Credit Suisse Pleads Guilty, Settles U.S. Tax Probe - Analyst Blog

Credit Suisse AG, the major arm of Credit Suisse Group AG CS pleaded guilty to criminal charges of assisting its U.S. clients to evade tax, marking the first instance in 10 years in which a financial giant accepted allegations in the U.S. The company will also shell out $2.8 billion as settlement charges to the U.S. authorities.

While regulators had the authority to revoke Credit Suisse's banking license, they did not do that.

The plea agreement revealed that Credit Suisse in several ways aided U.S. clients in hiding their undeclared accounts from Internal Revenue Service (:IRS) which includes helping clients to use false entities, destruction of account information forwarded to the U.S. and avoiding currency transaction reporting requirements by structuring fund transfers.

The Prolonged Investigation

Investigations by the U.S. Department of Justice (:DOJ) led to the indictment of seven Credit Suisse officials in Jul 2011, for aiding U.S. clients in tax evasion and hiding assets from the IRS.  Investigations gained further traction in the wake of the release of the U.S. Senate report – Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts – in Feb 2014. The report accused Credit Suisse of undertaking banking operations that aided tax evasion by U.S clients from the period between 2001 and 2008.

Further, the report revealed that Credit Suisse opened Swiss accounts for more than 22,000 U.S. clients with more than CHF12 billion in assets, out of which the U.S. extracted the names of only 230 account holders owing to limitations posed by Swiss secrecy laws.

The Settlement

The total settlement amount of $2.8 billion comprises payment of $2 billion to the DOJ (including $196 million for the SEC as declared in Feb 2014), $100 million to the Federal Reserve while the New York State Department of Financial Services will receive around $715 million.

The plea agreement requires Credit Suisse to take several steps, which include full disclosure of its cross-border operations, cooperation in treaty requests regarding account information and revealing detailed information pertaining to other banks that moved funds into secret accounts. Credit Suisse is also required to take measures in all its present and future transactions with U.S. clients in order to ensure compliance with U.S. laws including Foreign Account Tax Compliance Act and related tax treaties.

Expected Impact

Credit Suisse stated that owing to the settlement, its second-quarter 2014 net income will decline by CHF 1,598 million. Further, the company stated that it proposes to bolster its capital position by reducing risk-weighted assets at par or below the 2013 level and offloading non-core assets.

The company believes that it will achieve Look-through Basel III CET1 ratio to 10% by the end of 2014.  Also, it stated that upon achieving its capital ratio targets, the company plans to return around 50% of the earnings to shareholders through annual dividends.

What Lies Ahead?

In an attempt to restrict Credit Suisse's stock price from plunging, the settlement was announced after the market closed in the U.S. Though the license has not been revoked in order to prevent a collapse in the sector, nothing conclusive can be derived as it is a matter of time to witness any probable unfavorable impact on the financial sector or in the market owing to such stricter penalties on the company.

On the other hand, though no financial institution has indicated to cease business transactions with Credit Suisse, its association with alliances and clients may be impacted to some extent. Several pension and mutual funds have policies that restrict them from conducting operations with companies that have pleaded guilty to criminal allegations.  

Bottom Line

Credit Suisse is not the only company to be inflicted with a tax evasion probe, but the name stands among several other accused Swiss banks. UBS AG UBS settled a similar probe with the payment of $780 million to the regulators in 2009.

This settlement is marked as one of the significant cases as a major bank like Credit Suisse pleaded guilty. Of course it imparts a warning message for all other Swiss banks that are undergoing a similar probe.

Notably, recently the Swiss units of big Wall Street players like The Goldman Sachs Group, Inc. GS and Morgan Stanley MS have consented to cooperate with the DOJ regarding the ongoing probe into their alleged involvement in tax evasion practices.

Credit Suisse currently holds a Zacks Rank #4 (Sell).

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