UBS: A Model for Compelled Production of Foreign Evidence of U.S. Crimes

Last February, UBS admitted criminal liability and entered into a Deferred Prosecution Agreement (DPA) pursuant to which the government filed a criminal information charging UBS with conspiring to defraud the United States by impeding and impairing the lawful functions of the IRS. United States v. UBS AG, Case No. 09-60033-CR-COHN (S.D.F.L.). Under the DPA, UBS agreed to a statement of facts admitting (among other things) that it participated in a scheme to assist or facilitate U.S. clients in establishing accounts designed to conceal their ownership or interest from U.S. authorities. Pursuant to the DPA, UBS agreed to hand over records related to what the press has reported to be hundreds of U.S. account holders.

The DPA contemplated that the DOJ would seek to enforce a John Doe summons previously served on UBS, and that UBS could fully litigate the summons enforcement action. As set forth in paragraph 13 of the DPA, if UBS “fails to comply with an enforcement order after all its appellate remedies have been fully and finally exhausted, the Government may, in its sole discretion, after consultation with the IRS and the Board of Governors of the Federal Reserve System, deem this to be a material violation of this Agreement ' .” The DOJ did initiate the enforcement action, but the matter was settled before trial, avoiding what was likely to be protracted litigation.

Practitioners who advise foreign entities having contacts with the United States should be prepared to confront the issues UBS would have faced in the enforcement action had it gone to trial.

U.S. Jurisdiction

U.S. courts have asserted jurisdiction over foreign entities in a wide range of circumstances. One is when the foreign entity has branches or subsidiaries in the United States. For example, a court enforced a grand jury subpoena on a Canadian bank served on its branch in Miami, but seeking production of financial documents from the bank's branches in Bahamas, Cayman Islands and Antigua. United States v. Bank of Nova Scotia, 740 F.2d 817 (11th Cir. 1984) Similarly, U.S. courts have asserted jurisdiction over foreign entities engaged in conduct that causes criminal activity to occur on U.S. soil. Accordingly, a Swiss commodities trading corporation with no office in the United States was held in civil contempt for failure to comply with a grand jury subpoena because the company had sufficient contacts with the United States to warrant enforcement. Mark Rich & Co, A.G. v. United States, 707 F.2d 663 (2d Cir. 1983). Of course, where a foreign entity itself commits crimes in the United States, U.S. courts would find jurisdiction over the entity.

Comity Analysis

In cases where the laws of the United States conflict with the laws of a foreign jurisdiction, the courts have often turned to the Restatement (2nd) Foreign Relations Law Of The United States ' 40, which states:

Where two states have jurisdiction to prescribe and enforce rules of law and the rules they may prescribe require inconsistent conduct upon the part of a person, each state is required by international law to consider, in good faith, moderating the exercise of its enforcement jurisdiction, in light of such factors as: (a) vital national interests of each of the states; (b) the extent and the nature of the hardship that inconsistent enforcement actions would impose upon the person; (c) the extent to which the required conduct is to take place in the territory of the other state; (d) the nationality of the person; (e) the extent to which enforcement by action of either state can reasonably be expected to achieve compliance with the rule prescribed by that state.

Where U.S. courts have balanced the U.S. government's interest in enforcing its criminal laws against a foreign sovereign's interest in enforcing its financial-privacy laws, they have nearly unanimously sided with the United States. For example, one court held that the U.S. interest in the “serious and widespread use of foreign financial institutions, located in jurisdictions with strict laws of secrecy as to bank activity, for the purpose of violating or evading domestic criminal, tax and regulatory enactments” outweighed the Cayman Islands' interest in its banking secrecy laws. Bank of Nova Scotia, 740 F.2d at 827; see also United States. v. Chase Manhattan Bank, 590 F. Supp. 1160 (S.D.N.Y. 1984) (Hong Kong financial-privacy law). On the other hand, comity analysis may reject U.S. enforcement if the records sought are of minor importance. United States v. First National Bank of Chicago, 699 F.2d 341 (7th Cir. 1983).

Effect of Foreign Financial-Privacy Laws

In situations where a foreign entity must violate the laws of its own jurisdiction in order to comply with a U.S. court order to provide records, the Supreme Court has made clear that corporations have no Fifth Amendment right against self-incrimination. Braswell v. United States, 487 U.S. 99, 102 (1988). More recently, the Court has held that a resident alien cannot refuse to testify in the United States because the testimony would expose him to criminal prosecution by a foreign sovereign). United States v. Balysis, 524 U.S. 666, 668 (1998).

Even where a foreign government threatens to block a foreign entity from complying with a U.S. court order by seizing the records in question, the Supreme Court has held that the foreign entity can be ordered to comply. To “hold broadly that petitioner's failure to produce ' records because of fear of punishment under the laws of its sovereign precludes a court from finding that petitioner had 'control' over them, and thereby from ordering their production, would undermine congressional policies ' and invite efforts to place ownership of American assets in persons or firms whose sovereign assures secrecy of records.” Societe Internationale Pour Participations Industrielles et Commerciales, S.A. v. Rogers, 357 U.S. 197, 205 (1958). In sum, a foreign entity that subjects itself to U.S. jurisdiction will not be able to avoid compliance with U.S. process, even where compliance would be a violation of foreign law.

Conclusion

The above analysis of the issues involved in the UBS case makes it clear that where a foreign entity commits U.S. crimes or causes them to be committed, U.S. courts will order those foreign entities to produce evidence of those crimes, regardless of whether foreign law prohibits such production. Even where, as in the UBS case, the parties reach a negotiated disposition, any settlement will likely involve the production of the evidence of the crimes. Foreign entities and those who advise them should re-examine the risk of engaging in conduct causing U.S. criminal violations, regardless of whether such acts are crimes under foreign law.

Kevin M. Downing is Senior Litigation Counsel for the United States Department of Justice, Tax Division, Criminal Enforcement Sections. Michael P. Ben'Ary is a Trial Attorney for the Department of Justice, Tax Division's Northern Criminal Enforcement Section. The views expressed herein are the authors' and are not binding upon, and may not represent the official position of, the Department of Justice or any other Government agency.

Last August, the U.S. Department of Justice (DOJ) and UBS AG (UBS) ' the world's largest manager of wealth and Switzerland's biggest bank ' narrowly avoided a long-awaited showdown in federal court in Miami, FL. At stake were the U.S. interest in enforcing its criminal tax laws and Switzerland's interest in enforcing its storied bank secrecy laws. United States v. UBS AG, Case No. 09-20423-CIV-GOLD/MCALILEY (S.D.F.L.). The case was settled largely through inter-governmental negotiations in which UBS agreed to turn over the identities and account records of approximately 4,450 of its U.S. clients. These account holders meet several fact patterns described in an annex to the settlement agreement that is filed with the court under seal. If the IRS receives information on 10,000 UBS account holders through its Voluntary Disclosure program or other means before UBS satisfies its obligations under the settlement agreement, the IRS has agreed to withdraw the John Doe summons.

UBS's production of core information previously protected by Swiss bank secrecy reflects the strong likelihood that U.S. criminal enforcement would have trumped foreign law in the district court. Counsel representing foreign entities should take note.

Background

Last February, UBS admitted criminal liability and entered into a Deferred Prosecution Agreement (DPA) pursuant to which the government filed a criminal information charging UBS with conspiring to defraud the United States by impeding and impairing the lawful functions of the IRS. United States v. UBS AG, Case No. 09-60033-CR-COHN (S.D.F.L.). Under the DPA, UBS agreed to a statement of facts admitting (among other things) that it participated in a scheme to assist or facilitate U.S. clients in establishing accounts designed to conceal their ownership or interest from U.S. authorities. Pursuant to the DPA, UBS agreed to hand over records related to what the press has reported to be hundreds of U.S. account holders.

The DPA contemplated that the DOJ would seek to enforce a John Doe summons previously served on UBS, and that UBS could fully litigate the summons enforcement action. As set forth in paragraph 13 of the DPA, if UBS “fails to comply with an enforcement order after all its appellate remedies have been fully and finally exhausted, the Government may, in its sole discretion, after consultation with the IRS and the Board of Governors of the Federal Reserve System, deem this to be a material violation of this Agreement ' .” The DOJ did initiate the enforcement action, but the matter was settled before trial, avoiding what was likely to be protracted litigation.

Practitioners who advise foreign entities having contacts with the United States should be prepared to confront the issues UBS would have faced in the enforcement action had it gone to trial.

U.S. Jurisdiction

U.S. courts have asserted jurisdiction over foreign entities in a wide range of circumstances. One is when the foreign entity has branches or subsidiaries in the United States. For example, a court enforced a grand jury subpoena on a Canadian bank served on its branch in Miami, but seeking production of financial documents from the bank's branches in Bahamas, Cayman Islands and Antigua. United States v. Bank of Nova Scotia , 740 F.2d 817 (11th Cir. 1984) Similarly, U.S. courts have asserted jurisdiction over foreign entities engaged in conduct that causes criminal activity to occur on U.S. soil. Accordingly, a Swiss commodities trading corporation with no office in the United States was held in civil contempt for failure to comply with a grand jury subpoena because the company had sufficient contacts with the United States to warrant enforcement. Mark Rich & Co, A.G. v. United States , 707 F.2d 663 (2d Cir. 1983). Of course, where a foreign entity itself commits crimes in the United States, U.S. courts would find jurisdiction over the entity.

Comity Analysis

In cases where the laws of the United States conflict with the laws of a foreign jurisdiction, the courts have often turned to the Restatement (2nd) Foreign Relations Law Of The United States ' 40, which states:

Where two states have jurisdiction to prescribe and enforce rules of law and the rules they may prescribe require inconsistent conduct upon the part of a person, each state is required by international law to consider, in good faith, moderating the exercise of its enforcement jurisdiction, in light of such factors as: (a) vital national interests of each of the states; (b) the extent and the nature of the hardship that inconsistent enforcement actions would impose upon the person; (c) the extent to which the required conduct is to take place in the territory of the other state; (d) the nationality of the person; (e) the extent to which enforcement by action of either state can reasonably be expected to achieve compliance with the rule prescribed by that state.

Where U.S. courts have balanced the U.S. government's interest in enforcing its criminal laws against a foreign sovereign's interest in enforcing its financial-privacy laws, they have nearly unanimously sided with the United States. For example, one court held that the U.S. interest in the “serious and widespread use of foreign financial institutions, located in jurisdictions with strict laws of secrecy as to bank activity, for the purpose of violating or evading domestic criminal, tax and regulatory enactments” outweighed the Cayman Islands' interest in its banking secrecy laws. Bank of Nova Scotia , 740 F.2d at 827; see also United States. v. Chase Manhattan Bank , 590 F. Supp. 1160 (S.D.N.Y. 1984) (Hong Kong financial-privacy law). On the other hand, comity analysis may reject U.S. enforcement if the records sought are of minor importance. United States v. First National Bank of Chicago , 699 F.2d 341 (7th Cir. 1983).

Effect of Foreign Financial-Privacy Laws

In situations where a foreign entity must violate the laws of its own jurisdiction in order to comply with a U.S. court order to provide records, the Supreme Court has made clear that corporations have no Fifth Amendment right against self-incrimination. Braswell v. United States , 487 U.S. 99, 102 (1988). More recently, the Court has held that a resident alien cannot refuse to testify in the United States because the testimony would expose him to criminal prosecution by a foreign sovereign). United States v. Balysis , 524 U.S. 666, 668 (1998).

Even where a foreign government threatens to block a foreign entity from complying with a U.S. court order by seizing the records in question, the Supreme Court has held that the foreign entity can be ordered to comply. To “hold broadly that petitioner's failure to produce ' records because of fear of punishment under the laws of its sovereign precludes a court from finding that petitioner had 'control' over them, and thereby from ordering their production, would undermine congressional policies ' and invite efforts to place ownership of American assets in persons or firms whose sovereign assures secrecy of records.” Societe Internationale Pour Participations Industrielles et Commerciales, S.A. v. Rogers , 357 U.S. 197, 205 (1958). In sum, a foreign entity that subjects itself to U.S. jurisdiction will not be able to avoid compliance with U.S. process, even where compliance would be a violation of foreign law.

Conclusion

The above analysis of the issues involved in the UBS case makes it clear that where a foreign entity commits U.S. crimes or causes them to be committed, U.S. courts will order those foreign entities to produce evidence of those crimes, regardless of whether foreign law prohibits such production. Even where, as in the UBS case, the parties reach a negotiated disposition, any settlement will likely involve the production of the evidence of the crimes. Foreign entities and those who advise them should re-examine the risk of engaging in conduct causing U.S. criminal violations, regardless of whether such acts are crimes under foreign law.

Kevin M. Downing is Senior Litigation Counsel for the United States Department of Justice, Tax Division, Criminal Enforcement Sections. Michael P. Ben'Ary is a Trial Attorney for the Department of Justice, Tax Division's Northern Criminal Enforcement Section. The views expressed herein are the authors' and are not binding upon, and may not represent the official position of, the Department of Justice or any other Government agency.