Credit Suisse Pleads Guilty, Pays $2.6 Billion in Tax Probe

May 19, 2014 7:38 pm ET

(Updates with impact on quarter’s earnings, CEO’s statement starting in the second paragraph.)

May 19 (Bloomberg) -- Credit Suisse AG agreed to pay $2.6 billion in penalties and pleaded guilty to helping Americans cheat on their taxes, making it the first global bank in a decade to admit to a crime in a U.S. courtroom.

The plea also signals a tougher posture by the Justice Department, which has faced criticism that it avoided pursuing large banks after the 2008 financial crisis because of the potential economic fallout. The firm said the deal will cut second-quarter earnings by 1.6 billion francs ($1.79 billion).

“This case shows that no financial institution, no matter its size or global reach, is above the law,” Attorney General Eric Holder said during a press conference. He said “a company’s profitability or market share can never and will never be used as a shield from prosecution or penalty. And this action should put that misguided notion definitively to rest.”

The bank will pay $1.8 billion to the U.S., which includes almost $670 million in restitution to the Internal Revenue Service. The penalty also involves a $715 million payment to New York’s Department of Financial Services and $100 million to the Federal Reserve. The state banking regulator also called for the termination of certain employees and an independent monitor, the person said.

Executing Strategy

Credit Suisse AG is the bank subsidiary of the ultimate parent, Credit Suisse Group AG. Credit Suisse AG has dozens of subsidiaries that conduct most of the firm’s business, according to its most recent annual report. The bank was charged by the U.S. along with two subsidiaries earlier today.

Credit Suisse Group AG Chief Executive Officer Brady Dougan, an American, downplayed the offshore business and the extent of the wrongdoing during a Senate hearing in February. Dougan, 54, is starting to lose support in Switzerland, with the Swiss Social Democrats, the second-biggest party in parliament, calling for his resignation along with that of Chairman Urs Rohner.

“We can now focus on the future and give our full attention to executing our strategy,” Dougan said today in a statement, in which the company estimated what effect the deal will have on the quarter’s earnings. “We have seen no material impact on our business resulting from the heightened public attention on this issue in the past several weeks.”

The company will reduce risk-weighted assets to a level at or below what it was at the end of 2013 and take other steps to bolster capital, such as selling surplus real estate and other non-core assets, Dougan said.

Assisting Clients

Credit Suisse assisted U.S. clients in using sham entities to disguise undeclared accounts, failed to maintain U.S. account information and destroyed records sent to U.S. clients, according to court papers filed in Alexandria federal court.

The bank also helped clients withdraw money from accounts by providing hand-delivered cash or using Credit Suisse’s correspondent bank accounts in the U.S., the government said. The bank structured such transactions in a way that would evade currency reporting requirements, according to the filing.

Credit Suisse hasn’t identified as many account holders as bigger rival UBS AG did in its earlier agreement.

Avoid Prosecution

In 2009, UBS avoided prosecution by paying $780 million, admitting it fostered tax evasion and disclosing to the U.S. the names of 250 American clients. UBS later settled a U.S. lawsuit by revealing the names of 4,450 more account holders.

The last global bank to plead guilty in the U.S. was Credit Lyonnais SA, which admitted in 2004 it made false statements to the Federal Reserve. Banks including Zurich-based Credit Suisse, UBS, 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.

The Credit Suisse case involves tax evasion by U.S. clients that dates back decades, according to the government. After U.S. prosecutors charged seven Credit Suisse bankers and a trust company manager in 2011 for helping Americans hide $4 billion from the IRS, the case languished.

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 their indictment. The filing outlined how bankers helped 35 American customers use sham companies, foundations and trusts to hide their money from U.S. tax authorities. Bankers told U.S. clients to keep no records and access offshore funds with credit and debit cards.

The Justice Department told Credit Suisse it was a target of prosecutors in 2011. Settlement talks stalled during a standoff with the Swiss government over the handover of accounts.

SEC Case

Credit Suisse agreed to pay $196.5 million in February to settle a related investigation by the U.S. Securities and Exchange Commission.

The lender is the largest of 14 Swiss banks facing similar criminal probes by the U.S. The agreement today could provide a road map for the 13 others seeking peace with the U.S. The outcome also could affect an additional 106 Swiss banks that are seeking non-prosecution agreements.

--With assistance from Andrew Zajac and David McLaughlin in Federal Court in Alexandria, Virginia.