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Not All DoJ Punishments Are Created Equal, Just Ask Credit Suisse And UBS

This article is more than 9 years old.

UBS , Wegelin & Co and Credit Suisse are all Swiss banks that faced the wrath of the US Department of Justice over tax schemes, but not all punishment is created equal.

Here's what I mean. Credit Suisse is in the middle of a major investigation by the DoJ over allegations that it helped Americans shelter income and avoid taxes. There are reports that U.S. Attorney General Eric Holder is putting pressure on the bank to plead guilty, and is also hitting it with $1 billion or more penalty.

The billion dollar plus penalty is becoming the norm these days, but pressing for an admission of guilt is a new tactic used by the DoJ when dealing with banks.

Consider back in 2009 when another Swiss Bank, UBS, was facing a similar tax evasion investigation from the DoJ. The Justice Department said UBS provided Swiss bank accounts to 20,000 U.S. taxpayers with assets of about $20 billion, and that 17,000 of them hid their identities and the existence of those accounts from the IRS.

In the end, UBS entered a deferred prosecution agreement that allowed the charges against it to be dismissed. UBS also paid over $780 million in the case.

Now look at the case around Credit Suisse. The allegations are similar--that it helped Americans avoid taxes--but the numbers are less so. At its peak, Credit Suisse had over 22,000 U.S. customers with Swiss accounts with assets of roughly $10 billion, according to report from the U.S. Senate Permanent Subcommittee on Investigation.

That's about half of what UBS was accused of hiding for American taxpayers, yet it appears the DoJ's punishment for Credit Suisse will much harsher. In January, Switzerland-based Wegelin & Co. shut down after charges that it helped U.S. taxpayers avoid taxes on at least $1.2 billion for a nearly ten years.

"It’s disproportionate treatment that defies logic and justice," says Anthony Sabino a professor at St. John’s University‘s Peter J. Tobin College of Business. "How can you justify a deal with one, and such rough treatment of the other? This DoJ has a lot of explaining to do to the American people," he adds.

One explanation is the DoJ is feeling more pressure to get tough on banks. Under Holder, deferred prosecutions for banks, like the one UBS received, have been common. Last March, Holder testified before a Senate committee to discuss the lack of criminal cases against financial institutions in the aftermath of the financial crisis. One of his reasons:

I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.

Those remarks created quite a stir. Too big to fail banks were now too big to prosecute and jail.

Now, Holder is taking a more forceful approach. On Monday, the AG posted a video message stating no bank is too big to jail, and that the DoJ is in fact readying criminal cases against banks.

There's a bit of irony in all this, though. The too big to fail and jail debate came out of the lack of prosecutions involving financial crisis related cases, but Holder's new tough stance is being applied to tax evasion cases against Swiss banks. It's not that those alleged crimes should go unpunished, but criminal prosecutions around the financial crisis remain unseen.

And what message does all of this send big banks? "It’s not unfair to say you can take insane risks as a banker, endanger the global financial system, and then get a taxpayer bailout," Sabino says. "But if your bank helps Americans hide money from the IRS, oh boy, then you’re in big trouble. There’s a hypocrisy to all this, that is for certain," Sabino adds.

And for now, it seems Credit Suisse is falling in the cross-hairs of that hypocrisy.