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U.S. regulators question whether Credit Suisse has rule-breaking culture

Credit Suisse Deputy Head of Asset Management Bill Johnson (C) delivers remarks during a public regulatory hearing at the U.S. Labor Department in Washington January 15, 2015. REUTERS/Jonathan Ernst

By Sarah N. Lynch

WASHINGTON (Reuters) - U.S. pension regulators questioned on Thursday whether criminal violations in one unit of Credit Suisse Group AG reflect broader compliance problems at the Swiss bank, in an unusual public hearing to vet the bank's request to continue managing retirement plans.

Thursday's hearing at the U.S. Department of Labor came at the request of critics, including Democratic lawmakers and consumer groups, who claim the government has a history of rubber-stamping waivers or other exemptions sought by banks that break the law so they can continue certain activities.

At issue is whether Credit Suisse (CSGN.VX) should be granted permission to continue managing about $2 billion in U.S. retirement money, even though one of its units pleaded guilty in May to conspiring to help Americans evade taxes.

In a series of questions, top DOL officials on Thursday pressed Credit Suisse executives for assurances and other evidence that the bank's U.S.-based asset management unit had no hand in the violations.

Timothy Hauser, a deputy assistant secretary in the Employee Benefits Security Administration, said the bank had admitted to having lax compliance policies and training in its plea deal.

If a permanent exemption is granted, he added, he would waste no time sending in his investigators to follow up and make sure that the independent auditor hired to oversee compliance is not treated like "a set of boxes to be checked."

"It is very hard for me sitting here, without conducting an entire separate investigation, to really have an appreciation to what extent those problems at Credit Suisse AG are cultural problems that involved the entire organization," Hauser said.

Company officials told the regulators that the U.S. unit that manages pension plans is completely isolated from the one involved in the tax evasion case.

They also said that none of their pension clients to date have fired Credit Suisse over the criminal plea, and in fact the bank has since won even more business.

"Credit Suisse's U.S. asset management business was not involved in this conduct. Indeed, there has been no allegation from any regulator to the contrary," said John Popp, a managing director for the company.

Companies that break criminal laws or commit fraud are generally banned from activities such as conducting private offerings or managing pension plans.

But regulators, including the DOL and the U.S. Securities and Exchange Commission, have typically granted waivers or exemptions that allow them to continue operating as usual with little fanfare.

Starting last year, however, critics started questioning the process.

Leading the charge was SEC Commissioner Kara Stein, a Democrat who has openly criticized similar exemptions for Royal Bank of Scotland Group Plc (RBS.L), BNP Paribas SA (BNPP.PA) and Bank of America Corp (BAC.N), saying regulators treated banks as if they were "too big to bar."

Numerous consumer advocates sharing her position were lined up to speak Thursday about the Credit Suisse matter, with Ralph Nader among the most high profile.

Nader lambasted the DOL for what he called its "unblemished record" of granting big banks exemptions, and pleaded with the department to take a stand.

"They...were allowed to retain 22,000 client names of the tax evaders. They didn't have to turn them over as a group to the Justice Department. And then after it was over, there were statements by the executives saying 'No problem. It doesn't affect our business,'" Nader said.

"How many fingers in the eye do federal officials have to take from a company like that?"

Representative Maxine Waters, the ranking member of the House Financial Services Committee, who could not attend the hearing in person, submitted a letter calling on the DOL to deny the requested exemption "given the lack of important public facts and the insufficient proposed conditions."

At times on Thursday, DOL officials played devil's advocate with the bank's opponents and raised questions as to why none of the bank's own clients bothered to show up or write letters about the matter.

In response to Nader's comments, Hauser said he had a hard time understanding how not granting an exemption would truly serve as a deterrent to the bank.

If the Justice Department's penalty was not good enough, then from a "cold cash" standpoint, denying an exemption was unlikely to move the needle further, he said.

It is not clear when the DOL will make its decision on whether to grant the exemption. Last November, it granted the bank a temporary waiver until the matter can be concluded; that waiver is good for one year.

(Reporting by Sarah N. Lynch. Editing by Andre Grenon and Andrew Hay)