HSBC s Swiss Private Bank Prgress Update - January 2015 Overview HSBC Glbal Private Banking ( GPB ) and in particular its Swiss private bank have undergne a radical transfrmatin in recent years. HSBC has implemented numerus initiatives designed t prevent its banking services being used t evade taxes r launder mney. In the past, the Swiss private banking industry perated very differently t the way it des tday. Private banks, including HSBC s Swiss private bank, assumed that respnsibility fr payment f taxes rested with individual clients, rather than the institutins that banked them. Swiss private banks were typically used by wealthy individuals t manage their wealth in a discreet manner. Althugh there are numerus legitimate reasns t have a Swiss bank accunt, in sme cases individuals tk advantage f bank secrecy t hld undeclared accunts. This resulted in private banks, including HSBC s Swiss private bank, having a number f clients that may nt have fully met their applicable tax bligatins. We have taken significant steps ver the past several years t implement refrms and exit clients wh did nt meet strict new HSBC standards, including thse where we had cncerns in relatin t tax cmpliance. We have als refcused ur Swiss private bank n clients frm strategic markets f the Grup, such as wners and principals f the Grup s cmmercial banking clients. As a result f this repsitining, HSBC s Swiss private bank has reduced its client base by almst 70% since 2007. We are fully cmmitted t the exchange f infrmatin with relevant authrities and are actively pursuing measures that ensure clients are tax transparent, even in advance f a regulatry r legal requirement t d s. We are als cperating with relevant authrities investigating these matters and we acknwledge and are accuntable fr past cntrl failures. Changing Industry Expectatins Regulatry and public expectatins f a bank s rle in ensuring tax cmpliance by its clients have dramatically shifted. Banks are nw expected t assist tax authrities in pursuing tax evaders in additin t nt facilitating tax evasin r any frm f nn-cmpliance with tax bligatins. Majr regulatry refrm is underway in numerus jurisdictins t ensure the timely sharing f infrmatin with relevant authrities. Bilateral tax treaties, FATCA, OECD s Cmmn Reprting Standard and ther initiatives are designed t fster greater transparency and ensure that in the near future, an individual wishing t hide assets frm tax authrities will be unable t d s. HSBC fully welcmes and supprts these refrms, including the mve t Cmmn Reprting in 2016-2018, and is already in the prcess f adpting all necessary measures t fulfil its bligatins.
HSBC Refrms Histry Prir t the acquisitin in 1999 f Republic Natinal Bank f New Yrk and Safra Republic Hldings SA, a US private bank, HSBC had a small private banking activity fcused mainly n Grup clients. The Swiss private bank was largely acquired thrugh this transactin. The Republic/Safra business fcused n a very different client base and had a significantly different culture t HSBC. The business acquired was nt fully integrated int HSBC, allwing different cultures and standards t persist. With hindsight, it s clear that t many small and high risk accunts were maintained and the business was stretched ver mre than 150 gegraphical markets. We acknwledge that the cmpliance culture and standards f due diligence in HSBC s Swiss private bank, as well as the industry in general, were significantly lwer than they are tday. At the same time, HSBC was run in a mre federated way than it is tday and decisins were frequently taken at a cuntry level. Beginning in 2008 HSBC began t put a mre rigrus cntrl structure in place in the Swiss private bank by, fr example, intrducing a new plicy n US persns and reducing the number f US taxpayer accunts. In 2010, the Swiss private bank decided t exit US resident client business entirely. Present In January 2011, new Grup management fundamentally changed the way that HSBC is structured, managed and cntrlled. It was rerganised alng fur glbal business lines: Glbal Banking & Markets, Glbal Private Banking, Cmmercial Banking and Retail Banking & Wealth Management. In additin, Glbal Functins, including Risk & Cmpliance, Legal, and Audit were created t ensure central cntrl and imprved versight. At the same time HSBC undertk a cmplete verhaul f its entire private banking business, adding t initiatives it had previusly taken in cnnectin with US clients beginning in 2008. Fr the first time glbal management f GPB was mved t Switzerland t undertake this de-risking and re-shaping. GPB has reverted t its previus business mdel f fcusing n the wners and principals f the Grup s cmmercial banking clients. Tday, the management team in Switzerland which is carrying ut these refrms is substantially different t the perid befre 2011. Detailed changes Beginning in 2012, GPB develped a tax transparency plicy, stating that it will clse accunts and refuse any new business where it has reasn t believe the client r ptential client is nt in full cmpliance with relevant tax bligatins. Under the tax transparency initiative, a review was cnducted f existing accunts the bank intended t maintain. Each accunt was reviewed against a standard checklist t identify ptential indicatrs f nn-cmpliance with tax bligatins. Any issues were further investigated and if nt satisfactrily reslved, the accunt was clsed r put in the prcess t be clsed as sn as practicable.
Client Assets USDm Number f accunts Under the tax transparency initiative, we als enhanced bth ur knw yur custmer (KYC) prcedures, including an independent validatin by auditrs, and ur anti-mney laundering (AML) prcedures t ensure a mre cmplete cnsideratin f a new client s surce f wealth. We amended ur standard terms and cnditins t require the client t affirm that they are in cmpliance with their tax bligatins. The amended terms and cnditins allwed the private bank t refuse a cash withdrawal request, and placed strict cntrls n withdrawals ver $10,000. Where legally permissible, the terms and cnditins prvide HSBC with the right t disclse a client s infrmatin t relevant tax authrities. We discntinued the hld mail service and we implemented a new plicy t remediate any bearer shares in nn-individual accunts. In additin, we have withdrawn frm markets where we are unable t cnduct due diligence t a satisfactry standard n ur clients. We review all Plitically Expsed Persns annually at the highest levels within the Grup and use ur Financial Intelligence Unit t supprt this prcess. In line with the rest f HSBC Grup, GPB has significantly increased the number f peple wrking in Risk and Cmpliance. The result f ur refrms is evident as the number f accunts and ttal client assets f the Swiss Private Bank have been actively managed dwn by this intensive de-risking exercise, where we have put cmpliance and tax transparency ahead f prfitability: 140'000 120'000 100'000 35'000 30'000 25'000 80'000 60'000 40'000 20'000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Number f f accunts Clients Client Assets (USDm) 20'000 15'000 10'000 5'000 0 In 2007, the Swiss Private Bank had 30,412 accunts. At the end f 2014, we had reduced that number t 10,343. In 2007, the Swiss Private Bank had ttal client assets f USD118.4 billin. At the end f 2014, that number has been actively managed dwn t USD68 billin. In 2007, the Swiss Private Bank cvered clients resident in ver 150 cuntries. We are in the prcess f exiting clients residing in ver 100 f thse cuntries.
Glbal Standards As a wider cntext, in April 2012 HSBC Chief Executive Stuart Gulliver annunced HSBC's cmmitment t implement the highest r mst effective standards acrss the Grup t cmbat financial crime. HSBC is fllwing thrugh n that cmmitment t Glbal Standards, and is nw just ver tw years int a five-year prgramme t transfrm the way that HSBC manages financial crime risk. The steps HSBC has taken glbally t de-risk and the cmprehensive refrms the Grup is putting in place will ensure that HSBC has a rbust, sustainable anti-mney laundering and sanctins cmpliance prgramme. Amng ther steps, HSBC has: Successfully met a number f key sanctins bligatins under a tw-year Deferred Prsecutin Agreement with the District Attrney f New Yrk, resulting in the expiry f this DPA in December 2014. Strengthened Bard and senir executive management ver financial crime issues Added 1,750 cmpliance prfessinals between Q4 2013 and Q3 2014, taking the ttal number f cmpliance staff acrss the Grup t 6,900. Reduced the verall financial crime risk that we are expsed t by exiting prducts, custmers and markets where the financial crime risks were t great t be managed. Published glbal plicies fr AML and Sanctins (ur glbal standards) and we are deplying the systems, prcesses, training and supprt t implement the plicies everywhere HSBC perates. Established a glbal netwrk f Financial Intelligence Units (FIUs) t identify and investigate significant cases, trends and strategic issues related t financial crime risks and share relevant data and intelligence acrss the Grup. Data theft Over a perid f several mnths at the end f 2006 and early 2007, an IT emplyee f the Swiss Private Bank, Hervé Falciani (HF), systematically and deliberately dwnladed details f accunts and clients. This was a blatant criminal vilatin f Swiss law. HF is accused f attempting t sell the data t Lebanese banks under a false name, as the Swiss Attrney General made clear in a press release n 11.12.2014 (https://www.news.admin.ch/message/index.html?lang=en&msg-id=55629). HSBC has n recrd f HF ever escalating any cncerns t his line management, r using the Whistleblwing htline that was in place at the time f the theft. French authrities riginally seized the stlen data frm HF s parents huse in France. The data was nt relinquished by HF vluntarily. Since that time, the French authrities have subsequently shared the data with numerus gvernments arund the wrld. HSBC has cperated and cntinues t cperate t the extent that it can with requests fr infrmatin frm gvernments regarding accunt hlders. Hwever, prviding client data t freign authrities wuld itself cnstitute a criminal ffence under Swiss law. It is unclear if the integrity f the data has been preserved, r even if the riginal data itself was cmplete and accurate. Recent allegatins by a French law enfrcement fficial in Nice, suggest that the data has been manipulated and culd therefre cntain material inaccuracies.