By Darshi Mehta, Government Law College, Mumbai.

HSBC

Black money has been the centre of every anti-corruption movement in the world and it comes as no surprise that it is the main facet of the world’s biggest ever banking system breach. Switzerland is known for its world class banking system. In fact, banks represent 59.4% of the total value added to the Swiss financial sector. And what are the Swiss banks famous for? Their tradition of banking secrecy, which goes back to the middle ages.

It’s not the first time that this untainted and secretive banking system is in question. It was questioned before in the UBS tax evasion controversy when a whistleblower named Bradley Birkenfeld made certain disclosures. The controversy led to amendments in the fabled bank secrecy laws in Switzerland.

[sociallocker]

Again, in the Julious Baer case, in 2008, another former employee Rudolf Elmer turned whistleblower and handed over two disks which contained information about 2000 banking clients to Wikileaks founder Julian Assange.

In the wake of recent times, these banks have come in news again for money laundering, tax evasion and stashing black money, this time giving the scandal a new name, HSBC.

It seems like Banks these days have created a system for making themselves rich at the expense of the society, by assisting in tax evasion and money laundering.

This leads to collection of false information about the economy in the surveys and data sheets and drawing wrong conclusions, revenue loss to the government, creating inequalities in the society, misguiding the economy on resource allocation and affecting the monetary policy.

Long story short, the poor get poorer and the rich get richer, which is the prevalent condition of the world economy.

It goes back to 1999, when HSBC which is the world’s second largest bank, acquired the Swiss private bank in purchase of Republic National Bank of New York and US based Safra Republic Holdings which put them under the purview of stringent Swiss banking laws regulated by the Swiss Financial Market Supervisory.

In the Swiss Banking Law of 1934, privacy is statutorily enforced, with Swiss law strictly limiting any information shared with third parties, including tax authorities, foreign governments or even Swiss authorities, except when requested by a Swiss Judge’s subpoena.  However, banking is not strictly anonymous, since, under their banking law, all Swiss bank accounts, including numbered bank accounts, are linked to an identified individual. This law permits a bank to share information with others only in cases of severe criminal acts, such as identifying a terrorist’s bank account or tax fraud, but not simple non-reporting of tax -evasion.

Under pressure from the G20 and OECD countries, the Swiss government formally amended a few details like abolishing the difference between tax evasion and tax fraud for foreign clients. But the laws remain the same for domestic clients.

Also, any employee violating a client’s privacy would be subject to severe punishment. After signing 12 new double taxation treaties in accordance with the international standards set by the OECD countries, Switzerland was removed from the grey list. The real blow came, when in 2007, a system engineer, Herve Falciani working for HSBC, stole client account details and shared them with the magazine Le Monde, which further shared them with the French Finance Minister, Christine Lagarde, who released a short list containing only 2000 names of Swiss Bank account holders as opposed to the 130,000 names that Falciani shared. Thus, a list was formed, containing the details of accounts of as many as 130,000 HSBC clients from 203 countries worldwide. The list was called the ‘Falciani list’.

The nations who received the Swiss leaks list comprised, the US, Spain, Italy, Greece, Germany, Britain, Ireland, India, Belgium and Argentina. This resulted in many arrests.

But in 2010, a new fact of the breach came to light. About 600 Indian clientele names and details were shared with the Indian Government by the French in 2010, which was only a fraction of the data that was obtained by Falciani in 2007, the fact which was then backed by Herve Falciani himself.

In November, Falciani said that India had accessed only “one per cent” of the data, after which the Indian Government approached him for his assistance on the subject.

In early February, 2015 new revelations were made when fresh investigation of Falciani’s data was made. The data revealed that HSBC Geneva helped clients in more than 200 countries evade taxes on accounts containing $119 billion.

This was followed by a search in the HSBC offices by the Swiss police as a part of the ongoing investigation of ‘aggravated money laundering’.

For India which has been facing black money related problems for a while now, this comes as a huge leap. Falciani says, ‘a unique opportunity has opened up for India’s black money probe now that Switzerland has launched a criminal inquiry into allegedly money-laundering by Europe’s largest bank’.

Indian officials have already started a survey at the Mumbai office of HSBC India and served a long due notice to the bank. The notice has asked HSBC to furnish details of its banking transactions for the last 16 years.

This notice comes 4 years after the lists were originally received. In the late 2011, the Revenue department declined a request from Income Tax to carry out searches on HSBC India, after the French government had shared details of 628 Indian accounts. It is often claimed that the UPA government didn’t think that the information is good enough.

India is waiting for more details on the same issue from Falciani. He has been promised compensation on the basis of what is recovered from the untaxed money stashed in the Swiss bank accounts but he said he is not interested in the compensation but in fighting corruption and exposing the cover offered by the banks to illicit financial activity by the wealthy.

The Bank is also being summoned by the Indian Tax authorities and is being probed by the Tax authorities in many other countries on account of the various allegations against its Swiss subsidiary.

India is the fourth country after Argentina, Belgium and France to take actions against the Bank. However other countries haven’t acted on the information yet. In fact Greek officials acted like it didn’t exist for two years after it was shared with them. This action was followed by a report published by the Indian Express, which revealed a list of 1,195 names with Indian addresses who were clients of HSBC Swiss bank in 2007, with deposits of Rs. 25,420 crore.

This list included the names of who’s who of the corporate world and political leaders. India’s requests for the information on the Swiss leaks list was continuously refused citing the strict Swiss laws that think that the contents of the list were stolen by Falciani and hence inadmissible. But in the light of recent events Switzerland has decided to take actions against the bank. The Geneva offices of the bank were raided and criminal investigation has been started against it. The British bank also posted an apology accepting the shortcomings of the Geneva branch of the bank in February this year “We acknowledge and are accountable for past compliance and control failures”. On February 23rd, 2015 the guardian newspaper reported that HSBC Chief Executive Stuart Gulliver kept millions of dollars in a Swiss account. The report also claimed that the Chief Executive was a client of the HSBC Swiss bank.

As of now the bank is being accused of –

  • Marketed secretive new schemes to shield tax savings from European exchequer
  • Allowed withdrawal of large amounts of foreign currencies
  • Collusion with some clients to hide “black” accounts from domestic tax authorities
  • Helped clients set up offshore tax havens
  • Set up accounts for corrupt individuals and international criminals

The real questions remain:

Why the French released only one-fifth of the information in 2010? Why the Indian authorities failed to take action on the same in 2010? What is different this time? What about other Swiss Banks which haven’t been exposed yet? Do others banks also have skeletons in their closet? And if not, then how will other banks be exposed? Even after amending the Swiss banking laws and bringing transparency to this system how can we make sure that something like this never happens again? Will the black money find its way back to the right hands?

Black Money, Money laundering and tax evasion are problems that almost every country is facing these days. Switzerland’s strict banking laws are not helping. The first half of this decade was contributed to anti-corruption in India. It’s high time that these problems are properly addressed on a serious platform and that the Governments of the affected Nations accept that these problems exist. And that if corruption is to be gotten rid of, it has to be done from the grass-roots level, which will require efforts and collaborations of the Justice department, International institutions, Media and the Swiss Government.

Swiss banks clients seem to be transferring their accounts to banks in Honk Kong and Singapore which are alternatives to the banking secrecy that the Swiss Banks have been exposed for. Singapore has similar secrecy provisions as in Switzerland and Honk Kong has flexibility in the creation of opaque companies that serve as tax conduits. Many offshore banks, located in tax havens such as in the Cayman Islands and Panama, also have strict privacy laws. This is a huge concern as next time in place of Switzerland it could be Singapore or Honk Kong or Cayman Islands or Panama or whichever country has stricter privacy laws. The process of identifying the defaulters needs to be fast tracked, for this transfer to stop. International organizations should interfere in the working of the banks with strict secrecy laws.

Money laundering is real and the issue of black money is not only limited to corrupt politicians and corporate looking to further their monetary interests but also terrorists organizations and criminals. Bottom line is that this problem is deeper than it seems from the exterior and it needs to be addressed on the global level without further ado, as it is the same problem that keeps resurfacing every few years because of our failure to fully eradicate it.

[/sociallocker]