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HSBC: Shielded from the Criminal Law?

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About The Author

Jade Rigby (Writer)

Jade is a third year Law student at Newcastle University. She is currently completely an Erasmus year abroad at Universitat Pompeu Fabra in Barcelona, Spain, and will return to Newcastle in 2015. Jade is predominantly interested in commercial law, but also writes on criminal and private law topics.

Image © Gyver Chang

Lawyers are not the only ones who are suffering from a reputation problem. It seems that the bankers are at it again! Last Month, more than 50 media outlets around the world received information that HSBC had been helping over 100,000 wealthy clients evade tax across 203 countries. HSBC is now facing 10 separate inquiries from countries across the globe, including Brazil, Mexico, India and Argentina.  As tax legislation varies in different countries, there has been little crossover to date. However, as investigations progress, it is likely that the international community will cooperate with data exchanges.

Whistle-blower Herve Falciani, a former HSBC IT expert, exposed the data revealing tax evasion to the French authorities in 2008. In 2010, the French passed the data on to other European countries, including the UK and the US. Admittedly, it seems that tax authorities have been questionably slow to respond to the scandal. However, Governments have now recovered millions from Falcianis data leak by pursuing wealthy HSBC clients who were involved in the scandal, but further investigations could still recoup significant losses. So far, however, HSBC has not been subject to criminal proceedings in the UK, despite a public outcry.

Tax Evasion and the Criminal Law

Tax evasion/fraud describes criminal conduct which involves individuals or businesses acting dishonestly by paying too little tax, or wrongly claiming tax repayments. In the UK, Her Majesty's Customs and Revenue (HMRC) or the National Crime Agency (NCA) investigate tax based fraud.

Many countries have been quick to threaten the prominent HSBC actors, and the clients involved in the tax evasion, with criminal prosecution.

The Guardian reported that, in the US, ‘government officials said the investigation is not merely looking at HSBC’s US clients, and could also result in criminal indictments against the bank itself.’ HSBC are already in hot water in the US criminal justice system; in 2012, they entered into 'a deferred prosecution agreement over money-laundering with Mexican drug cartels and breaches of US sanctions.' If found guilty of further criminal offences, the US may reconsider this controversial agreement. HSBC could even face the revocation of their banking license in the US, which would force it to shut down its US banking operations.

In Belgium, leading HSBC officials have narrowly avoided international arrest warrants by promising to fully cooperate with Belgian authorities and their investigations. However, this does not exclude HSBC itself from criminal charges.

In the UK, HM Revenue and Customs published a statement detailing their position so far. Although they collected evidence for criminal prosecution, several tests and limitations mean that only three cases were prepared for the Crown Prosecution Service (CPS). The CPS ‘considered only one case to be strong enough to take forward, and that was successfully prosecuted in 2012’.

This does not seem to have appropriately addressed the fact that serious fraud has been committed, leaving taxpayers to pay the price. The question here is whether HSBC and the clients involved in the scandal should be prosecuted to the full extent of the law.

Purposes of the Criminal Law

Before any arguments in favour of punishing HSBC with criminal charges are submitted, it is necessary to understand the purpose of the criminal law.

There is no unanimously agreed ‘list’ of purposes of the criminal law. However, punishing wrongdoing and deterrence are recurring themes in most discussions. Bearing these concepts in mind, should HSBC face criminal proceedings in the UK?

Punishing Wrongdoing

This is a fairly straight-forward argument in favour of bringing criminal proceedings against HSBC, and their clients implicated in the scandal. If a person or entity commits a wrongdoing, then they deserve to be punished for it. In this case, HSBC have helped clients illegally evade tax. For ex director of public prosecutions Lord Macdonald, HSBC should face a criminal investigation ‘under the 1977 Criminal Law Act for its part in a “systemic” operation to deprive HMRC of revenue’.

Indeed, Chief Secretary to the Treasury Danny Alexander stated that HSBC are just as culpable as those who they have helped to evade tax. HSBC have committed a serious fraudulent offence, and deprived HMRC of millions of pounds. Hence, they deserve to be subject to criminal proceedings and, if found guilty, punished for these actions.

This argument is complicated, however, by the fact that it has to be proven that HSBC or their clients have committed crimes. In many cases, HMRC struggled to prove criminal intent, and they also faced issues when using the evidence handed in by whistle-blower Herve Falciani:

In 150 of these cases, we sought to collect evidence for criminal prosecution. To do this successfully, we needed to demonstrate criminal intent (rather than error, for example). In addition, because stolen data is considered ‘dirty’ it needs additional corroborating evidence.

The admissibility of evidence is central to a criminal case against HSBC or their involved clients. The right to a fair trial should not be stripped from HSBC. However, that does not prevent the authorities from continuing to collect evidence and interrogating HSBC officials in order to uncover the truth. Indeed, it would be a miscarriage of justice against taxpayers if a thorough investigation failed to be carried out.

Additionally, the power to punish wrongdoers is often used as a compromising tool. HMRC stated that, although they challenged more than 1000 HSBC account holders, many were protected by an international agreement called the Liechtenstein Disclosure Facility (LDF). The underlying idea behind this agreement is that it encourages accused persons to disclose all relevant information as soon as possible, in exchange for protection from the criminal prosecution. Arguably, this undermines the purpose of the criminal law because it enables wrongdoers to escape from criminal proceedings. However, in complicated cases such as tax evasion, agreements like this may help tax authorities to discover more serious offenders.

Deterrence

Many argue that the purpose of criminal law is to deter the offender in question (individual deterrence) and other potential offenders (general deterrence). In this way, the criminal law is used as a teaching tool in order to prevent further offending.

In relation to general deterrence, I believe that subjecting HSBC and their clients to criminal proceedings would be worthwhile. This is not to suggest that HSBC should be used as a scapegoat or punished extremely harshly just to ‘send a message’. However, as in every case, the punishment should be proportionate to the crime. Shielding HSBC from criminal proceedings directly conflicts with this concept and simultaneously suggests that, if you are big enough, you can ‘get away with it’. Hence, the value of general deterrence should not be underestimated. It is possible that other entities have used similar schemes in order to avoid tax, especially if the testimony of some HSBC officials is true. For example, the BBC reported that Mr Mears, the former head of global banking for HSBC, said that the tax evasion was a result of ‘control failings’. These failings could have been replicated by other entities in other industries. Additionally, HSBC have acknowledged that:

the compliance culture and standards of due diligence in HSBC's Swiss private bank, as well as the industry in general, were significantly lower [in 2007] than they are today.

Consequently, the deterrence value of prosecuting HSBC could be widespread and extremely effective.

With regards to individual deterrence, it is not clear that the mere threat of criminal proceedings has had any tangible effect on HSBC policies. As previously noted, HSBC have faced scandals in the US and yet controversially avoided criminal prosecution. This has clearly not prevented HSBC from acting illegally in the tax department. Admittedly, this tax scandal allegedly took place before HSBC’s agreement with the US government, but the US investigation began prior to 2012. It seems, therefore, that the threat of criminal proceedings has not constituted a threat grave enough for HSBC to clean up its act. Having snubbed these ‘second chances’, I think that the time has come for HSBC to suffer the consequences of its own actions. Going further and commencing a criminal trial may force HSBC to change their behaviour, or else they risk losing everything.

Ultimately, it seems that HSBC have, so far, been shielded from the criminal law. It is unclear whether or not this will continue following the Government’s investigations. Bearing in mind some key purposes of the criminal law, I do not think that HSBC or their clients involved in the scandal should escape unscathed. Admittedly, the CPS and HMRC have several hurdles to overcome as they work towards a just resolution, including international agreements and evidence corroboration tests, but it is of the utmost importance that those guilty of evading tax face prosecution. No person or entity should be allowed to escape the law. The time has come for all tax evaders to account and pay for their behaviour.

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Tagged: Banking & Finance, Commercial Law, Criminal Law, Tax Law

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