Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Just how harsh is that $2.5 billion fine for Credit Suisse? Not as bad as you might think.

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Previous post described the guilty plea by Credit Suisse on charges they willfully aided U.S. citizens in evading income tax.

Fine is $2.5 billion. That is a lot of money. Or is it?

Follow me on a journey to see how big a deal that may be.

Penalty in terms of months or days of net income

The Credit Suisse annual report for 2013 is here.

Here’s a few numbers from page 209, converted from Swiss Francs to US Dollars:

  • US$28,985M – net revenues, i.e. net of interest expense but including trading income and fees, 2013 (all amounts consolidated)
  • US  $2,607M – net income attributable to shareholders, 2013

Here’s the penalty:

  • US  $2,500M – penalty in 2014 for extensive, decades-long money laundering scheme
  • US$       62M – penalty amortized over 40 years; maybe it is actually 30 or 50 or 20, but I’ll assume 40

Now let’s convert that penalty into how many months of net income it represents:

  • 11.5 months – penalty in terms of number of months net income in 2013 needed to cover fine
  •   1.25 weeks – penalty in terms of weeks net income per year when amortized over 40 years

Maybe not such a bad deal. A week and a quarter of net income for each year of the scheme. How good a deal this product line is for the bank depends on how much they could charge customers for facilitating tax evasion and how much could be earned on interest margin for the billions parked in the bank.

Interest earnings

Let’s look at the interest earnings.

From pages 209 and 210 of the annual report:

  • 872,806M CHF – total assets
  • 220,413M CHF – trading assets – return not included in NII
  •   68,692M CHF – cash
  •   60,044M CHF – goodwill and brokerage receivable
  • 523,657M CHF – approximation of interest earning assets
  •     8,115M CHF – 2013 net interest income (int income less int exp)
  • 1.55% – rough approximation of NII as % of approximation of interest earning assets – this is my very rough estimate of net return on investable funds

So every billion of US$ hidden from the taxman could earn roughly 1.5% net interest margin. That would be US$15M dropping to the bottom line for every billion on deposit.

Tax evaded assets under management

So how much money was Credit Suisse hiding? A USA Today article says UBS was fined $780M for their efforts to aid tax evasion.

A Wall Street Journal article says Credit Suisse expected a penalty of $500M which would be in proportion to the volume of hidden assets they managed in relation to UBS’s laundering $20B.

Thus, my inference is they calculated they were hiding about $12.8B ($500M / $780M * $20B =$12.8B).

Very rough calculation of business line income

So, here is my very rough estimate of how much net interest Credit Suisse could have added to the bottom line:

  • $12.8B – rough estimate of hidden tax-evasion money on deposit
  • 1.55% – rough estimate of net interest margin in 2013
  • $198M – rough estimate of net interest income on hidden money

Not a bad deal.

Almost US$200M a year of net interest income, plus unknown amount of fees, less salaries, less US$62M fine per year.

Still, seems to me that was a reasonably profitable line of business. Until the U.S. government shut down their operation.

Looks like it was a good run while it lasted.

Your thoughts? I probably have some math errors in this long string of calculations. Likely have some conceptual errors as well.  Did I make any bad implied assumptions? What did I miss?

P.S. Since the bank pled guilty to a felony charge of aiding tax evasion, I think we can drop the word alleged and add the word fraud to the Credit Suisse story.

Update:  DealBook from the New York Times ponders In Credit Suisse Settlement, a Question of Justice.  The bank is claiming the ‘settlement’ (not plea deal, not felony settlement, not conviction) will have no material impact on operations.  Article wonders if that is justice while acknowledging any punishment can’t be so strong as to take down the bank or disrupt the entire financial system.

Written by Jim Ulvog

May 21, 2014, 8:37 am at 8:37 am

Posted in Fraud, Other stuff

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  1. […] shell corporations to facilitate laundering and prepare all the needed fake documents. Or that the $2.5B fine for doing so cuts into the profit margin of the Credit Suisse tax evasion product line, but does not turn it […]


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