Theft of HSBC Banking Data Further Exposes Threats to Offshore Banking Secrecy
by Asher Rubinstein, Esq.
We hate to say “told you so”, but . . .
Another example of the erosion of bank secrecy by the acts of bank employees has emerged.
It was recently reported that sometime in late 2006 an employee of the Swiss branch of HSBC, while transferring account data as part of an internal bank information technology project, transferred bank data to his own storage device. He stole confidential account information and took it home. He then offered it for sale to the French government. The French government, like many other governments including that of the United States, is interested in pursuing foreign accounts used to hide income from taxation.
Although the theft of the banking data occurred in late 2006, the story came to light this week because the French government only recently returned the data to Switzerland (after copying it). On March 3, HSBC revealed the full extent of the damage: thousands of account holders’ identities and banking data have been exposed, rather than “fewer than ten clients” which HSBC had admitted to earlier. The French government has reserved the right to make prosecutions for tax fraud, using the stolen banking data.
We’ve written before about the many threats to bank secrecy. See, e.g. Renegade Bank Employees Further Erode Offshore Banking Secrecy, and The Death of Bank Secrecy.
Banking secrecy, in Switzerland and other tax havens, is under attack on many levels. In 2009, many tax havens including Switzerland and Liechtenstein, signed Tax Information Exchange (TIE) agreements with the United States. In addition, international cooperation exists via Mutual Legal Assistance Treaties (MLAT), which require each participating country to disclose information, including bank account data, to the U.S. government in connection with an investigation of a serious crime, including tax fraud.
In addition to the exchange of banking information on the governmental level, there exists a very credible threat to banking secrecy on a more basic, individual level: the theft of confidential banking data by bank employees who hope to sell it, in return for money, to foreign governments interested in information about the offshore banking of its citizens. When foreign governments pay bounties for banking information, it creates an incentive for the theft of confidential banking data. Moreover, in the U.S., the enactment and publication of tax whistleblower laws has created a further incentive among underpaid bank employees and others (like former spouses and disgruntled employees), for the theft, sale and bounty collection relating to secret bank data.
There are many examples of the threat to banking secrecy due to the renegade actions of internal bank employees.
Earlier in 2010, the German government paid millions of Euro for banking data stolen by an employee of a Swiss bank.
In 2009, a different employee of HSBC also shared bank account data with the French government.
In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for more than four million Euros. With that data, the German government prosecuted Germans for tax fraud. The German government also shared the data with other governments around the world.
Going back to 1999, John Mathewson, the former owner of Guardian Bank and Trust, a defunct Cayman Island Bank, was charged with money laundering involving his Cayman bank. When Mr. Mathewson was arrested, he gave U.S. investigators computer records which he had stolen from the bank. These computer records contained information regarding American depositors at the bank who evaded U.S. tax obligations. In that case, the motivation for sharing banking data was not money, but cooperation in criminal prosecution and leniency in sentencing.
As we have long-counseled, any of these threats to banking secrecy, whether by governmental agreement, weakened bank secrecy laws, or renegade bank employees, is not material if the foreign account is tax-compliant. It is completely legal to have funds offshore, for many reasons (e.g., international business transactions, global investment and diversification), as long as the foreign accounts are part of a tax compliant strategy or are disclosed and taxes are paid on foreign the income. If the offshore accounts are tax-compliant, then the threat of information sharing – – from whatever source, governmental or individual – – is eliminated. Strategies exist for the minimization of tax on foreign income in a tax compliant manner. The lesson: if you have assets in foreign banks or foreign brokerages, make sure they are tax compliant. As the window of banking secrecy closes further, taxpayers with tax-compliant accounts need not worry.