Reality is sinking in.
It has been nearly a year since the United States and Switzerland jointly announced the U.S. Justice Department Program For Non-Prosecution Agreements for Swiss Banks. The joint program provides Swiss banks immunity from U.S. tax evasion charges if they help turn in their U.S. customers and pay a potentially substantial fine, among other things.
At the outset of the program, faced with an abrupt four month deadline, 106 different Swiss banks notified the U.S. Justice Department of their decision to participate as banks that may have committed a crime, or so-called “Category 2” banks. Those banks, however, are now beginning to understand the harsh realities of that decision.
From a U.S. law enforcement perspective, the joint program is brilliant because of the way it effectively pits Swiss banks against their American clients. Participating Swiss banks are required to pay huge, unprecedented penalties to the U.S. in exchange for an agreement from the Justice Department to not prosecute the bank. In turn, those banks receive penalty “credits” from the Justice Department for every American customer they force into compliance. For the U.S., this is a no-lose scenario. Either way, it gets paid. For the Swiss banks, on its face, this also appears to be a palatable deal.
But then comes the fine print: in order to obtain the benefits of the program, Swiss banks will be asked to publicly admit that they criminally conspired with their U.S. customers to defraud the U.S. Internal Revenue Service. This is tough pill to swallow. A public admission will undoubtedly cause these banks significant long-term reputational damage and adversely impact their ability to attract new customers, maintain existing customers, obtain necessary regulatory accreditation, and defend against certain litigation.
Publicly admitting guilt is not something that should be done impulsively. Certainly, it should not be done without fully understanding what a bank stands accused of, what defenses, if any, there may be to the accusations, and all of the collateral consequences of the guilty plea. The effects of a being an admitted felon are serious, vast and longstanding.
There is no doubt that the Category 2 banks were driven to their decision by fear. The Justice Department wisely used the successful prosecutions of UBS, Credit Suisse, and Wegelin to induce these Swiss banks to participate in the program. It’s a classic law enforcement strategy—scare the masses by making an example of a few. But are these Category 2 banks actually criminally culpable? It’s not a simple answer.
Criminal tax cases are the most difficult of all crimes for the Justice Department to prove, especially against a foreign bank. Under U.S. law, prosecutors have to prove beyond a reasonable doubt that a defendant had willfully committed a crime. This means demonstrating that Swiss banks intentionally set out to violate U.S. tax laws. That is a difficult to standard to satisfy because the American tax system is foreign, confusing, ever-changing, and technical.
Moreover, a Swiss bank facing a criminal tax prosecution in the U.S. can completely defeat the charges if it can show that it believed it acted appropriately. If the bank serviced certain accounts with a good faith belief that it was not violating any U.S. tax laws, under American law it cannot be criminally culpable for that conduct.
Under this standard, the United States does not get the benefit of hindsight. The Justice Department would have to show that at the time the bank serviced U.S.- related accounts, it did so with the intent to assist American clients evade U.S. taxes. This determination will not be colored by the Swiss banks’ present-day awareness of, and sensitivity to, U.S. tax evasion laws. But rather based on the perspective of Swiss banks beginning in August 2008, before they were aware that it is illegal for them to assist Americans conceal their assets from the IRS even if the bank has no presence in the U.S.
There is another important consideration. The Justice Department is currently focused on whether a bank actively marketed and solicited tax evasion services to U.S. citizens or helped U.S. persons further conceal their assets from the IRS. Critically, Swiss banks that actively marketed or further concealed assets are not viewed or treated the same as banks that happened to have a US person as a client. The activities of a single banker or the servicing of a handful of U.S. related accounts does not necessarily equate to criminal conduct on behalf of an entire bank.
Perhaps one of the problems with the joint program is that the Justice Department appears to be operating under a general misconception of Swiss Banks. When it thinks of Swiss banks, maybe the U.S. government seems to have an image of offices with secret elevators located in Zurich off the Bahnofstrasse, suitcases of cash, and offshore companies on the shelf ready to be used by American clients to conceal assets.
Some of the Category 2 banks may fit that stereotype. But an overwhelming majority do not. Those are the banks that need to think long and hard before publicly admitting criminal guilt because they very well may not be guilty of a crime.
In the end, if the Category 2 banks admit guilt, outsiders unfamiliar with the Swiss banking industry will say that it is one gigantic criminal conspiracy. And while these admissions may help bring about a resolution of the banks’ dealings with U.S. authorities, they may also create a series of new, severely debilitating ripple effects of global scale for these banks.
Thus, the decision to participate in the U.S-Swiss joint tax program is a complex one that should not be motivated solely by fear of U.S. prosecution. Swiss banks must closely examine both the facts of their involvement with U.S. customers and the implications of publicly admitting guilt. Absent this type of thorough analysis, Swiss banks may be unnecessarily condemning themselves to an unfortunate fate despite not actually being guilty of breaking U.S. law.