Singapore/ London: A US government probe into HSBC in India looks set to be the start of a wider crackdown on Americans using bank accounts in Asia to evade taxes.
The US Department of Justice’s announcement last week that HSBC India may have helped potentially thousands of Americans dodge federal income taxes surprised many commentators given India is far from being a tax haven.
But lawyers say it seems likely that private banking units across Asia are now on red alert for similar investigations into their businesses.
“It is likely US authorities are pursuing a tip about HSBC India and believe they can use the investigation to get the attention of the Asia banking community,” said William McGovern, a former Securities and Exchange Commission lawyer and now a partner at law firm Kobre and Kim in Hong Kong.
Prosecutors are using the same “John Doe” summons strategy with HSBC as they did in their case against UBS AG. UBS ultimately settled government charges against it by paying $780 million and agreeing to hand over nearly 5,000 client names to the United States.
That case, which saw UBS disclose client names to US authorities last year, prompted many private banks to tighten up their policies for dealing with American clients.
Jay Krause, Hong Kong-based partner at law firm Withers, said the US Internal Revenue Service (IRS) is now likely to start hunting down money they believe subsequently left Europe amid the crackdown and is now kept in Asia.
“It’s going to be the next area of focus. You follow the money and Asia’s where the money is,” he said.
Several private banks in Singapore, Asia’s largest wealth management centre, already will not take on US clients because of the risk of becoming embroiled in this kind of investigation.
The former head of consumer banking at one large Asian bank, who declined to be named because of the sensitivity of the topic, told Reuters most Asian and European private banks in Asia do not take US clients and if they do, there are numerous restrictions on the products that can be sold.
Lawyers said excluding all American clients can be tough, however, as people deemed US persons for tax purposes includes both citizens and permanent residents of the country, even if they no longer reside there.
It could also take in people with no real connection to the United States, but who may have a right to citizenship through family connections.
Under new US rules being introduced as part of its crackdown on tax evasion, non-US financial institutions will have to disclose details of US persons with accounts or face a 30% withholding tax on investments in US assets.
This effectively puts much of the burden of disclosure on the bank rather than the client and is likely to prove complex and costly, given the difficulty of identifying who is eligible.
“(Banks) are going to have to go much further than they think they need to,” said Krause.
The problem in Asia is also likely to have been exacerbated by the volume of capital that has flowed into the region’s markets in recent years. Ultra low interest rates in western markets and the crackdown on banking secrecy in Switzerland has made Asia a more attractive destination for investors to send their money.
And while it may be tough for the banks to do adequate due diligence on all of their clients’ potential ties to the United States, the investigation for the US authorities is relatively simple.
“It takes a long time to make the cases but it’s fairly straightforward to go through all the accounts of US citizens above $10,000 and look at which ones haven’t made an FBAR (report of Foreign Bank and Financial Accounts filing),” said McGovern at Kobre & Kim.