UBS case: developments in case law on laundering of tax fraud proceeds and likely consequences on the fine imposed

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Jean-Guillaume de Tocqueville
Gide Loyrette Nouel, Paris
toqueville@gide.com

Introduction

In a landmark decision issued on 20 February 2019,^[1] the Paris Criminal Court (tribunal correctionnel) sentenced the Swiss bank UBS AG to a record €3.7bn fine (together with damages of €800m to be paid to the French state) for illegal solicitation for banking or financial services and aggravated laundering of tax fraud proceeds. Its French subsidiary, UBS France, was tried for complicity in such offences and was fined €15m and held jointly and severally liable for damages. Several UBS managers were also convicted. This decision, which is under appeal, raised certain questions relating, inter alia, to the repression of laundering of tax fraud proceeds. Such questions have recently been addressed by six decisions related to tax fraud from the French Supreme Court (Cour de Cassation) issued on 11 September 2019, which brought up relevant clarifications. One case in particular, Achach^[2] has clarified the nature of the offence of laundering of tax fraud and its penalty.

The UBS decision

The facts

In the UBS case, UBS AG and UBS France were prosecuted for allegedly jointly organising customer events and meetings on French territory with the aim of enabling the sales people of UBS AG to offer services to French customers and prospects, in violation of French legislation on direct solicitation on banking or financial services. The purpose of these services was also questioned in that they allegedly contributed to the concealment of undeclared funds by French tax residents.

Characterisation of the offences

UBS AG was first found guilty of illegal solicitation for banking or financial services. Indeed, Article L.353-2 of the French Monetary and Financial Code makes it an offence for any person to carry out solicitation activity for banking or financial services without being licensed in France or having a European passport.

UBS AG was then convicted of aggravated laundering of tax fraud on the basis of Article 324-1 and 324-2 of the French Criminal Code.^[3] Under French law, money laundering is a consequential offence which requires a principal offence (eg, tax fraud) to be previously identified in order to be established. In the present case, laundering of tax fraud proceeds required the prior detection of tax fraud, which was established by the French judge.

The questions raised

While a significant number of arguments have been put forward by UBS in their defence and the questions submitted to the Court have been numerous, we shall focus our attention on two important issues.

First, a procedural argument based on time limitation for prosecution had been invoked by UBS AG, which did not prosper. To reject this argument, the Court considered that laundering of tax fraud proceeds is a ‘continuous offence’. Consequently, the prescription period had begun to run only as of the date of the latest incriminated acts, so that that the offences in question were not time-barred.

A similar reasoning was applied to the offence of prohibited solicitation, also considered to be continuous, as such acts had been ‘executed and pursued’ over time.

The Court also based the rejection of the prescription argument on the existence of ‘indivisible facts’, which formed an indivisible whole, in which case the prescription started running as of the last breach.

Second, at the sanction stage, the Court applied Article 324-3 of the French Criminal Code, which empowers judges to impose a fine on the launderer amounting to half of the laundered funds, in place of the fixed fine normally prescribed by Article 324-2 of the same code. Therefore, for the calculation of the criminal fine, it was necessary to first determine what is included in the concept of ‘laundered funds’ in the field of tax fraud.

The Court stated that in tax fraud cases, ‘profit is not a revenue but rather an economy’, which suggests that the laundered funds corresponded to the amount of tax evaded. However, it then considered that the laundered funds amounted to the aggregate funds concealed from the French tax authorities, through the transfer into bank accounts opened in UBS AG’s books in Switzerland or in offshore jurisdictions (ie, €3.77bn), instead of the amount of tax evaded which would have been much lower and would have required to be accurately assessed.

This is a key element because this amount became the basis for determining the highest fine incurred in France by a legal person for money laundering of tax fraud, as the Court: (1) used it to assess the fine of Article 324-3; and (2) applied at the same time Article 131-38 of the Criminal Code which provides that the fine incurred by a legal person for a criminal offence may be five times higher than the fine incurred by a natural person.

Both UBS AG and UBS France have appealed the decision.

Clarification provided by the Cour de Cassation in Achach

In several decisions of 11 November 2019, the Cour de Cassation set out new principles concerning the repression of money laundering of tax fraud proceeds. The Achach case addressed the nature of the offence and clarified the concept of laundered funds, thereby bringing welcome clarification in the UBS appeal process.

Laundering of tax fraud proceeds is an instant offence

In the Achach case, an individual was convicted of tax fraud and laundering of tax fraud for concealing the proceeds of his own fraud on bank accounts opened in Switzerland on behalf of offshore companies of which he was the beneficial owner.

Before the Court of Appeal of Paris, the plaintiff had invoked the benefit of the prescription period for laundering of tax fraud. To this end, he argued that money laundering was an instant offence so that the prescription period ran from the moment the acts of money laundering (ie, the opening of the offshore accounts) were committed. Consequently, he claimed that the prescription period had expired.

In a similar way to what was decided in the UBS decision, the Court of Appeal did not follow his argument, confirming his guilt on the grounds that money laundering was a continuous offence which continues after the opening of the accounts and the deposit of dissimulated funds. As a result, the prescription period could only run from the time the violation ceases.

The Cour de Cassation finally overruled the Court of Appeal’s interpretation, deciding that money laundering is an instant and not a continuous criminal offence. As a result, the money laundering cannot be considered continuing merely on the basis that the dissimulated funds are still sitting in an account which was opened illegally.

While this clarification is important, it is uncertain that it will have consequences in the UBS case.

Indeed, the Cour de Cassation has confirmed this view in its explanatory note^[4] to the Achach decision, reminding that in the presence of facts forming an indivisible whole, the prescription period only begins to run from the last money laundering operation.

In addition, it should be noted that in a case judged on the same day as the Achach case, the Supreme Court considered that money laundering may, in certain situations, constitute a ‘hidden infringement’, in which case the starting point of the prescription period may be reported to the date when it becomes known and likely to be prosecuted.^[5]

The laundered funds correspond to tax evaded and not the funds concealed

Nevertheless, the Achach decision should constitute a meaningful precedent for the calculation of the fine incurred by UBS AG.

In Achach, the Court of Appeal had sentenced the defendant to a €1m fine, taking the overall amount of the funds concealed to the French tax administration as a basis for calculating the fine incurred.

This analysis was overruled by the Cour de Cassation. The Supreme Court confirmed the principle that ‘the proceeds of tax fraud consist in the economy which it has made possible to achieve’, the amount of which ‘is equivalent to that of the taxes evaded’. The Court then deduced from this principle that the ‘amount of the duties evaded alone’ should be taken into account as the basis for calculating the fine imposed for money laundering of tax fraud, as further detailed by the Cour de Cassation in its explanatory note of the decision.

There is, therefore, a reasonable ground to expect that in the UBS case, the Court of Appeal should take it into account to significantly reduce the amount of the fine imposed on UBS AG.

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