Credit Suisse Offers Map to 13 Swiss Banks in U.S. Tax Probe

May 26, 2014 8:43 am ET

(Updates with comments from professors and banks volunteering information from 15th paragraph.)

May 26 (Bloomberg) -- Thirteen Swiss banks face rising stakes in their own criminal probes after Credit Suisse Group AG set a new standard for punishment in the U.S. crackdown on offshore tax evasion.

Julius Baer Group Ltd., Zuercher Kantonalbank and the Swiss unit of HSBC Holdings Plc are among those seeking to avoid pleading guilty to helping Americans cheat the Internal Revenue Service -- an unprecedented step taken by Credit Suisse on May 19. Their degree of wrongdoing and cooperation with investigators will help decide their fate, said the top U.S. tax prosecutor.

“We will look at the facts and circumstances of each investigation to determine an appropriate penalty,” Assistant U.S. Attorney General Kathryn Keneally said in an interview. “It should be very clear from the Credit Suisse investigation that cooperation, or the lack thereof, is an important factor.”

The guilty plea by Credit Suisse’s main bank subsidiary and $2.6 billion penalty last week marked a watershed in a campaign that has led to charges against more than 100 people since 2009. Another 100 or so Swiss banks and 43,000 U.S. taxpayers applied to the Justice Department to avoid prosecution by disclosing in detail how the evasion worked. The data, compiled by the IRS, has strengthened the U.S. hand against the 13 banks. With the Credit Suisse case over, the pace of the remaining cases will quicken, the Swiss Finance Minister said last week.

No Comfort

“It looks like DOJ has a plan in certain cases where they can get a guilty plea but not destroy the bank,” said Mark Matthews, a former IRS deputy commissioner who is now a tax attorney in Washington. “I’m sure that any bank confronted with that can hardly take comfort.”

Prosecutors have already charged taxpayers or bankers in cases implicating Julius Baer, the third-largest Swiss wealth manager; Zuercher Kantonalbank, the biggest Swiss publicly owned regional bank; and Mizrahi Tefahot Bank Ltd. and Bank Leumi Le- Israel Ltd., two Israeli banks with Swiss units.

Two Julius Baer bankers were charged in 2011 for practices similar to what Credit Suisse admitted and three ZKB bankers were indicted the following year. Several clients of Leumi and Mizrahi have pleaded guilty, and dozens of bank customers have helped the government investigation. Benny Shoukron, a Mizrahi spokesman, and Leumi spokesman Lee Neumann declined to comment on the probe.

The 13 Swiss banks vary in size and scope of business, with only HSBC having substantial operations in the U.S. Like Credit Suisse, HSBC could seek the blessing of regulators to operate in the U.S. if it pleads guilty. The smaller banks without a U.S. presence could lose the ability to engage in U.S. dollar clearing if they are charged or plead guilty.

UBS Clients

The crackdown picked up in 2009 after UBS AG, the largest Swiss bank, avoided prosecution by paying $780 million and handing over the names of 4,700 U.S. account holders. Swiss banks that took in UBS clients with undeclared accounts are in the cross hairs, said Milan Patel, a former IRS attorney now at Zurich-based law firm Anaford AG.

“If you stick your nose up to the Department of Justice, you might go the way of Wegelin and be indicted,” Patel said, referring to the Swiss bank that pleaded guilty last year to U.S. charges and closed its doors to clients. “If a bank tried to destroy information or engaged in any other act construed to be obstructing justice, that would be viewed negatively.”

Julius Baer has said its U.S. cross-border business accounted for a single-digit percentage of total assets under management, and the last client was accepted in 2008. Four analysts surveyed by Bloomberg News on May 20 estimated Julius Baer fines ranging from 400 million francs to 2 billion francs.

Julius Baer’s shareholders shouldn’t expect a dividend increase or share buyback “any time soon,” said Dirk Becker, a Frankfurt-based analyst with Kepler Cheuvreux.

Bank ‘Confident’

Jan Vonder Muehll, a spokesman for Julius Baer, said the bank “is confident to find a solution,” and there is no reliable basis to set aside money for a penalty.

Other banks under investigation, including HSBC, declined to comment on settlement talks.

After Credit Suisse was fined more than expected, Swiss banks being probed may increase efforts to persuade clients to give themselves up, said Peter V. Kunz, a University of Bern law professor.

“There has been quite an effort by banks to contact their clients, or former clients, in the hope this action might reduce the bank’s fine from the DoJ,” Kunz said.

Basler Kantonalbank appealed to one client in a letter on April 24: “If you have not yet reported your account(s) with our bank to the U.S. authorities, you are at serious risk of becoming the subject of an enforcement action in the United States, which may involve substantial fines and, in the most serious cases, imprisonment.”

Disclosure Program

Aside from the 13 banks under criminal inquiry, the 106 banks seeking non-prosecution deals with the U.S. face penalties ranging from 20 to 50 percent of undeclared assets. Those banks can reduce their penalties if they persuade clients to enter the IRS voluntary disclosure program that has drawn $6 billion in back taxes and penalties.

At least 36 banks, including Cie. Lombard, Odier SCA, Geneva’s oldest bank, and Union Bancaire Privee, the Swiss wealth manager used by American Jordan Belfort, according to his memoir “The Wolf of Wall Street,” have declared they contacted the DoJ voluntarily.

The Swiss units of Schroders Plc, Royal Bank of Scotland Plc’s Coutts private-banking business and the Rothschild banking dynasties are also among those hoping to avoid criminal probes by voluntarily cooperating.

While individual banks haven’t declared the amount of assets managed for past U.S. clients, the total amount of fines, including the Credit Suisse penalties, could come to about $10 billion, according to Patrick Emmenegger, a public policy and politics professor at the University of St. Gallen in Switzerland.

“The U.S. wants to proceed, the banks want to proceed, and the biggest animal is now out of the arena,” Emmenegger said.