Worrying Business for Banks’ Reputations
The Hong Kong and Shanghai Banking Corporation case offers a particularly striking episode whose shadows need to be dispelled. Also, we will have to learn all the lessons of this case. It must be said that this case is one of the most worrying cases for the reputation of the banks that have occurred in the last few years in the world. It is all the more so because it is not isolated since other revelations involving the responsibility of financial entities in international tax evasion have occurred in recent years.
It also illustrates several problems with the credibility of public policy when sensitive data is at stake. Several suspicions have been raised about the handling of data by the intelligence and anti-illegal financial channels that have faced these management difficulties. Since then, some aspects of this case have been clarified. Also, other aspects remain to be clarified, of course. It is essential that suspicions be totally dissipated all because, they are undermining the credibility of the public action. This case is not just about these shadows.
These failed revelations involving the responsibility of financial entities in international tax evasion demonstrated the narrowness of the intelligence authorities’ action against clandestine financial channels and the many legal difficulties it faces, and that are one of the major elements of the poor performance of the devices put in place to solve this type of business. It is worth noting, again, that a knot time, if need be, that banking operations at the heart of flare systems on tax. It is recommended that the banking supervisors and the competent authorities finally have a mission and obligation to detect, repress, and prohibit illegal loans from banks. With regard to failed revelations involving the responsibility of financial entities in international tax evasion, it is not in dispute that certain inactions by the authorities little Frit be discussed.
Indeed, the courts of several countries explain these inactions by the failure to certify the origin of the documents transmitted by the informants. The idea of not being able to use this evidence as mere information is incomprehensible. The question is whether further action should have been necessary. Of course, the choice could have been on other incriminations, for example, the laundering of tax evasion or the failure to report accounts abroad. Moreover, the difficulties in the origin of the evidence were no less the case for the intelligence and action services against clandestine financial circuits than for the judicial sendees. The information provided to the financial investigation authorities for the most part have been difficult to exploit because of their volume, their encryption, as well as their voluntary opacity. For these reasons, the financial investigation authorities of the countries concerned have had to mobilize significant resources.
If cooperation is proven in the handling of these files, far from being organized, it has resulted in a worldwide number of obstructions; all necessaiy assistance cannot be provided in explaining the mechanisms or in setting up a defence commensurate with the threats received. However, legal obstacles have not prevented the various financial investigation authorities in several countries from exploiting the data. This contradiction obviously poses problems, including that of interpretation. Is it a desire to explain the apparent inertia of the authorities by the legal constraints of the exercise; was it mere inadvertence or a way to defend from any falsification? If the exploitation of the data has concerned those transmitted by the courts, then there can be no falsifications carried out, any falsification set suitable for the data handed over to the courts and exploited by it.
The findings that can be gathered on this point also contrast with the statements of the public authorities, which indicated that they could not exploit the information transmitted because it was stolen and illegally provided to the courts. These contradictions fuel the integrity of the data compared to those transmitted. On this point, the position of the various intelligence and action services against clandestine financial circuits is astonishing. Did they never dispose of raw data passed on to the courts? On the other hand, if informants probably consider that the data transmitted to the two authorities were compliant copies, this feeling does not appear to be based on a thorough knowledge of their contents.
Two lists were drawn up from data submitted in this case: that of the Ministries of Finance and that of the prosecutors and therefore of the justice. We would like to be able to confront them to verify the integrity of the data. But, in reality, even assuming that the documents are compliant copies, it could not be inferred that they are of integrity content. On this point, it cannot be said that the list of prosecutors does reflect the data provided by the informants. The suspicion remains that the judicial list may have its singularity and that it cannot serve as a standard in an audit operation. Unavailability of information Judiciaries as a result of the judicial evidence status is not the main obstacle to the probative value of such a reconciliation. It must be considered that even if the two lists were identical, their comparison would not mean that they were not falsified. They may well have been harmoniously on both sides.
Admittedly, a first coherence role could be undertaken by the justices. But this control would not be enough to take away the certainty. Such an audit is undertaken within the framework of the agreements mutual distance between countries. On the other hand, it would be justified to move closer to the justice system in the country where the offence took place, since both comments could have been made on the integrity of the data provided. In any event, the known evidence does not allow us to cany the conviction that the official list, whose histoiy appears from an unprecedented angle, and contradicts the previously collected statements, accurately reflects raw data transmitted to the various countries involved.
For a long time, reading the relationships of the case may have given the impression that individuals that their functions hurriedly in possession of digital media containing the data of the case when in reality we are witnessing the assistance provided by secret services. The reasons for their intervention and their exact role cannot be further clarified. It appears, however, that the financial entities involved may have been caught up in cases that may have involved large criminal cases, some of which have been mentioned in the media. In any case, it is not trivial that the intervention of intelligence services be mentioned. It is quite impossible to determine whether it may have affected the exfiltrated data. On the other hand, it is likely that they have taken control of it.
A final reason for perplexity must be mentioned with the initial judicial aspect of this case, since both the retention of the data seized and its obtaining by the courts, appear to have given rise to “acrobatics” whose meaning would benefit from being clarified. In any event, a foim of collaboration, unevenly peaceful, seems to have prevailed between the courts of the countries concerned with the happy effect that the local judicial services were able to dispose of investigative elements and communicate them to the tax authorities. Without this collaboration, which appears to have been somewhat suffered by the highest judicial authorities at the time of the events, the exploitation of the data would probably not have taken place, which would not have been without effect on the tax revenues and public morality. For, if the tax services have not waited for the judicial communication to materially exploit the data, it is true that their legal exploitation did not precede this communication.
Beyond the question of data integrity, it is the complete administrative action in this case that must be considered. It must be said that the process of selecting files has gone through the identification of persons who have or have disposed according to the bank’s files, a local address as well as those with a local telephone number. The application of this test has resulted in the exclusion of many interest holders from the bank’s books. Their count revealed the existence of a hundred thousand natural persons and 20,000 legal persons. However, the sorting process has been used to identify a few thousand individuals or corporations comprising the 9000 “lines” identified as likely to be of interest to the services tax authorities to. A second sorting was then completed by the discarding of some 3000 individuals whose outstanding bench was negative or nil, of some 60 individuals or legal entities, including the bank stock, was, positive but did not have a local address on the day of the conclusion of the research supplements conducted on this point, and, 80 individuals or corporations whose bank stock was negative or nil and who could not be located.
The final list is deduced. It has an average of 3000 people, including 2900 individuals and 100 legal entities. In short, the local portion of the data shows a rate of personal taxpayer’s equivalent to 2.6% of individuals in this category identified and, for corporations, 0.4%. Although the technical explanations of the tax authorities on the existence of duplicates seem convincing to explain why from a total of nearly 9000 lines one has passed to about 3000 people, the smallness of these two ratios may come as a surprise. It invites further investigation, especially as several factors that may maintain certain doubts.
Apart from the incompleteness of the research carried out, it is necessary to question the relevance of the chosen sorting process, which may have led to the disorientation of persons holding assets and taxpayers in their countries. The use of the residency or disposition of a telephone number on the basis of the bank’s files may seem somewhat reductive in that the files did not always include this possibility identification.
Moreover, the classic existence in these circumstances of structures or persons interposed, such as the names offered by bank employees make it difficult to agree with the idea that all the customers hidden behind them may have been identified and a fortiori that all persons could be identified with the references chosen to sort out the making of the list. Furthermore, not only the exclusion of zero- or negative-stock accounts from the census spectrum is problematic in so far as this finding is not dated (over what period is the outstanding under consideration considered?), but also to the extent that the balance of an account is undated doubt the only relevant criterion for assessing an individual’s exact heritage status. Even if all individuals residing in their countries have been identified, it is possible that individuals who appear to have changed residence soured their attention.
Surprising errors seem to have been made, such as the exclusion of people from the list on the basis of the findings made on their outstandings finally reinstated. Furthermore, it should be noted that more than 500 of them have been involved in withdrawals of files appearing to be justified. Most of these withdrawals correspond to either deceased persons without the search for rights holders having been abandoned, or to persons who are not taxed residents at the end. The latter cause of abandonment is problematic in the sense that it is not quite established that it is sufficient to note the absence of tax interests.
With regard to financial issues, the sums concerned are estimated from the consideration of a 2-year period. One can thus question why almost all of the last few years have been in apparent in the mentions concerning financial issues. It should be considered that the values placed on these accounts may have evolved over time. In particular, it appears that it is necessary to draw up funds in order to identify the displacement processes that may have taken place once some taxpayers have been able to resort to this traditional means of track-jamming, which consists of transferring regularly or as circumstances arise, including alerts they may receive about the triggering of identification risks.
In any event, the estimate, which must be taken with caution (in view of the uncertainties about the maximum estimate method in particular), refers to a wholesale of 4 billion individuals and 2 billion in the moral stakes, for a total of 5 billion. The distribution of assets shows extreme concentration, with the top 1% of assets S2 billion, while the 5% of assets were high, more than half of the total. These amounts appear to correspond to the addition of the maximum amounts found on the accounts, which is an imperfect indicator of the cumulative values recorded on undeclared accounts. Tax issues can only be inferred approximately. In any case, the communication of the different players has evolved. They estimate that 700 million on average per country hidden assets based on the first 500 files checked. Assets are now estimated to be worth 10 times that amount.
As part of the tax controls, it should be noted that the processing of cases included an initial administrative procedure, the one known as the “de-stressing cell” in several countries. While this cell has received an average of 5000 cases, it appears that only about 60 files have been through it, or 1.4% of the files covered by the 2.2% of potentially HSBC files.
In addition, in different countries, the intelligence and anti-illegal financial authorities have been tasked with handling the files of individuals. They first drew up 1700 programming sheets for individuals with outstanding accounts in excess of S80,000. In fact, the audit was as follows: the first phase concerned 528 taxpayers with assets in excess of SI million; persons holding between $500,000 and $1 million were involved in 202 cases, 377 cases (reduced to 272 persons with assets between $300,000 and $500,000 were examined, but no longer in the proceedings, in the lighter context of the control over parts while new procedures were opened; finally, 613 cases involving detentions S50,000 and $300,000 were entrusted for carrying out parts checks (for 613 files). In total, only cases involving amounts in excess of $500,000 were processed for a total of 869 files. This number of files represents half of the programming sheets initially established and a ratio of 30% of the individuals finally selected (15% of the individuals initially envisaged).
The number of files handled in all controls is about 2000, which is the threshold of initial programming (but this threshold was calculated on files in excess of $80,000 while a part of the “affected” files consists of files with issues ranging from $50,000 to $80,000). There would still be 550 unaffected files included in this range. In total, the number of files considered could, on the basis of decisions made so far, reach 2300, or 80% of the individuals who have passed the initial selection screen. About 20% of the potential of the files submitted would not be treated. It is tine that the amounts corresponding to the first deciles of the distribution do not show large amounts.
However, if the tax adjustment strategy in the various countries in question can, subject to the significance of the assets identified for each file, be comprehensively approved, it cannot be approved if it were to be beyond the issue of recovery. The existence of hidden accounts, even if they are poorly fed, must lead to the presumption of a lack of tax compliance, which additional investigations must and can only corroborate. It has been suggested that taxpayers with the most likely fraudsters are very active in managing their accounts, which can result in multiple holdings of accounts with small amounts of assets. It would be very unwise for fiscal public order and perhaps for other public policy considerations to ignore it. The “Virus” case shows abundantly that funds that may have been transferred through crooked banking institutions have been transferred to other accounts, to banks in the same countries, or to other countries. Moreover, this data is known by the intelligence and action service against clandestine financial circuits.
On the other hand, the results of the checks are poorly satisfactory. The amount of regularized capital amounted to an average of 921 million, or 26% of the amounts, estimated conservatively, presented to be “at stake.” It is true that parts checks were conducted, but with a low regularization rate (14% in total). Moreover, the totality of the sums at stake has been addressed so that an adjustment of the regularizations within the framework of the ongoing parts controls should not have a major effect on the overall performance of the process. This relative disappointment is reflected in the performance of controls for public finances. It was initially dependent on “righting” taxes and penalties.
With regard to taxes, undeclared amounts could be taxed in several respects: a free transfer fee in the event of no prescription and subject to the application of tax treaties when the deceased or the donor was domiciled outside his country; however, the situation could be unfavorable to taxation saw rules of division then in force between the countries; as a wealth tax to the extent that the reintegration of assets involved it; and in respect of income tax and social levies on capital for the potential proceeds of these assets, considering that when the account was held by an interposed structure benefiting from a preferred tax system: legislation involving the imposition of a flat-rate income plus 25% was then to apply.
The context of the statute of limitations was unique because of the special rales adopted to predict assumptions of non-reporting of accounts abroad. The 10-year income tax requirement is given when the financial assets are held in a state that has no administrative assistance agreements to access information, as it was the case in some countries, the signing of tax agreements. The 10-year right of recovery now applies to all non-deregistered account situations wherever they are located. But on the condition that the taxpayer does not justify that the total balances of his accounts receivable abroad are less than 50 miles as of December 31 of the year under which the declaration of accounts should be made. However, this evidence seems rather easy to report since it is enough to empty his account on that date by the use of easily accessible banking techniques.
Similarly for some taxes, the right of recovery is from six extended to 10 when assets abroad are not declared. The late payment penalties at the legal rate (the penalties for delay at the statutory rate) are:
- • the increase for deliberate default (the increase for willful failure) of 40%,
- • or for failure to report income on time (10%)
- • the fined for not reporting accounts held abroad varies between $750 and $10,000 in Switzerland (according to the year - due to the hardening that occurred).
But the choice was made of a transactional scheme providing: the application of a reduced rate of increase, of 10% (compared to 40) for alleged liabilities (those whose accounts had been inherited or opened during a past local residence) and 30% in other cases; a cap on the fine for non-reporting to the lowest of the following amounts: 10,000 or 5% of assets in the most recent year (which may not have been the year of the highest detention). This scheme is different from that applied in the “de-escalation cell” since in the latter framework penalties and interest have been capped at 15% of the regularized rights for “passive” fraudsters and 40% for active fraudsters.
The application of two unequal regimes applied to assets of the same nature, which also comes from the same bank, may well have been justified by various considerations (efficiency, premium to the repentant), but nevertheless poses a problem of equal treatment. Above all, the moderations provided demonstrate the existence of room for maneuver which, in order to be useful, limit the scope of the legislation, even though some sanctions are already at a comparatively low level. One may even question the constitutional conformity of such decisions that are not consistent with the division of powers between parliament and the government on taxation of all kinds. In total, the tax rate of assets discovered under the scheme is found to be poor. A rate of 19.6% calculated on the basis of regulated assets. In reality, this rate reaches 25% once exchanged conversions are completed. Based on the estimate of non-reporting assets ($4 billion), subject to a choice of exchange rates, the levy rate is around 7%, including penalties.
One of the reasons for this under performance is the existence of challenges from a large number of taxpayers. However, the findings from the reconciliation of the recalled duties with the regularized capital show that a cap on the levy rate obtained in the procedure must be considered because of the difficulties in isolating income from assets, problems inclusion in the basis of certain taxes and barriers to the application of transfer fees. The confrontation between the concentration of assets and that of adjustments reveals significant differences: the relative weight of the latter does not correspond to the relative weight of the foimer. While the first 5% of cases were more than three-quarters of the assets, they supported only about 55% of the adjustments. For the highest hundredth in stakes the gap also reaches 25 points.
The conclusion will be drawn that the taxation of undeclared sums instead of externalizing a tax penalty seems to result in the application of a preferential regime, to say the least, paradoxical and unsatisfactory. This is why we should welcome the adoption of measures to compensate for this by some countries. Indeed, these countries now apply an automatic taxation of 60% of life insurance accounts or contracts abroad when they are not declared, even if it is necessary to question the conditionality of which this scheme is matched as it can be waived when the taxpayer is able to justify the origin of the funds contained in these accounts; a provision which reverses the burden of proof in the proposed scenario.
Also, the processing of the accounts of legal persons was inconclusive. This can be explained by the absence of any incrimination related to the holding of accounts not reported by legal entities. The bottom line is that the transactions traced in accounting result in externalizing a suitable tax result, that is, including all the assets and liabilities recorded in the account. However, according to the intelligence and action unit of the clandestine financial channels, it appeared that the accounts concerned were “generally” in accounting. A first question that can be debated is whether the territorial rules in any event simply excluded taxing the amounts involved. In addition, the tax requirement is limited to three years for corporations, which necessarily limited research.
In any case, the tax services suffer from a lack of information on transactions carried out abroad by legal entities. No doubt this is not generally apprehensible for tax services. Nevertheless, they can inform the determination of the tax result of companies either that foreign income must be included in the taxable base, or that transactions carried out abroad claim the deduction as expenses. The establishment of an obligation to report accounts held abroad would therefore not be superfluous as it would broaden the vision that the intelligence and circuit service would be able to track illegal financial institutions which may have the functioning of legal entities.
On the other hand, there may be an interposition of legal persons for the purpose of concealing the activity of individuals so that such an obligation could allow such practices to be identified. The access to information to this health services intelligence and action against clandestine financial channels, notes that several financial institutions (in addition to civil real estate companies in large numbers) were concerned by the existence of accounts traced in the investigations for large amounts.
The corresponding assets would mainly relate to funds managed by banks on behalf of third parties, in this case investment funds whose assets are deemed to belong to their clients and not to the managing institution. It is likely that some of these assets ultimately belong to individuals, so that the corresponding part should be attributed, not to legal persons, but to individuals under the principle of transparency generally applies to these structures. It is necessary to ensure that the intelligence and anti-illegal financial channels are diligent in this regard.
However, it also appears that leading banks can open accounts of which they are legally the holders while the economic beneficiary is a third party, which underlines the disadvantages of the absence of obligation imposed corporations to declare accounts abroad. In this configuration, everything happens as if the banks were used as a nominee, its interposition allowing in fact to circumvent the obligation to declare their accounts borne by individuals. This loophole in the scheme should be reduced by introducing a declaratory regime for legal persons as well. It is to be hoped that they will better comply with this obligation than they have played the game in the responses to the questionnaire sent by your report to some large companies.
Disturbing findings can also be made. By questioning large companies on their involvement in business relationships that could lead them to be mentioned in this file, companies say they have no knowledge or generally of reasons to believe that they can be mentioned on this file. However, with the exception of names, some entities seem to be well concerned by the census carried out. This is what is, therefore, perplexed in at least two respects. The published information refers to a systematic audit of the companies mentioned and entering its scope of verification. It is possible that the procedure is carried out from a part check without any particular contact with the companies involved. But this assumption would be a bit surprising given the importance of the case, if only on a symbolic level. This situation calls for all the clarification that is needed. The tax services have taken the happy initiative, to create a database whose future exploitation should be an important component of their actions. The tax evasion file was created by some states to identify bank accounts held outside their borders by individuals or coiporations with the aim of identifying information presuming the diction of such instillments without declarations.
It contains information on a dozen individuals and about 500 legal persons, or several thousand separate persons. It was fuelled by the dumping of the people identified in our case and then from the results of the right of communication with the banks. A new right of communication canned out on this basis should enrich it with several thousand new individuals and several hundred legal persons while the information obtained under the Savings Directive and, no doubt, exchanges of information, should be exploited within this framework.
With regard to the late implications, it is, first of all, to be surprised at the time necessary for the judicial services to intervene in such cases. It is possible that the change of jurisdiction has something to do with it. But, it is rather the choice to often place legal action in the continuation of tax control that must be considered at the same time as the lack of available means to carry out the investigations and a circumspection encountered in similar cases that are less common in other court cases.
On the judicial front, the small number of cases resolved must be mentioned: a hundred cases for a theoretical number of 7000 people on average, that is, a judicial rate of 7.8%. It is argued that the threat of a judicial inquiry could have taken a persuasive role toward taxpayers. It is difficult to verify this in this case since the number of “denial” taxpayers is particularly high. According to the figures cited, it would be in the order of one-third of the cases processed. It is noted that the level of “denials” is particularly high in parts controls (35%) but that it is so significant in other cases (32%).
These findings lead to the urgent need to address the legal obstacles associated with the status of evidence provided in the proceedings, which many taxpayers seem to be relying on the fragility of this statute to prevent regularization of their tax situation on the very determined advice of their lawyers. The court was brought before the courts in two separate proceedings: the ordinary procedure, which involves filing a complaint; investigation without prior tax control.
This procedure in several countries, mobilizes the tax police. It allows the intelligence and action service against clandestine financial circuits to file a salt complaint based on presumptions where there is a risk of withering and for cases of complex fraud with, for example, accounts opened in countries that have not entered into assistance agreements providing for the exchange of tax information. The CIF intervenes but in the context of a specific procedure without information from the taxpayer. Once the complaint has been filed, the investigation can be entrusted to the tax police by the prosecutor or the investigating judge. This policy is made up of the tax police. It has enhanced investigative resources in relation to those of the intelligence and action service against clandestine financial circuits.
The numerous investigations entrusted to the tax police would relate to concealed assets in the order of 6.2% of the estimated assets. This figure is not entirely reliable, of course, since both the sums potentially at stake in judicial investigations are far greater than those that have been identified from the consideration of tax issues alone. In fact, the cross-checking of information suggests that the monetary stakes could be considerably higher than those mentioned.
The choice to sort referrals from consideration of tax issues as it forms within the intelligence and action service against clandestine financial circuits is apparent as a problem because this fiscal reflex leads to mis-es-timation of the hypothesis, in which reality seems to confirm on its side, that there is no necessary correspondence between the perceptions of the tax man and the reality of the issues, even when we limit ourselves to the issues financial, business. Moreover, it is regrettable that the tax police have to manage the scarcity: scarcity of resources, the scope of its investigations, fiscal and especially financial competences, and so on. Finally, the division of cases between preliminary investigations and instructions given to investigating judges highlights the predominance of the former; what could be a problem with regard on the implications of their statutes by these magistrates. Finally, it is regrettable that the judges take so long to react on the part of the case concerning the bank itself.
