Monday, March 16, 2015

The scourge of Swiss banking.



The way Swiss banking works means we all are forced to live in a parallel tax universe. It becomes a scourge for countries trying to organise fair taxation policies.

I have been following the interviews conducted by Parliamentary Select Committees with senior officials from HSBC.

These events are great fun and they enable us to watch MPs giving Stuart Gulliver a hard time, along with sundry other grey men and women whom you would frankly have difficulty trusting to feed your cat while you were away on holiday.

The difficulty with this process is that the Committees never seem to resolve anything, and they leave the problem still wide open.

The witnesses are incredibly well briefed on what to say and how to say it, while the Select Committee members, tend to bumble along, asking wide open questions, each with their own agenda (apparently) and making assumptions they probably have no right to make.

Much as I have enjoyed watching Margaret Hodge losing it with Rona Fairhead, the HSBC non-executive director who earns in excess of half a million pounds a year for presiding over, well I’m not sure what she does, at the bank, Ms Hodge’s very righteous anger doesn’t do much more than allow the rest of us a brief period of schadenfreude, while we watched this grossly overpaid member of the Liberal Chatterati Establishment (she is also the Chair of the BBC Trust) squirm in her well-tailored suit while Margaret Hodge denounced her as untrustworthy, said she had lost any confidence in her, called upon her to resign her role from the BBC, to avoid being sacked, and generally trashed her reputation. Frankly, she would have a difficulty getting a job running a whelk stall after this public dressing down.

Sadly, this is about all the Select Committee seem to have been able to achieve, Chris Mears, another former HSBC Director came in for the Hodge softening up process, learning that he too had lost any confidence Ms Hodge might formerly have had in him!

The real problem with all this invective and reputation destruction is that while it makes for great television, as a forensic process of deep, insightful, investigative interviewing, it does nothing to help us pin the blame on the right people, who were responsible for allowing HSBC to add the words ‘Institutionalised Tax Evaders to the very rich and powerful’ to their tarnished commercial escutcheon.

You see, the way the world’s tax evasion systems were designed to work, anyone with a Swiss bank account could effectively hide his money from the oversight of his homeland Revenue collectors, and there was little the tax men could do about it.

The vast majority of countries used to work on the principle that no country would assist to enforce the tax laws of another, and the generalised fiction used to be that if X had abused his home tax laws, we would not pursue him here to help recover money for his home country’s exchequers.

Switzerland went a step further, and actively and knowingly accepted the proceeds of foreign tax evasion. Ironically, this did not apply to Swiss citizens and they were encouraged to pay all their taxes to their relevant tax authorities, but foreign tax evasion would always be certain of a warm welcome in Switzerland.

So a vast number of foreign banks have branches in Switzerland. These are largely Swiss-registered entities, operating under the home name, and would be subject to all the severe Swiss banking laws with regard to secrecy, and confidentiality, as well as the strict requirement for preventing any unauthorised person from having sight of the identities of the beneficial clients of the bank. 

If questioned, the foreign bank would say that they assumed that any clients from their home country who had a Swiss bank account would be fully aware of their responsibilities of reporting its existence to their home revenue authorities, and they would claim they felt entitled to assume that their clients were operating their accounts lawfully and within the terms of the home revenue’s requirements.

So when HSBC operated HSBC Suisse, the company was incorporated in 2001 and is headquartered in Geneva, Switzerland. HSBC Private Bank (Suisse) SA operated as a subsidiary of HSBC Private Banking Holdings (Suisse) SA.

It should be said right here that it was not a criminal offence for any non-Swiss person to possess a bank account or savings account in Switzerland, subject always to the proviso that its existence and contents were disclosed to the tax authorities of the home country in which the individual paid tax.

Simple really, but what on earth would be the point of having such an account, with its high operating fees if you then go and disclose it to your tax man. You might as well not have it in the first place.

However, and this needs to be emphasized, as far as the Swiss authorities were concerned, the Swiss bank was doing nothing wrong in allowing a non-Swiss individual to operate an account whose sole intention was to defraud his home nation of tax, relying on Swiss bank secrecy to enable him to get away with it.

What makes life even more difficult is that the senior managers of the Swiss bank, particularly if they were non-Swiss citizens would almost certainly not have been aware of the identities of the clients of the bank. Under the strict confidentiality laws, it is not certain that the CEO, particularly if he was a foreigner, would have known the identity of any client, and he would have made very sure not to ask.

Where things began to get a tad murky was when the European Savings Directive was introduced.

The original aim of the EUSD was that all countries would freely disclose interest earned by a resident of an EU country in order to ensure that the interest was fully declared in his country of residence. The plan was that non-EU countries would also agree to disclose information about the interest earned by EU residents. Many non-EU states and countries agreed to introduce similar measures. These countries included most tax havens and dependent territories of the EU countries. Countries such as the Isle of Man, Jersey, Guernsey, Cayman Islands, Andorra, Turks & Caicos, British Virgin Islands, Monaco, Switzerland, and many others thus agreed to implement similar or transitional arrangements.

Some countries agreed to fully comply with the EU Savings Directive by disclosing the names of their account holders and the interest that they earned. However, several other EU and non-EU countries, such as Switzerland, objected to the disclosure of account holders' names on the grounds that such a disclosure would be contrary to their bank secrecy laws, which prevent the disclosure of information about account holders, their assets, and their interest or other income.

Accordingly, in order to guarantee privacy and bank secrecy for EU residents who have accounts within certain territories such as Switzerland, a withholding tax of 35% was to be levied on the interest earned by those EU residents.

Then, to avoid the implications of such personal investments being subject to the witholding tax. HSBC marketed a scheme which offered clients the opportunity to switch their funds into a corporate account maintained in a tax secrecy jurisdiction, such as Panama. The EUSD did not extend to corporate funds, so if a client were to form such an additional layer of secrecy, then he would avoid becoming subject to the implications of the EUSD.

This begins to identify a very aggressive form of tax avoidance or evasion as in this example.

Indeed, Stuart Gulliver was the beneficial owner of one such scheme, although he insists that it was not done for tax-avoidance or even evasion purposes, but simply to guarantee him complete confidentiality of his financial affairs.

And I for one naturally believe him!

Nevertheless, the Swiss bank encouraged a large number of clients to adopt this tax evasive measure.

But all the time, it is extremely unlikely that the senior directors of the bank would have known the identities of the clients. They would have relied on the discretion of the respective account managers, as well as maintaining the full operational effectiveness of their own anti-money laundering provisions. The Swiss, ironically, have some of the most effective AML laws in the world, and they work and the Swiss enforce them. The only problem is that the information they possess can not be shared with other agencies, except under very specific criminal investigations, but specifically not when it comes to tax matters.

So when Stuart Gulliver and his colleagues were saying that they did not know who was banking with HSBC Suisse, they were in all probability telling the entire unvarnished truth, because they would not have known.

Indeed, Ms Fairhead not unreasonably made the point that when the directors of the bank wanted to satisfy themselves that all was in order, they had to rely on the word of the staff and the outcome of investigations by an external technical consultancy firm. All they would have been able to do was to confirm that the Swiss Bank had good ant-money laundering practices and procedures and that they were working effectively.

This would not have alleviated the concern of client identity, and to make matters more difficult, the directors would almost certainly have assumed or surmised that one of the purposes of running such an account was for tax evasion purposes. So it suited their purposes not to know the identity of the clients, or indeed anything about them at all, because they might otherwise have been required to start making disclosures under the Money Laundering provisions.

So we find ourselves caught in a Catch 22 situation. Had they been aware of the identity of any UK citizens, and possibly any other citizen of any country who was using these evasive schemes; and the information came to them through their office or employment; they could do very little other than suspect that the schemes were being used for tax evasion purposes, and they should have made disclosures to the relevant law enforcement aiuthority in the UK.

So, while It is illegal for a UK domiciled tax payer to defraud HMRC by possessing an undisclosed Swiss bank account, and using that account to disguise sums which would ordinarily become subject to tax.

The same situation is not illegal in Switzerland.

So, until a situation such as we now observe arises, whereby the identities of foreign nationals who possess Swiss bank accounts, and who have not made relevant disclosures comes to light, there is very little the UK authorities can do, because they cannot identify who is defrauding the Revenue, and the Swiss will not tell him.

Now, with the knowledge of the identities of the tax evaders, HMRC can begin oroceedings against all those persons who made use of the facilities to defraud the UK Revenue.

Further, they can now bring proceedings against relevant persons inside HSBC, if it can be shown that British employees of the Swiss entity came to the UK and solicited UK clients to make use of the new tax evasive facilities, and they can be prosecuted for various offences of incitement, or conspiracy to commit the relevant offences.

Then there are the offences under the Money Laundering Regulations of money laundering. Albeit the information is now possessed through these disclosures, it can now be clearly shown that HSBC were helping UK citizens to evade tax, and they are thus likely to be charged with Money Laundering.

These issues are all a matter for the Criminal Justice Authorities.

It is of course massively hypocritical of HSBC to now apologise for such actions, calling them ‘unacceptable’. They must have known or at the least suspected that any UK citizen who had a Swiss bank account, would be tempted to use it to evade UK taxes, albeit they could not prove at the time, the identity of their own clients, because their Swiss colleagues would have been prevented from telling them.

Of course, half an ounce of common sense, and a flair for investigation would have demonstrated that the profits the Swiss bank was making far outstripped profits in other bank sectors, which might at least have caused them to wonder ‘why’?

However, without the actions of the French insider who downloaded the relevant records and published them to law enforcement authorities, we would still be in the dark as to the dubious activities of HSBC Suisse.

However, this will always remain the conundrum when Swiss registered banks offer banking services to persons from outside their domicile, and no amount of well-intentioned shouting and insults from Select Committees, will alter that fact.

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