A Swiss miss for US regulators

Who would have thought it? Swiss banks, and in particular Credit Suisse, have been helping wealthy Americans set up offshore bank accounts, allowing them to go undeclared and therefore avoid paying US tax.

For anyone who has seen any James Bond film, I would have thought that was pretty much assumed knowledge. Yet the US has been slow to follow the plot so far, let alone understand the subtext of the multi-billion dollar tax scam.

Luckily for them, it looks as though Credit Suisse is going to ‘fess up and save them some time connecting all the dots.

Reuters this week reported sources close to those discussions as saying an eventual settlement is likely to be north of $US2 billion.

That figure combines the opening bid by the New York regulator, believed to be $US1bn, plus the federal Justice Department’s request for $1.6bn. The cheque that Credit Suisse eventually writes however is expected to be much less than that as negotiations drive that number down.

For those who haven’t been following the storyline, let me catch you up.

A report by a bipartisan US Senate subcommittee with the very specific title, Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts, found that from at least 2001 to 2008, Credit Suisse allowed US customers to open undisclosed Swiss accounts. 

Not only that but Credit Suisse bankers regularly flew to the US to service these accounts and generate new business so as not to leave a paper trail. One would think that level of customer service from a bank alone would have raised a few eyebrows.

The report found that Credit Suisse had over 22,000 US customers with these types of offshore accounts, who were able to hide more than 12bn Swiss francs ($14bn).

US authorities twigged to this about five years ago as Switzerland’s largest bank, UBS, admitted that it may have “fostered” a culture of allowing foreigners to establish offshore tax havens.

Given so much time has passed since that admission, the report justifiably slammed US authorities. It said that they “failed to prosecute more than a dozen Swiss banks that facilitated US tax evasion, failed to take legal action against thousands of US persons whose names and hidden Swiss accounts were disclosed by UBS, and failed to utilise available US legal means to obtain the names of tens of thousands of additional US persons whose identities are still being concealed by the Swiss”.

Credit Suisse also got a well-deserved dressing down for taking more than five years to close these accounts and for not identifying any leadership failures or lessons learned from the rort.

That was evident at Credit Suisse’s annual general meeting last week when its chief executive, Brady Dougan, a 24-year veteran of the bank and a US citizen himself, failed to take any responsibility for it.

“Fish stinks from the head down, more precisely, that’s the head of CEO Brady Dougan,” shareholder Ernst Schmid said at the meeting to applause. 

“Management always tries to sweep things under the carpet, but it’s no longer possible to hide.”

By Sunday, Dougan had lost the support of the Swiss Social Democrats, the country’s second-largest political party.

"If you're justifying your high salary with the responsibility you carry, then you cannot duck that responsibility in an emergency," SP president Christian Levrat said.

There is simply no way that Dougan will avoid the axe.  He is on record saying in 2008 that Credit Suisse’s cross-border business with wealthy US clients was “immaterial” for the bank. It was not. Then in April 2011, he vowed that his bank had “a really state-of-the-art compliant cross-border banking business”. Needless to say, it did not.

Dougan has always argued that his is a high-stakes job even more nail-biting than a James Bond flick and something more akin to the disaster movie, Twister.

“In the movie they’re chasing tornadoes in the US, and they basically try to get this apparatus so it actually goes up in the tornado,” he said 2009. “It’s a very difficult thing to do. When you get it right, though, it pays off hugely. When you get it wrong, it can also be pretty damaging.”

The tornado coming for Dougan won’t be stopped. I imagine the bank will keep him until a final toll of the devastation can be assessed and then bring in someone else to clean things up.

The damage, however, for US regulators could be much worse.

The Senate subcommittee had four major recommendations on how the US can lift its game and try and restore public confidence not only in its ability to catch the crooks but also in ensuring the tax system is equitable for all Americans.

The advice of the committee included improving prosecution of tax haven banks and hidden offshore account holders, increasing transparency of tax haven banks that impede US tax enforcement, amending US tax laws to uncover the names of taxpayers using offshore accounts and other means to evade US taxes and, finally, closing loopholes that allow foreign banks to treat offshore shell entities as not belonging to the US even when they are owned and controlled by Americans.

Every movie needs a hero, and in this case that role can’t be played by anyone other than the US Department of Justice and American regulators. They must be seen to be one step ahead of the bad guys. During those unexpected plot twists where the villains manage to sneak one past them, they need to do what any born hero does -- find them and bring them to justice.

Mathew Murphy is a Walkley Award-winning journalist based in New York.