Soon after Stuart Gulliver became chief executive of HSBC at the start of 2011 he hung a “for sale” sign on the Swiss private bank it had owned since completing the acquisition of a rival more than a decade earlier.
Mr Gulliver later abandoned the sale process after a lukewarm response from potential buyers. Yet given the furore produced by this week’s revelations about what had been going on at HSBC’s Swiss private bank at the time, it is easy to understand why he was eager to exit the business.
A vast cache of leaked bank account documents for clients of HSBC’s Swiss private bank between 2005 and 2007 has found its way to the Washington-based International Consortium of Investigative Journalists and other news organisations.
In total, there are 60,000 leaked files, some of which provide details of how the bank was aware of tax-avoidance behaviour and wrongdoing by some clients. The total value held in the bank accounts exceeds $100bn for more than 100,000 wealthy clients around the world.
News organisations published on Monday damaging revelations about widespread tax-avoidance practices in HSBC’s Swiss operation at the time, prompting outcry from some quarters about why governments — who have had these documents for almost five years — have not done more to prosecute individuals where appropriate.
“This is extremely damaging both for the bank and for the concept of banking secrecy,” says a rival Swiss banker, speaking on condition of anonymity. “HSBC’s franchise was already pretty damaged here, which is why they tried to sell it a few years ago.”
The reports allege that HSBC’s Swiss private bank provided large, untraceable bricks of cash in foreign currencies to clients and colluded with them to conceal “black” accounts from tax authorities.
The bank allegedly colluded with clients to conceal evidence of their Swiss bank accounts from relevant tax authorities. Code names including Captain Kirk, Painter and Capitaine Haddock were used to disguise clients’ identities. It also “aggressively marketed” schemes likely to enable wealthy European clients to avoid taxes.
France, Belgium and Argentina have already launched formal investigations into allegations that HSBC helped citizens of those countries to hide undeclared money from the taxman in accounts at its Swiss private bank.
|Today’s comment on HSBC|
|● Business Blog Andrew Hill revisits the former HSBC chairman’s 2009 book ‘Good Value’|
|● FT View: HSBC revelations are an invitation to prosecute|
|● Inside Business: Another legacy issue for HSBC to clean up, by Patrick Jenkins|
|● Lombard: HSBC’s unpalatable Swiss role reflects colonial bank’s federal failings, by Jonathan Guthrie|
|● Philip Augar: Travails of HSBC are a microcosm of problems in banking|
In the UK, investigations by the HMRC have resulted in about £135m of unpaid tax, interest and penalties being handed over by the British citizens involved, only one of whom — Michael Shanly, a property developer — has been prosecuted for tax evasion.
HSBC said many private banks at the time, including its own Swiss operation, had “a number of clients that may not have been fully compliant with their applicable tax obligations. We acknowledge and are accountable for past compliance and control failures”.
The bank said: “We have taken significant steps over the past several years to implement reforms and exit clients who do not meet strict new HSBC standards.” It added that its private bank client base had shrunk 70 per cent in the past decade.
It also said the 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”.
“The business acquired was not fully integrated into HSBC, allowing different cultures and standards to persist,” the bank said. “With hindsight, it’s clear that too many small and high risk accounts were maintained and the business was stretched over more than 150 geographical markets.”
HSBC is one of several Swiss banks still being investigated by the US Department of Justice for allegedly helping American citizens to evade taxes. UBS and Credit Suisse have recently settled with the DoJ, paying fines of $780m and $2.6bn respectively.
Switzerland has also signed agreements with several European countries to allow clients of Swiss banks to declare money that had previously been hidden from tax authorities in return for paying the tax they owe, interest and potential fines.
Swiss bankers say the industry has cleaned up its act. “The Swiss and international private banking industry has pursued higher international compliance standards [for] some years now,” says Ray Soudah at Millenium Associates, a Swiss consultancy.
“This is not a good thing for the entire Swiss financial centre — that is clear,” says Sindy Werner at the Swiss Bankers Association, adding: “It is very important to say that today the Swiss banks have really changed.”
Mr Gulliver has stressed the importance of keeping HSBC out of trouble since he took over. The bank paid almost $2bn in fines and signed a five-year deferred prosecution agreement with US authorities in December 2012 after admitting that it processed drug trafficking proceeds through Mexico and transmitted funds from sanctioned countries including Iran.
The agreement puts it at risk of a criminal conviction and potential loss of its crucial US banking licence if it commits another crime in that period. The tax-dodging allegations relate to actions that happened before the deal, so are unlikely to affect it.
But there are signs that HSBC has already been dismantling its troublesome private bank, which produced barely 3 per cent of the group’s $12.3bn of total pre-tax profits in the first half of 2014.
Krishna Patel, HSBC’s global head of private banking, resigned in December 2012, while Alexandre Zeller, the head of global private banking for Europe, Middle East and Africa, also left the bank in February of that year.
HSBC recently pulled out of the stately Geneva lakefront building where it once received VIP clients. The offices at 37 Quai Wilson are now up for lease in a sign of the depth of change hitting its Swiss operations.
Last year, it sold $12.5bn of Swiss private banking assets to Liechtenstein’s LGT Group, cutting its total assets by 15 per cent. In recent months, rival bankers have started to speculate that Mr Gulliver will once again look for a full exit.
Additional reporting by Madison Marriage in Zurich