April 12, 2011 / 7:46 PM / 8 years ago

UPDATE 1-HSBC case alerts Asia banks for U.S tax probes

* U.S. Justice Department investigating HSBC India

* Private bank units across Asia braced for similar probes

* Eight offshore banks under US grand jury probe (Adds details on banks under US grand jury probe, comments, context)

By Rachel Armstrong and Chris Vellacott

SINGAPORE/LONDON, April 12 (Reuters) - A U.S. government probe into HSBC (HSBA.L) in India is the first significant sign of authorities’ wider crackdown on Americans using bank accounts in Asia to evade taxes.

The U.S. Department of Justice’s announcement that HSBC India may have helped potentially thousands of Americans dodge federal income taxes surprised many commentators, given that India is far from being a tax haven. [ID:nN07129179]

But lawyers say it seems likely that private banking units across Asia are now on red alert for similar investigations into their businesses.

“It is likely U.S. authorities are pursuing a tip about HSBC India and believe they can use the investigation to get the attention of the Asia banking community,” said William McGovern, a former Securities and Exchange Commission lawyer and now a partner at law firm Kobre and Kim in Hong Kong.

Prosecutors are using the same “John Doe” summons strategy with HSBC they used in their case against UBS AG UBSN.VX (UBS.N). UBS ultimately settled government charges against it by paying $780 million and agreeing to hand over nearly 5,000 client names to the United States.

UBS disclosed the client names to U.S. authorities last year, and the case prompted many private banks to tighten up their policies for dealing with American clients.

The U.S. Internal Revenue Service (IRS) and Justice Department have been zeroing in on Asia for the past year, after money began leaving Europe amid the UBS crackdown.

“You follow the money and Asia’s where the money is,” said Jay Krause, a Hong Kong-based partner at law firm Withers.

Several private banks in Singapore, Asia’s largest wealth management centre, already will not take on U.S. clients because of the risk of becoming embroiled in this kind of investigation.

The former head of consumer banking at one large Asian bank, who declined to be named because of the sensitivity of the topic, told Reuters most Asian and European private banks in Asia do not take U.S. clients and if they do, there are numerous restrictions on the products that can be sold.

Lawyers said excluding all American clients can be tough, however, as both citizens and permanent residents of the United States, even if they no longer reside there, can be deemed U.S. persons for tax purposes.

The category could also include people with no real connection to the United States, but who may have a right to citizenship through family connections.

Under new U.S. rules being introduced as part of its crackdown on tax evasion, non-U.S. financial institutions will have to disclose details of U.S persons with accounts or face a 30 percent withholding tax on investments in U.S. assets.

This effectively puts much of the burden of disclosure on the bank rather than the client and is likely to prove complex and costly, given the difficulty of identifying who is eligible.

“(Banks) are going to have to go much further than they think they need to,” said Krause.

The problem in Asia is also likely to have been exacerbated by the volume of capital that has flowed into the region’s markets in recent years. Ultra low interest rates in Western markets and the crackdown on banking secrecy in Switzerland has made Asia a more attractive destination for investors to send their money.

STRAIGHTFORWARD, THOUGH TIMELY PROCESS

And while it may be tough for the banks to do adequate due diligence on all of their clients’ potential ties to the United States, the investigation for the U.S. authorities is relatively straightforward.

U.S. officials are now examining some 18,000 account names gathered from the latest amnesty program, which cut penalties to encourage tax avoiders to come clean.

“It takes a long time to make the cases but it’s fairly straightforward to go through all the accounts of U.S. citizens above $10,000 and look at which ones haven’t made an FBAR (report of Foreign Bank and Financial Accounts filing),” said McGovern at Kobre & Kim.

Eight offshore banks are under grand jury investigation around the world, according to the Justice Department.

In the case of HSBC, several lawyers said the government’s likely break was finding a New Jersey man with an HSBC India account. That man, Vaibhav Dahake, pleaded guilty to tax evasion on Monday. [ID: nN11109686]

HSBC said it does not condone tax evasion and cooperates with government probes.

“Now if I had to make a prediction of what comes out of India, it’s they are going to take a worldwide look at HSBC,” said Jack Blum, a long-time lawyer for tax whistleblowers. “And there are other banks that are in the pipeline.”

Last month, a Credit Suisse CSGN.VX client pleaded guilty to evading taxes, enveloping another bank in the government’s tax evasion net. [ID:nN08192853]

Credit Suisse has said it is not the target of any tax probe. (Additional reporting by Kevin Lim and Kim Dixon, Editing by Mark Potter, Gary Hill)

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