Svizerland: Not too big to prosecute

May 21st 2014| Multiple countries | Banking | Credit Suisse

On May 19th it emerged that Credit Suisse, a large Swiss bank, would plead guilty to enabling US clients to evade tax and would pay a fine of US$2.6bn—the largest penalty of any criminal tax case in the US. Nevertheless, markets appear unmoved and the senior management of the Swiss firm remains in place. The bank has indicated that it will sell assets this year to rebuild its common equity Tier 1 ratio, which is expected to fall to 9.3%following the settlement.

This marks the first time in over a decade that a financial services firm has admitted criminal misconduct in the US; the last conviction was of the accounting firm Arthur Andersen in 2002, on charges of obstructing justice in relation to its auditing of an energy major, Enron. In the case of Arthur Andersen, the conviction was overturned on appeal, but by then had destroyed the company. This time around, the indictment appears to have been carefully crafted in conjunction with regulators (including the US Federal Reserve and the Securities and Exchange Commission) to ensure that there were no untoward consequences which could impair the ability of the Swiss bank to continue operating.

The indictment was controversial on two counts: first, it did not call for any resignations among senior staff, and second, it allows US clients who evaded taxes with Credit Suisse's help to remain protected, for now at least. A US senator, Carl Levin, expressed surprise that the government did not require the bank to “cough up some of the names of US clients with secret Swiss bank accounts”.

This could draw a line under a three-year effort by the US Justice Department to crack down on tax evasion by Americans who use Swiss banks. Other firms who are involved in similar cases with the Justice Department are expected to reach settlements in the near future. The admission of guilt should help the department put accusations that it is too lenient on banks to rest. However the size of the fine—which dwarfs the US$780m paid by another Swiss bank, UBS, to settle a similar claim—will give rise to concerns over Credit Suisse’s capital position. For now, however, Credit Suisse appears to have bought itself some time with investors, who rewarded the announcement of the settlement with a 1% pickup in the share price.