Credit Suisse (NYSE:CS) admits US tax evasion guilt

by Matthew Allen, swissinfo.ch

The bank admitted to a US court that it set up sham companies to enable clients to unlawfully funnel assets away from the Internal Revenue Service (IRS). It agreed on Monday to pay out $1.8 billion to the federal authorities, $715 million to the New York state banking regulator and $100 million to the Federal Reserve.

The bank had previously settled a $196 million fine with the US Securities and Exchange Commission. This means the total bill to the bank reached $2.8 billion (CHF2.5 billion).

But the stain on Credit Suisse’s reputation, having owned up to criminal activities, may prove more damaging in the long run than the financial penalties. For example, some pension funds have rules that prevent them from doing business with convicted persons or entities.

Several Swiss politicians have already called for the heads of Credit Suisse chief executive Brady Dougan and chairman Urs Rohner. Others, including the Swiss Bank Employees’ Association, have been scathing of Brady’s assertion before a February US Senate committee hearing that the fault lay with a handful of rogue staff who acted under the radar of management.

“We deeply regret the past misconduct that led to this settlement,” Dougan said in a statement reacting to the guilty plea. The bank said a post-tax charge of CHF1.6 billion would be recorded in second quarter results.

“Having this matter fully resolved is an important step forward for us. We have seen no material impact on our business resulting from the heightened public attention on this issue in the past several weeks,” Dougan added.

US non-prosecution tax deal

Under the terms of the Swiss-US tax deal signed in August 2013, the banks in Switzerland could be placed into four categories.

Group 1: Some dozen banks already under active investigation for suspected tax evasion offences. These include UBS, Credit Suisse, Julius Baer, Pictet and the Zurich and Basel cantonal banks.

None of these banks were able to apply for the non-prosecution terms.

Group 2: Those banks that know or suspect that they have committed tax evasion offences in the US. By coming clean, these banks avoid criminal prosecution but would be subject to big fines.

Group 3: Banks that have US customers but believe that they, and their clients, have complied fully with US tax regulations.

Groups 2 and 3 had to apply to the deal by the end of 2013 and were then given 120 days to provide the relevant information to the US authorities.

Group 4: Banks with very limited exposure to foreign clients – no more than 2% of total client base is non-local.

This final group must sign up in the time window between July 1 and October 31, 2014. They also then have 120 days to prove they belong in that category.

Birkenfeld speaks out

Former Credit Suisse banker-turned whistleblower Bradley Birkenfeld had a mixed reaction to the verdict, having testified against his ex-employer in 2007.

“On the one hand it is quite gratifying to see that Credit Suisse is finally being held accountable for its cross-border tax fraud. On the other hand, it is nothing short of outrageous that the Department of Justice dragged its feet for seven long years before this day arrived,” he told swissinfo.ch.

“In the Spring of 2007, I not only blew the whistle on UBS but on Credit Suisse as well. Both banks were engaged in this illicit business. I used to work for both banks and I saw what went on.”

Birkenfeld was sentenced to 40 months imprisonment in 2009 for failing to tell the authorities about all of his activities, but received more than $100 million from the IRS for his testimony that saw Swiss bank UBS prosecuted the same year.

He now claims that the DoJ has wrongly downplayed the part he played in bringing both UBS and Credit Suisse to justice. “It’s just too embarrassing for them to publicly acknowledge this,” he told swissinfo.ch.

US tax lawyer Scott Michel told swissinfo.ch that Credit Suisse’s punishment is more severe than that imposed on UBS in 2009 for similar offences. UBS ‘escaped’ with a $780 million fine under a less embarrassing deferred prosecution process negotiated with the Department of Justice (DoJ).

“The DOJ’s decision to indict a major worldwide bank, rather than go the route of a deferred prosecution agreement, obviously reflects a judgment as to the severity of the underlying conduct,” Michel said. “Going through an indictment is certainly a more serious event.”

The penalty was about as far as prosecutors could go without threatening to bring down Credit Suisse and the people it employs on Wall Street, according to Beckett Cantley, a US legal consultant and professor of tax law at the John Marshall Law School in Atlanta.

“It appears that the DoJ and Credit Suisse have fashioned a settlement that gives DoJ the win it wanted, while preventing Credit Suisse from having to go so far that it would be imperiled as an institution and all the broader economic blowback that a major bank failure would have caused,” he told swissinfo.ch.

The implosion of bank secrecy

Swiss banking secrecy started its rocky road to ruin with the UBS (NYSE:UBS) case in 2009.

A few weeks later, the US demanded a list of 52,000 UBS client names to help track down individual offenders. The Swiss government stepped in to whittle this list down to around 4,500, but banking secrecy was irrevocably damaged despite this smaller number.

Undeterred by UBS’s fate, some smaller Swiss banks then set about poaching UBS clients, offering a perceived safe haven on the assumption that they could not be touched because they had no physical presence in the US.

But such illusions were to be horribly shattered. In January 2012, Switzerland’s oldest bank, Wegelin, was forced to dismantle its business and sell off its non-US operations after being charged with tax evasion offences.

A year later the rump of the bank dissolved after being fined $74 million. Also in 2013, Bank Frey said it would cease operations under the weight of US investigations.

Around a dozen other Swiss banks, including Credit Suisse, were also placed under criminal prosecution. These include private banking giants Julius Bär and Pictet.

Cut your losses

Alarmed by these developments, the Swiss government embarked upon a diplomatic damage limitation exercise.

Several rounds of negotiations with the US resulted in a deal to allow all Swiss banks to come clean about their US activities in exchange for immunity from prosecution.

More than 200 banks have decided to take advantage of the treaty that was signed last August. This compels them to send reams of documents relating to their US business dealings (but not names of clients) to the Internal Revenue Service via the Swiss government.

Those banks that were already under active criminal investigation (category one) were not allowed to take part in the scheme.

Professor Cantley warned that other banks that are awaiting potential criminal indictments should take notice of the criminal liability that Credit Suisse was forced to admit.

“This result is going to set the new bar for all category one Swiss

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