HSBC Sets Aside $773 Million for Tax Authority Investigations

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By Ben Stupples

HBSC Holdings Plc, the U.K.’s largest bank by market capitalization, has made a $773 million allowance within its accounts for ongoing tax authority investigations, according to its 2016 annual report.

London-based HSBC said Feb. 21 that it is the focus of investigations in the U.S., France, Belgium, Argentina and India on claims of tax fraud, money laundering, and illegal cross-border activity.

In the annual report, the bank said it has total provisions of $2.4 billion for legal settlements and regulatory fines. The “most significant” amounts relate to the tax investigations and currency market manipulation.

For 2016, HSBC Feb. 21 reported a 62 percent drop from last year’s pre-tax profits, to $7.1 billion.

“Due to uncertainties and limitations of these estimates, the ultimate penalties” from the tax-related investigations “could differ significantly from the amount provided,” HSBC said Feb. 21. “In light of the media attention regarding these matters, it is possible that other tax administration, regulatory or law enforcement authorities will also initiate or enlarge similar investigations.”

While the $773 million set aside for the investigations represents around 10 percent of HSBC’s 2016 pre-tax profit, it adds to Chief Executive Officer Stuart Gulliver’s battle to reverse five years of declining revenue as he also attempts to reduce the bank’s expenses and operations across 60 jurisdictions.

Panama Papers

The announcement of the provision also follows the bank’s warning in its half-year report last August over the potentially “significant” impact on HSBC from ongoing investigations into Mossack Fonseca & Co., the Panamanian law firm at the heart of the Panama Papers data leak.

An HSBC spokeswoman declined Feb. 21 to provide further comment on the bank’s provisions for the investigations.

David Grinsztajn, a Paris-based banking analyst for equity research company AlphaValue SA, told Bloomberg BNA in a Feb. 21 e-mail that the risk that HSBC faces from the investigations is “before all” else “financial,” citing the example of possible additional fines imposed by the tax authorities.

HSBC did not provide an amount that it had set aside for the tax investigations in its 2015 annual report.

Switzerland Private Banking Subsidiary

Most of the tax authority investigations concern HSBC’s private banking subsidiary in Switzerland, which was the focus of a journalistic investigation after a whistle-blower leaked a cache of 60,000 files that showed how HSBC had helped wealthy customers hide their assets to avoid paying tax.

In the U.S., the Department of Justice and the Internal Revenue Service are investigating whether the bank’s Swiss subsidiary and an HSBC company in India committed any wrongdoing with certain U.S. taxpayers.

In India, meanwhile, the Swiss branch and a Dubai subsidiary face prosecution on claims of helping four “Indian individuals and/or families” evade tax, according to HSBC’s 2016 annual report.

Most recently, in October 2016—following a formal criminal examination into tax-related offenses from the data leak—HSBC and the Swiss subsidiary received a brief from France’s public prosecutor. The prosecutor recommended that a judge refer the French authorities’ investigations to a trial.

In its annual report, HSBC said it is cooperating with the “relevant authorities” on the investigations.

HSBC and its worldwide subsidiaries accounted for more than 2,300 shell companies registered through Mossack Fonseca, according to the International Consortium of Investigative Journalists. These shell companies helped wealthy individuals to hide their financial assets and avoid tax.

“HSBC has received requests for information from various regulatory and law enforcement authorities around the world concerning persons and entities believed to be linked to Mossack Fonseca & Co.,” HSBC said in its annual report, repeating the August 2016 warning. “Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.

U.K. Probe

As part of the results, HSBC announced that the Financial Conduct Authority, the U.K.’s financial watchdog, is investigating the bank for failings around money-laundering and financial crimes.

In a statement accompanying its results, HSBC Group Chairman Douglas Flint said 2016 will be remembered for “significant and largely unexpected economic and political events.”

The uncertainty created by these events—such as the U.K.’s decision to leave the European Union—influenced investment activity and contributed to a “volatile” financial market, he added.

On Feb. 21, HSBC’s shares dropped the most in 18 months in London trading after it also reported fourth-quarter profit that missed estimates on a surprise drop in revenue. In response to the results, the bank said in a statement it will boost cost-cutting measures and extend a stock buyback.

To contact the reporter on this story: Benjamin Stupples in London at

To contact the editor responsible for this story: Penny Sukhraj at

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