Haaretz Article On New DOJ Entity Prosecution Policies and Isreali Banks (12/5/18)

A couple of days ago I wrote on new DOJ entity prosecution policies announced by DAG Rod Rosenstein.  New DOJ Policies for Prosecution of Entities and the Individuals Within Them Most Responsible (Federal Tax Crimes Blog 11/30/18), here.  Following through on that item with respect to offshore banks and their principal individual actors (officers, agents and other individual partners in crime), Haaretz has this article:  Michael Rochvarger, Bad News for Israeli Bankers: The U.S. Has a New Policy on Corporate Crime (Haaretz 12/5/18), here.  In the context of foreign banks and their individual actors that means that, although corporations and other juridical entities, cannot be jailed, individuals can, particularly those who are principal actors in the scheme.  Of course, with respect to principal individual actors for foreign entities (such as Swiss and Isreali banks), effectively prosecuting the principal individual actors can be a problem, but one that is sometimes not surmountable.  For example, Raoul Weil of UBS was extradited to the U.S. and tried, albeit with acquittal.  See On Foreign Enabler Indictments, Sealed Indictments and INTERPOL Red Alerts (Federal Tax Crimes Blog 6/29/16), here.  And, as I noted yesterday, principal individual actors for entities involved with the Panama Papers fiasco were indicted and extradited to the U.S.  Enablers and Taxpayer Related to Panama Papers Disclosures Indicted (Federal Tax Crimes Blog 11/5/18), here.

Here are some excerpts from the Haaretz article (bold-face supplied by JAT):

The main message Rosenstein relayed was that agreements would be difficult to reach unless the executives involved are required to personally pay fines and even be forced to resign if they are still in their jobs. 

“It is important to impose penalties on corporations that engage in misconduct. Cases against corporate entities allow us to recover fraudulent proceeds, reimburse victims, and deter future wrongdoing,” he said 

But Rosenstein went on to say: “The most effective deterrent to corporate criminal misconduct is identifying and punishing the people who committed the crimes. So we revised our policy to make clear that absent extrao rdinary circumstances, a corporate resolution should not protect individuals from criminal liability. 

Our revised policy also makes clear that any company seeking cooperation credit in criminal cases must identify every individual who was substantially involved in or responsible for the criminal conduct.” 

Among Israeli bankers, the new policy is most relevant to Eldad Fresher, the CEO of Mizrahi since 2013. Before and during the year the alleged tax violations occurred, he was chairman of the bank’s Swiss unit and head of its financial division, responsible for international activities. Dan Lubasch, Mizrahi Switzerland’s CEO since 2011, may also be affected. 

Most of the senior Hapoalim executives connected with the alleged affair have left the bank, but a number of middle managers who remained now find themselves in the Justice Department’s crosshairs. 

Of the three Israeli banks that have been investigated, only Bank Leumi has settled — agreeing to pay a $400 million penalty four years ago. That, however, may not be a good barometer for what Hapoalim will have to pay, on top of the threat that individual executives will also face penalties. 

In August, the Justice Department offered Mizrahi — Israel’s third-largest bank, but much smaller than Leumi and Hapoalim — a settlement that included a $342 million fine. 

Mizrahi rejected it, but also opted to set aside another $116.5 million in its second-quarter financial report, in expectation of a future penalty. Until then, its provisions had amounted to just $162 million. Meantime, the two sides are negotiating. 

At Hapoalim, the provisions connected with the probe have reached $365 million, with total costs, including legal fees, of 2 billion shekels ($540 million). It’s not clear when the bank will settle with U.S. authorities.

New DOJ Policies for Prosecution of Entities and the Individuals Within Them Most Responsible (11/30/18)

Deputy Attorney General Rod Rosenstein announced yesterday important changes to Government policy on prosecuting corporations and individuals yesterday at a conference on the FCPA.  See DOJ announcement here.  I include below the key excerpts (lengthy) explaining the policy:

Under our revised policy, pursuing individuals responsible for wrongdoing will be a top priority in every corporate investigation. 

It is important to impose penalties on corporations that engage in misconduct. Cases against corporate entities allow us to recover fraudulent proceeds, reimburse victims, and deter future wrongdoing. Corporate-level resolutions also allow us to reward effective compliance programs and penalize companies that condone or ignore wrongdoing. 

But the deterrent impact on the individual people responsible for wrongdoing is sometimes attenuated in corporate prosecutions. Corporate cases often penalize innocent employees and shareholders without effectively punishing the human beings responsible for making corrupt decisions.  

The most effective deterrent to corporate criminal misconduct is identifying and punishing the people who committed the crimes.  So we revised our policy to make clear that absent extraordinary circumstances, a corporate resolution should not protect individuals from criminal liability. 

Our revised policy also makes clear that any company seeking cooperation credit in criminal cases must identify every individual who was substantially involved in or responsible for the criminal conduct.  

In response to concerns raised about the inefficiency of requiring companies to identify every employee involved regardless of relative culpability, however, we now make clear that investigations should not be delayed merely to collect information about individuals whose involvement was not substantial, and who are not likely to be prosecuted. 

We want to focus on the individuals who play significant roles in setting a company on a course of criminal conduct.  We want to know who authorized the misconduct, and what they knew about it. 

The notion that companies should be required to locate and report to the government every person involved in alleged misconduct in any way, regardless of their role, may sound reasonable. In fact, my own initial reaction was that it seemed like a great idea. But consider cases in which the government alleges that routine activities of many employees of a large corporation were part of an illegal scheme. 

When the government alleges violations that involved activities throughout the company over a long period of time, it is not practical to require the company to identify every employee who played any role in the conduct. That is particularly challenging when the company and the government want to resolve the matter even though they disagree about the scope of the misconduct. In fact, we learned that the policy was not strictly enforced in some cases because it would have impeded resolutions and wasted resources. Our policies need to work in the real world of limited investigative resources. 

Companies that want to cooperate in exchange for credit are encouraged to have full and frank discussions with prosecutors about how to gather the relevant facts.  If we find that a company is not operating in good faith to identify individuals who were substantially involved in or responsible for wrongdoing, we will not award any cooperation credit.  

Prosecuting Corporate Employees and Officers, with Focus on Swiss Banks (1/15/16)

I have previously blogged on Professor Brandon Garrett (UVA Law) who have carved out an academic niche on how the Government deals with corporate crime, particularly large corporate crime (the too big to jail group).  See e.g., Judge Jed Rakoff Reviews Brandon Garrett's Book on Too Big to Jail: How Prosecutors Compromise with Corporations (Federal Tax Crimes Blog 2/10/15), here.  At the risk of oversimplifying his arguments, I summarize them in part relevant to this blog entry:  When the Government goes after corporate misconduct, it too often focuses only on the corporation in terms of criminal sanctions and not the individuals, particularly those higher up the chain, who committed the underlying conduct.  Corporations cannot go to jail; individuals can. Prosecuting and convicting individuals in addition to corporations could, he thinks, provide more front-end incentive for individuals to forego illegal conduct within the corporations.  However, as fans of tax crimes know at least anecdotally, it is hard to convict higher level corporate officers for conduct that their underlings actually commit.  The poster child example is the acquittal of Raoul Weil, a high-level UBS banker who "remoted" himself from the dirty work of actually servicing U.S. taxpayers seeking to evade U.S. tax.  See e.g., Raoul Weil Found Not Guilty (Federal Tax Crimes 11/3/14; 11/6/14), here.

One might turn a common phrase and say that lifeless, breathless, unthinking, unfeeling corporations do not commit crimes; people do.  Still in our jurisprudence, corporations can commit crimes.  They just can't be jailed.  To the extent that actual incarceration incentivizes people to avoid misconduct, people should be jailed.  In September of 2015, DOJ announced a new policy of more aggressively pursuing people for misconduct in corporations.  See the DAG memo here and my blog entry, New DOJ Policy on Prosecuting Individuals Beyond Corporate Crime (Federal Tax Crimes Blog 9/10/15), here.

Professor Garrett has a new article that updates in summary fashion his research.  The Year Banks Finally Paid (Slate 1/13/16), here.  The following are excerpts:

Nevertheless, we need to keep asking whether this strategy of chasing dollars rather than changing practices and prosecuting executives makes any sense. In the past decade, data I have collected show that federal prosecutors have set new records each year in corporate fines. For all their success and zeal, however, it’s not clear that fines alone are stopping bad actors on Wall Street. 

* * * * 

A remarkable number of banks, 80 of them, finalized cases with federal prosecutors. Most were Swiss banks that settled out of court as part of a DOJ Tax Division program designed to incentivize them to come clean or face the music. Next year we will see still more cases with less-cooperative Swiss banks that won’t get such lenient deals. More mammoth bank cases lumber along in the courts; last spring, several major banks, including Wall Street giants JPMorgan Chase and Citicorp, agreed to plead guilty in cases relating to foreign-exchange currency manipulation. Those cases have not resulted in sentencing yet, but when they do, prosecutors will rake in $5 billion more in fines. 

* * * * 

Banks pay the fines, but bankers don’t usually do any time. I have found that among the 66 cases of financial institutions that received deferred or nonprosecution agreements from federal prosecutors from 2001 to 2014, only 23 of them—33 percent—had any employees prosecuted. 

Now, I don't have Professor Garrett's expertise and have not spent enough time on his marvelous web site at UVA Law, here, but I thought I would add some thoughts from my even narrower niche of the universe in which he teaches -- the offshore account and enabler activities.

New DOJ Policy on Prosecuting Individuals Beyond Corporate Crime (9/10/15)

DOJ has announced new policies that, in the words of an NYT article, "prioritize the prosecution of individual employees — not just their companies — and put pressure on corporations to turn over evidence against their executives." Matt Apuzzo and Ben Protessept, Justice Department Sets Sights on Wall Street Executives (NYT 9/9/15), here.  The policies are state in a Memorandum by Sally Quillian Yates to DOJ Officers about the new policy, here.  DAG Yates discussed the policy in remarks at NYU, here.

The key seems to be to deter corporate misbehavior by getting to the people in charge who can be sent to prison.  The corporation itself cannot be sent to prison, but can only pay fines and take other remedial actions.  And, the corporation -- a lifeless breathless legal fiction -- does not commit crimes; rather its officers, employees and agents do.

Among the key points is to focus on individuals early in the investigation so that appropriate cases can be built against culpable individuals.  And, the corporation can mitigate its damages by cooperating in its own investigation as well as the investigations of the overall culpability.  The NYT article quotes Ms. Yates as saying: "We mean it when we say, ‘You have got to cough up the individuals.’"

Of course, those who remember the tax shelter prosecutions in the Southern District of New York after the turn of the 2000s will recall that pressure was placed on the entities -- most significantly KPMG -- to cough up individuals.  Some fairly high individuals were coughed up.

It is not clear precisely what this will mean in the real world of white collar crimes involving corporations.  The devil will be in the implementation.

Another good quote:  "We’re not going to be accepting a company’s cooperation when they just offer up the vice president in charge of going to jail.”

As an example of what DOJ wants to avoid, the NYT article says:

A criminal case last year against BNP Paribas, France’s biggest bank, demonstrated the gap between charging a bank and its employees. Even as officials extracted a record $8.9 billion penalty and made the company one of the first giant banks to plead guilty to a crime, no BNP employees faced charges. The Justice Department said the bank insulated its employees by withholding records until after a deadline had passed to file individual charges.

* * * * 

Still, even if the Justice Department’s effort succeeds, it will not automatically put more executives behind bars. Mr. Garrett, the University of Virginia law professor, analyzed the cases in which corporate employees had been charged.

More than half, he said, were spared jail time.

Swiss Banks, Federal Principles of Prosecutions of Business Organizations, and the U.S. Swiss Agreement (12/21/13)

A substantial amount of discussion has been generated in comments to earlier blog entries about the U.S. Swiss program for Swiss Banks.  I thought I would flesh out a point implicit in the blog entries I have already made and replies to some of the comments.  As I noted in an earlier blog, Category 2 under the program is designed for banks that might be at risk of criminal prosecution.  The particular language requires that the Swiss Bank have "reason to believe it may have committed tax-related offenses under Titles 18 or 26, United States Code, or monetary transactions offenses under §§ 5314 or 5322, Title 31, United States Code, in connection with undeclared U.S. Related Accounts held by the Swiss Bank during the Applicable Period."  The Applicable Period is defined as "the period between August 1, 2008, and either (a) the later of December 31, 2014, or the effective date of an FFI Agreement, or (b) the date of the Non-Prosecution Agreement or Non-Target Letter, if that date is earlier than December 31, 2014, inclusive." 

So the start of the period is the date that the world -- including all Swiss banks and their bankers in particular -- was on notice that the U.S. would no longer slumber while Swiss banks, in consort with U.S. taxpayers, raided the U.S. Treasury in stealth.  The corporate management of the banks at risk and the individual bankers knew that a tiger was awakened, but they thought, deluded themselves, and made sales pitches on the notion that, since they did not pitch and implement their services except on Swiss soil, they had a pass from U.S. criminal prosecution and could keep the U.S. depositors' information secret.  Buying that pitch was why many -- probably most -- U.S.  depositors opened secret Swiss bank accounts after August 1, 2008.  All players were intentionally complicit -- or, at best, willfully ignorant -- in such activity

Swiss banks fall into Category 2 only if they are at risk of criminal prosecution under the U.S. guidelines for criminal prosecution of organizations.  I discuss those guidelines below, but I want to say here that those guidelines do not contemplate prosecution for isolated rogue actions of officers, agents or employees.  The actions have to be sufficiently broad and significant so that they can be imputed to the organization (here the bank):.  In other words, the mere secret, relatively isolated pitching and implementation of secret Swiss accounts by one or two or three bank  officers while the other bank officers were careful to making such pitches or implementations would not be sufficient for the bank to be prosecuted.  In determining that they are at risk under Category 2, all of the banks were well counseled by top U.S. lawyers and must have determined that the actions went beyond the isolated and were sufficiently pervasive that the banks could be prosecuted under these guidelines.  Keep in mind that Category 2 applies only if the bank committed the potentially illegal conduct, not if some employee or agent committed the conduct (unless it is pervasive to be imputed to the organization).

So, let's look at the federal guidelines for prosecuting organizations.  These are set forth in the U.S. Attorneys Manual ("USAM") in Title 9, Chapter 9-28.000, titled Principles of Federal Prosecution of Business Organizations, here.  This subject is a big one and nuanced.  I cannot get into all of the nuances here, but will focus on only the one that seems to stand out in the Swiss bank situation.  For generally reading on the subject, however, see Brandon L. Garrett, Globalized Corporate Prosecutions, 97 Va. L. Rev. 1775 (2011), SSRN version here, (discussing inter alia the DPA of UBS); and Lucian E. Dervan, Reevaluating Corporate Criminal Liability: The DOJ's Internal Moral-Culpability Standard for Corporate Criminal Liability, 41 Stetson L. Rev. 7 (2011) (stating that the DOJ's guidelines below incorporate a concept of moral culpability on the part of the organization).

The following are excerpts from the USAM provisions cited above.

9-28.200 General Considerations of Corporate Liability 

* * * * 

Corporations are "legal persons," capable of suing and being sued, and capable of  committing: crimes. Under the doctrine of respondeat superior, a corporation may be held criminally liable for the illegal acts of its directors, officers, employees, and agents. To hold a corporation liable for these actions, the government must establish that the corporate agent's actions (i) were within the scope of his duties and (ii) were intended, at least in part, to benefit the corporation. In all cases involving wrongdoing by corporate agents, prosecutors should not limit their focus solely to individuals or the corporation, but should consider both as potential targets.  

Agents may act for mixed reasons—both for self-aggrandizement (both direct and indirect) and for the benefit of the corporation, and a corporation may be held liable as long as one motivation of its agent is to benefit the corporation. See United States v. Potter, 463 F.3d 9, 25 (1st Cir. 2006) (stating that the test to determine whether an agent is acting within the scope of employment is "whether the agent is performing acts of the kind which he is authorized to perform, and those acts are motivated, at least in part, by an intent to benefit the corporation."). 

In United States v. Automated Medical Laboratories, Inc., 110 F.2d 399 (4th Cir. 1985), for example, the Fourth Circuit affirmed a corporation's conviction for the actions of a subsidiary's employee despite the corporation's claim that the employee was acting for his own benefit, namely his "ambitious nature and his desire to ascend the corporate ladder." Id. at 407. The court stated, "Partucci was clearly acting in part to benefit AML since his advancement within the corporation depended on AML's well-being and its lack of difficulties with the FDA." Id.; see also United States v. Cincotta, 689 F.2d 238, 241-42 (1st Cir. 1982) (upholding a corporation's conviction, notwithstanding the substantial personal benefit reaped by its miscreant agents, because the fraudulent scheme required money to pass through the corporation's treasury and the fraudulently obtained goods were resold to the corporation's customers in the corporation's name).  

Moreover, the corporation need not even necessarily profit from its agent's actions for it to be held liable. In Automated Medical Laboratories, the Fourth Circuit stated:  

[B]enefit is not a "touchstone of criminal corporate liability; benefit at best is an evidential, not an operative, fact." Thus, whether the agent's actions ultimately redounded to the benefit of the corporation is less significant than whether the agent acted with the intent to benefit the corporation. The basic purpose of requiring that an agent have acted with the intent to benefit the corporation, however, is to insulate the corporation from criminal liability for actions of its agents which may be inimical to the interests of the corporation or which may have been undertaken solely to advance the interests of that agent or of a party other than the corporation. 

770 F.2d at 407 (internal citation omitted) (quoting Old Monastery Co. v. United States, 147 F.2d 905, 908 (4th Cir. 1945)).  

9-28.300 Factors to Be Considered  

A. General Principle: Generally, prosecutors apply the same factors in determining whether to charge a corporation as they do with respect to individuals. See US AM § 9-27.220, et seq. Thus, the prosecutor must weigh all of the factors normally considered in the sound exercise of prosecutorial judgment: the sufficiency of the evidence; the likelihood of success at trial; the probable deterrent, rehabilitative, and other consequences of conviction; and the adequacy of noncriminal approaches. See id. However, due to the nature of the corporate "person," some additional factors are present. In conducting an investigation, determining whether to bring charges, and negotiating plea or other agreements, prosecutors should consider the following factors in reaching a decision as to the proper treatment of a corporate target:  

1. the nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime (see infra section IV);  

2. the pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management (see infra section V);  

3. the corporation's history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it (see infra section VI);  

4. the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents (see infra section VII);  

5. the existence and effectiveness of the corporation's pre-existing compliance program (see infra section VIII);  

6. the corporation's remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies (see infra section IX);  

7. collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution (see infra section X);  

8. the adequacy of the prosecution of individuals responsible for the corporation's malfeasance; and  

9. the adequacy of remedies such as civil or regulatory enforcement actions (see infra section XI).  

* * * * 

9-28.500 Pervasiveness of Wrongdoing Within the Corporation  

A. General Principle: A corporation can only act through natural persons, and it is therefore held responsible for the acts of such persons fairly attributable to it. Charging a corporation for even minor misconduct may be appropriate where the wrongdoing was pervasive and was undertaken by a large number of employees, or by all the employees in a particular role within the corporation, or was condoned by upper management. On the other hand, it may not be appropriate to impose liability upon a corporation, particularly one with a robust compliance program in place, under a strict respondeat superior theory for the single isolated act of a rogue employee. There is, of course, a wide spectrum between these two extremes, and a prosecutor should exercise sound discretion in evaluating the pervasiveness of wrongdoing within a corporation.  

B. Comment: Of these factors, the most important is the role and conduct of management. Although acts of even low-level employees may result in criminal liability, a corporation is directed by its management and management is responsible for a corporate culture in which criminal conduct is either discouraged or tacitly encouraged. As stated in commentary to the Sentencing Guidelines:  

Pervasiveness [is] case specific and [will] depend on the number, and degree of responsibility, of individuals [with] substantial authority .. . who participated in, condoned, or were willfully ignorant of the offense. Fewer individuals need to be involved for a finding of pervasiveness if those individuals exercised a relatively high degree of authority. Pervasiveness can occur either within an organization as a whole or within a unit of an organization.  

USSG § 8C2.5, cmt. (n. 4). 

There are more of these guidelines that are potentially relevant to the situations of the Swiss banks within the scope of the U.S. Swiss agreement -- relating only to the opening of new secret accounts after 8/1/08 after they surely knew or willfully ignored that there was a problem with this type of behavior.  But, it seems to me these are the key ones.

Now, the foregoing, I think, is particularly relevant to the banks that, with the counsel of sophisticated U.S. criminal tax lawyers, are self-identifying themselves as Category 2.

It is also relevant to the banks that are Category 1 banks -- those already being criminally investigated.  Those principles will apply.  I don't know how DOJ Tax picked those banks as targets of investigations, but my sense from dealing in this area and with the prosecutors and IRS agents on some of the investigations is that the banks generally are the ones where it had a lot of indications of pervasive misbehavior -- developed from the OVDI/OVDP program, from whistleblowers and from other sources.  The ones with the most indicators of problems got the earliest and longest attention.  And, of course, the multitude of indicators would suggest the pervasiveness required to make the banks targets under these guidelines.

Let me say finally that I am not excusing U.S. taxpayers who joined Swiss bankers in the complicity (what we call here a conspiracy).  A number of those have been prosecuted.  A number have been able to resolve their past misbehavior civilly under the IRS's voluntary disclosure program, and its foreign bank-specific iteration, OVDI/OVDP.  That process is now playing out for Swiss Banks.  Some will be prosecuted.  Some will resolve their problems in a way that requires only public embarrassment and a significant penalty.