HSBC, money-laundering and Swiss regulatory deterrence

Number-crunching, a la Private Eye: the case of HSBC and its Swiss fine for “organisational deficiencies” in relation to money-laundering.

 

[table id=1 /]

 

Not all the assets under management were laundered, of course. Far from it, we must hope. But the “organisational deficiencies” – including reassuring clients that no information would reach their home authorities, or using offshore accounts to circumvent disclosure requirements – represent risks that applied to the whole operation.

To put it another way, the fine is about a fifth of the £135 million in tax that HMRC recovered in the UK alone.

Even the prosecutor imposing the fine was embarrassed, and “launched a stinging attack” on the Swiss law that apparently prevented anything within yodeling distance of being a deterrent.

Tax Justice Research Bulletin 1(3)

March 2015. The third Tax Justice Research Bulletin is out, catch it in its full glory (with backing track suggested by Christian Hallum) on its TJN home.

Mahon2015 fig2This issue looks at new papers on the responsibilities of tax professionals in respect of abusive tax behaviour and corruption; and on the parallels between the 1974 banking crisis and that of 2008, and policy lessons that emerge. The Spotlight considers contrasting views on tax and freedom.

One thing to flag: a call for papers from UNU-WIDER, who are stepping up their interest in tax. The call is open until 30 April, and is part of WIDER’s new project on ‘The economics and politics of taxation and social protection’ which is also worth a look (includes call for research proposals and researcher vacancies).

As ever, ideas for the Bulletin are most welcome – including suggested music.

PS. Congratulations to tax lawyer @jolyonmaugham on formally becoming a QC this month – now so silky he could feature in Barcelona’s midfield.

Poverty – a bad money-laundering risk factor

The UK’s Financial Conduct Authority has revealed the basis on which it ranks jurisdictions as low or high risk for money laundering – and it seems inevitable that it will support debanking of poorer countries.

AML rules under pressure

First a little context. There has been growing pressure lately on anti-money laundering (AML) rules. In recent years, a string of major banks has faced large fines for apparently systematic sanctions-busting. This has been followed by a pattern of withdrawal – ‘debanking’ – from a range of countries where the risks of inadvertently channelling funds of sanctioned and/or terrorism-related entities and individuals have come to be seen as too high.

On the one hand, there are reasons to be rather cynical about this process. First, because supporting generally small-scale remittances to Somalia, for example, is a far cry from accepting and anonymising Iranian funds – and presumably much less profitable. And second, because it feels a little convenient for major banks to be making a case for reduced financial regulation, in which their interests align with those of some of the world’s poorest people.

On the other hand though, there are good reasons to take the issue seriously. (Disclosure – I’m on a CGD working group looking at just this question, so I would say that…) First, even if debanking is motivated by relative profitability of Somalian remittances compared to Iranian sanctions-busting, the potential development impact of remittance channels becoming more expensive is nonetheless substantial. (And we surely don’t expect banks not to respond to profitability.) Financial inclusion also seems to be associated with lower inequality.

And second, we should take the issue seriously because ultimately we want AML rules that work, for everyone, and demonstrably so – which is not the case now.

The question is not whether and how AML rules should be relaxed. It is this:

How can AML rules be designed so that the risks facing banks and other financial institutions are proportionate to the risks of carrying criminal flows, and not inadvertently supporting discriminatory outcomes against poorer countries (and people)?

An inexplicably bad approach

The UK’s Financial Conduct Authority (FCA) is accountable to HM Treasury and the UK parliament for regulating more than 50,000 firms to ensure integrity of financial markets. As Matt Collin points out in a great post, the FCA has just fined the (British branch of the) Bank of Beirut £2 million, and ordered it to sort out its AML procedures.

In the interim, the bank is barred from taking on new business in ‘high risk’ jurisdictions – which the FCA defines as anywhere scoring 60 or less out of 100 on Transparency International’s Corruption Perceptions Index (CPI).

Matt makes two important points about the weaknesses of this approach:

  1. The CPI doesn’t reflect AML risks. Not a single one of the surveys which are aggregated into the CPI involves perceptions of money-laundering.
  2. The threshold is arbitrary – and includes nearly 80% of the 175 countries for which ratings are produced. See Matt’s great figure.

Let’s add a couple of other points:

  1. Even on its own terms, the CPI is a very bad measure of corruption. Sorry and all, and I think many TI chapters do really fantastic work; but the quicker the organisation drops the CPI, the better. Nor should anybody else be using it, as if it were some kind of objective indicator of corruption (never mind money-laundering) – it’s not.
  2. And here’s the real kicker. The CPI is mainly telling you one thing: how poor a country is. Per capita income ‘explains’ more than half of the variation of the CPI (for 2012, which I happened to have to hand). The equivalent for the Basle Anti-Money Laundering Index, which includes the CPI among its components, is a little over a third.

CPI v lngdppc

So: the FCA is basing their AML risk measure on an arbitrary threshold, in a bad measure of corruption, which has nothing to do with money laundering, and mainly reflects income poverty.

 

An alternative approach

What could the FCA do instead? Well, they could use the Basle index. Or they could follow the lead of researchers at the Italian central bank, or a German rating agency among a good many others – and use TJN’s Financial Secrecy Index (FSI).

The FSI – which is also a component of the Basle index – brings together 48 variables, predominantly from assessments by international organisations, to create 15 indicators of financial secrecy – that is, of the risk factor for money-laundering, tax fraud and other financial crimes. These are then compiled into a single ‘secrecy score’.

For the FSI, this is combined with a measure of each jurisdictions’ global scale in order to produce a final ranking that reflects the relative potential to frustrate other countries’ regulation, taxation and anti-corruption efforts.

For a risk measure, you’d only want to use the secrecy score (or perhaps a subset of indicators that are most tightly relevant to money laundering). Relationships with per capita income are much weaker and of mixed direction, reflecting the basis in objectively assessed secrecy and scale criteria rather than perceptions of corruption.

FSI 2013 and components lngdppcConclusion

To recap: If a financial regulator were to design a simple risk measure that would be most likely to lead to debanking of poor countries, while at the same time having no impact on the most risky jurisdictions, it’s hard to see how they could have done better than the FCA.

The broader lesson for the necessary rethinking of AML rules seems fairly clear. What are needed are context-sensitive measures that encourage responses proportionate to the actual financial crime risks – rather than encouraging the blanket withdrawal of services to poorer countries and/or people.

#SwissLeaks – Tax transparency for accountability

hsbcleakMuch of the #SwissLeaks data has been in the hands of tax authorities for 5 years. Many of the questions raised relate to individuals and to particular regulators and governments – but there’s also a broader question that goes to the type of solutions that will address the broader loss of trust in tax authorities’ effectiveness and independence. Clear policy changes are needed to recover trust and accountability.

Last night the International Consortium of Investigative Journalists (ICIJ), and a host of international media organisations from Le Monde and The Indian Express to the BBC and CBS, broke publicly a leak of documents from HSBC’s Swiss bank, dating to 2005-2007. TJN provides a little historical context here, while Richard Murphy poses some highly pertinent questions. Oh, and TJN’s Jack Blum gave a cracking interview to 60 Minutes.

The broader lesson

If there’s a broader lesson here – and there is! – it’s that providing data privately to tax authorities is insufficient. The leaked data provided privately to (mainly European) governments in or around 2010 simply failed, in different ways, to deliver accountable and effective taxation.

  • Exhibit I: UK. Since receiving details of more than 1,000 cases in 2010, the UK has undertaken 1 (one) prosecution. The coalition government that came to power in 2010 also negotiated a very bad agreement with Switzerland that TJN had shown beforehand would not only protect tax evaders from transparency and prosecution but would also fail to bring in anything like the claimed sum of revenue. In addition, the government appointed as a Lord and trade minister Stephen Green, who had been the chief executive and then chairman of HSBC during the entire period.
  • Exhibit II: Greece. Somewhat further down the road of accountability is Greece, where the then minister of finance is now facing charges of “attempted breach of trust at the expense of the state and improperly interfering with a document”, for alleged actions relating to the loss of the list received from France, and the possible removal of relatives’ names.
  • Exhibit III: India. As of last month, The Indian Express reports that 15 people were facing prosecution out of more than 600 names provided by France in 2011. Today, they have published data from #SwissLeaks relating to 1195 names.
  • Exhibit IV: USA. Here the questions relate, once more, to what action exactly followed from the 2010 receipt of leaked data from France – and whether HSBC should have been allowed to maintain its banking licence. As The Guardian notes, no reference to the case features in the HSBC settlement of nearly $2bn relating to sanctions-busting activities.
  • Exhibits V and VI: Denmark and Norway. With thanks to @FairSkat and @SigridKJacobsen respectively, both of these countries with a relatively strong reputation for fair taxation did the ‘inexplicable’ and chose not to request the data from France. In the wake of the #SwissLeaks story, both now seem likely to.

Without confidence in fair and accountable taxation, governments risk the erosion not only of wider tax compliance, but of state-citizen relations and so of effective democracy (see e.g. recent behavioural and cross-country studies on the important role of tax).

That doesn’t necessarily mean that individual taxpayer data should be in the public domain. While some countries go to this length, many consider it a serious violation of privacy.

What sort of transparency is needed for accountable taxation? 

How can governments (re)build trust that the rich and powerful – not to mention the criminal – will not simply go uncounted behind closed doors?

Here’s a suggestion – comments welcome:

  1. Publish data on the aggregate bank holdings in other jurisdictions of residents, as declared by the banks and through automatic information exchange between jurisdictions (in effect, the national components of the locational banking data collected but not published by the Bank for International Settlements, which was called out by the Mbeki panel and African Union last week);
  2. Publish data on the equivalent, as reported by taxpayers;
  3. Publish regular updates on the status towards resolution of any discrepancy, e.g. “three cases accounting for 27% of last year’s discrepancy are now being prosecuted; investigations continue into 154 cases which account for a further 68%; while further work is underway to determine the nature of the remainder of the discrepancy (5%).” Addendum: @AislingTax points out quite rightly that I need another category here: the ‘gap’ which is not a gap, but rather relates to other features of the tax system such as non-doms in the UK.

A parallel case is that of the watering down of proposals for country-by-country reporting by multinational companies. Publication is necessary so that companies are held to account for abuses, but also so that tax authorities (and governments) are held to account for fair and effective taxation.

Private provision of this data to tax authorities may allow them to tax companies more effectively, but does nothing to demonstrate to citizens if such an opportunity is actually taken. Much of the #Luxleaks data was available to tax authorities, in theory or in practice, but only publication has led to a policy response.

As I twoth last night, the lesson of #SwissLeaks is that accountability demands public transparency.

 

Show me the Follow the Money!

I had the great pleasure this week of attending three days of meetings of the Follow the Money network, in Berlin, courtesy of T/AI and ONE. A humbling amount of techie knowhow on show, and great goodwill too. Data geeks, criminal investigators, civil society activists, INGO advocates, hackers and all, ranging from corporate transparency to extractive resources, from budget analysis to local service provision, from money-laundering to… tax?

No show moneyIt wasn’t, and still isn’t exactly clear to me where TJN fits in. There’s a certain tendency to focus on (i) domestic issues rather than international aspects, and (ii) pure revenue questions rather than any of the other components of the 4 Rs of tax.

But maybe that doesn’t matter. What is clear is that there are great opportunities in terms of joining up existing work, and developing new collaborations. In that vein, a few speculative thoughts. Comments/offers/engagement on any or all would be most welcome.

  1. Country-by-country

This year sees the first big swathe of public country-by-country reporting, for EU banks. TJN will reach out across the network and try to compile these data as are they filed. The opportunity will then exist to work these into a standard format – not only to allow analysis of the extent to which banks’ activities may raise red flags in terms of tax risk, but also as an input to…

  1. Bank ownership project

There was a lot of interest around banking in partiMaptheBanks screen-shot-2014-12-10-at-12-00-10cular, from explicit criminality (be it Russo-Moldovan money-laundering, Swiss-US tax evasion or global market rigging) to  troubling patterns that may suggest illicitness if not actual illegality (from profit-shifting to avoid taxation, to the very curious patterns of licensing that OpenCorporates have started to turn up at Map the Banks. Hack day ahoy?

  1. The Offshore Game

The Offshore Game, a new TJN project dedicated to uncovering the illicit in sport, will soon have its hard launch with a report on offshore ownership. Other topics of interest include match-fixing and the associated role of gambling, corruption in national and international sports governing bodies, third-party ownership of players, tax affairs of all concerned… In fact, a good part of the FtM agenda comes out to play here.

  1. Show me the Follow the Money!

One of the more exciting ideas discussed, and also one in which there seems to be a clear role for TJNery, is the possibility of putting together (for a single country at first) a complete, integrated set of data on where the money goes (and doesn’t – because the lost revenues to e.g. corporate profit-shifting and individual offshore evasion are equally worth tracking, as the tax paid as it enters the spending process). Of all the possibilities, this feels like it might do most to show what the FtM network can deliver, beyond the sum of its parts.

With thanks to @jedmiller!