Did Credit Suisse Abet Tax Evasion?

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Legal troubles continue to mount for Credit Suisse Group AG (CS) in U.S. It seems that the Swiss bank will be sued by the U.S. Senate committee for facilitating tax evasion by American clients. The committee also plans to admonish the Department of Justice (:DOJ) for not supervising foreign banks in a more stringent manner.  

The latest legal issue comes after the Swiss bank reached a settlement with the SEC last week worth $196 million and accepted the charges related to providing unregistered cross-border securities services to clients in U.S.

The settlement amount included $82.2 million in disgorgement, $64.3 million in prejudgment interest and a $50 million penalty. According to the SEC, from 2002 to 2008, the bank communicated with several U.S. customers through email and telephone exchanges. Consequently, Credit Suisse collected fees of nearly $82 million through these transactions.

Swiss Banks: A Tax Haven?

The Senate committee alleged that Credit Suisse offered banking services at the Zurich airport to customers’ accounts that were hidden from the Internal Revenue Service (IRS). The bank also resorted to carrying clients in a special elevator and making appointment with them in locations that were outside its operating areas.  

The inquiry by the U.S. Senate puts pressure on the DOJ, which has been dragging its investigation on the Swiss bank since 2011 and has not arrived at any conclusion. The committee believes that the regulators’ probe has been influenced by a treaty between the U.S. and Switzerland related to information about U.S. clients’ accounts in Swiss banks.

Notably, after UBS AG (UBS) paid $780 million in 2009 to regulators as settlement related to U.S. criminal and civil investigation and acknowledged that it had helped clients evade taxes, the DOJ still has criminal investigations pending against 14 Swiss banks.

After UBS AG’s settlement, two other Swiss banks, Wegelin & Co. and Liechtensteinische Landesbank AG paid settlement charges of roughly $74 million and $24 million, respectively. However, an initiative by the DOJ has led to 106 Swiss banks seeking non-prosecution agreements on tax-evasion charges.

Since then, U.S. regulators have been pressing Switzerland to relax its rules on banking secrecy, which shielded client information, since the UBS AG fiasco. Consequently, Switzerland is cooperating with foreign regulators to aid tax authorities to collect information about their citizens' accounts.

Further, U.S. regulators have held at least 70 U.S. citizens for evading tax and caught roughly three dozen offshore enablers for hiding accounts from the IRS. Notably, more than 43,000 Americans avoided prosecution on tax evasion offence through an IRS amnesty program.

Conclusion

We believe that the U.S. Senate’s decision to crack its whip on Swiss banks like Credit Suisse will be a step forward toward reducing the huge losses incurred by the U.S. Treasury due to offshore tax evasion by Americans.

However, if a lawsuit is filed, it will be a major overhang on the financials of Credit Suisse. Though the bank is settling such litigation issues, stringent norms and a sluggishly recovering economy will pose challenges to Credit Suisse’s profitability going forward.

At present, Credit Suisse has a Zacks Rank #3 (Hold). Better-ranked foreign banking stocks include Mitsubishi UFJ Financial Group, Inc. (MTU) and The Royal Bank of Scotland Group plc (RBS), both carrying a Zacks Rank #2 (Buy).

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