The 13 Swiss banks still under tax evasion scrutiny from the United States Department of Justice (DoJ) have little hope of escaping with a light sentence following the large penalty imposed on Credit Suisse this week. Some relatively big hitters remain on the DoJ hit list.
Zurich Cantonal Bank (ZKB) was named as Switzerland’s third ‘too big to fail’ bank last year owing to its high share of domestic credit it offers to individuals and companies. Basel Cantonal Bank (BKB) plays a vital role in Basel city and canton while Julius Bär, the third biggest Swiss wealth manager, and Pictet are giants in the private banking sphere.
ZKB ceased its US client business at the end of 2011 but not before amassing some CHF1.8 billion in US assets while BKB is thought to have had up to CHF600 million of US money on its books in recent years.
“[The Credit Suisse fine] will serve as a model for the other Swiss bank cases. There’s no basis for calculating the fines, so it’s quite arbitrary on the part of US authorities. So it will surely get more expensive than expected for the rest of the banks,” tax expert Peter V Kunz told swissinfo.ch.
The question remains if any other Swiss bank will suffer the same fate as Wegelin, that was forced to dissolve after being convicted by a criminal court at the beginning of 2013. But many observers in the US feel that the DoJ has no further interest in claiming symbolic scalps.
Wegelin was given both barrels of the US justice system because it acted in the most blatant disregard of the UBS prosecution by poaching its clients after it was convicted, according to Florida tax lawyer Teig Lawrence. Furthermore, the bank failed to cooperate with US once it came under investigation.
Category 1 banks
In August 2013, the US authorities said they had placed 14 banks under direct criminal investigation. One other bank, Neue Zürcher Bank, was also probed by the DoJ before it shut down in 2011.
While neither the US or Swiss authorities will confirm the names of such banks, various media have pieced together the following names – some of which have confirmed they are part of the list.
Credit Suisse (settled its case on May 19)
Zurich Cantonal Bank
Basel Cantonal Bank
Wegelin (ceased operations in 2013)
Rahn & Bodmer
Neue Zürcher Bank (ceased operations 2011)
Neue Privat Bank
Bank Frey (said in October 2013 that it would close down)
Swiss branches of foreign banks:
Liechtenstein Landesbank (Liechtenstein) (announced in January this branch would be closed)
In papers submitted to a US court on Monday, Credit Suisse was also accused of destroying evidence and obstructing the DoJ’s investigation. It had also come under the scrutiny of a US Senate committee investigation and, as Switzerland’s second largest bank, was an obvious target for a symbolic penalty to send a warning to the rest of the world.
But Lawrence feels that Credit Suisse could be the last such symbolic case. “I believe that the US has bagged its elephant,” he told swissinfo.ch.
Lawrence also sees hope in the wording of DoJ statements for the two cantonal banks. Following the Credit Suisse punishment, the DoJ praised the Swiss authorities for their recent efforts to resolve the tax evasion dispute.
“It would seem somewhat contradictory to now aggressively pursue state-owned banks. That would send a very mixed message to the Swiss,” he told swissinfo.ch. “I believe that the cantonal banks will likely resolve their respective cases with non-prosecution agreements or deferred prosecution agreements, unless the actions of a given bank were exceptionally egregious.”
A bank’s reputation for security and reliability is everything. A full blown criminal conviction would be a death sentence for any institution as clients would run away and licenses could be withdrawn. Even an admission of criminal activity without a conviction could irreparably damage smaller banks than Credit Suisse.
A non-prosecution or deferred prosecution deal would save banks from being hauled through the courts and having “criminal” stamped over their names.
Credit Suisse fine
A $2.8 billion (CHF2.5 billion) fine and criminal liability was imposed on Credit Suisse on May 19.
The bank paid $1.8 billion to the DoJ, $715 million to the New York state bank regulator, $196 million to the Securities and exchange Commission and $100 million to the Federal Reserve.
The financial penalty raises the bar three and a half times higher from the $780 million handed out to UBS in 2009.
Credit Suisse also had to admit criminal liability, but kept its banking license. For the next two years it must open its wealth management books to a New York regulator appointed monitor.
A good part of the increased prosecutorial vigour of the DoJ can be explained by the actions of many Swiss banks following UBS’s punishment imposed.
In the mistaken belief that they were far enough away from the US to escape penalties, some poached US tax dodgers from UBS, offering continued safe haven from the US tax authorities.
Danger still lurks
But it should not be inferred that the DoJ will now sit back and rest on its laurels. “While today’s action is a significant milestone in our law enforcement efforts, our work in the offshore area is far from done, and we expect additional public actions in this area in the coming months,” US Deputy Attorney General James Cole warned on Monday.
US Senator John McCain, who sits on the committee that publicly grilled Credit Suisse executives in February, was also resolute.
“Over the next few days, I look forward to reviewing this guilty plea closely to see whether it appropriately holds officers, directors and key executives individually accountable and whether the plea will be sufficient to help deter similar misconduct in the future,” he stated.
And Swiss finance minister Eveline Widmer-Schlumpf was under no illusions at a press conference on Tuesday that further banks will face hefty punishments.
The size of the eventual penalty and the strain of criminal investigations could yet cause problems for smaller institutions. Bank Frey, that was thought to hold 44% of its assets from US clients, said last year it would wind down purely because the probe had made it too difficult to operate.
Neue Zürcher Bank shut down wealth management operations in 2009 after coming under the DoJ spotlight. Julius Bär and Pictet are seen by analysts as being big enough to absorb US fines, but observers are loathe to be drawn into speculation about smaller banks Rahn & Bodmer and Neue Privat Bank.
Bankers and lawyers targeted
As part of a Swiss-US tax deal, the 13 Swiss banks under criminal investigation have been placed in ‘category one’ and must sort out their affairs with the DoJ. But the Swiss government succeeded in ringfencing the remaining banks away from the DoJ with a non-prosecution treaty that is part of the agreement signed last year.
Under the terms of that deal, other banks must classify themselves as categories two, three or four depending on the level of their culpability in helping US clients avoid taxes.
But that does not mean they are definitely safe from criminal prosecution. Any bank that knowingly, or even unwittingly, declares itself in the wrong category could find itself expelled from the scheme and handed to the tender mercies of the DoJ.
Furthermore, lawyers speculated last year whether the financial burden of providing documentary proof of their US activities might be too much for some smaller banks to bear, irrespective of their guilt.
“This is a costly exercise which could kill some small banks. Many banks are struggling, even loss-making at the moment, and this is a huge additional cost that they will not be able to bear,” Christian Fischer, managing partner at the CFM Partners law firm, told swissinfo.ch in December.
In addition, the DoJ is also hunting down individual bankers who were deeply involved in tax evasion offences and asset managers, lawyers or wealth advisory companies that helped the banks set up bogus accounts and shell companies.
Asset management firm Swisspartners recently settled a multi-million dollar case with the DoJ while eight Credit Suisse employees, or former staff, are among those individuals already indicted in the US.
Credit Suisse may be perceived as the last of the big trophies for the DoJ, but several other players still have plenty to worry about.