Thursday, February 26, 2015

A tide in the affairs of men.

I hope, and indeed, I hope I am not alone, when I say that I believe that the tide is  beginning to turn as far as official concern regarding banking wrongdoing is concerned.

I am starting to sense a stiffening of the sinews among those responsible for over-seeing the activities and the actions of the banks, and although the stirrings are small at present, I hope that they will continue to increase, as more and more, those responsible for banking management, are required to give an account of themselves.

Yesterday 25th February, saw an interesting example of what I mean.

Douglas Flint, Group Chairman, HSBC Holdings plc, and Stuart Gulliver, Group Chief Executive, HSBC Holdings plc, were called to make such an account before the House of Commons Treasury Committee.

After the usual pleasantries and thanks for coming, the Chairman, Andrew Tyrie asked Stuart Gulliver straight out to explain why with regard to his tax affairs, he had felt it necessary to put in place ‘such an extraordinary complex offshore structure with a Panamanian company’.

Once we had got past the self-serving and pious outpouring of a ritualistic apologia, for the ‘unacceptable conduct’ of HSBC in the past years, a statement which sounded as if it was being read from a lawyer’s briefing, the first thing we learned from this statement was that Stuart Gulliver, despite having been born and brought up in England, was now a Hong-Kong resident, with property in Hong Kong and thus considered as domiciled in Hong Kong. 

Thus began a most convoluted search for the real Stuart Gulliver, who is he, what does he do, where is he a tax payer etc?

Chairman Andrew Tyrie repeated his question to Gulliver why he had felt it necessary, as a Hong Kong domiciled person, to have a Panamanian company incorporated in his Swiss-based structures.

Gulliver was immediately at great pains to say that this structure was not used for tax purposes, in fact he protested this at least 4 times, although no-one had alleged any wrong-doing regarding tax issues.

He was like the man arrested by the Flying Squad in the early hours of the morning who, when questioned at the police station, but before any direct allegations are put to him. the first thing he says is ‘well I haven’t been doing any robberies’!

Gulliver was listed as the beneficial owner of an account in the name of Worcester Equities Inc, an anonymous company registered in Panama, containing a balance in 2007 of $7.6m.

It was through this entity that Gulliver’s HSBC bonuses were paid until 2003. It was subsequently closed in 2009. He also held a second account in the name of Worcester Foundation, which had been closed before 2007. 

Although now based in the UK, where HSBC has had its headquarters since 2003, Gulliver is domiciled in Hong Kong for legal and tax purposes.

So let us look at what HSBC had been doing during these years with a specific focus on tax arrangements.

The Guardian reports that HSBC’s Swiss bankers had been aggressively marketing a device that would allow its clients to avoid a new taxation facility,the European Savings Directive, introduced under a treaty Switzerland signed with the European Union, the HSBC files reveal.

The documents show for the first time that rather than acting as a passive party to the tax schemes of its clients, HSBC Suisse proactively contacted clients to market techniques that would have effectively sabotaged the tax treaty deal.

The bank’s activities around the treaty, which related to the EU-wide European savings directive (ESD), now form the core of the criminal investigations into HSBC’s activities in France and Belgium, both launched due to the leaked documents.

The treaty, signed in 2003, allowed EU citizens to carry on hiding billions in anonymous Swiss accounts. But in return, Swiss banks such as HSBC’s would be obliged to collect some tax from each of their secret customers.

This “withholding tax” on the income from savings interest, initially 15%, would then be handed over in bulk to Britain and other EU states, to compensate them for losses caused by anonymous tax dodgers.

But HSBC came up with a “vehicle” that enabled customers to avoid the tax by exploiting a key loophole in the treaty: ESD only applied to individuals’ savings, not companies.

So the bank offered to transfer all of a customer’s secret cash into a corporate account with no genuine trading activity.

This would technically belong to a shell company, set up in such secretive offshore havens as Panama or the British Virgin Islands. To be doubly sure, the company itself in turn could, for a further price, even be registered as technically owned by an offshore trust or foundation, generally in the tiny principality of Liechtenstein, where details of the trust deed could be kept completely secret. The customer would be written in as the “beneficiary” of the trust, but not the legal owner of the company.

In return for paying several thousand pounds in annual fees to the bank, the rich clients could carry on enjoying the secret fruits of their cash, tax-free. One such BVI sham entity was even wittily named Alter Ego Ltd.

It may be purely coincidental, but it is of interest to note that Stuart Gulliver was Chairman of HSBC Private Banking Holdings (Suisse) SA from February 2010, but he had been a Director since September 2007.

To a possibly unsophisticated eye, unfamiliar with such fiscal niceties, it might look remarkably like Gulliver was taking advantage of such protections, so why would he need such corporate secrecy protection?

He told the committee yesterday that it was merely for secrecy so that his Hong Kong colleagues would not know how much he was earning! He repeated that it had nothing to do with tax!

The Guardian had also asked this question in the last week.

In response to queries from the Guardian about his personal account as revealed in the leaked files, a representative for Gulliver said he had made use of HSBC Suisse to hold his bonus payments prior to 2003, when he moved from Hong Kong to London.

Lawyers for Gulliver said that Hong Kong tax had been paid on this income – and explained that he “followed this procedure because he wanted his taxed bonus earnings to remain private from his then colleagues in Hong Kong, which they would not have done if he had kept them in an HSBC Hong Kong account”.

The Guardian asked Gulliver why he used a Panamanian company to hold the funds, given Swiss accounts already offer secrecy. His lawyers declined to answer.

Gulliver now claims that a computer programme in use in the bank would have allowed colleagues to know how much he was earning, which he wanted to avoid!

Gulliver’s legal representatives added that his Swiss accounts have “for a number of years” been voluntarily declared to UK tax authorities. They declined to specify the exact date they were first declared.

Gulliver is also among those current and former clients of HSBC Suisse to take advantage of non-dom status. Gulliver is a registered non-dom based on his long residence in Hong Kong – now a special administrative region of China – which he considers to be his home, despite his UK-based position.

A representative for Gulliver said: “Having lived there since the 1980s, our client has become a permanent Hong Kong resident with right of abode, as has his wife who is an Australian national. Hong Kong continues to be their home albeit that our client now works primarily in the UK. As a matter of law, our client is domiciled in Hong Kong.”

Non-dom status can confer several tax advantages on those who claim the status compared with those domiciled in the UK. These include advantages in how inheritance tax is applied, but can also exempt worldwide income earned from outside the UK from incurring UK taxes – a system known as the remittance basis.

Gulliver’s lawyers confirmed he was “entitled to claim the benefit of the remittance basis”, but did not say whether or not he did so. (We now know he does, he said so to the Committee yesterday). If Gulliver were on the remittance basis, he would not need to pay tax on investment income held outside the UK – which would include holdings in Swiss bank accounts.

It may well be that this feature is an important explanation in this conundrum! A man in Gulliver’s position might well be expected to have a substantial share and equities portfolio, and it is perfectly possible (and reasonable) that it is held and administered by the Swiss Bank facilities.

A representative for Gulliver said that he had paid all relevant income taxes: “Full UK tax has been paid on the entirety of his worldwide earnings less a credit for tax paid additionally in Hong Kong (where he is also tax resident) on that part of the same earnings doubly taxed.”

If he truly does possess non-dom status, this does not make a great deal of sense, because he would only be liable for income or dividends he earned in the UK or remitted to the UK, and rich men, particularly rich men with non-dom status are very careful what they remit to the UK. So although he states (I believe truthfully) that he pays UK tax on the entirety of his world-wide earnings, why would he do this when he doesn’t have to? What we don’t know is how much those earnings are calculated at and how much the tax paid amounts to!

Gulliver is a bit of an international tax gypsy, in that he seems to have a number of convenient international addresses for specific purposes. Let us have a look at some of them.

First of all, Gulliver is now described as Group Chief Executive, HSBC Holdings plc, well that’s pretty clear, I suppose. And as Group CEO he would earn a salary on which he would pay tax in the UK, so far so good! It is understood that he lives in the Uk at the present, he uses a chauffeur-driven car provided for him by HSBC when he needs it.

Except that Gulliver does not have a contract with HSBC Group as such!

The Guardian has established a separate employment route.

Gulliver, HSBC's highest paid banker was on a £10m deal in 2009, and was not employed by the bank's main holding company at all, despite taking over as chief executive.

The British-born executive who has spent 20 of his 30 years at the bank working outside the UK, is only seconded to work for HSBC Holdings – the overall operation – through a Dutch-based company called HSBC Asia Holdings.

His contract, seen by the Guardian, shows that his principal place of work is Hong Kong, where the bank moved the office of the chief executive  in 2010.. HSBC Asia Holdings has an Amsterdam address.

The contract, signed in February 2011, also shows that he expected to pay income taxes in Hong Kong and Britain – with the bank paying for him to receive advice on filing tax returns in both places.

Gulliver's contract gives his address as the main HSBC Hong Kong office in Queen's Road Central, and confirms he is on a £1.25m salary. He is also entitled to an additional 50% as a contribution to his pension. About £375,000 is paid into a Jersey-based defined contribution scheme called Trailblazer while the remaining £250,000 is paid in cash.

Gulliver has been employed by the bank since October 1980 and is one of 443 HSBC bankers who are also employed through the Amsterdam offshoot, which HSBC said is designed to allow them to continue to receive benefits and pension entitlements regardless of where the bank – which has operations in 87 territories – locates them.

As far as can be ascertained, Gulliver, on the face of what is known and disclosed, has done nothing wrong or illegal. His non-dom status would give him significant tax advantages, and there is nothing illegal about his ownership of a Swiss Bank Account as long as it is fully disclosed to the UK HMRC.

But this is not the point really. What is the point is that yet again, the average UK citizen sees yet another example of a banking fat cat, during a time of terrible austerity, presiding over a banking entity for which he has to go in front of a House of Commons Select Committee and apologise for conduct and behaviour which is now considered to be unacceptable, conduct and behaviour which was in so many cases, criminal, but which presumably, at the time it was being carried out, was helping to contribute to Gulliver’s bonuses.

Some of the unacceptable activity, being the facilitation of tax evasion and the laundering of the proceeds, presumably took place, at least in part on Gulliver’s watch while he was a Director.

They see him being quizzed by MPs as to how he structures his own financial affairs, and they learn that despite being British to all extents and purposes, (he lives in Kensington), he and his wife enjoy significant beneficial non-domiciliary status, a tax privilege denied to ordinary UK residents. 

He states he pays UK tax on his world-wide income, but he is not obliged so to do under his non-dom status, only on earnings he generates in the UK, or on any earnings abroad he remits to the UK. On paper, this sounds very generous, but wait, he is not employed in the UK, he is employed theoretically by a Netherlands company, and we are not told where or when his salary is taxed or paid. It might, for all we know, be paid in Hong Kong or into some other tax-efficient facility, with only some money being remitted to the UK, on which he then does pay UK tax. Nothing illegal about that!

During the Committee hearings, the Chairman read out a list of cases in which HSBC had been involved or were still being investigated for financial criminality and it made very sorry reading. Yet Mr Gulliver still manages to maintain an enviable income and lifestyle, while no evidence of wrong-doing or responsibility seems to stick to him.

Yet, ever the eternal optimist, I do sense, from the questions being asked by the Committee, that some of our Parliamentarians are finally getting the horrible message, that our banking sector, and some of our proudest banking names are little more than Mafiosi!

We can only hope they will act accordingly!

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