By Brian Monroe
After over a year of negotiations with UBS AG, U.S. officials will have more leverage to reach a settlement with another Swiss bank that may have helped American citizens hide taxable assets.
On Thursday, the U.S. Justice Department informed Credit Suisse Group AG that it was the subject of a probe related to its American accountholders. The investigation had been rumored since February, when federal prosecutors indicted four former bankers they said had helped Credit Suisse's clients avoid paying taxes on some $3 billion in assets.
The probe into Switzerland's second largest bank follows the $780 million penalty paid in 2009 by Switzerland's largest, UBS AG, for allegedly helping wealthy Americans hide billions of dollars in taxable assets. The bank and Swiss authorities turned over data on nearly 5,000 U.S. clients after a prolonged legal battle over the country's stringent bank secrecy laws.
Since the UBS AG deal, the legal arrangement between the United States and Switzerland "is a bit changed," said Rebeca Garcia, a spokeswoman for the Swiss Bankers Association. Revisions to the nations' tax treaty would make a deal over how to handle Credit Suisse's alleged violations "easier to work out this time around," she said.
An amended tax treaty signed in September 2009 required Switzerland to stop distinguishing between tax fraud—a crime—and using Swiss banks to evade paying taxes to other countries. Previously, Swiss authorities could only share bank data with foreign countries when their governments could show possible criminal abuse in specific accounts.
As part of the updated tax agreement, Switzerland became a party to Organization for Economic Co-operation and Development (OECD) Article 26, which calls on countries to exchange information that is "foreseeably relevant to the administration or enforcement of domestic laws concerning tax of every kind and description."
A ruling Friday by the Swiss Federal Supreme Court that found that Switzerland's release of the UBS client data to the United States was "justified" has also improved the chances that a similar agreement will be reached more easily this time, said Dennis Brager, founder of the Los Angeles-based Brager Tax Law Group.
The Swiss court stated that the Swiss Financial Market Supervisory Authority's decision to release the data legally trumped bank secrecy concerns because to do otherwise would've exposed UBS to criminal charges that could have "seriously jeopardi[z]ed the bank's liquidity and thus its existence" as well as the larger Swiss banking industry.
The ruling is "fascinating" because it implies that some legal concerns can overrule data and privacy protections in Switzerland, giving the United States and other countries greater legal standing in pursuing cases against Swiss financial institutions, he said.
The Justice Department's decision to formally notify Credit Suisse of the investigation comes as the United States has backed out of talks with Switzerland over how to address allegations that some Swiss banks have knowingly facilitated tax evasion, SonntagsZeitung reported Sunday, according to a story by Reuters.
Both governments had been negotiating a deal in which the United States would have dropped its cases against the banks if they paid a fine, ended their offshore banking services and turned over data on their U.S. clients to the Internal Revenue Service, Reuters said, citing anonymous sources.
U.S. officials and individuals familiar with the matter have acknowledged similar investigations of London-based HSBC Holdings Plc and Zurich-based Julius Baer Group. Citing anonymous sources, The New York Times said in December that the Justice Department had launched a formal investigation of Basel-based Basler Kantonalbank.
With the Credit Suisse case, U.S. officials may be ratcheting up pressure on Switzerland to win larger concessions from the country, said Brager.
"I don't think the Swiss government is ready for another prolonged battle," said David Spencer, a NY-based independent tax attorney. "It can see the writing is on the wall."
But how strong of a case the Justice Department has against Credit Suisse is unclear. In their charges against the former bank officials, who have not been arrested, U.S. prosecutors said the individuals helped their American clients to structure withdrawals to avoid reporting requirements and advised them to ignore a U.S. amnesty program for tax evaders.
While those allegations are "pretty serious," the degree to which the bank is legally exposed will depend on whether the incidents were isolated or symptomatic of broader problems, said Scott Michel, an attorney with Caplin & Drysdale in Washington, D.C.
Calls to spokespersons in the Justice Department and Credit Suisse were not returned.