Sunday 8 February 2015
US government faces pressure after biggest leak in banking history
Questions
for Department of Justice and IRS after disclosure of leak revealing HSBC’s
private Swiss bank helped clients to conceal undeclared ‘black’ accounts.
The US government will come under
intense pressure this week to explain what action it took after receiving a
massive cache of leaked data that revealed how the Swiss banking arm of HSBC,
the world’s second-largest bank, helped wealthy customers conceal billions of
dollars of assets.
The leaked files, which reveal
how HSBC advised some clients on how to circumvent domestic tax authorities,
were obtained through an international collaboration of news outlets, including
the Guardian, the French daily Le Monde, CBS 60 Minutes and the
Washington-based International Consortium of Investigative Journalists.
The files reveal how HSBC’s Swiss
private bank colluded with some clients to conceal undeclared “black” accounts from
domestic tax authorities across the world and provided services to
international criminals and other high-risk individuals.
The disclosure amounts to one of
the biggest banking leaks in history shedding light on some 30,000 accounts holding
almost $120bn (£78bn) of assets. Of those, around 2,900 clients were connected
to the US, providing the IRS with a trail of evidence of potential American
taxpayers who may have been hiding assets in Geneva.
A trail of evidence
The data was leaked by a computer expert turned whistleblower working in HSBC’s Geneva office. French authorities later obtained the files and shared them with the US Internal Revenue Service in 2010. That year, amid growing scrutiny from US tax authorities, HSBC’s private bank in Switzerland stopped doing business with US residents entirely.
The US Department of Justice and
IRS have been investigating HSBC’s Swiss banking operations ever since but the
scale of those inquiries remain unclear.
Confronted by the Guardian’s
evidence, HSBC admitted wrongdoing by its Geneva-based subsidiary. “We
acknowledge and are accountable for past compliance and control failures,”
the bank said in a statement. 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.
HSBC added: “Beginning in 2008
HSBC began to put a more rigorous control structure in place in the Swiss
private bank by, for example, introducing a new policy on US persons and
reducing the number of US taxpayer accounts. In 2010, the Swiss private
bank decided to exit US resident client business entirely.”
However the Swiss files, made
public for the first time by the Guardian and other media, are likely to raise
questions in Washington over whether there is evidence to prosecute HSBC or its
executives in the US. Lawmakers are also expected to question the rigour of IRS
investigations into undeclared assets hidden by US taxpayers in Geneva.
The IRS said it “remains
committed to our priority efforts to stop offshore tax evasion wherever it
occurs”, and pointed out it has collected more than $7bn from a program,
introduced in 2009, that allows US taxpayers to voluntarily disclose previously
undeclared offshore accounts.
However the IRS declined to say
how much it has retrieved in back taxes, interest and penalties as a result of
investigations stemming from the leaked HSBC Swiss data. The IRS also declined
to say how many US taxpayers have been investigated as a result of the leak,
citing taxpayer privacy and the Tax Information Exchange Agreement (TIEA), a
treaty that renders secret information shared between the US and France. The
DoJ said it “does not confirm or deny the existence of an investigation”.
Senior Senate sources said
government officials are likely to be questioned on Capitol Hill over what
action was taken after the US received the leaked HSBC data almost five years
ago.
Intense scrutiny in DC
On Tuesday, Maryann Hunter, who is on the board of governors of the Federal Reserve, and has some responsibility for regulation of foreign banking organizations operating in the US, will give evidence to the Senate banking committee. Two days later, Geoffrey Graber, a deputy associate attorney general at the DoJ who oversees settlements with Wall Street banks, will appear before a House judiciary subcommittee. Both are expected to be questioned about the leak.
Public disclosure of the leaked
files comes at a critical moment for HSBC in the US, where prosecutors have
already warned the bank is operating under a “sword of Damocles”. HSBC global
and its US bank was forced to pay a $1.9bn fine two years ago after the DoJ uncovered
evidence HSBC subsidiaries had enabled clients to breach US sanctions against
Cuba, Sudan and Iran and, due to oversight failures, allowed Mexican drug
cartels launder billions of dollars.
That deal was unveiled in
December 2012, six months after a damning investigation into HSBC global and
its US affiliate by the Senate permanent subcommittee for investigations. The
deferred prosecution agreement made no mention of evidence of tax evasion
connected to HSBC’s Swiss banking division, even though the US government had
received the leaked data two years earlier.
The 2012 settlement was overseen by Loretta Lynch, who was then US Attorney for
the Eastern District of New York. Lynch is currently Barack Obama’s current
nominee for attorney general.
At the time, the HSBC settlement
was heavily criticized by both Republicans and Democrats for allowing the bank
to escape criminal indictments and keep the charter which enables it to operate
in the US. Lynch and other senior DoJ officials defended the deal, pointing out
it committed HSBC to a five-year plan to stamp out money laundering and other
illicit practices, an ongoing process that is being overseen by an independent,
court-appointed monitor.
Files pertaining to HSBC’s
private bank in Switzerland were obtained by a Geneva-based computer technical
analyst, Herve Falciani, between 2006 and 2007. The files were later seized by
French authorities and have been quietly shared with governments around the
world, some of which have mounted investigations into tax evasion.
The HSBC leak has sometimes been
referred to as the “Lagarde List”, after the then French finance minister,
Christine Largarde, who shared portions of the HSBC data with her accounts counterpart
in Greece. The Guardian has reviewed the list of US clients with accounts in
HSBC’s private Swiss bank. They include prominent film directors, sports stars,
hedge fund managers, retail magnates and major political donors. The HSBC files
provide no indication as to whether US clients declared their assets to the
IRS.
In a recent court filing, Michael
Danilack, a deputy commissioner at the IRS in Washington, said he asked the
French for details of US individuals with undisclosed accounts in
HSBC’s Swiss bank in early 2010. The request was granted and he received a CD
file containing data leaked from HSBC’s Swiss bank “on or about April 6, 2010”,
he said.
Prosecuting cases in US
There is evidence in that at least some US clients of HSBC’s private Swiss bank have been prosecuted. HSBC was found to have handed over “bricks” of $100,000 a time to US surgeon Andrew Silva in Geneva, so that he could illegally mail cash back to America. He mailed the sum to an address of his home state in Virginia in sums of less than $10,000, to avoid declaring the packages to US customs. He pleaded guilty to criminal tax evasion in 2010.
Another US client, Sanjay Sethi,
pleaded guilty in 2013 to cheating the US tax authorities by maintaining $4.7m
in accounts in Switzerland and India. The prosecution in his case said a
high-ranking HSBC executive based in London promised on Swiss 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”.
It is not known how many other
investigations have been brought against US taxpayers over undeclared assets in
HSBC’s Swiss bank, or whether the DoJ is considering prosecuting the bank or
its executives. Almost five years after the data leaked by Falciani was passed
onto US authorities, the investigations into HSBC’s private Swiss bank appear
to be ongoing.
HSBC’s most recent annual report,
published last year, said the bank was under investigation in the US by the DoJ
and IRS “regarding whether certain HSBC companies and employees acted
appropriately in relation to certain customers who had US tax reporting
requirement”. It added: “In connection with these investigations, HSBC Private
Bank Suisse SA, with due regard for Swiss law, has produced records and other
documents to the DoJ and is cooperating with the investigation.”
It also warned HSBC shareholders
there was a “high degree of uncertainty” over the ongoing US investigations and
it was possible the bank could be forced to pay “significant” fines and
penalties.
The DoJ was under pressure to go
beyond financial penalties – to bring criminal charges against HSBC or its
bankers – in July 2012, after the Senate’s permanent subcommittee on
investigations published its crushing 330-page report documenting how the
bank’s lax anti-money laundering controls had been exploited by drug
traffickers.
HSBC’s head of compliance, David
Bagley, resigned before the committee during a gruelling cross-examination from
senators. Six months later, in December 2012, HSBC negotiated the settlement
with the DoJ in which it agreed to pay almost $2bn and commit to a five-year
plan to stamp out illicit practices, overseen by the independent monitor.
The settlement proved
controversial because it stopped short of criminally indicting the bank or its
executives; lawmakers from both parties complained it revealed some Wall Street
institutions were considered “too big to jail”.
HSBC deal ‘fundamentally wrong’
The Democratic senator from Massachusetts Elizabeth Warren famously labelled the HSBC deal “fundamentally wrong”. “HSBC paid a fine, but no individual went to trial, no individual was banned from banking and there was no hearing to consider shutting down HSBC’s actives in the US,” Warren said at a Senate committee hearing in 2013. “How many billions of dollars do you have to launder for drug lords and how many sanctions do you have to violate before someone will consider shutting down a financial institution like this?”
At the time of the HSBC
settlement, Lanny Breuer, then the head of the DoJ’s criminal division,
insisted the bank was not being let off the hook. “It’s the first time in
history that a foreign institution is going to have a monitor,” Breuer said.
“There’s a sword of Damocles right now over HSBC.” Lynch told a CBS news at the
time that she expected HSBC to “literally turn their company inside out” as part
of the agreement.
Lynch was pressed over the HSBC
settlement by Democratic senator Richard Blumenthal last week, during a
confirmation hearing by the judiciary committee. Obama’s candidate for attorney
general did not comment on the specifics of the deal, but told senators she was
committed to “aggressively” pursuing white collar crime. “No individual is ‘too
big to jail’,” she said. “And no one is above the law.”
HSBC is now just over two years
into its reform plan, and has been deemed to be complying with the terms of the
settlement. However the court-appointed monitor, Michael Cherkasky, who
oversees a team of banking investigators who review HSBC’s changes, has
expressed some concern over the pace of reform. Cherkasky’s most recent
assessment of HSBC’s ongoing efforts to clean up its act has once again
concluded it could do better, according a recent report in the Wall Street
Journal which cited people familiar with its findings.
Meanwhile, HSBC remains entangled
with US law enforcement and regulators on other fronts. In November, the bank
reached with the the Securities and Exchange Commission in which HSBC agreed to
pay $12.5m to resolve charges that its Swiss private banking division illegally
provided investment and brokerage services to US clients.
The following month, the IRS
issued a court summons to HSBC USA to “produce information about US taxpayers
who may be evading or have evaded federal taxes” using a company called
Sovereign Management & Legal Ltd, which trades via the website named ‘offshore-protection.com’.
Prosecutors believe the US correspondent bank accounts that HSBC USA holds
for Sovereign’s banks in Panama and Hong Kong are likely to have records of
financial transactions by US clients who may have evaded taxes.
In May last year, the DoJ
revealed it was prepared to bring criminal charges against banks suspected of
involvement in tax evasion, when it forced Credit Suisse to plead
guilty to a major conspiracy to aid US taxpayers filing false returns to the
IRS. Under a plea agreement, Credit Suisse paid a total of $2.6bn.
“This case shows that no
financial institution, no matter its size or global reach, is above the law,”
the Attorney General Eric Holder said at the time. “Credit Suisse conspired to
help US citizens hide assets in offshore in order to evade paying
taxes. When a bank engages in misconduct this brazen, it should expect that the
Justice Department will pursue criminal prosecution to the fullest extent
possible, as has happened here.”
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