Thursday, April 7, 2011

HSBC Targeted in Offshore Banking Juggernaut - John Doe Order Granted!!! (4/7/11)

The IRS has issued a "John Doe" Summons with the U.S. District Court in SF, according to a DOJ news release here.  Readers will remember that this was an opening salvo in the spat with UBS that led to a deferred prosecution agreement, $780 million  payment to the U.S., and the turn over of a bunch -- 4,500 -- names.  It is uglier and likely to get uglier for HSBC.  And how about the other banks?

Just curious because I was thinking about it today.  Why doesn't DOJ just get a John Doe grand jury subpoena and cut to the quick?

Update 4/8/11:  The order allowing the John Doe Summons was granted (see here).  (Editorial comment: I hope none of my readers are surprised.)

Update 7/16/11:  In response to some inquiries about what HSBC India will turn over, I provide the following.  I don't know what HSBC India might turn over, but I will provide here the scope of the requests made in the John Doe Summons discussed above.  In other words, if the DOJ / IRS gets everything requested in the summons and no more, this should indicate the scope of HSBC India's turnover.  However, in UBS, my understanding is that, as a result of subsequent negotiations, DOJ / IRS got less than the full scope requested in the summons.  On the other hand, my suspicion is that the HSBC India deal was wired before the John Doe Summons was issued so the scope of the John Doe Summons may indicate the scope of what will be turned over.  Nevertheless, I can provide here only the scope of the summons and readers can then infer whether the scope is the same or more or less than HSBC India will actually turn over.  Here is the indicated scope of the summons:

In the affidavit supporting the summons, the scope of the summons is described as: "
20. As will be described in greater detail below, the "John Doe" class is limited to United States taxpayers who, at any time during the years ended December 31, 2002 through December 31, 2010, directly or indirectly had an interest in or signature or other authority over any financial account maintained at, monitored by, or managed through HSBC India.
From the Memo in support of the petition:

In addition to offering "standard" banking services at HSBC India through its NRI program, HSBC offers an enhanced personalized banking service for high net worth individuals called HSBC Premier. For clients who maintain a minimum balance of $100,000 in all HSBC accounts combined, Premier banking provides around-the-clock international services with worldwide access to account information regardless of where, and with which affiliate, the accounts physically reside. HSBC describes Premier as "relationship banking without boundaries," that "enables customers to access all their local and international accounts from a single on-line view and provides free international funds transfers between these accounts." HSBC provides online access to Premier accounts and services "through a globally integrated account [emphasis added] that can be accessed from anywhere a customer chooses to live or work." HSBC Premier allows customers living anywhere in the world to manage their accounts from anywhere in the world through online integrated banking. HSBC Premier customers and bankers can transfer funds seamlessly between accounts and between countries with the click of a mouse.

Whether they maintain a Premier account, or a "standard" account, United States taxpayers with NRI accounts at HSBC India can conduct all their transactions concerning their India accounts without ever leaving the United States. Armed with the knowledge -- provided by HSBC India bankers -- that the bank will not disclose their foreign accounts or income to the IRS, NRI clients of HSBC India in the United States have been able to maintain these foreign accounts with reasonable confidence that the IRS would not discover them.

* * * *

HSBC has advised the IRS that as of September 2010, approximately 9,000 United States residents who were "Premier" clients of HSBC, also had NRI deposits at HSBC India. As of December 2009, according to HSBC USA, U.S. resident Premier clients had NRI deposits of nearly $400 million. And yet, for calendar year 2009, the most recent year for which information is available, there have been only 1,391 FBARs filed disclosing 1,921 accounts at HSBC India. Accordingly thousands of United States taxpayers who maintain more than $100,000 in accounts with HSBC, may have failed to disclose their HSBC India accounts to the United States government. It is also likely that those taxpayers may have failed to report income earned on those undisclosed accounts.

The IRS seeks information about all accounts, both Premier and "standard." Hence, the proposed "John Doe" class is described as follows:

United States taxpayers, who at any time during the years ended December 31, 2002 through December 31, 2010, directly or indirectly had interests in or signature or other authority (including authority to withdraw funds; trade or give instructions or receive account statements, confirmations, or other information, advice or solicitations) with respect to any financial accounts maintained at, monitored by, or managed through The Hongkong and Shanghai Banking Corporation Limited in India (HSBC India).

DOJ Memorandum in Support of Motion for John Doe Summons
Reeves Declaration in Support of Motion for John Doe Summons
Order Allowing John Doe Summons

Related Articles
Lynnley Browning, U.S. Seeks HSBC Customers’ Names as Part of Tax Inquiry (NYT 4/7/11)
William P. Barret, IRS Targest 9,000 Taxpayers with Offshore Accounts Linked to India (Forbes Blog 4/7/11)


  1. Jack

    Sorry, can you explain the distinction ? Is it just the case that a John Doe subpoena is easier to obtain from a grand jury ?

  2. Anonymous, my two cents worth. I think the summons or subpoena power generally would subsume the power to issue a summons to produce documents or information related to unknown people. For the IRS summons, Congress wanted a system wbere the affected taxpayer could contest the summons and would know about the summons to undertake the contest because of requirements that the IRS generally give notice and always give notice if the summons is to a third party recordkeeper. Most such contests are frivolous, but still is a right that section 7609 confers. Realizing that in a John Doe summons case, the taxpayers are not given notice (because the IRS does not know who they are, the whole point of a John Doe summons), Congress required that the IRS John Doe summons be approved by a court upon an adequate showing by the IRS. This is like a proxy for notice to the taxpayer and opportunity to contest.

    If that is right (and I think it is), if there were no special provision putting these conditions on the John Doe IRS summons, the IRS' general summons power could be used for a John Doe IRS summons. And, logically, the grand jury subpoena power would extend to a John Doe grand jury subpoena because Congress has put no special conditions on the issuance of a grand jury subpoena describing by appropriate categories otherwise unknown persons whose information and documents would have to be produced.

    Just my views.

  3. From remarks made in the press in the past and recently, HSBC will likely buckle to any pressure very quickly. HSBC undisclosed account holders should be quite nervous at this point. If they came in during the 2009 initiative they are likely in good shape but a little bit poorer. If not there are some gut wrenching decisions to be made. The new program is significantly harsher than 2009 with the higher FBAR penalty and longer lookback period. Also, with HSBC being in the press quite a bit, one would have additional worry about meeting the timeliness criteria. This could get ugly.

  4. Jack

    Thanks for your response.

    On another topic, I suspect IRS has gone after HSBC India (not its Swiss, Hong Kong or Singapore branches) because this would be an easy nut to crack, since Indian government rules are unlikely to stop this disclosure. Whether it would put pressure on people who have accounts in HSBC in other offshore sites is unclear.

    If you do get it, can you post a link to the summons online ? Also, one news article says that the summons asks for data from 2002-2010. Given the 6 year FBAR statute of limitations, does the IRS need to justify seeking data in that time frame ? For UBS, I believe the data was for 6 years only.

  5. The below Forbes article states that IRS is asking HSBC to disclose account details on some 9000 HSBC India accounts with balances over 100k.

  6. Jack

    The NYTimes mentions that this summons was sought by the "civil tax division" of the DoJ. Assuming the reporter got it right, does this have any significance at all, or is that simply a matter of administrative convenience. Or does it mean that DoJ will likely assert only civil penalties (excluding truly egregious cases) for these customers, excluding those already under criminal investigation ? Of course, the DOJ Tax does not have the resources to launch criminal cases against 9000 people, so that could be a factor as well.

  7. Josh,

    Summons enforcement proceedings are brought in U.S. district courts by the DOJ Tax civil sections. That procedure has nothing to do with whether DOJ Tax will pick up names of U.S. taxpayers who will be criminally investigated and prosecuted. Indeed, I suspect that when HSBC complies -- as it surely will at some level -- there will be some well publicized prosecutions.


  8. The Forbes article is incorrect. The summons asks for information on all account holders with US addresses (even those that are below the 10K reporting threshold). If someone is below the 10K limit, he or she doesn't have a FBAR reporting obligation for that account alone. I suspect that the IRS will still (maybe after processing larger targets) call some of these for examination. If someone is in the (happy) position of having total account balances < 10K for all foreign accounts, then he or she could probably get away with filing amended returns for 3 years and paying the miniscule amount of tax that would accrue on a < 10K account.

  9. Last year on tax filing day the DOJ announced indictments of 10 undisclosed
    UBS account holders. I am sure this was timed to increase awareness of their ongoing crusade against undisclosed accounts. Also to prod others into Voluntary Disclosure. It will be interesting to see if we get another such occurance as April 18th 2011 nears.

  10. Anonymous,

    If I were in charge of the ship, I would certainly do some widely publicized pre-4/18 indictments or other moves -- such as other John Doe Summonses or deferred prosecution agreements.

    Such announcements around tax filing time are designed to get taxpayers to file correct returns by the unextended filing date. A taxpayer filing an incorrect return by the unextended due date because not yet incentivized to file a correct return can always consider doing relatively prompt amended return and, of course, should file the FBAR by 6/30/11.

    Such a taxpayer should then consider what, if anything, he or she desires to do about past years. But, if he or she wants to consider joining the 2011 OVDP, that will have to be done in time to submit a complete package by 8/31/11 and, given the difficulty of extracting information and documents from some foreign banks, that person should start the process as soon as possible.


  11. Jack

    Do you think the IRS would also try to serve a John Doe Summons on Credit Suisse in the next week ? If anything, Credit Suisse's actions have been even more blatant. Credit Suisse's private bank in Switzerland would be a tougher nut to crack since there is still some residual protection from Swiss banking laws, even after the latest US-Switzerland tax treaty.

    Or is one large John Doe case at one time about all the IRS/DOJ can handle ?

  12. No, I think IRS/DOJ can handle more than one large John Doe case. As to timing on Credit Suisse, I can't predict other than I cannot imagine it being too far off.

    I do have some speculation, probably idle. I think the deal with HSBC might be wired. It is not unusual for a banking institution otherwise willing to cooperate in an investigation (tax or otherwise) to insist on compulsory process before implementing the cooperation.

    Keep in mind that the Indian government is going to be a lot more cooperative than Switzerland -- (1) India does not have a legal structure where the government and the business community collaborate to assist thieves steal from other governments and even nongovernment victims and (2) India is more civilized than Switzerland in respect to its need to get along with other countries and not act as a rogue state in a civilized world community. In this respect India actually has a real economy that doesn't need to join with crooks in this type of behavior. So India may well be more receptive to encouraging its banks to cooperate. So, a John Doe summons coupled with a John Doe treaty request might be very productive. Also, speculation.

  13. Why everybody is talking about "government of India" and "HSBC India will comply" if the summons was served to HSBC USA?
    The summons says that HSBC USA has an ability to identify those accounts (presumably, if US branch was used to open NRI account or payments to NRI accounts were processed by the US branch). It requests/demands nothing from HSBC India or Indian government

  14. I would suspect that Government wants not only names or even just names and bank account number. The Government wants documents that may not be in HSBC USA's direct control. However, consider the following from IRM (here

    Background. Summonses may be issued to persons or entities in the United States who have control over books and records located abroad. Examples of "control" of records abroad would include interlocking board of directors, corporate officers holding positions with each corporation, or direct or indirect ownership. See United States v. Toyota Motor Corporation, 569 F. Supp. 1158 (C.D. Cal. 1983) (enforcement of summons provisions not barred by principles of international law); In re Grand Jury Proceedings Bank of Nova Scotia, 740 F.2d 817 (11th Cir. 1984), cert. denied, 469 U.S. 1106 (1985) (Grand Jury subpoena to a branch of a foreign bank for records located in foreign countries is enforceable, even if disclosure of bank records is a criminal offense under the laws of those countries); United States v. Vetco, 644 F.2d 1324 (9th Cir. 1981), cert. denied, 454 U.S. 1098 (1981) (Service was successful in obtaining enforcement of and sanctions for noncompliance with a summons for corporate records held in a Swiss subsidiary). The summoned party may allege that compliance with the summons will violate the law of the country where the books and records are located. In that case, the court will balance the competing interests of the two countries. Restatement (Third) of the Foreign Relations Law of the United States, 442(1)(c).


    Thus, having established some jurisdictional nexus, the court could pile only onerous contempt sanctions if the summons is not complied with and that will incentivize HSBC India to make the records appear. And, of course, the U.S. government could put the real heavy hammer on via a grand jury criminal investigation, indictment, deferred prosecution agreement, etc. I suspect that the information and documents will appear.

  15. Jack

    The summons describes the information sought. Its a truly incredible amount of information required. I suspect that even with the best of intentions, it would take HSBC India weeks to obtain this data. Incidentally, I presume that the large majority of NRI accounts were opened in India. After all, HSBC had only 2 or so branches here that would open such accounts (and likely far more in India). Some of this information may be in HSBC USA, but most is likely in HSBC India.

    Also, you say "So, a John Doe summons coupled with a John Doe treaty request might be very productive. ". You are suggesting here that the US might/should make a request to the Indian Ministry of Finance/FinCen equivalent to allow HSBC India to release this information ? Under existing treaty obligations, India would probably authorize release of this information, but (guess here) there may be some quasi-judicial process and some diplomatic to and fro involved in India. That would involve delay and maybe some diplomatic fuss in India, so DoJ probably prefers to avoid that. Maybe a summons delivered to HSBC USA which travels up the corporate ladder to HSBC HQ in Londoan and down to India will suffice (without needing Indian government intervention).

  16. I think its fair to say that HSBC knows their goose is cooked. The summons will give them cover to cooperate fully with IRS/DOJ. Surely they have learned from the UBS case and would like to minimize the damage inflicted on them. As for these HSBC India clients, I sure hope they have either participated in the 2009 deal or already got pre clearance and conditional acceptance in the 2011 program. If not, they may want to lawyer up and look into it real quick like. I assume their disclosures would be deemed timely up until IRS actually got their information from HSBC. What a horrible situation.

  17. The last comment is particularly interesting. I have colleagues who theorize that applicants for the voluntary disclosure program who have accounts at banks that are already publicly targeted lack the the "voluntary" component to the disclosure. In other words, the IRS might argue that the taxpayers are coming forward because their bank has been targeted, the account holders are "on notice" and coming forward under such circumstances is not sufficiently voluntary. However, I have yet to see a rejection from the voluntary disclosure program under these circumstances. I do think that HSBC account holders better see an attorney sooner rather than later.

  18. Mr. Rubinstein,

    The IRS specifically indicates in their FAQ that mere delivery of a John Doe summons does not render a particular "John Doe" ineligible. Of course, the names the IRS already has are ineligible.

    I'm a little curious what the pre-clearance described in the FAQ actually signifies. Does someone who gets pre-clearance actually get a guarantee that the IRS would not reject him/her even if it gets specific information in the next 30 day window ? Or just assurance that he or she is not targetted now, so he or she had better put together a lot of data and get the intake letter together as soon as possible.

    I'm very curious to see if the IRS will target Credit Suisse as well before April 18th. Also, I'm sure the IRS really wants to target US person HSBC accounts in Hong Kong and Singapore.

  19. During the UBS debacle, UBS account holders were told they could come in under the 2009 initiative as long as IRS did not have their information to that point. I read somewhere a quote from an IRS official that said about 3% of the applicants in 2009 were rejected. These 3% may have included some of the 250 or so that actually got turned over initially. I think the key danger that the HSBC India account holders face is a more expedited turnover of their records. I would assume that if they could get pre clearance and conditional acceptance into the 2011 OVDI, they could minimize the damage. You know what they say about when you assume though! The pre clearance and submission letter hopefully should not take that long to put together. However, there is no time to waste should any of these people decide to disclose through the OVDI. Another key question that requires speculation: Does IRS really want to "catch" and prosecute all these folks or do they want to give them a reasonable chance to disclose through 2011 OVDI even after the tables have turned against them. It seems that it would be less resource intensive if the account holders could successfully disclose. On the other hand penalties and net recoveries would be higher if they got "caught". Who knows for sure?

  20. Here is the answer from the IRS website on FAQ #21 which addresses if a John Doe summons served on a bank disqualifies account holders from that bank from participating in 2011 OVDI:

    No. The mere fact that the Service served a John Doe summons does not make every member of the John Doe class ineligible to participate. However, once the Service obtains information under a John Doe summons that provides evidence of a specific taxpayer’s noncompliance with the tax laws, that particular taxpayer may become ineligible. For this reason, a taxpayer concerned that a party served with a John Doe summons will provide information about him to the Service should apply to make a voluntary disclosure as soon as possible.

  21. would IRS treat people who use their own names (not really hiding at all) differently ? some folks may not know their filing obligation. Prosecution on those people may not get a conviction.

  22. Re the last question:

    If you examine the offshore account prosecutions over the past two years (see Jack's "Offshore Charges / Convictions Spreadsheet"), you'll note that almost all of the accounts involved intermediary entities such as foreign foundations or corporations which were used to obscure the true beneficial ownership of the offshore account. However, the IRS is not limiting its investigations and prosecutions to accounts that were in the names of entities. People who had accounts in their own names are vulnerable also.

  23. Asher, Thank you! I just sent a request to ovdi for what I have been openly using off shore accounts. The fact is that I was an off shore resident and just recently became a US citizen. The notion of US citizen are required to report global income was really confusiong (in fact it should be US person whoever files f1040). Even from DOJ news release
    it states "United States citizens are required to report on their U.S. Individual Income Tax Returns (Forms 1040) all income, including their worldwide income, from whatever source derived, to include: wages, salaries, interest, dividends, bonuses, rental income, gross income from a business, and compensation for services rendered, such as fees, commissions, fringe benefits, and similar items.".

    A lot immigrants would believe they don't need to repport income from their home bank accounts. There is no reason for them to evade tax as their home country has much high tax rate on bank interets (in China it is 20% flat), in US I am on 15%.

    Anyway, the law does not have to make one understood, but he/she has to understand the law --- that is what i will have to pay the fine for being so stupid not to read the tax code carefully.

    As for criminal prosecution, I do think it is a weak case to prosecute someone who is not really hiding off shore accounts (for the purpose of evading US tax while paying much higher rate tax at their home country. Civil penalty may be reasonable

    I am not taking any chance, also I want to make it right.

  24. Jack, did you see this ?

    This reporter seems to have good sources, so this is likely accurate. The government is considering the possibility of applying 50% FBAR penalties against banks that abet offshore tax evasion. I think this probably merits a blog post from you -- I would love to hear your thoughts on whether the DOJ has a case.

    Personally, I think this could be overreach. Also, foreign banks may start refusing to serve US customers at all -- what bank would want to risk having to hand over 50% of bank balances, no matter how squaky clean it is .. Treasury should also be concerned about the impact on US capital markets -- any negative fiscal impact there could far outweigh any benefits from lessened tax evasion and fine $$

  25. Anonymous,

    Thanks for calling this article to my attention. I do have some thoughts on the subject but need time to collect and assemble them into a coherent whole (or at least a coherent half). I will try to get to it tomorrow.

    I will say right now that what is tweaking my mind (or at least my imagination) in another context is the interface of the derivative/vicarious liability provisions (18 USC 2 and conspiracy/Pinkerton) with the tax evasion provisions of the code. I have noised around that issue in prior blogs, but am now trying to put my thoughts together as a coherent whole (or at least half).

    Having said that, it is obvious that the Government has many criminal code provisions that it can deploy against the offshore banks (even those without much of a U.S. footprint). But, focusing on the FBAR criminal provisions, it seems to me that it could probably get convictions of the banks for the subtantive offense either directly or, if not directly, then handily under accomplice or causer liability under Section 2 or vicarious liability under conspiracy/Pinkerton.

    Now, I just have to think about the civil FBAR liability provisions, but moving back to the criminal side, perhaps some type of restitution would be a proxy for the civil penalties. Having just said that before I thought about it, I have to say that it is probably not that good an idea. Still, I will work on it and see what is there.

    Thanks again,

    Jack Townsend

  26. IRS/DOJ have a productive campaign going. Between John Doe Summons and Voluntary Disclosure Programs they are creating a self perpetuating process that pits banks against clients and vice versa. The John Doe Summons make the banks turn in clients while the Voluntary Disclosures make clients turn in the banks. All the while, the government can penalize both parties. Simply brilliant! I think the writing is on the wall for this type of tax evasion sceme. In 2013 FATCA will kick in and further pressure the concept of Americans with undeclared offshore accounts. There will likely be some very significant penalties paid to the government in the near future.

  27. Just wondering if anyone seen a rejection so far for 2011 ovdi for HSBC account holders?

  28. Boy, with a worsening US economy, and a brighter future in a growing India, I just have to wonder, along with the crazy FATCA rules, if banks aren't just going to say, screw it, it is not worth doing business in America or with Americans any more. I wonder if a lot of Indian software Engineers and entrepreneurs aren't looking at returning home, rather than disclose anything. To be subject to such penalties and threats, US residency might not look so attractive any more. What is that cost to the US economy, and does it offset the supposed tax revenue gains. Just pondering the unintended consequences of all of these IRS actions. Makes you wonder.

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