Credit Suisse has had a turbulent last few years, which began with its guilty plea with the federal government and New York financial regulators for allowing US clients to evade their taxes. That was followed by a fraudulent IPO with Luckin Coffee, wherein it grossly inflated its sales and was immediately removed from NASDAQ, where Credit Suisse acted as the underwriter. Then the bank allowed Archegos Capital to take “voracious” and “potentially catastrophic” risks that culminated in the hedge fund’s collapse. And in 2022, a bank run caused a liquidity crisis after it appeared that Credit Suisse was insolvent due to its high-profile risks, causing customers to withdraw billions of dollars. Let’s unpack a few of the risk management issues that have blighted the Swiss bank over the last few years.
Tax Evasion Case
In 2019, Credit Suisse agreed to pay $2.6 billion in fines after pleading guilty to helping US citizens evade taxes on their offshore accounts between 2001 and 2008. The settlement included a deferred prosecution agreement with the U.S. Department of Justice (DOJ), which required them to implement enhanced compliance procedures over a three-year period or face criminal charges. As part of the agreement, Credit Suisse had to strengthen its anti-money laundering procedures and hire an independent consultant to review how it identified customers who might be engaging in tax evasion activities. In addition, they had to create an internal group specifically tasked with preventing future instances of tax evasion by US citizens.
Risk Management Procedures to Prevent This Type of Risk
Risk management is very important for reducing the risk of money laundering and tax evasion. While looking for risk indicators, it’s imperative to be aware of certain red flags that could point to a bigger risk. One sign might be a complex business structure that makes it difficult to trace the top beneficiary of a company or foundation. A risk may also be present if the assets associated with the fraudulent company originates from an emerging market or if previous transactions indicate involvement in illicit or fraudulent activities. By keeping an eye out for risk indicators, businesses can reduce their risk exposure significantly, safeguarding their finances and protecting themselves from legal trouble.
Luckin Coffee Fraudulent IPO
In 2020, Credit Suisse became embroiled in scandal once again when Chinese coffee chain Luckin Coffee was revealed to have fraudulently exaggerated its sales figures prior to going public. Credit Suisse served as one of Luckin’s underwriters during its initial public offering (IPO) process but failed to identify any potential discrepancies before the stock went live on NASDAQ. Once these discrepancies became known publicly, however, NASDAQ suspended trading of Luckin’s shares and delisted them shortly afterwards—forcing investors who bought into the company’s falsehoods into losses amounting up to $618 million within just two days after its debut on Wall Street.
Risk Management Procedures to Prevent This Type of Risk
Risk management is a key factor when investing in fraudulent IPOs. This risk management can help to identify fraudulent activities and protect investors’ capital. Common indicators of fraudulent behavior include overly optimistic projections, unrealistic valuations, lack of transparency in the IPO process, promoters offering hidden incentives or pressuring potential investors, as well as any suspicious transactions or movements in the stock market. Paying close attention to these warning signs can help mitigate the potential risks associated with fraudulent IPOs and protect investors from devastating losses.
Archegos Capital Failure
Credit Suisse was also involved in another high-profile scandal involving Archegos Capital Management LLC—a family office whose risky trading strategies ultimately resulted in losses totaling more than $10 billion for various banks across several countries including Japan and Germany as well as Switzerland itself where Credit Suisse is headquartered. The mega-bank allowed Archegos Capital to take “voracious” and “potentially catastrophic” positions that were not commensurate with their capital base—which ultimately culminated in Archegos Capital’s collapse following margin calls from other banks that demanded immediate repayment of loans used by Archegos Capital for those risky trades. This incident showed how important proper risk management is for financial institutions like Credit Suisse if they are looking avoid similar situations in the future.
Risk Management Procedures to Prevent This Type of Risk
When attempting to identify riskier trading strategies among hedge funds, risk indicators are key tools for risk managers. These risk indicators can include metrics such as short-term volatility, leverage risk, liquidity risk, and concentration risk. Short-term volatility is usually assessed by taking into account the recent performance of a fund over some predefined time period. Leverage risk indicates the usage of borrowing to increase a fund’s exposure while liquidity risk can refer to how reliant the fund is on specific liquid instruments. Lastly, concentration risk is used to describe when a fund is over exposed to specific investments or asset classes. Combining these risk indicators together can help practitioners understand better potential exposures that may arise from certain trading strategies utilized by hedge funds.
The series of scandals that have plagued Credit Suisse over recent years have highlighted significant flaws in its risk management processes—which could have been avoided through proper implementation of anti-money laundering procedures, more diligent oversight during IPOs, and better oversight on loan agreements granted by banks such as itself. It is clear that Credit Suisse must learn from these mistakes if they are going avoid similar situations occurring again in the future —and ensure they remain one of Europe’s leading financial institutions despite this recent spate of high-profile risks taken by some their clients. Chief Risk Officers should all take note so they can protect themselves against similar risks taken by their own clients or partners.
