HSBC – plenty of cheesy tax shelters

Reports reveal that clients’ accounts held more than $100 billion, including $31.2 billion from clients based in Switzerland, $21.7 billion from Britain, $14.8 billion from Venezuela and $13.4 billion from US clients.

Hot on the heels of scathing remarks from the media about tax dodgers using shelters in Swiss branches of HSBC, one rejoices about its contrite admission that it has taken steps to clean its stables.

HSBC Holdings in a statement admitted failings by its Swiss subsidiary in response to media reports that it helped wealthy customers dodge taxes and conceal millions of dollars in assets.

Reports reveal that clients’ accounts held more than $100 billion, including $31.2 billion from clients based in Switzerland, $21.7 billion from Britain, $14.8 billion from Venezuela and $13.4 billion from US clients.

Perhaps it was not so surprising that 140 Maltese account holders had $687.4 million stashed away in Switzerland, away from the radar of the tax authorities, when so many millions were repatriated not so long ago following a tax amnesty last year.

In fact it is an open secret that HSBC disputed the actual amount of accounts claimed by the reports in its Swiss private bank, claiming they were much lower. Really and truly there has been a gradual closure of accounts as HSBC has reported a drop in the number of its Swiss private banks – it had 30,412 accounts in 2007, which had fallen to 10,343 at the end of last year.

The Guardian published allegations about HSBC’s Swiss private bank facilities with reference to documents obtained by the International Consortium of Investigative Journalists (ICIJ) via Le Monde.

The Swiss Leaks project, spearheaded by the International Consortium of Investigative Journalists, is based on a discovery of almost 60,000 leaked files that provide details on over 100,000 HSBC clients and their bank accounts. That response raises serious questions about oversight of the Swiss operation by senior executives of its parent company, HSBC Group, headquartered in London.

It has now acknowledged that it was not until 2011 that action was taken to bring the Swiss bank into line.

“HSBC was run in a more federated way than it is today and decisions were frequently taken at a country level,” the bank said. Definitely tax authorities around the world have had confidential access to the leaked files since 2010, yet the extent of the misconduct has never been made public, such that quoting one memo, an HSBC manager was recorded discussing how a London-based financier whom the bank codenamed “Painter”, and his partner, could cheat on Italian tax.

In another controversial case one meets the story of millions stashed away belonging to Emmanuel Shallop, who was subsequently convicted of dealing in “blood diamonds”, the illegal trade that helped propel war in Africa.

Paradoxically an internal memo reads as follows: “We have opened a company account for Emmanuel based in Dubai… The client is currently being very careful because he is under pressure from the Belgian tax authorities who are investigating his activities in the field of diamond tax evasion.”

Such practices suffered no prejudices as it also served those close to discredited regimes, such as of former Egyptian President Hosni Mubarak, former Tunisian President Ben Ali and current Syrian ruler Bashar al-Assad.

It is not surprising that HSBC provided assurances to its wealthy patrons that it would not disclose details of accounts to national authorities, even if evidence suggested that the accounts were undeclared to tax authorities in the client’s home country.

As an added convenience, one reads in the ICIJ files how diligent bank employees discussed with clients a range of measures that would ultimately allow clients to avoid paying taxes in their home countries.

How the mighty do fall out of grace – HSBC, the world’s second largest bank, has admitted wrongdoing by its Swiss subsidiary. “We acknowledge and are accountable for past compliance and control failures,” the bank said in a statement to The Guardian.

The Swiss arm, the statement said, had not been fully integrated into HSBC after its purchase in 1999, allowing “significantly lower” standards of compliance and due diligence to persist.

This is a lame excuse given that strict rules set by Basel 11 equally applied to Swiss banks which were monitored by regulators. So readers may well ask what actually happened for so many millions to go undetected, safely sheltered in the Swiss vaults of HSBC branches?

The answer can be found in reading The Guardian, which alleged that HSBC’s Swiss bank routinely allowed clients to withdraw tranches of cash, often in foreign currencies which were of little use in Switzerland. Furthermore The Guardian discovered how in a smart marketing trick HSBC actively created schemes which were likely to enable wealthy clients to avoid paying European taxes and colluded with some to conceal undeclared accounts from domestic tax authorities.

It seems that HSBC could not resist temptations to make the extra buck as one recounts its encounters with wealthy account holders handling Mexican drug monies. When this was discovered HSBC was contrite, saying: ‘We apologise, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.’

The bank says it has sharpened up its controls and doubled spending on compliance to £255 million. It also said it was closing 20,000 accounts in the Cayman Islands as a result of the investigation.

This could not come a moment too soon, especially when HSBC is linked to drug cartels, money launderers from Mexico, and suspect funds from Syria, Iran and Saudi Arabia – something went seriously wrong since an internationally reputable bank like HSBC will not be perceived to be associated with such questionable transactions.

But that is exactly what the US Senate was questioning as they came to the conclusion that a “pervasively polluted” culture at HSBC Holdings Plc allowed the bank to act as financier to clients seeking to divert suspect funds from the world’s most dangerous and secretive corners, including Mexico, Iran, Saudi Arabia and Syria.

The business practices of HSBC allegedly acted as a trusted conveyor belt for terrorists, drug dealers and money launderers. To conceal the transactions, HSBC affiliates allegedly used a method called “stripping”, where references to Iran are deleted from the books. HSBC affiliates also characterised the transactions as transfers between banks without disclosing the contact to Iran in what the Senate report called a “cover payment”.

Another serious revelation concerns the support of President Assad’s regime during the Syrian civil war against his own people. HSBC ran an offshore slush fund for billionaire businessmen who have bankrolled President Bashar al-Assad.

The bank did not disclose the information that two of Assad’s relatives – described separately as the “face and brain” of Syrian corruption – were beneficiaries of a trust in the Cayman Islands. The salt in the wound is the discovery that HSBC’s US division furnished money and banking services to some banks in Saudi Arabia and Bangladesh believed to have helped fund al-Qaeda and other terrorist groups.

It is believed that the global regulatory fines when all investigations are concluded reach $2 billion. To conclude on a positive note it is refreshing to admire that Malta ‘s banking reputation has passed all proprietary tests with flying colours. While this may be a consolation for us yet we cannot but sympathize with Med economies still hurting under the stiff regulatory overdoses that were partially triggered as a consequence of bank excesses mentioned in this article.

How can we ever ignore the curse of the sovereign debt crisis that has hit Greece and Cyprus. True solidarity with our EU neighbors exhorts us all to rally together to restore banking confidence – there is no other way to quickly return to banking stability and fiscal probity.