In Credit Suisse guilty plea, a template for criminal prosecution of major banks

On February 26 in a meeting room just blocks away from the US Capitol building, Deputy Attorney General James Cole struggled to defend the Justice Department’s five-year investigation into Credit Suisse for harboring US tax dodgers. Senator Carl Levin, chair of the US Senate Permanent Subcommittee on Investigations that had called Cole to testify, was listening closely.

Clearly, he did not like what he was hearing. Throughout the hearings, Levin had pushed the Justice Department to take decisive action against Swiss banks accused of facilitating US tax evasion. Cole characterized the long-running investigation as the gradual construction of an airtight case against Credit Suisse. If the case was so good, Levin asked, then where were the results?

“At some point, you’re going to have to play your cards,” Levin said to Cole. “Or no one will believe you have a strong hand.”

Three months later, the Justice Department has played its hand against Credit Suisse, extracting a guilty plea from the bank on one criminal count of conspiracy to assist US tax evasion on May 19. The plea agreement includes $2.6 billion in penalties. The Swiss financial giant, which has a sizeable investment banking affiliate in New York, is the largest bank to plead guilty in the US in nearly twenty years.

In forcing Credit Suisse to accept a guilty plea, the Justice Department has apparently demonstrated that a major financial institution can be criminally charged without significantly damaging the institution or disrupting the financial system. Based on their public statements, federal prosecutors may also use the Credit Suisse case as a template for future criminal enforcement actions against financial institutions. If so, those cases will be marked by a deliberate pace, extensive advance warning before charges are filed, and careful coordination with regulatory agencies to ensure an institution’s charter is not revoked.

“So long as this coordination [with regulators] occurs, it is fully possible to criminally sanction companies that have broken the law, no matter their size,” Holder said in a videotaped message in March. “This cooperation will prove key… [in] several important investigations.”

However, in taking pains to ensure that criminal charges would not be a “death sentence” for a major financial institution, the Justice Department may have simultaneously called into question their value as an enforcement tool.

“It is very rare in the US that there is a criminal tax prosecution of an entity,” says Bill Lovett, an attorney with Collora in Boston, and former prosecutor in the Justice Department’s Tax Division. “That’s usually reserved for individuals, and it enhances the deterrent value.”

“This has certainly led Credit Suisse to improve compliance,” Lovett continues. “The question is, does it drive the next guy into compliance?”

Credit Suisse CEO says ‘no impact’ expected from guilty plea

Credit Suisse already appears to be shrugging off its guilty plea, with its stock rising more than 1.5% the day after the agreement was announced and CEO Brady Dougan stating the plea agreement will most likely have “no material impact on our business.” Last year, the bank’s board of directors approved compensation of about $10 million for Dougan, despite objections from some board members.

For years, the DOJ has relied largely on deferred prosecution agreements and civil penalties in enforcement actions against financial institutions, particularly major banks. In statements yesterday, Attorney General Eric Holder said that Credit Suisse’s guilty plea refuted the concept of banks being “too big to jail,” stating that “this action should put that misguided notion definitively to rest.”

The case may not be an unequivocal victory for the Justice Department. Despite the record-setting monetary penalty and criminal charges, Credit Suisse did not disclose the names of US tax evaders it is accused of harboring, citing conflicts with Swiss bank secrecy laws.

The Justice Department reached the plea deal only after months of negotiations with Credit Suisse. Under the terms of the plea agreement, Credit Suisse will pay $1.8 billion to the Justice Department, $100 million to the Federal Reserve, and $715 million to the New York Department of Financial Services. The total reflects $196 million that Credit Suisse paid to the US Securities and Exchange Commission earlier this year, to settle charges it provided unregistered brokerage and investment services to US clients. The agreement also requires Credit Suisse to appoint a compliance monitor.

Extent of scheme, role of managers affected decision to seek criminal charges

In contrast with past cases, the parent company of Credit Suisse entered into the plea agreement, rather than a subsidiary. Recently, the Justice Department has allowed subsidiaries of major institutions to accept plea deals in place of their parent. Last year, a Japanese affiliate of Barclays pleaded guilty to fraud charges related to Libor rate manipulation.

Experts note that several factors likely contributed to the Justice Department’s decision to require a guilty plea from Credit Suisse, including the systemic and long-running nature of the tax evasion scheme, the involvement of higher-level bank employees, and the destruction of documents related to US clients.

One lesson from the Credit Suisse case is that cooperation is typically the best option once an investigation is launched, says Lovett. “When you’re in a hole, you should stop digging,” he notes.

Credit Suisse maintained for “decades” an elaborate set of operations catering to US tax evaders, according to the criminal information filed in the Eastern District of Virginia. Credit Suisse CEO Dougan has maintained that the violations were contained to a small number of relationship managers concentrated at the bank’s “North America International” desk. The statement of facts filed in the case depicts a broader scheme that saw roughly 450 employees servicing undisclosed US accounts. As of 2006, Credit Suisse held accounts for some 22,000 US clients, holding an estimated $10 billion.

In an ominous sign for both Credit Suisse’s former US clients and other banks tied to their business, the plea agreement “requires [Credit Suisse] to provide detailed information as to other banks that transferred funds into secret accounts, or that accepted funds when secret accounts were closed.”

That information may offer the Justice Department new details on where US tax evaders fled after the crackdown on Swiss banks began with the 2009 UBS case.

“What you’ll see is the Justice Department and IRS expanding beyond Switzerland, and looking at other countries that are non-compliant,” says Lovett.

Pending cases will test approach used in Credit Suisse case

The Justice Department will have a chance to test its use of criminal charges in the near future. BNP Paribas is reportedly nearing a plea agreement that would include nearly $5 billion in monetary penalties for violating US sanctions in transactions to Iran, Burma and Syria. It remains to be seen whether guilty pleas or criminal charges will become a fixture of financial crime enforcement actions.

Read the criminal information here

Read the statement of facts here