Tuesday, July 19, 2011

HSBC Retreats, Abandoning Its U.S. Tax Cheat (And Probably Some Other) Private Banking Customers (7/19/11)

The Wall Street Journal reports that HSBC is sounding a retreat from the U.S. tax cheat enabler business. Dan Fitzpatrick, Evan Perez and Laura Saunders, HSBC Acts on Offshore Cash: As U.S. Cracks Down on Tax Evasion, U.K. Bank Drops American Residents Keeping Money Abroad (WSJ 7/20/11).  Here are some excerpts:
HSBC Holdings PLC is moving to mollify federal authorities investigating how the banking industry has helped U.S. clients evade taxes.

The global banking giant is cutting ties with wealthy American clients who bank offshore, as U.S. prosecutors turn up the heat on the bank to produce information about account holders who may be evading taxes, people familiar with the matter say.

A spokeswoman said the global banking giant will "no longer offer wealth-management services to U.S. resident private clients from locations outside the U.S.," and that American clients "will be better served by our private banking teams in the United States." At issue are hundreds of clients with accounts totaling as much as $100 million, said a person familiar with the situation. U.S. clients need roughly $5 million in assets to qualify for an HSBC private-client account, another person familiar with the situation said.

The extraordinary move comes as the U.S. Justice Department and Internal Revenue Service intensify crackdowns on offshore tax evasion and look beyond the world of Swiss banking for institutions that might be providing places to hide money.

HSBC is ending the practice of serving wealthy American residents from locations outside the U.S. as a way of cooperating with the U.S. and avoiding the fate of rivals that were fined or threatened with prosecution for assisting tax scofflaws, the people familiar with the matter say. The Justice Department declined to comment.

In a letter sent earlier this month to U.S. customers who have accounts with HSBC India, the bank said it is terminating "private banking services to US persons and certain trusts and non operating companies connected to US persons." Customers have 30 days to close their accounts, according to the letter.
 
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JAT Note: The move appears only to affect the wealthier U.S. depositors ($5,000,000+).  The Bloomberg report below says that because only the wealthier U.S. depositors are involved "only about a few hundred will be involved."  That still leaves unaccounted for all the other U.S. depositors in HSBC who may not have qualified for or did not desire private banking services of the type subject to this notice.  For example, U.S. depositors for HSBC India, which was subject to a John Doe summons, are receiving notices that presage a release to the IRS of their information and documents and suggesting that the U.S. depositors consider the OVDI 2011.  However, one can project / speculate that if HSBC is willing to abandon its high net worth U.S. depositors, it will not behave better with its much more numerous lower net wroth U.S. depositors.

Other Articles:
HSBC shuns private banking business from Americans outside U.S. (Reuters 7/20/11).
HSBC Tells U.S. Private Bank Clients Banking Must Be Onshore (Bloomberg 7/20/11).

18 comments:

  1. Deja Vu.

    Anon123

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  2. Its kind of funny. HSBC in a Reuters article states that they have bank reps available to help these account holders transfer their funds to U.S. compliant accounts. I hope they do not forget to go through OVDI first!
    There is a very clear pattern of banks under pressure caving in to the IRS. So far they have been banks with a significant U.S. presence. UBS, Credit Suisse and HSBC. The final nail in the coffin will be the announcement of a bank without significant U.S. presence caving in to pressure. I think its right around the corner. These poor HSBC account holders have a serious problem. What the heck are you supposed to do with a 5 million dollar check from HSBC if you are noncompliant. I defer to Jacks signature title: "Get in line brother".

    Anon123

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  3. Why is this an "extraordinary move"? Many foreign banks have told their US clients to bank elsewhere, as the headaches of US tax compliance prove to be too burdensome for the banks to continue the relationships.

    Also, the suggestion that HSBC is taking this step "as a way of ... avoiding the fate of rivals that were fined or threatened with prosecution for assisting tax scofflaws" is incomplete. It does not account for the years of tax non-compliance until this point, which has been the focus of IRS and DOJ investigation. The fact that henceforth HSBC may be squeaky clean does little to undo the tax non-compliance until this point.

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  4. To Anonymous 7/20/11 @ 6:50 am:

    An HSBC high net worth depositor moving to a U.S. HSBC affiliate would be incredibly stupid not to attend to U.S. tax business before making the move. Wouldn't one expect that, at some point, the IRS would issue John Doe summons to the U.S. HSBC affiliate to get the names and information of new depositors with money wired from foreign accounts? And, with the amounts involved ($5,000,000+) these would likely be prime targets for the IRS if they haven't attended to their U.S. tax business. If they don't get into OVDI, they better have a good story to tell.

    Jack Townsend

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  5. Jack,
    These HSBC folks should of seen the writing on the wall early on when the HSBC India saga first broke. There have since been a number of prosecutions of these account holders as well as strong signals from HSBC that they were cooperating. Those that ignored these signs and did not initiate actions to bring their accounts into compliance may have put themselves behind the eightball. I would think that the majority joined the OVDI. Hopefully that is the case. Those that did not, need to do something quickly and pray that their disclosure is found timely and they can get preclearance. I think OVDI will ultimately yield more disclosures than OVDP because the IRS is making it abundantly clear that their efforts in this area will be relentless. We are seeing that the banks have no viable choice but to cooperate so far.

    Anon123

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  6. This story smells of a plant to me, originating with the PR team at HSBC, and the "people familiar with the situation" references is a clear indication. HSBC as an institution, believes (or at least thinks likely) that DOJ is about to bring criminal charges against Credit Suisse, and so they have their own mess to clear up. Frankly, the numbers thrown about are trivial for what HSBC through its old Republic Bank crew were up to in US, which likely rival or exceeed CS and UBS.

    Good luck with that!

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  7. Jack,
    Do you see DOJ/IRS making a move on any banks with little to no United States presence? If so, what will the leverage points be to persuade said banks to cooperate in disclosing noncompliant U.S. tax persons. The reason I ask is that I have read about advisors telling noncompliant clients to move assets to more low key locations with no U.S. presence. I understand that FATCA is intended to root out these types of senarios by limiting access to the U.S. financial system as well as applying withholding penalties to noncooperative institutions. FATCA is however a little ways out before full implementation. The 2009 OVDP supposedly exposed numerous banks in numerous countries. You have to wonder about how the IRS will deal with them.

    Anon123

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  8. To Anon 123 7/21/11 @ 7:42 am.

    I would be surprised if DOJ / IRS would not make some type of move on the banks with little or no U.S. presence. For example, they might be indicted on various theories even if, because of their absence, the U.S. may not be able to obtain a conviction. (Note in this regard that some Swiss enablers have been indicted even though the U.S. is likely not going to be able to convict them because they will just stay outside the U.S.) The mere indictment would make a statement.

    And, of course, there may be some less obvious ways to leverage these banks into believing that it is in their interests to deliver up the names and information of U.S. depositors.

    Finally, depending upon the Swiss governments interpretation and application of the double tax treaty exchange of information provision (which might be affected by leverage against Switzerland), these banks may have to deliver up information on U.S. depositors pursuant to a John Doe treaty request.

    Thanks,

    Jack Townsend

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  9. Its interesting why HSBC decided to close the $5mn+ clients and not their "premier" customers who have between $100K but say lesser than $2mn. Does that mean those guys are considered safe ? I thought they were subpoena'd to provide all accounts... even regular accounts with less than 10K. So why haven't those guys been abandoned as well ?

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  10. To Anonymous on 7/22/11 @ 11:49am:

    I think the action is probably cosmetic -- it just wanted to close down the "branch" that had the most egregious conduct (probably multiple U.S. contacts facilitating tax evasion). The smaller accounts which apparently are not now being shut down except on an isolated basis involved less active conduct -- simply accepting deposits, but no person enabling services like travel to the U.S., perhaps bringing in money or valuables as an accommodation to the partners.

    Finally, HSBC's unilateral actions self-preserving actions cannot make any of their U.S. depositors safe. The truth is that DOJ probably in most cases would prefer to nail the U.S. depositors with larger accounts and preferred customer services, but some have been nailed for less.

    Jack Townsend

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  11. Jack

    My reading is that HSBC is providing all names of pretty much all HSBC India US person customers.

    Somewhat separate from that, they are urging US customers with large accounts in all HSBC subsidiaries abroad to close their accounts.

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  12. Projecting from my anecdotal exposure to HSBC India accounts is that there are a lot of small HSBC India accounts. Does the U.S. really want all the names and what would it do with them if they got them? In the UBS case, there were some materiality parameters in the names that were disclosed. Hence UBS disclosed 255 of the highest and the 4500 of a broader subset, but not all of the UBS accounts with U.S. depositors. I would not be surprised if that is happening for HSBC India. I am thus aware of some small HSBC India depositors who have not gotten the letter which the the precursor to turn over of the information and documents.

    The question therefore for smaller accounts is whether to get in or stay out.

    Jack Townsend

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  13. Hi Jack, What do you consider smaller accounts (< 100k?)

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  14. Jack

    Pure speculation on my part, but in the UBS case, UBS (and their 'unindicted' co-conspirator, the Swiss government) was fighting hard to avoid releasing any names, finally settling for a subset. In this case, it doesn't look like HSBC is fighting (at least in public) and the Indian government doesn't seem to be creating any problems either. So the IRS could definitely get smaller account names, so I wouldn't rest easy if I had a smaller HSBC account (unless, of course, I had more or less returned to India for good, as is likely the case for a number of temporary Indian non-immigrant visa holders). This is especially if I had an immigration application pending, since tax issues can cause serious immigration problems.


    It wouldn't surprise me if the IRS were to ask for more HSBC India names subject to some constraints (US citizen or green card holder, account > 10K, account not closed before 2008 etc.) at some point and then call some subset of those in for a civil exam. Presumably the IRS wants to send the message that you should report all foreign (> 10K) accounts even if they are small and its probably not that hard to do some extra civil exams.

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  15. To Anonymous 7/22/11 @ 3:45 pm

    Ah, that is the question!

    The problem is that dollar amounts cannot be considered outside the context of a lot of other facts that would be relevant to (i) whether the IRS would want to prosecute and (ii) how much civil penalties it would assert if they catch you outside the program.

    If you're looking for an easy answer, you won't find it.

    Best and good luck.

    Jack Townsend

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  16. Jack - to your note above that some HSBC small a/c holders have NOT gotten the letter ... maybe they didnt cos they did not update banks with their US address after moving or still continue to retain resident Indian accounts after moving here and did not comvert to NRI accounts.

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  17. As far as I know you can not have a resident account with non-Indian address so my guess is those accounts were never converted to NRI type and did not have US address. So is it safe to assume that there is no risk for people having resident accounts only.

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  18. I don't think anyone can assume that they are safe because they have resident accounts -- unless of course, they plan to return to India for good. My understanding is that India does not allow non residents to maintain resident accounts, and is becoming stricter about KYC requirements and tax ids (after all, it has a big tax evasion problems of its own). Unless one is willing to lie low for years and break both Indian law and US law, there is clearly risk. Attempts to move funds to non FBAR assets brings problems of its own, including indications of wilfulness.

    ReplyDelete

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