Tuesday, January 7, 2014

Prosecuting the Banks: Does the U.S. Prefer Foreign Banks to U.S. Banks? (1/4/14)

There have been some commenters on this blog who complain about the Government's mistreatment of Swiss banks, all the while American banks are not prosecuted.

Today's news reports that JP Morgan Chase -- a very big and powerful U.S. bank -- has agreed to a deferred prosecution agreement and penalties of $1.7 billion with more to come from a civil case by regulators.  Ben Protess and Jessica Silver-Greenberg, JPMorgan Settles With Federal Authorities in Madoff Case (NYT DealBook 1/7/14), here.

The circumstances are not the same, of course, because the conduct which led to this agreement involved U.S. players, including JP Morgan Chase, and the conduct or nonconduct occurred in the U.S.  But it does establish some key points:

1.  The mighty banks in the U.S. are at risk.  The DealBook article also notes
In November, JPMorgan paid a record $13 billion to the Justice Department and other authorities over its sale of questionable mortgage securities in the lead-up to the financial crisis.
2.  JP Morgan takes the hit in these cases because, at a minimum, it did not smell the rat that was waived before its nose.

In addition, in the fraudulent tax shelter boom times in the late, for some reason it was the foreign banks who were the prominent enablers of the fraudulent / bullshit shelters.  Some of those foreign banks were similarly prosecuted.  See Another Chapter Closes in the Tax Shelter Wars - Deutsche Bank Admits Crimes and Takes $553,633,153 Hit (Federal Tax Crimes Blog 11/22/10), here, and HVB Cops Plea in KPMG Tax Shelter Fraud (Tax Prof Blog 2/15/06), here.  See also Dutch Bank Funded U.S. Tax Shelters: Rabobank Supplied Cash for Structures Under Investigation (WSJ 5/2/13), here.  (I think the supplied cash is a bit of an overstatement; usually they supplied bookkeeping entries only.)

Why is it that foreign banks -- not just Swiss banks -- imagine that they are entitled to enable U.S. tax evasion with impunity?  Why do they complain when they are called on the carpet for doing so?

I think it is for the same reason that JP Morgan has seen its brand tarnished for the same reason.  Why ask questions when you are making money.  See What Motivates the White Collar Criminal? (Federal Tax Crimes Blog 1/7/14), here.


  1. "In March 2001, a U.S. Senate investigation revealed Chase Manhattan had been among big firms that had provided correspondent accounts to offshore banks involved in criminal activity. Investigators found that Antigua-licensed American International Bank moved $116 million through its account at Chase even as it was engaging in frauds in the U.S. and working hand-in-hand with convicted felons...

    During their search, investigators found paperwork that led them to conclude that, over a six-year period, the store’s proprietor had laundered millions of dollars through a JPMorgan account on its way to Yemen, China and other places.

    Some of the money, investigators believed, went to a Yemeni cleric who later pleaded guilty to charges that he had conspired to aid terrorists.

    In February 2003, a month after the ice-cream shop raid, investigators for then-Manhattan District Attorney Robert Morgenthau raided an unlicensed money transfer firm, Beacon Hill Services Corp., that maintained dozens of accounts with JPMorgan...

    No criminal charges were filed against JPMorgan in the case."


    Currently, the US is forcing any Swiss bank to enter Category 2 for the purpose of being fined huge sums of money if it suspects that it might have a client who might not be at odds with the US tax authorities, even if the bank has no US clients and never did anything wrong.

    JPMorgan got caught helping its clients evade taxation for years and yet it neither got fined nor punished for doing so.

  2. I think the question should be, what right does American Government have thinking it can impose its legal and tax structures on the world? Just because it has the world's reserve currency?

    Is it because of the hubristic attitude, that "you use 'our' dollar, and since you have NO alternative, then you have to play by our rules? Is that it?

    Why does the USG think banks should be enforcers of the world's largest, most complex, convoluted and "special interest" corrupted Tax system in the world?

    Why does the compliance Complex, like KPMG engage in creating bullshit tax shelters, and then also play a BIG role as FATCA compliance co-enablers?

    What is the insidious relationship and revolving door between the BIG 4 Accounting Firm's attorneys and Treasury all about? Why are their Tax advisory services revenues expanding exceptionally as they assist in writing, enabling and then finding creative ways around ever more complex rules?

    When it comes to the BIG Four, "Why ask questions when you are making money?"

    Just askin'

    Those are all equal questions to ponder. :)

  3. I am reminded of the quote attributed to Joseph Heller: "Just Because You’re Paranoid Doesn’t Mean They Aren’t Out to Get You."

    Foreign governments and foreign banks do the compliance required by FATCA and the DOJ Swiss bank initiative because it is in their interest to do so. Otherwise, they would not do it.

    And, if the banks (really their officers, employees and agents) chose to violate U.S. law, they take their chances. They can choose not to violate U.S. law and avoid those consequences.

    I suspect Swiss banks will choose not to violate U.S. law in this manner in the future (unless they think of some other way to get around the rules or discovery for their violations).

    Jack Townsend

  4. There have been cases of banks prosecuted for laundering money for foreign dictators such as Riggs Bank. But cases against foreigners with money on deposit in the Us are not pursued. Miami, NY, LA and Houston are well known for such activity. The US does not tax bank interest received by non-US persons nor is any information on such accounts reported to the IRS (foreigners fill out form W8 instead of the W9 that you and I fill out.) Furthermore foreigners who invest in Treasury Bills through US brokers or directly with the US Treasury also don't have their interest taxed or reported.

  5. You are right that ultimately it comes down to a business decision. Right or wrong has nothing much to do with it. If it is in their interest, they will do it. Now they could be wrong about what is "in their interest" but that is what they pay the high priced attorneys to help them determine!

    Right now America, setting aside legal arguments, has the leverage to compel (some say extort) whatever it wants with the dominance of its reserve currency status. Does FATCA or the Swiss OVDP, on balance, increase or decrease its standing? Don't know. Time will tell. But, it seems to me, anything that has others looking for alternatives to U.S. investment and holdings can not be good, in the long term.


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