In French tax settlement with HSBC, new convention modeled after DPA gives glimpse of future
Wednesday, November 22, 2017
Posted by: Brian Monroe
By Louise Couret
Law Student, Cardozo Law School
November 21, 2017
A first of its kind tax-related penalty between a French court and one of the world’s largest banks gives a glimpse of the future of financial crime compliance settlements, a dynamic similar to deferred prosecution agreements used in the United States and, more recently, the United Kingdom.
On Tuesday November 14th, the Paris Tribunal de grande instance, referred to as the first level appeals court in France, approved the judicial convention of public interest, in French called the convention judiciaire d’intérêt public, between the French financial prosecutor's department and HSBC Private Bank for an amount of 300 million euros.
The settlement marked the end of the proceedings for tax fraud and money laundering instituted against this Swiss subsidiary of the U.K.-headquartered HSBC. As the first agreement of this type, it marks an unprecedented revolution in the French legal landscape in the fight against corruption.
French authorities indicted the bank on November 18th, 2014 for "illegal banking and financial solicitation" and "aggravated money laundering and tax fraud."
Prosecutors based the charges on suspicions that the bank sought out taxpayers in France in 2006 and 2007 via account managers and allowed these customers to hide assets from the treasury in an amount in aggregate of at least 1.6 billion euros, "with full knowledge of the facts," according to the financial national parquet.
The case is indeed unprecedented. If the Swiss bank had initiated, on similar facts, informal negotiations with the French financial prosecutor's department to consider the possibility of setting up a judicial convention of public interest, such negotiations would likely have failed for lack of agreement.
Such an agreement might seem harmless in the United States, but in France, it is revolutionary, like the Sapin II law promulgated by the French legislature on December 9th, 2016.
That law strengthened French defenses against graft in many ways, including requiring large companies to create formal anti-corruption compliance programs.
Indeed, France has often been, and is still subject to, much criticism regarding the implementation mechanisms – or lack thereof – to fight against corruption.
On one hand, the international community has criticized France, particularly the Organisation for Economic Co-operation and Development (OECD) member states, for its failure to hold certain companies accountable.
On the other hand, criticism arose from French companies that wanted to be offered a non-judicial avenue for settling conflicts, which is not in compliance with French law.
French legal convention inspired by U.S. DPA structure
Largely inspired by the Deferred Prosecution Agreement (DPA), the judicial convention of public interest offers an alternative for corporate entities accused of corruption, influence peddling, money laundering, aggravated money laundering or tax evasion.
Initiated by the Public Prosecutor and codified in Article 41 of the Penal Code, it is reserved for companies with at least 500 employees and consolidated revenue of greater than 100 million euros, the same threshold that requires corporate compliance programs in Sapin II.
It can occur at two stages. First, before any public action is taken, in which case the agreement must impose one or more obligations including payment of a fine, the submission to a compliance program designed to ensure the existence and implementation of certain measures and procedures and possible damages when the victim is identified.
Secondly, it can also be used after the criminal proceedings have been initiated, in which case the company will have to acknowledge the facts and accept the criminal classification applied.
That echoes a similar trend in U.S. DPA settlements.
When first initiated in the early 2000s, DPAs in some cases had clauses where the company did not admit or deny guilt, but acquiesced to a penalty.
But more recently, U.S. federal prosecutors and regulators have pushed for companies to admit to certain facts or even penalized certain compliance officers individually in deals related to extensive and longstanding compliance failures.
That made many in the compliance sector shudder to imagine they could be caught up in a push toward more “individual liability” or as some referred to it, some judges before signing off on DPAs, wanted “heads on a platter.”
As in the United States, a judge must then approve the French DPA. If the validation order is made, the legal entity involved has, from the date of validation, a period of ten days to exercise its right of withdrawal.
Similarly, if the validation order is not made, the information provided by the company during this procedure cannot be used in subsequent criminal proceedings. The effects of the agreement, like the DPA, do not extend to legal representatives who may be prosecuted even if the company enters a judicial convention of public interest.
To go back to HSBC’s case, this is what permits the former directors to be criminally prosecuted even after a negotiated corporate resolution.
As in the American mechanism, the validation order does not entail a conviction. It has neither the nature nor the effects of a judgment of condemnation. It is not registered in the criminal record, which enables the companies’ signatories of the convention to avoid having a criminal history, which would prevent them, for example, from obtaining public contracts.
Even after historic settlement, room to improve
However, unlike in the American system, there is a requirement to acknowledge the underlying criminal facts.
There are also differences with respect to the scope of the DPA which remains much broader in so far as it can take into account bribery of foreign agents and is also subject to the regulations by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) on economic sanctions, along with anti-trust matters, money laundering and others.
The American DPA therefore has a wider scope, which renders it far more effective.
Finally, the most significant difference is the amount of the financial penalties. To go back to our HSBC case, according to an overview by the financial prosecutor's department, the number of fines imposed so far on HSBC in Germany, the United States or Switzerland for similar events range from 12 to 36 million euros.
As a reminder, in 2015, the US government concluded a hundred DPAs, a record in an amount exceeding $6 billion. Among these were three major conglomerates, including General Motors, Commerzbank, and Deutsche Bank, which were fined respectively $900 million, $1.5 billion and $2.4 billion.
Therefore, although the initiative to create negotiated settlements on corruption and other financial crime and compliance failings, and especially this first application deserves praise, progress can still be made in order to make this practice more effective for both parties.
The question that should be posed is whether the past transaction now precludes any future prosecution from another country that would consider itself a victim of the actions at the origin of the lawsuits.
In a way, this has been answered in several recent FCPA enforcement actions that resulted in negotiated global settlements with multiple countries where the illicit acts took place, with several prosecutorial and investigative agencies getting a piece of the penalty pie.
The question arises from the extraterritorial application of the law of certain countries such as American law or English law. Two arguments favor a negative answer.
First, Article 4.3 of the OECD Convention states that countries shall consult each other to decide which is most able to prosecute. Further, Article 14.7 of the International Covenant on Civil and Political Rights of 1966 sets out the famous principle of "non bis in idem," which translated to "not twice in the same [thing]."
Others may know this from the popular pop culture term “double jeopardy.” But the concept is an important one, that a company can’t be prosecuted twice for the same crime or illicit action if it has already paid the required penalty or, if in the trial setting, was found not guilty.
The fact that the convention precludes any future prosecution by a third party is an essential condition for the future of this practice in France.