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The US DOJ Voluntary Disclosure Program for Swiss banks: What the Umbrella Man can teach bank counsel about criminal intent

13 February 2014

ITR Correspondent

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In the context of the US’s Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks, discerning a banker’s state of mind is often difficult and always an after the fact determination.

On August 29 2013, the US Department of Justice (DOJ) and the Swiss Federal Department of Finance executed a joint statement, together with a document labelled the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the Program), that provides a path by which all Swiss banks not under DOJ criminal investigation may bring closure to specified US criminal exposure by reason of having maintained Swiss bank accounts on behalf of noncompliant US taxpayers during the period from August 1 2014 through December 31 2014, known as the applicable period.

The Program permits Swiss banks that are not Category 1 banks; that is, the 14 Swiss banks that are apparently under criminal investigation by the DOJ concerning their operations as of August 29 2013, to come forward voluntarily in one of three categories, by requesting a letter of intent for a non-prosecution agreement under Category 2 or a non-target letter under Category 3 or 4, provided that in each case the bank satisfies the requirements of the applicable category.

  • A Category 2 bank encompasses a Swiss bank that has reason to believe that it may have committed tax-related offences under Titles 18 and 26 of the US Internal Revenue Code (IRC) or monetary transactions offences under Title 31 of the IRC in connection with undeclared US related accounts held by the Swiss bank during the applicable period and is not a Category 4 bank.
  • A Category 3 bank encompasses a Swiss bank that has not committed any tax-related or monetary transactions offences in connection with undeclared US related accounts held by the Swiss bank during the applicable period and is not a Category 4 bank.
  • A Category 4 bank encompasses a Swiss bank that satisfies the requirements of a registered deemed compliant "Financial Institution with Local Client Base" under the Swiss intergovernmental agreement (IGA), as modified by the Program.

Criminal culpability
A Swiss bank could have criminal culpability under US law for undeclared US related accounts if it conspired, aided and abetted or exhibited conscious avoidance in connection with the opening, maintenance or closing of these types of accounts.

Under US law it is a crime to conspire with another person to commit any offence against the US, including conspiracy to commit tax violations under the IRC. Accordingly, any bank or banker knowingly assisting a US account holder to either not report an account itself, or the income derived from that account, has committed a criminal act. This is so even if the banker never enters the US or the bank has no US presence. The US taxpayer’s failure to report the account or its income gives the US jurisdiction to prosecute all involved. All prosecutions of Swiss bankers extant have been based on this provision of US law.

The "aiding and abetting" provision of the IRC also makes any person who aids, abets, counsels, induces or commands another person to commit a crime as culpable as the person who actually commits the crime. Thus, if a banker knowingly assists a non-compliant US taxpayer in avoiding the reporting of an account or its income, such banker is as culpable as the non-compliant US taxpayer.

A third precept of US federal law relating directly to the matters under review is "willful blindness," also known as "conscious avoidance." US criminal conduct requires mens rea, that is, criminal intent. One cannot commit a crime without intentionally performing acts known by the actor to be against the law. That knowledge requirement, however, can sometimes be satisfied without direct or specific information that the underlying conduct is criminal. An often-used example is a situation where one is approached to buy an expensive item at an absurdly low price. The buyer asks no questions of the seller, but is later arrested for receiving stolen goods. In the example, the buyer chose to be "willfully blind," that is, did not ask the seller the obvious question how such an expensive item could be purchased at such a low price without the item having been stolen.

In the historical Swiss private banking era, the common use of coded accounts, hold-mail agreements, offshore structures, repetitive wire transfers in amounts just under $10,000, closing of a US account with loans or gifts to third parties and/or similar conduct raises the potential that the banker acted with criminal intent, or at the least, was willfully blind. Standing alone, a client file containing one or more of these so called "badges of fraud" may create the impression that the banker and/or the bank acted with the requisite criminal intent.

Yet reliance on such outer manifestations of a relationship manager’s state of mind can sometimes lead to erroneous conclusions, as there may be a perfectly innocent explanation of conduct that viewed in a vacuum seems damning. A classic example is the infamous case of the "Umbrella Man," described below.

The Umbrella Man
On November 22 1963 Dallas, Texas was bathed in sunshine. The weather forecast was for more of the same. Yet, in the crowd assembled along President Kennedy’s motorcade route in front of the schoolbook depository from which Lee Harvey Oswald fired the shots that killed the president, stood a man carrying a large, black umbrella. "The umbrella man," as he became known, was not only the sole person in Dallas that day carrying an umbrella, but he was among those closest to the passing presidential limousine, and he stood directly in the path of the bullets fired into the limousine. As the president’s car approached, he opened up and lifted the umbrella high over his head, then spun it clockwise as the president passed.

These facts, all recorded in photos and in the famous Zapruder film that became one of the main bases for the Warren Commission investigation of the assassination, established to many that the umbrella man must have had a role in the assassination. The specific role played by the umbrella man was hotly debated among the legion of conspiracy theorists. Some, including Oliver Stone in his film JFK, suggested he was a "spotter" helping Oswald direct fire. Others believed the umbrella itself was a weapon that may have fired a dart to immobilise the president. Still others believed the umbrella had been configured to fire a bullet and thus accounts for the so-called "missing bullet" in assassination autopsy records.

The controversy ended in 1978 when a man named Louie Steven Witt appeared before the Congressional House Select Committee on Assassinations to testify that he was the man in the photos and film. Brandishing the very object in question, he explained that he brought his umbrella to the motorcade that day not to aid an assassination, but to wield it as a symbol of protest. He wanted to "heckle" the president, whose father, Joseph Kennedy, as US ambassador to Britain in the years leading up to WWII, had been a supporter of the allegedly Nazi-sympathising British Prime Minister Neville Chamberlain. The cartoons of that era famously used Chamberlain’s black umbrella as a symbol of Nazi appeasement. Witt was certain that JFK, a student of that era and author of Why England Slept would surely recognise the symbolic protest. His explanation was never refuted.


Lessons to be learned from the umbrella man
What the umbrella man teaches US attorneys advising Swiss banks participating in the Program is that the existence of possible "badges of fraud" (as enumerated above) in a bank file, if not carefully followed up, could well lead to an erroneous determination of US criminal culpability. In essence, the Program evaluates the actions of Swiss banks and their employees by reviewing conduct reflected in bank records, all through the prism of US criminal law, despite the fact that such conduct occurred in a private banking culture, whose practices and operations were quite different from those in the US. Whether the file note red flags, alone or taken together, reflect actual criminal conduct, can often be determined only by a detailed interview of the relationship manager engaged in the file under review.

In the context of the Program, discerning a banker’s state of mind is often difficult and always an after the fact determination. A relationship manager’s first-hand account of what actually happened and why will provide counsel for the bank far more meaningful information than can be gleaned by any file review. On the one hand, an interview may well confirm the worst suspicions about the underlying activity. On the other, the interview may uncover innocent explanations otherwise unavailable. Either way, crucial decisions impacting participation in the Program cannot be made in a vacuum. Cryptic file notes and entries are a poor substitute for a first-hand account. If film and photos of the umbrella man were embarrassingly insufficient to understand what he actually intended that fateful day in Dallas, how can notations in a client file constitute conclusive evidence of the knowledge and intentions of a Swiss banker?

William Sharp, Sr (wsharp@sharptaxlaw) and
Alan Winston Granwell (agranwell@sharptaxlaw) of Sharp Partners; and
Robert Katzberg (rfk@kapkatlaw.com) of Kaplan & Katzberg






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