Friday, July 15, 2011

DOJ Investigating Credit Suisse (7/15/11)

In a July 15 press release, Credit Suisse advised:
As previously disclosed, Credit Suisse has been responding to requests for information, including subpoenas, in an investigation by the US Department of Justice (DoJ) and other US authorities. The investigation concerns historical Private Banking services provided on a cross-border basis to US persons. As part of this process, on July 14, 2011, Credit Suisse received a letter notifying it that it is a target of the DoJ investigation. It has been reported that the US authorities are conducting a broader industry inquiry. Subject to our Swiss legal obligations, we will continue to cooperate with the US authorities in an effort to resolve these matters.
Comments:

1.  Credit Suisse acknowledges that it has been cooperating previously.  The devil, of course, is in the details of its cooperation which are yet to emerge.  The press release does say that it's cooperation is subject to Swiss legal obligations.

2.  In measuring the Swiss Legal obligations, readers should review Federal Tax Crimes blog Swiss Court OKs UBS Initial Turnover of 255 U.S. Depositor Information (7/16/11).

3.  Jeff Neiman, a key early player in the Government's offshore bank initiative against UBS who has since entered private practice, notes in his blog titled Credit Suisse Confirms Target Status (7/15/11):
From UBS, we know the DOJ will not agree to a resolution short of pleading guilty to a criminal indictment without complete cooperation.   DOJ will most likely require the production of client names as part of Credit Suisse’s complete cooperation.   Will Credit Suisse budge?   Time will tell, but the Swiss high court recently said that when a bank faces “serious and virtually uncontrollable economic repercussions” they can turn over client names and not violate Swiss secrecy. [The reference is to item #2 above.]
Other Reports:

US Probes Credit Suisse for Aiding Tax Evasion, Reuters 7/15/11. (The article also has a good summary of recent developments on the Swiss front.)

Chris V. Nicholson, Credit Suisse Discloses U.S. Inquiry Into Private Banking (NYT DealBook 7/15/11).

This blog was substantially revised on 7/16/11.

16 comments:

  1. Jack,
    Do you think this is a pressure tactic given the rumors of ongoing negotiations with the Swiss government? Or could this be a catalyst for OVDI even though the hour is late? Any thoughts?

    Anon123

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  2. I think the DOJ and IRS like to make their moves efficient. So, I speculate that the timing of this notice is not unrelated to OVDI and the Swiss Government.

    I think most practitioners would have thought that Credit Suisse was already in the cross-hairs (that may not be a politically correct word, but I think it works). I suspect it was and this was just a formal notice.

    Best,

    Jack Townsend

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  3. From this and other news articles, it seems like the Swiss have pretty much agreed to give up US client names. The only issue that is still a sticking point is whether Swiss enablers would be indicted or not.

    Irrespective of the resolution, if I were a US customer of Credit Suisse, the various Swiss Cantonal banks or even a former customer, I would think very seriously about OVDI.

    ReplyDelete
  4. Credit Suisse is one of the biggest tax fraud enablers on the Street (along with HSBC and UBS). It was the "go to" intermediary to avoid major-scale dividend withholding taxes for hedge funds (30% tax paid on US dividends to offshore hedge funds). They did "cross in, cross out" when others like Goldman (believe it or not) thought that too risky.

    For those of Jack's readers who are unfamiliar with the trade parlance, hedge funds typically have a US domestic entity for US investors and an offshore (think Cayman) entity for non-US investors, both managed through a US entity.

    CS as the prime broker for a hedge fund would enter into a "swap" where it would swap out the offshore hedge fund of its equity interest interest in the offshore hedge fund in the US dividend paying stock for a contract claim against CS. CS kept the underlying stock in its inventory,

    Swap In, Swap Out, was a book entry technique where it would simply keep the underlying dividend paying stock in its broker inventory, and give it back to the offshore hedge fund "ex dividend." It basically rented out its balance sheet to the hedge fund for a brokerage fee. Remember tax guys CS as a US taxpayer gets the dividends received deduction for the dividend while the offshore hedge fund gets taxed at 30% on the dividend.

    Ok, I am skipping over detail but this is a riskless principal transaction for CS (it holds the dividend paying stocks on its balance sheet and the contract provides that all ups and dowsn less the commission is allocated to the hedge fund on closing out of the swap), and criminal enabling in the minds of big law and accounting firms.

    Hopefully, DOJ is looking at this too.

    This is the type of blatant evasion that has brought this great country to its knees IMHO.

    ReplyDelete
  5. Here is a link to the Credit Suisse announcement as to the DOJ investigation thats posted on their website:

    https://www.credit-suisse.com/news/en/media_release.jsp?ns=41815

    ReplyDelete
  6. In UBS case they had to go through the parliament to get the final approval. Any reason this time the process and its final agreement might be different?

    ReplyDelete
  7. To Anonymous @ 7/17/11 7:17am.

    I think the Swiss have put into process an interpretation of their exchange of information provision of their double tax treaty that could permit information sharing without the procedural brouhaha encountered in the UBS case. You might check the blog entries on Tax Treaties below, which gives the following link: http://federaltaxcrimes.blogspot.com/search/label/Tax%20Treaties. I think the Swiss administrators will still be stingy on how it interprets the rules but with the right pressure the Swiss administrators have the tools to relax the interpretation without further Swiss parliament approval. And, to the extent that they have to get parliament approval, they will.

    Thanks,

    Jack Townsend

    ReplyDelete
  8. I agree with Jack completely. When DOJ went after UBS, Swiss law still distinguished between tax fraud and tax avoidance, between assisting foreign governments with their criminal versus their civil tax investigations. These distinctions are now irrelevant. Swiss law now requires cooperation with foreign tax investigations (although, as Jack suggested, in practice, this cooperation will likely be spartan and reluctant).

    ReplyDelete
  9. The Great Karnak sees a deferred prosecution agreement including a big fine and some sort of cooperation(turning over account names/details) on the near term horizon. I think Credit Suisse has already closed down private banking for U.S. persons. Hopefully all noncompliant Credit Suisse folks have hit the exit stage right door into OVDP or OVDI.

    Anon123

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  10. According to Reuters today "Switzerland's parliament would not vote for a second tax treaty to help settle U.S. charges that Credit Suisse" which means that "The bank must solve its problems alone".
    If this is true, what are the options the bank has? (Jack and Asher suggested earlier in this blog that the Swiss law is more lenient now than it was during the UBS probe, so why do we need another treaty ? )

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  11. High profile tax attorneys agree with Karnak the Great. They figure Credit Suisse is in worse shape than UBS was during the UBS saga.

    http://www.swissinfo.ch/eng/Home/Archive/Credit_Suisse_worse_off_than_UBS_in_the_US_.html?cid=30768150

    Anon123

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  12. Given the fact that the Credit Suisse situation seems to be following the path of the UBS settlement there is room for much pondering. How many Credit Suisse clients disclosed? How many moved to other locations when Credit Suisse shut this private banking segment down?
    Credit Suisse will very likey have to turn over account information. Those that did not disclose may face a senario like the UBS 4500. Below is an article wriiten by tax practioners that handled some of the UBS 4500 cases. They dig into the aspects of representing a taxpayer who's disclosure may have been untimely under these circumstances. A lot of the focus is on minimizing the chances of prosecution by intervention with DOJ Tax.

    http://www.sharptaxlaw.com/wp-content/uploads/2011/06/10-02-22-TNI-Representing-US-Taxpayers-in-List-or-Declined-UBS-Voluntary-Disclosure-Cases2.pdf

    Anon123

    ReplyDelete
  13. This case validates the fact that historical noncompliance can leave you vulnerable to big problems. Credit Suisse supposedly closed all these accounts a while back, yet DOJ is on them in a big way. My guess is that they will seek records going back to 2003 or 2004.

    Anon123

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  14. I believe that the treaty that settled the UBS litigation allowed the IRS to reach records for accounts in existence as far back as 2000.

    The fact that an account is currently closed does nothing to erase the tax non-compliance that occurred in the past.

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  15. Asher,
    This situation makes that point very clear. Otherwise why would DOJ pursue Credit Suisse after they exited the secret account business with U.S. persons. At this point DOJ can taste blood. They got Credit Suisse to quit enabling tax evasion by U.S. persons, they will get a huge fine from Credit Suisse and they will likely get a lot of historical account information that will enable them to collect a lot of money from account holders that remained noncompliant post UBS and the initiatives. What really sticks out in my mind is the self perpetuating noncompliance that occurs each year at FBAR and tax return filing time. The only way to get out of the bad pattern is to proactively disclose in some manner so that historical noncompliance is erased or forgiven(at a price of course). Otherwise one is left vulnerable and there is no telling when or how the situation may explode.
    Do you think IRS will have another special disclosure initiative after OVDI concludes? Also have you heard any feedback as to the level of participation in the 2011 OVDI to this point?

    Anon123

    ReplyDelete
  16. Here is yet more speculation on the developing events with Credit Suisse in their spat with the IRS/DOJ:

    http://www.bloomberg.com/news/2011-08-15/credit-suisse-likely-to-settle-u-s-probe-than-risk-charges-lawyers-say.html

    Anon123

    ReplyDelete

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