Credit Suisse Likely to Settle Criminal Tax Probe, Lawyers Say

Credit Suisse Likely to Settle Criminal Tax Probe
A tram passes the Credit Suisse Group AG headquarters in Zurich, Switzerland. Photographer: Gianlucca Colla/Bloomberg

Credit Suisse Group AG, the Swiss bank facing possible U.S. indictment for aiding tax evasion, will likely settle with prosecutors by admitting wrongdoing and paying a penalty that may exceed $1 billion, tax lawyers said.

Credit Suisse, the second-largest Swiss bank, has too much to lose by fighting the Justice Department and risking indictment, said lawyers not involved in the case. Prosecutors told the bank last month that it’s a target of a probe into its former cross-border banking services to U.S. customers.

The lawyers expect Credit Suisse to reach an agreement like that of UBS AG, which was charged in 2009 with aiding tax evasion by U.S. clients. UBS avoided prosecution by paying $780 million, admitting it fostered tax evasion, and giving the U.S. Internal Revenue Service data on more than 250 accounts. It later turned over data on another 4,450 accounts.

“The UBS deferred-prosecution agreement is going to be a template for what happens with Credit Suisse,” said tax attorney Bryan Skarlatos of Kostelanetz & Fink LLP in New York. “It’s very likely that they’ll reach an agreement with the U.S. government, pay a fine, and possibly turn over names.”

Victoria Harmon, a spokeswoman for Zurich-based Credit Suisse, declined to comment, referring to a bank statement on July 21. Seven Credit Suisse bankers, including the former head of North American offshore banking, Markus Walder, were indicted that day in federal court in Alexandria, Virginia, on a charge of helping U.S. clients evade taxes through secret accounts.

‘Fully Compliant’

“Credit Suisse is committed to a fully compliant cross-border business,” the bank said in that statement. “Subject to our Swiss legal obligations and throughout this process we will continue to cooperate with the U.S. authorities in an effort to resolve these matters.”

Tax attorney Robert McKenzie said “it’s an absolute certainty” that Credit Suisse will enter into a deferred-prosecution deal with the Justice Department.

“The only smart thing you can do when you’re caught is to take the best deal and pay some money,” said McKenzie of Arnstein & Lehr LLP of Chicago. “If Credit Suisse is indicted, the government could seek to forfeit the U.S. assets of the bank. A bank that’s convicted of a felony won’t have a license to operate in this country.”

Walder and the other Credit Suisse bankers helped U.S. customers evade income tax through accounts that weren’t declared to the IRS, according to the indictment.

‘Aiding and Abetting’

“Managers and bankers working in the cross-border business knew and should have known that they were aiding and abetting U.S. customers in evading their U.S. income taxes,” according to the indictment. Walder couldn't be immediately reached for comment and has yet to formally respond to the charges.

In the fall of 2008, the bank maintained thousands of secret accounts for U.S. customers with about $4 billion in assets, according to the indictment.

The U.S. Attorneys’ Manual says a target is “a person as to whom the prosecutor or the grand jury has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant.”

Since 2008, the U.S. has filed criminal tax charges against more than three dozen former U.S. clients of Zurich-based UBS, Switzerland’s largest bank, Credit Suisse, and London-based HSBC Holdings Plc, Europe’s biggest bank. Most of those clients have pleaded guilty and admitted they didn’t file a Report of Foreign Bank and Financial Accounts form, or FBAR. As a penalty, prosecutors demand 50 percent of the highest account balance in the previous six years.

$4 Billion

To settle the Credit Suisse case, the Justice Department can demand half of at least $4 billion on the theory that the bank caused FBAR violations, said Jeffrey Neiman, a former federal prosecutor who handled the UBS case. Banks aren’t required to file FBARs.

“If the Justice Department applies the same formula to the bank that it applies to individuals, it could seek up to $2 billion from Credit Suisse,” said Neiman, who is now in private practice in Fort Lauderdale, Florida.

The department also wouldn’t enter into a deferred-prosecution agreement unless the bank cooperated, which means “the production of names of U.S. clients who had money concealed at Credit Suisse in Switzerland,” Neiman said. “They’re also going to have to admit criminal wrongdoing in the form of a statement of facts.”

McKenzie said the Justice Department won’t demand $2 billion because “UBS was the largest bank in Switzerland and they didn’t pay anywhere near that.”

Swiss Government

He said a more appropriate penalty is based on the amount of tax loss to the government caused by undeclared interest, dividends and capital gains in the accounts.

“Part of the bargaining is just how much money was the loss to the government as a result of these activities,” he said.

Any settlement would likely require the involvement of Switzerland's government, which typically makes it illegal to turn over account data protected by Swiss bank secrecy, according to Neiman and other tax lawyers.

After UBS agreed to hand over data on 255 accounts as part of its deferred-prosecution agreement, the Swiss Federal Administrative Court ruled in January 2010 that the nation's financial regulator exceeded its authority in telling UBS to make the disclosures to the U.S. Last month, the Swiss Federal Supreme Court ruled that the disclosures were lawful.

Swiss Supervisory Authority

The Swiss Financial Market Supervisory Authority, or Finma, ``proceeded on the assumption that if this data hadn't been disclosed, the U.S. Department of Justice would have filed an indictment against UBS, which would arguably have caused the bank's ruin and consequently have had serious repercussions for the Swiss economy,'' the Lausanne-based court said.

After resolving the UBS criminal case, the U.S. also filed a lawsuit seeking data on another 52,000 secret accounts. The Swiss and U.S. governments negotiated an agreement for the bank to surrender the names of 4,450 clients. The Swiss Parliament later ratified that agreement.

``This demonstrates the game of high-stakes poker that's going on between the U.S. and Switzerland, with Credit Suisse caught in the middle and Swiss secrecy hanging in the balance,'' Neiman said.

Whether the U.S. government can apply a 50 percent penalty to Credit Suisse “is going to be the subject of horse trading,” said tax attorney Scott Michel of Caplin & Drysdale in Washington.

'More or Less'

“You have to wonder whether they would pay more or less than UBS,” Michel said. “There’s a general sense that Credit Suisse didn’t have as many U.S. clients that they marketed to aggressively in the same way that UBS did. If that’s true, there would be less income tax that had gone unpaid compared to UBS.”

Before the UBS deferred-prosecution deal, U.S. prosecutors said the bank managed $20 billion in undeclared assets for American clients.

The Justice Department has entered dozens of deferred-prosecution agreements with companies, including Credit Suisse. In December 2009, the bank agreed to pay $536 million to resolve claims that it helped process payments that let Iran and other nations avoid government sanctions and gain access to U.S. financial markets.

Prosecutors said the bank made more than $1.6 billion in illegal transactions involving Iran, Sudan, Burma, Cuba and Libya from the mid-1990s through 2006. Credit Suisse settled with the Justice Department and New York state prosecutors at the Manhattan District Attorney’s Office, which agreed to dismiss the case in December 2011 if the bank complies with the agreement.

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