Thursday, January 26, 2012

HSBC Reportedly Being Investigated for Money Laundering (1/26/12)

The U.S. Senate is reportedly investigating HSBC for money laundering.  See Carrick Mollenkamp, Exclusive: Senate Investigating HSBC for Money Laundering (1/25/12), here.  I don't know precisely what that means in terms of the topic of this blog.  I can say that my impression is that, generally speaking, the U.S. Government would treat money laundering that touches important U.S. interests as more important than promoting U.S. tax evasion.

Keep in mind that the U.S. angst was great over UBS tax evasion actions for U.S. depositors.  HSBC did much of that same thing as UBS, although perhaps not at the same brazen scale as UBS.  But UBS was hammered for its tax evasion conduct without money laundering being in the mix.  My sense would be that, if indeed HSBC facilitated money laundering that affected the U.S., HSBC might be in much deeper doo-doo than was UBS.  (On the other hand, since the Swiss banks tended all to do the same thing, if HSBC did money laundering perhaps UBS did  so also; I doubt that anyone would be surprised that any Swiss bank participated in this type of conduct; but apparently HSBC is the first to be called out -- discovered -- on it.)

I am sure there is more to come.

U.S. HSBC depositors who have not yet resolved their U.S. tax situations should be concerned.  You may quickly be on the chopping block as HSBC tries to mitigate the damage.  While I doubt that the U.S. Government would be assuaged by merely delivering up the U.S. depositors HSBC helped with their U.S. taxes, still such cooperation might buy some time or be seen as a good faith action that will get something somewhere down the road.

However, among those U.S. HSBC depositors there may be some whose goal was not just to cheat on their taxes, but to launder money.  Those persons should be particularly concerned, especially those who may have joined the voluntary disclosure program and submitted either false or misleading information about their offshore banking activity.

Update on 2/4/12:  Please see the later blog titled Wegelin Indicted in SDNY with Money Laundering Fofeiture (2/2/12), here.  In that initiative against Wegelin & Co., the Government indicted for the defraud / Klein conspiracy and not for money laundering, but did seek money laundering forfeiture.


  1. Jack,

    Have you seen anywhere the indictment of the West Virginia doctor cited in the article. My understanding is he was hiding the money at HSBC Bank Canada. I would be curious to see how that was alleged to have happened. Why I know I am jumping the gun COMPLETELY it did cross my mind if HSBC Canada was involved you could have a similar situation between the US and Canada and US, Switzerland, and UBS (Note: I am the same commentor always asking about Canada issues)

  2. To Anonymous @ Jan 26, 2012 04:48 PM

    I have not seen anything related to that case. I will be on the lookout for it, but would appreciate readers offering any information they have.

    Jack Townsend

  3. The Virginia doctor (Andrew Silva) was having the account with HSBC Switzerland. HSBC closed his account and give him the
    money in cash. he tried to send the money via post in envelopes with less than 10k. customs intercepted one of his mails and he got caught. It was inheritance in his case. His mother was a Swiss national who had left the money.

    1. The case I was actually asking about was actually the West Virginia doctor who was involved in Medicare fraud and was sending to proceeds to an account in Canada opened by a nominee(something I thought from a Canadian perspective was next to impossible). HSBC Canada has has issues like giving a high limit credit card and big 1.2 Million CAD mortgage to a reputed street gang leader in East Montreal(the bad side of town) with a pretty long rap sheet.

  4. To Anonymous @ Jan 27, 2012 05:02 AM

    I had forgotten about the details of Silva's case. Pretty bad facts for him and for HSBC which, as I recalled, may have suggested the attempt to fly under the radar (and the reporting requirements).

    Still, on the bare facts I recall, if all he was doing was moving inherited money into the U.S., I am not sure that would have been money laundering. Isn't a requirement that the proceeds be from Specified Unlawful Activity? I haven't worked my way through the money laundering provisions recently, so just don't recall. And, of course, the focus now is on HSBC rather than Silva. Certainly that genre of conduct probably would include SUA for some depositors.

    Jack Townsend

  5. Jack,

    I think to make sense of your note, one would have to understand what constitutes money laundering a little better, as in what constitutes "Specified Unlawful Activity" in the context of tax evasion?

    For example, would offshore tax evasion in and of itself constitute money laundering in certain circumstances. Or perhaps insider trading or such like consummated through offshore entities?

    This is an interesting topic.

    1. Good question, Patrick.

      The list of SUA in 1956 money laundering does not include tax crimes but do include mail and wire fraud. Since most tax crimes include some use of mail or wires which are SUA, then in theory the omission of tax crimes from the list of SUA would not prevent prosecution of tax crimes under the rubric of mail or wire fraud.

      Having said that, I cut and paste the following from my Federal Tax Crimes book:

      DOJ policy requires that DOJ Tax approve all criminal charges against a defendant “in connection with conduct arising under the internal revenue laws, regardless of which criminal statutes the United States Attorney proposes to use in charging the defendant;” DOJ Tax approval will not be given “where the effect would merely be to convert routine tax prosecutions into money laundering prosecutions, as the statute was not intended to provide a substitute for traditional Title 18 and Title 26 charges related to tax evasion, filing of false returns, or tax fraud conspiracy.”

      CTM 25.01 (2008 ed.). DOJ Tax approval is not required where the gravamen of the offenses for which criminal charges are warranted are consistent with the serious offense of money laundering and not just tax offenses leveraged into money laundering. Specifically, DOJ Tax approval is not required where (Id.):
      (1) the principal purpose of the financial transaction was to accomplish some other covered purpose, such as carrying on a specified unlawful activity like drug trafficking; (2) the circumstances do not warrant the filing of substantive tax or tax fraud conspiracy charges; and (3) the existence of a secondary tax evasion or false return motivation for the transaction is one that is readily apparent from the nature of the money laundering transaction itself.


      So, Patrick, to answer your question, although the Government might find some technical SUA involved in garden variety offshore tax cheating, I don't think it would pursue such money laundering charges against any of the participants for that. I think that what will hang HSBC and the participants will be something that everyone can recognize as money laundering (assisting drug traffickers and other unsavory activity that was the intent of the money laundering provisions). To be redundant, the money laundering provisions were not intended to leverage a tax crime into money laundering.

      And, of course, if the gravamen of the conduct is just a tax crime with a technical money laundering footfault, upon sentencing, the sentence would probably look awful like a tax sentence. So, I don't see the Government having any real incentive to pursue technical money laundering where the gravamen of the offense is a tax crime.

      Jack Townsend

    2. One other point, Patrick, although I am sure you know about it. Here is a cut and paste addressing the statutory requirement of proceeds of unlawful activity (this is technically a different requirement than SUA):

      Furthermore, in a controversial decision, the Third Circuit held with respect to Virgin Islands tax: “[u]npaid taxes, which are unlawfully disguised and retained by means of the filing of false tax returns through the U.S. mail, constitute ‘proceeds’ of mail fraud for purposes of supporting a charge of federal money laundering.” n524 Does this mean, by extension, that every false tax return and resulting underpayment could be a money laundering crime?

      n524 United States v. Yusuf, 536 F.3d 178 (3d Cir. 2008), cert. denied 549 U.S. 1338 (2007). See CTM 25.03[1] (2008 ed.) (Noting that “Yusuf created a conflict with United States v. Khanani, 502 F.3d 1281, 1296-97 (11th Cir. 2007), in which the Eleventh Circuit held that the definition of ‘proceeds’ is limited to ‘something which is obtained in exchange for the sale of something else,’ and thus does not include retained taxes.”

    3. Finally, if the Government levels money laundering at HSBC, I suspect it will relate to real money laundering and not the pattern of hiding money solely for gaming the U.S. tax system. In other words, there will be drug trafficking (I don't doubt that HSBC did some of that, but whether that activity was aberrational and ad hoc or part of a culture to assist money launderers (like the culture we know existed to assist U.S. tax evaders) will be the big issue that could drive money laundering charges.

  6. Thank you Jack for this enlightening analysis.

    I remark though that the rules of the game may have changed with the industrial-scale offshore tax evasion that we read about routinely, and deeply dissatisfied public with tax tricks by well-informed US taxpayers.

    I could see how DOJ might reinforce an otherwise straight up tax evasion situation with money laundering to up the ante on HSBC and Credit Suisse (and such like), for the purpose of sidestepping the 'avoidance" v. 'evasion' distinction (in my opinion a specious defense at best) that the Swiss employ to oppose US demands for account information. Why would adding the ML aspect not bolster our case?

    Thanks, and this might make an interesting topic itself.


    1. Patrick,

      I think your concern is well taken that the "industrial-scale offshore tax evasion" engaged in by certain banks -- Swiss and otherwise -- might change the IRS's inclination not to escalate tax evasion into money laundering. Still, I am not sure that the Swiss need necessarily give an ML charge with evasion of tax as its core any differently than a tax evasion or tax conspiracy charge.

      Of course, merely making the ML charge will have powerful repercussions, particularly if the gravamen of the charge were tax crimes. It would up the ante for the U.S. taxpayers because they could be seen as conspirators or participants in the ML. As to the U.S. taxpayers, they are merely cogs in the wheel and should not be charged or threatened with an ML charge.

      I think, though, that if DOJ scratches hard enough, it will find some mainstream money laundering through the main foreign bank offenders. Why would these banks have turned away, say, drug traffickers when they had no problem assisting tax evaders? The issue is not whether those banks should be participating in the conduct; rather, from their perspective, the issue is whether they could hide the conduct. )(Remember that these banks stole money from Holocaust victims because they could and thought they would not be discovered.) We now know that the Swiss bank's ability to hide conduct is not as strong as they once imagined.

      And, it seems to me that, if the Swiss banks would cough up the real ML offenders (traffickers, etc.), they might find the U.S. Government more amenable to an acceptable settlement on the tax front. (Not that they would be let off, but they might be able to mitigate the damage, including moving to a resolution rather than letter it drag on interminably.)

      Any way, just my ruminations.

      Thanks, Patrick, for your comments.

      Jack Townsend

  7. I agree entirely Jack. And your thought that Swiss bankers will do anything, legal or illegal, if they believe they will get away with it, is well-founded. Personally, I saw that repeatedly in my dealings with them on the "street." And they will grin-screw you to death while you persuade them to do the "right thing."

    As any pirate will tell you as he unfolds the black flag, he will not do the "right thing" until the prospect of hanging from the yard-arm is real and immediate. The whole point of pillage is that you believe you can get away with it, hell or high water.

    That is not to say there aren't right thinking Swiss bankers--its just I haven't met them.

  8. One last point Jack, if I may, having had a little time to think about what was nagging me about this discussion:

    From a European popular perspective, while the US's leveling tax charges against Swiss and other Euro banks would generally be dismissed by the populace with a shrug of the collective shoulders": there are the self-righteous Americans, at it again!" Such is European cultural reaction (especially on the mainland) to tax cheating.

    However, I suggest that ML charges are an entirely different animal, which would cause the populace to pay serious attention to the US efforts: ML charges would increase immeasurably the political pressure to settle with the US. That, in and of itself, might be sufficient reason to include those charges alongside pro forma tax charges, even if, as you correctly suggest, there would be little gain from a strict analytical perspective.

    Sometimes one should consider changing the game one plays if the rules prove intractable?

    That yard-arm would appear in much higher relief, I suggest, if ML were part of the tax bundle. Let's hope the DOJ personnel are able to see this path.

  9. The danger Patrick for the US is efforts like FATCA are turning public opinion against the US even more and perhaps especially so anglo-saxon countries like Canada. At this point no one is going "buy" ML charges as anything but the US doing it "normal" thing.

    Take a look at sites like these:
    Here you have a grassroots populist site in Canada essentially demanding the Canadian government challenge every aspect of US law enforcement, economic, and tax policy

    Then you have Canadian MP's putting out statements such as the following:

    And I suspect there is even more to come(i.e. I have heard people who want to challenge FBAR under NAFTA)

  10. "From a European popular perspective, while the US's leveling tax charges against Swiss and other Euro banks would generally be dismissed by the populace with a shrug of the collective shoulders": there are the self-righteous Americans, at it again!" Such is European cultural reaction (especially on the mainland) to tax cheating."

    Patrick, as a European myself, I can tell you this statement is utter rubbish. It is a libellous allegation, an insulting and overly broad generalization, backed up with no facts whatsoever. You would do well to read some non-US media for a sense of exactly how the rest of the world views FATCA.

    The European view of US activities here is definitely more nuanced than you believe it to be. Unlike the US media and US government, who have nothing but a one-dimensional view, European media understand and can distinguish between efforts to combat genuine tax evasion and imperialist, overbearing and extra-territorial tax laws imposed in a bullying way by an aggressive and unpleasant government.

    The US is making a lot of enemies of other countries with its one-sided actions here. These are countries whose cooperation is needed if the US is to combat genuine evasion, so ticking them off is about the last thing it should be doing. Yet it is doing so anyway. This will not end well for the US.

  11. The fundmamental problem is the US has been unable or unwilling to impose a VAT/GST of even a low amount such as 5% which would "clean out" much of the underground economy. In Canada the introduction of the GST in 1991 did just that. The really big cases with UBS et al I as I understand aren't Americans underreporting or non reporting foreign source income and foreign originated funds but Americans pilfering funds out of US based businesses before the taxman arrives for an audit. In a GST environment they would be sucked into paying tax on all of their business inputs and then having to claim back input tax credits. The Canada Revenue Agency is quite clear GST "must" charged and collected at every stage of production and distribution if necessary through self assessment. With FATCA and QI the US is trying to push witholdings further and further away from the US payor.

  12. Please, need guidance for the following matter.
    I live in a country where there is money exchange control by the governament. You cannot by US$ or EU at any bank, and government only sell you $xxx/year as cash for traveling abroad, and if applayin on time you could also buy US$ once a year only for traveling abroad.
    Besides, any US$ or EU you have can only be sold to the government for 1/2 de price you can sell it in the black market.
    I work for a foreing company which pays me in US$ by deposits to my account in the US; but I have to use local currency for food, housing and normal expenses.
    For this reason I have to sell US$ to best payer and issue a check to buyer for him to cash it or deposit it in his US bank account. My question is: does US bank would consider this operation as money laundering? will it help if I present to the bank and MOU signed between the foreing company and me?.


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