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Credit Suisse Group AG (CS - Snapshot Report) may shell out around $2.5 billion as settlement charges and is expected to plead guilty related to an ongoing tax probe by the United States Department of Justice (:DOJ). The Swiss banking giant is alleged to have deliberately helped its clients in the U.S. to evade tax. While nothing is official to date and the deal is yet to finalize, the market rumor is that of Credit Suisse is nearing the settlement.

As per The Wall Street Journal report, the settlement amount includes a payment of around $1.7 billion to the DOJ, $100 million to the Federal Reserve while the New York State Department of Financial Services may receive around $600 million.

The Background

Investigations rolled amid the release of the U.S. Senate report – Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts – in Feb 2014. The report accused Credit Suisse of undertaking banking operations that aided tax evasion by U.S clients from a period between 2001 and 2008. 

Further, the bank opened undisclosed Swiss accounts for U.S. individuals as well as accounts under the garb of fake entities in order to conceal their U.S. ownership. Also, the bank hired U.S. clients by making secret appointments in the U.S., violating prohibitions of U.S. law and bank policy.

Further, the report revealed that Credit Suisse opened Swiss accounts for more than 22,000 U.S. clients with more than CHF12 billion in assets, out of which the U.S. extracted the names of only 230 account holders owing to limitations posed by Swiss secrecy laws.

Swiss laws forbid the disclosure of documents and client details by Swiss banks to outsiders. The report stated that the Swiss government is pushing the U.S. authorities to issue non-prosecution agreements to several Swiss banks, leaving those that are not willing to disclose U.S. client names.

In Jul 2011, seven officials of Credit Suisse were indicted by the DOJ for aiding U.S. tax evasion and hiding assets from the Internal Revenue Service. Investigations gained further traction as in Mar 2014, a former Credit Suisse banker pleaded guilty in the federal court for aiding U.S. clients in evading tax and agreed to assist the investigation. Notably, earlier in the year, Credit Suisse Chief Executive Officer Brady W. Dougan apologized for the misdeed while it held a group of bank officials liable for such wrongdoings.

Efforts to Remove Legal Hassles  

Notably, in Apr 2014, Credit Suisse revised its 2013 results owing to a higher litigation reserve related to this ongoing tax probe by DOJ. The tax probe resulted in an after-tax charge of CHF 468 million.

Notably, results also include the impact of CHF 275 million after-tax charges, which Credit Suisse incurred after the company settled a mortgage-related dispute in Mar 2014 with the Federal Housing Finance Agency (:FHFA) – the conservator of Government Sponsored Enterprises (:GSEs) Freddie Mac (FMCC) and Fannie Mae (FNMA).

Per the annual report 2013, the company has made a total provision of CHF 895 million relating to tax and securities law issues.

Implications

The settlement, if it materializes, would be marked as one of the significant cases in which a major bank, in this case Credit Suisse, will be expected pleading guilty to criminal charges.

While regulators possess the authority to a certain extent to revoke licenses based on a criminal conviction, it is expected that Credit Suisse’s banking license would not be revoked. The regulators are attempting to restrict any significant unfavorable impact on the financial sector or in the market owing to such stricter penalties on the company, particularly the guilty plea.  

Bottom Line

Credit Suisse is not the only company to be inflicted with a tax evasion probe, but the name stands big among several other accused Swiss banks. Notably, another Swiss biggie UBS AG (UBS - Analyst Report) settled a similar probe with the payment of $780 million to the regulators in 2009.

At a time when the U.S. authorities are striving hard and taking initiatives to combat hidden offshore accounts, resolving issues has become challenging owing to secrecy laws in foreign nations like Switzerland.     

Credit Suisse currently holds a Zacks Rank #4 (Sell).

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