A large part of the current reporting on HSBC is quality journalism, but there are two things that are being missed out on in all the reports I have seen so far.
1. Lack of historical perspective
2. Lack of understanding of banking secrecy legislation and culture
Here, with my first post in a three part series during this week, I will begin to fill you in so you will have a better understanding of why and how it all happened. This way you’ll be better informed than the majority of those following the story.
It’s important to first understand how banking secrecy works within a multinational bank that has banking operations in a banking secrecy country. Please note that this is not just an HSBC issue, it affects every single bank that has had a subsidiary in a banking secrecy location. For the purposes of this blog post however, I will stick to just HSBC.
HSBC got into the Swiss private banking business in 1999 by acquiring the Republic New York Corporation and Safra Republic Holdings, even though the acquired bank became part of HSBC, carrying its name, its Swiss subsidiary will have been completely separate from all the rest of HSBC. The subsidiary in Switzerland was, from a legal perspective, a Swiss bank, coming in under Swiss legislation. This means that HSBC Switzerland will have had no information sharing within the HSBC group. For example, if you were a client with HSBC and had accounts with them in both the UK and in Switzerland, the UK arm will have had no knowledge (unless you informed them otherwise) that you had an account with the Swiss arm.
Much has been discussed about Lord Green who was the chairman of HSBC at the time. Lord Green is facing a barrage of accusation for either being complicit in tax evasion or ignorant of it. Just because he was Chairman of HSBC group doesn’t mean he would have had access to information regarding the clients of HSBC Switzerland. The only way he could have had access is IF he sat on the board of HSBC Switzerland at the time the "tax evasion" was happening. (I will come to that just a little bit later).
This is purely my own personal speculation, but it is unlikely that matters of tax evasion would have come up on board level in HSBC Switzerland prior to 2008 because tax evasion was not a problematic issue until then. Pre 2008 there was a general laissez faire culture within the offshore banking sector regarding clients and their taxes. Banks in banking secrecy countries at the time saw tax as an issue that was of no concern to the banks themselves, it was the seen as the clients’ problem to deal with.
The reason that 2008 is such a pivotal year is because that was the year the UBS tax scandal story regarding US clients with assets in Switzerland became public. This was the first really public story involving Switzerland and tax evasion, with juicy (and fresh and minty) stuff like the smuggling of diamonds in tubes of toothpaste. This would have been the first time that Swiss banks and banks in other banking secrecy jurisdictions would have had their initial contact with the possible reputational risks regarding tax evasion by their clients. It is therefore likely that the subject of tax avoidance was discussed in 2008 at board level in Switzerland, how seriously and how extensively, is something that only those who sat on the board of HSBC Switzerland at the time could answer.
With the above in mind, I'll end this post with an interesting bit of information: Lord Green was still mentioned as chairman of the Swiss arm of HSBC in the group annual report of 2007, but no longer in 2008. What could possibly be the reason? Coincidence?
In tomorrow's blog post I'll delve into why so few have been convicted of tax evasion on the back of the HSBC leaks.