Credit Suisse not too big to jail

Credit Suisse Group AG is a Switzerland-based multinational financial services holding company headquartered in Zürich that operates the Credit Suisse Bank and other financial services investments.

Credit Suisse pleaded guilty to federal criminal charges on Monday May 19 2014. The banking giant pleaded guilty to an “extensive and wide-ranging conspiracy” to help US clients evade taxes over the course of several decades and agreed to pay about $2.6bn in fines as it became the first large global bank in two decades to admit to criminal charges.

As part of the pact, the US Department of Justice will receive $1.8bn in fines and restitution. New York State’s Department of Financial Services will receive $715m, with $100m going to the Federal Reserve.

Credit Suisse said it would book an after-tax charge of SFr1.6bn ($1.79bn) in the second quarter and
expected no impact on its licences, nor any material impact on its operational or business capabilities. Brady Dougan, chief executive, said: “We deeply regret the past misconduct that led to this settlement.” 

It is the first time in a generation that such a large financial institution has pleaded guilty.

Eric Holder, the US attorney-general was criticized last year after telling Congress that large banks had become hard to prosecute, appeared to foreshadow the guilty plea in a video message earlier this month in which he said no financial institution was "too big to jail."

The US attorney-general, said hundreds of bank employees, including managers, were involved in the misconduct over decades. “This case shows that no financial institution, no matter its size or global reach, is above the law,” Attorney General Eric Holder said announcing the conviction. “Credit Suisse conspired to help U.S. citizens hide assets in offshore accounts in order to evade paying taxes. When a bank engages in misconduct this brazen, it should expect that the Justice Department will pursue criminal prosecution to the fullest extent possible, as has happened here.”

“A company’s profitability or market share can never and will never be used as a shield from prosecution or penalty. And this action should put that misguided notion definitively to rest,” said Mr Holder.

The US DOJ is seeking to send a message that it is punishing financial institutions yet also limit the
fallout of the plea. The key to the pact was negotiating an assurance that regulators would not revoke Credit Suisse’s licence to conduct business in the US, which would have had instant consequences.

The DoJ insisted on a guilty plea by Credit Suisse in part because it did not feel the bank had been fully co-operative with the investigation and for the destruction of critical documents, people familiar with the matter have said.

As part of its deal, Credit Suisse must disclose its cross-border activities and cooperate in requests for account information from the U.S. government. The bank must also provide info about other banks that helped transfer funds into secret accounts and close the accounts of Americans who improperly report their assets to the U.S. government.

Credit Suisse has also agreed to terminate three employees previously indicted for the tax evasion scheme and install a monitor, determined by the Discover Financial Services (DFS), to review the past misconduct and recommend remedial measures. Mr Dougan and other top bank figures remained unscathed despite calls in Switzerland for their resignations.

Credit Suisse bankers aided thousands of wealthy Americans in concealing their money from U.S. authorities, the Department of Justice said. The bank helped American clients set up shell accounts to shuttle their money overseas and then solicited false Internal Revenue Service (IRS) documents to make the accounts seem legitimate. According to a U.S. Senate subcommittee report released in February, Credit Suisse recruited new clients at bank-sponsored events, like golf tournaments in Florida and a gala in New York. In one instance, a Credit Suisse employee handed a client secret bank statements hidden in a copy of Sports Illustrated during a breakfast meeting. Credit Suisse had 22,000 U.S. customers with about $13.5 billion in their Swiss accounts in 2006, the “vast majority” of which was undeclared to U.S. authorities, according to the report.

Before the guilty plea was announced, one hedge fund manager overseeing $1bn said the firm would “monitor developments and will be prepared to make any necessary adjustments”. The manager said while they did not see any immediate risk to keep trading with the bank, the firm would watch the interbank lending market to gauge whether other banks were pulling back their business.

“All things being equal, institutional investors may still pull back some business temporarily or put CS in a penalty box. It is not worth having to answer those questions,” a second client of the bank said.

The case was filed in federal court in suburban Alexandria, Virginia, in July 2011, where eight former Credit Suisse bankers were indicted on federal charges of conspiracy to defraud the US in connection with the tax probe. Two of them pleaded guilty earlier this year. It is not clear whether charges against other individuals will follow.

Credit Suisse chief executive Brady Dougan, who has said previously that senior executives at the bank were not aware that some bankers were helping U.S. customers evade taxes, said in a statement Monday that the bank regrets its past "misconduct" and was looking to resolve the matter and move forward. The bank has said it stopped providing private banking services outside the U.S. to Americans several years ago.

Credit Suisse earned $2.6 billion in profits in 2013 and generated $28.3 billion in revenue. The bank said the settlement would reduce its second-quarter net profit by 1.6bn Swiss Francs ($1.8bn; £1bn).

The administration's action against Credit Suisse, a banking fixture on Wall Street, comes amid public outrage that boiled over from the financial crisis that plunged the economy into the deepest recession since the Great Depression of the 1930s. Calls for holding big Wall Street banks accountable, and sending top executives to jail, have come from consumer advocates, lawmakers and others, putting the Justice Department on the defensive.                                                                                  

U.S. government officials hope the Credit Suisse case quells criticism that they have not been aggressive enough in their pursuit of banks.

A report from the Senate Permanent Subcommittee on Investigations accused the Justice Department of lax enforcement and faulted the government for gleaning only 238 names of U.S. citizens with secret accounts at Credit Suisse, or just 1 percent of the estimated total.

Sen. Carl Levin, D-Mich., who heads the subcommittee that conducted the investigation, said Monday that he was disappointed that the bank was not obligated under the deal to provide names of U.S. clients with secret Swiss bank accounts. But Justice Department officials said they were satisfied with the overall amount of customer information that the bank would be required to turn over.

A spokesman for Finma declined to comment on the possible impact of the settlement on Credit Suisse's stability.

Still, Credit Suisse's relationships with its clients and partners may take a hit. Many pension and mutual funds have guidelines that prevent them from dealing with institutions that have pleaded guilty to criminal charges. Other clients may simply choose to steer clear of a bank perceived to have trouble, experts say.

"If you're a customer and you have a choice between a bank that has a reputational hit versus one that doesn't, you might decide to go with the one that doesn't," said Andrea Bonime-Blanc, who runs GEC Risk Advisory, a consultancy firm.

Ajibola Aderonke is an auditor at professional services firm Ernst & Young (EY). She previously worked another Big 4 accounting firm PwC. She can be reached at ajibolaaderonke@gmail.com for ideas and suggestions. The post above and its ensuing comments, if any, is purely the opinion of the writer.