Too big to manage? HSBC's chiefs to testify on tax scandal

Staff Writer
Columbus CEO

LONDON (AP) — First there was money laundering. Then foreign-exchange rigging. Now tax evasion.

HSBC, Europe's biggest bank, has endured a string of scandals — and paid millions in penalties to regulators around the world. But recent revelations that its Swiss private bank helped the wealthy evade taxes are raising new questions about HSBC's conduct and shining a spotlight on an industry still reeling from the 2008 financial crisis.

Politicians and analysts are asking whether big banks, which during the crisis were considered to be too large to be allowed to fail without endangering the wider economy, have also become too big to manage.

"If they're too big to fail, they're too big to control," said Crawford Spence, a professor of accounting at Warwick Business School. "But are they too big to bludgeon into corporate responsibility?"

HSBC Chairman Douglas Flint and Chief Executive Stuart Gulliver may get the chance to answer that question Wednesday, when the U.K. Parliament's Treasury Committee grills them about allegations that HSBC's Swiss private bank actively marketed tax avoidance schemes that helped as many as 1,000 Britons evade taxes.

While Flint and Gulliver have publicly apologized for HSBC's conduct, they stress that the issue is an historical one and that the bank has taken steps to ensure proper practices. HSBC has "no appetite" to help tax evaders, the bank said in an open letter published in national newspapers.

The scandal broke this month when reporters mined a trove of leaked documents from 2005-07 for details of 30,000 accounts at the Swiss private bank that held almost $120 billion of assets. The information was turned over to French authorities by a former bank employee.

HSBC isn't the first bank to be hit with allegations it helped clients avoid taxes as governments sought to boost revenue and balance budgets ravaged by the financial crisis.

Swiss banking giants UBS and Credit Suisse have both agreed to fines in the U.S. on allegations they conspired to help Americans evade taxes. The U.S. Department of Justice says it is investigating "numerous additional offshore banks" in Switzerland, India, Israel and other countries.

"Although the political pressure has been on HSBC for helping wealthy individuals avoid tax, other banks will be just as culpable," said Louise Cooper, a former Goldman Sachs stockbroker who writes the financial blog CooperCity. "If you think this is just HSBC, then you are mistaken. HSBC is just the bank to get caught as the French whistleblower happened to work there."

But tax evasion is only the most recent issue to damage HSBC's reputation.

In 2013, the bank agreed to pay U.S. authorities $1.9 billion to settle charges that its practices enabled Latin American drug cartels to launder billions of dollars. U.S. and U.K. regulators in December fined it another $618 million for failing to prevent manipulation of foreign-exchange markets.

HSBC executives acknowledge that the bank's sheer size and rapid growth before the financial crisis led to control issues.

HSBC acquired much of its Swiss private bank when it bought Republic National Bank of New York and Safra Republic Holdings in 2009.

"The business acquired was not fully integrated into HSBC, allowing different cultures and standards to persist," the bank said in a report released this month. "With hindsight, it's clear that too many small and high risk accounts were maintained and the business was stretched over more than 150 geographical markets."

Founded 150 years ago as the Hong Kong and Shanghai Banking Corp., HSBC now has more than 6,100 offices in 73 countries. Under Gulliver's leadership, HSBC has simplified its organizational structure and reduced its workforce by about 17 percent to 257,000.

"It might be worth thinking more carefully about whether some banks can become 'too big to regulate' - in terms of the 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," said Kim Kaivanto, an economist at Lancaster University Management School.

On a conference call with reporters this week, Gulliver said society now holds public companies to a higher standard than other large institutions, such as the military — arguing essentially that top executives shouldn't be held responsible for the actions of individual employees, just as generals aren't expected to track the actions every solider in the trenches.

"I don't think the firm is too big to manage," Gulliver said.

The chief executive was personally dragged into the scandal last weekend, when the Guardian reported that Gulliver himself had an account at the Swiss private bank.

Gulliver said he opened the account through a Panamanian company to protect his own privacy because other executives at HSBC's Hong Kong offices were able to see what their colleagues were earning. He insisted he's paid all his taxes.

But top bankers may find themselves increasingly under the focus of regulators. Writing in the Financial Times, Andrew Bailey, the Bank of England's deputy governor for prudential regulation, outlined legislation that would increase the power to take action against senior managers who don't take reasonable steps to avoid problems such as tax evasion.

"We do not seek to collect scalps, or to make examples of individuals," he wrote. "Success will be well-governed companies, where senior management know what is expected and run their firms responsibly."