Credit Suisse Under Fire From Senate For Aiding Tax Evaders

The tax evasion charges against Credit Suisse (NYSE:CS) were escalated considerably this week, with the Senate cracking the whip on the Swiss bank for its role in helping U.S. citizens evade taxes. ^[1] U.S. regulators have been investigating a number of Swiss banks over tax-evasion charges for well over a year now, and Credit Suisse figured at the top of the list due to its sizable presence in the country. Top executives at Credit Suisse admitted in the Senate hearing that a group of bankers had indeed been found guilty of advising U.S. clients on ways to evade taxes, but that senior officials had no knowledge of these wrong-doings. The bank also reiterated its inability to hand over the details of the 20,000 bank accounts that the Department of Justice (DoJ) has been demanding for a while now, stating Swiss secrecy laws that prohibit the bank from disclosing account information.

The bank settled a related matter with the SEC last Friday for $196 million. ^[2] Considering the fact that its competitor UBS (NYSE:UBS) settled tax evasion charges with the U.S. in 2009 for $780 million, we expect Credit Suisse to shell out roughly a billion dollars over the coming months and share details of thousands of accounts with the DoJ to put this contentious issue behind it.

See our complete analysis of Credit Suisse | UBS

The Swiss banking system has thrived for decades on the back of the secrecy privileges it provides account holders, allowing it to amass the $2 trillion in offshore assets it boasts today. And while the Swiss government’s unyielding support of privacy in its banking system has been the target of scorn from governments across the globe for decades, extreme pressure from the likes of the U.S., U.K., Germany and France since the 2008 recession has forced the Swiss government to relent and agree to various tax agreements with some of these countries (see UBS and Credit Suisse Will Take Lumps from Swiss-British Tax Agreement)

The U.S. DoJ in particular has been ardent in pursuing the Swiss banks for assisting U.S. citizens, starting with the crackdown of UBS in 2009. UBS ended up paying a $780 million fine and also handed over details of nearly 4,500 secret accounts to the U.S. The DoJ then shifted its focus to other Swiss banks and demanded that they furnish information about all U.S. clients holding accounts worth at least $50,000 over the last 10 years – something that the Swiss government partially agreed to last September (see The Swiss-U.S. Tax Accord Is Both Good And Bad News For Credit Suisse).

But things got more serious after a Senate subcommittee released its U.S. Offshore Tax Evasion report this Tuesday, which specifically detailed malpractices by Credit Suisse employees to earn more business. The report triggered a Senate hearing, with the DoJ also drawing flak for not exploring readily available options like serving the bank a subpoena to get the account details and reaching a conclusion on the long-drawn dispute quickly.

The increased visibility of the tax evasion charges against Credit Suisse following the hearing is bad news for the bank, as it is now under considerably higher pressure to settle, and may have to cough up more to reach an agreement with the DoJ. It should be noted that Credit Suisse no longer offers offshore accounts to U.S. clients, so the issue does not impact future growth in the bank’s Swiss assets under management. However, the expected settlement figure will dent operating margins for the bank’s wealth management unit in the quarter in which it is reached. The impact of this on the bank’s share value can be understood by making changes to the chart below.

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1. Senate Report Blasts Credit Suisse as Soliciting Tax Evaders, The Wall Street Journal, Feb 25 2014 [↩]
2. Credit Suisse Group announces settlement with SEC in US cross-border matter; US Department of Justice matter remains ongoing, Credit Suisse Press Releases, Feb 21 2014 [↩]