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On the Wednesday 19 February, Swiss authorities belatedly raided the Geneva offices of HSBC, accusing the bank of money laundering in what clearly was a face-saving exercise. If Switzerland's long history of providing banking services to nasties teaches us anything, its that the Swiss don't really care where the money is coming from so long as its flowing into their coffers. Scenting positive headlines and an easy target, ten different national authorities are now investigating HSBC and its clients (mostly for tax-evasion). Some of these authorities - such as the Danish - have failed to request the incriminating data (detailing individuals holding bank accounts in the Swiss branch of HBSC) off the French during the seven years it had been available. Yet the most worrying probe from HSBC's standpoint is probably the Department of Justice investigation; it has previous in the US - HSBC settled DoJ money laundering charges in 2012 for a record $1.9bn - and is no doubt also fearful of being banned from clearing dollar transactions (as BNP Paribas was following a guilty plea to DoJ charges in 2014).
In a global sense, the HSBC affair is an example of the increased scrutiny of practices that were tolerated in the boom times or of the difficulty for national authorities to chase sophisticated, footloose and wealthy tax evaders across international boundaries - unless they get caught with their pants down, as in this instance. Unfortunately, in the UK at least, the HSBC affair has become ludicrously polemical and binary.
The basis of the affair is a list of bank accounts taken by a former employee of HSBC's Swiss branch in 2007, which was given to the French tax authorities in 2008 and to the UK authorities in 2010. It is alleged that HSBC actively aided tax evasion and also turned a blind eye to money laundering. The the UK Tax Authority (Her Majesty's Revenue and Customs) has recovered £135 million pounds in tax, but has only prosecuted one measly individual out of 1000 alleged British tax evaders. And here begins the supposed tale of deceit, corruption and intrigue. Ed Miliband, leader of the Labour opposition in the UK, has had one of his rare successes in catching the public mood - shaming implicated Conservative Party donors and questioning the government's decision to appoint HSBC's former chair as a minister shortly after the allegations were received. Chris Bryant, Labour MP, has implied that HMRC is in cahoots with shadowy rich and powerful interests. And, predictably, Lin Homer, head of HMRC, was hauled in front of Margaret Hodge's Public Accounts Parliamentary Select Committee - the kangaroo court over which she presides with populist panache - to be accused of incompetency and nepotism.
The HSBC affair, in the UK has elsewhere, has been characterised as just another incident in a long history of banker abuses dating back to before the Great Recession. Unfortunately, as politicians probably grasp, but are too caught up in the anti-banker whirlwind that they have helped to create, the facts are (one shade of) grey. There are several pertinent reasons why HMRC hasn't prosecuted more individuals:
1. The difficulty of achieving the criminal threshold - the criminal burden of proof generally requires the judge/jury to be sure beyond 'reasonable doubt' that the suspect perpetrated the crime (99.9% sure they did it). Add to this fact that the offences themselves are often incredibly complex, whilst UK prosecutors lack the various tools used by US authorities to imply guilt without having to prove it in open court (such as deferred prosecution agreements - due to be introduced in the UK later this year). Therefore, civil settlements - where the defendant does not admit guilt - are often more cost-efficient. It appears that the majority of these cases were settled using the Lichenstein disclosure facility - which involves HMRC taking only a 10% penalty as opposed to 100% of the tax due (or more). This was despite the fact that the facility was set up for individuals to volunteer information that HMRC didn't otherwise know about (clearly not the case here).
2. A lack of resources - HMRC has seen some of the most brutal cuts of any department (25% since 2010) for quite a while (its budget has been falling steadily since 2005). Whilst it has beefed up its enforcement team in recent years, the department is clearly under-resourced.
3. Pick on someone smaller than you - HMRC is under pressure to increase the number of tax-evasion convictions it achieves (more than doubling the 2011/12 figure of 365 to approximately 800 in 2013/14). In practice this means that they are just pursuing criminal charges in relatively straightforward cases where otherwise a civil remedy is sought. With such pressure for successful prosecutions combined with falling resources, investigators have little choice but to ignore the HSBC list of sophisticated individuals with their well-paid and combative lawyers.
Clearly HMRC is not entirely to blame here; the fault lies with the myriad of actors and politicians who, over decades, have drawn up the legal and regulatory framework within which UK plc operates. The pre-2007 onus was on a 'light touch' regulation and supervision and - dare I say(!) - it was with good reason. For, after all, up until 2007, and even to this day, the financial services industry generates an enormous amount of revenue - in 2010-11 the banking sector alone contributed £21.0 billion to UK tax receipts in corporation tax, income tax and national insurance. In the UK since 2008 investment banking has been stigmatised to a detrimental extent. Whilst it is great that politicians rail against retail deposits being used to collateralise trading and underwriting activities, the tie-ups have long since happened and look very difficult to undo - as underlined by the delaying of plans to ring fence retail deposits from investment banking activities. Meanwhile, endless political intervention at the Royal Bank of Scotland and other banks is harming lending to small businesses and destroying the value of the state's large shareholding.
It is very convenient to place the blame for the Great Recession at the door of the bankers; in fact fault lies more broadly. Central bankers, funds/private equity, consumers and governments all played their part. Bearing in mind the delicacy of the UK's economic recovery, it might finally be time to stop bashing the banks.
The basis of the affair is a list of bank accounts taken by a former employee of HSBC's Swiss branch in 2007, which was given to the French tax authorities in 2008 and to the UK authorities in 2010. It is alleged that HSBC actively aided tax evasion and also turned a blind eye to money laundering. The the UK Tax Authority (Her Majesty's Revenue and Customs) has recovered £135 million pounds in tax, but has only prosecuted one measly individual out of 1000 alleged British tax evaders. And here begins the supposed tale of deceit, corruption and intrigue. Ed Miliband, leader of the Labour opposition in the UK, has had one of his rare successes in catching the public mood - shaming implicated Conservative Party donors and questioning the government's decision to appoint HSBC's former chair as a minister shortly after the allegations were received. Chris Bryant, Labour MP, has implied that HMRC is in cahoots with shadowy rich and powerful interests. And, predictably, Lin Homer, head of HMRC, was hauled in front of Margaret Hodge's Public Accounts Parliamentary Select Committee - the kangaroo court over which she presides with populist panache - to be accused of incompetency and nepotism.
The HSBC affair, in the UK has elsewhere, has been characterised as just another incident in a long history of banker abuses dating back to before the Great Recession. Unfortunately, as politicians probably grasp, but are too caught up in the anti-banker whirlwind that they have helped to create, the facts are (one shade of) grey. There are several pertinent reasons why HMRC hasn't prosecuted more individuals:
1. The difficulty of achieving the criminal threshold - the criminal burden of proof generally requires the judge/jury to be sure beyond 'reasonable doubt' that the suspect perpetrated the crime (99.9% sure they did it). Add to this fact that the offences themselves are often incredibly complex, whilst UK prosecutors lack the various tools used by US authorities to imply guilt without having to prove it in open court (such as deferred prosecution agreements - due to be introduced in the UK later this year). Therefore, civil settlements - where the defendant does not admit guilt - are often more cost-efficient. It appears that the majority of these cases were settled using the Lichenstein disclosure facility - which involves HMRC taking only a 10% penalty as opposed to 100% of the tax due (or more). This was despite the fact that the facility was set up for individuals to volunteer information that HMRC didn't otherwise know about (clearly not the case here).
2. A lack of resources - HMRC has seen some of the most brutal cuts of any department (25% since 2010) for quite a while (its budget has been falling steadily since 2005). Whilst it has beefed up its enforcement team in recent years, the department is clearly under-resourced.
3. Pick on someone smaller than you - HMRC is under pressure to increase the number of tax-evasion convictions it achieves (more than doubling the 2011/12 figure of 365 to approximately 800 in 2013/14). In practice this means that they are just pursuing criminal charges in relatively straightforward cases where otherwise a civil remedy is sought. With such pressure for successful prosecutions combined with falling resources, investigators have little choice but to ignore the HSBC list of sophisticated individuals with their well-paid and combative lawyers.
Clearly HMRC is not entirely to blame here; the fault lies with the myriad of actors and politicians who, over decades, have drawn up the legal and regulatory framework within which UK plc operates. The pre-2007 onus was on a 'light touch' regulation and supervision and - dare I say(!) - it was with good reason. For, after all, up until 2007, and even to this day, the financial services industry generates an enormous amount of revenue - in 2010-11 the banking sector alone contributed £21.0 billion to UK tax receipts in corporation tax, income tax and national insurance. In the UK since 2008 investment banking has been stigmatised to a detrimental extent. Whilst it is great that politicians rail against retail deposits being used to collateralise trading and underwriting activities, the tie-ups have long since happened and look very difficult to undo - as underlined by the delaying of plans to ring fence retail deposits from investment banking activities. Meanwhile, endless political intervention at the Royal Bank of Scotland and other banks is harming lending to small businesses and destroying the value of the state's large shareholding.
It is very convenient to place the blame for the Great Recession at the door of the bankers; in fact fault lies more broadly. Central bankers, funds/private equity, consumers and governments all played their part. Bearing in mind the delicacy of the UK's economic recovery, it might finally be time to stop bashing the banks.
