Lessons from Credit Suisse

India must crack down on Swiss banking malpractices

Credit Suisse Group, the Switzerland-based multinational financial services giant, has agreed to pay $2.6 billion in penalties after pleading guilty to charges of criminal wrongdoing brought against it by prosecutors and regulators in the United States. The charges of aiding tax fraud, to which Credit Suisse has admitted, are serious and reflect the deep malaise that afflicts the Swiss banking system, which, on the plea of guaranteeing secrecy, has allowed all sorts of wrongdoing by its customers and has exposed it to criminal charges of such magnitude. Credit Suisse is the most prominent bank to plead guilty in the US since Drexel Burnham Lambert in 1989 and the largest to do so since Bankers Trust in 1999. According to the prosecutors, Credit Suisse helped its clients cheat US tax authorities by concealing assets in illegal and undeclared bank accounts for decades. These rich clients (the total number of them in the US was over 22,000, with accounts worth around $10 billion) were then helped by the bank to withdraw their funds from the undeclared accounts by using illegal methods.

There may be some legitimate cause for celebration within the regulatory system in the US over the detection of the fraud, admission of guilt by the bank and the huge penalties consequently imposed on it. But the Credit Suisse settlement has raised many disconcerting questions. Why is it that Swiss banks have been frequently in the news for aiding tax frauds? Only five years ago, UBS, another Swiss bank, had to pay a penalty of $780 million to settle similar charges and had to furnish names of over 4,450 of its clients to the US regulators. There are other questions as well. The penalty amount imposed on Credit Suisse may be large, but the Swiss bank may have escaped harsher punishment, such as the cancellation of its banking licence or criminal prosecution against top bank officials who were responsible for allowing the illegal transactions. Nor does it seem that the bank management has contemplated dismissal of the bank's chief executives. This is likely to raise questions about the effectiveness of the regulators in preventing a repeat of similar frauds by other Swiss banks.

The fact is that Swiss banks have thrived largely on the strength of their secrecy laws that make it almost impossible for regulators to uncover wrongdoings. As long as regulators in different countries turned a blind eye to Swiss banks' operations and did not force them to lift the veil of secrecy over the accounts held by their clients, such banks' business model faced no challenge. In recent years, however, the US has cracked down on Swiss banks and has been forcing them to furnish data on secret accounts maintained by its citizens. Unfortunately, India, along with many other countries, has made little headway on this front. This is partly because the Swiss authorities have been uncooperative and partly because the Indian government has lacked the necessary drive and initiative to force Swiss banks to put an end to such financially opaque banking practices. The Bharatiya Janata Party, which will lead the new government to take oath next Monday, had made an electoral promise to crack down on the secret accounts maintained by Indians in Swiss banks. A good start for the new government and the banking regulator would be to send out a firm and clear message to the Swiss authorities that they need to put an end to all their banking malpractices and co-operate with them to identify and punish those who have been guilty of financial irregularities.