Credit Suisse Pleads Guilty, Pays $2.6 Billion To Settle U.S. Tax Evasion Charges

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The fight between Credit Suisse (NYSE:CS) and U.S. regulators over the Swiss bank’s role in helping U.S. citizens evade taxes finally drew to a close this week, with the bank pleading guilty to these charges. [1] The bank will pay a total of $2.6 billion to the U.S. Department of Justice (DoJ), the New York State Department of Financial Services and the Federal Reserve, in addition to the $196 million penalty it paid the Securities and Exchange Commission (SEC) this February – bringing the total bill for the bank from U.S. tax-related misgivings to $2.8 billion. ((Senate Report Blasts Credit Suisse as Soliciting Tax Evaders, The Wall Street Journal, Feb 25 2014)) As a result, the bank will take a one-time after-tax hit of CHF 1.6 billion (~$1.8 billion) to its Q2 figures. The payout is also expected to drag down Credit Suisse’s Basel III CET1 ratio by roughly 70 basis points (0.7%) – a shortfall the bank will make up for by selling surplus real-estate and non-core assets.

Notably, this is one of the very rare instances in recent years when regulators have been able to extract a guilty plea from a financial giant. In fact, even in the case of the record $13 billion mortgage settlement by JPMorgan Chase (NYSE:JPM) last year, the banking group managed to settle the case without having to admit to any wrongdoing. Although Credit Suisse has secured assurances from state and federal regulators that it will not be charged with any more lawsuits in the U.S. related to tax evasion, the fact that it pleaded guilty to criminal charges leaves it vulnerable to similar action from regulators in other countries in the coming months. In light of this settlement, it appears that the largest Swiss bank UBS (NYSE:UBS) got off the hook easily in 2009 when it paid just $780 million to settle the issue without having to plead guilty. [2]

We are in the process of updating our $33 price estimate for Credit Suisse’s stock to factor in the impact of the settlement on the bank’s value in the long run.

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See our complete analysis of Credit Suisse here

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.

The U.S. DoJ in particular has been ardent in pursuing the Swiss banks for assisting U.S. citizens, starting with the crackdown on UBS in 2009. [3] 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 in September 2012 (see The Swiss-U.S. Tax Accord Is Both Good And Bad News For Credit Suisse). But Credit Suisse remained in the line of fire, with things getting serious in February when a Senate subcommittee report titled “U.S. Offshore Tax Evasion” specifically detailed malpractices by the bank’s employees to earn more business. [4] The report triggered a Senate hearing and forced the bank to speed up negotiations with U.S. regulators to settle the issue.

The recently reached agreement puts a lid on the highly contentious issue for Credit Suisse, with the $2.6 billion fine being split as:

  • $1.8 billion for the U.S. Department of Justice (DoJ), out of which around $600 million will be transferred to the Internal Revenue Service (IRS)
  • $715 million for the New York State Department of Financial Services
  • $100 million for the Federal Reserve

The impact of this settlement will reflect in a one-time expense for the bank’s wealth management division in Q2 2014. You can see how changes in operating margins for Credit Suisse’s wealth management business affects its share value by making changes to the chart below. Also, the hit taken by the bank’s reputation from these criminal charges can potentially affect future growth of its asset base as investors may opt to give their business to its competitors. This presents a downside to the bank’s share value – especially since the wealth management unit is Credit Suisse’s most valuable business division.

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Notes:
  1. Credit Suisse announces a comprehensive and final settlement regarding all outstanding U.S. cross-border matters, Credit Suisse Press Releases, May 20 2014 []
  2. UBS Agrees To Pay $780 Million, Forbes, Feb 18 2009 []
  3. ref:3 []
  4. Senate Report Blasts Credit Suisse as Soliciting Tax Evaders, The Wall Street Journal, Feb 25 2014 []