This past week, the study of money laundering and tax evasion took a perverse turn: Union Bank of Switzerland (UBS) was fined more than $5 billion by a French court, by far the largest in French history.
UBS leaders made a breathtaking error in judgment, having taken the charges that it helped clients evade taxes via laundering to trial. According to news reports, after settlement talks broke down with French prosecutors and regulators, UBS thought it could do better before a Napoleonic panel of judges. UBS still denies wrongdoing, and says it will appeal the judges' decision.
At the trial, the testimony and evidence contended that UBS spared no expense to lure affluent French citizens (called “big potatoes”) to secretly open bank accounts in Switzerland in order to commit a variety of crimes, most directly, more than $10 billion in tax evasion. This misconduct took place between 2004 and 2012, according to prosecutors.
It is not the size of the fine that warrants discussion here, however: UBS had already admitted to helping taxpayers hide accounts from the IRS in 2009.
Not only has it been prosecuted for assisting affluent U.S. clients to evade taxes but also for engaging in criminal price-fixing of the LIBOR interest rate in 2012 and 2015 (along with four other international banking giants). It also settled a case for "for Apparent Violations of the Global Terrorism Sanctions Violations" in 2015.
In nearly all these prior cases, however, UBS was allowed to enter into a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA) or, in the case of the Office of Foreign Assets Control sanctions, a civil rather than criminal settlement.
In the United States, the Department of Justice has broad prosecutorial discretion and, as such, it — rather than the victims or the courts — may allow resolution for a large corporation through a DPA or NPA.
With a DPA or NPA, the corporate defendants admit to the criminal misconduct, purportedly agree to not sin again and usually pay a fine.
Corporate defendants enter into such agreements rather than being criminally convicted, which may carry substantial regulatory consequences, such as forfeiture of the license to conduct banking business in the United States, sell securities or financial products or serve as the custodian over retirement accounts. In other words, they suffer actual punishment that measures the true scope of the crime.
Based on the recent conviction in France, the fallacy of using NPAs and DPAs by the Department of Justice has now come into focus. UBS entered into the DPA with the Department of Justice over identical misconduct and promised to curtail its violations of law.
Yet, according to French prosecutors and the court's decision, UBS continued to engage in misconduct during and right after entering into the DPA. One lesson the UBS case may demonstrate is that some corporations are deemed, incorrectly, “too big to jail.”
Duke University professor Brandon L. Garrett wrote a book by this title in 2014. His research showed that some corporations considered too economically important to fail instead are allowed to negotiate settlements to avoid any real punishment.
Even worse, very few if any corporate leaders are punished criminally. We know virtually nobody went to jail in after the banking crisis.
While many might suspect this government policy was created or accelerated during Republican administrations, professor Garrett’s research instead demonstrates that the preference for DPAs and NPAs started during the Clinton administration and then greatly accelerated during the Obama administration, such as when it approved UBS' DPA.
Those in favor of DPAs or NPAs point at the demise of Arthur Andersen in the wake of Enron, which, after its conviction, resulted in tens of thousands of employees losing their jobs.
Indeed, it was concerns of "too big to jail" and the Andersen effect that led to the Department of Justice not charging KPMG in its tax shelter business in 2005.
Underscoring how the Democratic Party is now fracturing, certain elements of the party have called for large corporations to suffer real punishment. As one example, Sen. Elizabeth Warren (D-Mass.) introduced S.2544, the "Ending Too Big To Jail Act," in March 2018. This bill went nowhere.
It has been generally recognized that there are five purposes of punishment. Three of those purposes — deterrence, incapacitation and retribution — support reconsideration of Sen. Warren’s (D-Mass.) bill.
In certain cases, we should act just as we do with a recidivist human convict: If these corporations and their leadership are not capable of staying out of trouble, this may be indicative that the corporation has a risk profile and operational tempo that simply cannot be managed under any form of intensive supervision.
A corporation cannot be incarcerated. But it can be broken up or closed. Perhaps it is finally time for tough love.
David P. Weber is an attorney and certified fraud examiner. He is a professor at the University of Maryland, where he teaches business ethics, fraud examination and forensic accounting. He concluded his federal career as the assistant inspector general for Investigations at the U.S. Securities and Exchange Commission. Follow him on twitter @umd_dpweber.