August 2, 2010 - Phil Hodgen

HSBC risks in Singapore and India

Regular readers and informal fans of tax *ahem* problems facing innocent grannies will be up to speed on the fact that the U.S. government had announced it will chase HSBC accounts in India and Singapore.

I am currently in Singapore. That does not make me smart. πŸ™‚ I spoke with a number of bankers here and they know what they’ve read in the newspapers. Same as you.

So let’s do a bit of Sherlock Holmes meets Occam’s Razor, shall we?

The recent spate of enforcement activity started with stolen bank records from Liechtenstein. Then we had Bradley Birkenfeld open the kimono at UBS. There have been other instances of stolen data (disgruntled employees) including at HSBC/Geneva.

This means that the governments of the world only get traction when they have an informant or they have a thief.

First deduction: to the extent the IRS has anything, it is due to exactly that — the IRS is squeezing all of the juice out of an HSBC banker.

The alternate explanation is that they developed data from the 15,000 cases they have on file with the amnesty. I do not think they would get sufficient data points to target specific individual taxpayers unless it was a situation with a joint account where one individual participated in the amnesty and the other didn’t. This would be rare in my experience. This is usually a family account and a mom is not going to sell out a son. Or vice versa.

Alternatively the amnesty could have identified hotspots of activity. HSBC might have appeared many times. But the government would be dumb to just announce “we are going after HSBC” without real facts. Otherwise they look toothless and impotent. So there must be real data behind it.

And real data will come from a disgruntled or frightened banker, or it will come from the institution itself.

The institution cannot cough up data without damage to market reputation and the wrath of the bank regulators where they operate.

HSBC will likely be unwilling in the extreme to have a reputation of opening the door to US government inquiries worldwide. Their business would be in the toilet instantly.

Governments and bank regulators in Singapore and India will want laws and procedures followed. See what happened in Switzerland. It ultimately took an act of Parliament to cause official information sharing. That may be an extreme case. But neither India not Singapore fall into the “cowboy country” category. Rules, processes, and diplomatic procedures are highly developed.

Second deduction: the IRS does not have bank-level access to data. This is a practical judgment. Time elapsed seems insufficient to get things done at a government level. This is a pure guess on my part and in international inter-government machinations I am an imbicile.

I hazard no guess as to the likelihood of actual sharing of information at a treaty-authorized level sometime in the future. It might happen. But I think not. The person at the IRS who wants this to happen will soon rotate out of government to make a mint on the other side of the table. Inertia will take this project down eventually.

Conclusion: we are back to the idea that it is an individual who has spilled a pile of beans. This is a “probabilities” conclusion. Remember that.

Now. Is that individual an informant or a thief? Given the US treatment of Bradley Birkenfeld as an informant (prison) I think it unlikely that they have a happy informant in for the bounty. It is just too scary to approach the IRS on this basis. They will throw you in jail given half a chance. Exhibit A: Mr. Birkenfeld.

So my money haha is on the thief theorem.

Next question. Is this a new thief or is this a thief we know about already, namely the HSBC/Geneva leak? My money again is on a new source, just because information sharing from Switzerland to India or vice versa seems to be farfetched. I can see accounts opened in Geneva and transferred to an Indian or Singapore branch. I can also see instances where trusts were administered from Switzerland on behalf of an account situated in India or Singapore.

Next question: one leaky source or two? Don’t know. I don’t know what common elements are shared here.

Conclusion: the IRS has stolen or leaked data, they don’t have “Board of Directors” level cooperation from HSBC, they don’t (yet) have diplomatic assistance in Singapore and India.

Please play Sherlock Holmes in the comments (or Poirot if you prefer) and tell me what your guess is.

And. FFS. If you are in this problem do not make a strategic decision based on this blog post.

This was composed on an iPhone in the taxi to Changi Airport and sitting at the Starbucks in Terminal 1. Please excuse the lack of editing.

And I am proud to have done a blog post in @tomiahonen style. πŸ™‚ Read his blog for great insights into the mobile telecom business.

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