Bramwell’s Lunch Beat: Will Guilty Plea Really Hurt Credit Suisse?

Senate Democrats split on private debt collectors for IRS
Patrick Temple-West of Reuters reported yesterday that a proposal to make the IRS hire private companies to collect unpaid taxes is dividing Senate Democrats, with some warning it could lead to harassment of low-income people, but others saying it would boost tax revenue.

The proposal from Senator Charles Schumer (D-NY) would raise an estimated $4.8 billion in new tax revenue over 10 years. New York is home to two of four firms that would likely be hired to do IRS collection work, Temple-West noted.

Cosponsored by Senator Pat Roberts (R-KS), Schumer attached the bipartisan proposal to a broad Senate tax bill meant to renew more than 50 temporary tax breaks, mostly for corporations, known as the extenders. By raising new revenue, the proposal would help offset the costs of the tax breaks.

But Senator Benjamin Cardin (D-MD) and two other Democrats are trying to remove Schumer’s proposal from the extenders bill, although tax lobbyists say they will face an uphill battle.

The proposal would let collection firms target only long-standing tax delinquencies. Taxpayers already working with the IRS to repay their taxes, as well as individuals facing certain hardships, would be exempted, according to the article.

Credit Suisse pleads guilty in felony case
As part of a deal announced on Monday, Credit Suisse agreed to one count of conspiring to aid tax evasion in a scheme that “spanned decades.” Credit Suisse, which has a giant investment bank in New York and whose chief executive is an American, will also pay about $2.6 billion in penalties and hire an independent monitor for up to two years, Ben Protess and Jessica Silver-Greenberg of the New York Times reported.

But as Protess and Silver-Greenberg noted, other than the fines and the reputational stain of being a felon, the implications of the guilty plea are likely to be limited.

“The bank may lose some clients but is otherwise expected to survive largely unscathed,” they wrote. “The plea deal also enables it to move beyond a case that had prompted a congressional hearing and had thrust the bank into an international squabble over tax dodging. If the bank had continued to fight the case, it would have been indicted, calling into question its very existence.”

Recognizing that criminal charges could prompt regulators to revoke a bank’s license to operate, the corporate equivalent of the death penalty, prosecutors met with the Federal Reserve and New York’s state banking regulator, Benjamin Lawsky, to discuss punishing Credit Suisse without putting it out of business and imperiling the economy, according to people briefed on the matter who were not authorized to speak publicly, the article stated.

Last week, the US Securities and Exchange Commission (SEC) also voted to grant Credit Suisse a temporary exemption from a federal law that requires a bank to hand over its investment-adviser license in the event of a guilty plea.

Credit Suisse chief sees little impact from tax evasion plea
Jenny Anderson of the New York Times wrote that Brady Dougan, Credit Suisse’s chief executive, said today the bank took full responsibility for its actions but emphasized that it had seen little effect on its business.

“We have found no instances where clients cannot do business with us,” he said, according to the article. “Our discussions with clients have been very reassuring and we haven’t seen very many issues at all.”

Credit Suisse shares were up about 1 percent in morning trading in Switzerland, Anderson noted.

On a call with analysts and reporters on Tuesday, Dougan said the bank would pare its assets to try and restore its capital levels in the wake of the fine.

Credit Suisse clients remain secret as bank to help US
Credit Suisse has so far avoided identifying thousands of customers who cheated the IRS. Instead, it promised to point investigators in the right direction, David Voreacos of Bloomberg wrote today.

In a deal overseen by Attorney General Eric Holder, Credit Suisse pledged to help the United States seek those names through a tax treaty with Switzerland. It also will provide other information, outlining the size and number of accounts and indicating where money went. That contrasts with UBS AG, the largest Swiss bank, which avoided prosecution in 2009 by paying $780 million and disclosing names of 250 American clients. UBS later revealed 4,450 more account holders in settling a US lawsuit, Voreacos noted.

Senator Carl Levin (D-MI), chairman of the Senate Permanent Subcommittee on Investigations, which issued a report and held a February hearing criticizing practices that the bank has now admitted, as well as the US Justice Department’s failure to get more customer names, was not happy the plea agreement yesterday didn’t include the disclosure of those names.

“It is a mystery to me why the US government didn’t require as part of the agreement that the bank cough up some of the names of the US clients with secret Swiss bank accounts,” he said, according to the article.

Credit Suisse is latest Swiss bank humbled by US tax-evasion crackdown
Credit Suisse joins three other Swiss banks – UBS, Wegelin & Co., and Bank Frey – that have been humbled by the US crackdown on tax cheats.

Andrew Morse recapped the other three instances in the Wall Street Journal Law Blog.

Statement from Credit Suisse CEO Brian Dugan (May 19)
“We deeply regret the past misconduct that led to this settlement. The US cross-border matter represented the most significant and longstanding regulatory and litigation issue for Credit Suisse. 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. We want to thank our clients and employees for their support as we continued to work through this matter and brought it to a conclusion. We can now focus on the future and give our full attention to executing our strategy.

“The settlement will reduce our second quarter net income by CHF 1,598 million. If the charge arising from the settlement had been applied at the end of the first quarter 2014, our Look-through Basel III CET1 ratio would have been 9.3 percent, rather than 10 percent. We intend to reduce our risk-weighted assets to at or below the level of end 2013 as well as take other capital actions, including the sale of surplus real estate and other non-core assets. These measures alone should be sufficient to return our Look-through Basel III CET1 ratio to 10 percent by year-end 2014. Furthermore, once this 10 percent CET1 ratio has been achieved and while continuing to accrete capital towards our 11 percent long-term target, we intend to return approximately half our earnings to shareholders through our annual distributions.”

Attorney General Eric Holder announces guilty plea in Credit Suisse offshore tax evasion case (May 19)
“Today, the Department of Justice filed a criminal information against Credit Suisse AG – a bank that is one of the largest wealth managers in the world. In the course of our painstaking, years-long investigation, the department discovered that Credit Suisse and its subsidiaries engaged in an extensive and wide-ranging conspiracy to help US taxpayers evade taxes. The bank actively helped its account holders to deceive the IRS by concealing assets and income in illegal, undeclared bank accounts. These secret offshore accounts were held in the names of sham entities and foundations. This conspiracy spanned decades. In the case of at least one wholly owned subsidiary, the practice of using sham entities to conceal funds began more than a century ago. Credit Suisse not only knew about this illegal, cross-border banking activity, they willfully aided and abetted it. Hundreds of Credit Suisse employees, including at the manager level, conspired to help tax cheats dodge US taxes.

“In the course of these activities, Credit Suisse deceived the IRS, the Federal Reserve, the Securities and Exchange Commission, and the Department of Justice. The bank went to elaborate lengths to shield itself, its employees, and the tax cheats it served from accountability for their criminal actions. They subverted disclosure requirements, destroyed bank records, and concealed transactions involving undeclared accounts by limiting withdrawal amounts and using offshore credit and debit cards to repatriate funds. They failed to take even the most basic steps to ensure compliance with tax laws. And when the bank finally began to feel pressure to correct illegal practices and comply with the law – as a result of the Justice Department’s investigation, of which they were notified in 2010 – Credit Suisse failed to retain key documents, allowed evidence to be lost or destroyed, and conducted a shamefully inadequate internal inquiry.

“Today, I can announce that Credit Suisse has agreed to plead guilty to criminal charges related to this pervasive illegal activity. This is the largest bank to plead guilty in 20 years. The bank will pay a total of $1.8 billion in the form of a fine of over $1.13 billion and nearly $670 million in restitution to the IRS. They have admitted criminal wrongdoing in a detailed Statement of Facts filed alongside the information in this case.   And they have stopped these activities, fundamentally changed their business operations, and agreed to provide critical information that will aid in our enforcement efforts – so the bank can move forward in full compliance with the law.

“This plea agreement caps a years-long investigation that has already led to law enforcement actions with respect to several individual Credit Suisse employees. Since 2011, the department has indicted eight employees at the bank, including some at the manager level; two of these have so far pleaded guilty.

“This announcement should send a firm and unequivocal message to anyone who would engage in dishonest or illegal financial activity that the Justice Department does not, and we will not, tolerate such activities. 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.

“This case shows that no financial institution, no matter its size or global reach, is above the law. When the Department of Justice conducts investigations, we will always follow the law and the facts wherever they lead. We will never hesitate to criminally sanction any company or individual that breaks the law. 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.

“This resolution, and today’s announcement, were conducted in close coordination with the bank’s financial regulators – in this case, the Board of Governors of the Federal Reserve, which today announced a $100 million penalty; the New York State Department of Financial Services, which announced a resolution totaling $715 million; and the SEC, to which Credit Suisse paid $196 million this past February.

“Because criminal charges involving a financial institution have the potential to trigger serious follow-on actions by regulatory agencies, this coordination was imperative. As the regulators have conveyed this afternoon, notwithstanding this plea agreement, the bank will move forward. And although I cannot comment on, or specify the targets of, other ongoing investigations, I am confident that this robust cooperation will serve us well in the weeks and months ahead.”

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