Banks & regulators must counter tax cheats and stay business-friendly

THE scandal that has erupted anew over HSBC's apparent role in helping clients evade taxes through Swiss bank accounts is one that has played out several times in the recent past in the financial industry.

In 2009, UBS paid US$780 million to settle a tax evasion probe by the US Justice Department. In 2012, Standard Chartered Bank agreed to a US$340 million fine with the New York State Department of Financial Services for hiding transactions with Iran. Last year, it agreed to another US$300 million fine over its failure to tighten anti-money-laundering controls. Even for HSBC it is déjà vu, albeit arguably a far more damaging one. In 2012, it was fined US$1.9 billion by the United States for its role in helping to launder drug money in Mexico. The current revelations, which stem from documents stolen by a former employee, chronicle dealings in its Swiss subsidiary dating back to pre-2007, when employees evidently facilitated tax evasion and money laundering. Unlike other incidents, this time the client list was made public. So far it is a veritable who's who spanning 200 countries and includes politicians, entertainers and corporate executives, some of whom may well have maintained legitimate tax-compliant accounts.

In a lengthy response, HSBC said the compliance culture and standard of due diligence in its Swiss bank and the industry in general were "significantly lower" in the past than they are today. It said it is accountable for "past compliance and control failures". Its mea culpa, however, is unlikely to assuage the public outcry and the intense pressure to bring it to heel. In a number of countries, there are calls for regulators to launch fresh investigations into HSBC dealings. The issue is one with potentially widespread industry repercussions and should put other institutions on guard as it raises the likelihood that more whistleblowers will emerge. More than that, client confidence is at stake as the wholesale release of clients' names raises questions about an institution's data security and risks tarring even legitimate accounts with the same brush.

To be sure, tax evasion has been made a crime in many jurisdictions including Singapore over the past few years. For financial institutions, heightened compliance and vigilance have entailed the rejection of accounts and funds that do not pass the smell test. In Singapore, the banking industry's code of ethics has a lengthy addendum relating to "serious tax offences" which spells out the institution's responsibility to ensure that clients and their funds are bona fide. It suggests red flags to watch out for, such as requests for holdmail services without good reasons and the use of complex structures. HSBC said it has overhauled its private banking business. Its global private banking division's know-your-client process includes an independent validation by auditors, for instance. But with the threat of yet more investigations, it may have to brace itself for heftier fines.

Against the backdrop of vigilance, yet more intense regulatory oversight and self-policing measures on the part of banks may be on the cards. For banks, this potentially dampens growth and raises costs. More stringent due diligence on clients' source of funds also risks alienating those with legitimate needs and funds. A balance must be struck between raising barriers against tax cheats and money launderers, and maintaining competitive business-friendly services. As difficult as it might be to strike that balance, a financial system with institutions that stand up to scrutiny is in everyone's interest.

READ MORE: Swiss bank's problems erode HSBC's profit and reputation