US probe of HSBC India 'a warning to HK'

PUBLISHED : Sunday, 24 April, 2011, 12:00am
UPDATED : Sunday, 24 April, 2011, 12:00am


A move by US tax officials to target 'secret' HSBC bank accounts in India should be seen as a warning shot across the bows of all Hong Kong banks, a tax expert warns.

Two weeks ago the US Department of Justice accused HSBC staff of telling US clients of Indian origin that they would not have to pay US tax on so-called Non-Resident Indian (NRI) accounts they opened with the bank.

HSBC says it had not seen the summons, but 'fully supports the US efforts to promote appropriate payment of taxes by US taxpayers'.

This comes on the back of two US-backed initiatives geared to tighten the economic noose on banks involved in illegal financial activities in Hong Kong.

One is the Foreign Account Tax Compliance Act (Fatca) and the other is a US Internal Revenue Service (IRS) tax amnesty launched two years ago, which will bring banks in the city under increasing scrutiny. A tax lawyer said these developments would have banks in the city nervously looking over their shoulder.

'It could be any day that a major financial institution in Hong Kong comes under the same scrutiny as what has happened to HSBC in India,' said Jay Krause, partner at law firm Withers. 'The US Department of Justice and IRS officials have said they have a number of these investigations ongoing, so just watch this space. They are going to be actively pursuing these organisations.

'India is not an obvious tax haven, but US authorities acted anyway. Large financial centres like Hong Kong and Singapore will take note. They've been given a clear warning of what could happen if they aren't playing by the rules.'

US authorities issued a so-called John Doe summons against HSBC in India, to get the names of all its American customers who have NRI accounts. That is the strategy the American government used to pursue Swiss bank UBS.

It inflicted a harsh lesson on Switzerland in 2009 by forcing the world's biggest offshore banking centre to lift its treasured secrecy and slapped a US$780 million penalty on UBS for helping wealthy Americans dodge taxes from 2000 to 2007.

The Fatca agreement will play a big part in catching out banks in Hong Kong that have been helping clients hide their wealth from US authorities. It is a law that obliges foreign firms to report offshore accounts and security trades by US clients that amount to more than US$50,000. If they fail to do so, they will be hit with a 30 per cent withholding tax penalty.

The tax amnesty led 15,000 taxpayers to make voluntary disclosures to the IRS involving bank accounts held in more than 60 countries. Another 3,000 individuals have made voluntary disclosures since the amnesty ended in 2009.

'You just don't know what information the IRS has obtained from the voluntary disclosures over the past couple of years, and who at a particular bank has been involved in whistle-blowing,' Krause said.

'What is certain is that when the Department of Justice and the IRS get tangible evidence that this type of evasion is going on they are going to look to make a move. They've already demonstrated that with the action they've taken in India. From a US perspective there's bound to be some juicy targets here.'