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Investigations into the bank

New Law, New Loophole, New Business for Giant Global Bank HSBC

HSBC client notes reveal how the bank sold ways to shield wealth from tax authorities – and set off investigations the world over of both the bank and clients.

Selling ways to shield wealth from tax authorities – and setting off investigations the world over of both the bank and clients

HSBC bankers in Switzerland marketed secretive new ways for wealthy customers to shield their savings as Europe imposed sweeping reforms to curtail tax evasion a decade ago. 

“You should be aware of different options that exist to attenuate the economic effect of this tax,” said Colin Wyss, then chief operating officer of HSBC Private Bank (Suisse), and Denis Soussi, the bank’s head of tax, in a letter to clients in February 2005.

The letter is only part of the story.

A huge cache of previously confidential client files exposes private details on thousands of HSBC Private Bank (Suisse) accounts. They describe the bank’s efforts to help customers set up holding companies in Panama and the British Virgin Islands to get around a new mandatory 15 percent withholding of interest-income earned in Switzerland and a small number of offshore tax havens.

The account details are contained in government investigative files obtained by the French newspaper Le Monde and the International Consortium of Investigative Journalists.

In a written statement to ICIJ, HSBC said “the compliance culture and standards of due diligence” in its Swiss private bank were formerly “significantly lower than they are today.” HSBC said it recognizes that “banks are now expected to assist tax authorities in pursuing tax evaders in addition to not facilitating tax evasion or any form of non-compliance with tax obligations.” It did not acknowledge any lapses specifically related to European taxation.

Criminal prosecutors in Belgium, France and Argentina are now investigating the Swiss unit of London-based HSBC, the world’s second-largest bank holding company by asset size, and some of its customers. The issue reverberates in the United States, as well.

Sovereign Management & Legal Ltd's website
Sovereign Management & Legal Ltd’s website

In December, a federal judge authorized the Internal Revenue Service to issue summonses to HSBC Bank USA and several package-courier services to identify U.S. taxpayers who “may be evading” federal taxes by using the offshore consulting firm of Sovereign Management & Legal Ltd, according to the U.S. Attorney’s Office for the Southern District of New York. Some U.S. taxpayers may have used Sovereign to set up anonymous companies in Panama and elsewhere to “conceal their foreign assets,” federal prosecutors said.

The IRS is seeking records from the end of 2005 through 2013, a court filing said. They include documentation of Sovereign Management’s relationships with HSBC Panama and HSBC Hong Kong through accounts at HSBC USA. Such records “should be a rich source of leads to identify Sovereign’s U.S. clients,” the filing said.

Sovereign did not respond to a request for comment. 

$1.9 billion settlement 

The investigations come at a sensitive time. HSBC Holdings PLC, the corporate parent, and HSBC Bank USA, the unit named in the December court order, both narrowly averted criminal prosecution in 2012 for lax controls that allowed Latin American drug cartels launder at least $881 million and for “knowingly and willfully” helping to move hundreds of millions of dollars to Iran and other targeted nations to avoid U.S. sanctions.

They now operate under a U.S. court-approved monitor and a five-year deferred-prosecution agreement that could be terminated, resulting in prosecution, if either breaches the agreement or commits further crimes. HSBC paid $1.9 billion in penalties and agreed to wholesale reforms to address lapses in anti-money laundering controls and due diligence identified in a four-count felony criminal information filed in the case. 

The fine—the largest bank settlement in U.S. history at the time—amounted to less than two months of profit for the parent company, which started in  Hong Kong, a British colonial outpost, and Shanghai, during the late 19th century. It is now a global financial giant with 54 million customers, offices in 75 countries, and assets of about $2.7 trillion.

Some critics of the offshore banking system say the only effective way to discipline financial giants such as HSBC is to prosecute criminal charges or to go after the personal wealth of their top executives.

“They all walked off with a mountain of money. That’s ludicrous,” said Jack Blum, a former Senate investigator and senior advisor to the nonpartisan Tax Justice Network, in an interview. “Sending them to jail would be a good idea. But short of that, make them pay, down to the last cuff link.”

HSBC’s troubles have persisted ever since the settlement.

“At HSBC, their business people still don’t get it … They are more out of control than in control.”

In November, one of its principal operating units — London-based HSBC Bank PLC — was fined $618 million by regulators in the United States and the United Kingdom for routinely manipulating foreign-exchange markets with other large financial institutions. It is also a defendant in U.S. civil lawsuits in which investors allege that the bank and a small number of other big financial institutions manipulated gold and silver prices for years.

The U.S. Securities and Exchange Commission ordered HSBC’s Swiss private banking unit to pay an additional $12.5 million in November for providing unregistered investment-advisory services in the United States until late 2010 or early 2011.

Another U.S. regulator, the Federal Deposit Insurance Corporation, is pursuing civil claims against HSBC Holdings and its U.S. banking unit along with about two dozen other large financial institutions for allegedly manipulating the world’s most important interest rate, Libor, from 2007 to mid-2011.  

 “At HSBC, their business people still don’t get it,” said Dennis Lormel, former chief of the FBI’s financial crimes unit, in an interview. “They are more out of control than in control.” The bank’s culture won’t change, he added, “until the business side has its compensation tied into its compliance performance.”

Bank clients under scrutiny 

While HSBC defends itself on a growing number of legal fronts, tax authorities around the world are also taking aim at some of its customers using the bank’s own records.

This comes more than five years after a former HSBC computer specialist turned whistleblower, Hervé Falciani, spirited away Swiss private-bank account records and turned over the data trove to French authorities.

In August, HSBC disclosed that Belgian and French officials were investigating its Swiss affiliate.

“HSBC Private Bank (Suisse) SA has been notified that it has been placed under formal investigation by a Belgian judge who, along with the French authorities, is examining whether the bank acted appropriately in the past in relation to certain clients who had Belgian tax reporting requirements,” HSBC said in written comments. “Both the Belgian and French investigations have been notified in our filings previously and we will continue to cooperate to the fullest extent possible.”

Photo: AP
Photo: AP
In October, a Belgian judge formally accused HSBC of money laundering for allegedly helping more than 1,000 wealthy Belgians to evade taxes. U.S. authorities also are investigating whether some HSBC Private Bank customers failed to pay taxes on undeclared accounts owed to the U.S. Treasury, court filings in New Jersey and Virginia show.

Michael Danilack, an IRS deputy commissioner, filed a declaration in the Virginia case last February stating that in early 2010 he learned that France had “received information regarding U.S. persons who maintained undisclosed accounts at HSBC Bank in Switzerland.” Danilack said he requested copies of that information from French authorities and received a letter and compact disc of data in April 2010.

Danilack retired last July and was unavailable to comment.  An IRS spokesman declined to answer any questions about the cases, citing taxpayer privacy. 

In the New Jersey case, Eli Chabot and his wife Renee appeared for interviews with IRS lawyers in May 2012. The Chabots “refused to answer any questions about foreign bank accounts,” IRS revenue agent Angelina Grasty said in a court-filed declaration.

Eli Chabot held as much at $2.8 million in four undisclosed HSBC accounts through a company for which he was listed as the beneficial owner, according to an IRS filing. In October, the court ordered the Chabots to comply with the IRS request for information, which they are now appealing. 

Attorneys for Chabot didn’t return phone calls seeking comment.  

In February 2014, the IRS brought a similar enforcement action against Constantin Kotzev of Arlington, Virginia, an electrical engineer and businessman who provided Air Force One design work during Ronald Reagan’s presidency, according to the Cambridge Who’s Who.

Kotzev held as much as $859,823 in an undeclared HSBC account in Switzerland as of December 2006, according to the IRS.  Kotzev told the IRS he did “not possess any records responsive” to its request for information on the account, according to the revenue agents’ court filing. In July, the IRS told the court that Kotzev had “now produced all the responsive documents,” and dismissed the enforcement petition.

Matthew C. Hicks, an attorney for Kotzev, said his client had no comment on the IRS investigation, which is continuing.

New law, new loophole 

The dedication to secrecy by Swiss banks and their wealthy customers is one reason why the European Union and some non-EU partners such as Switzerland implemented the continent-wide transparency initiative known as the European Savings Directive, or ESD, in July 2005. 

Under the agreement, EU-member and cooperative states pledged to work together to report earned interest in one country to the account-holder’s home government.

In Switzerland, the government opted out of the information exchange and instead agreed to withhold 15 percent of interest income and remit most of it without disclosing clients’ names so that its privacy laws were maintained.

The initial phase of the program worked so well that Swiss-shared tax proceeds nearly tripled to €255.9 million ($324 million) between the second half of 2005 and the full year of 2006, according to a September 2008 staff working document prepared for the executive body of the European Union.

But the EU directive pertained only to individuals, not to corporations — a loophole that HSBC Private Bank seized on to market products that transformed an individual into a corporation for tax-reporting purposes.

HSBC records from the period demonstrate that the private bank’s relationship managers enthusiastically promoted products designed to dampen the ESD’s impact.

British Virgin Islands
British Virgin Islands Image: Photo: Shutterstock
By creating an offshore shell corporation in the British Virgin Islands or Panama that would be technically owned by an intermediary such as a foundation or trust, HSBC Private Bank and others created a double layer of anonymity for wealthy customers whose earning would remain hidden and untaxed, records and interviews show. 

“Met with Maurice, he will open a Panamanian corporation as a solution of the ESD. He will then transfer his assets to the new account,” states an HSBC account record from February 2005, referring to the account of Belgian real estate investor Maurice Freund, of London. Within the next couple years, an account in the name of the Panamanian corporation had as much as $2.3 million on deposit. Freund and his wife are listed as “Internet users” of this account, a role not defined in the files. This record is part of the computer files that ended up in government investigators’ hands. 

“Mr. Freund wishes to advise you that he is in contact with the relevant tax authorities regarding these accounts and there is nothing for your newspaper to be concerned about,” said Alan Blake of Willow Management, responding to a request for comment by Freund.

A June 2005 note in the account of the Iraqi-born British investment advisor Joseph Sofer— who instructed the bank on an account with up to $1.1 million in 2006-2007 —states, “The purpose of the new Trust is to shelter the funds from European Savings Directive.” Diana McNichol, a secretarial supervisor at Kleinwort Benson Bank in the Channel Islands, who is listed on investment fund materials as a contact for Sofer said she would forward to him a reporter’s request for comment. He did not respond to that request for comment.

“John called from Ireland,” begins another note in April 2005 about an account held by office-supply business owners John and Brenda Cashell, the bank’s records show. “We discussed his exposure to the ESD. His biggest concern is with regard to the exchange of information and I was able to assure him that there would be none.” A follow-up states, “John called form [sic] Spain. Once again his pre-occupation is with the risk of disclosure to the Irish authorities.” 

The Cashells held $515,899 at the account’s peak for 2006/2007. While bank records indicate the couple opted to invest in Spanish real estate rather than in one of the bank-marketed offshore trusts, John Cashell pleaded guilty in Ireland in December 2014 and was fined for failing to declare interest income on his tax returns from other offshore accounts for the years 2001-2003.

John Cashell did not respond to requests for comment left at his office and on his personal cell phone. 

Critics suggest solutions 

“It is, in my opinion, a scandal if HSBC [was] marketing a product that more or less overtly circumvents the new EU legislation,” University of Copenhagen economics professor Niels Johannesen said in an e-mail message.

David Garrido, general counsel to the Swiss private bank, was reminded during a Belgian judicial inquiry in late October 2014 of remarks he had made earlier to French authorities that “no Swiss bank was aware — right or wrong — that it was illegal to offer structures to clients in order not to be in the scope of the European Savings Directive.” In response, Garrido told Belgian authorities: “Today a diligent bank would have a different approach,” according to a copy of his testimony obtained by Le Monde. And HSBC does now, he added. 

Swiss bank deposits held by EU residents fell by as much as 40 percent relative to other Swiss deposits in the six months immediately before and after the ESD reporting requirements took effect, according to the Danish economist Johannesen, who studies tax avoidance and evasion.  He estimates that during the same period, Swiss-based deposits in Panama increased by 129 percent. 

Global Financial Integrity's Raymond Baker
Global Financial Integrity’s Raymond Baker
Raymond Baker, the president of Global Financial Integrity, a Washington-based nonprofit research and advisory service that tracks illicit money flows, is pushing Congress and U.S. rulemaking authorities to establish public registries of “beneficial owner” information that would be available to regulators and law enforcement.

The term “beneficial ownership” refers to who ultimately controls financial accounts, assets and entities, as opposed to who holds signature authority or legal title that can obscure it. 

Getting rid of anonymous companies is “the starting point for achieving financial transparency,” Baker said in an interview. He has called them “the number one tool for laundering the proceeds of crime, corruption and tax evasion.”

Meanwhile, HSBC’s court-approved monitor Michael Cherkasky — a former New York state prosecutor — has assembled a team of 60 to police the reforms the bank promised in its 2012 money laundering settlement. Cherkasky declined to comment for this story. 

In December 2013, U.S. prosecutors told the judge in the deferred-prosecution case that HSBC’s U.S. bank self-disclosed “three apparent violations of the Global Terrorism Sanctions Regulations” related to payments involving an individual and a company the U.S. Treasury Department had identified three years earlier as financiers of Hezbollah, the Lebanese-based terrorist group.

The prosecutors’ letter didn’t mention that a former HSBC anti-money laundering employee named Everett Stern says he discovered the same illicit flows just after the Treasury made the connection to Hezbollah. Stern said in a recent interview that he  complained about the alleged infractions to bank officials at the time and staged a public protest about this and other complaints in September 2013 — three months before the Justice Department reported HSBC‘s mea culpa.  Prosecutors said Treasury officials determined that any infraction was not the result of willful or reckless conduct, and the bank agreed to pay a $32,400 penalty. 

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