Anand Sithian, ?but the Americans Made Me Do It!?: How United States v. Ubs Makes the Case for Executive Exhaustion

• Publication year: 2010

“BUT THE AMERICANS MADE ME DO IT!”: HOW UNITED STATES V. UBS MAKES THE CASE FOR

EXECUTIVE EXHAUSTION

INTRODUCTION

In 2008, the U.S. government launched an investigation into UBS AG (“UBS”) following the indictment and conviction of one of UBS’s senior bankers on charges of assisting a wealthy American with tax evasion.1 The banker admitted to traveling regularly from Switzerland to the United States to

help wealthy U.S. residents hide assets abroad and evade payment of taxes on income derived from these assets.2 Shortly thereafter, UBS admitted to assisting wealthy residents of the United States evade taxes.3 As part of a deferred prosecution agreement with the U.S. Department of Justice (“DOJ”), UBS agreed to provide the U.S. government with the identities of taxpayers residing in the United States who maintained secret accounts abroad with UBS.4 The United States filed a summons in federal court seeking information from UBS concerning the identities of these unknown taxpayers.5 Swiss bank secrecy laws, however, explicitly forbade such disclosure.6 UBS was caught in a classic conflict-of-laws dilemma. On the one hand, UBS and its employees would face potential criminal sanctions if they violated Swiss bank secrecy laws to comply with a U.S. court order.7 On the other hand, UBS could decline to comply with a potential U.S. court order and face contempt of court

1. See Randall Jackson, Former UBS Banker Indicted in Tax Evasion Case, 50 TAX NOTES INT’L 519 (2008).

2. See J.P. Finet & Robert T. Zung, Former Banker Pleads Guilty to Conspiring to Assist Billionaire

   Developer in Tax Evasion, DAILY TAX REP., June 20, 2008.

3. See J.P. Finet & Alison Bennett, UBS to Pay $780 Million to Settle Claim Bank Conspired to Defraud United States, DAILY TAX REP., Feb. 19, 2009.

4. Id.

5. See Petition to Enforce John Doe Summons at 4, United States v. UBS AG, No. 09-20423 (S.D. Fla. Feb. 19, 2009), 2009 WL 864716 [hereinafter Petition to Enforce Summons].

6. See Brief of UBS AG in Opposition to the Petition to Enforce the John Doe Summons at 16, United States v. UBS AG, No. 09-20423 (S.D. Fla. Apr. 30, 2009), 2009 WL 1612393 [hereinafter UBS Opposition

   Brief].

7. See Kristen A. Parillo, UBS, Switzerland Urge U.S. Court to Reject IRS Summons, 54 TAX NOTES INT’L 458, 458 (2009).

   sanctions and violation of the deferred prosecution for noncompliance with the court order.8

   
   

   In situations like the one UBS faced, a number of competing interests arise, such as the United States’s interest in enforcement of its laws, a foreign state’s interests in maintaining compliance with its laws, the importance of the documents to the requesting party, and the potential consequences faced by the

   requested party in its home state if it complies with a U.S. court order.9 U.S.

   courts thus have a dilemma when the United States, through its executive agencies, wants parties to disclose foreign accounts for tax or other investigatory purposes but bank secrecy laws stand in the way of these investigations.10 While many courts have used balancing tests to solve this problem, they have found that U.S. law-enforcement interests trump the interests of foreign nations.11 This places a defendant financial institution in the position of either providing client data in violation of its home state’s laws

   to meet the demands of the United States or disregarding U.S. discovery orders to meet its home state’s legal requirements.12

   
   

   Currently the Third Restatement of Foreign Relations Law (“Third Restatement”) advocates a five-part balancing test for courts to apply when contemplating ordering discovery on a party that would require violation of

   
   

8. See Memorandum of the United States in Reply to the Response Filed by the Government of Switzerland at 3, United States v. UBS AG, No. 09-20423 (S.D. Fla. July 12, 2009) [hereinafter U.S. Reply Memo to Switzerland]. The Swiss government had a large financial interest in ensuring UBS did not face sanctions for its actions because of a massive recapitalization of UBS by the Swiss government. See Dana Cimilluca, Swiss Move to Back Troubled UBS, WALL ST. J., Oct. 17, 2008, at A3. In addition, the Swiss government later noted that a criminal prosecution of UBS for failing to disclose account information could bankrupt UBS and “endanger the Swiss economy.” See Elena Logutenkova, UBS Reports Higher Client Outflows, Return to Profit, BLOOMBERG (Feb. 9, 2010, 11:50 AM), http://www.bloomberg.com/apps/ news?pid=newsarchive&sid=aIdbCSf0R4.k.

9. See Roberto Grasso, Note, The E.U. Leniency Program and U.S. Civil Discovery Rules: A Fraternal

   Fight?, 29 MICH. J. INT’L L. 565, 592 (2008).

10. See Martin Vaughn, IRS Boosts Scrutiny of Overseas Money, WALL ST. J., Mar. 25, 2009, at D3.

11. See In re Grand Jury Subpoena Dated Aug. 9, 2000, 218 F. Supp. 2d 544, 547 (S.D.N.Y. 2002) (compelling disclosure when compliance with order would require violation of foreign law); accord United

    States v. Bank of Nova Scotia (In re Grand Jury Proceedings Bank of Nova Scotia) (Bank of Nova Scotia III), 740 F.2d 817, 826 (11th Cir. 1984).

12. The Supreme Court has declined to resolve the issue of whether a federal court petitioned by a

    government agency can, in fact, order a bank to produce documents located abroad that requires the violation of foreign nondisclosure law. See In re Grand Jury Proceedings, 946 F.2d 904 (11th Cir. 1991), cert. denied sub nom., Union Bank of Switz. v. United States, 502 U.S. 1092 (1992). For a discussion of the prior history and factual issues of the case, see John Turro, Supreme Court Will Not Review Subpoena of Foreign Bank Records, 55 TAX NOTES 1011 (1992).

    
    

    another nation’s laws.13 One of the factors for a court to weigh in the balancing formula is “the availability of alternative means of securing the [requested] information.”14 This Comment uses the recent tax investigation into UBS and its account holders as a case study to argue that the alternative means factor

    from the Third Restatement should be a mandatory step for Executive Branch agencies to exhaust before they can petition a court to compel disclosure of foreign discovery that would require the defending party to violate foreign law. This mandatory step, which this Comment terms executive exhaustion, is derived from the concept of administrative exhaustion, in which courts decline to hear cases until the moving party has exhausted all available administrative

    remedies.15 The application of executive exhaustion will prevent courts from

    having to engage in the Third Restatement’s balancing test. By avoiding the Third Restatement’s balancing test, a court can avoid placing parties in a catch- 22—following one state’s laws at the expense of violating those of another state.

    
    

    In Part I, this Comment provides the background to the UBS tax investigation litigation. Part II examines how early courts treated the issue of government requests that required a party to break foreign law. Part III discusses the various Restatements’ sections that have been published to address this issue, particularly the creation of balancing tests. Part IV analyzes how courts have applied the Restatements over time in deciding whether to compel a defendant to turn over information to satisfy U.S. demands. Part V introduces the concept of executive exhaustion and the alternative mechanisms that government agencies can utilize to resolve conflict situations similar the one faced by UBS. Part VI addresses the possible solutions advocated by executive exhaustion to the UBS case to demonstrate executive exhaustion’s

    
    

13. See RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES § 442(1)(c)

    (1987). The seven-part test involves the balancing of the following factors:

    
    

    [T]he importance to the investigation or litigation of the documents or other information requested; the degree of specificity of the request; whether the information originated in the United States; the availability of alternative means of securing the information; and the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the request would undermine important interests of the state where the information is located.

    Id.

    
    

14. Id.

15. See, e.g., Scott C. Idleman, The Emergence of Jurisdiction Resequencing in the Federal Courts, 87

    CORNELL L. REV. 1, 74–75 n.402 (noting several situations when federal courts consider the administrative exhaustion requirement jurisdictional). For a thorough explanation and historical analysis of administrative exhaustion, see 2 RICHARD J. PIERCE, JR., ADMINISTRATIVE LAW TREATISE § 15.2 (4th ed. 2002).

    utility. Part VII concludes the Comment by recommending an implementation of executive exhaustion and explaining how to better strengthen the doctrine.

    
    

    1. BACKGROUND TO THE UBS TAX INVESTIGATION BY U.S. AUTHORITIES

       
       

       UBS is a large Swiss bank that provides a variety of financial services, including private wealth management, Swiss banking, and investment banking.16 UBS’s private wealth management division offers services and products for high-net-worth individuals, and UBS maintains a strong presence in the United States.17

       
       

       The U.S. investigation of UBS truly gained steam in summer 2008 when one of UBS’s top private bankers was indicted and pled guilty to assisting wealthy Americans evade taxes through a cross-border private banking program.18 The DOJ issued a statement of facts in which the banker admitted that, with the support of an unnamed “Swiss bank,”19 the banker created Swiss bank accounts for U.S. clients for the purpose of avoiding income tax as required by both U.S. law and the Qualified Intermediary Agreement20 (“QIA”) between the “Swiss bank” and the Internal Revenue Service (“IRS”).21 The QIA required UBS to report to the IRS income for its U.S. clients who held U.S. securities.22 Shortly after the banker’s conviction, the

       
       

16. See UBS in a Few Words, UBS (Dec. 10, 2010, 4:41 PM), http://www.ubs.com/1/e/about/ourprofile. html.

17. See Our Clients & Businesses, UBS (Mar. 18, 2011, 4:03 PM),...