HSBC’s Bure Din: Domino Effect
- UK: To probe tax evasion through HSBC Suisse
- Argentina: Wants repatriation of $3.5 bn from HSBC
- Bermuda: Under pressure to disclose HSBC accountholders’ names
- US: Might revoke previous deferred prosecution agreements with HSBC
- France: Criminal trial being considered against HSBC Suisse
- Switzerland: Pursuing Herve Falciani, who ran away with HSBC Suisse database
- India: Since 2011, SIT examining 628 Indians allegedly with HSBC Suisse accounts. Second ‘leak’ in Feb takes number of accounts under scanner to 1,823. I-T ‘survey’ at HSBC Mumbai.
One day this spring, Naina Lal Kidwai, head of the beleaguered HSBC India, defended her position before a banker-friend thus: “I can put my hand on my heart and say HSBC India is clean.” The acquaintance, a retired senior banker, said Kidwai swore that the Indian arm was uninvolved in misdemeanours that HSBC is accused of internationally.
Kidwai arrived spectacularly at the top of HSBC India in 2006. In just a few years, bigger storms hit HSBC. Today, it faces a global stream of investigations, charges and indictments in the US, France, Argentina, Mexico and, for the first time, India. Here, the big question being asked is: did HSBC help clients open accounts in HSBC Suisse, its private banking arm, and did those clients evade tax? An HSBC spokesperson declined comment for this report, saying, “We have cooperated continuously with the authorities and we continue to cooperate.”
A former HSBC investment banker, who now works overseas, is blunt: “HSBC is taking a hit in India and globally. Its stock price is down, its 2014 results were bad (profit down 17 per cent, around $2.4 billion set aside for regulatory costs).” He, however, says that HSBC could be no different from many other banks in terms of practices. “There is more scrutiny in India now because HSBC’s case is mixed up with all the noise about black money and the media is also hyperactive. It’s also bad luck,” he says.
Black money is indeed an explosive issue in India, but somehow, the ‘venerable’ HSBC brand, around in India since the 1850s as the British Empire’s banker, has escaped social opprobrium. Not just that, it added 1,000 to its Indian headcount last year. Another, perhaps lesser, brand would certainly have fared worse.
One reason, experts say, is how India deals with ‘black money’. Tax sleuths dig up wealth held by individuals in Swiss accounts and tax it. End of story. There are no signs of an investigation into possible systemic default at HSBC India. “One doesn’t know how many of the leaked HSBC accounts are legit but it is well known that illicit wealth often lubricates the wheels of finance. The Indian government must get to the bottom of it—not just in HSBC’s case, but banking in general,” says Rajrishi Singhal, a global finance expert with Gateway House.
A Supreme Court-appointed special investigative team (SIT) is already examining 1,823 Indian and NRI clients of HSBC to see if they evaded tax in India via HSBC Suisse accounts. However, the SIT is limited to probing just these leaked account-holders. So far, it has yielded a taxable Rs 3,150 crore—a decidedly paltry sum, though the probe is going on.
It is perhaps a testament to HSBC’s brand power in India—and Kidwai’s appeal in corporate and government circles—that the case has not attracted wider attention. Even the RBI, which had once raised questions on her appointment, is not, so far, investigating. Last fortnight, there were indications this might have changed. The I-T department conducted a ‘survey’—a notch below a full-fledged raid—at HSBC’s Mumbai offices. The obvious suspicion: without HSBC India’s help, could HSBC Geneva have identified high net worth Indians keen to open Swiss Bank accounts?
One HSBC India executive says the tax sleuths sought information on HSBC’s Indian account holders, not on the bank itself. It could not be ascertained if there was prior notice of this survey, as is usual, or if HSBC India ever recommended potential or existing clients to HSBC’s Swiss arm (as in New Jersey businessman Vaibhav Dahake’s case). Indian banking laws do not permit banks in India to offer products available in overseas banks.
Banking industry sources, many of them former HSBC India executives, say the immediate fallout of the ongoing probes will be on people who found their names on the list of 1,823. Some of these executives agree that HSBC’s problems are bigger than the focus on ‘Swiss’ accounts allows one to believe.
A former HSBC executive of Indian origin, who was close to the top echelons of HSBC in West Asia in the mid-2000s, says many controls at HSBC were lax in the past. Till around 2006-07, Know Your Customer (KYC) rules were not stringently enforced worldwide. “Compliance was not such a big thing back in the day,” he admits. “KYC annoyed the hell out of us. We always felt it was anti-business.”
This is borne out by several international investigations, including a 2012 report of a United States Senate Subcommittee examining US vulnerability to money-laundering, drugs and terrorist financing in HSBC US. The report reveals widespread ignorance, even within the bank, of shady clients and damaging transactions. It also revealed understaffed compliance teams. Once, in 2010, the bank raced to meet a compliance deadline but failed, even though several HSBC units—including one in India—pooled compliance resources.
Former HSBC India executives express shock that Kidwai’s bank—which regularly fields her on TV debates ranging from black money to censuring the investment climate—is being investigated in India, as also in Argentina, Mexico, the US and UK. “Today, compliance rules are stringent and the notion of private banking secrecy is itself being questioned,” says the former HSBC executive in West Asia. The fact that the second leaked “HSBC list” provoked a ‘survey’ at HSBC’s Mumbai offices raises questions about the bank’s future and reputation in India.
Another former HSBC executive, now in a senior banking position in India, says the buzz these days is that the bank is swinging to the other extreme: “The legal guys will get hyper-technical, even with old accounts. They’ll insist blindly on KYC. Clients will consider HSBC too much of a hassle. Instead of having every piece of paper in place, they will take the easier way out and leave,” he says.
Says a third former HSBC India executive, with over a decade of experience at the bank, “Indians write complaint letters when they believe their bank is in crisis. In Hong Kong or China, people move on.” He believes HSBC India will also be “extra cautious” and take a reputational knock till it fixes compliance. He believes the issue is being dragged out, painfully since 2008. “I say, pay the fine, decide on regulatory action, close the issue. It’s like surgery—hurts, but is the only way out.” The SIT probe and tax sleuths will cause little long-term damage, experts feel, unless their focus shifts from recovering tax to a wider probe.