Too big to jail? HSBC bank helped wealthy clients conceal billions -- and the US knew in 2010

A leading member of the Senate banking committee is calling on the US government to explain what action it took after receiving a massive cache of leaked data that revealed how the Swiss banking arm of HSBC , the world’s second-largest bank, helped wealthy customers conceal billions of dollars of assets.

The leaked files, which reveal how HSBC advised some clients on how to circumvent domestic tax authorities, were obtained through an international collaboration of news outlets, including the Guardian, the French daily Le Monde, CBS 60 Minutes and the Washington-based International Consortium of Investigative Journalists.

The files reveal how HSBC’s Swiss private bank colluded with some clients to conceal undeclared “black” accounts from domestic tax authorities across the world and provided services to international criminals and other high-risk individuals. The Guardian has established the leaked data was shared with US regulators five years ago.

“I will be very interested to hear the government’s full explanation of its actions – or lack thereof – upon learning of these allegations in 2010,” said Ohio Senator Sherrod Brown, the leading Democrat on the committee.

Referring to previous charges against HSBC, which were resolved in a landmark civil settlement in 2012, he added: “If the charges are true, the same institution that was first caught violating US sanction laws and laundering money for Mexican drug cartels could then escape accountability for promoting widespread evasion of US tax laws. I intend on pressing regulators, the IRS, and the DOJ for answers.”

Related: HSBC files: why the public should know of Swiss bank’s pattern of misconduct

The disclosure amounts to one of the biggest banking leaks in history shedding light on some 30,000 accounts holding almost $120bn (£78bn) of assets. Of those, around 2,900 clients were connected to the US, providing the IRS with a trail of evidence of potential American taxpayers who may have been hiding assets in Geneva.

A trail of evidence

The data was leaked by a computer expert turned whistleblower working in HSBC’s Geneva office. French authorities later obtained the files and shared them with the US Internal Revenue Service in 2010. That year, amid growing scrutiny from US tax authorities, HSBC’s private bank in Switzerland stopped doing business with US residents entirely.

The US Department of Justice and IRS have been investigating HSBC’s Swiss banking operations ever since but the scale of those inquiries remain unclear.

Confronted by the Guardian’s evidence, HSBC admitted wrongdoing by its Geneva-based subsidiary. “We acknowledge and are accountable for past compliance and control failures,” the bank said in a statement. The Swiss arm, the statement said, had not been fully integrated into HSBC after its purchase in 1999, allowing “significantly lower” standards of compliance and due diligence to persist.

HSBC added: “Beginning in 2008 HSBC began to put a more rigorous control structure in place in the Swiss private bank by, for example, introducing a new policy on US persons and reducing the number of US taxpayer accounts. In 2010, the Swiss private bank decided to exit US resident client business entirely.”

However the Swiss files, made public for the first time by the Guardian and other media, are likely to raise questions in Washington over whether there is evidence to prosecute HSBC or its executives in the US. Lawmakers are also expected to question the rigour of IRS investigations into undeclared assets hidden by US taxpayers in Geneva.

The IRS said it “remains committed to our priority efforts to stop offshore tax evasion wherever it occurs”, and pointed out it has collected more than $7bn from a program, introduced in 2009, that allows US taxpayers to voluntarily disclose previously undeclared offshore accounts.

However the IRS declined to say how much it has retrieved in back taxes, interest and penalties as a result of investigations stemming from the leaked HSBC Swiss data. The IRS also declined to say how many US taxpayers have been investigated as a result of the leak, citing taxpayer privacy and the Tax Information Exchange Agreement (TIEA), a treaty that renders secret information shared between the US and France. The DoJ said it “does not confirm or deny the existence of an investigation”.

Senior Senate sources said government officials are likely to be questioned on Capitol Hill over what action was taken after the US received the leaked HSBC data almost five years ago.

Intense scrutiny in DC

On Tuesday, Maryann Hunter, who is on the board of governors of the Federal Reserve, and has some responsibility for regulation of foreign banking organisations operating in the US, will give evidence to the Senate banking committee. Two days later, Geoffrey Graber, a deputy associate attorney general at the DoJ who oversees settlements with Wall Street banks, will appear before a House judiciary subcommittee. Both are expected to be questioned about the leak.

Public disclosure of the leaked files comes at a critical moment for HSBC in the US, where prosecutors have already warned the bank is operating under a “sword of Damocles”. HSBC global and its US bank was forced to pay a $1.9bn fine two years ago after the DoJ uncovered evidence HSBC subsidiaries had enabled clients to breach US sanctions against Cuba, Sudan and Iran and, due to oversight failures, allowed Mexican drug cartels launder billions of dollars.

That deal was unveiled in December 2012, six months after a damning investigation into HSBC global and its US affiliate by the Senate permanent subcommittee for investigations. The deferred prosecution agreement made no mention of evidence of tax evasion connected to HSBC’s Swiss banking division, even though the US government had received the leaked data two years earlier.

Related: Catalogue of malpractice endorsed by bankers laid bare in HSBC files

The 2012 settlement was overseen by Loretta Lynch, who was then US Attorney for the Eastern District of New York. Lynch is currently Barack Obama’s current nominee for attorney general.

At the time, the HSBC settlement was heavily criticised by both Republicans and Democrats for allowing the bank to escape criminal indictments and keep the charter which enables it to operate in the US. Lynch and other senior DoJ officials defended the deal, pointing out it committed HSBC to a five-year plan to stamp out money laundering and other illicit practices, an ongoing process that is being overseen by an independent, court-appointed monitor.

Files pertaining to HSBC’s private bank in Switzerland were obtained by a Geneva-based computer technical analyst, Herve Falciani, between 2006 and 2007. The files were later seized by French authorities and have been quietly shared with governments around the world, some of which have mounted investigations into tax evasion.

The HSBC leak has sometimes been referred to as the “Lagarde List”, after the then French finance minister, Christine Largarde, who shared portions of the HSBC data with her counterpart in Greece. The Guardian has reviewed the list of US clients with accounts in HSBC’s private Swiss bank. They include prominent film directors, sports stars, hedge fund managers, retail magnates and major political donors. The HSBC files provide no indication as to whether US clients declared their assets to the IRS

In a recent court filing, Michael Danilack, a deputy commissioner at the IRS in Washington, said he asked the French for details of US individuals with undisclosed accounts in HSBC’s Swiss bank in early 2010. The request was granted and he received a CD file containing data leaked from HSBC’s Swiss bank “on or about April 6, 2010”, he said.

Prosecuting cases in US

There is evidence in that at least some US clients of HSBC’s private Swiss bank have been prosecuted. HSBC was found to have handed over “bricks” of $100,000 a time to US surgeon Andrew Silva in Geneva, so that he could illegally mail cash back to America. He mailed the sum to an address of his home state in Virginia in sums of less than $10,000, to avoid declaring the packages to US customs. He pleaded guilty to criminal tax evasion in 2010.

Another US client, Sanjay Sethi, pleaded guilty in 2013 to cheating the US tax authorities by maintaining $4.7m in accounts in Switzerland and India. The prosecution in his case said a high-ranking HSBC executive based in London promised on Swiss undeclared account would allow his assets “to grow tax-free and bank secrecy laws in Switzerland would allow Sethi to conceal the existence of the account”.

Last year, there were additional US court cases, in New York and Virginia, to enforce IRS summons for records of undeclared HSBC Swiss accounts held by two US taxpayers.

It is not known how many other investigations have been brought against US taxpayers over undeclared assets in HSBC’s Swiss bank, or whether the DoJ is considering prosecuting the bank or its executives. Almost five years after the data leaked by Falciani was passed onto US authorities, the investigations into HSBC’s private Swiss bank appear to be ongoing.

Related: Obama will propose mandatory tax on US companies' earnings held overseas

HSBC’s most recent annual report, published last year, said the bank was under investigation in the US by the DoJ and IRS “regarding whether certain HSBC companies and employees acted appropriately in relation to certain customers who had US tax reporting requirement”. It added: “In connection with these investigations, HSBC Private Bank Suisse SA, with due regard for Swiss law, has produced records and other documents to the DoJ and is cooperating with the investigation.”

HSBC also said in the report that the DoJ had requested additional information from HSBC’s Swiss bank “regarding the transfer of assets to and from US person related accounts and employees who serviced those accounts”. The report disclosed the fact that the DoJ informed HSBC’s Swiss bank, in August 2013, that it was not be eligible for the non-prosecution agreements made available to other Geneva-based banks.

It also warned HSBC shareholders there was a “high degree of uncertainty” over the ongoing US investigations and it was possible the bank could be forced to pay “significant” fines and penalties.

The DoJ was under pressure to go beyond financial penalties – to bring criminal charges against HSBC or its bankers – in July 2012, after the Senate’s permanent subcommittee on investigations published its crushing 330-page report documenting how the bank’s lax anti-money laundering controls had been exploited by drug traffickers.

HSBC’s head of compliance, David Bagley, resigned before the committee during a gruelling cross-examination from senators. Six months later, in December 2012, HSBC negotiated the settlement with the DoJ in which it agreed to pay almost $2bn and commit to a five-year plan to stamp out illicit practices, overseen by the independent monitor.

The settlement proved controversial because it stopped short of criminally indicting the bank or its executives; lawmakers from both parties complained it revealed some Wall Street institutions were considered “too big to jail”.

HSBC deal ‘fundamentally wrong’

The Democratic senator from Massachusetts Elizabeth Warren famously labelled the HSBC deal “fundamentally wrong” . “HSBC paid a fine, but no individual went to trial, no individual was banned from banking and there was no hearing to consider shutting down HSBC’s actives in the US,” Warren said at a Senate committee hearing in 2013. “How many billions of dollars do you have to launder for drug lords and how many sanctions do you have to violate before someone will consider shutting down a financial institution like this?”

At the time of the HSBC settlement, Lanny Breuer, then the head of the DoJ’s criminal division, insisted the bank was not being let off the hook. “It’s the first time in history that a foreign institution is going to have a monitor,” Breuer said. “There’s a sword of Damocles right now over HSBC.” Lynch told a CBS news at the time that she expected HSBC to “literally turn their company inside out” as part of the agreement.

Lynch was pressed over the HSBC settlement by Democratic senator Richard Blumenthal last week, during a confirmation hearing by the judiciary committee. Obama’s candidate for attorney general did not comment on the specifics of the deal, but told senators she was committed to “aggressively” pursuing white collar crime. “No individual is ‘too big to jail’,” she said. “And no one is above the law.”

HSBC is now just over two years into its reform plan, and has been deemed to be complying with the terms of the settlement. However the court-appointed monitor, Michael Cherkasky, who oversees a team of banking investigators who review HSBC’s changes, has expressed some concern over the pace of reform. Cherkasky’s most recent assessment of HSBC’s ongoing efforts to clean up its act has once again concluded it could do better, according a recent report in the Wall Street Journal which cited people familiar with its findings.

Meanwhile, HSBC remains entangled with US law enforcement and regulators on other fronts. In November, the bank reached with the the Securities and Exchange Commission in which HSBC agreed to pay $12.5m to resolve charges that its Swiss private banking division illegally provided investment and brokerage services to US clients.

The following month, the IRS issued a court summons to HSBC USA to “produce information about US taxpayers who may be evading or have evaded federal taxes” using a company called Sovereign Management & Legal Ltd, which trades via the website named ‘ offshore-protection.com ’.Prosecutors believe the US correspondent bank accounts that HSBC USA holds for Sovereign’s banks in Panama and Hong Kong are likely to have records of financial transactions by US clients who may have evaded taxes.

In May last year, the DoJ revealed it was prepared to bring criminal charges against banks suspected of involvement in tax evasion, when it forced Credit Suisse to plead guilty to a major conspiracy to aid US taxpayers filing false returns to the IRS. Under a plea agreement, Credit Suisse paid a total of $2.6bn.

“This case shows that no financial institution, no matter its size or global reach, is above the law,” the Attorney General Eric Holder said at the time . “Credit Suisse conspired to help US citizens hide assets in offshore accounts in order to evade paying taxes. When a bank engages in misconduct this brazen, it should expect that the Justice Department will pursue criminal prosecution to the fullest extent possible, as has happened here.”

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