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Last updated: May 19, 2014 10:03 pm
Credit Suisse pleaded guilty to an “extensive and wide-ranging conspiracy” to help US clients evade taxes and agreed to pay about $2.6bn in fines as it became the first large global bank in two decades to admit to criminal charges.
The plea to one count of conspiracy entered by bank representatives in a Virginia courthouse resolves a long-running investigation into the Swiss bank’s private banking business, including its Clariden Leu subsidiary, in helping Americans hide assets offshore.
As part of the pact, the US Department of Justice will receive $1.8bn in fines and restitution. New York state’s Department of Financial Services will receive $715m, with $100m going to the Federal Reserve.
Credit Suisse said it would book an after-tax charge of SFr1.6bn ($1.79bn) in the second quarter and expected no impact on its licences, nor any material impact on its operational or business capabilities. Brady Dougan, chief executive, said: “We deeply regret the past misconduct that led to this settlement.”
It is the first time in a generation that such a large financial institution has pleaded guilty. Japan’s Daiwa Bank pleaded guilty in 1995 to hiding a $1.1bn loss from regulators, which led to a sale three months later of its US operations. It also far exceeds the $780m fine paid in 2009 by UBS for helping US citizens evade taxes.
Eric Holder, the US attorney-general, said hundreds of bank employees, including managers, were involved in the misconduct over decades.
“A company’s profitability or market share can never and will never be used as a shield from prosecution or penalty. And this action should put that misguided notion definitively to rest,” said Mr Holder, whose department has been criticised for being lenient on banks.
The unknown is how counterparties, other banks and investors will react to Credit Suisse’s guilty plea, which has been slowly made known in the market through news reports for the past several weeks.
The DoJ is seeking to send a message that it is punishing financial institutions yet also limit the fallout of the plea. The key to the pact was negotiating an assurance that regulators would not revoke Credit Suisse’s licence to conduct business in the US, which would have had instant consequences.
The US Department of Justice’s decision to pursue criminal charges against Credit Suisse marks the first time in more than a decade that a major bank has pleaded guilty to a crime
Credit Suisse has sought to assure clients and counterparties, people familiar with the matter said. The DFS said it did not revoke the bank’s licence because the office engaging in the misconduct no longer existed.
Certain pension funds cannot do business with a convicted person or entity, while others may reduce their exposure to the bank near-term over the uncertainty. On Friday, Lloyd Blankfein, Goldman Sachs’ chief executive, indicated his bank would try to keep trading with Credit Suisse.
The DoJ is also putting pressure on BNP Paribas to plead guilty and pay over $3.5bn for doing business with Iran in violation of US sanctions.
The DoJ’s move marks a significant shift to demand a guilty plea by the holding company of a bank and represents a sea change from the 2002 indictment of Arthur Andersen, which prompted client defections which crippled the auditor before it was found guilty of obstructing prosecutors’ investigations into Enron, its audit client.
Prosecutors became more hesitant after that fallout, but have since been criticised for being too soft on banks following the financial crisis.
The DoJ insisted on a guilty plea by Credit Suisse in part because it did not feel the bank had been fully co-operative with the investigation, people familiar with the matter have said.
Mr Holder said that, after learning of the investigation, “Credit Suisse failed to retain key documents, allowed evidence to be lost or destroyed, and conducted a shamefully inadequate internal inquiry.”
February 2014: Credit Suisse executives faced an intense grilling by US senators over allegations the bank helped US clients avoid taxes. The hearing follows a scathing report saying Credit Suisse bankers used secret elevators, created offshore shell entities and hid account statements in a Sports Illustrated magazine in the alleged tax evasion scheme
Credit Suisse has also agreed to terminate three employees previously indicted for the tax evasion scheme and install a monitor, determined by the DFS, to review the past misconduct and recommend remedial measures. Mr Dougan and other top bank figures remained unscathed despite calls in Switzerland for their resignations.
Before the guilty plea was announced, one hedge fund manager overseeing $1bn said the firm would “monitor developments and will be prepared to make any necessary adjustments”. The manager said while they did not see any immediate risk to keep trading with the bank, the firm would watch the interbank lending market to gauge whether other banks were pulling back their business.
“All things being equal, institutional investors may still pull back some business temporarily or put CS in a penalty box. It is not worth having to answer those questions,” a second client of the bank said.
In July 2011, seven former Credit Suisse bankers were indicted on federal charges of conspiracy to defraud the US in connection with the tax probe. Two of them pleaded guilty earlier this year. It is not clear whether charges against other individuals will follow.
Chuck Grassley, the Iowa Senator, said: “It might turn heads on Main Street that this is characterised as a sharp rebuke when the bar has been so low for Wall Street for years. Maybe we’ll see some top individuals held criminally liable at some point but not today.”
Tom Braithwaite contributed to this article
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