Last week, the United States Department of Justice asked a federal court in San Francisco to force HSBC India to disclose the names of U.S. customers whom the Justice Department suspects are evading U.S. tax laws. According to the Justice Department’s brief, HSBC India solicited U.S. residents of Indian origin to open bank accounts. HSBC apparently advised those individuals that the bank would not disclose the existence of the accounts, or any interest earned on those accounts, to the U.S. government.
Meanwhile, two individuals recently pled guilty to tax evasion in connection with their respective failures to report their interests in, and income from, foreign-held bank accounts. (For news stories, see here and here.) Each of these cases involved individuals who either failed to file Reports of Foreign Bank and Financial Accounts (each, an “FBAR”) for their respective accounts or filed FBARs with false information.
Previously, the U.S. government’s efforts to fight suspected tax evasion had focused primarily on Swiss bank accounts. In 2009, the government’s criminal investigation of and subsequent agreement with UBS yielded a $780 million fine on the bank and the disclosure of the names of thousands of U.S. taxpayers with offshore accounts. The action against HSBC widens the scope of the government’s investigation and is consistent with reports of a broader inquiry into accounts held in Asia generally.
The Justice Department has chosen an interesting time to put pressure on HSBC and its putative customers. Roughly two months ago, the Internal Revenue Service announced a new offshore voluntary disclosure initiative (“OVDI”), which is intended to encourage individuals to disclose foreign bank accounts and unreported income. The government, it would seem, is pursuing a carrot-and-stick approach in which OVDI serves as the carrot, offering lesser penalties than might otherwise be imposed, and the summons serves as the stick, threatening taxpayers with involuntary disclosure of their accounts and the higher penalties that would accompany such disclosure.
At this point, it is unclear whether the Justice Department will pursue a criminal investigation of HSBC. When it investigated UBS, the threat of criminal prosecution gave the Justice Department the leverage needed to negotiate around Swiss secrecy laws that prohibited UBS from disclosing the names of account holders. Because HSBC is not constrained by similar laws, the Justice Department might not need to resort to such measures to coerce the bank into compliance.
Information about the OVDI is available here.
Information about FBARs generally is available here.