Legal Issues Mount for Credit Suisse - Analyst Blog

On Friday, Benjamin Lawsky, superintendent of New York's Department of Financial Services DFS became the latest regulator to order tax-evasion probe on Credit Suisse Group AG CS. The regulator has demanded documents to scrutinize whether the Swiss bank has concealed facts from the New York authorities about facilitating tax evasion by American clients.

Legal troubles seem endless for Credit Suisse. On one side, where the Department of Justice (DOJ) is about to conclude its criminal inquiry related to tax evasion, a civil investigation has been initiated in New York. Notably, the DOJ has been continuing with its investigation on the Swiss bank since 2011.

After UBS AG UBS paid $780 million in 2009 to regulators as settlement related to U.S. criminal and civil investigation and acknowledged that it had helped clients evade taxes, the DOJ still has criminal investigations pending against 14 Swiss banks.

Following UBS AG's settlement, two other Swiss banks, Wegelin & Co. and Liechtensteinische Landesbank AG paid settlement charges of roughly $74 million and $24 million, respectively. However, an initiative by the DOJ has led to 106 Swiss banks seeking non-prosecution agreements on tax-evasion charges.

Therefore, in the coming weeks, though a major issue will be resolved for Credit Suisse, the bank will still be embroiled in the tax-evasion issue.

Lawsky has also requested the U.S. Senate's Permanent Subcommittee on Investigations for documents related to the board's scrutiny of Credit Suisse's private banking and wealth management business.

Recently, the Senate subcommittee's report concluded that Credit Suisse opened banking services at the Zurich airport to around 22,000 customer accounts that were hidden from the Internal Revenue Service IRS. The bank also resorted to carrying clients in a special elevator and fixing appointments in locations outside its operating areas. Moreover, the bank was criticized for loopholes in its internal controls over senior executives.

The tax evasion issue comes after the Swiss bank reached a settlement with the SEC in February worth $196 million and accepted the charges related to providing unregistered cross-border securities services to clients in the U.S.

Moreover, last week, Credit Suisse increased its litigation reserve by about $528 million related to an ongoing tax probe by the DOJ. Further, the bank might need to pay more penalties when Lawsky's investigation concludes. The New York regulator is scrutinizing the role of the bank's New York employees in crafting the tax shelters. Moreover, any loss of tax revenue for New York is also been examined.

We believe that ongoing investigations on Swiss banks like Credit Suisse will be a step forward toward reducing the huge losses incurred by the U.S. Treasury due to offshore tax evasion by Americans.

Regulatory authorities are investigating scandals and are determined to put forward a landmark judgment to terminate such shrewd practices in the future, bring justice to the sufferers and punish the wrongdoers. While settlement of such issues will put to rest a long-drawn investigation and bring reprieve to the banks, this comes as a huge blow to their financials.

Currently, Credit Suisse carries a Zacks Rank #4 (Sell). Better-ranked foreign banks include Westpac Banking Corporation WBK and Sumitomo Mitsui Financial Group, Inc. SMFG, both carrying a Zacks Rank #1 (Strong Buy).