB will be put on the IRS web site titled "Foreign Financial Institutions or Facilitators," here (" meaning that participants in OVDP will have to pay a 50% penalty.  BKB was not listed as of the time of this posting but presumably will be listed in the next day or two.

My cumulative spreadsheet (which my not be complete) indicates:

US DOJ Swiss Bank Program	Number	Resolved	Total Costs
U.S. / Swiss Bank Initiative Category 1 (Criminal Inv.) *	18	8	$4,181,733,560
U.S. / Swiss Bank Initiative Category 2	87	81	$1,368,983,990
U.S. / Swiss Bank Initiative Category 3	13		$0
U.S. / Swiss Bank Initiative Category 4	8		$0
Swiss Bank Program Results	126		$5,550,717,550
* Number and Number Resolved may not be same as DOJ and IRS numbers because of how related entities were counted; the Total Costs Column should be consistent.
Recoveries from Swiss Financial and Related Institutions (per above)			$5,550,717,550
Recoveries from NonSwiss Offshore Financial and Related Institutions			$249,770,542
Recoveries from All Offshore Financial and Related Institutions			$5,800,488,092
Foreign Bank & Bank Related Other than Swiss
Bank Leumi & Related			$157,000,000
Liechtensteinische Landesbank AG			$7,525,542
Cayman National Securities Ltd.			$3,000,000
Cayman National Trust Co. Ltd.			$3,000,000
Total			$164,525,542
Sum of Swiss Bank Program and Other			$5,715,243,092

JAT Comment:

1.  A quibble.  The press release includes restitution in the general category of penalties.  Criminal restitution is seen as compensating the victim.  Nevertheless, some sentencing guidelines materials refer to restitution as a penalty.  E.g., Federal Sentencing: The Basics p. 10 (U.S. Sentencing Commission 2015), here ("Federal law provides for three primary types of financial penalties — fines, restitution, and special assessments — which can be imposed in addition to imprisonment or probation."; and Cortney E. Lollar, What Is Criminal Restitution?, 100 Iowa L. Rev. 93 (2014), here (arguing that, contrary to the authority discussed, restitution be treated as a penalty.),  Other authorities say the restitution to compensate the victim is not a penalty for some purposes, e.g., whether the jury must find restitution beyond a reasonable doubt).  See Kevin Bennardo, Restitution and the Excessive Fines Clause, 77 Louisiana Law Review 21 (2016), here.  Certainly, in a colloquial sense, most people might consider restitution a penalty, since technically it is a financial imposition that accompanies conviction for a crime.  There is a civil tax analogy over the issue of whether the Trust Fund Recovery Penalty ("TFRP") in § 6672, although called a penalty, really is a penalty for purpose of the § 6751(b) requirement for immediate supervisor written approval for a penalty since the TFRP functions, like restitution, to compensate the victim (IRS) for the unpaid trust fund taxes.  That issue has not been resolved.  E.g. Blackburn v. Commissioner, 150 T.C. ___, No. 9 (2018) (noting the issue but not resolving it); and United States v. Rozbruch, 621 Fed. Appx. 77, 2015 U.S. App. LEXIS 19223 (2d Cir. 2105)); and CCN 2018-006 (6/6/18) (IRS position not a penalty for § 6751(b)).