The Swiss banking arm of financial giant HSBC helped wealthy clients dodge taxes and did business with diamond traffickers named on Interpol’s most wanted list, according to leaked bank documents published Monday. The reports could threaten a previous agreement the bank had reached with the U.S. Justice Department (DOJ) that avoided prosecution of the firm after allegations of money laundering that benefited Iran and Latin American drug cartels.
The files were obtained by French newspaper Le Monde, The Guardian, the International Consortium of Investigative Journalists (ICIJ) and the BBC, which aired the program “The Bank of Tax Cheats” on Monday evening. The leaked data are available at the website of the ICIJ.
The revelations raise questions about the lengths to which banks are willing to go to obtain new business. One of the main features HSBC stressed to its clients, according to the reports, was its ability to shield their accounts from scrutiny by government authorities — which is attractive to clients looking to evade their tax obligations. According to the ICIJ, HSBC “repeatedly reassured clients that it would not disclose details of accounts to national authorities, even if evidence suggested that the accounts were undeclared to tax authorities in the client’s home country.”
In one of the leaked files, an HSBC employee wrote about assuring Irish businessman John Cashell, later convicted of tax fraud, that the bank would not disclose his information to authorities: “His preoccupation is with the risk of disclosure to the Irish authorities. Once again I endeavored to reassure him that there is no risk of that happening.” And The Guardian reported that HSBC “keenly marketed tax avoidance strategies to its wealthy clients” and “proactively contacted clients in 2005 to suggest ways to avoid a new tax levied on the Swiss savings accounts of EU citizens.”
Tax dodging by corporations and wealthy individuals isn’t a victimless crime: A 2014 study from the consumer group U.S. Public Interest Research Group (US PIRG) shows that the average U.S. taxpayer pays $1,259 more in taxes each year to make up for shortfalls resulting from the use of tax havens.
"When corporations and wealthy individuals are able to avoid paying their taxes, whether through legal or illegal means, the public ends up picking up the tab," said Jaimie Woo, a tax and budget advocate for US PIRG.
But HSBC is not only accused of working to obscure the accounts of wealthy clients. The documents also appear to show the bank providing services to arms dealers and diamond traffickers.
The leaked files, which cover 2005 to 2007, show that HSBC did business with “the Coltan Queen,” Aziza Kulsum, even after a 2001 United Nations report naming her as a key player in conflict minerals. Other HSBC clients revealed in the documents include Katax Mines Guinee, which was named by the United Nations as a front company used to train child soldiers in Liberia; alleged arms dealer Fana Hlongwane; and Mozes Victor Konig and Kenneth Lee Akselrod, who appear on Interpol’s most wanted list for diamond trafficking.
When first notified about the leak, HSBC initially told the ICIJ to destroy the documents. The bank later modified its approach and admitted its past due diligence standards “were significantly lower than they are today” while stressing that the firm has made “radical transformations” in its operating procedures.
HSBC is hardly the first banking institution to come under scrutiny for alleged money laundering and tax evasion. In 2014, U.S. banking giant JPMorgan Chase paid $1.7 billion as part of a agreement with the U.S. Attorney’s office for the Southern District of New York for anti-money-laundering failures in its facilitation of the Bernard Madoff scam. Swiss bank UBS admitted to tax evasion in 2009 but avoided prosecution through a $780 million deferred prosecution agreement, although the bank is facing a new tax evasion probe by the U.S. Attorney’s office in Brooklyn, according to Bloomberg.
But the example that may be the most foreboding for HSBC is that of British Bank Standard Chartered. In 2012 the bank paid $340 million to New York's Department of Financial Services to settle charges of laundering money for Iran. But the department found in 2014 that the bank violated the terms of the settlement and imposed an additional $300 million fee.
In 2012, HSBC agreed to pay a $1.9 billion fine under a deferred prosecution agreement to settle allegations of laundering money for Mexican drug cartels. HSBC was required under that agreement to overhaul its anti-money-laundering controls and to “prevent a repeat of the conduct that led to this prosecution.” Now Reuters and the FT have reported that the leaks may imperil HSBC’s deferred-prosecution deal with the Justice Department.
While the HSBC files are just now being leaked to the public, U.S. authorities reportedly had access to them in 2010, two years before HSBC’s agreement with the Justice Department. This has led some lawmakers to question how regulators used the information. The ranking Democrat of the Senate Banking Committee, Sherrod Brown of Ohio, said in a statement, “I will be very interested to hear the government’s full explanation of its actions — or lack thereof — upon learning of these allegations in 2010.”
The leaked documents underscore questions raised in an earlier Senate investigation. In 2012 the Permanent Subcommittee on Investigations issued a 339-page report on money laundering and drug-cartel and terrorism financing that used HSBC as its case study. Among its key findings were that HSBC had weak money-laundering controls and disregarded links to terrorism among its clients. The subcommittee reached those conclusions without the help of the leaked documents. According to the ICIJ, the subcommittee requested copies of the leaked files but never received them.
The HSBC revelations will amplify long-standing concerns about accountability for transgressions by the world’s wealthy and well connected. U.S. Attorney General Eric Holder was questioned about the HSBC money-laundering settlement in 2013 by Sen. Chuck Grassley, R-Iowa, and drew intense criticism after implying that some firms were too big to punish.
“If you're caught with an ounce of cocaine, the chances are good you're gonna go to jail,” Sen. Elizabeth Warren, D-Mass., told a Banking Committee hearing in 2013. “But evidently if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fine, and you go home and sleep in your bed at night.” This time, however, the media firestorm looks likely to make it a lot more difficult for politicians to let bankers off with a friendly wrist slap.