Credit Suisse has done what no other bank of its size and significance has done in over two decades: plead guilty to criminal wrongdoing.
In a sign that banking giants are no longer immune from criminal charges, despite concerns that financial institutions have grown so large and interconnected that they are too big to jail, federal prosecutors demanded that Credit Suisse’s parent company plead guilty to helping thousands of American account holders hide their wealth.
As part of a deal announced on Monday, the Swiss bank met the demands, agreeing to one count of conspiring to aid tax evasion in a scheme that “spanned decades.” Credit Suisse, which has a giant investment bank in New York and whose chief executive is an American, will also pay about $2.6 billion in penalties and hire an independent monitor for up to two years.
The rebuke from federal prosecutors as well as from the Federal Reserve and New York’s state banking regulator, Benjamin M. Lawsky, is intended as a blow against overseas tax dodging and the shadowy world of Swiss bank secrecy. The deal also signals a shift in prosecutors’ tactics. It is the most prominent bank to plead guilty in the United States since Drexel Burnham Lambert in 1989, and the largest to do so since the Bankers Trust in 1999, a bank a fraction the size of Credit Suisse.
For Credit Suisse, other than the fines and the reputational stain of being a felon, the implications are likely to be limited. The bank may lose some clients but is otherwise expected to survive largely unscathed. The plea deal also enables it to move beyond a case that had prompted a congressional hearing and had thrust the bank into an international squabble over tax dodging. If the bank had continued to fight the case, it would have been indicted, calling into question its very existence.
The Justice Department sought to contain the damage. Recognizing that criminal charges could prompt regulators to revoke a bank’s license to operate, the corporate equivalent of the death penalty, prosecutors met with the Fed and Mr. Lawsky to discuss punishing Credit Suisse without putting it out of business and imperiling the economy, according to people briefed on the matter who were not authorized to speak publicly. Authorities agreed to announce the plea after the markets closed in the United States, preventing the bank’s stock from plummeting.
Last week, the Securities and Exchange Commission also voted to grant Credit Suisse a temporary exemption from a federal law that requires a bank to hand over its investment-adviser license in the event of a guilty plea, according to two of the people briefed on the matter. That decision effectively spares Credit Suisse from one of the harshest repercussions of pleading guilty.
The plea from Credit Suisse, some three years after federal prosecutors in Virginia indicted eight bank employees, is expected to provide a template for prosecuting other financial misdeeds.BNP Paribas, France’s largest bank, is next in line to plead guilty in the coming weeks, the people briefed on the matter said. The bank, which is suspected of doing business with countries like Sudan that the United States has blacklisted, will also pay more than $5 billion in fines, the people briefed on the matter said.
The BNP and Credit Suisse cases may also lay the groundwork for criminal actions against American banks. While the new strategy applies to American banks like JPMorgan Chase and Citigroup, those inquiries are at an earlier stage and it is unclear whether they warrant charges.
Prosecutors were not always so aggressive. In the wake of the 2008 financial crisis, the Justice Department did not file any criminal cases against a Wall Street bank or top executives. And in 2012, the British bank HSBC escaped charges of money laundering, stoking a public outcry.
Against that backdrop, prosecutors homed in on the Credit Suisse case as a turning point in their pursuit of big banks. While Credit Suisse’s lawyers proposed a more modest guilty plea from a subsidiary rather than the parent company, people briefed on the matter said, prosecutors rebuffed the overtures.
“This case shows that no financial institution, no matter its size or global reach, is above the law,” the United States attorney general,Eric H. Holder Jr., said at a news conference on Monday.
The decision to seek a guilty plea stems in part from Credit Suisse’s failure to fully cooperate with the federal government. The bank, prosecutors say, was slow to turn over documents, deleted important emails and conducted an internal investigation that “failed to interview a number of the culpable individuals.”
The bank also kept three of the eight indicted employees on its payroll. Under the terms of the deal with Mr. Lawsky, Credit Suisse must fire the employees.
“We deeply regret the past misconduct that led to this settlement,”Brady Dougan, the bank’s chief executive, said in a statement. “We can now focus on the future and give our full attention to executing our strategy.”
By coordinating their plans, prosecutors and regulators believe they have minimized the fallout from pleading guilty. The plea is expected to lead at most a handful of pension funds and other clients to cut ties to the bank.
“This coordination was imperative,” Mr. Holder said.
Long before the Credit Suisse case came to a head, prosecutors in Washington drafted a document outlining a possible chain reaction of a guilty plea, the people briefed on the matter said. The prosecutors, required under federal guidelines to weigh collateral consequences of charging a corporation, explained that some regulators have legal authority to withdraw a bank’s charter.
For Mr. Holder, blamed for enabling the idea that banks are “too big to jail,” the new strategy offers an opportunity to rewrite his legacy. But the public and congressional lust for Wall Street accountability may linger all the same.
For one, the plea deal will not require the bank to turn over the names of its American account holders, a hot-button issue in Congress. Credit Suisse has argued that Swiss law prevented it from turning over the names.
What is more, the cases against Credit Suisse and BNP will not quell the lingering outrage over the financial crisis. While the Justice Department levied billions of dollars in penalties on JPMorgan Chase and other banks, those cases were civil rather than criminal.
“Credit Suisse is a really big case, but people want to see accountability for the global financial crisis, and this just won’t do that,” said Brandon L. Garrett, a professor at the University of Virginia School of Law and the author of a new book, “Too Big to Jail: How Prosecutors Compromise With Corporations.”
The notion that a criminal conviction could jeopardize the financial system stems from the experience of Arthur Andersen, Enron’s accounting firm. In the aftermath of a 2002 criminal conviction, Arthur Andersen went out of business.
After that collapse, prosecutors adopted a more tentative approach to punishing big companies, relying instead on so-called deferred-prosecution agreements that suspend charges against corporations in exchange for fines and other concessions.
Parent companies remained elusive. Prosecutors obtained guilty pleas from companies in pharmaceuticals and other industries. But guilty pleas from financial firms have been rare.
The Credit Suisse case traces to earlier investigations of Swiss banks, which for decades helped wealthy Americans conceal their assets.
In 2012, federal prosecutors indicted Wegelin, Switzerland’s oldest private bank. Three years earlier, Switzerland’s largest bank, UBS, struck a deferred-prosecution agreement and agreed to pay a $780 million.
With Credit Suisse, Switzerland’s second largest bank after UBS, the authorities aimed higher.
The bank will pay $1.8 billion to the Justice Department. And $715 million will go to Mr. Lawsky, who forced the bank to hire an independent monitor to oversee operations in Switzerland and the United States. The bank will also pay $100 million to the Fed.
The federal money will flow to the Treasury, while the payment to Mr. Lawsky will enter New York state’s coffers. Mr. Lawsky also required Credit Suisse to keep a record of all its American transactions in the United States, a measure against Swiss secrecy.
The bank’s conduct came to light during an investigation by Senator Carl Levin, the Michigan Democrat who runs the Senate’s Permanent Subcommittee on Investigations. That investigation, which relied on 100,000 internal documents, culminated in February with a scathing report showing how the bank helped Americans hide their wealth through Swiss bank accounts.
As part of the plea deal on Monday, the Justice Department and the bank agreed to a statement of facts that further detailed the wrongdoing at Credit Suisse.
Hundreds of Credit Suisse employees were involved in the scheme. They often created “secret offshore accounts” that were held in the names of “sham entities and foundations.” One Credit Suisse subsidiary began the practice more than a century ago. To cover up the crime, bankers were keen on “destroying account records.”
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Photo courtesy of Credit Suisse