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. 

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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. 

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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.

As all of the readers of this blog know, offshore banks and other financial institutions -- poster children being Swiss Banks -- have for years enabled U.S. taxpayers to evade tax.  The U.S. taxpayers evading tax committed tax and tax-related (including FBAR) crimes; the Swiss Banks, their employees and related enablers committed crimes.  The Government has prosecuted and entered a number of DPAs and NPAs with Swiss Banks, and has prosecuted a number of Swiss bankers and other enablers.  My latest count of the Swisss bankers shows over 40 individual "enablers", many of whom are or were Swiss bankers.  Many of these remain fugitives (about which more later).

An important requirement of US DOJ Swiss Bank program is that the participating Category 2 Banks must rat on their employees committing misconduct.  So, since the Category 2 part of the program is now winding up in terms of reaching NPAs with the Banks, I expect that DOJ will be bringing more indictments of Swiss Bank employees.  Those employees may not be able to avoid indictment, but they can avoid the prosecution by not coming into the U.S.  But, as Mr. Weil found out, traveling outside Switzerland is risky.  So, as I have noted before, many Swiss bankers (and other enablers, such a lawyers) have constrained their travel or take risk when they travel.  I have said before that this risk and fear may make Switzerland (which will not extradite for tax crimes) a kind of Club Fed -- a great place to be but somewhat confining if you can't leave it.

One issue inspired by Professor Garrett's research is whether higher-ups with the banks can be prosecuted successfully.  I mentioned Mr. Weil, the high level UBS officer, who mounted a successful defense that he was too remote from the criminal conduct to be responsible for it.  DOJ had the full cooperation of UBS and still could not convict Weil.  In the Swiss banker context, I will refer to that defense as the Weil defense.  My suspicion -- based on no real hard information -- is that in serving up the gory details of its employees' misconduct to DOJ, the Swiss Banks liberally applied the Weil defense to the fullest possible in order to avoid incriminating the higher ups.  In other words, I suspect, they served up minions and deflected from the higher ups to the extent they could with the Weil defense.  If that happened, I suspect it happened by omitting key information on the notion that, under the Weil defense, the higher-up conduct was not criminal.

One final note. the statute of limitations for tax crimes is suspended while the person "is outside the United States or is a fugitive from justice within the meaning of section 3290 of Title 18 of the United States Code."  26 USC 6531 (flush language), here.  So the risk of prosecution for this group is likely to be indefinite.  And, if DOJ does start with the minion employees, it may deploy the usual prosecution tactic of working their way up toward the top on the back of the minion employees.