Friday, 9 November 2012

Well Regulated?

The tax authorities have obtained details of every British client of HSBC in Jersey after a whistleblower secretly provided a detailed list of names, addresses and account balances earlier this week. The Telegraph understands that among those identified on the list are Daniel Bayes, a drug dealer who is now in Venezuela; Michael Lee, who was convicted of possessing more than 300 weapons at his house in Devon; three bankers facing major fraud allegations and a man once dubbed London's "number two computer crook". A series of other accounts containing six-figure deposits are also registered to modest addresses in relatively poor parts of the country. The disclosures raise serious questions about HSBC's procedures in Jersey, with the bank already preparing to pay fines of around $1.5 billion in America for breaking money laundering rules.(1)

Of course, you can read all about HSBC's offering in their brochure for HSBC Expat. This states that:

Convenient, secure and potentially tax-efficient, saving and investing offshore makes it easier for you to grow and protect your wealth while you're living or working abroad. An ideal place to grow and protect your wealth HSBC Expat is based in Jersey (Channel Islands) - a well regulated offshore jurisdiction that offers political and economic stability. So you know your money will be secure. (2)

It's true that one bad apple does not mean the whole orchard is rotten, but HSBC is hardly a small bank. The Jersey Financial Services Commission pounce and scrutinise small Trust Companies within the Island, and rightly so, but it would appear they do not apply the same level of scrutiny to large banks.

Ironically, the HSBC brochure says:

We can help you understand your tax obligations - at home and in the country you've moved to. Depending on your circumstances, you may also benefit from tax efficiencies on your offshore savings and investments. (2)

The Telegraph article notes that:

The use of tax havens by British residents and citizens to minimise tax is legal but subject to a range of complex rules and regulations. British taxpayers have a duty to report to HMRC details of money held offshore that is liable to tax. (1)

But if there are accounts which have not been declared, and are illegal tax evasion rather than tax avoidance, questions must be asked as to how well HSBC is helping customers "understand their tax obligation". Of course the HSBC brochure has a convenient escape clause - it is "your responsibility":

Whilst banking offshore may have tax benefits for you, tax rules differ from country to country. If you are unsure about your personal tax obligations, you should seek professional advice. It is your responsibility to disclose your income to the tax authorities. (2)

Now although HMRC still has to check the data, it already appears from the Telegraph finding accounts in the names of various crooks that HSBC have been failing to notify the Jersey authorities about suspicious accounts.

I don't know if it still does, but the Jersey Financial Services Commission or the States of Jersey police Financial Crimes Unit used to issue regular emails with names of people to check to financial service companies - they would be flagged up to report on if they were on a client database. Does it still send out these compliance checks for names?  Did it ever send one for Daniel Bayes or Michael Lee? These are questions which should be answered.

Recently, Senator Philip Bailhache told members of the Jersey Association of Trust Companies that "a huge amount of work was being done both very publicly and behind the scenes to promote the Island as a well regulated finance centre around the world." The failure of any reporting of suspicious transactions, and the failure to flag up individuals who were convicted as crooks suggest that a huge amount more work is still needed.

But apart from those which the Telegraph flagged up, it is important to keep a sense of perspective. At the moment, it is not clear what percentage of those accounts have in fact been declared to the British tax authorities. It is easy to make sweeping allegations, but I'd prefer to wait for the follow up news which will reveal how bad the situation is before making blanket condemnations.

What the names of the crooks does show, however, is that there are significant weaknesses in the regulation. It should also be observed that Jersey's regulatory regime - in law, at any right - is much tighter than the UK, where money was stashed in banks around the City of London to evade tax (as reported recently in Private Eye).

The major lesson learnt here is probably that there should be an agreed international regulatory law, with proper independent scrutiny. The fact that the IMF gave Jersey a glowing report shows that while the legislative framework is probably very good, there needs to be more critical testing of how that applies in practice both in Jersey, and elsewhere. Box ticking is just not good enough.
For example, the Libor manipulation shows the weakness of the UK regulatory authority, which is why Private Eye terms it the "Financial Supine Authority":

The fact that the Committee says that the Libor manipulation doesn't look good  for either the Financial Services Authority or the Bank of England is a masterpiece of understatement. Since its creation, the FSA has been known for its weak regulation of the markets. Time and time again, the "Financial Supine Authority" - to use Lord Gnome's sobriquet for it - has been seen to act late, if at all, and to be consistently outmaneuvered by financiers more adept and skilled at the dark arts than the so-called guardians.  As I have consistently said, it is not more regulation that is needed but better regulation. The FSA is up against some of the smartest back-office boys in the world and its only response until recently has been a box-ticking, data collecting quango. (5)

In the meantime the data is being studied of over 4,000 British residents "who have bank accounts with HSBC Holdings Plc (HSBA), the country's largest lender, in the offshore tax haven of Jersey."

"We have received the data and we are studying it," Jan Marszewski, a spokesman for Her Majesty's Revenue and Customs, said by telephone today. "Clamping down on those who try to cheat the system through evading taxes and over claiming benefits is a top priority for us."(1)

In the recent speech against critics of Jersey, Sir Philip Bailhache said that much of the criticism directed at Jersey and its label as a tax haven which was harmful to UK, EU and third world countries were the result of 'the green-eyed monster of envy and ignorance'." (4)

Sir Philip should be grateful that the release of all this data to HMRC means that at least any criticism directed at Jersey arising from this will not be a result of ignorance!



Anonymous said...

Hi Tony,

Great write up as usual.

I was rather surprised by the intellectual level of 'Sir' Philip Bailhache's comments Re. "the green-eyed monster of envy".

These are hardly the words of a supposed statesman but more the level of the average establishment commenter on 'thisisjersey'.

Is 'Sir' Philip entering his second childhood or is this his attempt to re-connect with his natural support base now that the rest have noticed that the emperor has no clothes and his withering little end is in sight ?

Anonymous said...

Hi Tony,

Typo in the wordsmiths artifact ?

at any right >>>> at any rate ???

at 4 screens down, paragraph starting "What the names of the crooks does show......."

TonyTheProf said...

Yes, well spotted. It was the blog software that did it, of course! Not me typing fast! When in doubt, blame the software. Online proof reading is always tricky!