Credit Suisse and American Tax Evaders: Two Sets of Regulators

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For many years, the United States Congress and the Department of Justice have searched for clues on the role Credit Suisse (NYSE:CS) has played in helping American customers hide their wealth on foreign soil. The two-year review conducted by Senate Permanent Subcommittee on Investigations’ culminated in a congressional hearing and a 176-page report that chronicled how Credit Suisse bankers actively recruited American clients and assisted them avoid taxes by hiding funds offshore. The picture that emerged from the inquiry was a “classic case of banking secrecy,” as lawmakers explained. February’s Senate hearing concluded with searing indictment of the Swiss bank’s willingness to help Americans hide assets and evade taxes and of the Justice Department’s slowness in proceeding to prosecute or settle with Swiss banks under investigation. However, in recent weeks, the Justice Department has taken steps closer to inking a so-called deferred prosecution agreement with the institution.

But the Justice Department is not the only regulator with Credit Suisse under its microscope. The Zürich, Switzerland-based financial institution is in the midst of a double-pronged inquiry. While the Justice Department’s criminal investigation is drawing to a close, the civil inquiry launched by Benjamin Lawsky — New York State’s Superintendent of Financial Services — has just begun. Sources familiar with the situation informed The New York Times that office of the state’s top financial regulator has already requested documents from Credit Suisse and petitioned the Subcommittee on Investigations for its collection of internal Credit Suisse documents. Even though this new spotlight on the bank’s will keep Credit Suisse embroiled in legal problems for even longer, the bigger threat to the bank is the pressure of federal prosecutors.

The Justice Department is pushing for a deferred-prosecution agreement, which would defer an indictment in return for a large cash penalty and other concession. It is expected that any fine levied on the bank by the Justice Department will exceed the $780 million that UBS (NYSE:UBS) — Switzerland’s largest bank — paid in 2009 to settle similar charges. Plus, the Lawsky case could bring a fine of its own. Federal prosecutors also want an admission of guilt from a Credit Suisse subsidiary, as people briefed on the case told the Times. A guilty plea is a punishment banks generally avoid in all but the most serious cases.

Last week, in preparation for a settlement, the bank announced it had set aside approximately $528 million for legal expenses.

These two investigators follow closely on the heels of Credit Suisse’s $200 million settlement of a Securities and Exchange Commission civil case. The growing momentum of the examination of the tax avoidance assistance the Swiss bank provided to American customers could produce a stronger governmental response. The multiple investigations have added some competition into the investigative process; Lawsky’s office has examined several cases in recent months, while the Justice Department’s investigation has proceeded slowly.

But more importantly, the increased regulatory oversight will give the government’s efforts to collect taxes and punish the banks involved in tax avoidance more strength. Credit Suisse may not be the first bank to settle with government authorities, but a widespread government response could produce a much louder message of deterrence to the Swiss banking industry, which is a principal sector of the country’s economy.

Even with the prosecution of a total of 73 account holders and 35 bankers, as well as the identification of 14 banks as suspects, the Justice Department’s investigation has lagged for quite some time.

Credit Suisse is suspected of sheltering an estimated $10 billion to $12 billion worth of assets in 22,000 American accounts. So far, the bank has only revealed to American authorities the identities of about 1 percent of account holders. “We’re really talking about a minuscule number of individuals who have intentionally evaded U.S. taxes” that have been uncovered, Republican Senator McCain of Arizona said at the hearing. In response to similar allegations, the institution’s executives repeatedly said that Swiss law prevented them from disclosing certain client information. Had the United States Senate ratified a bilateral treaty with Switzerland, more transparent disclosures would be allowed.

The 176-page Senate report described the extent the bank went to help Americans avoid paying taxes, including helping clients to set up shell corporations and sending bankers to the United States to avoid create paper trails. “One former customer described how, on one occasion, a Credit Suisse banker travelled to the United States to meet with the customer at the Mandarin Oriental Hotel and, over breakfast, handed the customer bank statements hidden in a Sports Illustrated magazine,” stated the document.

Bank executives have acknowledged that, “Misconduct, centered on a small group of Swiss-based private bankers, previously occurred” at Credit Suisse, as the bank’s Chief Executive Brady Dougan testified before the Senate subcommittee. “While that employee misconduct violated our policies, and was unknown to our executive management, we accept responsibility for and deeply regret these employees’ actions.” In 2011, federal prosecutors indicted seven Credit Suisse bankers for abetting tax evasion.

He also admitted that, “Credit Suisse recognizes the historical reality that Swiss laws that protect client identity — commonly referred to as ‘Swiss banking secrecy’ — were vulnerable to abuse and were abused. Specifically, it is clear that some U.S. clients of Swiss banks historically viewed Swiss banking secrecy as a way to hide the fact that not all of their income was taxed and declared to their local tax authorities.” But since the subcommittee’s 2008 investigation, the bank has taken “proactive steps” that restrict the bank’s clientele to those Americans who have established compliance with U.S. tax laws, Dougan added.

“We’re interested in collecting taxes that we’re owed, that were evaded,” said Democratic Senator Carl Levin of Democrat, who chairs the Permanent Subcommittee on Investigations. “We simply have got to use our own domestic laws to force cooperation from the banks.” The stronger scrutiny of Credit Suisse from both the Justice Department and Lawsky might appease Senate lawmakers like Levin who has said United States government had let “them get away with it,” in reference to Credit Suisse.

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