JURIST Guest Columnist Shu-Yi Oei of Tulane University Law School discusses tax evasion investigations and possible criminal charges against HSBC’s Swiss private banking unit…

Beginning around 2006, Hervé Falciani, a computer systems engineer at HSBC’s Swiss private banking unit, HSBC Private Bank (Suisse) (“HSBC Suisse”), obtained and extracted a large quantity of client data from HSBC Suisse. Falciani was detained in Geneva in December 2008 before being released and fleeing to France, where the data eventually ended up in the possession of French authorities. Rather than extraditing Falciani, as requested by the Swiss, France instead began to investigate the data. In March 2015, the French Financial Prosecutor’s Office recommended that HSBC Suisse face criminal charges for facilitating and encouraging tax evasion. HSBC Suisse has been given a month to respond to the recommendation, after which French Magistrates will decide whether there will be charges and a trial. In April 2015, it was subsequently reported that French Magistrates had also placed HSBC’s parent company, HSBC Holdings PLC, under investigation. The exact nature of that investigation is unknown, but it will likely examine the conduct of managers at HSBC Holdings and their responsibility for the actions of HSBC Suisse.

The implications of the Falciani leak are still reverberating and there are many unknown details, including the exact nature and scope of the charges and other legal consequences in both France and other countries. Also unknown at this point is what will happen to Falciani, who was indicted in Switzerland on December 11, 2014, and may be tried there in absentia. What is clear, however, is that the Falciani leak has triggered collateral consequences on an international scale. France has shared the data with the tax authorities of other countries, including reportedly the United States, and some of these countries are investigating HSBC Suisse. The aftermath of the initial leak has been a series of international controversies extending well beyond simply tax evasion.

This commentary makes two broad observations. First, the leak has called into question legal and regulatory decisions made by countries prior to the release of the data as well as decisions made after the data’s release that may have failed to take into account the new information. Second, given the increasing public awareness of the leaked data, countries will make future decisions regarding HSBC Suisse, HSBC Holdings and the leaked clients based on the steps other countries decide to take. A decision by one country to aggressively prosecute HSBC Suisse may pressure other countries to follow suit.

Reevaluation of Prior Actions in Light of New Data

First, as the data has become more widely available and publicly known the prosecutorial and other decisions (including non-tax decisions) made by various countries with respect to the HSBC entities have been called into question.

Here the US case is instructive, though similar dynamics are likely to occur in other countries. In 2012, the US Department of Justice entered into a deferred prosecution agreement (DPA) [PDF] with HSBC Bank USA, NA and HSBC Holdings. That DPA pertained to violations of the Bank Secrecy Act, the International Emergency Economic Powers Act [PDF] and the Trading With the Enemy Act, as well as willful failure to have an effective anti-money-laundering program, willful failure to conduct diligence on foreign correspondent account holders and engagement in prohibited transactions on behalf of customers in countries subject to Office of Foreign Assets Control sanctions.

The Department of Justice agreed to defer prosecution of HSBC Bank USA and HSBC Holdings on these charges. In exchange, HSBC Bank USA and HSBC Holdings agreed to undertake heightened anti-money-laundering and compliance obligations, to retain an independent compliance monitor and to restructure leadership and operations. HSBC Bank USA and HSBC Holdings also agreed to forfeit $1.256 billion and to pay another $665 million in civil penalties to the Office of the Comptroller of the Currency and the Federal Reserve.

The use of deferred prosecution agreements for banks and corporations has been the subject of significant debate, and critique and scrutiny of the 2012 DPA has been especially heightened in light of the Falciani leak. The overarching question has been whether the United States had access to the Falciani data at the time it entered into the DPA. It has been reported that the United States came into possession of the data in 2010. Loretta Lynch, recently confirmed as Attorney General, testified [PDF] before the Senate Judiciary Committee that her office had not been provided with the Falciani documents and that she did not recall having reviewed the documents or being aware of them at the time the DPA was executed.

These responses have raised a number of questions: Did the United States in fact have the data? If the answer is no, should the DPA be revisited in light of the new data? If the United States did have the data, but the Department of Justice was not aware of or did not have access to it, why or why not? If the United States did have the data and the Department of Justice in fact knew about it, were the terms of the DPA too lenient, and if so why?

Admittedly, the 2012 DPA [PDF] did not address tax evasion and did not bind the Department of Justice Tax Division or the Fraud Section of the Criminal Division with respect to the tax evasion accusations. Rather it concerned only bank secrecy, money laundering and sanctions violations. Nonetheless, there are indications that the United States may now be feeling pressure to revisit the DPA’s terms.

Such pressure may be stronger following the April 1, 2015, quarterly court-ordered report filed by the US government, suggesting that, in some respects, HSBC Bank USA’s and HSBC Holdings’ progress towards developing an effective anti-money-laundering and sanctions-compliance program and crime detection mechanisms has been too slow, largely due to corporate culture and compliance technology deficiencies. Moreover, the Department of Justice may be considering bringing tax evasion charges against HSBC. The extent, nature and existence of any such charges remain to be seen, but clearly the data leak has caused reevaluation of a key agreement entered into before the data became more public and has given rise to public scrutiny and criticism. This dynamic will likely continue both in the United States and abroad.

Tensions and Interactions between Countries

A second observation is that a country’s response to the leaked data is in part a political calculation shaped by the actions of other countries and by public opinion. As noted, France has shared the data with a number of countries, some of which are investigating HSBC Suisse and the listed clients, although to varying degrees. In addition, public knowledge about the data is increasing. The data has come into the hands of journalists, including the International Consortium of Investigative Journalists, which has undertaken an extensive investigative report on the data leak and its contents. The increased availability and public knowledge of the leaked data, together with press reports tracking the responses of various governments, has magnified scrutiny of government responses and decisions with respect to HSBC Suisse and the listed clients.

If HSBC Suisse or HSBC Holdings are charged in France, and particularly if they are found guilty, other countries, such as the United Kingdom, may feel pressure to hold HSBC Suisse or HSBC Holdings accountable as well. Similarly, a move by the United States to prosecute HSBC Suisse or HSBC Holdings might influence the prosecutorial choices of other countries.

A parallel story can be told with respect to the individual HSBC Suisse clients. The leak implicated almost 60,000 files and over 100,000 clients and accounts. These clients included politicians, political donors, business leaders, actors and athletes from countries such as Switzerland, France, the United Kingdom and the United States. While not every client is necessarily a tax evader, at least some were engaging in tax evasion. Just recently, Arlette Ricci, granddaughter of fashion designer Nina Ricci, was convicted of tax fraud in France as a result of the leaked data and was sentenced to a year in prison, with a two-year suspended sentence. Ricci was fined $1.1 million and two of her properties were subject to confiscation. Other French nationals are expected to face criminal charges and trials for tax evasion.

The way in which one country reacts to the prosecutorial and investigative decisions of other countries in light of press-facilitated sunshine has the potential to be very instructive. It will be interesting to observe whether these dynamics result in more aggressive investigation and prosecution of the bank entities and the listed clients as a result of inter-country peer pressure, or whether the propensity to investigate and prosecute is reduced by other factors. It is worth noting in this regard that these investigations and prosecutions have taken quite a while to unfold. France obtained the data in 2008 and shared it with other countries in 2010, but it was not until this year that the French prosecutor recommended charges against HSBC Suisse and formally placed HSBC Holdings under investigation. This time lapse raises questions regarding what other factors may be causing delay.

Despite a number of unknowns, the Falciani leak has illuminated important investigative and prosecutorial tensions and dynamics between and within countries. Years later, the fallout is only now beginning to rain down on the HSBC entities, their clients and the tax authorities and other investigators in various countries.

Shu-Yi Oei is Associate Professor of Law at Tulane University Law School. She specializes in taxation and tax policy, bankruptcy law, and commercial law. She holds the Hoffman F. Fuller Professorship in Tax Law.

Suggested citation: Shu-Yi Oei, The Aftermath Of A Leak: What’s Next in the HSBC Suisse Tax Evasion Saga?, JURIST – Academic Commentary, May 8, 2015, http://jurist.org/forum/2015/04/shu-yi-oei-tax-evasion.php.