HSBC tax scandal prompts rivals to check for ‘problem dossiers’

The reaction of rival private banking executives to the tax evasion scandal unfolding at HSBC has been swift. Many have called internal meetings and brought in outside advisers in the past 10 days to check there are no “problem dossiers” lurking in their own client portfolios, said several industry executives.

The raid on HSBC’s Swiss headquarters on the shore of lake Geneva by the local public prosecutor on Wednesday morning will have only intensified the industry’s clean-up operations.

The issue many in the industry face is that the controversial practices HSBC has been accused of — and for which it has apologised — were rife until a few years ago, say the executives. However much they sanitise their existing operations there is still a risk of the past catching up with them, they add.

The Geneva public prosecutor said it had launched a criminal inquiry into suspected “aggravated money laundering” by HSBC’s Swiss private banking arm in response to “recent public revelations”.

HSBC has been reeling since the publication of damaging details about alleged tax evasion by wealthy clients of its Swiss private bank by the Washington-based International Consortium of Investigative Journalists and dozens of other news groups at the start of last week.

The reports showed how some of HSBC’s Swiss clients between 2005 and 2007 were offered a variety of services to help them dodge the taxman. These included giving them large, untraceable “bricks” of cash in foreign currencies and setting up offshore companies to hide their undeclared wealth from authorities.

The revelations have sparked political outcry in several countries. Politicians have demanded to hear why regulators — who have known the details of the affair for almost five years — have not been tougher on HSBC and the clients of its Swiss unit.

Yves Bertossa, the Geneva public prosecutor, left HSBC’s office on the Quai des Bergues at about 10:45 local time. He drove off with half a dozen other plain-clothed officials after spending more than an hour searching the premises.

The raid came as a surprise to HSBC. The first some of the bank’s executives in London knew of it was when the Geneva prosecutor’s office made a public statement as the raid began.

It also surprised many in the Swiss private banking industry, who have become used to Swiss authorities taking a hands-off approach to allegations that the country’s banks helped many of the world’s super-rich to hide their wealth from tax authorities.

Saverio Lembo, a defence lawyer at Bär & Karrer in Geneva, said: “Money-laundering by definition requires a predicate offence, and this has to be under Swiss law technically a crime — punishable with more than three years of prison — as opposed to a simple felony.

“While the law is about to change, tax infractions are currently not a criminal offence under Swiss law,” he added. “This means that Swiss prosecutors are probably after other predicate offences than tax infractions, such as drug trafficking, financing of terrorism, corruption, etc.”

HSBC is being investigated over the tax evasion allegations in other countries, including the US, France, Belgium and Argentina. Some bankers questioned whether the Swiss authorities were trying to save face by raiding the bank.

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“The move is so belated that they would have done better to let it go. How embarrassing,” said one Swiss private bank executive, speaking on condition of anonymity. He added that most big Swiss private banks should have cleaned their portfolios of dodgy clients “ages ago”.

Hervé Falciani, a Franco-Italian IT specialist who worked at HSBC’s Swiss private bank for a decade, downloaded details of its client accounts — including private notes taken by the bank’s advisers — between 2005 and 2007.

He fled to France in 2008, and later that year the files ended up in the hands of the French finance ministry, which has subsequently passed them on to several other countries, including the UK. It is not clear if the Swiss authorities have seen the files.

Until now, the main response of the Swiss authorities has been to brand Mr Falciani a thief and try to extradite him for breaching Swiss banking secrecy. Late last year, the Swiss attorney-general charged Mr Falciani with data theft from HSBC, saying his motivation was “cashing in”, after he allegedly tried to sell the data.

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When the revelations were first published 10 days ago, HSBC said its Swiss private bank had undergone a comprehensive clean-up that included shedding many high-risk clients.

The bank said its acquisition of Republic National Bank of New York and Safra Republic Holdings in 1999 — accounting for the bulk of its Swiss private bank — brought with it “a very different client base and had a significantly different culture to HSBC”. It added the Swiss business “was not fully integrated into HSBC, allowing different cultures and standards to persist”.

HSBC also said the Swiss private banking industry had changed dramatically in recent years and it had “implemented numerous initiatives designed to prevent its banking services being used to evade taxes or launder money”.

Swiss regulator under fire over supervision

Finma, the Swiss regulator, has conducted three investigations into HSBC’s Swiss arm in the last three years, focusing on IT security and money laundering, writes Madison Marriage. The regulator, which does not have the power to impose fines, found that the bank had breached certain rules and issued sanctions as a result.

Finma declined to comment on what the sanctions entailed but said that in general it can require the banks, insurers or asset management companies it oversees to alter their business models or enhance compliance standards.

Criticism is now being levied at Finma for being too lenient with the country’s banking sector, which has faced a number of issues following the financial crisis, including its role in the manipulation of Libor and foreign exchange rates.

To regain credibility Swiss authorities have to show that the rules are not just on paper

Patrick Emmenegger, an economics professor at the University of St Gallen, said: “Finma has been extremely secretive about [the money laundering issues at HSBC]. They are being accused of not being tough enough. Supervision has been relatively weak in Switzerland and the cosy relationship [between regulatory authorities and companies] cannot go on.

“[All Swiss authorities] are under pressure to be more robust in these matters. To regain credibility Swiss authorities have to show that the rules are not just on paper.”

A Swiss fund manager, who requested anonymity, described the regulator as “chronically understaffed and under-resourced”.

Finma was formed in 2009 to replace the Swiss Federal Banking Commission, which had limited resources, according to Mr Emmenegger. “Finma is a major step forward in terms of resources, but now even more action is needed,” he said.

In response, Finma, which has 480 full-time employees, said: “Finma is a supervisory authority and naturally criticism will be levied at us. We accept these criticisms and take them seriously. Frequently, however, this criticism is contradictory: either we are accused of reacting too slowly, or we are criticised for going too far in our remit. Finma operates under predetermined legal parameters and strives to be credible, consistent and coherent.”

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