Reference no: EM133358794

Case Study: In November 2015, a former IT employee at HSBC's subsidiary bank in Switzerland, Hervé Falciani, was sentenced by a Swiss federal criminal court to five years in prison for industrial espionage, data theft and breaches of banking secrecy laws. Falciani, by then well known as a whistleblower, was not present to hear the verdict. In the largest data leak in banking history, he had downloaded the banking details of 130,000 of the Swiss subsidiary bank's clients between 2005 and 2007. Most were people who simply wished to hide their wealth from tax authorities, but among them were arms dealers, drug dealers and money launderers. The massive amount of data was released to the media and to tax authorities in the relevant countries, who could then investigate the individuals.

HSBC is listed in London, but a large proportion of its business is in Asia. The bank started life in Scotland in 1965, and set up in Hong Kong and China soon thereafter, providing trade finance in the British colonial era-hence its original name, Hong Kong and Shanghai Banking Corporation. In Hong Kong, it has become one of the dominant financial institutions, but it moved its base to London in the 1990s, in anticipation of Hong Kong's handover to China. Its Swiss bank was acquired in the course of HSBC's global expansion strategy. Dating from 1999, it aimed to cater for very wealthy individual clients. But the bank had veered away from traditional banking services towards a model that had systematically allowed the thousands of account holders to hide money and evade taxes. Some clients were even given 'bricks' of untraceable banknotes on a regular basis. In the year Falciani was tried, HSBC was fined 42 million Swiss francs for facilitating money laundering at its Swiss subsidiary. Did HSBC's head office knowingly acquiesce in the Swiss activities, or did it simply fail to notice? Either way, it was clearly failing to exert proper control.

HSBC said the federal structure of the bank allowed the various businesses to operate independently under country managers, arguing that senior executives knew nothing of the wrongdoing. Executives, it insisted, cannot know what everyone is doing in a bank with 240,000 employees. This explanation sounded thin to the various forums in which HSBC was having to answer searching questions. Stephen Green, the CEO at the time of the leaks, was in the firing line. As an ordained Anglican priest, he was noted as a spokesman for high moral principles, going beyond simply abiding by the letter of the law. But the culture of the bank, and the lax oversight, suggest that there were serious failings in the way the bank was run. Green was CEO from 2003 to 2006. He became chairman in 2006, and in 2010, he was appointed trade and industry minister in the Conservative government, becoming Lord Green. This period saw the emergence of damaging evidence that international branches of HSBC in Mexico had been involved in money laundering by drug cartels. The US fined the bank $1.9 billion in 2012.

The UK tax authority, HMRC (Her Majesty's Revenue and Customs), had evidence on wrongdoing at HSBC's Swiss bank at the time that Green was appointed trade minister. The current CEO, Stuart Gulliver, took over in 2010. He has admitted that there were failures in controls during Green's tenure. HMRC had also received the names of the British holders of HSBC Swiss bank accounts, but was noticeably reluctant to take action in the way that other countries had. HMRC's head of tax retired from the service two years after the leaked data were handed over - and went to work as a consultant for HSBC. Senior executives from both HSBC and HMRC were questioned before the parliamentary public accounts committee. The committee's chairman, Margaret Hodge, expressed the view that that there appeared to be 'a systemic policy to support hundreds of people in avoiding paying their tax' (Leigh et al., 2015). She urged that tax authorities in the UK should pursue possible legal action against HSBC.

Stuart Gulliver has stressed that the bank has been completely transformed since 2008. While the global financial crisis brought other British banks to their knees, HSBC did not have need of a government bailout, its strong Asian business helping to bolster its financial position. But its shares have suffered, and many shareholders criticized executive remuneration in 2015. In 2016, leaked documents known as the 'Panama Papers' implicated HSBC in Panamanian offshore firms designed to hide clients' wealth. Even the CEO was found to have used an offshore firm in Panama to hold £5 million. In 2016, the board bowed to shareholder criticism, and reduced executive pay.

HSBC considered moving its headquarters from London to Hong Kong, where much of its business is located. However, the political tension with China posed a risk. Under the handover agreement with the UK, there are 32 years left before Hong Kong loses its current status and becomes part of China. The bank announced early in 2016 that it would not be moving.

Sources: Leigh, D., Ball, J., Garside, J. and Pegg, D. (2015) 'HSBC files: HMRC had data on misconduct before bank boss made trade minister', The Guardian, 9 February, at www.theguardian.com; Ratcliffe, R. (2015) 'HSBC boss: we failed to live up to the standards expected of us', The Guardian, 13 February; Farell, G. and Kocieniewski, D. (2016) 'UBS, HSBC offshore dealings thrust into Panama Papers spotlight', Bloomberg, 5 April, at www.bloomberg.com.

Questions for discussion:

• Where does the blame lie for the massive tax avoidance operations that flourished in HSBC's Swiss bank?
• The CEO said he cannot know what everyone in the bank is up to, and therefore cannot be held liable. Do you agree?
• What regulatory weaknesses were there in Britain?
• Why was HSBC tempted to leave London and go back to Hong Kong, and why did it reject this idea?