The past few days have seen a stream of negative headlines about banks that will do nothing but perpetuate the sense that they not only were, but still are, actively engaged in wrongdoing, including flagrant breaches of criminal laws. That image of bankers as bad guys just won’t go away, and with the stories that continue to emerge, it’s no wonder.
The allegations against HSBC’s Swiss operation actively promoting tax evasion for wealthy clients – bizarrely originating from someone who refused the whistleblower channel but who instead stole client data with a view to shopping it to Lebanese banks and others – is just the latest episode in the long-running tax saga involving Swiss private banks.
For HSBC, this is pretty damning, coming in the wake of the US$1.9bn fine it paid in December 2012 in the US for lax money laundering controls. The bank now faces criminal investigations in the US, France and other countries.
Beyond the HSBC tax-evasion story, we have the FBI, SEC and FINRA involved in claims against UBS in Puerto Rico for trying to strong-arm reluctant staff to sell bond funds stuffed with Puerto Rican government and agency debt underwritten by the bank itself that its own brokers said were highly-leveraged, illiquid and unstable.
And the US Department of Justice is expanding the scope of the FX probe by investigating a number of banks for excessive undisclosed mark-ups – a probe that includes structured products sold by Barclays and UBS to hedge funds and other sophisticated clients where the banks reportedly failed to disclose profits they made from FX switch trades. (The DoJ, of course, was not part of the settlement UBS made with various authorities for under the FX spot rigging investigation, while Barclays declined to settle pending the outcome of the New York Superintendent of Financial Services’ case against it.)
I’m not going to comment on the individual instances of right or wrong in any of these cases – I don’t have enough information for a start. I certainly don’t know whether the banks had any fiduciary or any other responsibility in the structured products investigation that should have required them to disclose what went on in the back-end. And as with most wrongdoing or allegations of wrongdoing that have emerged to-date, these are not current examples; they’re in some cases years old. Alas, as is the way with these things, there’s rarely smoke without fire.
Undesirables on both sides
As for HSBC, the chap who stole the data – Herve Falciani – has been charged with qualified industrial espionage; unauthorised obtaining of data; and violation of Swiss banking secrecy. The data is the data, I guess. How it got out there is another matter…
You’ve got to wonder about Falciani. The Swiss Attorney-General’s office (OAG) brought charges against the ‘fugitive IT specialist’ in December following a tip-off that he had tried sell the client data he’d stolen to Lebanese banks and several foreign authorities using a false name. The OAG said it had become aware of the events as early as April 2008 and initiated criminal proceedings a month later.
Following initial questioning by the OAG during which he admitted the offences, it appears he skipped Switzerland under cover of darkness for France. French authorities conducted house searches but only a year later sent the results to the OAG, at which time an international arrest warrant was issued and he was arrested in Barcelona in 2012. Following failure of an extradition request, he was released in May 2013 but a Swiss hearing will be held in absentia. (This is truly the stuff of Hollywood).
Ongoing saga
The HSBC story is but the latest element to a tax saga that has been running for years involving Swiss private banking. It’s already led to a ton of government-to-government and other settlements, name give-ups, and the closure of Wegelin & Co – Switzerland’s oldest bank. The implications for Swiss private banking have been wide-ranging and profound. (Roger Keller, a former Wegelin adviser, was arrested a few days ago in Germany and is being held pending extradition to the US to face charges by US prosecutors that he helped Americans evade more than US$1.2bn in assets.)
I do wonder, though, what HSBC thinks it achieved by issuing a long and detailed statement on the matter. It tried valiantly to say it had been actively engaged in dealing with the racier element of its private banking cadre but at the end of the day it all reads a little unconvincingly, especially in light of comments by former employees that the status quo was little changed as late as 2013.
This undermines one of the central points of HSBC’s lengthy response, which is that it had “undergone a radical transformation” and actively managed down the number of clients in its Swiss private bank by 70% as a result of a change of focus that now targets owners and principals of its commercial banking clients.
Having acquired the business in 1999, HSBC said it put a “more rigorous control structure in place” from 2008 (2008?) exited US resident client business in 2010, undertook a complete overhaul of its entire private banking business in 2011 at the time of a group re-org and is now committed to the highest or most effective standards across the group to combat financial crime under a 2012 diktat from CEO Stuart Gulliver.
Despite the protestations, I was taken with an over-riding sense that the bank did too little too slowly to wheedle out undesirables or people who no longer fitted the mould.
I was fascinated by a passage in the bank’s statement, which is food for thought:
“Regulatory and public expectations of a bank’s role in ensuring tax compliance by its clients have dramatically shifted. 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”.
Until the re-regulation of the banking industry, banks assumed it was the client’s responsibility to declare income for tax purposes, not them. This is a fundamental change in approach and in pushing this line, regulators are forcing banks to become arms of regulation and supervision. I ask myself whether this the right approach. Answers on the proverbial postcard.
