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 

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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.