Credit Suisse pleads guilty to tax evasion

Credit Suisse is admitting it’s guilty of evading taxes. It’s a huge blow for large banks trying to stay out of government’s way.

Ben Protess and Jessica Silver-Greenberg wrote for the New York Times that it was the first time in two decades that a bank is admitting guilt:

Credit Suisse has done what no other huge bank has done in over two decades: plead guilty to criminal wrongdoing.

In a sign that global banking giants are no longer immune from criminal charges — despite public concerns that financial institutions have grown so large and interconnected that they are “too big to jail” — federal prosecutors demanded that Credit Suisse’s parent company plead guilty to helping thousands of American account holders hide their wealth and evade taxes.

In the Federal District Court in Alexandria, Va., a Credit Suisse lawyer, Alan Reifenberg, accepted the plea agreement in a 45 minute hearing before Judge Rebecca B. Smith.

As part of a deal with the Justice Department, the Swiss bank agreed to plead to one count of conspiring to aid tax evasion. 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.

The Wall Street Journal story by Andrew Grossman and John Letzing pointed out that prosecutors were betting that the guilty plea won’t hurt the bank:

The settlement marks the Justice Department’s biggest victory in its crackdown on tax evasion since Credit Suisse’s crosstown rival UBS AG agreed to pay $780 million as part of a deferred prosecution agreement in 2009. As part of that deal, UBS acknowledged aiding U.S. tax evasion but didn’t plead guilty.

UBS was charged with helping Americans hide about $20 billion in assets from tax authorities. However, the period between actions against Switzerland’s two biggest banks has seen an escalation in the U.S. crackdown. In addition, UBS’s penalty came amid the financial crisis, which had deeply affected the Zurich-based bank’s stability.

Prosecutors took steps to limit the potential ripple effects from a guilty plea by winning assurances from state and federal regulators not to take punitive measures that would cripple the bank, such as stripping Credit Suisse of its ability to operate in the U.S. The bank’s chief executive and chairman aren’t expected to lose their jobs over the case, despite calls by some in Switzerland for them to leave the firm.

In extracting a guilty plea prosecutors are taking somewhat of a gamble that the criminal charge won’t harm the bank in unanticipated ways. Prosecutors have won admissions of guilt before, sometimes with catastrophic outcomes. Junk-bond powerhouse Drexel Burnham Lambert Inc. ultimately collapsed after pleading guilty to six counts of fraud in 1989 and accounting giant Arthur Andersen was felled by a criminal indictment.

As Credit Suisse’s own problems first arose, executives generally expected a settlement of less than $500 million was possible, according to a person familiar with the bank’s thinking, a sum they thought would reflect the smaller size of the bank’s business with undeclared American assets compared with UBS’s.

The Reuters story by Aruna Viswanatha, Douwe Miedema and Karen Freifeld had these details about the bank’s wrongdoing:

The Swiss bank, which has a large business managing wealthy clients’ money, helped them withdraw money from their undeclared accounts by either providing hand-delivered cash to the United States or using Credit Suisse’s correspondent bank accounts in the U.S., the Justice Department said.

Credit Suisse was the largest bank to plead guilty to a criminal charge in 20 years, Holder said, amid a push by U.S. politicians for tougher punishments for big banks after the 2007-2009 financial crisis.

Dougan, who has come under pressure from Swiss politicians to resign, and Chairman Urs Rohner, would both stay in their jobs as part of the settlement, a person close to Credit Suisse said on Monday.

U.S. authorities have not often sought criminal convictions against a financial institution, fearing it could put a firm out of business, and result in lost jobs for people that had nothing to do with the crime, or jeopardize the financial system.

Ahead of the official announcement of the agreement, financial markets had been calm in the face of potentially stiff penalties against Credit Suisse. There had been no indications other banks have stopped doing business with the Swiss bank. It was still obtaining short-term funds in the repo and commercial paper markets, analysts said.

The Financial Times story by Kara Scannell and Stephen Foley outlined some of the consequences of the guilty plea:

Certain pension funds cannot do business with a convicted person or entity, while others may reduce their exposure to the bank near-term over the uncertainty. On Friday, Lloyd Blankfein, Goldman Sachs’ chief executive, indicated his firm would try to keep trading with Credit Suisse.

DoJ is also pressuring BNP Paribas to plead guilty and pay over $3.5bn for doing business with Iran in violation of US sanctions.

The DoJ’s move marks a significant shift by the DoJ to demand a guilty plea by the holding company of a bank and represents a sea change from the 2002 indictment of Arthur Andersen, which prompted client defections which crippled the auditor before it was found guilty of obstructing prosecutors’ investigation into Enron, its audit client.

Prosecutors became more hesitant after that fallout, but have since come under criticism for being too soft on banks following the financial crisis.

I’m sure that prosecutors would like for this to be the first of several guilty pleas, especially since many suffer from the perception they could do more to penalize banks after the financial crisis. Many pundits have talked about the unintended consequences of having banks plead guilty to crimes. It will be telling to see what happens next.