Tuesday, May 20, 2014

Headline Justice: Credit Suisse Pleads Guilty and Chinese Indicted

Headline Justice: Credit Suisse Pleads Guilty and Chinese Indicted

Many in the Obama Administration have to be very happy with this morning’s headlines.  Whether they open The Washington Post, The New York Times, The Wall Street Journal or any one of hundreds of other papers, they have captured the front page.  For example, The Journal leads with “U.S. Charges Chinese Army Workers With Cybercrimes,” and also includes “Credit Suisse Pleads Guilty in Tax Case.[1]  These stories run in the featured first and sixth columns of The Times.  However, as The Times admitted several paragraphs into the Chinese story:

The move by the Justice Department was almost certainly symbolic since there is virtually no chance that the Chinese would turn over the five People’s Liberation Army members named in the indictment.[2]

In reality, the Justice Department broke no new ground in indicting Chinese military officials, and Credit Suisse’s guilty plea was almost certainly symbolic as well.  Credit Suisse pleaded guilty to one criminal charge of conspiring to aid tax evasion.  The bank will also pay $2.6 billion to various regulators, and hire an independent monitor.  Attorney General Eric Holder said, “This case shows that no financial institution, no matter its size or global reach, is above the law. Credit Suisse conspired to help U.S. citizens hide assets in offshore accounts in order to evade paying taxes. When a bank engages in misconduct this brazen, it should expect that the Justice Department will pursue criminal prosecution to the fullest extent possible, as has happened here.”[3]



According to Mr. Holder, the criminal plea and fine occurred because:

The bank went to elaborate lengths to shield itself, its employees, and the tax cheats it served from accountability for their criminal actions. They subverted disclosure requirements, destroyed bank records, and concealed transactions involving undeclared accounts by limiting withdrawal amounts and using offshore credit and debit cards to repatriate funds. They failed to take even the most basic steps to ensure compliance with tax laws.

In other words, Credit Suisse engaged in a widespread practice of helping US citizens avoid paying taxes.  This settlement is being presented as a major breakthrough and a repudiation of the doctrine Mr. Holder recommended as an Assistant Attorney General in the late-1990’s: “too big to jail.”  What is different about this criminal settlement and the dozens of civil settlements announced by the Justice Department in the past several years?  Nothing.

No one is going to jail as a result of this settlement.  No one in a senior position is losing his job, pension, or stock options.  I suppose the bonus pool may be a bit smaller because $2.6 billion will be paid out.  However, I’m sure the bank had already taken reserves for this settlement, and lower level employees will feel any remaining pain.

Credit Suisse didn’t have to turn over its customer list so the US government would know which American taxpayers evaded taxes through the bank’s schemes.  Apparently this revelation would have violated Swiss law.

Credit Suisse doesn’t have to worry about losing its license in the United States because it primary regulator, the New York State Bank Superintendent, has agreed to waive that remedy.  Although I’m not suggesting that Credit Suisse lose its license and thereby lose its ability to do business in the United States, the Superintendent’s decision means that this resolution is no different than a civil settlement. 

The bank issued the standard press release in which it indicated that it regretted its past actions, and reassured its customers and shareholders that the settlement will allow it to move forward.  All that has changed is that the Federal Reserve, State Bank Superintendent, and the Justice Department get to issue better press releases.   

I doubt the Chinese government is going to change its behavior because the Justice Department issued an indictment and received banner headlines about its actions.  And I doubt corporate behavior is going to change much because prosecutors and regulators managed to get one guilty plea and had harsh things to say about Credit Suisse.






[1] http://online.wsj.com/public/resources/documents/pageone0520.pdf
[2] http://www.nytimes.com/2014/05/20/us/us-to-charge-chinese-workers-with-cyberspying.html?ref=world&_r=0
[3] http://www.justice.gov/iso/opa/ag/speeches/2014/ag-speech-1405192.html

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