Whats gone wrong at HSBC?

As HSBC suffers under the scorching spotlight of public scrutiny once more, it is fair to ask
why the banking group so often finds itself at the heart of the action.
Author: Kim Kaivanto
Originally published in TheConversation 25 February 2015, 4.10pm GMT
https://theconversation.com/whats-gone-wrong-at-hsbc-37990
under Creative Commons Attribution NoDerivatives license, so you can republish our articles
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H is for heft. Matt Buck, CC BY-SA

As HSBC suffers under the scorching spotlight of public scrutiny once more, it seems fair to
ask why the banking group so often finds itself mired in controversy.
The latest revelations from leaked bank files about the tax services offered by HSBCs Swiss
private banking subsidiary have caused shockwaves. Its former and current leadership have
faced intense pressure and Britains Chancellor of the Exchequer George Osborne has
floated the possibility of new penalties for bankers and accountants who are found to have
navigated routes along and beyond the edge of legality as they seek to cut clients' tax bills.
But for HSBC, it must seem awfully familiar. Details from the Swiss data leak have been
pored over by tax officials and journalists for evidence of evasion or aggressive tax
avoidance. It all adds to a long list of scandals which have led many commentators to reach
damning conclusions about HSBCs in-house culture.

Leaving footprints
Among the reputation-decimating scandals which have engulfed HSBC, we have witnessed
investigations and fines over its failure to prevent foreign exchange manipulation attempts
in the UK, failure to maintain effective anti-money laundering in the US, as well as sustained
international legal and regulatory investigations and action over the alleged fixing of LIBOR,
the rate at which banks lend each other short-term money.
Add to that fines for mis-selling of payment-protection insurance and interest-rate swaps in
the UK, and you understand why the culture is questioned perhaps even more so than at
other banks which have transgressed.
One explanation is a simple one: HSBC is big. As regulators and prosecutors take a more
vigorous approach in the post-financial crisis era, the compliance culture within
international banks has had to change, but confrontations with authorities pertain to
practices, by and large, during the years preceding this culture change. And because HSBC
has such a large global footprint, spanning multiple jurisdictions where these issues have
been brought to light, its name is bound to come up again and again.

The role of the state

Another explanation begins with the observation that HSBC is headquartered in London and
therefore falls under UK law, taxation and regulation. If Richard Brooks a former UK HMRC
Tax Inspector, and currently an author and journalist is right about the relationship
between UK tax authorities and large UK-based corporations, then one might conjecture a
slippery slope between the facilitation of technically legal tax avoidance by UK-based
companies and the emergence of an environment in which tax evasion and money
laundering can take place. At face value, this is not obviously implausible. Brooks view is
that HMRC has been acting on a narrow and technical definition of tax avoidance, and a
thriving large-scale tax-avoidance industry is the result.

Another kind of offshoring. Yachts off the coast of Capri. Elliott Brown, CC BY-SA

The working ingredients of this industry include off-shore corporations and trusts, as well as
ready availability of banking services to facilitate the required international transfers, wealth
management, withdrawals, and so on. Therefore, in terms of organisational infrastructure,

distribution of footprint, knowledge and skills, it is not a great leap from excellence in
supporting technically legal tax avoidance to enabling tax evasion.

Peep peep
Relative to other large international banks, HSBC has suffered from extremely damaging
revelations made by whistleblowers. John Cruzs revelations ignited money laundering
investigations in the US, Herv Falcianis revelations led to tax evasion and money
laundering investigations in Luxembourg, Switzerland and finally, in the UK. But it is clear
that HSBC is not alone. Antoine Deltour revealed 28,000 pages of documents from the
Luxembourg office of PricewaterhouseCoopers, exposing the details of confidential tax
agreements between 340 of the worlds largest corporations and the Luxembourg tax
authorities. These so-called sweetheart agreements were the final lynch pins in the
corporations aggressive but legal tax-avoidance schemes.

Green is go for whistleblowers. Steven Depolo, CC BY

The absence of whistleblowers from other large banks does not necessarily imply an
absence of wrongdoing. The current public focus on HSBC could in fact be taking place for
the want of whistleblowers from other big banks, rather than due to any asymmetry in
conduct. In the US, it is not only HSBC that has struck a deferred-prosecution agreement in
the wake of the Justice Departments anti-money-laundering crackdown JP Morgan Chase
and Standard Chartered have been targeted by the Justice Department as well.
Although no longer a novel statement, it might be worth thinking more carefully about
whether some banks can become too big to regulate. There does seem to be an issue in
terms of the number and types of legal jurisdictions they span, in terms of the influence

they can bring to bear upon regulators over extended periods of time, and in terms of the
possible systemic effects of strict enforcement actions for example the shockwaves that
might ensue if a regulator stripped a major bank of its licence to operate.
From a regulatory and enforcement standpoint, it might be worth studying more carefully
whether a tougher line on tax avoidance would have more than just a direct effect on this
vanilla end of the industry, as Lord Fink might call it. If we look at tax avoidance as the
gateway drug for clients, one which introduces infrastructure, skills and opportunities
which can lead all the way down to international money laundering, then it is crucial to
institute tighter gateway controls, if not more transparency.
In that case, it will be measures like Osbornes to introduce financial and civil penalties for
facilitating tax evasion and overly aggressive tax avoidance that may achieve just the
required tightening to have a significant impact, if we can avoid diluting their strength in
implementation and enforcement.