Monday, February 9, 2015

HSBC Skullduggery Further Exposed (1/9/15)

The Guardian reports on some of the fruits of a collaborative news effort by investigative journalists.  David Leigh, James Ball, Juliette Garside and David Pegg, HSBC files show how Swiss bank helped clients dodge taxes and hide millions (The Guardian 2/8/15), here.

Among the revelations, HSBC's Swiss private bank:
• Routinely allowed clients to withdraw bricks of cash, often in foreign currencies of little use in Switzerland. 
• Aggressively marketed schemes likely to enable wealthy clients to avoid European taxes. 
• Colluded with some clients to conceal undeclared “black” accounts from their domestic tax authorities. 
• Provided accounts to international criminals, corrupt businessmen and other high-risk individuals. 
The HSBC files, which cover the period 2005-2007, amount to the biggest banking leak in history, shedding light on some 30,000 accounts holding almost $120bn (£78bn) of assets. 
HSBC has the usual excuses for bad behavior.  The one that caught my eye is that its management was just not paying attention while the lower level unit and employees misbehaved.  Further excerpts:
Although tax authorities around the world have had confidential access to the leaked files since 2010, the true nature of the Swiss bank’s misconduct has never been made public until now. Hollywood stars, shopkeepers, royalty and clothing merchants feature in the files along with the heirs to some of Europe’s biggest fortunes. 
* * * * 
The files show how HSBC in Switzerland keenly marketed tax avoidance strategies to its wealthy clients. The bank proactively contacted clients in 2005 to suggest ways to avoid a new tax levied on the Swiss savings accounts of EU citizens, a measure brought in through a treaty between Switzerland and the EU to tackle secret offshore accounts.
The documents also show HSBC’s Swiss subsidiary providing banking services to relatives of dictators, people implicated in African corruption scandals, arms industry figures and others. Swiss banking rules have since 1998 required high levels of diligence on the accounts of politically connected figures, but the documents suggest that at the time HSBC happily provided banking services to such controversial individuals. 
* * * * 
The Guardian’s evidence of a pattern of misconduct at HSBC in Switzerland is supported by the outcome of recent court cases in the US and Europe. The bank was named in the US as a co-conspirator for handing over “bricks” of $100,000 a time to American surgeon Andrew Silva in Geneva, so that he could illegally post cash back to the US. 
Another US client, Sanjay Sethi, pleaded guilty in 2013 to cheating the US tax authorities. He was one of a group of convicted HSBC clients. The prosecution said an HSBC banker promised “the undeclared account would allow [his] assets to grow tax-free, and bank secrecy laws in Switzerland would allow Sethi to conceal the existence of the account”. 
In France, an HSBC manager, Nessim el-Maleh, was able to run a cash pipeline in which plastic bags full of currency from the sale of marijuana to immigrants in the Paris suburbs were collected. The cash was then taken round to HSBC’s respectable clients in the French capital. Bank accounts back in Switzerland were manipulated to reimburse the drug dealers. 
HSBC is already facing criminal investigations and charges in France, Belgium, the US and Argentina as a result of the leak of the files, but no legal action has been taken against it in Britain.
Former tax inspector Richard Brooks tells BBC Panorama in a programme to be aired on Monday night: “I think they were a tax avoidance and tax evasion service. I think that’s what they were offering. 
“There are very few reasons to have an offshore bank account, apart from just saving tax. There are some people who can use an ... account to avoid tax legally. For others it’s just a way to keep money secret.”
 Thanks to gottaloveUStax, a commenter, for the link to the article.

Here are other reports:

  • Chad Bray, HSBC Under Renewed Scrutiny Over Swiss Tax Avoidance Claims (NYT DealBook 8/9/15), here.
  • Bill Whitaker, The Swiss Leak (CBS 60 Minutes 2/8/15), here.
Here is a an interesting excerpt from the Bray DealBook article:
A spokesman for the British tax collection agency said on Monday that it had used the data to collect more than £135 million in back taxes and penalties and that the government had increased the maximum penalty an individual faces for hiding money overseas to 200 percent of the tax evaded. Those agreements, which are civil in nature, remain confidential.
The maximum US income tax penalty is the fraud penalty of 75%.  That has historically been the penalty that applied.  (There have been some adjustments to the base to which it applied; it used to be all unreported and unpaid, but now, under burden of proof rules, only the portion of the tax attributable to fraud.  See Section 6663, here.  This raises an interesting issue that is discussed from time to time -- what is the appropriate level of civil penalty for tax misbehavior.  Focusing on the current civil fraud penalty of 75%, is that the appropriate level to discourage that particular type of misbehavior, to recompense the Government for the costs it necessarily incurs to root it out, to offer some punishment and recompense for the many who do not get caught, and so on.  Britain has apparently decided that 200% is more appropriate.  I think something higher than 75% is appropriate.  Where exactly, I can't say.  That is a big discussion.


  1. This was also covered in 60 Minutes last night.

    It was well-known that Geneva was the North American and European center for HSBC's illegal activity. The protagonists were the propel HSBC acquired when it bought the old Safra Republic Bank.

    What is surprising (to me at least) is that neither the U.S. nor UK tax authorities pursued HSBC more aggressively. As I wrote above, many knew what HSBC/Republic in Geneva was all about, including the IRS.

    In addition, HSBC was a major purveyor of ultra-aggressive tax shelters for hedge and private equity funds costing the U.S. Teasury tens of billions of revenue. again, the IRS did not shut it down--in fact it blossomed post 2009.

    Next step for HSBC: hire a big law firm to do an internal (read "independent") that will find that the tainted activity was narrowly confined to a few bad actors and senior management knew knothing, saw nothing or did nothing wrong. and anyway, this an old story--look at HSBC now!

    Rant if my day: it's hard to say which is worse: the banks or the so-called professionals who aid and abet them. Are you paying attention Thomas Piketty?

  2. The other half of the story is why the Tax Division of the DoJ sat on this client account data for the last 5 years. Just who are they trying to protect, again?!

  3. Not to hijack your blog Jack, but here is a link to the current story being run in the UK by the BBC, a highlight of which I extract for your readers. Panorama is a highly respected investigative news program operated by the BBC (the rough equivalent of 60 Minutes but much more detailed, aggressive, and impartial IMHO):

    "But Panorama has spoken to a whistleblower who said there were still problems with tax dodging at HSBC private bank when she worked there in 2013.

    Sue Shelley was the private bank's head of compliance in Luxembourg. She said HSBC did not keep its promise to change. "I think the verbal messages were great but they weren't put into practice and that disturbed me greatly," she said.

    It was her job to make sure HSBC followed the rules, but she said she was sacked after raising concerns. She has since won a tribunal hearing for unfair dismissal.

    Watch Panorama: The Bank of Tax Cheats on February 9 at 20.30 GMT on BBC1."

    Seems clear HSBC is continuing to do what it did before, just moved the chess pieces somewhere else, as I remarked in my earlier post.

    What is clear is this story has legs, at least in the UK.

  4. Regarding the 75% vs 200% penalty, you are not considering the up to 50% of account balance FBAR penalty. I'm sure most of the people convicted in the US would have gladly just paid a 200% of taxes owed rather than what they agreed to pay.

  5. Actually, I was trying to just focus on the civil fraud penalty and ask whether it is the appropriate level penalty only for the income tax delinquency. Many would argue that the 75% penalty is actually to low -- significantly too low -- given the benefits of playing the audit lottery with the strain on the IRS's resources. In other words, even with the risk of the 75% penalty, the risk-taking taxpayer would take the risk because the risk-reward ratio is so favorable. There is little risk that the taxpayer will be discovered or penalized, so the punishment if discovered and penalized does not discourage or properly penalize the behavior.

    Jack Townsend

  6. I agree completely with Jack, as someone who has sat in meetings where precisely that risk reward analysis was trotted out and accepted.

    But the analysis doesn't end there: oftentimes, the tax misconduct will not be one compact item which if caught will trigger a large tax but a bundle of items, EACH bundle split up into different pieces to make the whole harder to detect. Absent an insider advising the IRS, it will often be nigh impossible for the IRS to figure out the entire scenario.

    And there will be the "too big to litigate" factor, which runs that the IRS will not want to litigate situations that might devour its resources (or cynically, it will hide behind that fence in order to avoid doing its job). Big law and accounting firms are often confident the IRS will concede good issues for pennies on the dollar for big corporations and wealthy individuals rather than litigate them.

    So it seems clear to me that the 75% fraud penalty is way too low and conversely (perhaps perversely) the penalty mechanism the IRS/DOJ employs in relation to offshore bank accounts (and interestingly certain overstatements of tax basis) offers the right deterrence disincentive.

    To add to Jack's point, perhaps if the facilitators (i.e., banks, accounting and law firms) could be held jointly or severally liable for the taxes and penalties (looking through entities to individuals) as conspirators you would see a sharp fall off in aggressive tax maneouvring--because you would have changed substantially the risk/reward analysis for those who put the deals in front of taxpayers.

    This might make an interesting discussion Jack worthy of its own post.

  7. Seems you are not alone:


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