[Senate Hearing 113-397, Volume 1]
[From the U.S. Government Publishing Office]
S. Hrg. 113-397
OFFSHORE TAX EVASION: THE EFFORT TO
COLLECT UNPAID TAXES ON BILLIONS IN
HIDDEN OFFSHORE ACCOUNTS
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
VOLUME 1 OF 2
__________
FEBRUARY 26, 2014
__________
Available via the World Wide Web: http://www.fdsys.gov
Printed for the use of the
Committee on Homeland Security and Governmental Affairs
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Washington, DC 20402-0001
COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
THOMAS R. CARPER, Delaware Chairman
CARL LEVIN, Michigan TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri ROB PORTMAN, Ohio
JON TESTER, Montana RAND PAUL, Kentucky
MARK BEGICH, Alaska MICHAEL B. ENZI, Wyoming
TAMMY BALDWIN, Wisconsin KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota
Richard J. Kessler, Staff Director
Keith B. Ashdown, Minority Staff Director
Laura W. Kilbride, Chief Clerk
Lauren M. Corcoran, Hearing Clerk
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
CARL LEVIN, Michigan Chairman
MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri ROB PORTMAN, Ohio
JON TESTER, Montana RAND PAUL, Kentucky
TAMMY BALDWIN, Wisconsin KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota
Elise J. Bean, Staff Director and Chief Counsel
Robert L. Roach, Counsel and Chief Investigator
Allison F. Murphy, Counsel
Henry J. Kerner, Minority Staff Director and Chief Counsel
Michael Lueptow, Counsel to the Minority
Brad M. Patout, Senior Advisor to the Minority
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Levin................................................ 1
Senator McCain............................................... 7
Senator Coburn............................................... 9
Senator Johnson.............................................. 26
WITNESSES
Wednesday, February 26, 2014
Brady W. Dougan, Chief Executive Officer, Credit Suisse Group AG,
Credit Suisse AG, New York, NY................................. 10
Romeo Cerutti, General Counsel, Credit Suisse Group AG, Credit
Suisse AG, Zurich, Switzerland................................. 10
Hans-Ulrich Meister, Co-Head, Swiss Private Banking and Wealth
Management, Chief Executive Officer-Region Switzerland, Credit
Suisse Group AG, Credit Suisse AG, Zurich, Switzerland......... 10
Robert S. Shafir, Co-Head, Swiss Private Banking and Wealth
Management, Chief Executive Officer Region Americas, Credit
Suisse Group AG, Credit Suisse AG, New York, NY................ 10
Hon. James M. Cole, Deputy Attorney General, Office of the
Attorney General............................................... 61
Hon. Kathryn M. Keneally, Assistant Attorney General, Tax
Division, U.S. Department of Justice........................... 61
Alphabetical List of Witnesses
Cerutti, Romeo:
Testimony.................................................... 10
Joint prepared statement..................................... 93
Cole, Hon. James M.:
Testimony.................................................... 61
Joint prepared statement..................................... 107
Dougan, Brady W.:
Testimony.................................................... 10
Joint prepared statement..................................... 93
Keneally, Hon. Kathryn M.:
Testimony.................................................... 61
Joint prepared statement..................................... 107
Meister, Hans-Ulrich:
Testimony.................................................... 10
Prepared statement........................................... 93
Shafir, Robert S.:
Testimony.................................................... 10
Prepared statement........................................... 93
APPENDIX
Report by the Permanent Subcommittee entitled ``Offshore Tax
Evasion: The Effort to Collect Unpaid Taxes on Billions in
Hidden Offshore Accounts,'' February 26, 2014.................. 115
EXHIBIT LIST
VOLUME 1
1. a. GCredit Suisse U.S. Customers with Swiss Accounts: Only 1%
Given by Swiss to United States, chart prepared by the
Permanent Subcommittee on Investigations....................... 329
b. GEffect of Credit Suisse Reallocation of Client 5 Assets
in 3Q2012, chart prepared by the Permanent Subcommittee on
Investigations................................................. 330
U.S. Account Disclosure:
2. GCredit Suisse email, dated March 2010, re: Account
Instructions (It will certainly be a pleasure to welcome you as
a client, should you opt to knock on our door again in future
times.). [CS-SEN-00025083-084]................................. 331
3. GCredit Suisse email, dated October 2008, re: Numbered
Accounts (He needs not to disclose anything to anyone. He has
the choice of disclosing it to the US authorities or not. It is
his choice! Whatever he does is of no concern to us.). [CS-SEN-
00345395-396].................................................. 333
Documents Related to Travel:
4. a. GCredit Suisse Business Trips 2006 (Swiss Ball). [CS-SEN-
00080267-269].................................................. 335
b. GCredit Suisse Business Trips SALN and SALN1 2007 (Key
Client Visits). [CS-SEN-00080270].............................. 338
c. GCredit Suisse Business Trips SALN and SALN1 2008 (Key
Client Visits). [CS-SEN-00080271-273].......................... 339
5. a. GCredit Suisse Travel Report Summary, February 2006,
Destination: New York (Clients covered - 20 - CHF 80,000,000 .
. . Invitation to the Swiss Ball in New York, regular RO [Rep
Office] New York visit, Key Clients visited, successful
meetings overall, Retention, new Referrals). [CS-SEN-00081860]. 340
b. GCredit Suisse Travel Report Summary, May 2006,
Destination: New York, Philadelphia, Chicago (Clients covered -
42 - CHF 80'000'000 . . . Will have follow-up business, in
pipeline NNA CHF 3'000'000). [CS-SEN-00081868-869]............. 343
c. GCredit Suisse Travel Report Summary, May 2006,
Destination: Miami, New York, Houston (Clients covered - 40 -
CHF 160'000'000). [CS-SEN-00081872-873]........................ 345
d. GCredit Suisse Travel Report Summary, July 2006,
Destination: Miami, New York, Toronto, Montreal (Clients
covered - 34 - CHF 54'000'000 ... Client sends me a list of
shares that we need to give our recommendations!). [CS-SEN-
00081874-875].................................................. 347
e. GCredit Suisse Travel Report Summary, February 2006,
Destination: Houston, Los Angeles, Reno (Clients covered - 28 -
CHF 65,000,000 ... Knows some very wealthy people for future
referrals.). [CS-SEN-00081879-880]............................. 349
f. GCredit Suisse Travel Report Summary, February 2007,
Destination: New York (Invitation to the Swiss Ball in New
York, regular RO [Rep Office] New York visit . . . new
Referrals). [CS-SEN-00081883].................................. 351
g. GCredit Suisse Travel Report Summary, March 2008,
Destination: San Francisco, Los Angeles, New York, Toronto,
Montreal (Clients covered - 49 - CHF 230,000,000 ... [Credit
Suisse redacted] for dinner in Beverly Hills . . .). [CS-SEN-
00081901-906].................................................. 352
Documents Related to Credit Suisse New York Representative
Office:
6. GCredit Suisse Important phone numbers (Doerig Josef, Doerig
Partner, external Trust expert; Singenberger Beda, Sinco AG,
external Trust expert) [CS-SEN-00011615-616]................... 357
7. GCredit Suisse Weekly Report - Rep. Office New York (Client
Activities - Assisting client of Niccole (wire instructions to
send additional funds) . . . Contact with prospective client
from Chicago (US$3-5 Mio). [CS-SEN-00096325-328]............... 359
8. GCredit Suisse email, dated July 2008 (We do not have any
educational or promotional material we could provide to a US
person regarding accounts in Switzerland. We are not allowed to
actively solicit or promote offshore accounts from or into the
United States. However, if your clients wants to call me to
learn more about what services can be offered out of
Switzerland - he can do that anytime. Please let me know if I
can assist you in this regard.) [CS-SEN-00095655-656].......... 363
9. GCredit Suisse PB Americas--Representative Office New York,
CSG Internal Audit, Executive Summary, dated February 7, 2008
(Audit Results . . . The overall control environment was found
to be operating effectively.) [CS-SEN-00226719-724]............ 365
Documents Related to SALN:
10. a. GSALN: Organizational Chart as of 01.04.2008, with Swiss
codes [CS-SEN-00080287]........................................ 371
b. GSALN: Organizational Chart as of 01.04.2008 [CS-SEN-
00011631-632].................................................. 372
11. a. GCredit Suisse PB Americas--North America Offshore, Latin
America and Bahamas, CSG Internal Audit, August 2006 draft
(Employees of SWLN making visits or holding meetings in the
United States should not provide investment advice or solicit
business, given existing regulations . . . the level of travel
activities (in 2005 approximately 500 clients were met in the
United States and Canada) may entail regulatory risk. [CS-SEN-
00408714-730].................................................. 374
b. GCredit Suisse PB Americas--North America Offshore, Latin
America and Bahamas CSG Internal Audit, dated August 31, 2006
(final) (The overall control environment was generally found to
be operating adequately.) [CS-SEN-00418830-839]................ 391
12. GCredit Suisse PB Americas--North America International, CSG
Internal Audit, dated December 9, 2009 (Significant
Reputational Risk Issues: None . . . The overall control
environment was generally found to be operating adequately and
we noted no deficiencies with regard to Policy P-00025.) [CS-
SEN-00417862-870].............................................. 401
Documents Related to Project W9:
13. GCredit Suisse, Project W9 Kick-Off Meeting, dated September
29, 2006 (Chart at CS-SEN-00426144--Swiss Booked W9 Clients:
Affected Units, 998 CIFs.). [CS-SEN-00426138-158].............. 410
14. GCredit Suisse, Project W9 6th Core Team Meeting, dated
January 26, 2007. [CS-SEN-00173686-704]........................ 431
Documents Related to Credit Suisse Accounts Numbers/Exit
Projects:
15. GCredit Suisse email, dated March 2007, re: Risk Country:
Yearly Review 2006 (US--Market purity is still insufficient
with regard to the business risk involved.). [CS-SEN-00409535-
555]........................................................... 450
16. GCredit Suisse, US Project - STC #1, dated August 19, 2008
(Chart at CS-SEN-00426306--US Intl. business activities spread-
out across whole organization). [CS-SEN-00426290-307].......... 471
17. GCredit Suisse, Project Tom - STC #5, dated December 19, 2008
(Chart at CS-SEN-00455231--Quick Win Non W-9 (transfer SIOA 5
to SALN). [CS-SEN-00455224-234]................................ 489
18. GCredit Suisse, Update on Development of AuM and Accounts of
U.S. Clients to the Senate Permanent Subcommittee on
Investigations, dated April 20, 2012. [CS-SEN-00189151-157].... 500
19. GLetter from Credit Suisse legal counsel to the Permanent
Subcommittee on Investigations, dated August 13, 2013 re:
Credit Suisse's exit projects. [PSI-CreditSuisse-37-000001-051] 507
20. GLetter from Credit Suisse legal counsel to the Permanent
Subcommittee on Investigations, dated December 20, 2013 re:
questions regarding Credit Suisse's internal investigation
covering its U.S. cross-border business (In early 2012, the
Bank formed a special task force to follow up on potential
breaches of its internal policies . . . [and] imposed
disciplinary action against a total of 10 Swiss based employees
(6 in 2012 and 4 in 2013) . . . None of the employees were
terminated). [PSI-CreditSuisse-54-000001-048].................. 558
Document Related to Net New Assets (NNA):
21. GCredit Suisse email, dated February 2012, re: Important -
NNA, PBMC (. . . we will again discuss our NNA results which
have been very disappointing up until now. As our capability to
attract clients and new assets is of utmost importance - also
externally - we need to take all possible measures in order to
change this into a positive story within the next weeks.). [CS-
SEN-00463981-984].............................................. 606
22. GCredit Suisse email, dated March 2012, re: Major flows last
week (. . . none of these assets are currently categorized as
AUM and I would caution against it before speaking with me as I
am very knowledgeable about the plans for the assets.). [CS-
SEN-00441333-335].............................................. 610
23. GCredit Suisse email, dated March 2012, re: Project
[Redacted] (There is no agreement at this time. . . . There
have been suggestions that we count as much as 5B CHF . . .
this is not a number I want to risk having to reverse, so let's
be sure we are VERY confident in what we count.). [CS-SEN-
00443178-181].................................................. 613
24. GCredit Suisse email, dated April 2012, re: PB NNA ([C]an you
also check the disclosure issue re NNA in Switzerland vs US PB?
As we know, investors are keeping a close eye on this and of
course it is key that finance be comfortable with how we
present this external[l]y.). [CS-SEN-00424575-577]............. 617
25. GCredit Suisse email, dated October 2012, re: NNA Q3 2012 (.
. . please find below . . . NNA for Q3 2012, as reported
internally for PB Americas (CHF 2.4bn) vs. the externally
released figure (CHF 0.2bn)). [CS-SEN-00443246]................ 620
26. GCredit Suisse email, dated December 2012, re: NNA 4Q12
Forecast (Based on reported November NNA and the result of the
first December week, our ambition to deliver WMC [Wealth
Management Clients] NNA of around CHF 6-7bn in 4Q12 is at risk.
With 3 weeks to go until the year comes to a close and QTD
[Quarter to Date] actuals of CHF 2.5bn, we still need CHF 3.5bn
to reach the lower end of this ambition. This requires
continued efforts on all levels and your support is very
important.). [CS-SEN-0000560923-924]........................... 621
27. GCredit Suisse email, dated December 2012, re: Confidential:
Global Client Segments metrics (Zurich is looking for more
potential NNA positions to support the global 2012 year-end
disclosure. As a consequence they are looking to transfer more
of [Redacted/Client 5] balance into AUM.). [CS-SEN-00425106-
107]........................................................... 623
28. GCredit Suisse email, dated January 2013, re: Americas
[Redacted] (Currently - for Q4 reporting - WMC [Wealth
Management Clients] runs for NNA substantially below
expectations. . . . [I]n order to support the PB division, a
further [Redacted/Client 5] portion of 0.9bn CHF - fully
reported internally and externally in the Americas region -
would be a great favour for our division. Hans-Ueli [Hans-
Ulrich Meister] would be extremely happy if you could support
this.). [CS-SEN-00425140-142].................................. 625
29. GCredit Suisse email, dated January 2013, re: WG: NNA (I am
convinced that with this enhanced story we will get approval
soon from Carlos. . . . Given the rather weak granularity, we
need to create a more powerful story in the sense of making
more around the existing weak figures in the sense of:
[redacted] consists of xx accounts, all held in the xx branch,
covered by 2 senior RMs xx and yy which do high interaction
level.......blabla. Might not be relevant but sounds rather
good.). [CS-SEN-00442608-613]................................. 628
30. GCredit Suisse email, dated June 2013, re: Feedback from new
RMs (We need some fresh blood and some nna.). [CS-SEN-00424732] 634
Documents Related to the Department of Justice and the Swiss:
31. a. GTax Convention with Swiss Confederation Message from the
President of the United States Transmitting Convention Between
the United States of America and the Swiss Confederation for
the Avoidance of Double Taxation with Respect to Taxes on
Income Signed at Washington, October 2, 1996, together with a
Protocol to the Convention..................................... 635
b. GProtocol Amending Tax Convention with Swiss
Confederation, January 2011.................................... 680
c. GTranslation of Swiss Parliamentary Resolution, dated
March 16, 2012, Federal Resolution Concerning a Supplement to
the Double Taxation Treaty between Switzerland and the United
States of America.............................................. 705
32.a./b. GCommunications from the Department of Justice to Swiss
representatives, unsigned and undated, outlining steps to be
taken by the Department of Justice and The Swiss Confederation
regarding Agreement between the Internal Revenue Service and
The Swiss Confederation. [Also see Exhibit 45 for related
communications.]............................................... 707-9
33. GDepartment of Justice letter, dated December 9, 2011, (. . .
in order to determine whether it will be fruitful for the
United States Department of Justice to discuss with your
institution the possibility of an agreement with us that could
avoid indictment, the Department of Justice must have complete
and accurate information and must have the information
quickly.)...................................................... 711
34. GTranslation of newspaper article, Tax Dispute with the US is
Escalating, SonntagsZeitung, September 4, 2011................. 714
35. a. GPress Release of the Swiss Federal Supreme Court, dated
July 5, 2013, Exchange of information in Tax Matters with the
United States--The Federal Supreme Court rejects a first
appeal......................................................... 717
b. GPress Release of the Swiss Federal Administrative Court,
dated January 8, 2014, Julius Baer: IRS request for
administrative assistance not sufficient for the disclosure of
client data.................................................... 719
36. a. GTranslation of the Swiss Federal Parliament Lex USA,
Measures to facilitate the resolution of the tax dispute
between the Swiss banks and the United States, dated May 29,
2013........................................................... 721
b. GSummarized Translation of the Swiss Federal Parliament
Dispatch explaining Lex USA, dated May 29, 2013................ 724
37. a. GJoint Statement between the U.S. Department of Justice
and the Swiss Federal Department of Finance, dated August 29,
2013........................................................... 731
b. GU.S. Department of Justice Program for Non-Prosecution
Agreements or Non-Target Letters for Swiss Banks, dated August
29, 2013....................................................... 733
38. GDeferred Prosecution Agreement, U.S. v. UBS AG, undated..... 743
39. a. GSettlement of the John Doe Summons, agreement between
the United States and the Swiss Confederation, August 19, 2009. 786
b. GSettlement of the John Doe Summons, agreement between the
United States, the U.S. Internal Revenue Service and UBS AG,
dated August 19, 2009.......................................... 796
40. GU.S. v. Walder et al., Case No. 1:11-CR-95 (E.D. Virginia)
Superseding Indictment (July 21, 2011)......................... 808
Additional Documents:
41. GCredit Suisse email, dated January 2013 (There was some
legacy Clariden issues (CB) brewing that we need to brief you
on.). [CS-SEN-00426110-111].................................... 855
42. a. GSwiss seek U.S. tax deal by year-end, but not at any
price, Reuters, August 3, 2012................................. 857
b. GSwitzerland to Allow Its Banks to Disclose Hidden Client
Accounts, The New York Times, May 29, 2013..................... 858
43. a. GIndictment, U.S. v. Wegelin & Co., et al., February 1,
2012........................................................... 863
b. GPlea, U.S. v. Wegelin & Company, January 3, 2013......... 922
44. GLetters between the Department of Justice and the Permanent
Subcommittee on Investigations, March and June 2014, regarding
extradition of Swiss nationals from Switzerland................ 949
45. GLetters between the Department of Justice, Internal Revenue
Service and the Swiss State Secretariat for International
Financial Matter, August, 2011, regarding Swiss-U.S.
discussions on tax issues...................................... 953
46. a. GResponses of Credit Suisse to supplemental questions for
the record from Senator Carl Levin............................. 960
b. GSEALED EXHIBIT: Question 4a and Credit Suisse's response. *
c. GMemorandum to File from the Permanent Subcommittee
Investigations Staff regarding Credit Suisse Classification of
Net New Assets................................................. 967
47. GResponses of Credit Suisse to supplemental questions for the
record from Senator Tom Coburn................................. 969
48. GResponses of the Department of Justice to supplemental
questions for the record from Senator Carl Levin............... 970
VOLUME 2
49. GDocument Locator List and documents cited in the footnotes
to Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on
Billions in Hidden Offshore Accounts, the Report released in
conjunction with the Subcommittee hearing on February 26, 2014.
The Document Locator List provides the Bates numbers or a
description of the documents cited in the Report and the
hearing record page number where the document can be located.
Not included are widely available public documents and
documents related to Subcommittee interviews, which are not
available to the public........................................ 1002
* Retained in the files of the Subcommittee.
.................................................................
OFFSHORE TAX EVASION: THE EFFORT TO
COLLECT UNPAID TAXES ON BILLIONS IN HIDDEN OFFSHORE ACCOUNTS
VOLUME 1 OF 2
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WEDNESDAY, FEBRUARY 26, 2014
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:34 a.m., in
room G-50, Dirksen Senate Office Building, Hon. Carl Levin,
Chairman of the Subcommittee, presiding.
Present: Senators Levin, McCain, Coburn, and Johnson.
Staff present: Elise J. Bean, Staff Director and Chief
Counsel; Mary D. Robertson, Chief Clerk; Robert L. Roach,
Counsel and Chief Investigator; Allison F. Murphy, Counsel;
Henry J. Kerner, Staff Director and Chief Counsel to the
Minority; Michael Lueptow, Counsel to the Minority; Brad M.
Patout, Senior Advisor to the Minority; Angela Messenger,
Detailee (GAO); Admad Sarsour, Detailee (FDIC); Christopher
Reed, Congressional Fellow; Joel Churches, Detailee (IRS);
Admad Sarsour, Detailee; Jacob Rogers, Law Clerk; Alex Zerden,
Law Clerk; Samira Ahmed, Law Clerk; Mohammad Aslami, Law Clerk;
Harry Baumgarten, Law Clerk; Benjamin Driscoll, Law Clerk;
Elizabeth Freidrich, Law Clerk; Megan Schneider, Law Clerk to
the Minority; Bob Heckart and Tom Everett (Sen. Levin); Keith
Ashdown, HSGAC Staff Director to the Minority (Sen. Coburn);
Andrew Dockham, HSGAC Chief Counsel to the Minority (Sen.
Coburn); Stephanie Hall (Sen. McCain); and Ritika Rodrigues
(Sen. Johnson).
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Good morning, everybody. The Permanent
Subcommittee on Investigations will come to order.
The American public is angry about offshore tax abuse--
efforts by well-off Americans to evade their U.S. tax
obligations by hiding money offshore.
Today's hearing follows up on a hearing that this
Subcommittee held 5 years ago--in 2008--when we presented
evidence that well-known international banks, located in
secrecy jurisdictions, were deliberately helping U.S. clients
cheat on their taxes by opening offshore accounts never
reported to the Internal Revenue Service (IRS), despite U.S.
laws requiring their disclosure. The hearing focused in part on
Union Bank of Switzerland (UBS), the largest bank in
Switzerland, which at one time had 52,000 U.S. customers with
Swiss accounts holding $18 billion in hidden assets, and which
back then had a practice of sending Swiss bankers onto U.S.
soil to service those secret accounts.
On the first day of those hearings, in a dramatic
admission, UBS acknowledged what its Swiss bankers had been up
to and committed the bank to stopping the abuses. Seven months
later, UBS signed a Deferred Prosecution Agreement (DPA) with
the U.S. Justice Department (DOJ), paid a $780 million fine,
and promised to close all undeclared Swiss accounts for U.S.
clients. As part of that agreement, UBS turned over about 250
secret Swiss accounts with U.S. client names. And after a John
Doe summons proceeding that took another year, UBS coughed up
more accounts for a total of about 4,700 accounts.
UBS' actions sent a powerful signal that U.S. tax cheats
using offshore accounts better pay up or face prosecution.
Thousands of Americans with undeclared Swiss accounts, along
with U.S. account holders with accounts in other offshore
secrecy jurisdictions, ended up joining a voluntary disclosure
program established by the IRS. Altogether, 43,000 taxpayers
have paid back taxes, interest, and penalties totaling $6
billion to date, with more expected. Tax evaders acted to avoid
being prosecuted. It is as simple as that.
UBS' breaking of Swiss secrecy also signaled a seismic
shift in the offshore world. Suddenly Switzerland, as well as
other secrecy jurisdictions, declared they would no longer use
secrecy laws to facilitate tax evasion. A flurry of new tax
information exchange agreements were signed around the world
promising some new transparency. The G-20 world leaders
declared the ``era of bank secrecy is over.''
Well, it is 5 years later, and the sad truth is that the
era of bank secrecy is not over. Bank secrecy has been
discredited and condemned, but it is not gone. Billions in
unpaid taxes remain uncollected thanks to tax evaders' use of
bank secrecy. And we have great concern that the battle to
collect those unpaid taxes on hidden offshore assets seems
stalled.
Our investigation chronicles the uneven and halting
progress made in identifying U.S. taxpayers who cheated Uncle
Sam by using offshore accounts. A bipartisan report that we are
releasing today cites chapter and verse of the failure to
collect taxes owed and to hold accountable the U.S. persons who
evaded their tax obligations and the tax havens who helped
them. To lay bare the problems, our report uses a detailed case
study involving Credit Suisse.
After the UBS scandal broke in 2008, this Subcommittee
asked Credit Suisse, as well as several other Swiss banks,
whether they had been engaged in the same type of conduct as
UBS. Credit Suisse privately admitted to Subcommittee
investigators that it had, but that it was going to clean up.
After seven Credit Suisse bankers were indicted by the Justice
Department in 2011, we checked in again and found the bank had
not yet closed thousands of undeclared Swiss accounts held by
U.S. taxpayers. So we decided to take a closer look.
And what we found was that Credit Suisse had been holding
back about how bad the problem was at the bank.
At its peak, in Switzerland, Credit Suisse had over 22,000
U.S. customers with accounts containing more than 12 billion
Swiss francs, which translates into US $10 to $12 billion.
Nearly 1,500 accounts were opened in the name of offshore shell
companies to hide U.S. ownership. Another nearly 2,000 were
opened at Clariden Leu, Credit Suisse's own little private
bank. Almost 10,000 were serviced by a special Credit Suisse
branch at the Zurich airport which enabled clients to fly in to
do their banking without leaving airport grounds.
Although Credit Suisse policy was to concentrate its U.S.
client accounts in Switzerland at a Swiss desk called SALN,
which had about 15 bankers trained in U.S. regulatory and tax
requirements, that policy was largely ignored. In 2008, over
1,800 bankers spread throughout the bank in Switzerland handled
one or more U.S. accounts. One U.S. client told the
Subcommittee about visiting the bank's main offices in Zurich.
The client was ushered into a remotely controlled elevator with
no floor buttons and escorted to a bare room with white walls,
all dramatizing the bank's focus on secrecy. The client opened
an account after being told the bank did not require completion
of the W-9; without that form, the account was not reported to
U.S. authorities. In later visits, the client was offered cash
withdrawals and credit cards to draw from the Swiss account
while in the U.S., and the client always signed a form ordering
that the Credit Suisse account statements be immediately
shredded. It was a classic case of bank secrecy and bank
facilitation of U.S. tax evasion.
But the Swiss bankers did not stay in Switzerland. Like
UBS, Credit Suisse bankers traveled across the U.S. Ten SALN
bankers alone took more than 170 U.S. trips from 2001 to 2008
to look for new clients and service existing accounts. Credit
Suisse arranged for them to host tables at the annual Swiss
Ball in New York and to host golf tournaments in Florida to
prospect for wealthy clients. Some also met with as many as 30
to 40 existing U.S. clients in a single trip to attend to their
banking needs.
We learned of one Swiss banker who met with a U.S. client
over breakfast at a U.S. luxury hotel and slipped the client
bank account statements in between the pages of a Sports
Illustrated magazine. Although none of the Swiss bankers were
registered with the U.S. Securities and Exchange Commission
(SEC), many provided broker-dealer and investment advisory
services for U.S. clients, resulting in the $196 million fine
that Credit Suisse paid last week. Some Swiss bankers also
advised U.S. clients on how to structure cash transactions to
avoid filing reports of cash transactions over $10,000, as
required by U.S. law. Other Swiss bankers helped U.S. clients
set up offshore shell corporations to hold their accounts and
to hide the ownership trail. Some bankers lied on visa
applications when they entered the United States, saying the
purpose of their visit was tourism when, in fact, it was
business.
The bottom line is that Credit Suisse was in it as deep as
UBS, aiding and abetting U.S. tax evasion both in Switzerland
and on U.S. soil.
Once UBS' misconduct was exposed, Credit Suisse initiated a
series of so-called Exit Projects to close its U.S. client
accounts in Switzerland. Those projects took 5 years, until
2013, to complete. In the end, the bank verified accounts for
about 3,500 out of the 22,000 U.S. clients as compliant with
U.S. tax law, meaning they were disclosed to the IRS. The bank
closed accounts for the other 18,900 U.S. customers. It is
clear that the vast majority--up to 95 percent--were
undeclared, meaning hidden from Uncle Sam.
So where are we now? Unlike UBS, U.S. enforcement action
against Credit Suisse has stalled, even though the bank got a
target letter 3 years ago in 2011. While seven of its bankers
were indicted by U.S. prosecutors in 2011, none has stood trial
and none has been the subject of a U.S. extradition request.
Less than a handful of U.S. taxpayers with Credit Suisse
accounts have been indicted.
Now, that is not much accountability for the bank, its
bankers, or U.S. clients. Taxes owed on billions of dollars in
hidden offshore assets remain uncollected. To collect those
unpaid taxes and to hold U.S. tax evaders accountable, the
critical first step is to get their names. The prospect of the
U.S. getting names is what produced the UBS effect--the rush of
U.S. offshore account holders making so-called voluntary
account disclosures to the IRS and paying what they owe to
avoid embarrassment and worse. But getting names is where this
whole story goes bust.
Now, there is a chart,\1\ which I would ask that we put up.
It is a chart of the 22,000 U.S. clients with Swiss accounts at
Credit Suisse. The total number of accounts with U.S. names
disclosed by the Swiss to the United States over 5 years hits a
grand total of 238. That is the slim, green sliver there. That
is 238 out of 22,000, about 1 percent. Other Swiss banks with
thousands of U.S. clients in Switzerland have, as far as we
know, disclosed no names at all.
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\1\ See Exhibit No. 1a, which appears in the Appendix on page 329.
---------------------------------------------------------------------------
Now, the reason for this near total failure to date is
continued Swiss insistence on bank secrecy and the U.S. letting
them get away with it. When the U.S. Department of Justice
issued grand jury subpoenas to Credit Suisse to get U.S. client
names and account information in Switzweland, the Swiss
Government inserted itself into the criminal investigation to
stand between the bank and our Department of Justice. It told
Credit Suisse that it could not deliver documents directly to
the United States, but had to funnel them through Swiss
officials first. Despite grand jury subpoenas outstanding
against Credit Suisse, the Department of Justice did not
attempt to enforce those subpoenas in a U.S. court. Nor did the
Department of Justice turn to the IRS to issue a John Doe
summons to the bank, even though it was a John Doe summons that
caused the UBS to turn over 4,500 accounts, the largest single
production from Switzerland.
Now, rather than using those proven U.S. tools that could
be enforced in our courts, the Department of Justice reversed
course from its UBS approach. For 5 years, the Department of
Justice has voluntarily limited its requests for Swiss
documents, including the names of tax evaders, to requests made
under a U.S.-Swiss tax treaty, despite that treaty's highly
restrictive, maddeningly slow, and unproductive process. In
2011, the Department of Justice submitted a treaty request for
U.S. client names and account information from Credit Suisse
and told the Swiss Government that the Department of Justice
saw the request as a ``test case'' of Switzerland's willingness
to produce critical documents. At the end of a torturous
process that took two requests, two court decisions, and nearly
2 years, in the summer of 2013, the Department of Justice was
rewarded with 238 accounts that included U.S. client names. To
me, getting 238 in 5 years out of a universe of 22,000, less
than 1 percent, is more than an embarrassment. It abdicates the
home-court advantage of using U.S. courts. Now, remember: the
law which is accepted almost everywhere, including the United
States, is that if a bank chooses to do business in a foreign
country, it must accept and operate under the laws of that
country.
By restricting itself to the treaty process, the Department
of Justice essentially handed over control of U.S. information
requests to Swiss regulators and Swiss courts that rule on how
they will be handled and have regularly elevated bank secrecy
over bank disclosures.
But the Swiss roadblocks did not end there. In 2009, right
after the UBS battle, Switzerland agreed to amend the U.S.-
Swiss tax treaty to replace its highly restrictive ``tax
fraud'' standard with the somewhat less restrictive
``relevance'' standard. But the Swiss also insisted that the
less restrictive disclosure standard be used only for
information requests regarding Swiss accounts in existence
after the amendments were signed on September 23, 2009. U.S.
negotiators went along and produced a new treaty standard that
may be useful prospectively, but cannot be used for potentially
tens of thousands of Swiss accounts employed for U.S. tax
evasion before 2009. The end result is that the tax evaders and
the Swiss banks who helped them may get away with wrongdoing.
And in 2012, the Swiss passed legislation erecting still
another roadblock to U.S. efforts to acquire U.S. client names.
The legislation says that to get the names of a Swiss bank's
U.S. clients, a U.S. treaty request must establish that the
holder of the client information--in other words, the bank--
``significantly contributed'' to the pattern of misconduct by
those unnamed account holders. In other words, the Department
of Justice will have to prove that a bank is guilty of
facilitating misconduct by a group of unnamed account holders
before it can even get the account information needed to prove
the misconduct. And even if the Department of Justice wanted to
meet that new standard, it would have to do so in a country
that prizes bank secrecy and whose banks have made a fortune
from that secrecy. It is still a rigged game.
During the same time period, Switzerland pressed the
Department of Justice to create a program to enable most of its
banks--other than the 14 large banks under active Department of
Justice investigation--to obtain non-prosecution agreements
(NPA) or non-target letters in exchange for providing limited
information and monetary fines, but still without producing any
U.S. client names. In response, the Department of Justice, in
2013, announced an unprecedented program to give prosecutorial
amnesty to hundreds of Swiss banks, without requiring those
banks to disclose a single U.S. client name. Giving up on
getting U.S. client names contradicts U.S. policy of demanding
full cooperation from parties excused from prosecution, and it
sets a bad precedent for how the Department of Justice will
handle other tax haven banks.
The Department of Justice program allows the banks to give
U.S. prosecutors bits and pieces of information, hints and
clues that might help the United States in its hunt for tax
evaders, instead of a straightforward list of U.S. clients with
Swiss accounts. Accounts that existed before August 1, 2008,
are not even covered. The United States is then told to piece
the clues together and go on a treasure hunt, trying to
identify accounts, again, using very limited information, while
Swiss banks get immediate immunity from prosecution.
To make the situation even more difficult, in January a
Swiss court turned down a U.S. treaty request for client names,
ruling that the fact that a Swiss account was undisclosed--
hidden from U.S. authorities--was not enough on its own to
justify piercing Swiss secrecy laws. Again, the Swiss found
preserving bank secrecy more important than supporting U.S.
efforts to prosecute tax evasion.
After the Department of Justice overcame Swiss secrecy
obstacles to obtain 4,700 accounts with U.S. client names from
UBS, many predicted that Swiss secrecy would no longer impede
U.S. prosecutions. In 2008 testimony before this Subcommittee,
Justice officials pledged to act energetically. Associate
Attorney General Kevin O'Connor testified, despite the
challenges posed by bank secrecy, ``we will not be deterred. We
will pursue other formal and informal methods of obtaining the
foreign evidence we seek.'' And he said, ``This includes the
use of John Doe summonses as well as Grand Jury subpoenas.''
Well, that did not happen as promised, but it is not too
late, though, to fulfill the pledge. The Department of Justice
can still use U.S. tools, including grand jury subpoenas, John
Doe summons, and U.S. indictments, to get U.S. client names
from the 14 targeted banks, which includes some of the largest
banks. The Department of Justice can still make extradition
requests for indicted Swiss bankers and test Switzerland's
professed willingness to cooperate with U.S. tax enforcement.
The Department of Justice can still hold accountable the U.S.
tax evaders and the tax haven banks that helped them, if the
Department has the will. Among the questions we will be asking
today is why the Department of Justice has slowed its
investigations of the 14 banks through its failure to use U.S.
legal tools; why it accepted Swiss bank secrecy principles in
the Department of Justice non-prosecution program; why it
obtained only 238 accounts with U.S. client names in 5 years
out of the tens of thousands of Credit Suisse accounts; and how
it plans to collect the unpaid taxes still owed on billions of
dollars of Credit Suisse accounts.
Allowing Americans to evade their tax obligations through
hidden offshore accounts deprives our government of needed
revenue. And more than that, it deprives honest American
taxpayers of something vital to the legitimacy of our tax
system: fairness. Laws need to be enforced to ensure that
taxpayers are not able to go offshore to cheat Uncle Sam and
instead pay what they owe, and the tax haven banks that aided
them are held accountable for their actions.
I would like to thank my Ranking Republican, John McCain,
and his great staff for their strong support and involvement in
this investigation and for carrying on the bipartisan work that
began, in this case, as in so many other cases, with Senator
Tom Coburn and his great staff.
Senator Coburn is now, of course, the Ranking Member of the
full Committee, and we welcome him here today. But we will
first call on my Ranking Member, Senator McCain.
OPENING STATEMENT OF SENATOR MCCAIN
Senator McCain. Well, thank you, Mr. Chairman, and I thank
you for that comprehensive overview of this really disturbing
situation, and I thank you and all the staff for their hard
work on this issue for a long time.
The bipartisan investigation into tax haven banks focuses
today on Credit Suisse, Switzerland's second largest bank. The
investigation has revealed another unfortunate example of a
foreign bank succumbing to the charms of compensation over
compliance and uncovered how, for years, Credit Suisse greatly
profited by helping U.S. clients hide billions of dollars of
taxable assets from the U.S. Treasury. By willfully undermining
U.S. tax and securities laws and taking advantage of
Switzerland's opaque banking practices, the bank became a safe
haven for tax evasion, pure and simple. Today's hearing will
examine instances of past misconduct, highlight how the bank
delayed meaningful compliance for as long as possible, and
consider how the Department of Justice's ineffective response
allowed this conduct to persist.
How Credit Suisse bankers helped their U.S. clients hide
their assets--and keep them hidden--from the view of U.S. tax
authorities was egregious. As Chairman Levin mentioned, the
bank orchestrated a wide range of surreptitious meetings with
U.S. clients, on both sides of the Atlantic. Remotely
controlled elevators leading to hidden rooms in the bank's
Zurich headquarters, magazines in American hotel lobbies, and
even family events were all used by bankers to unsuspectingly
conduct illicit business with their U.S. clients. Credit Suisse
bankers reportedly stated on customs forms that they were
traveling to the United States for ``tourism'' purposes. But
instead of sightseeing, they would secretly meet with clients--
a violation of U.S. securities laws. In one instance, a Credit
Suisse banker traveled to the United States, purportedly, to
attend the wedding of a client's child. However, in addition to
enjoying the wedding festivities, the banker also took
advantage of this social occasion to secretly brief his client
on the status of the client's undeclared Credit Suisse account.
These alarming instances of illicit banking practices belong in
a spy novel--not at one of the world's top banks.
The Swiss banking secrecy provisions that enabled such
practices went largely unchallenged until 2008, when this
Subcommittee conducted a seminal investigation and held public
hearings into offshore tax evasion practices. Indeed, Credit
Suisse prospered for years by not requiring its U.S. clients to
be tax compliant. While it made some changes to its internal
policies, it was slow to ensure sufficient compliance by its
U.S. account holders. Even today, the bank still must answer
for decades of ill-gotten profits.
Coincidentally--or not--just 5 days ago, with this hearing
on the horizon and announced, Credit Suisse agreed to a
regulatory settlement with the SEC whereby it would admit
wrongdoing and agree to pay $196 million for providing banking
services in the United States without registering with the
regulator. This fine, however, pales in comparison to the
severity of the full extent of Credit Suisse's misconduct. The
Justice Department and other Federal regulators should not sit
by and give these foreign banks a free pass for their role in
enabling U.S. tax evasion, concealing billions of dollars in
tax revenue, and deceiving the U.S. Government and the American
people.
At a time of fiscal hardship, the Justice Department
appears to have willingly given up on using the tools it has to
collect taxes owed to the U.S. Government. In 2008 alone, the
Justice Department obtained information on U.S. tax evaders
from a Swiss bank, leading to 72 prosecutions. But from 2009 to
2013, the Justice Department seems to have abandoned its
efforts, issuing no summonses and enforcing no subpoenas
against Swiss banks.
In fact, I am sure the Justice Department will probably
dispute that, but facts are stubborn things. From 2009 to 2013,
the Justice Department issued no summonses and enforced no
subpoenas against Swiss banks.
In fact, even though in 2011 the Justice Department
indicted a handful of individual Credit Suisse bankers for
engaging in illicit banking practices, to date, it has failed
to prosecute these indictments. That is since 2011. Instead,
the Justice Department has opted to play the role of diplomat--
helping to negotiate with the Swiss Government the creation of
a program that allows Swiss banks to voluntarily disclose their
tax evasion practices without risk of prosecution in the United
States. As a result of this program, some banks may not even
have to admit any wrongdoing for their misconduct. Instead,
these financial institutions will simply pay fines on the
illicit accounts they hold--a mere slap on the wrist for their
role in concealing billions of dollars from the U.S. Treasury
and a payment that may be deemed by banks wishing to engage in
similar wrongdoing as an acceptable ``cost of doing business.''
As a result of offshore tax haven practices by Credit
Suisse and other financial institutions, as recently as 2011,
it has been estimated that the United States has been deprived
of $337.3 billion in potential revenue--the largest amount of
revenue lost due to tax evasion in the world. With this in
mind, the Justice Department should be relentless in continuing
its investigations into foreign banks, such as Credit Suisse,
and seek penalties that reflect the severity of the wrongdoing,
disgorge them of their wrongful gains, make aggrieved taxpayers
whole, and effectively deter similar misconduct in the future.
It is past time to fully and clearly expose how offshore tax
haven banks help American account holders evade paying their
taxes.
I want to thank the witnesses for appearing before the
Subcommittee today, and I look forward to their testimony. And
I want to thank Senator Coburn for his incredibly important
efforts in this investigation and his work on the Subcommittee.
Thank you, Mr. Chairman.
Senator Levin. Thank you so much, Senator McCain.
As I mentioned, this has been a lengthy investigation
lasting well over 2 years, and until January of last year, the
Ranking Member of our Subcommittee was Dr. Coburn, so he and
his staff played a major role in the early part of this
investigation, a very important part of the investigation, and
so I now call on him as the Ranking Member of our full
Committee but the former Ranking Member of this Subcommittee.
Welcome back to our Subcommittee, Dr. Coburn.
OPENING STATEMENT OF SENATOR COBURN
Senator Coburn. Thank you, Mr. Chairman and Senator McCain.
I have a statement for the record that I would ask unanimous
consent to be put in, but I would make an observation for the
American public.
When you have a Justice Department that selectively
enforces the law rather than carries out its oath to fully
enforce the law, you have problems like this that occur. And we
do not just see it in this case. We see it across a broad array
of laws that are selectively enforced to the detriment of
undermining the glue that holds this country together, which is
the rule of law. And my disappointment in the actions of the
Justice Department in this case are great, but not greater than
what I see in the leadership in this Justice Department of a
leader who does not take his oath seriously, does not do what
is necessary to enhance the glue that binds us together.
I want to thank Senator Levin and Senator McCain. These are
thorough investigations. This one has been extremely difficult
in terms of getting information, and the report is
comprehensive.
I also would thank the present leadership at Credit Suisse
for, one, admitting culpability and, two, coming to testify and
being open and honest with us.
And the final point I would make is that the tax treaty
that has been negotiated needs to be completed, and then we
need to put the pressure on to enhance further improvements to
that so that we will not have the same things occurring in the
future.
With that, I yield back.
Senator Levin. Thank you so much. Senator Johnson.
[No response.]
Thank you.
OK. We will now call our first panel for this morning's
hearing, and I want to discuss the timing of the hearings here.
Our second panel has to go to the White House, so when this
panel finishes, we are going to probably have to adjourn. It
depends on how long this panel lasts. But the second panel
cannot start after 12:30. I assume this panel will last at
least until then. So the likelihood is that we will be in
recess approximately from 1 to 3 o'clock when we would begin
the second panel.
Now, the reason I say that is the likelihood is because we
do not know precisely when this panel will be over, and if it
goes beyond 12:30 or 1 p.m., we will continue with this panel
until it is concluded. I do not know if that came out clearly,
but it is the best I can do at the moment.
And we will now call our first panel for this morning's
hearing: Brady Dougan, the Chief Executive Officer (CEO) of
Credit Suisse Group AG in Zurich, Switzerland; Romeo Cerutti,
General Counsel of Credit Suisse Group AG in Zurich,
Switzerland; Hans-Ulrich Meister, the co-head of Private
Banking and Wealth Management of Credit Suisse Group AG in
Zurich, Switzerland; and Robert Shafir, the co-head of Private
Banking and Wealth Management of Credit Suisse Group AG in New
York. We appreciate all of you being with us here this morning,
and we look forward to your testimony.
Pursuant to Rule 6, all witnesses who testify before this
Subcommittee are required to be sworn, and at this time then I
would ask you to please stand and raise your right hand. Do you
swear that the testimony you will give before this Subcommittee
will be the truth, the whole truth, and nothing but the truth,
so help you, God?
Mr. Dougan. I do.
Mr. Cerutti. I do.
Mr. Meister. I do.
Mr. Shafir. I do.
Senator Levin. We will be using a timing system for our
witnesses today. Be aware that approximately 1 minute before
the red light comes on, you will see the light change from
green to yellow, giving you an opportunity to conclude your
remarks. While your written testimony will be printed in the
record in its entirety, we ask that you limit your oral
testimony to 15 minutes. And if you need additional time beyond
that, I am sure that we can find a way to provide it to you.
Mr. Dougan, please proceed.
TESTIMONY OF BRADY W. DOUGAN, CHIEF EXECUTIVE OFFICER, CREDIT
SUISSE GROUP AG, CREDIT SUISSE AG, NEW YORK, NEW YORK; ROMEO
CERUTTI, GENERAL COUNSEL, CREDIT SUISSE GROUP AG, CREDIT SUISSE
AG, ZURICH, SWITZERLAND; HANS-ULRICH MEISTER, CO-HEAD, PRIVATE
BANKING AND WEALTH MANAGEMENT, CHIEF EXECUTIVE OFFICER-REGION
SWITZERLAND, CREDIT SUISSE GROUP AG, CREDIT SUISSE AG, ZURICH,
SWITZERLAND; AND ROBERT S. SHAFIR, CO-HEAD, PRIVATE BANKING AND
WEALTH MANAGEMENT, CHIEF EXECUTIVE OFFICER-REGION AMERICAS,
CREDIT SUISSE GROUP AG, CREDIT SUISSE AG, NEW YORK, NEW YORK\1\
Mr. Dougan. Good morning, Chairman Levin, Ranking Member
McCain, and Members of the Subcommittee. My name is Brady
Dougan. I became the Chief Executive Officer of Credit Suisse
in 2007. I am joined by Romeo Cerutti, who has been the General
Counsel of Credit Suisse since 2009, and by Hans-Ulrich Meister
and Rob Shafir, who have served since 2012 as co-heads of our
Private Banking and Wealth Management Division. I would like to
thank you for the opportunity to appear before the Subcommittee
today.
---------------------------------------------------------------------------
\1\ The joint prepared statement of Credit Suisse appears in the
Appendix on page 93.
---------------------------------------------------------------------------
Mr. Chairman, I would like to make a brief opening
statement and ask, as you mentioned, that our longer prepared
statement and our written comments to the report be included in
their entirety in the hearing record. My fellow panelists will
make brief oral statements following mine, but they have
allowed me to encroach somewhat on their time.
I would like to begin by providing a little background
about Credit Suisse. Our Bank operates in more than 50
countries and has over 45,000 employees, including
approximately 9,000 U.S. employees in 19 locations in the
United States. In the United States, Credit Suisse is regulated
by the Federal Reserve. We have a New York branch, which is
supervised by the New York State Department of Financial
Services. We also have three regulated U.S. broker-dealer
subsidiaries.
Our primary U.S. broker-dealer has been designated a
Systemically Important Financial Institution under the Dodd-
Frank law. Our Bank has a deep and substantial business in the
United States.
The Credit Suisse management team also has strong personal
ties and commitments to the United States. Rob Shafir and I are
American citizens. I am the first American CEO of a major Swiss
bank. Romeo Cerutti, our General Counsel, is an attorney who
was admitted to both the Swiss and California bars. And Hans-
Ulrich Meister has also worked in the United States. Our Bank
also has deep roots in the United States. Parts of today's
Credit Suisse date back to the First Boston Corporation, a U.S.
firm that has its roots going back to the 18th Century.
Mr. Chairman, there are a few key points that I would like
to clearly express to the Subcommittee at the outset today.
In 2008, your Subcommittee first held hearings highlighting
abuses of Swiss banking secrecy to hide untaxed U.S. assets.
That event, one year into my tenure as CEO, challenged the
entire Swiss banking sector, and it encouraged us at Credit
Suisse to push forward, work hard, and help bring about a
transformation in the Swiss banking system.
Over the past 5 years, Credit Suisse has become one of the
leaders in Switzerland, encouraging legal, cultural, and
business changes to enable the United States to have
transparent access to information about U.S. clients and to
enable the United States to recover taxes that are still unpaid
by Americans holding assets abroad.
I can assure you that not all banks in Switzerland agree
with us, and many have privately and publicly opposed the
positions we take. But for me it is very clear. Swiss banks can
only hold assets that U.S. clients have established are
compliant with U.S. tax law. Seeking out U.S. customers who
want to hide untaxed assets and profiting from these untaxed
assets is simply not acceptable.
Mr. Chairman, we are working daily to build a different and
better legal and cultural reality for Credit Suisse and the
Swiss private banking model. We have tried to demonstrate
leadership in this area in a number of different ways. We have
supported legal steps, both here and in Switzerland, that would
enable the U.S. authorities to obtain information and recover
unpaid taxes from U.S. clients. Credit Suisse has strongly
supported the Foreign Account Tax Compliance Act (FATCA) at
every opportunity, supporting it in both the United States and
Switzerland, and working closely with the U.S. Senate to make
the law as effective as possible.
While we supported FATCA, other banks opposed it. Because
we embraced FATCA, Credit Suisse now has in place, sooner than
FATCA requires, procedures to make sure U.S. clients
demonstrate compliance with U.S. tax laws.
In addition, Credit Suisse supports full information
exchange beyond FATCA, including the Organisation for Economic
Co-operation and Development (OECDs) efforts toward global
standards for automatic information exchange.
We have also supported the ratification of the Protocol to
the Double Taxation Treaty agreed to by the U.S. and Swiss
Governments in 2009 and approved by the Swiss Parliament almost
4 years ago. Credit Suisse is ready at this moment to provide
the additional information about U.S. accounts that has been
requested by the U.S. authorities, but we have been unable to
do so because the U.S. Senate has not yet ratified the
protocol. We urge the Senate to ratify the protocol so that
Swiss banks can assist the U.S. authorities in recovering
unpaid U.S. taxes.
We have proactively taken steps to require that only those
U.S. clients who established compliance with U.S. tax laws can
be clients of our Bank. In 2008, when UBS became the first
Swiss bank to become the focus of investigations by the Justice
Department and this Subcommittee, and many U.S. resident
clients left UBS, some other Swiss banks welcomed those
clients. But Credit Suisse immediately prohibited the transfer
of assets from those former UBS clients to our bank.
Long before investigations by U.S. authorities, Credit
Suisse--again, on our own initiative--moved to address the
issues highlighted by the UBS situation. We wanted to ensure
that all U.S. clients of our Bank establish compliance with
U.S. law, and we prioritized that exercise based on what we
understood were the key priorities of the U.S. Government.
Over the past 5 years, we pushed forward with a significant
and complex remediation exercise. In addition to dedicated
Credit Suisse staff, we hired numerous outside experts--law
firms, accountants, and others--to help check whether clients
who might have a possible U.S. connection were identified. If
they had any U.S. connection, they were required to demonstrate
their compliance with U.S. tax law if they wanted to remain
clients of our Bank.
To check the thoroughness of our efforts, we hired one of
the Big Four accounting firms which carefully analyzed what we
had done. In 2013, this accounting firm confirmed that we had
identified the complete population of potential U.S. account
relationships to an extremely high level of confidence. Our
remediation has been extensive and demonstrable, and the
results of this substantial effort have been presented to the
Subcommittee staff.
We fully recognize, Mr. Chairman, that despite our efforts,
Credit Suisse has not been free of its own problems. We have
invested enormous efforts to achieve as much clarity as
possible about whether and to what extent Credit Suisse
employees violated U.S. laws or helped clients to do so. We
commissioned an independent internal investigation by the
United States and Swiss law firms that reviewed all aspects of
the Bank's Swiss-based private banking business with U.S.
clients. The investigation identified evidence of violations of
Bank policy and U.S. laws that were centered on a small group
of Swiss-based private bankers.
The investigation's evidence showed that these people went
to great lengths to disguise their bad conduct from the Bank.
We have presented the Subcommittee with the unvarnished results
of our internal investigation.
Credit Suisse's management team regrets very deeply that,
despite the industry-leading compliance measures we put in
place, we had some Swiss-based private bankers who appear to
have violated U.S. law. While I am extremely dismayed by their
conduct, Mr. Chairman, I also believe that leadership requires
facing up to the past and taking responsibility for what our
employees did.
Mr. Chairman, let me conclude by stating once again that we
made a decision some years ago to work hard and help bring
about a transformation of the Swiss banking industry toward the
highest standards of compliance. We have tried sincerely to
demonstrate our leadership in the various ways I discussed this
morning, and for me personally it has been one of my highest
priorities to get this fixed, to get it right, and I believe we
have made significant progress toward that goal.
And with that, with your permission, I would like to turn
it over to Romeo Cerutti, our General Counsel.
Senator Levin. Thank you very much. Mr. Cerutti.
Mr. Cerutti. Good morning, Chairman Levin, Ranking Member
McCain, and Members of the Subcommittee. My name is Romeo
Cerutti, and I have served as the General Counsel of Credit
Suisse since 2009. I am happy to appear today to answer your
questions. We have taken a hard look at this issue, and I will
explain everything I can to the extent possible.
Before 2008, our Bank, like many banks in Switzerland at
the time, had the view that tax compliance was a matter that
was between the individual taxpayer and that taxpayer's
government. Looking back, that approach left the Bank
vulnerable to abuse by those U.S. clients and Swiss private
bankers who wanted to hide untaxed assets. And back then,
preventing U.S. accounts from holding untaxed assets was not a
priority. That was a mistake.
But since that time there has been a real and meaningful
change, and I should say that one of the most important drivers
of that change has been this very Subcommittee and, most
particularly, the Subcommittee's report of July 2008 concerning
UBS.
Once the report came out, within a week we immediately
decided that we would not take in the account holders that were
leaving UBS as a result of the revelations in that report. We
also decided that we would identify and close U.S. taxpayer
accounts that would not or could not prove tax compliance.
We believed that our Swiss-based private bankers serving
U.S. clients were complying with our policies. We were wrong.
In fact, as we later learned, we had a problem. Certain private
bankers in our Bank had apparently violated U.S. laws.
As a bank, we have since taken a number of important steps
to face up to the past and guard against a recurrence of these
problems.
First, we commissioned a full and independent internal
investigation as to what happened and have provided detailed
information to the U.S. authorities. We have searched for the
truth of what happened with a view that we need to take
responsibility and resolve these matters.
Second, we have worked very hard to get the U.S.
authorities the necessary information they wanted. This has not
been easy, given that we need to comply with the laws of both
the United States and Switzerland and these laws are sometimes
directly conflicting.
Third, our effort has also included urging both the Swiss
Parliament and the U.S. Senate to adopt the 2009 Protocol to
the Double Taxation Treaty. While the Swiss Parliament adopted
the Protocol a long time ago, it still awaits ratification by
the U.S. Senate.
Fourth, we have worked very hard to close all U.S. accounts
where clients have not demonstrated compliance in fulfilling
their reporting obligations.
Fifth, we contacted current and former U.S. account holders
and encouraged them to participate in the IRS' Voluntary
Disclosure Program, which enables the IRS to recoup unpaid
taxes.
Sixth, and last, we have made real progress in proactively
improving our compliance standards. For example, we have
prepared for the implementation of the Foreign Account Tax
Compliance Act, ahead of time and have been a vocal leader in
Switzerland and globally in support of FATCA, which will bring
about important changes in providing the IRS information about
U.S. accounts held abroad.
Senators, when we make mistakes, we take responsibility and
we hold ourselves to high standards. The last 5 years have been
an important wake-up call for the Swiss private banking
industry. At Credit Suisse we have learned real lessons, and we
have genuinely tried to use this experience as an opportunity
to meaningfully improve our Bank's compliance framework.
Thank you.
Senator Levin. Thank you very much, Mr. Cerutti.
Did you want Mr. Shafir or Mr. Meister?
Mr. Meister. Good morning, Mr. Chairman. Good morning,
Ranking Member McCain. Good morning, Members of the
Subcommittee. My name is Hans-Ulrich Meister. Along with my
partner, Rob Shafir, I am the co-head of the Private Banking
and Wealth Management Division at Credit Suisse.
I have had the privilege of working in this country and
also had the opportunity to complete advanced management
programs at Wharton and at Harvard.
I joined Credit Suisse in August 2008 as the regional CEO
of Switzerland. In that role, one of the main tasks was to
enhance and to drive the integration of the various local
businesses in Switzerland, including the investment banking
business, asset management, private banking, and the retail and
the commercial businesses in Switzerland.
In August 2011, I became the Chief Executive Officer of the
Private Banking Division, and in November 2012, Rob Shafir, to
my right, and I were appointed to the newly formed division
called Private Banking and Wealth Management.
As a Swiss person who has spent close to 30 years in the
financial service industry, there are two points I want to
emphasize.
The first point is that we agree that Swiss bank secrecy
was abused by some clients in order to hide untaxed money from
their local tax authorities.
We also recognize that there were some Swiss bankers,
business people in Swiss banks, who helped those clients to
hide their untaxed money.
I want to state clearly and directly to this Subcommittee
that this approach, by some clients and some Swiss bankers, is
totally unacceptable.
Not everyone in Switzerland wants to deal with this fact,
but in my view, the Swiss banks have to recognize this issue
and have to accept their share of responsibility.
The second point I want to make is that it is clear to me
personally and it is clear to the entire management team of the
Bank that the only way forward for the private banking business
at Credit Suisse and for all the Swiss banks is to serve only
U.S. clients who can establish compliance with U.S. laws, and
this has been our goal for some years.
In 2008, while other banks in Switzerland accepted U.S.
clients who left UBS, we prohibited acceptance of those
clients. We have conducted a series of intensive projects over
the last 5 years to check that only U.S. clients who can
demonstrate that they have established compliance with U.S. tax
laws can be clients of Credit Suisse. We are doing this because
we do not want U.S. clients who are not fully compliant with
the laws of this country.
The private banking industry worldwide, not just in
Switzerland, has been going through a process of change for
years in the direction of clear transparency, international
exchange of information, and working closely together with
regulators all over the world to enhance and improve the
business.
Rob Shafir and I, as the responsible co-heads for the
Private Banking and Wealth Management Division, welcome these
changes because we strongly believe that is the only way
forward for the Swiss financial center and the international
private banking community. Thank you.
Senator Levin. Thank you very much, Mr. Meister. Mr.
Shafir.
Mr. Shafir. Good morning, Chairman Levin, Ranking Member
McCain, and Members of the Subcommittee. My name is Rob Shafir.
I am the co-head, along with my colleague Hans-Ulrich Meister,
of the Private Banking and Wealth Management Division.
I joined Credit Suisse in 2007 and have had a 30-year
career in the U.S. financial services business. I appreciate
your giving me a chance to speak with the Subcommittee today.
From 2007 to 2012, I have served at different times as the
Chief Executive Officer of the Americas Region and the Chief
Executive Officer of our asset management business. I have been
on the Executive Board since I joined the Bank.
From the time I joined Credit Suisse, I have experienced
firsthand a sincere and unambiguous culture of compliance. Our
leadership has an intense focus on controls. We have strong and
committed employees in various different functions who are
ready and empowered to enforce the highest standards in the way
we do business. That commitment starts with Mr. Dougan and the
Board of Directors, and it is crystal clear to the members of
the Executive Board and the employees on down the line in the
United States, Switzerland, and the rest of the world.
From outside the Bank, you can see our culture of
compliance in action in the concrete steps we take. I have
witnessed during my time at Credit Suisse that the Executive
Board has a constant focus on creating a compliance culture,
and the Bank has made significant progress in that direction.
You can also see the other steps that we have taken to
support greater transparency in international banking. We have
strongly advocated in favor of the Protocol to the Double
Taxation Treaty, allowing for mutual assistance in tax matters.
We have publicly supported the enactment of the implementation
of FATCA, which represents a major advance in international
information sharing. Even though the official implementation of
FATCA has been delayed, we proactively adopted requirements
that exceed what FATCA will require, and have done so on a
faster timetable than required by the IRS. Then and now, we are
totally committed to ensuring that our clients and our
businesses are compliant with U.S. legal requirements.
I am not suggesting, Mr. Chairman, that we get it right
every time or that we are always able to detect every problem
in the Bank as soon as we would like. I can tell you that the
attitude of this management team is to prioritize a culture of
compliance at every level of this Bank and to resource and
empower the people in the control functions.
In 2012, I was asked by Mr. Dougan to join my partner,
Hans-Ulrich Meister, as co-head of the Private Banking and
Wealth Management Division. I am the first American to serve as
co-head of this business at our Bank. Mr. Meister and I are
completely on the same page when it comes to the strategy we
are implementing for our business. The value proposition of
Credit Suisse for U.S. clients is that we can manage client
assets with outstanding client service and performance. There
is no value proposition in having U.S. clients that have not
demonstrated compliance with U.S. law.
Mr. Chairman, these are the standards we have set for
ourselves. This is where Credit Suisse is now. We believe this
is the responsible and necessary future for the international
banking industry.
Thank you for your time this morning.
Senator Levin. Thank you very much.
We will have many rounds of questions, but let us have 10
minutes for each round for each of us.
Mr. Dougan, in your opening statement, you said that Credit
Suisse is willing to provide names of U.S. customers who held
Swiss accounts, pending ratification of the 2009 Swiss
Protocol. Now, that treaty is not going to facilitate the
production of U.S. account names and information on accounts
that are closed before September 2009, right? Is that correct?
Mr. Cerutti. May I?
Senator Levin. Either one.
Mr. Cerutti. Yes, that is correct. But any account that was
still open at that time, you are going to get information. And
if I may add, a lot of the accounts that were closed at that
time went on to other Swiss banks. So you will get it if the
IRS makes the same request under the treaty to other Swiss
banks.
Senator Levin. Right. And, of course, the Swiss Parliament
has amended the law so that we have to make certain proofs
before we can get the information from those other banks. Bits
and pieces are provided to us instead of the names. Instead of
your going back and giving us the names, which is what will
allow us to collect the taxes, instead you hide behind Swiss
secrecy laws.
So we are interested in collecting taxes that are owed,
which have been evaded, and we need the cooperation of the
banks in order to do that. But if the banks will not cooperate,
citing Swiss secrecy laws, then we simply have to use our own
domestic laws to force cooperation from the banks.
Now, you cite Swiss secrecy laws, you said, Mr. Dougan,
that you do not agree with those laws. Is that correct?
Mr. Dougan. Well, I think our position is very clear, which
is we are ready to provide any information that we can legally
provide. But I think that, as you point out, the issue that we
have is we have two different legal jurisdictions and,
therefore, for us to break the law in one jurisdiction in order
to provide that information is difficult for us to do. But I
think the most important thing, from our point of view, is that
we cannot necessarily influence these discussions between
governments and how they proceed. We are ready to provide any
information that we can provide legally, and we do believe that
approval of the new treaty would actually provide a lot of
facility for the IRS and for the DOJ to actually get a lot of
the information that they need. That is our belief.
Senator Levin. Well, I have indicated that we hope that
treaty will get ratified, but it has its limits, and it does
not apply to thousands of accounts of people who owe us money.
And you folks have not been willing to give us more than 238 of
those accounts, and that means that we lose billions of dollars
in tax collections. And that is unacceptable to us. And if we
are not going to get cooperation from the Swiss--and we will
make this point very strongly to our own Department of Justice
this afternoon--we are going to use our own means. And our own
means are subpoenas, and our own means are to use the ways in
which we can enforce our own laws in order to get those names.
And so you can say that you are caught between two
countries' laws, but when you come to this country, you sent
bankers into the United States, set up an office in the United
States, helped U.S. customers hide what they were doing from
U.S. authorities--that is what you did. And now the jig is up.
You say you want to cooperate, but you cannot do it because of
Swiss secrecy laws. Those laws do not apply in the United
States. You are operating in the United States.
And so we believe and we think the law, which is fairly
well accepted around the world, is that if you are going to
operate in a country, you must abide by the laws of those
countries, and you cannot hide behind the laws of your own
country. That is not the way it works.
And so we are going to put a lot of pressure on our Justice
Department to enforce the laws here and to enforce them against
you if you are unwilling to do what our laws, we believe,
require you to do, which is to turn over the names of the
people whom you aided and abetted in tax evasion.
Mr. Dougan. Well, Mr. Chairman----
Senator Levin. Let me just ask you about Swiss laws, too,
by the way. Have you urged the Swiss Government to change the
laws to allow disclosure of U.S. customers' names? Have you
urged the Swiss Government to change the laws?
Mr. Dougan. We have actually worked at all levels within
Switzerland, certainly with the government, with regulators,
and also have been very public about our support for increasing
the ability for transparency. As we have said, we are----
Senator Levin. That is not my question.
Mr. Cerutti. If I may----
Senator Levin. My question is: Has Credit Suisse urged the
Swiss Government publicly to change the law so that you can
turn over the names of your customers that you had prior to
2009?
Mr. Cerutti. Mr. Chairman, we have absolutely the same
goal. Every----
Senator Levin. No. Not the same goal. It is a very specific
question. Have you urged the government to change the law so
that you can cooperate with us so that we can collect taxes
that are owing to us?
Mr. Dougan. Yes, we have.
Senator Levin. To change the law so that you can provide us
those names?
Mr. Dougan. Yes, we have done that.
Senator Levin. You have.
Mr. Dougan. We have encouraged them. We have done it
publicly. We have supported that goal, yes.
Senator Levin. That is good. Now, and you are saying other
banks have not--no, no. Not the goal, because the goal can be
achieved in the eyes of some through a treaty which gives us
bits and pieces, not names. What the new treaty does is say, we
are not going to give you the names. We are going to tell you
generally what accounts were transferred to what other banks,
and then you can go to those other banks, and then the
Parliament in Switzerland changed the law to say under that new
treaty, you are going to have to show that the bank that has
received that account somehow or other worked with and is
guilty also of aiding and abetting. That is a very difficult
burden. So you can talk about the new treaty, and we hope it
gets ratified. But its value is very limited. It has loopholes
in it which will be used, I am sure, by banks to avoid ponying
up the names.
Now, I want to ask you this question, not goal: Have you
urged the Government of Switzerland, the Parliament of
Switzerland, to allow you to give us the names of your
customers that you aided and abetted in evading taxes prior to
2008?
Mr. Dougan. Yes, we have.
Senator Levin. OK. Now, Mr. Cerutti, as the bank's General
Counsel, let me ask you questions about some grand jury
subpoenas. Is it correct that in September 2011, the Department
of Justice issued two grand jury subpoenas to Credit Suisse
seeking information from the bank in Switzerland?
Mr. Cerutti. That is correct.
Senator Levin. And those subpoenas in part ask for U.S.
client names and account information for certain accounts going
back to January 2000?
Mr. Cerutti. That is also correct.
Senator Levin. Is it correct that while Credit Suisse
produced some business records and information from
Switzerland, it did not produce any account information
disclosing U.S. client names?
Mr. Cerutti. That is correct, yes.
Senator Levin. And the reason was Swiss secrecy laws. Is
that correct?
Mr. Cerutti. That is correct.
Senator Levin. Now, the bank must have known that the
United States has case law bundled under the Bank of Nova
Scotia line of cases that says if a bank is based in a secrecy
jurisdiction but does business in the United States and if it
gets served with a grand jury subpoena, the U.S. interest in
criminal prosecutions outweighs the foreign jurisdiction's
interest in secrecy and that the bank must produce the
requested information. Are you aware of that line of cases?
Mr. Cerutti. Yes, I am.
Senator Levin. And so you knew that the day would come when
the bank might be subpoenaed for information in Switzerland and
that a U.S. court would order the bank to honor the subpoena.
But what actually happened here is that instead of enforcing
the grand jury subpoenas in a U.S. court to obtain the U.S.
client names in Switzerland, the Department of Justice put the
subpoena on hold and in September 2011 filed a treaty request
instead to obtain the names. Is that true?
Mr. Cerutti. Yes, I think so.
Senator Levin. And that treaty request took two different
requests, two court decisions, 2 years, and we ended up with
238 accounts with U.S. client names. Is that correct?
Mr. Cerutti. That is correct, because that treaty request
was made under the current 1996 treaty with the very tough
standard, and as soon as the new treaty would be ratified, you
would get, I am convinced, many more, probably thousands of
account names.
Senator Levin. Well, I understand, but there also were
1,500 accounts, were there not, which were organized in the
same way that the 238 came from? Those were the ones that were
set up in the third country's jurisdictions using shell
corporations. Is that correct?
Mr. Cerutti. You are talking about entity accounts. That is
correct. Now, the Swiss Federal Administrative Court has set up
conditions under which they consider these entities to fall
under this tax fraud or the like standard, and only 238 in
their view----
Senator Levin. And so the Swiss courts again made the
decision which denied us the names of accounts in Switzerland
opened up by shell corporations--by the way, many of which your
people helped to set up, and we will get into that later in my
second or third round. But it was, again, a Swiss court which
then denied us the names of your account holders which used
shell corporations to cover up who the beneficial owners really
were. That is totally unacceptable, and I just hope that our
Department of Justice understands that when subpoenas are
issued in 2011 and they sit there unenforced year after year
after year, and the excuse is that secrecy laws in another
country do not allow the subject of that subpoena to provide
information critical to our tax collection, that the Department
of Justice, as far as I am concerned, is taking a totally
unacceptable position, and we are going to do our best to
change it.
Senator McCain.
Senator McCain. Thank you, Mr. Chairman. I thank the
witnesses for being here.
Mr. Dougan, I would like to get something straight here. Is
it true that, at its peak in 2006, Credit Suisse had over
22,000 accounts in Switzerland for U.S. customers with assets
exceeding $10 to $12 billion? Is that roughly accurate?
Mr. Dougan. At the end of 2008, we had about 22,000
accounts, and the total--I think the total amount of assets
that has been referred to by the Subcommittee is about $12
billion.
Senator McCain. So that is an accurate statement now?
Mr. Dougan. That is generally accurate, yes.
Senator McCain. Now, to date, due to Swiss law
restrictions, is it true that Credit Suisse has turned over to
the United States the names of only about 230 former U.S.
customers with hidden accounts? Is that true?
Mr. Dougan. Yes, that is correct.
Senator McCain. So we are really talking about a minuscule
number of individuals who have intentionally evaded U.S. taxes
has been revealed to the Justice Department or the Department
of Treasury or other interested agencies. Is that true?
Mr. Dougan. That is correct, in terms of what has been
delivered.
Senator McCain. Now, would you explain again what Swiss law
prevents you from providing that information?
Mr. Dougan. Yes, perhaps I could ask Mr. Cerutti to give
the----
Senator McCain. OK. Maybe Mr. Cerutti----
Mr. Dougan [continuing]. Legal point of view.
Mr. Cerutti. Yes, Senator, Article 47 of the Swiss banking
law, the banking secrecy provision, prohibits us from
furnishing any client names to anyone within Switzerland or
outside of Switzerland. And this is subject to imprisonment and
fines. So that is----
Senator McCain. So any real idea that the Government of
Switzerland is cooperating with us is a joke, right? If we can
only get 230 names out of 22,000 accounts, anyone in the Swiss
Government who alleges that they are cooperating with the
United States in trying to track these people down is just
contradicted by the facts.
Mr. Dougan, 5 days ago, Credit Suisse settled with the SEC
and paid over $82 million for disgorgement of its profits. The
SEC settlement did not relate to the bank's facilitation of tax
evasion of U.S. client accounts in Switzerland.
Do you know what the profits from those accounts were? Have
you got a general idea?
Mr. Dougan. In terms of, sorry, as opposed to the SEC?
Senator McCain. Right, the profits that you made from those
accounts.
Mr. Dougan. No, Senator, I do not think we have a good idea
of that. I can perhaps lead you through some of the numbers
that might give you an understanding of how those numbers
developed. But I do not think we have a precise idea, no.
Senator McCain. But those profits were pretty substantial
given the number of clients that--and the $10, $12 billion in
the accounts.
Mr. Dougan. No, in terms of the importance of this
business--and, frankly, it is one of the issues that makes this
an issue that is for us as well as something that we regret a
lot, this was a very small business, actually. From our point
of view, it was about less than 1 percent of the profitability
of our global Bank. And so this was actually a relatively small
part of the business. Obviously we are not in any way trying to
avoid responsibility for the acts which happened and the
behavior, but clearly it was, from an economic point of view, a
very small part of the business.
Senator McCain. But I guess it is all dependent on how you
look at it, but if it was $12 billion and, say, 10 percent,
which is very modest, would be well over $1 billion.
Mr. Dougan. Well, can I address the $12 billion? Because I
think that is actually an important issue that we thought was
worth spending a little time on with the Subcommittee.
Senator McCain. I thought you just responded $10 to $12
billion in the 22,000----
Mr. Dougan. Well, $12 billion was the amount of assets that
we had outstanding as of the end of 2008. Of that $12 billion,
$5 billion of that, as we went through and did a full
investigation, was determined to be fully tax compliant. So not
all of the $12 billion was not tax compliant. So $5 billion was
tax compliant. Another $2.2 billion was actually determined to
not have a U.S. taxpayer connected with it.
Senator McCain. We are down to $10 billion now.
Mr. Dougan. We are basically down to about $7 billion.
Senator McCain. Only $7 billion, OK. I think the point is
that you made quite a bit of profits, even if it was a small
percentage, and I guess it all depends on where you view a
billion or two dollars. Maybe from Credit Suisse's standpoint
it is not much, but, frankly, from most average citizens, that
is a fair amount of money.
In your statement where you accept responsibility and
deeply regret the actions, you said, how many culpable
officers, directors, and key executives have been held
accountable--I mean fired?
Mr. Dougan. Well, Senator, with this business, what we
determined to do starting in 2008, 2009, particularly after the
actions of the Subcommittee in highlighting these issues, was
to shut this business down. So over the course of the last
years, over the course of the first 2 years after that, we
basically reduced the size of the business by about 80, 85
percent.
Senator McCain. How many employees were fired?
Mr. Dougan. Which means that most of those people involved
with the business actually were fired as part of shutting down
the business, so the vast bulk of them actually left the
business as we shut it down.
Senator McCain. Mr. Meister, you are a high-ranking
official, and you were directly responsible for overseeing a
division that serviced many U.S. bank accounts in Switzerland.
Is that true?
Mr. Meister. That is true, starting in August 2011, for
the----
Senator McCain. There was an office right in the Zurich
airport, meaning the clients would not have to even enter the
city to conduct these transactions. Yet in interviews with the
staff, you said you were unaware that the branch was servicing
these undeclared U.S. accounts? You were unaware of that?
Mr. Meister. Perhaps in the interviews I said that, because
it was not clear to me at the time, because I took over the
private banking as the CEO in August 2011, there was years
before this sort of a team. In the meantime, of course, in
preparation for this hearing, I now know that there was a team.
There was a team of around seven to eight relationship managers
and around 10,000 clients. The bulk of the clients were smaller
clients with a balance between $30,000 and $75,000 and most of
them did not hold securities. Generally, in Credit Suisse, a
relationship manager normally in the private bank covers around
100; here it is around 1,000. So there was specific service for
U.S. residents who came in, have perhaps a house somewhere in a
tourist spot, used cash, most of them were cash accounts, no
securities accounts and no advice.
Senator McCain. So it really did not mean much that you had
an office right there in the Zurich airport?
Mr. Meister. I did not say it did not mean much. That is
what I learned in the meantime because I was not, as I said,
accountable for this part. Perhaps Mr. Cerutti can give more
light, or Mr. Dougan.
Mr. Dougan. Well, Senator, if I could just add, this
airport office, as you mentioned--I think Hans-Ulrich Meister
has outlined some of the parameters of it--it was really an
office where, as you say, it was an office of convenience for
clients----
Senator McCain. It certainly was.
Mr. Dougan [continuing]. Who would come in, but basically
they held relatively small amounts of money, and there was no
active management. And actually in our investigation, which was
a very detailed investigation, we did not find any systematic
issues in that area.
Senator McCain. Mr. Cerutti, you conducted an internal
review in 2008 that included looking at the SALN desk, which
primarily dealt with U.S. accounts. Your review found no
wrongdoing. Yet in 2011, the DOJ found enough evidence to
indict several employees from that desk. How do you explain
your inability to--and gave a clean slate to your review of the
SALN desk, and yet the DOJ found enough evidence to indict
several employees from that same desk?
Mr. Cerutti. Senator, we did the review at the end of 2008,
beginning of 2009. We looked at the SALN desk, at our policies
and our trainings, at the travel. We looked also at the audit
reports, all that stuff, and we did not determine that we had a
problem. In retrospect, that was a mistake.
Senator McCain. I thank the witnesses. I thank you, Mr.
Chairman.
Senator Levin. Thank you very much. Dr. Coburn.
Senator Coburn. Mr. Dougan, in your prepared testimony, you
stated that Credit Suisse undertook an extensive internal
investigation to try and uncover potential wrongdoing. Was
there a formal report inside the bank on that investigation?
Mr. Dougan. Well, it was a very extensive and long-running
investigation. We were updated very frequently on that. We also
had various discussions, obviously, with our regulators, with
various authorities here as well, updating them on the progress
on that.
I think our view has been that, we are going to continue to
make sure that we are looking throughout the Bank and doing
everything we can to ensure compliance, so we did not really
view it as a process that had ended. But we have constantly
been, obviously, updated and involved in lessons learned and
improving the environment as a result of that.
Senator Coburn. But there was no report brought to your
board or to your chief executive level that here is the summary
of what happened, here is----
Mr. Dougan. There was no formal report. Not one formal
report.
Senator Coburn. Do you think that is unusual? Or was that
done for legal purposes?
Mr. Dougan. No, I think it was--I have to tell you, I think
in our firm and certainly in my 32 years in the industry, I
have never seen a project with as much focus, as much
resources, and as much time spent on it as this issue. I would
say over the past 5 years this has probably been the single
thing which has been the highest focus for us as a management
team. And so this is discussed very regularly. It is discussed
very regularly at our Executive Board virtually every week. It
is discussed at our outside board meetings as well.
So it has been a very integral part of how we manage the
business and what we have done all along. So I guess, in fact,
I view that as a positive. We did not view it as a project
which ended, and then we had a report which sort of summarized
it. It is actually something that we continue to work with on a
daily basis.
Senator Coburn. On this kind of plan that people would take
tourist visas here to raise business, which is no longer
happening, was there one individual that kind of promoted that
scheme? And were they held accountable? And what has been the
basis of that?
Mr. Dougan. The team that was involved in that--and, again,
this is historic behavior, as you say, so it was pre-2008
behavior--was a group which compromised different numbers over
time, but about 10 to 15 different account officers, and it was
really concentrated in that group. That is the group where we
admit there was behavior that we certainly do not countenance,
we certainly think is egregious. We agree with, I think, all
the adjectives that were used by the Subcommittee here. And
that was really the group that was involved in that activity.
The managers of that group were clearly the managers who I
believe orchestrated that. We did not see any knowledge of that
by others above them in the organization. And many of those
individuals were part of the Department of Justice indictment.
Many of those individuals are gone from the firm, and have been
for a long time.
So that was the small focus group where we saw the behavior
that was clearly not behavior that we would in any way
countenance or defend.
Senator Coburn. All right. Mr. Cerutti, if John Doe
subpoenas and the Justice Department fully carried out what
they could carry out in this country, would you all have
complied with those subpoenas?
Mr. Cerutti. Senator, that is very difficult--impossible
under Swiss law. We would all face criminal indictments in
Switzerland and most probably prison terms if we would hand
over these client names without the permission of the Swiss
Government.
If I may just say in the UBS matter that Chairman Levin
mentioned at the very beginning, the 4,500 names that
ultimately were turned over were turned over as a consequence
of a treaty that was entered into between the U.S. Government
and the Swiss Government that allowed that any accounts with
assets under management of $1 million and more be turned over.
I would say that under the new Double Taxation Treaty, the one
that still needs to be ratified here in the Senate--and I urge
you to ratify it as quickly as possible, you will get many more
accounts, and you can get them quickly, and the $1 million
asset limitation, is not in that treaty.
Senator Coburn. Do you foresee a consequence if the Justice
Department used all the tools and carried it through the courts
that you might face prosecution in this country for not
complying with those subpoenas?
Mr. Cerutti. Yes.
Senator Coburn. So you have double jeopardy. Where would
you like to spend time? [Laughter.]
Mr. Cerutti. That is a tough decision.
Senator Coburn. The Subcommittee Report found that 1,800
different Credit Suisse employees serviced the 22,000 U.S.-
linked accounts. According to the Subcommittee's Report, only
10 of the 1,800 employees were disciplined, and no one was
fired. Is that an accurate statement?
Mr. Dougan. I think it is largely accurate, but maybe I
could explain it. We did have a concentration of coverage of
U.S. clients in a few areas, and the SALN desk, which is the
area where we have seen the systematic, problematic behavior
was the area that had a specific focus on U.S. accounts.
The larger group, the 1,800 number that is quoted, those
were RMs throughout the bank. Typically they had one or two
U.S. clients, and so they were not specifically focusing on the
United States, but they might have an account that might have
been, say, an expat in Switzerland, so it could have been a
U.S. citizen who was living in Switzerland.
Senator Coburn. Got you.
Mr. Dougan. So most of those, the vast bulk of those 1,800
simply had a few U.S. accounts, and, again, in the course of
our very thorough investigation, we did not find any systematic
abuses in that group.
Senator Coburn. All right. Thank you very much.
One other question, Mr. Dougan. Credit Suisse started--in
2008, you undertook efforts to identify and close out
noncompliant U.S. accounts. In other words, they were not
compliant with our tax laws.
Mr. Dougan. Yes.
Senator Coburn. How many noncompliant accounts were
identified as part of your efforts?
Mr. Dougan. Do you want to answer that?
Mr. Cerutti. Senator, if I may try to answer that, we did
it the other way around. We tried to identify the ones that
were compliant, and over the time we have identified some 6,678
that were compliant and another 1,900 that lost their U.S.
nexus, so if you add that up, you have about 8,500 that were
not part of the 22,000.
In addition, of the 22,000, you have about 9,000 that had
less than $10,000 U.S. dollars, really small accounts. And this
is a mix you have some 6,300, 6,500 expats, Americans who live
abroad, mostly in Switzerland. They need an account. They beg
us to open an account quite often because most Swiss banks are
shut for business for U.S. persons. Everyone is so afraid at
this point to----
Senator Coburn. Are they compliant?
Mr. Cerutti. We looked at----
Senator Coburn. Are those 6,000 expat accounts compliant
with U.S. tax law?
Mr. Cerutti. We looked at this population, and starting in
2012, we had been hoping to do that as part of the FATCA
implementation. FATCA got delayed, twice, as you know, it will
now go into effect on July 1, 2014. We looked at that, and from
a perspective of assets under management, to a large extent
they were compliant. Account number-wise, I do not have the
exact number here, but I could deliver that. Many, many are
compliant.
Senator Coburn. That is a cultural issue, and we ought to
address that. The fact is if your policy today is that U.S.
accounts will be compliant with U.S. tax law, it does not
matter what the percentage of assets under management that are.
It is whether or not the accounts are. So, what I would do is
just admonish that if that is your policy, then it ought to be
installed vigorously and throughout.
Mr. Dougan. Perhaps, Senator, maybe I could just add
another way to state it that might help in terms of
understanding the process. Our top priority was to get to a
point where all of the accounts that were here at the Bank were
compliant. That was our top priority.
Now, as part of that as well, we made the decisions around
restructuring this business, and so there were many parts of
this where we just exited the business. So we did not spend a
lot of time determining whether they were or they were not
compliant. We just said----
Senator Coburn. You just closed the accounts?
Mr. Dougan. Yes, we just closed the accounts. And that is
how--obviously, you go down by 80 percent in terms of the
footprint in this business.
So that was our priority. I think as Mr. Cerutti said, on
an ongoing basis, every account has to be compliant, and that
was our most important goal, and so that is what we focused on.
Senator Coburn. All right. Thank you. I yield.
Senator Levin. Thank you, Dr. Coburn. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
Mr. Cerutti, you might be the best person to answer this
question. How do you determine whether an account is compliant?
Mr. Cerutti. Senator, today we have put all the FATCA
requirements in place, so we are really looking at whether
someone is a U.S. person from a tax perspective, U.S.
nationality, green card, substantial presence test. We have
them to sign these documents. We are also looking at dual
citizens because often you have in Europe people who might have
been born in the United States, and they are dual citizens now.
So we are really looking at all of these people, and now they
are signing waivers. They are all signing also a W-9 at this
point. And once FATCA is in place, we can then transmit the
account information to the IRS under the intergovernmental
agreement that Switzerland has entered into with the United
States.
Senator Johnson. OK. So you determine compliance because
they basically sign waivers and a W-9, which gets reported back
to the IRS, and so somebody knows that they have an account
there and then that income is reported to the IRS, just like it
is at any other normal bank.
Mr. Cerutti. Exactly. It will now be starting July 1, 2014,
with FATCA, and someone would be a fool to sign all of that and
not pay the taxes.
Senator Johnson. I want to understand a little bit about
what is so different about the 230 accounts where we actually
received the names versus the other 22,000. What is unique that
those 230 names were actually supplied?
Mr. Cerutti. Historically, Switzerland distinguished
between what the Swiss defined as tax fraud and tax evasion.
And under the Double Tax Treaties in the past, you would only
be able to get administrative assistance in a tax matter if the
tax fraud standard was really fulfilled. And the Swiss courts
have determined that these 238 accounts have the tax fraud
standard fulfilled.
The other accounts, and by far not all of the 22,000 are
not tax compliant, as I tried to explain before, but let us
assume there are a number of those who are not tax compliant
that would qualify as tax evasion. They would be covered by the
new treaty, because Switzerland agreed to the new OECD
standards, dropped the tax fraud requirement, accepted the tax
evasion requirement, accepted also in 2012, as was mentioned by
Chairman Levin, the group requests, and so once this treaty is
signed, the IRS could just send out these requests, and these
accounts should come in.
Senator Johnson. So the 238 accounts were determined
fraudulent----
Mr. Cerutti. Yes.
Senator Johnson [continuing]. That they were committing
fraud?
Mr. Cerutti. Yes.
Senator Johnson. How was that determined? How did the Swiss
authorities determine that those 238 out of the 22,000 were
actually engaged in some kind of tax fraudulent activity?
Mr. Cerutti. Senator, it is a very good question. We have
several court decisions by the Swiss Federal Administrative
Court that have set the standards for fraud. Typically these
were entity accounts, like someone had an offshore entity, a
U.S. person was sort of hiding behind an offshore entity. The
corporate governance of the entity was violated. They held U.S.
securities. I think these are the three main criterias to
qualify for the fraud standard.
Senator Johnson. How were those entities targeted? How were
they ever investigated? We did not know their names, so
obviously, Swiss authorities opened up some kind of
investigation for those 238 accounts?
Mr. Cerutti. Yes, Senator, there was a group request by the
IRS. It went to the Swiss Financial Tax Administration. They
forwarded it to us at Credit Suisse. We had to identify all
these accounts that qualified pursuant to these different
criterias. We sent them in to the Swiss Federal Tax
Administration. It was a somewhat larger group than 238. They
then decided which one in their views would qualify. They were
then forwarded on to the IRS by the Swiss Federal Tax
Administration. Some appealed this decision, and those cases
were then decided by the Swiss Federal Administrative Court.
Senator Johnson. OK. Mr. Meister, I think you mentioned
that some clients and some Swiss bankers were involved in some
of these fraudulent transactions. I think that was basically
your testimony. I would like to review in general how important
the Swiss banking sector is to Switzerland's economy. The
numbers I have is that the Swiss economy is somewhere between
$600 and $700 billion. Is that correct? Anybody know? Those are
the figures I have.
Mr. Meister. Maybe I----
Mr. Dougan. That sounds right. I do not think we could
contradict it.
Senator Johnson. I am seeing the banking sector somewhere
between 6 and 12 percent of that, so somewhere in the $40 to
$75 billion range.
Mr. Dougan. That sounds about right.
Senator Johnson. Now, when they reported that GDP, is that
the profitability of the Swiss banking sector? Obviously total
assets under management are much higher than that.
Mr. Dougan. So, yes. I would think that would be
profitability, yes.
Senator Johnson. Why would a U.S. investor invest into a
Swiss bank? What are the motivations?
Mr. Meister. To invest as an investor. You ask me as an
investor. I think one of the points is no doubt that we can,
because of the talent, provide attractive returns.
Senator Johnson. Have you historically had far higher
returns than U.S. banks, British banks, or other banks?
Mr. Dougan. I would say largely in line, probably--I mean,
different in different years, obviously, but I would say not
systematically different.
Senator Johnson. So if U.S. investors have invested about
$12 billion into Swiss banks, I mean, obviously that is a
pretty small portion of the Swiss banking assets held, right?
Isn't Credit Suisse about $1 trillion in assets held?
Mr. Dougan. Yes, that is right. It is a very small portion,
that is correct.
Senator Johnson. So you have a lot of investors from all
over the world then?
Mr. Dougan. Absolutely, yes.
Senator Johnson. And they invest in Switzerland, again,
because? If there is no exceptional returns in Swiss banking,
why do they do it in Switzerland?
Mr. Dougan. Well, I am sorry, I misunderstood your comments
before to be talking about sort of our equity or our equity as
an investment. If you are talking about our asset base, which,
as you say, is over a trillion Swiss francs in terms of assets
under management for our clients, I think, as Mr. Meister said,
it is a combination of our ability to provide good service, our
ability to provide very competitive returns on those assets as
a banking client, our ability to provide lending to those
clients, and I think particularly, obviously a comprehensive
business that we can offer across asset management, private
banking, but also some of the wholesale investment banking type
services.
Mr. Meister. Perhaps if I can add also stability of the
country and, of course, also currency risk diversification,
because the Swiss Franc is a very stable currency.
Senator Johnson. I am just trying to get to the obvious
point to why people put money into Switzerland. What is the
obvious reason people take their money, transfer it from the
United States or from Brazil or from England or from Russia and
put their money in Switzerland?
Mr. Dougan. Well, I think----
Senator Johnson. I just want to state the obvious.
Mr. Dougan. Well, I think, first of all, we actually--we
have a global business, so obviously that $1 trillion of assets
is not all in Switzerland.
Senator Johnson. OK.
Mr. Dougan. So we have a lot of those assets here in the
United States in----
Senator Johnson. I am not even targeting Credit Suisse. I
am talking about the Switzerland banking sector. Why do people
take money out of their countries of origin and invest in
Switzerland?
Mr. Dougan. In Switzerland, you mean, actually in
Switzerland as a country?
Senator Johnson. Right.
Mr. Dougan. Well, I think historically, as we discussed,
there has been--one of the things that is obviously highlighted
is that there is an ability to shelter assets and income from
paying taxes. Obviously, that is decreasingly the case, and
clearly, going forward, our view is that that is not the future
of the industry. That is certainly not our business model. We
do not think that should be any Swiss bank's business model.
And, clearly, with FATCA, with a number of the OECD
arrangements that are taking place, and also with a number of
other developments, that is not an advantage that the Swiss
banking system is going to have going forward.
So it really has to be around the ability to offer services
and returns that are competitive and, in fact, superior to what
they can see in other markets and other places where they can
put their money.
Senator Johnson. OK. Well, again, I appreciate that I think
it is important to get that basic, obvious reality on the table
as we are talking about this, because that is what all the
secrecy is about, that is what this whole thing is about.
So I think from the U.S. perspective, we are just trying to
make sure that Switzerland opens it up, makes it transparent so
that U.S. taxpayers cannot shelter income over there. If we
want to invest in Switzerland because of great returns, we
should have the right to do that. But we should not have the
right to shelter income.
Mr. Dougan. Understood, and we completely agree with that.
Senator Johnson. OK.
Mr. Dougan. We are completely, exactly in the same place on
that.
Senator Johnson. Well, thank you. I appreciate that.
Thank you, Mr. Chairman.
Senator Levin. Thank you, Senator Johnson.
Well, you may be in the same place, but the Swiss
Government surely is not. It still has under the law that you
cannot release the names of an account. You cite that for not
complying with a subpoena. So maybe your bank is in that
position, maybe for future deposits, but it sure does not
reflect where the Swiss Government is. And your bank is using
the Swiss Government's position in arguing against the
enforcement of subpoenas. It says it puts you in a difficult
position. But you come to this country, and you are governed by
this country's laws, by almost universally accepted law. And
yet you hide behind the Swiss law even though you are operating
here. And that is just simply not going to cut it.
The trouble is that the Justice Department has been
deterred by the Swiss Government's law, which you folks cite,
and year after year after year goes by with subpoenas not being
enforced to get the names that we have to have if we are going
to enforce our tax laws and collect taxes which are owed to the
United States. So that is a huge issue.
Is it not true that the Swiss law continues to have on its
books you cannot release the name of your account holders? Is
that true?
Mr. Dougan. Yes, that is true, and that----
Senator Levin. They have not changed their laws, have they?
Mr. Dougan. Well, as we said, the protocol----
Senator Levin. I know those new treaties, I understand the
whole business of treaties, and I know all the holes that are
in the treaties, including the one that is being apparently
heard today in our Foreign Relations Committee. You buy a
lawsuit if you operate under that treaty, because under Swiss
law, now passed by the Parliament, the defense against that
request is you have to prove that the bank to which the funds
have been transferred somehow or other is violating the law, is
contributing to the aiding and abetting. That is the burden of
proof which someone has under that treaty. It is not the same
threshold when we seek the names of the Americans who have
accounts there, as when we seek to get the names of accounts in
the United States. So there is a big loophole in this treaty
which you continue to say we ought to ratify. I am all for it
because it will provide some good, but the key point is Swiss
law still requires going through hoops to get the names of
people who are hiding their assets from our tax folks. That is
the bottom line.
Just have a direct response: We are bound by your laws; we
come to your country, and we are going to comply with them; and
we will take on the Swiss Government if they try to prosecute
us for complying with the laws of a country where we do
business, because that is not sustainable.
Do you think you are going to be convicted in a Swiss
court? Is the Swiss Government going to prosecute you if you
comply with our laws and turn over those names? Are you going
to be prosecuted? Is that your fear?
Mr. Cerutti. Yes.
Senator Levin. That is your fear?
Mr. Cerutti. That is my fear, absolutely.
Senator Levin. Of the Swiss Government. In that case, let
us be real clear here what we are talking about. You are not
cooperating with us, hiding behind a law which applies in
Switzerland but does not apply here, and yet you want to do
business here. And that is not the way the international law is
applied. You want to do business here? You must comply with our
laws.
Now, let me go back to this so-called investigation which
you have carried on. In answer to Dr. Coburn's question--and I
believe this was you, Mr. Dougan, who responded to this
question. You have an internal investigation going on on the
issue of aiding and abetting tax evasion, and you are
conducting interviews and you are looking at documents and so
forth. You indicated there is not going to be a written report.
I do not understand how you can have something as serious as
you say you are undertaking and not have a written report. But
is that your testimony under oath that there are no written
reports about that?
Mr. Dougan. I said we have not yet had a summary written
report. We have had a number of reports, but we have not had a
summary report because we view this as an ongoing process.
Senator Levin. All right. We have asked you for those
ongoing written reports, have we not?
Mr. Dougan. I believe you have, and I think we have had
many sessions with the Subcommittee updating them on the
progress of the projects, and I think, in fact, the
Subcommittee's report today chronicles in great detail through
many pages, all of the different efforts that we have made over
the past 5 years to get at this problem and to get it right.
Senator Levin. Let me go back to my question. You say that
you have some written reports but not a summary report, and I
believe we have asked you for the written reports that you do
have. Is that correct?
Mr. Dougan. Well, I believe we have provided on an ongoing
basis----
Senator Levin. No, I am just talking about the written
reports that you do have. I am not talking about the summary
report. I am talking about these ongoing written reports. Have
we asked you for those reports?
Mr. Dougan. Mr. Chairman, we have been asked for a lot of
information by----
Senator Levin. Do you know whether we have asked for those
written reports----
Mr. Dougan. I do not know----
Senator Levin [continuing]. As part of this very detailed
investigation that you have undertaken? You have described this
as a major investigation.
Mr. Dougan. Absolutely.
Senator Levin. OK. And there are some ongoing written
reports, not yet a summary report. I think that is what you
just said.
Mr. Dougan. Yes.
Senator Levin. Now, these ongoing written reports, have you
made those available to this Subcommittee?
Mr. Dougan. I believe we have shared those with the
Subcommittee, but maybe Mr. Cerutti can----
Senator Levin. Have you, Mr. Cerutti?
Mr. Cerutti. Mr. Chairman, we have shared the conclusions
of our investigation, but not any of these reports that we had
to prepare for other regulators. Some are confidential and
cannot be shared at this point with this Subcommittee.
Senator Levin. Well, would you give us a list of the
reports that we have asked for that you have not shared them
with this Subcommittee and the reason that you have not shared?
Will you give us that for the record?
Mr. Dougan. Sure.
Mr. Cerutti. OK, sure.
Senator Levin. All right.
Now, even though you have not shared those reports, I want
to ask you whether you can tell us about some of the things
that you found. For instance, have you found that Credit Suisse
bankers repeatedly traveled to the United States to get
prospective U.S. customers and to serve existing U.S. customers
in violation of your own policies? Have you found that?
Mr. Dougan. Yes, we did find that with the limited group of
people that we mentioned. Yes, we did find that.
Senator Levin. Did you find that some Swiss bankers advised
U.S. customers to secure transactions under $10,000 which would
then avoid triggering cash transaction reports?
Mr. Dougan. We did find some conversations around that, so
we think that there may have been some of that activity, yes.
Senator Levin. All right. Was that limited, too, to the
SALN?
Mr. Dougan. It was, yes. Materially it was, yes.
Senator Levin. Did you find that some Credit Suisse bankers
helped refer U.S. customers to intermediaries who advised them
to transfer their U.S. assets to foreign shell companies and
then treat them as foreign account holders in the bank's own
books?
Mr. Dougan. We did see activity with these private bankers
referring to, as you say, outside potential arrangers. I am not
sure that any of that came--if you are saying some of that came
back on to our books----
Senator Levin. Oh, yes.
Mr. Dougan. Is that right? Yes, we did----
Mr. Cerutti. We saw some of that, correct.
Senator Levin. Just think about that.
Mr. Dougan. Yes.
Senator Levin. Your bankers referred customers to create
shell corporations in tax havens knowing that then those shell
corporations would deposit those funds in their accounts with
your bank under the name of the shell corporation.
Mr. Dougan. I view that just as egregiously as you do, Mr.
Chairman. I agree.
Senator Levin. And who was fired for that?
Mr. Dougan. Well, as we said, a number----
Senator Levin. No. Was anyone fired who did that? I know a
number of people have been fired, a number of people have been
let go. I just want to know: People who engaged in that
egregious act, illegal under our laws, by the way, were any of
those people fired, for referring people to intermediaries for
the purpose of then having that same money go in the name of a
shell corporation back into your bank? Were any of those people
fired, do you know?
Mr. Dougan. I believe all those people do not work for the
bank anymore, but perhaps Mr. Cerutti can give you a more
specific answer.
Senator Levin. Do you know, Mr. Cerutti?
Mr. Cerutti. I do not know of anyone who was fired
specifically because of that.
Senator Levin. All right.
Mr. Dougan. But the issue, Mr. Chairman, if I could just
add to that, the issue is, as you know, again, we began the
exit of this business starting in 2008. And so we basically
exited virtually 85 percent of the business over the course of
the next 2 years. By the time we actually found this behavior--
which we agree with you, we find it just as unacceptable as you
do. By the time we found that behavior, most of those people
were gone.
Senator Levin. Mr. Cerutti, were all of those people in
SALN?
Mr. Cerutti. I would say it was centered around----
Senator Levin. Not centered. Do you know whether all of the
people who engaged in that egregious conduct were in SALN?
Mr. Cerutti. I would not know, Mr. Chairman.
Senator Levin. I am over time. Senator Johnson.
Senator Johnson. Thank you again, Mr. Chairman.
Mr. Dougan, let us go back to my line of questioning
because, again, I want to get the obvious on the table here.
Mr. Dougan. Sure.
Senator Johnson. Historically, let us go back. People
around the world have deposited money into Swiss banks as a
real safe haven. Correct?
Mr. Dougan. Yes.
Senator Johnson. Is there validity to that? Do you think
globally people ought to have some place, whether they are in
an incredibly oppressive regime somewhere around the world, it
would be kind of nice to move some money out of that terrible
country and put it in some safe haven?
Mr. Dougan. Well, I think what we see in terms of our
customers around the world is that they do have interest in--
even being completely tax compliant and no issues around that,
they do have an interest in diversifying the jurisdictions
where they hold their money. We do see that as an interest from
those clients.
Senator Johnson. And there is a conundrum right now for the
Swiss Government. Obviously the U.S. Government is highly
concerned about not being able to collect taxes because people
are committing tax fraud and sheltering income there. And now
they are having to open up information which puts at risk the
ability of the Swiss Government to attract those types of
deposits. Correct?
Mr. Dougan. Well, I actually think, our view is actually
that we as an institution and the country have to go to a
compliant framework. There is no other choice. So there is no--
there is not any other choice. And, frankly, I think that the
Swiss financial system can be very competitive on that basis.
So I do not think that it is necessary, as you say, to have the
ability to not pay taxes on money in Swiss banks for the Swiss
financial system to be successful. I actually think--I actually
think we would be a lot better off as a financial system with a
completely compliant and transparent framework, which is what
we have been promoting, actually.
Senator Johnson. I agree, and that makes an awful lot of
sense. It gets back to the question of whether Credit Suisse
has tried to work with and encourage----
Mr. Dougan. Absolutely.
Senator Johnson [continuing]. The Swiss Government to open
up and be transparent because it is in your best interest as a
global banking company, because there is still going to be
value to have Switzerland as a pretty stable neutral country,
as a safe haven, as a diversification destination for global
assets.
Mr. Dougan. We think that is exactly right. We think it is
in the best interest of the Swiss financial system. We think it
is in our best interest, and we have absolutely promoted that
at every level, publicly, with the regulators, with the
government as well, because we think that is the right
direction for the business and the right direction for
Switzerland.
Senator Johnson. OK. I may be going to the Foreign
Relations hearing on treaties later on, so, Mr. Cerutti, how
could we strengthen that treaty so we do not have the loopholes
that Senator Levin is talking about? Again, in the interest of
transparency the Swiss banking sector can still operate and
provide that safe haven where it is required.
Mr. Cerutti. Senator, thank you for your question. I think
this is a pretty good treaty. It goes very far because it is
going to be really based on the OECD standard of tax evasion.
It allows for group requests. It is untested yet. I think what
Chairman Levin is afraid of is that the IRS will have to prove
the misbehavior of the bank, the participation of the bank.
Given that the DOJ has issued that program, as you know, the
program for the Swiss banks, and that over 100, I think 106
banks have now filed to be in Category 2, I would assume at
this point that for all the Category 2 banks, that the
misbehavior that is requested under the treaty would be
established just by being a Category 2 bank.
So I would hope that this treaty would really generate
thousands and thousands of account names. That is my hope.
Mr. Dougan. Yes, and, Senator, I guess what we would say is
we understand the Chairman's concerns about it, and I am sure
there would be ways to even make that treaty stronger and
better. This has been signed 4 years ago, and our view is that
a good first step would be to simply get it approved in the
Senate so that we could provide--in our view, we could provide
the vast bulk of the information that has been requested, which
we want to do. We want to provide that information.
Just with that treaty approval, we think that would allow
us to satisfy the bulk of that request from the U.S.
authorities.
So I am sure there are ways to improve it down the line. I
mean, we have been working very hard just to get the treaty
approved, which, in our view, would be the first step and would
be a very important step in getting these issues to a great
degree resolved and allowing us to provide the information that
we would like to provide.
Senator Johnson. When I asked a question earlier about how
were you able to determine compliance, you talked about clients
were signing waivers, they were filling out W-9s. What prevents
you from having every client sign those waivers?
Mr. Cerutti. Today, Senator, every U.S. client has to sign
these waivers. Everyone who wants to keep an account or open an
account at Credit Suisse has to sign these waivers.
Mr. Dougan. And perhaps you could explain the concept of
the waiver. Waiver as to?
Mr. Cerutti. On the one hand, there is the W-9 that reports
the dividend and interest on U.S. securities. On the other
hand, there is the waiver so that we can file the information
under the FATCA law starting as of July 1, 2014.
Senator Johnson. So then what complicates that? Now we
start talking about shell corporations.
Mr. Cerutti. FATCA, I think FATCA is a brand-new law that
has been now implemented and will start taking effect. I was
surprised when I read the report last night to see that the
Subcommittee is afraid that FATCA contains loopholes. But I
would say let us see how FATCA starts. It is a huge, huge, huge
administrative project. We have already spent about $100
million to implement FATCA globally, because it is not just for
Switzerland, it is not just for the private bank. We have to do
it in the investment bank, asset management private banking
globally, and we continue to spend quite an amount of money. I
think this year's budget is another $40 to $45 million. So you
see we are really trying to get this right.
Senator Johnson. OK.
Mr. Dougan. And I think one of the things, I mean, we feel
the combination of the steps we have taken, with the waiver,
with the full implementation of the projects that we have laid
out, with FATCA, will allow us to be 100 percent compliant with
those requirements around the U.S. taxpayer. So we feel very
good about that. In fact, we also believe we see some progress
in this, because as the exit project has gone on, we have not
seen from any of our regulators or other investigative bodies
any issues that have come up post 2009. So, actually, that exit
project we think has actually worked pretty well, and we
believe we are in a position now, which is where we wanted to
be, which is so that we can be compliant going forward. And, as
the Chairman said, to make sure that any business we do with
any U.S. client is done on a completely compliant basis, that
is our objective.
Senator Johnson. Now, again, you have reported--or
certainly in our reports we see the size of U.S. banking assets
in Credit Suisse. Do you have any estimate of U.S. assets in
total housed in Switzerland?
Mr. Dougan. I do not know if we do.
I do not think we do have that estimate, no. You are saying
U.S. citizen assets in Swiss banks.
Senator Johnson. Assets in Swiss banks.
Mr. Dougan. I do not have that in hand, no.
Senator Johnson. OK. Well, I have no further questions.
Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Johnson.
Let us go to just a few facts to get down very firmly. Of
the 22,000 customers that you had in 2006, after you required a
showing of compliance with our U.S. tax laws--we are talking
about U.S. customers--18,900 of those accounts were closed, and
today there are about 3,500 that you then have determined are
in compliance. Are those numbers correct?
Mr. Cerutti. Those numbers are correct as of today, but I
would like to add that in total we have reviewed and verified
for tax compliance some 6,678, of which about half, like 3,000,
have been closed, and 3,500, the number you have just
mentioned, are still with us.
Senator Levin. So what is the total number of accounts that
you no longer have of the 22,000?
Mr. Cerutti. Well, the 18,000 number you mentioned.
Senator Levin. All right.
Mr. Cerutti. And if I may add, Mr. Chairman?
Senator Levin. Sure.
Mr. Cerutti. We had a large population of U.S. resident
clients, I think some, I would say, 11,000, I believe. They had
account balances below $1 million in assets under management,
and they were not even given the option to stay because to move
to one of our fully U.S.-licensed broker-dealers, you needed $1
million as a minimum balance. So 11,000 of these 19,000 or
18,000 did not have the opportunity to prove tax compliance.
Senator Levin. All right. Mr. Cerutti, your U.S. persons
policy required that Swiss accounts opened for U.S. residents
be concentrated in that single Swiss office we have talked
about, the SALN. Is that correct?
Mr. Cerutti. It required that they be concentrated I think
in SALN and in the other office that was near the airport.
Those were the two offices that were then later merged into
SALN in 2009.
Senator Levin. All right. And the point was that that
office was supposed to have relationship managers that got
special training in U.S. regulatory and tax compliance?
Mr. Cerutti. That is also correct, Mr. Chairman, although I
would like to add that every single relationship manager with
one or more U.S. resident client got the training.
Senator Levin. So how many relationship managers had one or
more accounts?
Mr. Cerutti. Well, I think you mentioned the 1,800 number
at the beginning. I would deduct about a thousand of those
because they were dealing with expats. They were in the retail
bank mostly. And then I think there are some--whether it is
500, 600, to 800, I do not have the exact number, but they were
then all trained.
Senator Levin. So you had about a thousand that you say
were trained.
Mr. Cerutti. I think the number is somewhat lower. We can
provide you with the exact number. I think the staff should
have it.
Senator Levin. Well, there were about 1,800 that had one or
more client accounts. As a matter of fact, take a look, if you
would, at Exhibit 16.\1\
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\1\ See Exhibit No. 16, which appears in the Appendix on page 471.
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Mr. Cerutti. Which page, if I may ask?
Senator Levin. Well, it should be numbered, the exhibits
there. Now, Exhibit 16 is a Credit Suisse presentation chart
called ``US Project--Steering Committee #1,'' dated August 19,
2008, and at the chart on page, the last three digits, 306, the
title of the chart is, ``U.S. international business activities
spread out across whole organization.'' And it shows that,
besides SALN, there were another half-dozen offices in
Switzerland that served U.S. clients.
In 2008, there were over 1,800 different Swiss bankers that
had one or more client accounts. You said you wanted to deduct
600 or 800 that were dealing with expats or other reasons, so
that would leave about a thousand, would it not?
Mr. Cerutti. Mr. Chairman, I would like to deduct the third
line, PB CH, the 993, because that is our retail business in
Switzerland. Those were taken--they were mostly dealing with
the expats, and so that would leave around 800.
Senator Levin. A total of 800. All right. Now, you are
saying that these were the people who had special training?
Mr. Cerutti. Yes, if you take the 800, you deduct the 240
of Clariden Leu, you have some 560 at Credit Suisse. I need to
check whether that is the right number, but most of them, if
not all of them, have been trained, and Clariden Leu I
understand also had trainings, but I do not have the details
there. So I would suggest we provide the staff with the exact
number.
Senator Levin. Well, assuming it is around 500 or 600.
Mr. Cerutti. Yes.
Senator Levin. And was the training about the same whether
or not they were in SALN or whether they were in one of the
other offices?
Mr. Cerutti. I think they used the same training materials.
Whether they spend the same amount of time on it as with the
SALN people, I could not answer that question.
Senator Levin. Now, there were 1,800 relationship managers,
approximately. Is that correct?
Mr. Cerutti. On this chart, yes.
Senator Levin. Well, is that an accurate chart?
Mr. Cerutti. That was a chart that was provided for the
first Steering Committee. You see that it was August 2008, a
few weeks after your report on UBS had been published. We were
really trying to look at it and do the right thing. I would
assume that these numbers are correct, but these were early
numbers.
Senator Levin. So SALN had about perhaps 10 percent of the
Swiss accounts opened by U.S. customers, and about 90 percent
were spread out across the rest of the bank. Is that about
right?
Mr. Cerutti. If you look at it from an account perspective,
that is correct. If you look at it from an assets under
management perspective, it is a little bit different.
Senator Levin. Right. But, still, only about 10 percent of
the Swiss accounts opened by the U.S. customers were in SALN.
This was supposed to be a place where they were going to be
concentrated.
Mr. Cerutti. Plus the ones that are listed under PB EMEA
because that would encompass the airport desk that you have
mentioned before. That is also an area of concentration.
Senator Levin. All right. So to all 60----
Mr. Cerutti. That is then almost, what, 60, 70 percent,
because I always----
Senator Levin [continuing]. Seventy percent were spread out
across the Bank?
Mr. Cerutti. No.
Mr. Dougan. Sorry, Mr. Chairman. About 70 percent were
concentrated in those two groups, so the airport office and
SALN, and obviously 30 percent, I mean, I think we--
particularly in hindsight, we would rather have seen it more
concentrated, so we would rather have seen the 30 percent
smaller, but that is where we were at that point in time, 70
percent in those two areas and 30 percent in the rest of the
Bank.
Mr. Cerutti. And that is about----
Senator Levin. The purpose, though, of this chart was to
show, according to its title, how spread out this was across
the whole organization.
Mr. Cerutti. I understand.
Senator Levin. That is the purpose, whether it was 30
percent outside of those two units or 70 percent, this was
spread out across the whole organization. So you had 1,800 or
so, according to this, relation managers that were in contact
with U.S. persons. And what that means, of course, is that when
you have all those customers, most of whom--I think it is
pretty clear perhaps 80-90 percent of whom were not paying
their U.S. taxes--that is a very major problem for us, and it
cannot easily be answered by saying that the rogue bankers were
all located in SALN and that is where the problem was. You had
bankers that were doing things that you acknowledge were
improper, in some cases egregious, from other areas than SALN.
Mr. Dougan. Well, I think it is important to point out
that, as we mentioned, Mr. Chairman, we have done a very
extensive investigation across the whole Bank, including all of
those, as you mentioned, 1,800, all of these other RMs, and we
did not find any of the misbehavior, again, which we agree with
you is egregious and should not have happened, that we found in
SALN. We did not find it there.
So as you say, I think certainly from a business point of
view, we would have rather seen it more concentrated, and that
would have been better from a compliance point of view as well.
But we have not seen any of the abuses in that broad
population.
Senator Levin. Well, are you saying that all of the abuses
that we have identified and you have acknowledged were found in
your investigation were concentrated in SALN? Is that what you
are saying?
Mr. Dougan. Yes, I mean, virtually all----
Senator Levin. Mr. Cerutti says that he does not even known
where what you call egregious conduct--and I would agree with
you on that issue--was concentrated in SALN. He does not know
that.
Mr. Cerutti. It was--it was centered around SALN, but there
was----
Senator Levin. Go on.
Mr. Cerutti. Most probably also outside of SALN, there was
also some----
Senator Levin. What you would call ``rogue bankers''?
Mr. Dougan. It is hard to exclude that there were not
issues outside of that, but, again, in the investigation, the
vast bulk of that behavior was in that one area. So, there were
smatterings of issues elsewhere, as you would expect, I think,
and obviously we are disappointed with those as well. But the
vast bulk of the behavior was in that area, and----
Senator Levin. The vast bulk. And were accounts outside of
SALN undeclared?
Mr. Dougan. I think the answer to that is probably yes.
Senator Levin. That is the problem we are focusing on, of
course.
Mr. Dougan. Yes.
Senator Levin. It is not the problem you are focusing on.
It is what we are focusing on. The billions of dollars that are
uncollected in taxes, and there are a lot of reasons for that,
but you folks have to look in the mirror if you want to help us
identify one reason and go after the folks who have evaded
paying taxes.
I just want to be real clear that you have a law there on
your books, and you cannot simply say that if we ratify a
treaty that that is going to solve that problem. Does your law
get repealed if the treaty gets ratified, the law saying it is
illegal to identify the name of people on accounts? Does that
law go away when the treaty is ratified?
Mr. Cerutti. Mr. Chairman, the law is not going to be
repealed, but the law will permit to give you all the names
under the treaty process.
Senator Levin. It will give us the names which comply with
the treaty process, right?
Mr. Cerutti. That is correct.
Senator Levin. Which is a long way from all the names. If
we ask you for the names, you say, ``We will give you the
names. Just ratify that treaty.'' That is a commitment which I
hope you will keep, because, remember, under that treaty,
whoever wants those names is going to have to prove that the
bank contributed significantly to the aiding and abetting. And
this is after 2008, because we are not going to get any names
before 2009 under the treaty, right? So we lose all those
names, which is most of your accounts, which were closed by
then. And the accounts that you kept open are compliant, you
say, because you have proof of tax compliance. So when we ask
you for the names pre-2009, when the treaty goes into effect,
are you saying that under this new treaty you are going to give
us those names? Is that what you are saying?
Mr. Cerutti. Mr. Chairman, we can give you any names of the
accounts that were still open on September 23, 2009----
Senator Levin. And most were closed.
Mr. Cerutti. If you look at the account numbers, that is, I
think, not correct. I think number-wise----
Senator Levin. 50/50, let us say.
Mr. Cerutti. Probably that might be right.
Senator Levin. OK.
Mr. Cerutti. But then let me maybe just state that 50
percent of these accounts remained in Switzerland. They went to
other Swiss banks, approximately 50 percent, and so they would
have been opened at another bank in Switzerland, and you would
then get them through a treaty request from another bank.
Senator Levin. And with that treaty request, again, whoever
is making the request, has to prove that the bank was involved
significantly in the aiding and abetting.
Mr. Cerutti. That is again correct, Mr. Chairman.
Senator Levin. Now, let us just focus on that.
Mr. Cerutti. Yes.
Senator Levin. Now, we are going to ask you for these
names, I hope. We should use our subpoena power to get the
names so we can collect the taxes owed. But you can expect that
when this treaty is ratified that you are going to get a
request for all the names prior to the effective date of that
treaty. Will we get those names from you?
Mr. Cerutti. The treaty works the way that the IRS may----
Senator Levin. Will we get those names from you, those half
of the 22,000 names, are we going to get them from you?
Mr. Cerutti. The Swiss legal system will most likely not
let us provide those names.
Senator Levin. So do not tell us the treaty is going to get
us what we want. It will not. You have just acknowledged it
will not. The treaty is going to do some good in the future--
some good--if we can prove that the banks that have the
accounts have contributed to aiding and abetting in tax
evasion, which is not an easy proof, and it is left up to the
Swiss courts, and we know what the Swiss courts have done. OK?
So, most of us, I hope, want this treaty ratified. It has a
slightly better test. But do not, please, represent to this
Subcommittee and to the public that when the treaty is
ratified, we can then expect those names from you. We are not
going to get any pre-2009 names because of Swiss law. And the
additional names, there is a burden of proof on the applicant
for the names. You have to show that the bank significantly
contributed to the problem. If you do not have the names, how
do you show that the bank contributed to aiding and abetting
the tax evasion if you do not have the names of the people? It
is a chicken-egg problem.
So you have been helpful in acknowledging that that treaty
is not going to get us the names that we are after.
Mr. Cerutti. One last comment.
Senator Levin. Sure.
Mr. Cerutti. May I?
Senator Levin. Go ahead.
Mr. Cerutti. I would say with the DOJ's program, with the
106 banks in Category 2, that should be a very good indication,
very helpful to fulfill the standard that these 106 banks have
aided and abetted. So I hope that you should get tons of
accounts.
Senator Levin. You would hope it would, but in terms of
your bank, you are not one of the 106, are you?
Mr. Cerutti. We are one of the 14 in----
Senator Levin. You are one of the 14.
Mr. Cerutti. Yes.
Senator Levin. Not covered by that----
Mr. Cerutti. Not covered by that program.
Senator Levin [continuing]. Program. So you cite the
program relative to 200 or 300 other banks.
Mr. Cerutti. Yes.
Senator Levin. A hundred of which have signed up.
Mr. Cerutti. Yes.
Senator Levin. And those banks do not have to provide any
information either before----
Mr. Cerutti. The 14 will, to the 14 it will apply, anyway.
That was my assumption.
Senator Levin. Well, the----
Mr. Cerutti. The 14 in Category 1 that they are in the DOJ
process, I think they will fulfill the standard for the treaty,
anyway.
Senator Levin. OK.
Mr. Cerutti. So we should have the 14, we should have the
106. That is 120.
Senator Levin. But they are not covered. We do not know for
sure, do we, that those 14----
Mr. Cerutti. I am pretty convinced.
Senator Levin. You hope they are covered.
Mr. Cerutti. Yes.
Senator Levin. OK. We do, too.
Let me keep going here. I think it is clear, but whether we
are talking about the program, which does not apply to the 14
banks, or to the new treaty itself, they do not give us names
of account holders prior to 2009. Is that correct?
Mr. Cerutti. That is correct, Mr. Chairman.
Senator Levin. So we cannot collect taxes owed from those
folks, which is the heart of the problem of this hearing. It is
tax collection.
One of your bank's former clients who admitted to tax
evasion told us about opening an account at Credit Suisse, and
we refer to the account holder as ``Client 1'' in our report.
And Client 1 is an American citizen who, when he opened an
account at Credit Suisse's main office in Zurich, provided a
U.S. passport and a driver's license as identification so that
he made it obvious he was an American. He told the Subcommittee
that the Swiss banker expressly told him that a W-9 form, which
identifies U.S. accounts and leads most importantly to the
account being reported to the IRS, that banker told Client 1
that this form was required by the United States, but not
required by Credit Suisse to open an account.
So he opened an account without the W-9, used it for 5
years, so there was no disclosure to the IRS. Later on the
client entered into a voluntary disclosure program.
Would you agree that this is a pretty stark example of what
facilitating tax evasion is? Mr. Dougan.
Mr. Dougan. Yes, I believe that you are referring, I think,
to Client 1, if it is consistent with the DOJ indictment
document, which, as you say, that first opened the account in
1990. So obviously we would look at the timing on that. But
basically, yes, I think we would view that as a process that we
think is obviously not something we would undertake today and
is not something that we in any way approve of.
Senator Levin. Now, the bank told--I am sorry?
Mr. Cerutti. I would just add, I think under the Qualified
Intermediary Agreement of 2001, the requirement I think in
retrospect that was a mistake in this agreement. It only
applied to U.S. persons who held U.S. securities, and we were
very strict for any U.S. person, U.S. client with Credit Suisse
who wanted to purchase U.S. securities, we requested and
required the W-9.
But as you just explained, there were situations where
clients did not buy U.S. securities, so they did not have to
sign the W-9, and that led then to what you just described. But
with FATCA, this has--I think this will be closed.
Senator Levin. Client 1 opened the account in 2005, not in
1990.
Mr. Cerutti. In 2005, yes.
Senator Levin. Now, the bank told us about 150 trips by 10
Swiss bankers to the United States from 2002 to 2008, and the
Subcommittee has documented another 22. Did the bank have
training or standards when relationship managers traveled to
the United States?
Mr. Cerutti. I think our U.S. policy was very strict as to
traveling to the United States. It was only permitted for
social purposes. Unfortunately, as we got to learn during our
internal investigation, people used social purposes to get the
trip approved and then met other clients during the same trips.
Senator Levin. Now, did the bank allow visits to clients in
the United States to help them set up Swiss accounts and to
conduct banking business while on U.S. soil?
Mr. Cerutti. That would have been a violation of our
policy.
Senator Levin. And the bank, though, paid for bankers to
travel to the United States, 24 trips in 2007 and 2008, and not
just, by the way, by SALN office bankers alone.
Now, take a look at Exhibit 5g,\1\ if you would, in your
book, Exhibit 5g. Credit Suisse required its bankers to
complete travel reports after a U.S. trip, and this is a travel
report for 2008. It is dated March 18, 2008. And it was
completed by R29, whom we have determined to be Markus Walder,
the head of the SALN office, which is otherwise known as the
North American offshore private banking operation.
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\1\ See Exhibit No. 5g, which appears in the Appendix on page 352.
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On the form, the banker reported that during his U.S. trip,
he visited 49 clients with assets totaling $230 million. Now, I
think you would agree, would you not--and either one of you
could answer this--that it is obvious that this person was
doing business in the United States, soliciting new clients and
servicing existing clients? Would you agree it is obvious from
the form?
Mr. Dougan. I would say it is, yes.
Senator Levin. OK. Now, why did Credit Suisse ignore its
own policies and pay for Swiss bankers to do this, to transact
business? Why did you approve that?
Mr. Dougan. I think it was a mistake. I mean, we should--
this was not approved--this was not authorized travel. They
should not have been traveling for those purposes. And as you
say, we should not have allowed the travel, let alone pay for
it. So it was obviously a mistake. I mean, the fact that this
was overlooked and that we, A, allowed the travel and, B, paid
for it is a historical mistake. I mean, I think there is no
other explanation for it.
If we had understood this kind of activity was going on, it
should have been stopped absolutely at the time. So as you say,
it is----
Senator Levin. Now, see, you have tried to say this
misconduct was mainly in one area of the bank. From our
perspective, it is pretty obvious, it was all over the bank
wherever aiding and abetting tax evasion was going on. But in
any event, you acknowledge that misconduct was not all in this
one area of the bank. But you said that some rogue bankers
mainly located in this one area of the bank. But the bank
approved this expenditure. In other words, the person's travel
should not have been allowed. Does that make that person a
rogue banker?
Mr. Dougan. Our policy was very clear.
Senator Levin. No, but in your testimony, you said that the
wrongdoing was just a small group of rogue bankers. I am asking
you, was that banker who did that travel--and I do not know how
many of these cases we have--were all those bankers rogue
bankers?
Mr. Dougan. Yes, I would argue they were violating our
policies. Now, as you say, we should have caught it. We should
have had managers, we should have had control people who caught
the fact that this was happening. But, absolutely, they were
wantonly violating our policies.
Senator Levin. And the people who approved their travel,
were they wantonly violating your policies?
Mr. Dougan. I think in our investigation what we found is
that they were not intentionally doing so, but they obviously
made mistakes in allowing that.
Senator Levin. So the people who approved the travel were
not rogue, but the people who did travel were rogue. Is that
what you are telling this Subcommittee?
Mr. Dougan. Well, we did feel that this group of people
were misleading--at a certain level of management, misleading
them as to this activity. So, yes, these people were violating
the policy intentionally and obviously hiding that from their
management.
Senator Levin. Now, this is not hidden to me. It is pretty
obvious. If you look at Exhibit 5g,\1\ it is just over and over
again: Hotel for dinner to prepare for an introduction to
somebody, obviously a prospective customer; we went to this
person, to their offices, followed by lunch; we went to this
person, followed by a dinner, followed by a meeting; we went to
a certain restaurant to prepare for an introduction to somebody
else, an introduction over the phone. This is not hidden. It is
all hanging out here.
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\1\ See Exhibit No. 5g, which appears in the Appendix on page 352.
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Mr. Dougan. I could not agree more.
Senator Levin. You say this was hidden from the managers.
It was open to the managers. My question is about the managers
who got these reports and to the auditors who approved the
travel. Are they rogue bankers?
Mr. Dougan. Well, I am not sure the managers did get these
reports, and we know that----
Senator Levin. We believe they did get these reports. At
any rate, if they got these reports and the auditors who got
them approved them, are they part of that group, that small
group of rogue managers?
Mr. Dougan. I think if they were aware and intentionally
involved in allowing this behavior, they would be. That is not
what we found. We found that they either unintentionally or
through errors, allowed this to happen, or perhaps they were
not vigilant enough in terms of their responsibility. But we do
not feel that they were aware of the conduct and allowing it to
happen.
Senator Levin. Even though this document is on its face
very clear, you say----
Mr. Dougan. It is very clear. You are right.
Senator Levin. Then they are not doing their job as
auditors if they are not reading the document.
Mr. Dougan. That is a fair comment.
Senator Levin. OK. Take a look, if you would, at Exhibit
6.\1\ It is page 2 on Exhibit 6.
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\1\ See Exhibit No. 6, which appears in the Appendix on page 357.
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Now, this is a list of ``Important phone numbers''--that is
the title--that was kept in Credit Suisse's New York
representative office, and it includes this entry. You will
find this entry on page 2, about the third one from the top.
There are two entries I want to talk to you about, again, on
this list of important phone numbers.
Entry 1 says Josef Doerig. He is with Doerig Partnership,
and he is an external trust expert.
And then the second one is near the bottom of that first
group, Beda Singenberger, who is with Sinco AG, and that person
is also an external trust expert.
Now, both of those gentlemen have been indicted for aiding
and abetting U.S. tax evasion.
Is it correct that your Swiss bankers worked with both of
these outside intermediaries to help U.S. citizens set up
offshore shell entities and to open accounts in your bank in
Switzerland in the name of those entities instead of in their
own names?
Mr. Dougan. Yes, in some instances they did.
Senator Levin. And they were called intermediaries, right?
Is that one of the names they were called?
Mr. Dougan. I am not sure. Fiduciaries? I think maybe
fiduciaries, Mr. Chairman.
Mr. Cerutti. I think these----
Senator Levin. Synonymous with intermediaries, would you
agree?
Mr. Dougan. To me they sound very similar, yes.
Senator Levin. OK. Now, the bank has acknowledged that it
has also worked with other intermediaries. Can you tell us who
they were? Besides these two, who have been indicted, can you
tell us what other intermediaries--or what was the name that
you used?
Mr. Dougan. Fiduciaries.
Senator Levin. Fiduciaries--that the bank worked with to do
what I just described, to help U.S. clients set up--this is the
egregious conduct you were talking about, Mr. Dougan--to set up
offshore shell entities and then open accounts in your bank in
Switzerland in the name of those entities instead of in their
own names? What other names do you know of your people worked
with?
Mr. Cerutti. Personally, right now I know of no other name.
Senator Levin. Were there others?
Mr. Cerutti. I would have to ask and go back and check.
Senator Levin. Is there someone who is behind you who might
be able to tell you whether there were others?
Mr. Cerutti. I can ask, yes.
[Pause.]
Mr. Chairman, apparently there were others, but under the
Swiss laws, we are unfortunately not permitted to give you
these names.
Senator Levin. OK. Do you know how many others there were,
approximately?
Mr. Cerutti. May I ask?
Senator Levin. Sure.
[Pause.]
Mr. Cerutti. They are telling me that including the two you
have mentioned, a total of maybe five, so three more.
Senator Levin. So here, again, Swiss secrecy protections is
preventing us from going after behavior which is criminal
behavior, allegedly, and is this going to be cured by the
treaty?
Mr. Cerutti. I would expect that, to a large extent, you
should already probably be in possession of these names given
the 38,000 or 43,000 people in the VDP plus the names you
should get through the treaty.
Senator Levin. Do you think the treaty will provide that to
us?
Mr. Cerutti. Well, if you get these client names, you get
the documentation----
Senator Levin. Oh, if we get the client names.
Mr. Cerutti. When you get the--when you get it.
Senator Levin. If and when.
Mr. Cerutti. If and when.
Mr. Dougan. But also, to be clear, Mr. Chairman, in our
case, obviously, there will be no issues around this because we
are going to be completely compliant going forward, so there is
no----
Senator Levin. To the extent that Swiss law allows you.
Mr. Dougan. We will be completely compliant going forward
with FATCA, etc. We will be compliant with the law, so any of
these structures or anything else would have to be completely
compliant with all the U.S. tax laws and----
Senator Levin. Going forward.
Mr. Dougan. Going forward, certainly. Well, since----
Mr. Cerutti. Mr. Chairman----
Senator Levin. We are asking you about names going
backward.
Mr. Cerutti [continuing]. I have just been informed that
the DOJ has these three names.
Senator Levin. Good. Well, that helps. Thank you.
Now, the United States has indicted over two dozen Swiss
bankers for aiding and abetting U.S. tax evasion, including
seven from Credit Suisse back to 2011. I can ask either one of
you: Do you know of any U.S. extradition requests to bring
those to trial? I am talking about the two dozen Swiss bankers
for aiding and abetting U.S. tax evasion, including seven from
Credit Suisse? Do you know of any U.S. extradition requests?
Mr. Cerutti. Mr. Chairman, I do not know of any such
extradition requests, but typically they are not made public,
so maybe there were some, but I would not know.
Senator Levin. All right. But you do not know of any.
Mr. Cerutti. No.
Senator Levin. Now, under our treaty, at Swiss insistence,
obviously, the existing treaty, there is an exception to
extradition which allows the Swiss to deny an extradition
request for a person who is involved in a tax offense. Is that
correct? Do you know, either one of you?
Mr. Cerutti. Yes, Mr. Chairman, that is typically in all
the extradition treaties that continental European countries
have. It might also be--I do not know if the United States
might have similar provisions in their treaties.
Senator Levin. It might, but it does with Switzerland.
Mr. Cerutti. Yes.
Senator Levin. OK. And the question is whether or not
Switzerland would deny extradition if a request was made, and
my question to you both is the following: If the United States
were to make an extradition request--and, by the way, we
believe there have not been any. That is what we believe is the
case. If the United States were to make an extradition request,
would your bank object? I better ask you, Mr. Dougan. Maybe on
advice of Mr. Cerutti, but let me ask you.
Mr. Dougan. No, Mr. Chairman, we would not object.
Senator Levin. OK. The last area I want to talk to you
about is an area of what is called ``net new assets.'' Mr.
Cerutti, one of the things that we have reviewed in this
investigation is the bank's decisions regarding its net new
asset figures in 2012. Net new assets is the measure of the
amount of new assets obtained by the bank on which it provides
investment advice or asset management services. It is, in my
lingo, not the custodial service. It is the investment service.
Is that a way to describe it which you can connect with?
Mr. Dougan. Yes, I think that is broadly a reasonable----
Senator Levin. OK. Net new assets also is a key performance
measure of the growth of the private bank, and I think both the
bank and investors view it that way.
Now, we are going to talk about a client of your bank. We
are going to call him Client 5. And in 2012, he chose Credit
Suisse over other financial institutions, and Credit Suisse
recognized billions of dollars of that client's assets as net
new assets throughout the year. The bank also made decisions on
where, in its books, to credit those net new assets in the
various regional areas of the private bank, particularly
between two regional areas: Switzerland and the Americas
region.
Now, recently you have told the Subcommittee that Credit
Suisse has initiated an internal investigation into its net new
asset process, and this is a process which I hope you would
agree should be objective, and should produce accurate
financial figures to the public and to investors.
Is it correct, first of all, that the bank is looking into
the possible influence of business people on the net new asset
process?
Mr. Cerutti. That is correct, Mr. Chairman. As we have
informed your staff, we are looking into 2011 and 2012. It will
probably take a few weeks or months, and we are going to report
back to the staff.
Senator Levin. And is the investigation reviewing the net
new assets--is that investigation something which stemmed from
Client 5's assets, or is it broader than that?
Mr. Cerutti. It will be broader. I think we want to look at
the whole area for the 2 years I mentioned before.
Senator Levin. You told the Subcommittee staff that the
investigation has identified indications from the private
bank's chief operating office that may raise issues of
influence being inappropriately placed on the net new asset
process. Is that correct?
Mr. Cerutti. That is also correct, Mr. Chairman. That is
why we want to look into it. It is too early to draw any
conclusions.
Senator Levin. OK. Were there emails that you have looked
at?
Mr. Cerutti. Yes, there are some emails we have looked at,
the wording we did not like, and I think that is what we need
to go into.
Senator Levin. Can you tell us who sent the emails?
Mr. Cerutti. I think there are a number of emails, and we
are going to report back to the staff.
Senator Levin. Do you know the names of any offhand?
Mr. Cerutti. Oh, that is a little bit difficult. I think
some are probably in this stack of materials in here.
Senator Levin. OK. But there is no problem with Swiss
secrecy on that one? You can give us that information?
Mr. Cerutti. We gave you all the information that is in the
United States. We are now reviewing also the emails that are in
Switzerland. We can give you a summary and the conclusions, but
we can at this point, unfortunately, not give you the emails
that are only in Switzerland.
Senator Levin. Because of the Swiss secrecy law?
Mr. Cerutti. Because of Swiss data protection laws and the
Swiss so-called blocking statutes. It is really unfortunate.
Senator Levin. OK. Now, the private bank chief operating
officer was, I believe, Mr. Rolf Boegli. Am I pronouncing his
name correctly?
Mr. Dougan. Yes, that is correct.
Senator Levin. Is he one of the people you are going to be
speaking to as part of that investigation?
Mr. Cerutti. The investigation is going to be handled by
two outside law firms. They will most probably speak with
everyone that is relevant.
Senator Levin. And are you going to be looking into whether
or not the bank's net new asset numbers on the books were
accurately stated to the public?
Mr. Cerutti. Yes, that is definitely part of the
investigation, but so far we have really no indication that
they were not.
Senator Levin. All right. And are you going to look into
whether the numbers on the books differed from the numbers that
were shown to the public? Did they differ?
Mr. Cerutti. I would not know. At this point I think I----
Senator Levin. How do you know that----
Mr. Cerutti. I think at this point we have just----
Senator Levin. How do you know they are accurately stated?
Mr. Cerutti. That is what I have been informed by the law
firms who have looked into this already. At this point there is
no reason to assume that the numbers are not accurately stated,
but, please, give us the time to do the work and come back to
your staff.
Senator Levin. Well, except you represented here that the
numbers are accurately stated, and so now I am asking you
whether you were told by your lawyers that the numbers that
were on the books were different from the numbers that were
shown to the public. Have you talked to your lawyers about that
problem?
Mr. Cerutti. No, I----
Senator Levin. Pardon?
Mr. Cerutti. I am not--this is really----
Senator Levin. That is OK. If you have not talked to them
about it, you just say so.
Mr. Cerutti. Yes, OK.
Senator Levin. Is that true?
Mr. Cerutti. Yes, I--really I do not have the information.
Senator Levin. That is not my question. But have you talked
to the lawyers about whether or not the numbers on the books
were different from the numbers stated----
Mr. Cerutti. May I just----
Senator Levin. Yes, sure.
[Pause.]
Mr. Cerutti. The lawyers inform me that you might be
referring to internal scorecards versus externally published
numbers.
Senator Levin. I.e., books versus public statements.
Mr. Cerutti. I would not call it ``books versus public
statements.''
Senator Levin. What is an internal scorecard?
Mr. Dougan. As you know, we obviously have a very robust
and crisp process around all of our publicly stated numbers.
This is another one of our publicly stated numbers. We are
going to look into this. But we also have a set of what we call
management information. You might think of it as the Management
Information Systems (MIS). So there are MIS numbers which we
use to judge individuals' performances, groups' performances,
and those often have a number of different rules that might
depart from the public numbers that are stated, and there is
nothing unusual about that. In some cases you might double
count revenues in order just to provide certain incentives to
different groups and sort of those are the internal accounting
methods of looking at numbers.
Senator Levin. Well, we call them ``books.'' But we are
going to get into this a little bit more.
Take a look at Exhibit 21,\1\ if you would. Now, this is a
Credit Suisse email dated February 2012, and the subject is
``Important--NNA, PBMC.'' The beginning of the email is on the
last page of this exhibit, so that is 84. And it says, ``. . .
we will again discuss our NNA results which have been very
disappointing up until now. As our capability to attract
clients and new assets is of utmost importance--also
externally--we need to take all possible measures in order to
change this into a positive story within the next weeks.''
---------------------------------------------------------------------------
\1\ See Exhibit No. 21, which appears in the Appendix on page 606.
---------------------------------------------------------------------------
Now, this is a memo from Mr. Boegli. Is that correct?
Mr. Dougan. That is right.
Mr. Cerutti. Correct, yes.
Senator Levin. All right. Now, did he work for you? I guess
I will ask Mr. Meister this. Did Mr. Boegli work for you?
Mr. Meister. Yes, that is correct.
Senator Levin. He was the chief operating officer (COO)?
Mr. Meister. He was the chief operating officer, and this
area was also the chief financial officer (CFO) part for the
division.
Senator Levin. And he was then saying we have to ``take all
possible measures in order to change this into a positive story
in the next weeks.'' And you were on the email, I gather.
Mr. Meister. Yes.
Senator Levin. So he was pushing toward a particular NNA
result in part, because it was reported externally. Is that
correct?
Mr. Meister. I think that that email was February 27, and
generally because new net asset is one, as you said, of the key
performance indicators. he makes everybody aware of all
possible net new assets, positive or negative, that can be
recognized within the FINMA rules.
Senator Levin. Well, he did not say that.
Mr. Meister. No, but it is a normal process----
Senator Levin. I am not saying it is normal. I am just
saying what he said. ``We need to take all possible measures to
change this into a positive story.'' That is not positive or
negative.
Mr. Meister. So perhaps----
Senator Levin. He did not say change this into a positive
or negative accurate story. He said, ``We have to take all
possible measures to change this into a positive story.'' How
do you say ``positive or negative'' when he says ``positive''?
Mr. Meister. Perhaps the email, I am copied on the email,
but perhaps the language is not the right one or the
appropriate one. But generally it is that we go through all the
possible bigger tickets within the Bank, in order to check if
there is a change from custody to assets under management. This
is a normal process. The BA heads all over the world are
contacted to see that we have the accurate numbers in the
system and for the end of the quarter.
Senator Levin. I am very glad to hear that you seek
accuracy at the end of the quarter, but this is not what this
email says. This does not say, ``We have to be absolutely
accurate because we are making external statements.'' It says,
``We need to take all possible measures to change this into a
positive story.'' That is a deviation from your policy, I take
it.
Mr. Dougan. Mr. Chairman, we agree with that. We have a
process to ensure that all of our NNA numbers are recognized
properly. And you are right, this kind of language is not
consistent with the way we would think about it.
Senator Levin. All right. Now, take a look, if you would,
at Exhibit No. 26,\1\ Mr. Meister.
---------------------------------------------------------------------------
\1\ See Exhibit No. 26, which appears in the Appendix on page 621.
---------------------------------------------------------------------------
Mr. Meister. Yes.
Senator Levin. This is another Credit Suisse email dated
December 2012. This is about a fourth quarter forecast, also
from Mr. Boegli. ``Our ambition to deliver WMC NNA of around
CHF 6-7bn [Swiss francs] in 4Q12 is at risk.'' It does not say,
Our ambition to have an accurate statement is at risk. It says
we have an ambition to deliver WMC [wealth management clients]
NNA of around 6 to 7 billion, it is at risk. And I take that
back. I misspoke, because this is a slightly different issue.
What he is saying is we want to try to bring in 6 to 7 billion,
and I think that is a more accurate reading than what I said a
moment ago. And I do not see anything particularly wrong with
saying we have an ambition to add NNA. Nothing wrong with that.
I do not think.
Then it says, ``With 3 weeks to go until the year comes to
a close . . . we still need CHF 2.5bn [Swiss francs] to reach
the lower end of this ambition. This requires continued efforts
on all levels . . .'' What does that mean, ``efforts on all
levels?'' What is that?
Mr. Meister. To give you perhaps a little bit of
perspective, you have normal in-and outflows of net new assets,
but you have these so-called big custody clients like the
client in scope you had where we are looking in every single
quarter. This was his intention to see if there was a change in
the intention of the client or in the amount of advice we could
provide or generally a change. And for that, you have to go
through the world to all the different regions to see if there
was a change on these big tickets. And then, of course, they
have to go back to the relationship manager to look, and he
does that in advance that we are of the respective quarter.
That is what really the intention was, even if perhaps the
language is not exactly what we want to have.
Mr. Shafir. Mr. Chairman, may I interject?
Senator Levin. Sure.
Mr. Shafir. It is hard for me to say specifically what Mr.
Boegli was intending here, but if you look at this email
specifically, the people it is addressed to are the sales
managers and a couple of the product managers, who actually are
the people who are interfacing with the clients. So, I mean, to
have an ambition, as you said earlier, to hit a target, this
would be very similar to hitting a sales target in a quarter,
and addressing that to the sales managers seems to be a normal
course of business, just looking at it objectively.
Senator Levin. Did you discuss, either one of you, with Mr.
Boegli pushing bank employees to meet external NNA targets?
Mr. Meister. What I wanted to explain before, as a normal
process now--we are co-heads, of course, we always push in our
function, that we have the right figures in the system. That
means that all new intents of the clients or investment advice
are correctly reflected in the system. Mr. Boegli, who at the
time was in charge of this process, made it aware to all the
different business heads around the world that they have to
take responsibility and ownership to see that the right figures
are in place.
Senator Levin. All right. Did you ever talk to him about
the language of this email?
Mr. Meister. I cannot recall that.
Senator Levin. Did you ever talk to Mr. Boegli about the
language in this email?
Mr. Meister. Not to my memory.
Senator Levin. OK. Now, Mr. Meister, during 2012 Client 5
was shifting assets, apparently to bring them under the
investment management of Credit Suisse, and his assets were a
boost, a big boost to the bank's net new asset total for 2012.
And this is especially in a year when net new assets was under
pressure because the bank did not have much new money coming
in, particularly in Switzerland.
Now, that is one issue. It is not the issue I want to focus
on today, because when the bank showed the NNA stemming from
Client 5's assets, the bank had a decision to make about what
region should receive the credit for those assets. So one
issue, which I am not going to focus on, has to do with whether
or not that was properly considered custodial or investment and
whether he properly shifted it to investment in the absence of
a signed agreement. But, again, I am not going to focus on that
piece.
I am going to focus, however, on the decision as to what
region would receive the credit for that asset. And you said it
was your decision, I believe, Mr. Meister, and you decided to
split that new net asset 50/50 between the two regions of the
private bank, Americas and Switzerland. Is that right?
Mr. Meister. That is right.
Senator Levin. And you told us that you made that decision
early in 2012. Is that correct?
Mr. Meister. That is correct, yes.
Senator Levin. So now I want to discuss what actually
happened with the regional credit for that net new asset amount
from Client 5 in 2012.
In the first quarter, the NNA, net new asset, for Client 5
was actually split 60/40 between Americas and Switzerland. Now,
why wasn't it split 50/50 between the Americas and Switzerland,
like you said?
Mr. Meister. I do not know.
Senator Levin. OK. And the second quarter, the NNA for
Client 5 was not split at all. It was entirely credited to
Americas. Why?
Mr. Meister. Also this I do not know.
Senator Levin. In the third quarter, the bank went back to
the beginning of the year, retroactively, added up all the
Client 5 assets, divided it in half, deducted 1.6 billion from
the Americas, added it to Switzerland. Retroactively. Why did
you do that?
Mr. Meister. Also I do not know why this was done in the
third quarter, but it was in line with my original decision to
apply a 50/50 split because of the story looking back the last
10 years, and especially 2 years before, before the client
decided to sell his company.
Senator Levin. All right. It also had a major effect, did
it not, on net new assets for Switzerland, made it look a lot
better than it otherwise would, wouldn't it?
Mr. Meister. To split the 50/50 generally?
Senator Levin. No. The retroactive shifting around these
numbers made Switzerland look a lot better than it otherwise
would vis-a-vis the Americas section, right?
Mr. Meister. That is right, yes.
Mr. Dougan. Mr. Chairman, if I could add, I think that, as
you say, that was certainly the impact of that. We also show
even more transparent disclosure on those net new assets in
Switzerland, and we have been showing it in a more granular
form. It has been showing outflows in Switzerland, and so we
are not trying to hide the fact that there might be outflows in
Switzerland because of certain business trends.
So as you say, that was certainly the effect of that, but,
again, I think our view is really we want to show the accurate
numbers, which I think this 50/50 split was what we thought was
the accurate way to do it.
Now, as you point out, why that was not accurately
reflected in the first and second quarter is one of the things
that we will be looking into.
Senator Levin. Now take a look----
Mr. Shafir. If I may?
Senator Levin. Sure.
Mr. Shafir. The only thing I would add is, through the
first three quarters, I was in the regional role in the
Americas, so my involvement would be somewhat more peripheral
until the fourth quarter. But I do remember the specific
instances, the issues around this client.
And there were multiple people involved with getting this
business, from the investment banking people to the private
banking people, both in Switzerland and the United States. And
it is difficult to really determine whether it is a 60/40 or a
50/50 split or a 25/75.
I would say this. It was clear, certainly from my seat,
that there were several people that were part of winning the
mandate for this client, and as long as I have managed
businesses that have involved people from different regions,
there have often been arguments about, who gets credit for
what. So when I heard about the logic of putting--of splitting
this thing down the middle, that did not seem inconsistent with
what I had observed as the fact pattern around winning this
business.
Senator Levin. Well, that is not the question. The question
is the shifting around, the percentage of shifts every quarter.
That is the problem and it obviously has an impact, an impact
very favorably to what a public perception is. Would you agree
with that, Mr. Dougan?
Mr. Dougan. Yes, I agree it has an impact. Again, in terms
of the overall financial results, though, this is one element
which I would say in 7 years as the CEO, I have been asked
maybe a couple handfuls of questions about the NNA numbers,
particularly on a regional basis. So I am not sure it is that
important an issue that investors focus on. But yes, you are
absolutely right.
Senator Levin. Are you serious, that that is not a factor
that investors focus on?
Mr. Dougan. It is a factor. It is not high on the list of
importance, I think, with most investors. That is just my
experience. That is my----
Senator Levin. But would you say it is a relevant factor
for investors?
Mr. Dougan. It is a relevant factor. I mean, the numbers--
--
Senator Levin. Would you say it should be accurately in----
Mr. Dougan. Absolutely.
Senator Levin. Would you say it should not be manipulated
during a year----
Mr. Dougan. Absolutely.
Senator Levin [continuing]. From quarter to quarter----
Mr. Dougan. Yes.
Senator Levin [continuing]. To give a particular
impression----
Mr. Dougan. Of course.
Senator Levin [continuing]. Or to avoid a bad image?
Mr. Dougan. Of course.
Senator Levin. OK. Well, that is what happened here. It was
shifted around from quarter to quarter and then retroactively,
retroactively was shifted, which then helped Switzerland--the
Swiss part of the operation--look like it got a little bit of
net NNA.
Mr. Meister. Perhaps, Mr. Chairman, I understand, of
course, when you looked at the----
Senator Levin. That is the chart we are all looking at now,
by the way, which shows what the----
Mr. Meister. The only thing I wanted to add--and we had the
discussion with the Subcommittee in my interviews--when you
look back at the last quarter of 2013, we are not shy to show
negative numbers in Switzerland. We had two quarters in 2011
and we also had the last quarter in 2013, where we published
negative Swiss NNA numbers.
So what is in line, looking back, therefore, is the 50/50
split out of the original discussion and the reasons Mr. Shafir
also explained before, but how it was implemented is a part of
our investigation and hopefully we will find out what was the
reason why it was done, not in the second quarter, but
retroactively in the third.
Senator Levin. With the effect that it had, which was to
make the Swiss operation look more positive than it otherwise
would.
Mr. Meister. But as I said, we are not shy.
Senator Levin. You are not shy now, maybe because you do
not have the opportunity to do this.
Mr. Meister. I do not say, sir----
Senator Levin. Maybe somebody who is making a decision as
to whether to have an investment of this $5 billion or whether
to put it in custody. You may not have $5 billion coming in
every day. That $5 billion is a huge part of what happened in
2012, and the retroactive shifting around of the division of
that number between the regions does not happen every year. So
you may not have an alternative. You say you are not shy. There
is no way of knowing whether or not you had the same
opportunity. My guess is you did not. But that is my guess.
Take a look at Exhibit 25.\1\ This is a Credit Suisse
email, dated October 25, 2012. This is about the third quarter
NNA. The email shows the math for the retroactive split. It
meant that the bank's internal books, whatever you want to call
them, you have a different word for books, Mr. Dougan, the
internal----
---------------------------------------------------------------------------
\1\ See Exhibit No. 25, which appears in the Appendix on page 620.
---------------------------------------------------------------------------
Mr. Dougan. We call them MIS, so that is to distinguish
from the financials that are, as you say, public. So it is more
what management uses to manage the business.
Senator Levin. OK. So your own internal management books
had a different number from the external book, and here is what
it says in this email. ``As per your request, please find below
the bridge--for the NNA for third quarter 2012 as reported
internally for Private Bank Americas versus the externally
released figure.'' There it is. I mean, you were very much
aware of it, that there was an external released figure that is
different from what you were showing internally. Why?
Mr. Dougan. Well, Mr. Chairman, that is actually--as I
tried to explain before and probably did not do a very good job
that is a very common occurrence within the Bank because we
do----
Senator Levin. On this kind of an issue? On NNA?
Mr. Dougan. Sure, because we are trying to provide the
right incentives around for our sales forces, and if you think
of it as sort of MIS side of things, it is more like a sales
credit issue, which is not as influenced by the financial
statements. It happens in this kind of an issue; it happens on
all sorts of issues. Revenue splits----
Senator Levin. I am only talking about something which is--
--
Mr. Dougan. OK.
Senator Levin [continuing]. Shown to the public.
Mr. Dougan. OK.
Senator Levin. And where it is different. It is different
in a very critical way at a very critical time for your bank.
And what the effect was, you are saying, was a coincidence. Is
that what you are saying?
Mr. Dougan. No. What I am saying is that----
Senator Levin. Are you saying it was a coincidence?
Mr. Dougan. We have specific rules around how MIS internal
numbers are calculated and, in fact, I think what this email is
laying out is a reconciliation between what is reported from an
MIS point of view, sort of a management perspective, versus the
financials, and we would have this every quarter. Every quarter
there would be a reconciliation between how we, the internal
performance----
Senator Levin. OK. On NNA?
Mr. Dougan. On NNA, yes.
Senator Levin. You would show this big a gap between what
the internals show?
Mr. Dougan. Well, the size of the gap may vary from quarter
to quarter.
Senator Levin. Right.
Mr. Dougan. But there are a series of rules and the way we
think about it internally versus the external numbers and we
try to----
Senator Levin. Which was more accurate?
Mr. Dougan. I would not know how to answer that. We have,
for externally reported numbers, we have the FINMA rules, which
we follow, and I think as Mr. Cerutti said, we are clearly
going to look into making sure that we are following those
faithfully in terms of what we externally report, and then
internally we have a different set of rules in terms of how we
think about and show those numbers internally to manage and
motivate our sales forces.
Senator Levin. Can we agree on one thing? If Switzerland
had not received the re-allocation in that quarter, it would
have shown a negative 1.5 billion in NNA. Would you agree with
that?
Mr. Dougan. Well, that is correct, but also, I guess, I
would point out that it was really--it should have been 50/50
all along, which means Switzerland would have benefited in the
first and the second quarter. So, in fact, we penalize
Switzerland in the first and the second quarter by not properly
reflecting that 50/50.
You are right. In the third quarter, that came through and
it benefited Switzerland, but effectively, it penalized
Switzerland in the first and second quarter. So if someone was
intentionally trying to benefit Switzerland, they did a poor
job because the first two quarters it was the other way around.
Senator Levin. No, but the question is not benefiting
Switzerland. The question is showing Switzerland in the
positive or in the negative. That is the issue. And by shifting
this money retroactively, you are able to show publicly,
externally that Switzerland is slightly up instead of massively
down. That chart up there shows massively down. That is what
your internal books show. Publicly you showed slightly up. That
is not casual. That is important. That is what people count on,
one of the things they count on when they invest.
Now, take a look at Page 135 in the report. We are going to
give you our report so that you can take a look at Page 135.
This is a page from your third quarter earnings report and it
is headed----
Mr. Dougan. Page 134.
Senator Levin. Sorry. Did I give you the wrong page?
Mr. Dougan. Page 134. I think we are there.
Senator Levin. Page 134. This is a page from your third
quarter earnings report. It says, Swiss francs ``5.2 billion
net assets driven by inflows and international booking centers,
predominantly from emerging markets.'' That is what you are
showing the public, inflows.
And then you look at this on the right-hand side: ``Strong
inflows from Asia Pacific', EMEA with strong inflows from
Eastern Europe.'' Then look at that third one: ``Positive
contribution from Americas and Switzerland albeit seasonal slow
down.''
Now, Mr. Dougan, I do not think you can fairly or honestly
say that this is irrelevant, this representation to the public.
Would you agree to that?
Mr. Dougan. Of course I would not say it is irrelevant.
Senator Levin. Putting aside the motive for a moment, it
was the result of that retroactive shift. Is that correct?
Mr. Dougan. The regional allocation was, obviously, the
overall number as you referenced, the 5.2 billion would not
have been impacted.
Senator Levin. Of course.
Mr. Dougan. But regional allocation----
Senator Levin. Would have. OK. And how do you think this
would have read if it said positive contribution from Americas
and negative in Switzerland? Do you think that gives a
different impression to the public if that is what this had
said? It does not make any difference. The public does not read
these things anyway. Is that what you are saying?
Mr. Dougan. No, I think they do read it and obviously it
needs to be correct, so I do not disagree with that. I do not
think it would have had a significant difference in terms of
how the earnings result would have been perceived, because
obviously it is a much broader, more detailed set of issues.
This is one aspect, the regional allocation between two
regions, I am not trying to minimize it and it is relevant, but
it is relatively--it is a detail in the overall----
Senator Levin. It is not a detail when you say positive
results, black and white, from Switzerland, albeit, seasonal
slow-down. And look at your chart. This is your chart. You may
call it a detail. I call it something that investors would
presumably look at. I hope they care whether or not your bank
is profitable in all the regions or which region it is or which
it is not.
But look at the Private Bank third quarter chart. You show
for the Americas .2-plus for Switzerland, .1-plus, so that it
is all on the upswing for your entire bank. By the way, you say
it is the entire bank which counts. That is the 5.2 billion net
assets driven by inflows. You think that is the only thing that
counts. There is something else that counts.
There is a visual that you created that shows NNA generally
on the upswing, and if that visual had reflected what the
division was before the retroactive activity, you would have
had a big increase in the Americas and a big decrease in
Switzerland, and that would be a hell of a lot different to the
viewer than what your chart is. Would you agree with that? It
would give a very different impression visually.
Mr. Dougan. I would agree it would be different and I also
agree the numbers need to be accurate. The question of how
important an issue that would be to our investor base is one
where perhaps you and I disagree. But I agree with those
comments, yes.
Senator Levin. OK. Now, is the bank going to look at this
process to try to avoid this kind of a situation where your
internal books, I will call them, is different from your
external to this degree? Are you going to change any procedure
at all?
Mr. Dougan. Well, we are going to look into this whole
process and we will take whatever measures we need to take, and
I think as Mr. Cerutti said, it is probably a little premature
to talk much about that, Mr. Chairman. But certainly we want--
we believe it has been a process that has had integrity, but we
will look at it and make sure that it does and we will
certainly make whatever changes we need to make to it.
Senator Levin. Please take a look at Exhibit 28.\1\ This is
a Credit Suisse email dated January 2013 regarding
``Americas.'' And this is what Mr. Boegli wrote: ``Wealth
management clients runs for NNA substantially below
expectations. In order to support the Private Bank Division, a
further''--now he refers to Client 5----
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\1\ See Exhibit No. 28, which appears in the Appendix on page 625.
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Mr. Cerutti. Sorry, Mr. Chairman. We have a problem
locating the document.
Senator Levin. I understand. Let me slow down.
Mr. Cerutti. Which number?
Senator Levin. Exhibit 28.
Mr. Cerutti. Exhibit 28? OK, we found it.
Senator Levin. OK.
Mr. Cerutti. Thank you.
Senator Levin. And it is down on the bottom. This is from
Mr. Boegli. And it is dated--you have the date?
Mr. Dougan. Yes, we found it.
Senator Levin. January, OK. ``Dear Tony: Currently--for Q4
reporting--WMC runs for NNA substantially below expectations.
In terms of your region, latest indication from your regionally
BI&S team estimates approx. 2.8bn NNA compared to a predicted
Forecast of 3.0bn which is an excellent result in stormy times.
However''--this is the part I want you to focus on--``in order
to support the PB division, a further [redacted] portion of the
0.9bn CHF [Swiss francs]--fully reported internally and
externally in the Americas region--would be a great favor for
our division.''
Is this the way your bank should operate?
Mr. Dougan. No, it is not. That is not language that we
would agree with. It is not consistent with the process, so no,
we do not think it is.
Senator Levin. And, Mr. Meister, did you talk to Mr. Boegli
about this before he asked his colleague for the favor?
Mr. Meister. I can only repeat what Mr. Dougan said, that
the language is, of course, completely inappropriate, and that
the word ``favor'' is completely wrong in this place, because
when we speak about 900 million, that is a completely separate
process which goes to the CFO area of the group so nobody can
give a favor if there is not a clear case for that. So I can
only say the words used here in the email are completely
inappropriate language.
Senator Levin. But it also said that ``Mr. Meister''--that
is you--``would be extremely happy if you could support this.''
Mr. Meister. Also, there are----
Senator Levin. Is that true?
Mr. Meister. What?
Senator Levin. Was that true?
Mr. Meister. I cannot remember what----
Senator Levin. But would you have been ``extremely happy?''
Mr. Meister. I would never use such terms.
Senator Levin. Well, where did he get that impression from?
Mr. Meister. I am sorry?
Senator Levin. Where did he get the impression you would be
very happy unless you talked to him?
Mr. Meister. No, I think generally, it is clear that we
drive the organization, Robert Shafir and myself, that we have
net new asset number and hopefully, positive regions, and we
are more happy if there are bigger portions, but always in line
with what the FINMA rules and what the process is allowing,
even if----
Senator Levin. You can say always in line, but that is not
what the emails say.
Mr. Meister. Yes, but I did not----
Senator Levin. So it is not always in line. And the
question is, you were reported as being ``extremely happy'' if
that favor were granted. And my question to you is whether or
not you talked to Mr. Boegli about this before he asked his
colleague for that favor. That is my question.
Mr. Meister. I cannot recall that.
Senator Levin. Now, Mr. Shafir, are you familiar with the
bank's account for Client 5 and how the bank showed $8.5
billion in NNA for 2012 as a result of Client 5?
Mr. Shafir. Yes.
Senator Levin. Did you ask your deputy to take a careful
look at the fourth quarter NNA recognition by Client 5?
Mr. Shafir. Yes.
Senator Levin. The next step was for him then to get the
head of Finance, Carlos Onis, to review it; is that correct?
Mr. Shafir. Well, yes. As Mr. Meister said, we have a
process specifically--there are two parts to the process,
Senator Levin. The first part is that we have an independent
committee that looks at classification of NNA as a whole. The
second piece of the process for larger transactions,
specifically $500 million or above, is that their findings have
to be reviewed and signed off by the Finance organization.
Carlos Onis is the CFO of the Americas for Credit Suisse.
Senator Levin. OK. Continuing now, if you take a look, Mr.
Shafir and Mr. Meister, at Exhibit 29,\1\ it is on the second
page about halfway down, the email indicates that, ``Carlos
asks for further detail with regards to the revenues.''
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\1\ See Exhibit No. 29, which appears in the Appendix on page 628.
---------------------------------------------------------------------------
And then, on the first page Mr. Bluntschli responded:
``Given the rather weak granularity, we need to create a more
powerful story in the sense of making more around the existing
weak figures in the sense of redacted consists of xx accounts,
all held in the xx branch covered by two senior RMs, xx and yy,
which do high interaction level, blabla. Might not be relevant,
but sounds rather good.''
And then at the top Mr. Bluntschli wrote: ``I am convinced
that with this enhanced story, we will get approval soon from
Carlos.'' Enhanced story. Do you know what that is?
Mr. Shafir. I do not know specifically.
Senator Levin. What he means, is that not like a half-
truth?
Mr. Shafir. I do not know.
Senator Levin. An enhanced story. Does that language
trouble you?
Mr. Shafir. The language is troubling, but it is difficult
to say really what he meant by that. I was not copied on this
email. But as I said, this process did go through two different
checks. It did go through the independent committee and it also
went to the Finance organization as well.
Senator Levin. Then what does it say, though, when it says,
``it may not be relevant, but sounds rather good?'' Is that the
way you folks operate? This sounds good, ``not relevant'',
``blabla.''
Mr. Shafir. Senator, I cannot respond to the----
Senator Levin. ``Enhanced story.''
Mr. Shafir [continuing]. Intent of the email.
Senator Levin. What do you think, Mr. Dougan?
Mr. Dougan. Certainly I do not think that is consistent
with our process. I think as Mr. Shafir said, when I hear
something like enhanced story, it could mean--as you say, that
it is a story, that it is something that is made up. On the
other hand, enhanced--the enhanced--if there are enhanced facts
around it, that I would support it.
Senator Levin. No, no. It is not----
Mr. Dougan. Well, maybe----
Senator Levin. Let us try to get a better input. It is an
enhanced story.
Mr. Dougan. I think it may be hard to determine that just
from this language. As you know, I mean, it is hard to exactly
determine that. I agree with you that we would have the same
concern that you have voiced. We would have that same concern
and that is part of what we are going to be looking into.
Senator Levin. Well, these are examples of your process at
work and I think you have real problems with your process.
Mr. Dougan. Well, we are going to look into it and we are
going to determine if we do have problems, we are going to
address them and we are going to fix it.
Senator Levin. Will you get back with us as to what, if
anything, you do about it?
Mr. Dougan. Sure.
Senator Levin. And by the way, you said, I think, Mr.
Shafir, you did not see Mr. Bluntschli's email; is that
correct?
Mr. Shafir. That is correct.
Senator Levin. How about you, Mr. Meister? Did you see that
email before today?
Mr. Meister. No, not to my memory.
Senator Levin. OK. Is this an appropriate way to recognize
NNA, to ``make more around existing weak figures? Is that
appropriate?
Mr. Meister. I am sorry. I think I am to repeat again. The
language used here out of this context, it is definitely not
what we want to see.
Senator Levin. I am giving you the context. You have the
whole context. You have the whole email.
Mr. Meister. But what you do not know is Mr. Onis--is Mr.
Onis really asking about more granularity about why he could
really reclass this? I do not know what it really means, and
this email, Mr. Bluntschli is a German-speaking guy, so this is
also, perhaps taking into consideration about the language
around this. Therefore, it is difficult only based on this
email to say what the intention was.
Senator Levin. Well, Mr. Dougan, I would hope in your
investigation that you would take a look at the process for
recognizing NNA. That is represented to the public. And it
cannot be accurate and involve colleagues like Mr. Boegli did,
to recognize NNA as a ``favor.'' Would you agree?
Mr. Dougan. I would agree with that, yes, sir.
Senator Levin. And it cannot have enhanced stories. It has
got to be accurate stories. Would you agree with that?
Mr. Dougan. I would agree. Again, I am not sure what his
exact meaning was there, but I agree with you in the sense----
Senator Levin. The common understanding of enhanced story.
Would you not agree?
Mr. Dougan. Well, again, he is not a native English
speaker, so it is a little unclear. But in your--the way you
have interpreted it, we agree, yes.
Senator Levin. The way I have interpreted it? This is an
email, enhanced story. The way you interpret the words enhanced
story, would you not agree you do not want enhanced stories?
You want enhanced profits.
Mr. Dougan. Again, as native English speakers, I completely
agree with you.
Senator Levin. All right. And you do not think, I hope,
that we should ``make more around the existing weak figures,''
but we ought----
Mr. Dougan. Not language that I think is appropriate.
Senator Levin. OK. And ``blabla might be relevant, but
sounds rather good?''
Mr. Dougan. Not language I think is appropriate.
Senator Levin. This process, the way you read it, is not a
good process?
Mr. Dougan. Well, I actually do believe the process--we
believe the process is actually a good process, but we are
going to get to the bottom of it and we are going to figure it
out.
Senator Levin. Was the process, as reflected in these
emails, the kind of process that you want to defend?
Mr. Dougan. The language and the things that have happened
here, no, absolutely not. Whether the ultimate decisions that
were made and whether the actual determinations that were made
were correct is a different issue. But absolutely, this kind of
language, this kind of an approach to the process is not
consistent, it is not acceptable.
Senator Levin. Thank you. Well, it has been a long hearing.
We are very grateful that you appeared here today and for your
cooperation with the Subcommittee. We will look forward to the
reports that you have promised to give us.
The bottom line for me is that your bank is a bank that
really wants to be seen as a reformed bank, and you, in your
opening statement, laid out the reforms that you have made. So
that is something which is important to you. You do not want to
be in the dirty business any longer of helping U.S. clients
cheat on their taxes. But it is important, if you are going to
really be a reformed bank, that you have to acknowledge what is
clear in our report, that the wrongdoing went beyond a small
group of rogue bankers; that there is 22,000 Swiss accounts
that were hidden from our authorities and we need full
cooperation if we are going to be able to collect the taxes
owing from those accounts. We need your cooperation.
And the bank right now is hiding behind a shield that the
Swiss law tries to provide it, which cannot be recognized in
any other country because we have to apply our own laws, and if
you do banking in this country, you have to abide by our own
laws and you have to take on your own government. You have to
explain to your own government that you are banking in these
other countries. You cannot cite a Swiss law that says account
names are going to be kept secret in defense of what I hope
will be the enforcement of subpoenas or other appropriate
actions in order to get those names.
And so, what we will now do is recess the hearing. We are
going to resume at 3 o'clock in a different room. We are going
to resume at 3 p.m. in 342 Dirksen, which is the full
Committee's hearing room because the Department of Justice has
informed us that Mr. Cole has to go to the White House. We have
agreed to accommodate him. So that is the reason for the delay,
is the reason for the change in the room. I do not have it in
front of me so I do not know, but for those of you who are
going to be here this afternoon, or want to be here, it will be
a different location.
We thank you again, all of you, for your presence and you
are excused.
Mr. Dougan. Mr. Chairman, thank you very much.
[Whereupon, at 12:58 p.m., the committee recessed, to
reconvene at 3 p.m. this same day, in room 342, Dirksen Senate
Office Building.]
Senator Levin. The Subcommittee will come back to order and
we will now call our second and final panel of witnesses for
today's hearing. James M. Cole, the Deputy Attorney General at
the U.S. Department of Justice, and Kathryn Keneally, Assistant
Attorney General of the Tax Division of the U.S. Department of
Justice. We thank you both for being with us today. We look
forward to your testimony.
As you know, pursuant to Rule 6, all witnesses who testify
before this Subcommittee are required to be sworn, so at this
time I would ask that you please stand and raise your right
hand.
Do you swear that the testimony you are about to give
before this Subcommittee will be the truth, the whole truth,
and nothing but the truth so help you, God?
Mr. Cole. I do.
Ms. Keneally. I do.
Senator Levin. Thank you very much and we will be using our
timing system today. A minute before the red light comes on,
you will see the lights change from green to yellow, which
gives you an opportunity to conclude your remarks. Your written
testimony will be printed in the record in its entirety. We
would appreciate you limiting your oral testimony to no more
than 15 minutes. And if you need more than that, we will try to
arrange it. We will have you go first, Mr. Cole, followed by
Ms. Keneally, and then after we have heard the testimony, we
will turn to questions. Mr. Cole.
TESTIMONY OF HON. JAMES M. COLE,\1\ DEPUTY ATTORNEY GENERAL,
OFFICE OF THE ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE, AND
HON. KATHRYN M. KENEALLY, ASSISTANT ATTORNEY GENERAL, TAX
DIVISION, U.S. DEPARTMENT OF JUSTICE
Mr. Cole. Thank you, Chairman Levin, and Ranking Member
McCain. And first of all, Mr. Chairman, I want to thank you for
accommodating the scheduling that we had to do today. I very
much appreciate it.
---------------------------------------------------------------------------
\1\ The joint prepared statement of Mr. Cole and Mr. Keneally
appears in the Appendix on page 107.
---------------------------------------------------------------------------
I want to thank you for inviting us here to testify in the
Department of Justice's efforts to address Swiss bank
facilitation of U.S. tax evasion. With me this morning, as you
have noted, is Kathryn Keneally, who is the Assistant Attorney
General for the Tax Division. She oversees the Department's tax
enforcement program.
The Department of Justice is committed to global
enforcement against financial institutions that facilitate
cross-border tax evasion, as well as against the individuals
who evade their tax and reporting obligations and the bankers,
accountants, lawyers, and other professionals who help them do
it.
And while the Department's initial efforts and this hearing
have focused on Switzerland, we have expanded our
investigations to go after tax cheats and the banks assisting
them in India, Israel, Liechtenstein, Luxembourg, and several
Caribbean countries.
Since 2009, the Department has publicly charged 73 account
holders and 35 professionals with violations arising from their
offshore banking activities, and 72 individuals have pled
guilty or were convicted at trial. Just as importantly, our
enforcement efforts have driven over 43,000 taxpayers with
secret offshore accounts to identify themselves to the IRS,
disclose their offshore accounts, and to pay a total of over $6
billion in back taxes, penalties, and interest, and that number
is growing.
As this Subcommittee well knows, investigating offshore
banks and U.S. taxpayers with secret foreign accounts is
difficult and time-consuming. It requires us to use virtually
all of the tools at our disposal and to be creative and
innovative. We must pursue not just legal avenues such as grand
jury subpoenas and John Doe summons, but also discussions with
the Swiss Government to obtain information we need.
And we need to make full use of cooperators and
whistleblowers, and I can tell you that we are receiving
information from such individuals in the offshore cases we are
working right now. In appropriate circumstances, the Department
may seek the enforcement of a Bank of Nova Scotia grand jury
subpoena or a John Doe summons for Swiss bank records, but
those tools cannot always be effectively employed.
First, they can only be used against a foreign bank that
has a U.S. presence, and the majority of the Swiss financial
institutions that we are currently investigating do not.
Second, the use of Bank of Nova Scotia grand jury subpoenas or
John Doe summons for extraterritorial records may result in
protracted litigation.
Absent acquiescence by the Swiss Government, a bank may be
caught between facing contempt sanctions in the United States
or violating Swiss law or a Swiss blocking order. Because we
are involved in active ongoing criminal investigations we are
quite limited in what we can disclose publicly. But just
because we cannot disclose what we are doing does not mean we
are not actively pursuing these cases.
I do, however, want to quickly discuss a number of public
actions we have taken recently and we fully expect additional
public developments over the course of the coming months. By
way of example, in 2013, the Department obtained four separate
orders authorizing the IRS to issue John Doe summons seeking
records from banks in the United States for the U.S.
Correspondent accounts of banks located in the Caribbean,
Switzerland, and other European countries, and we have
successfully compelled account holders to provide us with their
personal records of their foreign banking activities.
Since the UBS Deferred Prosecution Agreement in February
2009, the Department has taken public action against two other
banks. In January, 2013, Wegelin Bank, one of the oldest
financial institutions in Switzerland, pled guilty to
conspiracy to defraud the United States and was ordered to pay
substantial fines and to forfeit funds. As a result of its
criminal conviction, Wegelin was forced to close its doors,
which sent a shockwave through the community of banks in
Switzerland and bankers in Switzerland that had been engaging
in facilitating U.S. tax evasion.
In July 2013, Liechtensteinische Landesbank AG entered into
a non-prosecution agreement and paid substantial fines. What is
particularly notable about this case is that we were able to
take an innovative approach, and with the bank's cooperation
have Liechtenstein actually change its bank secrecy laws
retroactively. This enabled the Department to obtain files
relating to non-compliant U.S. account holders.
In August 2013, the Department publicly stated that 14
banks have been authorized for investigation concerning the use
of Swiss bank accounts. This is in addition to ongoing
investigations concerning cross-border activities by banks in
India, Israel, Liechtenstein, Luxembourg, and several Caribbean
countries.
A fundamental issue with respect to obtaining cooperation
from Swiss banks has been the degree to which Swiss law blocks
disclosure of banking information, including the identity of
account holders, and for this reason, the Department and the
IRS engaged in a series of discussions with representatives of
the Swiss Government.
On August 29, 2013, the Department announced the program
for non-prosecution agreements or non-target letters for Swiss
banks. This program is designed to encourage Swiss banks not
currently under investigation to cooperate with our law
enforcement efforts in return for the possibility of non-
prosecution agreements or deferred prosecution agreements.
I want to emphasize that the program expressly does not
include the 14 Swiss banks we have targeted and are actively
investigating. Each of those banks will need to negotiate a
separate resolution with the Department that reflects the
severity and the magnitude of its conduct, nor does the program
offer or provide protection or immunity to any U.S. account
holders or foreign bankers or other advisors.
What the program does do is provide an opportunity to banks
that we currently have little or no information about to self-
report to the Department that they have committed or
facilitated U.S. tax evasion. By the program's December 31,
2013 deadline, the Department received letters from 106 Swiss
financial institutions concerning their intent to participate
in the program.
The program requires extensive cooperation by each
participating bank, including full disclosure of its illegal
activities, the names of each of its culpable employees and
third-party advisors, and the number and value of each of its
U.S. accounts. For the accounts that closed after the
Department's investigations became public, the banks are
required to provide information that will allow the Department
to follow the money. That is, we will be given detailed
information to enable us to go after Swiss banks and banks
around the globe to which those secret accounts were
transferred.
In addition to this, the terms of the program require
cooperation. Each of the banks must also pay steep penalties
calibrated to reflect both the magnitude and the severity of
the bank's conduct and agree to get out of the business of
facilitating U.S. tax evasion.
Every Swiss bank that comes forward to cooperate under the
program represents an opportunity to obtain valuable law
enforcement information that is new to the Department and from
a source which the Department did not previously have. While
the program does not expressly require the banks to provide the
identities of account holders, which is barred under Swiss law,
we will be able to use the information the banks are obligated
to provide under the program to formulate more effective treaty
requests to obtain that very information.
And as one of the requirements for obtaining an NPA or a
DPA, the banks are obligated to assist the Department in
preparing such treaty requests, requests that the Swiss
Government have committed to process on an expedited basis.
The treaty process is working, to some extent, and we are
receiving some information. We cannot disclose the details
publicly, but our success has not escaped notice. Since the
announcement of the program, the IRS has advised us that they
have seen an increase in the number of U.S. taxpayers
participating in their offshore voluntary disclosure program.
But we believe we could obtain substantially more account
information if the Senate were to ratify the new treaty known
as the Protocol Amending the Convention Between the United
States of America and the Swiss Confederation for the Avoidance
of Double Taxation with Respect to Taxes on Income, which was
ratified by Switzerland in September 2009. And as you yourself
have mentioned, Mr. Chairman, I understand that there is a
hearing on this treaty this morning before the Senate Foreign
Relations Committee.
As I noted earlier, as a result of our enforcement efforts,
over 43,000 individuals have self-reported that they have held
secret Swiss bank accounts and paid over $6 billion in back
taxes, interest, and penalties. In contrast, before 2009 and
our law enforcement efforts in this area, the average number of
voluntary disclosures submitted to the IRS ranged from
approximately 50 to slightly over 100 per year.
Because the Swiss banks that cooperate under the program
will provide information about bank accounts globally, anyone
who has not yet come forward to disclose a secret bank account
anywhere in the world is on notice that their time is running
out. The Department is engaged in and committed to robust
enforcement globally using all available tools to enforce the
law that we have at our disposal.
I want to thank you again, Mr. Chairman, for the
opportunity to appear this morning to discuss our law
enforcement efforts, and I want to thank you for your strong
support of this vital law enforcement matter. We are happy to
answer any questions that you or the other Members of the
Subcommittee may have. I have given this opening statement on
behalf of both myself and Ms. Keneally.
Senator Levin. Thank you so much, Mr. Cole. We will have 10
minutes for our first round and the subsequent rounds for each
of us.
On Page 4 of your statement, your written statement, you
say the following: A fundamental issue with respect to
obtaining information about accounts located in Switzerland has
been the degree to which Swiss law permits disclosure under the
Convention Between the United States and the Swiss
Confederation for the Avoidance of Double Taxation with Respect
to Taxes on Income signed in 1996. And then you say, Swiss
banks have often contended, in response to our investigations,
that Swiss law prohibits meaningful cooperation.
As part of our efforts to obtain information, you say, from
these banks, the Department and the IRS engaged in a series of
discussions with representatives of the Swiss Government. Now,
the bottom line here, and I think the real problem that we have
is this endless negotiation with the Swiss about their laws
instead of implementing our laws, year after year after year
instead of using the tools at our command.
We had a deal. In 2011, we issued subpoenas to Credit
Suisse; they have not been enforced. And so, we have tens of
thousands of names of people who have evaded taxes which Credit
Suisse has, but what they do is say, Well, we have to go
through a treaty request because there is a Swiss law that we
are worried about.
Well, I am worried about implementing our laws and the
failure to aggressively use the tools at our command to
implement our laws. So why is it that you focus, right in your
testimony, about a series of discussions with the
representatives of the Swiss Government? Why is that such at
the heart of what you are doing here, instead of doing what we
know succeeds?
And that is what we did with UBS when we blew the whistle
on them here in this Subcommittee. And then as a result of the
exposure and as a result of the embarrassment and as a result
of our investigation with UBS, what they did was basically
confess error and turn over names, and those names led then to
a fear of God in the hearts of a whole lot of tax evaders, and
that is what led to people paying their taxes. It was the fear
that accompanied UBS' release of names. This is the heart of
the matter--names, names, names. It is like location, location,
location for the value of real estate. You have to get names.
You are going to get--and you talk a lot about this--this
new program that you have, you are going to get bits and
pieces. You are going to get leads and those leads will go to
other banks, and then you are going to have to make treaty
requests with those banks. Those are goose chases. And what we
need is to see aggressive implementation by the Department of
Justice.
In 2011, Credit Suisse received subpoenas. We do not see
any enforcement. Now, you have issued a subpoena. You have
issued a subpoena and you have not enforced it. And I want to
just say one other thing about these treaty requests. We always
have not been so willing to rely on treaty process. Now, there
is value to the treaty process. I hope we ratify the treaty.
OK? Let me get that clear. It was slightly better criteria. Not
much, by the way, but slightly better criteria than the old
treaty does and I hope we ratify it.
It has also got some holes in it. It does not get us to the
names before 2009. The major number of names that Credit Suisse
has, or at least half of the names, are the pre-2009 names.
They are not covered by this new protocol.
And then there is something else which has happened. The
Swiss unilaterally announced in their Parliament that the
Protocol is not going to apply unless the person who makes the
treaty request can show that the bank that it seeks the names
and information from, significantly contributed to a pattern of
conduct by the very unnamed people. You do not have the names.
It is a chicken-egg kind of a deal.
It gives you just the hints and then you have to make a
treaty request, and then it is against the bank, under a
unilateral law passed by the Swiss, you have to make a showing.
And where is the showing made? In a Swiss court. And what have
the Swiss courts done? They have weakened every effort that we
have made to pierce their secrecy because bank secrecy is the
law of Switzerland.
Now, we have not always been willing to rely on the treaty
process. Barry Schott, who was a senior IRS official, Deputy
Commissioner, told a U.S. court the following about these so-
called treaty requests. He said he spoke with the officials of
the Swiss Government about the treaty requests on January 21,
2009.
During that conversation, I learned that the Swiss
Government had made final determinations to provide the
requested records for only 12 accounts. They will not provide
records to the IRS about those 12 accounts until after the
account holders had been given an opportunity to litigate in a
Swiss court the Swiss Government's decision to turn those 12
records over to the IRS.
In sum, he said to the court, the American court, the Swiss
Government has not provided any records sought under the treaty
requests and it is not clear when, if ever, it will.
Now, it is very clear that the Department has the authority
right here at home to require the banks to hand over client
names and account information. It has been established law for
30 years that a foreign bank operating here in the United
States served with a grand jury subpoena to provide records in
its offshore offices--in other words, in its offices back
home--must obey and abide by that subpoena.
And the court here, the 11th Circuit Court of Appeals,
upheld the subpoena and it said in the Bank of Nova Scotia
cases, this Court simply cannot acquiesce in the proposition
the U.S. criminal investigations must be thwarted whenever
there is a conflict with the interest of other States.
The foreign origin of the subpoenaed documents should not
be a decisive factor. The nationality of the bank was Canadian
in that case, but its presence was pervasive in the United
States. That is true with Credit Suisse. It cannot expect to
avail itself, the Court said, of the benefits of doing business
here without accepting the concomitant obligations.
Now, that is a good law today. It is established that the
Department has the ability to control our own destiny on these
matters and we do not always have to play ball with the other
country and to play on their play field. It has the authority
and the power to create for itself a direct line of evidence
that it needs and it wants in order to identify tax cheats and
the entities that abet them and collect what is owed to the
U.S. Government.
That is a much more productive way, it seems to me, and a
preferable way to move forward than using this frustrating,
unproductive treaty process, and it has been a proven way to
get names as seen in the UBS case. So I am going to ask you
whether or not you accept the decision of the Swiss Parliament
to unilaterally place limitations on this 2009 protocol.
Mr. Cole. Mr. Chairman, I want to start out by telling you
how much I share your frustration in trying to get the names of
account holders, U.S. taxpayers, who use Swiss banks to try and
hide their money from lawful U.S. taxes. This has been a source
of frustration from the day I got into office here as the
Deputy Attorney General.
This is why we are using all our tools, because it is tough
to get through the Swiss secrecy laws. We have gone through the
analysis of the Bank of Nova Scotia subpoena and what we have
determined it would give us to enforce it. We have never seen
one, a Bank of Nova Scotia subpoena, that has actually produced
an account record from Switzerland.
What you get, if you try and enforce it, is a contempt
citation for failure to actually produce from the court with
fines that will go each day. Many of these financial
institutions are very wealthy and can afford those fines and do
not want to run afoul of Swiss law where they are.
Second, you can only bring one against a company or a
financial institution that is in the United States.
Senator Levin. Is Credit Suisse in the United States?
Mr. Cole. It is.
Senator Levin. Thank you.
Mr. Cole. It is. But we raise the UBS example, which I
think is a good one, because it really informs how we go about
trying to get through this very frustrating brick wall that the
Swiss put up.
In that case, they built a case against UBS, and at the end
of the day, as I understand how the names came through, it was
through the resolution of that case, and then ultimately,
actually, a treaty request that produced the 4,700 account
names. Many, many more were sought from UBS at that time, but
only 4,700 were produced, and it was as part of a treaty
request process in relation to their deferred prosecution
agreement.
So what does that tell me about the best way for us to go
about this? What it tells me is the best way to go about it is
to build a strong criminal case against the banks in
Switzerland who are fostering the tax evasion by U.S. citizens.
And what I have been focusing on is ways that I can go
about getting information that I can use to build a solid
criminal case against those 14 banks, and that involves maybe
not the account records because that seems to be the real brick
wall, but a lot of the discussions we had with the Swiss were
about getting the internal bank records, non-account records,
about how those banks conducted their business, about who the
employees were in those banks who were fostering and
facilitating this tax evasion, about who the managers were who
were operating it and running it and condoning it so that we
can bring criminal charges here in the United States against
the financial institutions and against their officers and their
employees who are doing it, because when you do that, that, the
lesson from UBS taught us, is how you get account records out
of the Swiss. Otherwise, they put up their wall.
Senator Levin. Thank you. My time is up. I want to come
back to the UBS case when it comes back to me. I guess Dr.
Coburn was next.
Senator Coburn. Mr. Chairman, I am going to defer at this
time. I have another meeting I have to go to.
Senator Levin. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman. I am no lawyer,
so can you talk to me a little bit about what types of criminal
charges would you try to bring, and what are the impediments?
What are the challenges doing that here in the United States
against a Swiss entity?
Mr. Cole. Well, there is a whole host of criminal charges
that you could bring depending on what kind of evidence you
have from aiding and abetting tax evasion to conspiracy to
fraud. I mean, there is a whole host. You would have to just
sit and try to go through what your best alternatives would be.
But there are a number of provisions in both the Tax Code and
the Criminal Code that could be used.
Senator Johnson. And what were the charges, specifically
criminal charges, brought against UBS? I am pretty new to this
issue.
Mr. Cole. I was not here during that time. It ended up
being a deferred prosecution agreement. I defer to Ms. Keneally
as to the details of what were the topic of that deferred
prosecution agreement.
Ms. Keneally. I also was not here at the time, but I
understand it was conspiracy to evade taxes in the United
States.
Senator Johnson. OK. In the morning hearing, what I was
trying to establish was kind of the obvious in terms of, why
does Switzerland have this very huge banking sector and is
there value there? Is it nice to have some place where people
can diversify where they hold their money? I am not necessarily
opposed to that, but obviously totally opposed, as we all are,
to tax evasion.
My guess is the reason the Swiss Government is so utterly
opposed to any kind of transparency is they do not want to
destroy that safe haven for other countries. So is there some
way of preserving that safe haven in Switzerland for other
countries and still allow the United States to get the type of
information we want so there is no tax fraud?
Mr. Cole. This is what we are trying to discuss with the
Swiss. Chairman Levin mentioned the 2009 treaty, which is very
different in many respects. It is not perfect. It is not going
to be a panacea that is going to solve every problem. It will
be another tool.
Senator Johnson. Let me stop you right there. Talk to me
about the holes in it, because Senator Levin has certainly been
talking about that. I mean, what is the primary problem with
that treaty?
Mr. Cole. Senator Levin has described what he views as a
number of the holes. I think there is no treaty that is perfect
and we just look for as many tools as we can find in order to
use them all, because we need to come at this problem from a
number of different angles. There is no one strategy that is
going to solve this problem. You have to do a number of
different strategies to try and break through it.
Senator Johnson. But again, do you have a comment? It
looked like you wanted to say something, Ms. Keneally.
Ms. Keneally. Well, I would comment on the treaty process.
Under the current treaty, we are required to establish fraud or
the like, which is a Swiss standard that would be higher than
tax evasion. Under the protocol, it is a relevance standard,
and under the protocol it is a relevance standard to any tax
enforcement. So it would give us information both on the civil
and criminal side. The protocol would enhance our ability to
get information in those ways.
To answer your question, Senator, on why--on how to allow
Switzerland to maintain its banking system for other reasons
and eliminate this, I think the protocol goes a long way toward
addressing that issue, as do other steps that Switzerland and
its banks have taken.
Senator Johnson. Can you describe how?
Ms. Keneally. Well, Switzerland ratified the protocol which
will enable us to get information from its banks in--when we
need it for tax enforcement reasons in a far simpler approach
than not. Separately----
Senator Johnson. But that is going to require us to
actually have knowledge that there may be some fraudulent
activity occurring, correct or not?
Ms. Keneally. Senator, we need to be able to say that the
information that we are looking for is relevant to our tax
enforcement efforts. Senator Levin is correct that the Swiss
did enact this legislation saying that there would need to be
involvement shown by the banks. We need to ratify the protocol
and test that.
But the way we have designed our law enforcement efforts
under this program that we have for the Swiss banks, those
banks that we did not already have under investigation and were
not on our radar screen who have come forward will need to tell
us what they did and what their wrongdoing was and cooperate
with us in formulating treaty requests. And we believe that
will get us the account information, we believe, under the
current treaty, but certainly more effectively and probably
more completely under the protocol.
Senator Johnson. That would not be blanket information.
That would be, specific taxpayers at a time? Or is that a
broader requirement?
Ms. Keneally. Under either the 1996 treaty in effect today
or the protocol, we can make a request that are known as
pattern requests. We can describe a kind of conduct or a kind
of category of accounts and then get the account information
which would give us the individual account holders.
Senator Johnson. What percent of the U.S.-based accounts or
U.S.-owned accounts do you think that would reveal? A high
percentage? Or would we still be scratching the surface? Would
we be talking about 238 names out of a list of 22,000?
Ms. Keneally. I think if you take the standards under the
protocol and combine it with the information that we expect to
receive from the banks through the bank program that we have
set up, it would be a very high percentage of the accounts that
are currently in Switzerland, and we would also be getting
information about accounts that closed and were transferred. I
think we would get a very high percentage through these two
mechanisms and the interaction between the two of them.
Senator Johnson. Now, earlier, obviously, we had a hearing
with Credit Suisse and they have actually reduced the number of
U.S.-held or U.S.-owned accounts pretty dramatically. What are
the facts on the ground with the other banks? Have other banks
taken similar action that you are aware of?
Mr. Cole. We are a little limited on what we can talk about
that we have learned in the course of our investigation because
these are banks that are currently under investigation, and we,
in a long rule, both from statutory secrecy rules, grand jury
secrecy rules, and long-standing Department of Justice rules,
do not talk about all the things we are finding in a lot of
these investigations.
Senator Johnson. Have you developed an estimate of how many
dollars or how many Americans, how many dollars have Swiss bank
accounts and how much is invested there? Do you have any
estimate at all?
Mr. Cole. There have been a lot of numbers thrown out,
Senator, and I think----
Senator Johnson. A range?
Mr. Cole. I am not sure exactly what the range would be and
how valuable it would be. I think we would want to measure it
more by how many dollars we bring in. From the voluntary
disclosure program so far, we have gotten $6 billion and that
number is growing every day. Since we established this latest
program, the numbers in the voluntary disclosure are going up
significantly. So we are looking forward to that number going
up. It will be a post-view that will tell us how much.
Senator Johnson. I understand that, but again, I would
think you would be making some kind of estimate. Have you been
50 percent effective in terms of that voluntary program? Do you
think maybe the outstanding liability would be $12 billion? Is
it 1 percent and is it going to be even higher?
Mr. Cole. I will let Ms. Keneally talk about it but some of
it is you do not know what you do not know.
Senator Johnson. I understand.
Mr. Cole. We do not know how many people really put that in
there. If we knew, we would be a lot better off because we
would have more information about what is there. We know it is
a sizable number.
Senator Johnson. Ms. Keneally.
Ms. Keneally. Senator, all I can say on that is we set this
program in place in late August and 106 Swiss financial
institutions came forward. If you had asked me in August or
September, I would not have anticipated 106 to come forward. So
I have to agree with the Deputy Attorney General, I do not know
what I do not know.
Senator Johnson. One hundred six out of how many? What is
the total universe there?
Ms. Keneally. Somewhat over 300 is the total universe.
Senator Johnson. OK, so about a third.
Ms. Keneally. About a third. I would hope that it is true
that not every Swiss bank engaged in this kind of conduct. So I
think about a third was a remarkable response to the program.
Senator Johnson. But again, you are saying that the
Department of Justice has made no estimate whatsoever in terms
of the dollar amount of assets held in Swiss bank accounts? We
really do not--not even give a guesstimate?
Mr. Cole. We really do not. It would be pure speculation.
Senator Johnson. Are you aware of any other agency that has
done so?
Mr. Cole. Not offhand.
Senator Johnson. OK, I have no further questions.
Senator Levin. Thank you, Senator Johnson. Senator McCain.
Senator McCain. Thank you, Mr. Chairman. I thank the
witnesses for being here.
In the previous panel, Credit Suisse took great pains to
assert the narrative that after UBS they fully cleaned up their
act. They would have done even more if the 2009 protocol had
been ratified or FATCA had been finalized. I believe that
narrative glosses over the years of widespread misconduct
across the Bank.
They asserted that they would have turned over the names of
the tax-evading account holders but they were prevented from
doing so by Swiss bank secrecy laws.
However, it appears that FATCA loopholes in the 2009
protocol will not permit U.S. authorities to get names for
accounts closed before 2009. This means it is highly unlikely
the United States will be able to collect much of the lost tax
revenues from the billions hidden overseas. I do not buy their
narrative. The American people should not, nor should the
Department of Justice, Mr. Cole.
I ask that you keep in mind and use all already available
legal tools at your disposal rather than relying on the treaty
process.
So I guess my first question, Mr. Cole, is it not true
that, even if the Senate ratifies the 2009 protocol to amend
the Convention between our two countries for the avoidance of
double taxation, the Justice Department will be no closer to
obtaining information for non-compliant bank accounts closed
prior to 2009?
Mr. Cole. Senator, that is true. The 2009 treaty only
applies to matters and situations after the September 2009 time
that it was put into place.
Senator McCain. So basically, we will never--certainly in
the way we are approaching it now, have information about non-
compliant bank accounts prior--that were closed prior to 2009?
Mr. Cole. I do not think that is necessarily the case,
Senator, because I----
Senator McCain. How do you do that, then?
Mr. Cole. Because the program that we have is going to
require that banks, even prior to 2009, going back into 2008,
provide us with the information about accounts that will enable
us to make much more effective treaty requests----
Senator McCain. Going back to 2008.
Mr. Cole. That is right.
Senator McCain. One year.
Mr. Cole. It is an additional year, that is correct.
Senator McCain. That is good.
Mr. Cole. And many of those accounts were there in 2008 and
had been there for quite a bit of time. It was not until,
frankly, later in 2008 that the accounts really started to
move.
Senator McCain. So you are saying you will be able to
obtain information for non-compliant bank accounts closed prior
to 2009?
Mr. Cole. That is our hope. That is the goal we have with
this program, yes.
Senator Levin. For the one year?
Mr. Cole. Well, we think that many of those accounts will
have been in place for longer than just 2008. They will have
been----
Senator McCain. You think that----
Mr. Cole. We think that.
Senator McCain. But the fact is, you will not be able to go
back before that.
Let us move on here a second. The Justice Department's
voluntary disclosure program allows banks to enter into non-
prosecution agreements, avoiding a conviction or going to
trial. Doesn't this change the risk/reward equation for
complying with U.S. tax laws?
Mr. Cole. I do not think it does, Senator. A couple of
things that need to be kept in mind about this program. One, it
is only applying to banks that we really did not have any
information about. These banks were not on our radar screen.
The vast, vast majority of them have no presence here in the
United States at all, so there is not any tools that we would
have that we could really use.
The 14 banks are not covered. Individuals are not covered.
We are going to get, first, a lot of information from these
banks that will help us prosecute their employees and their
officers. Second, we are going to get a lot of penalties from
them, a lot of money, which is what this is all about. Third,
we are going to get information that will help us do treaty
requests in a better way because there is the proverbial wall
that the Swiss keep putting up.
And all of this is, in fact, going to lead us to a lot of
different beneficial avenues.
And the final one is they are contacting their bank account
holders, who are U.S. citizens, and telling them that they are
going to be providing this information and it is causing
increases in the voluntary disclosure to the IRS and the U.S.
people coming in, paying their taxes, their penalties and their
interest. So it is having those effects.
The only thing we are not getting--and this is the thing we
have always had a problem with--is the name of the account
holders. But we are trying to get another set of tools to help
us break through that wall.
Senator McCain. In the last nearly 5 years your Department
has achieved a plea of guilty from one out of the 14 banks
under investigation. True?
Mr. Cole. That is correct.
Senator McCain. So 5 years----
Mr. Cole. Not of the 14 necessarily. We have achieved a
plea of guilty from one bank, which is Wegelin. We had an
agreement with the Liechtenstein Bank. And we have an
additional 14 Swiss banks, and that is not counting others that
may be there, as well.
Senator McCain. You have 14 banks that you have gotten a
plea of guilty from?
Mr. Cole. No, that we are in the process of investigating.
Senator McCain. Over 5 years.
Mr. Cole. I would not say it is necessarily over 5 years.
There is periods of time----
Senator McCain. Well, over 5 years you have gotten one
guilty plea; right?
Mr. Cole. Well, if you go back 5 years, you would include
UBS, which was a preferred prosecution case.
Senator McCain. Since UBS----
Mr. Cole. Since UBS----
Senator McCain. Let us not quibble here, Mr. Cole. Since
UBS, you have had one plea of guilty.
Mr. Cole. That is correct, Senator.
Senator McCain. So over the next 5 years, can we then count
on two? The fact is that you have been incredibly slow over a
5-year period since UBS, getting one guilty plea and--my
understanding is--14 banks under investigation.
Now if you think that is progress, fine. I do not.
Ms. Keneally, do you think that is progress over 5 years?
One plea of guilty out of 14? And of course, over a 5-year
period, we cannot discuss ``ongoing investigations''; right? We
cannot discuss any of these other 13 because they are ``ongoing
investigations'' that have been going on for 5 years. I have
seen that movie before.
Go ahead.
Ms. Keneally. Senator, just to clarify, Wegelin is not one
of the 14. So there are 14 banks under investigation.
To specifically answer your question, yes, I do think it is
progress. A number of those banks have----
Senator McCain. You think it is progress?
Ms. Keneally. A number of those banks have come under
investigation only recently. The majority----
Senator McCain. Why only recently?
Ms. Keneally. The majority of those banks do not have a
U.S. presence. It takes time to find out what is going on.
Senator McCain. It takes 5 years.
Ms. Keneally. It takes time to find out what is going on in
activity that is secret.
Senator McCain. I disagree. I disagree, and so would any
objective observer. That is not progress when nearly 5 years
goes by and you have one bank.
Mr. Cole. Senator, if I may----
Senator McCain. Yes, go ahead.
Mr. Cole. You also have 73 account holders who have been
charged.
Senator McCain. How many?
Mr. Cole. Seventy-three.
Senator McCain. Seventy-three out of the estimate of
23,000----
Mr. Cole. Thirty-five professionals.
Senator McCain [continuing]. I think it is.
Mr. Cole. Thirty-five professionals who are bankers and
financial advisors. So it is not just one bank with a guilty
plea. There have been many charges.
We are talking about people who are taking great pains to
hide what they are doing. It takes time----
Senator McCain. Excuse me, it was only----
Mr. Cole [continuing]. To disclose that.
Senator McCain. It was only 22,000 accounts that Credit
Suisse alone had, and you have gotten how many? Three hundred,
did you say?
Mr. Cole. I am not saying they are all from Credit Suisse,
73 account holders have been prosecuted.
Senator McCain. Then there is many thousands more?
Mr. Cole. There may well be and we are trying to find out
who they are, Senator.
Senator McCain. And you are doing a job that, frankly, has
not shown any progress. That is the point, Mr. Cole. And if you
want to sit there as a witness and say that one bank has been
guilty over nearly 5 years, that of the 22,000 accounts just in
Credit Suisse--and you say you have gotten how many, 300? Is
that what you said?
Mr. Cole. No, I did not say that.
Senator McCain. Mr. Cole, the taxpayers' dollars are not
well spent by the way that you and your organization and you,
Ms. Keneally, have been pursuing these individuals. And I still
do not get it. If somebody comes forward and then just agrees
to pay their taxes, even though they have been violating law,
all is forgiven. That is not my idea of incentive for people to
do the right thing.
So you have seen 106 Swiss banks file a letter of intent,
Ms. Keneally, to enter into the Justice Department voluntary
disclosure program, which will allow these banks to avoid
prosecution in court. As to those banks that profited
considerably from their wrongdoing, how do you justify that?
Banks--they made a lot of money off of these depositors.
Ms. Keneally. Senator, the program is designed to have
those banks pay penalties that will be higher than the money
that they made. The program has very steep penalties that are
based on the amount of U.S. assets that were under management
and not disclosed to the United States. The program is designed
to have those banks provide us with information that will lead
to other wrongdoing and will further our investigations. The
program is motivating taxpayers into voluntary compliance.
We may disagree on this, but 43,000 people coming forward
and becoming compliant taxpayers voluntarily, to me, is a very
meaningful thing. And the program is motivating more people in.
Those 43,000 people have paid not just the back taxes but
penalties and interest that is now well over $6 billion.
So I see all of these tools working to that result.
And again, Senator, the 106 banks are banks we did not know
about. So they have come in.
Senator McCain. Maybe we should have. Maybe we should have
known about them.
Thank you, Mr. Chairman.
Senator Levin. Thank you.
Let us just go through a few more numbers here.
Since 2009, either one bank or no banks of the 14 that were
under criminal investigation have been indicted, depending on
whether you count Wegelin. Now Ms. Keneally, you said Wegelin
was not one of the 14, but whether it was or not--by the way,
it did not have a presence here in the United States.
Nonetheless, it was indicted and then pled guilty.
So your point, Mr. Cole, about you have to have a presence
here in the United States if we are going to be using our tools
against you, the one example we have was not the case because
Wegelin did not have a presence here in the United States.
You also said that 38 bankers have been indicted. Is that
correct?
Mr. Cole. I think it is 35.
Senator Levin. And how many convicted?
Mr. Cole. I will give that to Ms. Keneally, as to the exact
number.
Senator Levin. How about four?
Ms. Keneally. If four is the number in our testimony, then
the number is five as of today.
Senator Levin. OK, so five out of 30----
Ms. Keneally. One more pled guilty today, so the number--if
four is the number, then five would be the number today.
Senator Levin. Out of how many?
Mr. Cole. Thirty-five.
Senator Levin. Now most of those would require extradition;
is that correct?
Mr. Cole. That is correct.
Senator Levin. And have you sought extradition?
Mr. Cole. We have not filed an extradition request because
we have been, through our experience in our Office of
International Affairs, the Swiss will not extradite their
citizens. So we have been focusing our efforts on things we
thought would be more productive.
Senator Levin. But there is no prohibition on our
requesting extradition?
Mr. Cole. There is not.
Senator Levin. And wouldn't we make a pretty clear point
about our determination also about the Swiss being unhelpful if
we file a request for extradition, in a criminal case, for
people who have operated in the United States. If the Swiss
reject that, that says something about their willingness to
cooperate. But the failure to even seek extradition says
something about our willpower.
In any event, we have not sought extradition for any of
them.
Now, in terms of 73 account holders being--I think that was
the number you used--being found guilty or pleading guilty,
that is out of--my numbers are 74,000 that we had from UBS and
Credit Suisse together: 52,000 UBS; 22,000 Credit Suisse. So 73
account holders is out of 74,000 possibilities of names we did
not get.
So this is all about names. And so I want to go back to the
UBS issue. We got names from UBS and that is what started this
flood that you have talked about, of all these voluntary
payments. It was the threat that their names would be disclosed
following UBS that began the flood.
With UBS, one of you said that we got the names through a
treaty process. That is really very inaccurate except
technically because, as a matter of fact, the treaty process
was not working. The testimony that I read before was testimony
about the failure of the treaty process in that matter.
And it was only because there was criminal evidence in the
United States, related to an indictment that was going to be
issued against UBS, and the fear of that indictment led to a
deferred prosecution agreement because the treaty process was
not working.
So now you have a deferred prosecution agreement with UBS.
And then a John Doe summons, another one of the tools in our
toolkit, was requested because the treaty process was not
working.
And then, and only then, the Swiss agreed to release the
names ``under the treaty process'' because it believed that the
results under either the deferred prosecution agreement or the
John Doe summons--would have been worse for the Swiss.
So it really is inaccurate for you to say that it was the
treaty process in UBS that worked. It was the failure of the
treaty process in UBS to work that led us to use the tools, the
threat of indictment, and the John Doe summons request, that
led then to the UBS outcome. And it was that outcome again--and
it was acknowledged by Credit Suisse this morning--it was the
UBS outcome, and this Subcommittee frankly going after UBS,
that led to that outcome.
But it was that outcome, not driven by a treaty process,
but by a failure of the treaty process and the willingness then
of the Department of Justice to use the very strong tools that
are available to you.
Mr. Cole. May I answer that?
Senator Levin. Sure.
Mr. Cole. I think that is what I was trying to--if I did
not convey that that clearly, Senator, that was what I was
trying to say is that UBS was, in fact, the model. That it was
the threat of building a strong case that produced those
records and that it was not a grand jury subpoena that got
them----
Senator Levin. But it was not the treaty process.
Mr. Cole. Well, it ended up--as I believe I testified----
Senator Levin. Technically.
Mr. Cole [continuing]. Technically it was the treaty
process, but it was the threat of the criminal process that got
it.
Senator Levin. There you go.
Mr. Cole. Which is why I am focusing, and the Department of
Justice is focusing its efforts, on trying to build the
criminal cases against the 14. Because we think that is what is
going to work.
Senator Levin. But you issued indictments against Credit
Suisse in 2011. It is now 2014.
Mr. Cole. It was indictments against individuals.
Senator Levin. OK, in 2011.
Mr. Cole. Right.
Senator Levin. It is 2014. What is going on with Credit
Suisse?
Mr. Cole. Senator, there is a lot that I cannot talk
about--about what it is we are investigating. And as you and I
discussed yesterday when we met, we explained that we cannot
talk about the cases that we have pending and what we are doing
with those in public forums. We cannot do that. That is not
allowed.
Senator Levin. All right.
Now let us then talk about this new treaty again. Is it not
true that the Swiss Parliament, after this new treaty was
entered into, passed a law which put up a barrier to the
usefulness of this new treaty? Is that correct?
Mr. Cole. That is my understanding and I think the treaty
is helpful but it is not going to solve every problem.
Senator Levin. Well, the Swiss went ahead and passed laws
unilaterally which created a barrier to the use of the treaty,
saying that the effort to collect names must show a significant
contribution by the bank to a pattern of conduct, by the very
unnamed people who we do not know the names of.
Now what protest did we make, if we did, when the Swiss
passed a law which nullifies some of the value--to the extent
there is value--in the new treaty? Did we tell the Swiss, hey,
that is inconsistent with the law, the treaty that you agreed
to?
How do you expect to get a treaty ratified in the Senate--
and I am all for it, by the way, for whatever value it has; it
has some--but how do you expect to get that ratified if the
other party, the partner to that treaty, then unilaterally
passes a law which nullifies part of the value of the treaty?
Did you protest to the Swiss?
Mr. Cole. Did I personally? No.
Senator Levin. Did the government, our government, protest?
Mr. Cole. I do not know.
Senator Levin. Should we not know? Should you not know? Do
you know, Ms. Keneally?
Ms. Keneally. I know that in designing the program, we
took----
Senator Levin. Do you know whether we protested to the
Swiss when they passed the law which nullified part of the
treaty?
Ms. Keneally. I do not know if we formally protested----
Senator Levin. How about informally?
Ms. Keneally. I know that I raised the issue with the
Swiss.
Senator Levin. Yes, but you do not know whether our
government has?
Ms. Keneally. I do not know whether the government has. I
know that I took it into account in how we designed the program
so that we will be able to get the information through treaty
requests based on the information that the banks need to give
us under the Swiss bank program.
Senator Levin. You took it into account? You accepted that,
what they did?
Ms. Keneally. Senator--I--we thought through----
Senator Levin. I know, but----
Ms. Keneally. What information we needed to make effective
treaty requests and we are requiring that of the banks. We did
not do that in a vacuum. We were aware of what positions the
Swiss had taken in terms of how their treaty system would work.
Senator Levin. Does that unilaterally created hurdle create
a problem for us of any kind?
Ms. Keneally. Again, Senator, I----
Senator Levin. Is that a problem? You objected to it, I
assume, informally. Is that because it was improper for them to
unilaterally try to change a treaty?
Ms. Keneally. Senator, I would defer to those in the
government who are responsible for the treaty process. In this
case, I believe that would be Treasury. I did what I thought we
needed to do for law enforcement, which was to build into the
program the ability to get the information that we need to make
effective treaty requests.
Senator Levin. OK.
[Pause.]
We have shown a chart this morning, I guess you may not
have been here for it, Exhibit 1a\1\ in your book. It shows
that since 2011, Credit Suisse has turned over to the United
States 238 accounts with U.S. client names out of the 22,000
U.S. customers with Swiss accounts, which is less than 1
percent of the relevant accounts.
---------------------------------------------------------------------------
\1\ See Exhibit No. 1a, which appears in the Appendix on page 329.
---------------------------------------------------------------------------
The Department of Justice never apparently tried to enforce
a subpoena against Credit Suisse, although they issued
subpoenas that were not complied with. And they never worked
with the IRS to issue a John Doe summons to Credit Suisse to
get records from Switzerland.
Looking more broadly, all 14 banks under investigation for
facilitating U.S. tax evasion, we have seen no grand jury
subpoenas enforced, no John Doe summons issued to get the bank
records in Switzerland, and less than 250 accounts from the
Swiss with U.S. client names during that period.
Would you call that experiment a success?
Mr. Cole. Senator, I think as I have said a couple of times
here, I have not seen Bank of Nova Scotia subpoenas, frankly,
or John Doe summons on their own be very successful----
Senator Levin. Not on their own, but they have been
helpful, have they not?
Mr. Cole. They set up a situation where if you have--
frankly, you look at the UBS model again. If you have
sufficient leverage from the criminal prosecution end, then
maybe you can use those vehicles as the formality with which to
get this. But without that, I have not seen them produce Swiss
account records. And that has been the frustration, is that
they do not.
So we try and build our cases against the individual
institutions to hope that that will, in fact, try to blast out
some of the account records because that seems to be what it
takes.
Senator Levin. It is difficult for me to accept that, when
you do not try to enforce a subpoena, when you do not go to a
court when you have a subpoena which you have issued, to
enforce it to get records, to help put the pressure on a bank.
They are not going to want, for instance, lose their
accreditation here in the United States if they are in
violation of an order of a court to produce records.
Mr. Cole. I am not sure. That is not part of the Justice
Department rulings, to lose their accreditation. But I am not
sure that if they are not complying with a subpoena because
they have received a blocking order from their home country,
that that is going to cause them to lose their accreditation.
These are things where there----
Senator Levin. I am not sure either. At least I think it
might. What do you think? Do you think it might? Could it?
Mr. Cole. My experience, Senator, is what happens is they
get a fine per day that they are not in compliance from the
court, and that that goes on for an appreciable period of time
and does not result in getting the records.
What I would rather do is have the resources----
Senator Levin. Yes, but have we sought to have their
registration revoked in the United States for any bank for
failure to follow a court order to produce records?
Mr. Cole. I am not aware of that.
Senator Levin. Have you tried?
Mr. Cole. What I have tried----
Senator Levin. These banks operate in the United States.
They come here, they get clients here. OK? They have to operate
according to our laws. And if they do not operate according to
our laws and disclose client information, then it seems to me
our laws have been violated.
You go to a court. You say we want to see those documents.
We want those names. You are entitled to them against every
American account holder in an American bank.
And so now you are telling me that, that a court will
enforce the subpoena. You know that. But you do not know what
the implications are, in terms of a bank losing its license to
operate in the United States.
Frankly, you ought to know what it is. And we ought to
argue. We ought to raise the fear of God that if you are going
to aid and abet violations of American law, you are not going
to be allowed to operate in America.
And I do not see that kind of a passion from you. I just do
not see it.
Mr. Cole. Well, these are the issues that come out of the
Treasury Department and the Fed, who control banks' abilities
to operate in the United States.
Senator Levin. I know, but do you not ask them whether or
not they might consider revoking a license to operate here in
the United States if an order of a Federal Court is ignored? Do
you ask the Fed?
Mr. Cole. Senator, again, there is a lot of things that we
cannot talk about that we are involved in in our
investigations.
Senator Levin. Well, you can tell me whether or not you
asked the Fed to revoke a license of a bank which is in
violation of a U.S. court order. You can tell me that without
identifying the bank.
Mr. Cole. We are constrained from talking about the
procedures we use, the tactics we use, things of that nature.
Senator Levin. You are not constrained about talking about
whether or not, as a policy, you go to the Fed if there is a
violation of a court order and urge the Fed to withdraw a
license. There is no possible constraint on you. You are not
identifying somebody or a bank. You are talking about a policy
here. And that is the problem. We do not sense that kind of
urgency here.
We collected $6 billion when Americans who had been
avoiding and evading taxes they should not have been avoiding.
They are evading their taxes, their obligations to the people
of the United States, to their own countrymen.
And they run overseas and they put this money in banks and
they hide it. And a lot of them are going to get away with it.
And the ones that came forward, those 43,000, came forward
because they were afraid, after UBS, that their names might get
out there. That is what it is. It is just that simple.
And so, if nothing has happened since 2011 when indictments
were issued, then there is a lag in this feeling on the part of
these tax evaders that something is going to happen, they are
going to pay a price. They have to fear that. They should fear
it.
Mr. Cole. They do, Senator, and the numbers are going up
right now as we sit here.
Senator Levin. I know, they are going up. How much are they
going up?
Mr. Cole. Substantially. We are getting 400 or 500 a month.
Senator Levin. Four hundred or 500, great. And is it
because then there is some fear?
Mr. Cole. Yes.
Senator Levin. Can you add to the fear?
Mr. Cole. We are trying to.
Senator Levin. By what publicly? By what?
Mr. Cole. By trying to bring cases. By trying to
investigate things that people are hiding.
Senator Levin. You cannot talk about cases.
Mr. Cole. When we finally bring cases, they will be talked
about, Senator.
Senator Levin. I will tell you, the $6 billion that was
produced was the result of a tough enforcement action that
worked, and the threat of an indictment and the John Doe
summons against UBS. Even Credit Suisse acknowledged that this
morning. They were very clear about it.
It was the UBS model. And we do not see that model being
used, using our enforcement techniques.
Let me go on into the next question. Would you agree that
the goal----
Ms. Keneally. Senator, can I comment on what scares
taxpayers?
Senator Levin. Sure.
Ms. Keneally. Because before I was in this position, I
represented taxpayers who came in through the voluntary
disclosure program. And without question, the concern that
names were going to be turned over by UBS scared taxpayers. But
they are scared today because they know that we are getting
names. We are getting names through treaty requests. We are
getting names through cooperators. We are getting a lot of
information.
We are getting information through John Doe summons that we
are serving on U.S. banks for the correspondent accounts of
offshore banks. That is an easy tool that we are using now
because those records are in the United States and those banks
cooperate almost immediately.
Senator Levin. Of course they do. They are in the United
States. We are talking about names of accounts outside of the
United States where American--some Americans who do not want to
be full Americans, and instead they want to evade their
obligations--get involved in tax evasion.
The accounts in the United States are the easy ones. I
agree with you on that.
Ms. Keneally. But no, these are not accounts that are not
in the United States.
Senator Levin. They are correspondent accounts----
Ms. Keneally. These are records in the United States----
Senator Levin [continuing]. For records in the United
States.
Ms. Keneally [continuing]. Of transactions in foreign
banks. They are not U.S. account records. They are foreign bank
records.
Senator Levin. With correspondent accounts, you said, in
the United States.
Ms. Keneally. They are correspondent accounts in the United
States. It is a very powerful tool.
Also, Senator, in the program we built in an incentive to
the banks to drive their remaining account holders into the
voluntary disclosure program.
Senator Levin. And I know, and Mr. Cole made reference to
that before.
Ms. Keneally. And so Senator, there are a lot of things
that motivate taxpayers into that voluntary disclosure program
and we are doing those things.
Senator Levin. Now the finance minister of Switzerland and
president of the Swiss Confederation in 2012 said ``It is
important for us''--for them--``to be able to let the past be
the past.''
Are we going to take that attitude toward people who have
evaded taxes and who owe Uncle Sam money? Is that our attitude?
Mr. Cole. It is not our attitude, Senator. And when they
said that to us, when we were having discussions with them, we
said that is not the case here.
Senator Levin. Good. I am glad you brought it to their
attention.
In February 2011, the Department of Justice indicted four
Credit Suisse bankers for participation in an ongoing
conspiracy to defraud the government of tax revenue. In July of
that year, a superceding indictment charged three more Credit
Suisse bankers, as well as a corporate service provider who was
a former Credit Suisse employee.
According to the indictment, the Credit Suisse bankers were
coming here to the United States, facilitating tax evasion,
violating our securities laws. At about the same time, Credit
Suisse announced that it had received a target letter from the
Department of Justice.
The U.S. Attorneys' manual indicates that a target letter
is a very serious matter. It states that a target letter is
only sent to: ``A person as to whom the prosecutor or the grand
jury has substantial evidence linking him or her to the
commission of a crime and who, in the judgment of the
prosecutor, is a putative defendant.''
So a target letter was sent to Credit Suisse, they say. I
do not know whether you can confirm that or not? Do you want to
confirm that?
Mr. Cole. I cannot confirm it.
Senator Levin. They said it was and acknowledged it again
today.
If it was sent, would that have presumably met the
standards for a target letter? If it was sent, do you presume
it met those standards that I just read?
Mr. Cole. When the Justice Department sends out target
letters, it is because we meet the standard in the U.S.
Attorneys' Manual. But it does not necessarily mean that we
have sufficient evidence to go into court and win the case----
Senator Levin. Of course.
Mr. Cole [continuing]. And fully expose the complete
breadth and scope of the misconduct that any particular
putative defendant may have engaged in.
Senator Levin. Of course, but it means you have substantial
evidence.
Mr. Cole. That is correct.
Senator Levin. And that substantial evidence is enough that
it could lead to summons and indictments.
Mr. Cole. It can, but you want to make sure that if you
pull the trigger and indict somebody that you are ready to go
to trial and you are ready to describe the full breadth and
scope of their conduct.
Senator Levin. And there is also, however, a fear of an
indictment, is there not? Particularly of a bank that has a
widely known name around the world and wants to maintain its
reputation? That also exists, too, does it not?
Mr. Cole. As a general matter, financial institutions are
afraid of being indicted.
Senator Levin. Now, take a look, if you would, at Exhibit
32b\1\ in your book.
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\1\ See Exhibit No. 32b, which appears in the Appendix on page 707.
---------------------------------------------------------------------------
[Pause.]
Mr. Cole. Yes, Senator.
Senator Levin. What is this?
Mr. Cole. This is a draft of a position that the Department
of Justice was taking in the course of our discussions with the
Swiss. It is not what was actually communicated.
Senator Levin. I am going to show you what we think is the
final document. We did not have it until last night, but we
will show it to you now.
[Pause.]
What is that document that I showed you?
Mr. Cole. This is a final copy that was communicated to the
Swiss in regard to some negotiations that they were having with
the IRS.
Senator Levin. Is this the one that led to that test case
in November 2011?
Mr. Cole. I am not sure. I do not believe so----
Senator Levin. Is this an agreement----
Mr. Cole [continuing]. Because I do not think this was sent
until December 2011.
Senator Levin. In any event, was this an agreement between
us and them?
Mr. Cole. No, it was not an agreement.
Senator Levin. Is this our statement or their statement?
Mr. Cole. It is our statement.
Senator Levin. And it says, down in the middle there, ``The
records need not identify account holders.''
Mr. Cole. At this point, what we were trying to do is the
Swiss were not even allowing the banks to produce to us their
own corporate records. Forget about account holder records, we
were trying to get corporate records so we could build our
criminal cases against the banks.
This was another block that the Swiss were throwing up
against us and we were, at that point, trying to work to get
some freedom from them to give those records over.
And so this really focuses on that aspect of it so we could
build our criminal cases in the investigation.
Senator Levin. In any event, this is not an agreement?
Mr. Cole. It is not.
Senator Levin. There was a treaty request on September 26,
2011 seeking Credit Suisse account records; is that correct?
Mr. Cole. I believe that is--well, I will refer that to Ms.
Keneally.
Senator Levin. Is that correct?
Ms. Keneally. My understanding is under Section 6105 of the
Internal Revenue Code we cannot discuss specific treaty
requests or responses.
Senator Levin. OK.
Did we, at some point, have a test of the Swiss
Government's intent and ability to provide U.S. client names?
Did we ever have a test case with them?
Ms. Keneally. Senator, I would have two problems responding
to that. One would be timing. I would not--whether it happened
on my watch or not. And second, again, I think it would be
blocked by Section 6105.
Senator Levin. You cannot tell us that either?
Ms. Keneally. That is my understanding, yes, Senator.
Senator Levin. Go back then and look at the document, if
you would, that I showed you there. Take a look at paragraph
three of that document.
[Pause.]
``To assess the feasibility of such agreements, DOJ needs--
and the Swiss government reasonably expects to produce by
February 14, 2012--complete, unredacted account records for
100-150 accounts covered by the September 26, 2011 treaty
request.''
Do you see that?
Ms. Keneally. If that is directed to me, I see it. Yes,
Senator.
Senator Levin. So there is--that is our document; right?
Ms. Keneally. That is my understanding. Yes, Senator.
Senator Levin. So we make reference there to a treaty
request.
Ms. Keneally. Yes, it does, Senator.
Senator Levin. Does this violate the law?
Ms. Keneally. I do not know, Senator. And I do not have
personal knowledge of the document or the treaty request.
Senator Levin. Then let me ask you, Mr. Cole. You are
familiar with this document?
Mr. Cole. I am familiar with it, yes.
Senator Levin. There is a reference here: ``To assess the
feasibility of such agreements, DOJ needs--and the Swiss
government reasonably expects to produce''--even though this is
our document--``by February 14, 2012--complete, unredacted
account records for 100-150 accounts covered by the September
26, 2011 treaty request.''
Right? So it is public that there was a treaty request?
Mr. Cole. It is not public that there was a treaty request
and this was not a public document. And what the Swiss were
saying is let us show you that we can produce some account
records to you.
Senator Levin. Well, it is a public document now.
Mr. Cole. Not that we made public, Senator.
Senator Levin. No, but it is a public document now.
Mr. Cole. Yes.
Senator Levin. And so, according to this document, we were
seeking account records for 100 to 150 accounts covered by a
treaty request. Right? Am I reading it correctly?
Mr. Cole. That is what it says, Senator.
Senator Levin. But you cannot confirm that is what we were
seeking?
Mr. Cole. I cannot confirm the treaty request. I can
confirm that we were talking with the Swiss at that time to see
if they could produce account information, as a test to see if
what they were saying was, in fact, valid.
Senator Levin. Take a look at Exhibit 33,\1\ if you would.
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\1\ See Exhibit No. 33, which appears in the Appendix on page 711.
---------------------------------------------------------------------------
[Pause.]
Can you tell us what this document is?
Mr. Cole. I do not know what it is, Senator.
Senator Levin. You do not?
Mr. Cole. No.
Senator Levin. It is on Department of Justice Tax Division
stationery?
Mr. Cole. That is correct.
Senator Levin. OK. Do you know John Dicicco?
Mr. Cole. Yes. He used to be the Principal Deputy Assistant
Attorney General for the Tax Division. He was the Acting
Assisting Attorney General for the Tax Division.
I saw this yesterday for the first time so I do not really
know what it is.
[Pause.]
Senator Levin. In March 2012, the United States indicted
the Wegelin Bank, which is a small Swiss-based bank. And the
President of Switzerland, I believe, is quoted in the press as
saying that the Swiss Government was ``very surprised'' by the
indictment because we that is, the Swiss, understood there to
be an implicit agreement that they would not do something like
that during the negotiations.
Mr. Cole. That was not our understanding, implicit or
explicit.
Senator Levin. All right, so there was no such agreement?
Mr. Cole. No, there was not.
Senator Levin. And have you let the Swiss know that?
Mr. Cole. By indicting Wegelin they knew that pretty
clearly.
Senator Levin. But did you tell them that you had never
made such an agreement?
Mr. Cole. Yes.
Senator Levin. Do you know where they got the idea that the
United States had made an implicit agreement?
Mr. Cole. I do not. You would have to ask them.
Senator Levin. OK.
Are you familiar with the fact that there were Tax Division
attorneys that were sent off to U.S. Attorneys' offices to help
out with work? Are you familiar with that?
Mr. Cole. Yes, I am, Senator.
Senator Levin. While we have all of these actions that we
need to enforce our tax laws, everything has been frozen now,
waiting for 2 years for treaty requests to be resolved. Now,
apparently things are slowed down to the point that Tax
Division attorneys are actually sent to another office to work
on some other important business.
A letter to the Subcommittee says that the Department wrote
that the attorneys continued to work on tax matters. But is it
not the case that those transfers focused on something else
other than tax matters?
Mr. Cole. Well, first of all, our work was not frozen.
During that entire period of time, even if there was treaty
requests out that were not being honored, we were doing a lot
of other work at that same time doing lots of other things,
Senator. So that is one premise that I think is not completely
accurate.
Second, with the tax attorneys, they were doing work--many
of them, I think most of them--on these kinds of cases, on
offshore cases, even while they were detailed. Lots of U.S.
Attorneys' offices are involved in these cases, as well.
Senator Levin. Is that their major mission, do you know?
Mr. Cole. I would have to go back on each one, but I think
it was----
Senator Levin. Well, for the most of them. Put them all
together, was the major----
Mr. Cole. Most of them, I think, were very involved. Ms.
Keneally could----
Senator Levin. Was the major mission of most of them tax
enforcement?
Ms. Keneally. Senator, I just want to make sure I
understand the question. We are talking about the lawyers who
were detailed?
Senator Levin. Right.
Ms. Keneally. The details began----
Senator Levin. My question is, was the main mission of
those that were detailed tax enforcement? That is my question.
Ms. Keneally. A significant portion of what they did----
Senator Levin. No. Was the major mission--not significant
portion, major mission--of those detailed attorneys tax
enforcement? That is my question.
Ms. Keneally. Senator, I am not sure I can sit here and
quantify it. I know what I did when I joined the Tax Division,
because the details were already in place----
Senator Levin. All right.
Ms. Keneally [continuing]. I spoke to each of the U.S.
Attorneys who had our detailed attorneys and confirmed that
they were working on tax or other financial matters.
Senator Levin. As their main mission?
Ms. Keneally. As their main mission, tax or financial
matters. Some of them were civil attorneys. Some of them were
prosecutors. Where they were prosecutors, they were prosecuting
tax and financial crimes.
And a number of them--it was only a small number of them
that were handling any offshore matters before the details and
a number of them continued to handle the same offshore matters
on their details.
And again, the Deputy Attorney General is right, we work in
conjunction with the U.S. Attorneys' offices. A very
significant portion of the work in this area, in offshore tax
enforcement, has taken place in the U.S. Attorneys' offices.
Senator Levin. They were not detailed to the U.S.
Attorneys' office mainly to continue the work they were doing
here. That is not why you detail people.
Ms. Keneally. Senator----
Senator Levin. If the main mission is to do the same thing
they were doing here, you do not detail.
Mr. Cole. Well, actually Senator, the main reason we were
detailing them was budget oriented.
Senator Levin. All right, fair enough.
Mr. Cole. We were in a position where the attrition rate at
the Tax Division was not what it used to be. They were running
out of money, as you may recall back then. The Federal
Government had very strict constraints on our money. The U.S.
Attorneys' budget had more money. So this was a way to
alleviate some of the pressure on the Tax Division's budget by
sending them there.
Senator Levin. OK, let us talk about the Wegelin plea. In
2013 February they pled guilty to aiding and abetting tax
evasion. They paid $74 million in fines, forfeitures and
restitution. In the indictment, the government charged that
Wegelin had helped over 100 U.S. tax cheats hide $1.2 billion
from 2002 to 2010.
And as I understand it, however, as part of that agreement
we did not require Wegelin to turn over any client names. Is
that true?
Mr. Cole. This was not an agreement with Wegelin. They pled
to the indictment. So it was not a negotiated plea, in that
regard.
Senator Levin. But there was a plea, was there not?
Mr. Cole. There was a plea. And people can plead guilty
whenever they want. We did not have to agree.
Senator Levin. Of course, but was there not an agreement as
to the sentence?
Mr. Cole. I think there may have been some understanding
that were reached about the fine because there was only so much
money available.
Senator Levin. And was there an understanding that they
would turn over the names?
Mr. Cole. There was not.
Senator Levin. So instead, the IRS ends up issuing a John
Doe summons to a UBS branch in the United States to obtain the
records of a Wegelin correspondent account here.
Is that not awfully convoluted? Do you know whether there
was an effort as part of an agreement on sentencing following
that plea to have Wegelin provide the names? Do you know if
that effort was made?
Mr. Cole. I do not know what the discussions were with
Wegelin at that time, but the Swiss Government was not allowing
account names to be given over. Wegelin was not continuing in
existence. There was no ability to try and force that at that
point because the Swiss Government was blocking it.
And so all we would have ended up having was the same thing
we have now, which is Wegelin went out of business, paid us the
money that they had. We made a big point in Switzerland about
how we will take this seriously. And we were able to try and
pursue whatever leads we could through the correspondent
accounts to try and find the names of some of the people who
were using the Wegelin account to evade their taxes here.
Senator Levin. Anyway, as far as you know, there were no
names that were provided as part of a sentencing agreement or
sentencing negotiation nor were there any names that were
provided?
Mr. Cole. As far as I know, that is correct, Senator. But I
did not do the negotiation.
Senator Levin. I understand.
Mr. Cole. I understand, but the Swiss Government was not
allowing that.
Senator Levin. I know the Swiss Government does not allow
things but that plea was not in Switzerland.
Mr. Cole. The plea was here----
Senator Levin. Right.
Mr. Cole [continuing]. And we had very little leverage to
do that with a bank like Wegelin at that time.
Senator Levin. It was a criminal case, was it not?
Mr. Cole. It was, and they pled guilty to the full
indictment.
Ms. Keneally. Senator, may I add something?
Senator Levin. No, I want to go to another matter, which is
Julius Baer.
In January 2014, a Swiss court rejected a U.S. treaty
request filed around April 2013 for client names and
information from Bank Julius Baer about accounts in the name of
offshore corporations that were owned by U.S. taxpayers.
Now this is what, this morning, the head of the Credit
Suisse Bank said was ``egregious.'' And this is really
egregious, by the way. I cannot think of anything much more
egregious in this area than a bank telling a customer, helping
a customer to open up an account in a shell corporation account
in some tax haven, the purpose of which is to then transfer
that same money to the Swiss bank--in this case Credit Suisse--
but now in the name of the shell corporation instead of the
beneficial owner. And that was aided and abetted by Credit
Suisse.
I cannot think of anything much more egregious. As a matter
of fact, that is what constituted fraud, which produced the
couple of hundred names that we did get from Credit Suisse.
So now Julius Baer. The Department of Justice apparently
did not get any client names from the treaty request after
almost a year of effort. Is that true?
Mr. Cole. We cannot talk about that under Section 6105. We
are prohibited.
Senator Levin. All right.
Ms. Keneally. Senator, I may be able to add some
information on that.
Senator Levin. On this case? On my question?
Ms. Keneally. Well Senator, I----
Senator Levin. Is it in response to my question?
Ms. Keneally. I believe it is in response to your question.
Senator Levin. Fine.
Ms. Keneally. Senator, when we make treaty requests, the
Swiss Government publishes the fact of the treaty requests. The
Swiss Government gives notice of the treaty request. And this
is something I wanted to point out earlier.
So where we cannot speak, there is something out there that
may indicate where there have been treaty requests. And we
cannot comment on what responses we get to the treaty requests.
But what happens is if an account holder seeks to block the
treaty request they are required by U.S. law to notify the
Attorney General that they have made that effort in the foreign
country.
So what we usually see happen with the treaty requests is
that the account holders do not try to block it. When they see
the treaty requests, they come into the voluntary disclosure
program.
So that a particular account holder actually attempted to
block it and litigate it should not be interpreted as meaning
we got nothing from a treaty request to a particular bank.
Senator Levin. You may have gotten some people coming in
the office and you do not know whether they would have come in
anyway. But that is not the point. The point is----
Ms. Keneally. But Senator, if I----
Senator Levin. Let me just finish. The point is that you
were denied access to those names after making a treaty request
by a Swiss court; is that correct?
Ms. Keneally. Senator, we were denied access for the
account holder who brought that case.
Senator Levin. OK, that is fine.
Ms. Keneally. And you cannot draw the inference from that
that other names did not come. I cannot say whether they did or
they did not.
Senator Levin. I am not drawing the inference, but we could
not get the name of that account holder from that court. Is
that correct?
Ms. Keneally. One account holder. Yes, Senator.
Senator Levin. One account holder. So we go to get the name
of one account holder with a treaty request that we had alleged
had engaged in something that the Swiss have said constitutes
fraud under the old treaty. And we cannot get that name from a
Swiss court.
Ms. Keneally. Senator, my understanding is that the court
said that the treaty request was too broad, that the treaty
request can be redrawn, and the treaty request can be
resubmitted. And my point is, it does not mean we got nothing
under that treaty request. I just cannot comment on that.
Senator Levin. I know, you are trying to say the fact that
making this request maybe encouraged other people to enter into
a voluntary program.
Ms. Keneally. No, Senator----
Mr. Cole. Senator, the request may have been broader than
just----
Ms. Keneally. I am saying that the request may--the fact
that one account holder did not have that account holder's
information turned over does not mean we got nothing under that
treaty request. We just simply cannot comment on that specific
treaty request.
Senator Levin. We were trying to get, as I understand, a
client name and information from Bank Julius Baer; is that
correct?
Ms. Keneally. Senator, I cannot comment on the specific
treaty request but I cannot----
Senator Levin. Was there not a decision by the court that
denied that request?
Ms. Keneally. As to one account holder----
Senator Levin. I know that----
Ms. Keneally [continuing]. Who opposed it, yes.
Senator Levin [continuing]. You cannot comment on it.
Ms. Keneally. Yes, Senator.
Senator Levin. I am just asking you whether or not we were
denied and you are saying you cannot comment, it was a treaty
request and the denial was a public opinion of a Swiss court,
was it not?
Ms. Keneally. As to that account holder, yes.
Senator Levin. But you cannot confirm it?
Ms. Keneally. I can confirm that the decision exists.
Senator Levin. Every time, just about every time here that
a reason is provided for a problem in trying to get names, it
comes back to a refusal or reluctance or some act of
obstruction by the Swiss Government or a Swiss court. Over and
over again. This is what we come back to.
And that is why--we have all spoken on this subject now--we
have to rely on our tools. Now you can give us the reasons why
you think it is premature, Mr. Cole. But we also have a pretty
good record with the UBS model that worked. And we do not have
evidence of that model being used as to these folks, in 2011,
were indicted, and no letters of target notices going out since
2011.
So you can say things are happening that you cannot comment
about. But we do not see is what we saw with UBS, where two
things were threatened, involving tools in our toolbox that
were used successfully to pry out a solution in UBS, which then
helped to create--and I think most observers will agree--a
flood of people coming forward with so-called voluntary payment
of their taxes.
And every time, it seems like everything we come back to as
to what the problem is, the problem goes back to Switzerland.
And now we have another deal with Switzerland. And under
this deal, which was again discussed in another room this
morning, in the Foreign Relations room, under this deal we have
the Swiss adopting a law which vitiates part of the value of
the deal unilaterally. But then we do not know whether or not
we made a formal protest or not.
And that is the weakness on our part. The Swiss roadblocks
seem to be forever. It is just one after another. You enter
into a deal with them, they will pass a law vitiating part of
the deal, the value. Our response? We do not even know if we
had a formal protest.
That is what we see. And it is important that you see what
we see and what we do not see because, it is a very important
effort that we made, for all of the reasons that we gave this
morning. When people try to evade paying Uncle Sam the taxes
they owe, we should go after them vigorously. And it is the
lack of vigor that we feel and you should be aware of it.
Now we talked about the Swiss Parliament, and you do not
like what they did and so forth.
[Pause.]
I think there was a little confusion about dates earlier
this afternoon. Whatever the benefits of the new treaty
language is, it states that the provision will only apply to
``information that relates to any date beginning on or after
the date of the signature of the Protocol.'' The information
that relates to any date beginning or after that date, which is
September 23, 2009.
So if an account is closed before that date, the date the
Protocol is signed, the information about that account will not
be provided under the revised treaty.
Do we agree on those dates?
Mr. Cole. Yes.
Senator Levin. OK.
And I can only tell you that tax abuse was rampant between
2005 and mid-2009. The amount of taxes being evaded with
accounts opened during that period, from our investigation, was
very high. And so we are going to have to go through the old
treaty, apparently, to get that information, which is hopeless.
And so the only way it is possible to get it, is using the
tools that are at your service.
Would you also agree that targets of treaty requests have a
right to challenge those requests in Swiss courts?
Mr. Cole. That is my understanding.
[Pause.]
Senator Levin. Mr. Cole, we have talked a bit, at least,
about the subpoenas that were issued in 2011 involving Credit
Suisse. The Department issued a grand jury subpoena to Credit
Suisse in 2011, and they reiterated that today. It asked for
client names in that subpoena, account information going back
to January 2000.
I wonder if you can tell us why the Department of Justice
has not attempted to enforce the subpoenas that it issued in
2011 against Credit Suisse?
Mr. Cole. First of all, I do not think I did talk about
those because I cannot talk about grand jury subpoenas that
were issued. But I can talk about----
Senator Levin. I talked about it.
Mr. Cole. You did. But I can talk generally about our view
on the effectiveness of enforcing these grand jury subpoenas
and I think we have talked about that. And I have heard your
views and I have tried to express mine that I do not think that
has proven to be an effective method to get the records. The
Swiss block it.
And so we have tried to----
Senator Levin. That is a terrible admission, by the way,
that enforcing a subpoena does not have effects.
Mr. Cole. In the face of another country's laws that they
then enforce on the banks that are resident there and say you
cannot do this, this is very frustrating, Senator.
Senator Levin. Are they not bound by our law, Mr. Cole?
Mr. Cole. They are----
Senator Levin. Is there going to be an order----
Mr. Cole. They are subject to our law as well as to the
laws of their home country. And this is where we get very
frustrated. I share your frustration, Senator.
Senator Levin. This goes to the heart of the matter. If
they want to operate here and they are bound by our laws, it
seems to me, for us to give away the power of subpoena
enforcement because that can get them in trouble back home when
and if they are ordered by a court in the United States to do
something, and they then do it, I do not think we have any
alternative if people want to operate here. They abide by our
laws. And if they do not abide by our laws, then it is our
responsibility to then say, sorry, you cannot operate here.
And if we say that--and you do not know whether or not that
has been said to them and you do not know whether you have
asked the licensee or the people who issue the licenses to
people to operate here. If we do that, I can almost guarantee
you that those banks, if they want to function here, are going
to have to comply. They are going to want to stay in the United
States.
It is an unacceptable explanation. That is their
explanation. It should not be your explanation. Your
explanation, it seems to me, must be that you are going to
aggressively go after the enforcement of subpoenas and if you
win in court and if they do not abide by the subpoena, that you
are going to aggressively seek to end their ability to do
business in a country where they will not abide by the laws
because of some other country's laws.
That is what I would like to hear from you and we have not.
Mr. Cole. Senator, what I can tell you is we are going to
use every tool we can and we are going to use every tool that
we think is going to be effective. And in particular, we think
that the UBS model proved effective to a degree, and even that
had its limitations. And that is where we are focusing, is
building good solid cases against these banks to try and use
that to make sure we get the information we want. And, through
all of the other things we have talked about today, trying to
ferret through voluntary disclosures and other kinds of
information to find ways to encourage taxpayers to come forward
and enable us to make whatever inroads we can in trying to find
them.
It is hard. It is frustrating. It is time consuming. There
are walls in our way. And we are going at it from every angle
we can find that we think is going to work.
Senator Levin. Well, we have focused on two main issues
today: the Credit Suisse history, showing how a major bank got
into the dirty business of actively facilitating U.S. tax
evasion. The other issue is the response of the Department of
Justice which has--from my perspective--turned away from the
UBS model and has chosen to rely instead on Swiss courts and
treaty requests, which then has basically given up the full
value of our home court advantage and U.S. tools.
Now the Swiss banks sought out U.S. clients. They traveled
here. They sold Swiss secrecy to U.S. taxpayers. And they made
a heck of a lot of money doing it. And they should be subject
to U.S. transparency and not shielded by Swiss secrecy.
Now the Swiss Government has said it is willing to turn
over a new leaf. And with some of the terms of the new treaty,
frankly I am somewhat skeptical. But in any event, it has
clearly indicated time and time again--including statements of
its President, including keeping on its books its law that
makes it a crime to divulge the name of a client or a
customer--it will not unlock the vault to the secrets and
misdeeds of the past.
There are promises about future conduct. They are not very
effective as long as it does not provide the names. Instead, it
provides a treasure hunt, of bits and pieces. Here, here is a
few hints. Go and try to ferret it out from the banks now, the
banks that have received the accounts from earlier banks that
have maintained the secrecy, for instance.
So most of the tax evasion is probably in the past, we hope
it is in the past. But in any event, if it is not going to be
in the future, we have to go after the tax evaders and get them
to pay what is owed. That is the best way to make sure that
there is going to be less tax evasion in the future than there
was in the past, is to go after these folks and to not allow
Swiss law, Swiss interpretation, Swiss regulation, Swiss
commentary to thwart our efforts.
And so it is important for our government to use every
power and authority that we have to reclaim this money and to
hold accountable those that have helped the tax avoiders,
rather than to allow itself to be run through a convoluted and
an unproductive process by a Swiss Government that has shown
over and over again it is going to resist giving up the
information, giving up the secrecy.
So I believe that the Department of Justice and the IRS has
good intention, they are dedicated people. But I think also
that you are going to have to be far more aggressive, as you
were in the UBS case. And if you are not, we are not going to
get the taxes owed and we are not going to be able to hold
accountable those institutions that aided and abetted this
massive fraud that has gone on for decades.
So at some point, Mr. Cole, you are going to have to play
your cards. If you do not, no one is going to believe that you
have a strong hand. That is the bottom line. It is the threat
of prosecution that has been the incentive for tax cheats to go
into the voluntary program. But that threat is going to lose
force if people believe that our government is not serious
about pursuing them.
The only people, roughly, who have been convicted so far at
least in these major Swiss banks--and their names that they had
on their accounts--were the folks that the UBS Bank were
involved with.
And so that is what we are going to urge you to do, and
with all of our energies we are going to keep on this case. We
just simply cannot spend years negotiating treaties, watch the
treaty partner poke holes in them, allow the courts in
Switzerland to interpret their value away or to minimize their
value, to then watch people that we go after be provided the
kind of immunity that we have provided to them without, in
exchange, insisting that we get the names from the banks that
we are providing amnesty to.
It is all about the names. It is not about the hints. It is
not about a treasure hunt. It is a treasure hunt. The treasure
is the money that belongs to the U.S. Government. So I use the
word treasure hunt here in kind of two ways. One way, it is
what we cannot do, just be diverted to a hunt with clues. But
in some sense, it is a treasure hunt. And if we are going to
win the treasure that is owed to our Uncle Sam, we are going to
need a very aggressive Department of Justice and IRS.
We thank you both. Thank you for your service and for your
work for our government. We urge you on with much greater
strength and we would ask you to keep us informed in the ways
that we have requested.
Mr. Cole. Mr. Chairman, thank you for this hearing today.
Thank you for your thoughts. We share your goals. We share your
frustration. And we are trying to build a pretty good hand,
which hopefully will show.
Senator Levin. Thank you.
[Whereupon, at 4:49 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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