Tax Haven Exposure in Light of HSBC’s Swiss Leaks

Hervé Falciani, an ex-software engineer for the Swiss branch of the HSBC bank, revealed an ‘informational bomb’ that may, finally, change the secretive practices of modern banking. Between 2005 and 2007 Falciani extracted confidential data of thousands of clients who, through the HSBC bank, engaged in complex tax evasion practices. Upon extraction, he handed over the complete set of data to French authorities and, when citizens from other countries were involved, to those governments as well.  The question that remains is whether this publication will instigate profound reforms in the banking system or merely be swept under the rug. Source: WSJ.com

While the Falciani List scandal, or ‘Swiss leaks’ as it has become known, has been in the news for a while, recent efforts by the International Consortium of Investigative Journalists, composed of over 60 international newspapers, have brought this topic back to the front page of newspapers all around the world.  According to The Guardian, “The revelations will amplify calls for crackdowns on offshore tax havens and stoke political arguments in the US, Britain and elsewhere in Europe where exchequers are seen to be fighting a losing battle against fleet-footed and wealthy individuals in the globalised world.” This coordinated publication is meant to strengthen the fight against ever-more prevalent fiscal misconducts. In the ICIJ’s website, where all the data is neatly divided into “countries, people and stories”, anyone can read about the “$100 billion from 106,000 clients of 203 countries”. Every foreign-owned dollar concealed sealed by Switzerland’s hermetic banking privacy laws does not pay taxes, and therefore deducts from countries’ budgets for education and health care.

Notwithstanding, it is even equally concerning that as many as 106,000 clients took advantage of the lax tax policy of the HSBC branch in Switzerland to evade taxes, thus essentially creating an international tax evasion consortium.  According to Falciani, the pressure of international competition drives banks to carry out practices that attract the most valuable customers but also border or infringe upon legal standards. When asked if banks would rectify their practices in light of the Swiss Leaker scandal, Falciani replied: “No… just the fact that they face international competition ensures that banks will continue to offer wealthy clients ways to evade tax authorities.”

The Falciani List, available online, displays the profiles of all of the tax evaders. These clients come from over 203 countries, featuring figures such as Spanish banker Emilio Botín to to King Abdullah II Jordan, or Mexican billionaire Carlos Hank Rhon. The list, which seems endless, is filled with such members of the international jet set and contains most professions: athletes, politicians, bankers, and most type of high remunerating jobs.

European nations within the ‘Top 30’ ranking account for an amount of untaxed money totaling $95 billion. Spain and France, for example, have been able to utilize the published information to rightfully identify and tax $340 million and $290 million, respectively, of  previously unreported money. While these developments are promising for international transparency, there still remain greater hidden amounts all over the world. It is thus imperative to improve upon banking laws by carrying out much needed structural reforms.

The Spanish Minister of Finance, Mr. Montoro, has boasted that the investigations that sprouted from the Falciani list have helped diminish tax evasion. Unfortunately, on a national level, Mr. Montoro has not proposed new legislation targeted at tax havens –although in a country such as Spain, plagued by fiscal fissures that allow 163.302 million Euros to be deviated into fiscal paradises, this does not come as a surprise. In Britain “prosecutions are up fivefold” according to British politician George Osborne. In France for example, where HSBC hid €5.7 billion in tax havens, the government has shown a frimer reactionary stance and has already declared that they will investigate HSBC’s practices. However, French jurisdiction is limited by Switzerland’s sovereignty, meaning that international political pressure will become the most probable policy measure used to modify Switzerland’s controversial banking laws.

In an interview with Italy 24, Mr. Falciani declared that he is skeptical that transnational organizations such as the Organization for Economic Co-operation and Development, which oversees the CRS (Common [tax] Reporting Standard) - a transparency measure adopted by many middle-to-high-income nations-  will successfully implement change. While his statement that “today, the fight against tax evasion doesn't exist” is not true, since it does happen on national levels, his view that “the rules are so complicated that it becomes impossible to fight tax evasion” is understandable. Moreover, it is countries such as Switzerland, with infamous reputations for secretive banking practices, that seem least interested in undertaking reforms. Switzerland, as described in the ICIJ’s article “Whistleblower? Theif? Hero? Introducing the Source of the Data that Shook HSBC”, has indicted Mr. Falciani and not, unsurprisingly, HSBC or its administration. According to a HSBC report in 2015, “[HSBC is] fully committed to the exchange of information with relevant authorities and are actively pursuing measures that ensure clients are tax transparent, even in advance of a regulatory or legal requirement to do so.” Unfortunately, only time will tell whether this renewed spirit of cooperation will suffice or, instead, whether the profit-maximization drive will continue to dictate HSBC’s practices.

It seems unlikely that there will be any near future changes bringing greater transparency to Switzerland’s banking system, especially considering that the country owes its favorable financial advantages and appeal to unique client confidentiality arrangements. Moreover, issues of legal jurisdiction will continue to be an impediment in persecuting unethical and illegal tax heaven systems. Hopefully, the legislative representatives of some of the 203 countries will accurately portray the indignation surrounding the scandal and demand an effort to end tax havens worldwide.

Countries need to revisit their own legislation to ensure that their laws on tax evasions are more stringent and better enforced, in addition to ensuring that sufficient resources and disposition are dedicated to the prevention of such financial crimes. Only collective pressure combined with national responsibility will drive Switzerland and other tax haven locations towards more transparent and more rigorous banking laws.