“This case shows that no financial institution, no matter its size or global reach, is... Read More
The Justice Department didn’t blink
in its pursuit of a guilty plea from Credit Suisse AG (CSGN) for
helping thousands of Americans evade taxes. What prosecutors
accomplished with the criminal conviction -- the first of a
major bank in a decade -- isn’t as clear.
The punishment, announced yesterday in federal court, was
intended to send a strong message to other banks and quell
public criticism since the 2008 financial crisis that
prosecutors have been soft on financial institutions.
Credit Suisse agreed to pay $2.6 billion -- the largest
penalty in an offshore tax case -- for using secret Swiss
accounts to help Americans hide money from the Internal Revenue
Service, concluding a three-year probe by the U.S. If the
penalty strikes the right balance between punishing the bank and
containing broader market repercussions, prosecutors could use
it as a model in other matters, such as a probe of BNP Paribas
SA (BNP)’s transactions with sanctioned countries.
“This case shows that no financial institution, no matter
its size or global reach, is above the law,” Attorney General
Eric Holder said at a press conference yesterday. “A company’s
profitability or market share will never be used as a shield
from prosecution or penalty. And this action should put that
misguided notion definitively to rest.”
Photographer: Gianluca Colla/Bloomberg
Top executives at Credit Suisse including Chief Executive Officer Brady Dougan are... Read More
Eight Credit Suisse employees have been indicted in the
matter. Top executives including Chief Executive Officer Brady Dougan are expected to keep their jobs, even though Holder
called the conduct “an extensive and wide-ranging conspiracy.”
Containing Fallout
Credit Suisse AG is the bank subsidiary of the ultimate
parent, Credit Suisse Group AG. Credit Suisse AG has dozens of
subsidiaries that conduct most of the firm’s business, according
to its most recent annual report.
Prosecutors have been reluctant to criminally charge large
companies after the Justice Department’s 2002 indictment of
Arthur Andersen LLP caused the accounting firm to collapse and
put 85,000 people out of work.
To contain fallout from the Credit Suisse plea, prosecutors
worked in concert with banking regulators, who moved to reassure
some of the largest U.S. financial firms that Credit Suisse’s
guilty plea won’t trigger a crisis, according to a person
briefed on the conversations.
The full impact of the plea may not be felt immediately,
and early indications suggest that Credit Suisse’s
counterparties won’t turn their backs on Switzerland’s second-biggest bank. Lloyd Blankfein, chief executive officer of
Goldman Sachs Group Inc., said May 16 that “it becomes a very
weighty decision for us to cut someone off, and we wouldn’t do
it lightly.”
Re-evaluating Relationship
Some clients could react differently. New York Life
Insurance Co., which manages more than $500 billion and is a
client of Credit Suisse, will re-evaluate its relationship with
the bank, said John Kim, the firm’s chief investment officer.
The insurer will seek to “determine whether there’s
something sort of systematic to that institution that caused
them to behave poorly on one side of their business, and whether
that extends to the investment banking side,” Kim said in an
interview.
The Credit Suisse case could pave the way for other guilty
pleas by companies, which have in recent years been able to
settle criminal investigations with deferred- or non-prosecution
agreements. At least 20 such agreements with financial firms
have been entered into during Holder’s five-year tenure,
according to data published by law firm Gibson Dunn & Crutcher
LLP.
‘Collateral Consequences’
If prosecutors were to seek a guilty plea from an American
bank, the regulatory hurdles could be more complicated. While
Credit Suisse has a license to operate in the state of New York,
nationally-chartered banks are overseen by the Office of the
Comptroller of the Currency, which would be central to deciding
whether the bank could stay in business.
“The Justice Department wants to be perceived as tough as
nails while avoiding the collapse of a too-big-to-fail
institution and other consequences,” said Neil Barofsky, a
former prosecutor who is now a partner at Jenner & Block LLP.
“If there are very few collateral consequences, and the
criminal plea is perceived as just another cost of doing
business, then the deterrent effect will be minimal.”
Deputy Attorney General James Cole said the guilty plea was
justified because Credit Suisse’s misconduct was brazen and took
place over many years -- one subsidiary began concealing funds
more than a century ago. The bank also destroyed documents and
didn’t fully cooperate with the Justice Department’s
investigation, Cole said.
Earnings Impact
Credit Suisse said yesterday that the penalty would cut
into second-quarter earnings by 1.6 billion francs ($1.79
billion) though the bank doesn’t foresee the guilty plea having
any impact on its licenses or business capabilities.
“We can now focus on the future and give our full
attention to executing our strategy,” Dougan said in an e-mailed statement. “We have seen no material impact on our
business resulting from the heightened public attention on this
issue in the past several weeks.”
Dougan, a 54-year-old American who has led the bank for
seven years, is starting to lose support in Switzerland, with
the Swiss Social Democrats, the second-biggest party in
parliament, calling for his resignation along with that of
Chairman Urs Rohner. Dougan downplayed the offshore business and
the extent of the wrongdoing during a Senate hearing in
February.
‘Some Repurcussions’
“Given the requirements for counterparties and things like
that, it’s hard to believe there won’t be some repercussions,”
said Nancy Bush, a bank analyst who founded NAB Research LLC in
New Jersey.
The agreement may not silence Justice Department critics.
Top managers weren’t charged, and the bank hasn’t produced the
names of U.S. account holders at the heart of the matter -- a
point lawmakers raised as evidence that prosecutors haven’t been
aggressive enough.
“This guilty plea strikes an important blow against tax
evasion through bank secrecy,” Senator Carl Levin, who leads
the Senate subcommittee that reviewed the Justice Department’s
tax-evasion probe, said in a statement. “But it is a mystery to
me why the U.S. government didn’t require as part of the
agreement that the bank cough up some of the names of the U.S.
clients with secret Swiss bank accounts.”
Revealing Names
Credit Suisse didn’t have to identify as many account
holders as bigger rival UBS AG (UBSN) did in its earlier agreement. In
2009, UBS avoided prosecution by paying $780 million, admitting
it fostered tax evasion and disclosing to the U.S. the names of
250 American clients. UBS later settled a U.S. lawsuit by
revealing the names of 4,450 more account holders.
Through tax treaty requests, the Justice Department got
names of 238 Credit Suisse customers out of the 22,000 accounts
held by Americans, according to a Senate subcommittee report in
February. The panel said the Justice Department should have used
subpoenas and other enforcement tools to get the names.
While Credit Suisse won’t turn over the names of account
holders -- a violation of Swiss law -- Cole said the bank will
help the department with treaty requests and provide other
information such as where accounts were transferred.
“This is a serious consequence for a financial
institution, and it certainly limits their ability to have any
further misconduct in the future by already having one criminal
conviction on their record,” Cole said during yesterday’s press
conference.
Avoided Convictions
The last global bank to plead guilty in the U.S. was Credit
Lyonnais SA, which admitted in January 2004 it made false
statements to the Federal Reserve. Banks including Credit
Suisse, UBS, HSBC Holdings Plc and JPMorgan Chase & Co. avoided
convictions through settlements in recent years. While
prosecutors have extracted guilty pleas from subsidiaries of
some large banks, they have spared parent companies.
“The value of a criminal admission only has symbolic value
to let the public know the Justice Department is out there doing
its job.” said Roy Smith, a finance professor at New York
University’s Stern School of Business and a former Goldman Sachs
Group Inc. partner. “I don’t think it extracts anything other
than an opportunity to register a symbolic victory.”
To contact the reporters on this story:
Tom Schoenberg in Washington at
tschoenberg@bloomberg.net;
David Voreacos in federal court in Newark, New Jersey, at dvoreacos@bloomberg.net
To contact the editors responsible for this story:
Sara Forden at
sforden@bloomberg.net
Joshua Gallu
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