Credit Suisse Said Close to $2.5 Billion Deal in Tax Probe

May 16, 2014 9:21 am ET

(Updates share price in sixth paragraph.)

May 16 (Bloomberg) -- Credit Suisse Group AG is close to reaching an agreement to plead guilty and pay about $2.5 billion to the U.S. Justice Department and regulators to resolve investigations into whether it helped Americans evade taxes, three people familiar with the matter said.

The Zurich-based bank would pay about $1.7 billion to the Justice Department, at least $600 million to the New York Department of Financial Services and $100 million to the Federal Reserve, said two of the people, who asked not to be identified because the matter isn’t public. The proposed accord could be announced as early as next week, the people said.

“That seems higher than what everybody was anticipating,” said William Sharp, an American tax lawyer who splits his time between Switzerland and the U.S. “It’s mutually beneficial for both the bank and the U.S. government to put this dispute behind them. It’s been dragging on for many years, and frankly could drag on for several more years.”

The parent company would plead guilty in federal court in Alexandria, Virginia, one of the people said. A guilty plea by Credit Suisse’s parent company would be the first by a major global bank in the U.S. in more than two decades. Switzerland’s second largest bank would admit to a statement of facts still being negotiated, and the firm wouldn’t have to disclose the names of U.S. account holders, the person said.

Holder Criticism

“It’s a phenomenal amount of money,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA, adding that the bank’s Basel III common equity ratio would probably fall below the 10 percent level it reported for the end of March. Credit Suisse is targeting a ratio above 11 percent. “That’s not what you want when you’re trying to get cash back to shareholders, but this thing is becoming something that we just want to see the end of,” Wheeler said.

Credit Suisse rose 0.1 percent to 26.01 francs by 3:20 p.m. in Swiss trading. The stock is down 7.3 percent over the past two weeks, compared with a 1.8 percent decline in the Bloomberg Europe Banks and Financial Services Index, which tracks 43 companies.

U.S. Attorney General Eric Holder is seeking to blunt criticism from lawmakers that the Justice Department considered large banks immune from prosecution after the 2008 financial crisis because of their size and importance to the economy. Holder has been faulted for settlements that let banks escape criminal charges while paying fines, admitting wrongdoing and improving controls.

Guilty Plea

The last global bank to plead guilty in the U.S. was Credit Lyonnais, which admitted in January 2004 it made false statements to the Federal Reserve. Banks including Credit Suisse, UBS AG, HSBC Holdings Plc and JPMorgan Chase & Co. avoided convictions through settlements in recent years. While prosecutors have extracted guilty pleas from subsidiaries of some large banks, they have spared holding companies.

U.S. authorities are also seeking more than $3.5 billion from BNP Paribas SA to settle federal and state investigations into the Paris-based lender’s dealings with sanctioned countries including Sudan and Iran, according to people familiar with the matter.

Calvin Mitchell, a spokesman for Credit Suisse, and Dena Iverson, a Justice Department spokeswoman, declined to comment.

SEC Probe

Last month, Credit Suisse set aside 425 million francs ($477 million) in provisions for the Justice Department probe, in addition to 295 million francs for U.S. tax matters in 2011. It agreed to pay $196.5 million in February to settle a related investigation by the U.S. Securities and Exchange Commission.

Seven Credit Suisse bankers and a trust company manager were indicted in Alexandria in July 2011 on a charge of conspiring to help U.S. clients hide $4 billion in assets from the Internal Revenue Service. The Justice Department told the bank that month that it was a target of prosecutors.

The bank is the largest of 14 Swiss firms facing similar criminal investigations. The U.S. legal assault seeks to chip away at the promotion of tax evasion through bank secrecy in Switzerland, the world’s largest cross-border financial center with $2.2 trillion in assets.

In February, a Senate subcommittee issued a report and held a hearing that blasted the bank for helping Americans dodge taxes and the Justice Department for not aggressively pursing the names of account holders through subpoenas and other enforcement tools.

CEO’s Apology

Chief Executive Officer Brady Dougan apologized in testimony to the Senate panel, saying a small group of Swiss- based bankers appear to have broken U.S. laws.

“This was a very small business from our point of view, less than 1 percent of the global profitability of the global bank,” Dougan said at the hearing.

The report detailed the bank’s wooing of wealthy Americans with invitations to the annual Swiss Ball in New York and golf tournaments in Florida and the Bahamas. A branch office at the Zurich airport with the code name “SIOA5” offered banking services to clients passing through on skiing holidays.

Credit Suisse helped clients open accounts under false names and delivered account statements discreetly. One client was given an account statement hidden in a Sports Illustrated magazine. Another client said he was transported to a meeting in an elevator with no buttons that was remotely controlled. He signed orders to destroy account statements afterward.

Treaty Requests

Through tax treaty requests, the Justice Department got names of the holders of only 238 out of the 22,000 accounts held by Americans, according to the Senate report.

By contrast, the U.S. got the identities of 4,700 accounts holders in settling a criminal probe and civil lawsuit in 2009 with UBS AG, Switzerland’s largest bank. UBS paid $780 million and admitted fostering tax evasion.

The Credit Suisse case involves tax evasion by American clients that dates back to the 1950s, according to the 2011 indictment of seven bankers.

Managers 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. It outlined how bankers helped 35 American customers use sham companies, foundations and trusts to hide money from the IRS.

Bankers told U.S. clients to keep no records and access offshore funds with credit and debit cards. Unlicensed bankers picked up and dropped off cash. One client, identified as Customer 17, carried $250,000 from the U.S. to Switzerland by hiding cash in nylon pantyhose wrapped around his or her body.

The case against the bank grew stronger when two of the people under indictment pleaded guilty in recent weeks and agreed to help prosecutors. Andreas Bachmann, a former banker, and Josef Dorig, a Swiss trust company owner, both said they helped U.S. customers set up nominee accounts in tax havens.

Dorig implicated some of the other bankers under indictment, including Markus Walder, former head of North American offshore banking; Susanne Ruegg-Meier, a former member of senior management in cross-border banking; and Roger Schaerer, who worked in the bank’s New York office and was a senior manager. They haven’t responded to the 2011 indictment.

--With assistance from Elizabeth Dexheimer in New York and Elena Logutenkova in Zurich.