Credit Suisse Group AG (CSGN) and Julius Baer Group Ltd., the largest Swiss banks embroiled in a U.S. tax-evasion probe, may face delays in reaching settlements after the Swiss Parliament rejected a bill that would have freed the industry to send information to the U.S.
The two Zurich-based banks, among at least 14 Swiss financial firms investigated by the Department of Justice since 2011 for allegedly helping Americans hide money from the Internal Revenue Service, are seeking to strike individual agreements to avoid or defer prosecution by the U.S.
The government bill, supported by Swiss banks, was aimed at helping firms not yet part of the U.S. probe avoid an indictment like that of Wegelin & Co., which pleaded guilty in January to helping American clients dodge taxes. While Credit Suisse and Julius Baer can already share some data with U.S. authorities, lawmakers’ rejection of the bill yesterday in Bern may complicate matters for them.
“The U.S. will simply start to play hardball,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA. “The question is whether Credit Suisse and Julius Baer will get hurt because they’re actually negotiating their own deferred prosecution agreements, or does the whole thing just grind to a halt where the U.S. says we’re going to leave it hanging over you and wait till Switzerland sorts itself out.”
Switzerland, the world’s largest center for cross-border wealth, is trying to shed its reputation as a haven for undeclared funds. Credit Suisse and Julius Baer are in talks with the U.S. authorities to resolve the probes after UBS AG (UBSN), the biggest Swiss bank, avoided prosecution in 2009 by admitting it aided tax evasion, paying $780 million and handing over client names.
Both banks have previously said they expect to pay fines and provide client names to resolve the U.S. probes after the Justice Department indicted bankers and requested the firms give up the names of former clients with undeclared offshore wealth.
Julius Baer is seeking to resolve the matter by the end of this year with an “affordable” settlement, Chief Executive Officer Boris Collardi said May 30. Credit Suisse Chairman Urs Rohner told Swiss paper Neue Zuercher Zeitung in an interview published May 28 that “to believe that one can just postpone this problem and that it will solve itself isn’t realistic.”
Credit Suisse and Julius Baer declined to comment for this article on the details of a potential settlement.
Credit Suisse set aside 295 million Swiss francs ($321 million) for U.S. tax matters in the third quarter of 2011. Julius Baer has said the size of its penalty remains unclear.
“Any delay on the matter would only fuel investor concerns on the size of the fine and prolong the uncertainty,” said Eleni Papoula, a London-based analyst with Berenberg Bank. An affordable settlement “could be a short-term catalyst for the share price of Credit Suisse and Julius Baer,” she said.
Credit Suisse sank as much as 3.8 percent today and was down 3.3 percent as of 12:18 p.m. in Zurich. The stock has declined 13 percent since this year’s high on May 17, compared with a 10 percent drop in the Bloomberg Europe Banks and Financial Services Index. Julius Baer lost 11 percent while Basler Kantonalbank (BSKP), a regional lender among the 14 firms already being probed, slumped 28 percent since May 17.
Resolving the dispute would probably be positive for Credit Suisse, depending on what it has to pay, because Switzerland’s second-largest bank has businesses in the U.S., according to Teresa Nielsen, an analyst at Vontobel Holding AG in Zurich.
“Settling means they can approach their U.S. clients in a way that’s clean and they won’t have this legacy issue anymore,” Nielsen said. “For Julius Baer, a settlement would ease uncertainty over the impact on capital of a potential fine. It’s more a reputational issue than about driving business forward as the bank doesn’t intend to have operations in the U.S.”
While Swiss companies are usually prohibited from sending evidence to assist foreign legal proceedings, in April 2012 Credit Suisse and 10 other banks under investigation by the U.S. were granted permission by the Swiss government to comply with information requests from the Department of Justice and the Securities and Exchange Commission.
The banks were required to document their activities regarding U.S. cross-border business and forward records, including internal policies, project documentation, minutes of meetings and correspondence between client advisers and customers.
That did not include data on American clients, which can only be obtained through administrative assistance procedures if the customers were in fact engaging in potentially illegal activities. The IRS has also been submitting such assistance requests to get the client data.
The Swiss government received a request from the IRS in September 2011 for data on Credit Suisse clients suspected of evading taxes, which was clarified with a renewed request the following July. The IRS was seeking information on accounts of U.S. persons owned through a domiciliary company and maintained by Credit Suisse or its Neue Aargauer Bank AG unit from 2002 through 2010.
Criteria cited by the IRS included U.S. securities being held in the account, a balance in excess of $50,000 at any point in the period and a lack of, or contradictory, records at the bank on whether U.S. taxes have been paid from the account.
By March 2012, the Swiss tax authority supplied the IRS with information relating to 150 of the 650 administrative assistance cases originally submitted to Credit Suisse, Thomas Brueckner, a spokesman for the Swiss tax authority, said on June 19 by phone. Brueckner said the information as it has already been made public and declined to give further details about data transfers as administrative assistance matters are usually treated confidentially under Swiss-U.S. tax arrangements, he said.
Julius Baer, which said last year that it exited its U.S. cross-border private client business between 2009 and 2011, informed some American clients last month that their accounts meet the criteria of a U.S. request for data. The IRS is seeking information on accounts “owned through a domiciliary company” and held at any time between the beginning of 2002 and the end of last year, the Zurich-based bank wrote in a letter obtained by Bloomberg News and dated May 16.
The banks under investigation, which includes HSBC Holdings Plc (HSBA)’s Swiss private bank and another state-guaranteed regional lender, Zuercher Kantonalbank, can use the existing legal framework to respond to administrative assistance requests for names of American clients, the Swiss government said on May 29.
The bill rejected yesterday would have allowed other Swiss financial firms beyond the group under investigation to cooperate by sending names of employees, descriptions of cross-border business operations and identifying third parties including lawyers, trusts and financial intermediaries.
“A federal law would have been the best possibility for creating legal certainty,” the Basel-based Swiss Bankers Association said in an e-mailed statement late yesterday. “The SBA expects the Federal Council to assume its responsibility to do everything in its power to ensure that a legal framework is created.”
Failing to resolve the probes would have “incalculable” consequences for the financial center and the entire Swiss economy, the SBA said.
Swiss Finance Minister Eveline Widmer-Schlumpf has warned lawmakers more banks may face indictments if the bill didn’t pass. Widmer-Schlumpf may bypass Parliament by issuing a government decree authorizing banks to cooperate, the minister was cited as saying by Swiss public broadcaster SRF on June 18.
“Some people in Switzerland are trying to hold on to the past strong value of secrecy no matter what,” said Warren Whitaker, a New York-based attorney and head of international estate planning at Day Pitney LLC. “The U.S. could take stronger steps. It could indict a lot of these banks and then come back to make an agreement.”
The failure of the bill jeopardizes a program agreed between the two governments dividing firms into four categories based on the size of their American cross-border business and allowing them to cooperate with the U.S. Banks would have 120 days to decide whether to participate and to announce into which category they fall. They then have another 120 days to individually negotiate with the Justice Department.
“There are other political solutions to these problems that don’t require the approval of the Swiss parliament,” said Arno Endres, a banks analyst at Luzerner Kantonalbank AG in Lucerne, Switzerland. “I’m quite sure that both Credit Suisse and Julius Baer will come to a resolution with the U.S. authorities, although these individual settlements could take a little longer than the end of this year.”
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