HSBC Tax Evasion Scandal In Light Of Corporate Governance Principles

Introduction to Corporate Governance Principles

Corporate Governance refers to the administration process undertaken in governing corporations. Corporate governance principles refer to certain ethical and moral standards that must be adhered to by corporations to ensure that their administration is accountable. A corporation is governed by its board of directors and Chief executive officer (CEO) yet it is its own separate legal entity (Commons 2017). Thus, a corporation maybe held accountable for its actions. This means that a corporation may sue or be sued in its own name. However, in practicality the decision making process in a corporation is controlled by individuals holding the apex position in the organizational structure. Thus, the corporate veil must be lifted in order to assess the individuals originally responsible for the corporation’s actions (Macey and Mitts 2014). Good corporate governance principles include the separation of chair (chairman of the Board of directors) and Executive officers (CEO), frequent external audits and disclosure of such audit reports, a larger number of independent directors (directors whose interests are not aligned with the interests of the management), regular evaluation of the board and disclosure of the same (Tricker and Tricker 2015). These bring about a transparent and true image of the company’s financial position.  A corporation’s first and foremost obligation lies towards its stakeholders (mainly comprising of investors), this obligation must be looked after as its highest priority. Falsified and fabricated disclosures by companies result in mislead investments that often lead to a complete loss for the investors. This loss must be avoided as far as possible. Global events such as the Enron scandal in the United States and HIH Insurance fraud in Australia gave rise to the need for formulating well defined corporate governance principles that provide for financial accountability of the corporation before its stakeholders (McLean and Elkind 2013). The following paragraphs will elaborate on the HSBC tax evasion scandal in light of corporate governance principles.  

HSBC Bank in its present structure can be traced back to its establishment in London in the year 1991 by the Hongkong and Shanghai Banking Corporation (Kynaston and Roberts 2015). However, the bank’s origin can be traced to the establishment of the Hongkong and Shanghai Bank in 1865 (Muirhead and Green 2016). The corporation is currently titled HSBC Holdings Public Limited Company (plc).  The founding member of the bank was Sir Thomas Sutherland who established the bank in the British colony of Hong Kong in 1865. HSBC Holdings plc was first named Vernat Trading Company Limited and was later renamed Vernat Eastern Agencies limited before ultimately adopting its present structure in 1991 (Walker et al. 2013). Headquartered in London the bank currently can be found to be prominently present in all of the world’s leading banking markets. HSBC has been historically synonymous with stability and a risk-aware approach to business transactions. Due to various controversies linked to it in the past, since 2015, it has been audited by PricewaterhouseCoopers which is one of the leading audit firms in the world. The largest and most consequential scandal related to HSBC Bank is the “Swiss leaks” scandal uncovered by the International Consortium of Investigative Journalists a wing of the Center for Public Integrity which is an American non-profit organization established in 1989. This organization aimed at being instrumental in uncovering the truth about abuse of power and corruption in the global context. The “Swiss leaks” scandal mainly related to charges brought in by an internal whistle-blower who alleged money laundering on part of the bank for their higher income group customers.

History and Structure of HSBC

The HSBC Private Bank is a subsidiary of HSBC Private Banking Holdings (Suisse) SA which is wholly owned by HSBC Bank plc (Cull and Peria 2013). This was the Swiss banking subsidiary of the parent bank and it lead to the leaks that resulted in the scandal in question. The main charges brought in were through a whistle-blower who revealed classified data relating to personal customer data which established tax evasion by these customers through manipulated records which was fabricated by the bank. Harve Falciani was the employee in question who disclosed the documents relating to the customers. The main disclosure was made to French tax authorities but subsequently there were various investigations launched around the world specially-Argentina, Brazil, Denmark, Belgium and Switzerland. Falciani disclosed information relating to 100,000 bank accounts which brought out laundered amounts to the tune of $114 Billion (£78 Billion) (Naheem 2015). Only a fraction of the total amount has been recovered till date. By late 2008, the investigations lead to global disclosures of money laundering which the tax authorities sought to pursue legally. Harve Falciani on the other hand faced prosecution and was sentenced to 5 years imprisonment from Swiss authorities as leaking personal information that related to bank’s customers is an offence in Switzerland. HSBC was offered a plea deal under which payment of £1 Billion would avoid a trial, HSBC however, opted to reject the plea deal and proceed to trial (Lord and Broad 2018). During the trial HSBC admitted to active participation in fraudulent activities till the year 2007 and stated that they have revamped the organizational structure to provide for more ethical administration of the same.

The proceedings against HSBC commenced in 2015 following the allegations levied against them through the “Swiss leaks” scandal (Gheorghe 2015). The judgment ruled for a penalty of 300 million euros to be recovered from HSBC as damages. HSBC was established as an active aid to tax evaders from all over the world. It seemed to cater to its wealthiest clients with these money laundering schemes devised at disclosing lower assets on their behalf (Young 2015). The leak evidently established that HSBC does not adhere to global standards of transparency which are followed by corporations all over the world. This also observed that the administration and management were not aligned with the best interests of the company or its stakeholders. The leak would obviously lead to reduced investments from prospective investors and a drop in share value. Also it would definitely establish that HSBC is not a safe investment in any market globally.

The Swiss Leaks Scandal

The first issue which this brings out in light of corporate governance principles is the lack of disclosures. As stated above various disclosures are necessary to ensure that corporate governance principles are adhered to (Khan, Muttakin and Siddiqui 2013). These include disclosures such as financial statements, evaluation of the board, evaluation of the CEO and disclosure of audit reports. HSBC provided fabricated disclosures that produced a falsified image of its financial stand. More importantly, the assets of its customers were disclosed to be lower than the actual figures, this invariably lead to a flawed tax assessment which enabled these customers to evade tax authorities. The primary purpose of these disclosures is transparency (Chan, Watson and Woodliff 2014). Transparency is the only way to ensure stakeholder’s interests are protected. Beyond the financial stakeholders the societal structure in which an organization functions would also be a part of the stakeholders who the corporation owes an obligation to. The societal structure is mainly protected though Corporate Social Responsibility (CSR) activities undertaken by the corporation. This refers to measures taken by the company to provide benefits to society (Elshandidy and Neri 2015). However, even if no CSR activities are undertaken by the corporation they still owe an obligation to society. Facilitating money laundering and tax evasion would lead to a situation where the host country’s economy would face repercussions as calculation of national income and similar barometers would be faulty and make false representations (Obradovich and Gill 2013). Such a fabricated representation could result in the collapse of global economic structures as seen during the 2006 global recession. Thus, the individual breach of obligations observed by a corporation could have a rippling effect throughout the global economy. This necessitates that adequate disclosures are made by corporations despite not being under scrutiny (Essen, Engelen and Carney 2013).

Transparency as explained above denotes the conduction of business in a manner where all factors are clearly visible to stakeholders (Andrade, Bernile and Hood III 2014). All factors here, translates into all monetary and other implicit considerations that determine a corporation’s viability and current position. This is primarily important for investors (present or prospective) but is also useful for other stakeholders who have a vested interest in the company. Employees of the company also form a part of this. In this breach it was clear that the employees of HSBC did not condone or encourage the large scale concealment of assets of customers to aid tax evasion. This becomes clear from the fact the leaked documents that lead to uncovering of the scandal were provided by an employee acting as a whistle-blower. The management and administration of the company however were the minds behind the money laundering. This establishes that HSBC did not observe its obligations towards its investors, its employees and the society as a whole. Being a multi-national corporation HSBC has branches all over the world and it can be safely inferred that they encouraged the same form of deceit in other countries as well.

Legal Proceedings against HSBC

Market mechanism refers to processes by which actors in a particular market (buyers and sellers) tend to optimize the distribution channels though optimal utilization of the resources available to them (Shiltz, Cvetkovi? and Annaswamy 2016). The market mechanisms in the financial sector, mainly the banking sector, relate to provision of optimal financial services to its customers through the accumulated capital in their reserves. They do not however, extend to aiding your clients in illegal activities. This meant that facilitating tax evasion was not a prerogative that the corporation was compelled to adhere to. Thus the steps employed by the corporation to aid their clients in illegal activities display their blatant disregards for good corporate governance. The compelling evidence brought out by the documents that were leaked by Falciani were enough for HSBC to accept all claims of fraudulent activities. However the corporation claimed that all fraudulent activities had ceased since 2007. This however was not true as various other controversies were uncovered in following years which shows that board of HSBC continued to breach their obligations despite facing criminal liability in the past.  There was a U.S. senate committee report in 2012 which said that HSBC had been laundering money and even alleged that they had aided countries like Iran and North Korea to bypass U.S. nuclear-weapon sanctions. A further $3.5 billion scandal was uncovered in 2016 by the U.S Department of justice (Garrett 2016). Each of these incidents is evidence of HSBCs vehement participation in fraudulent activities using market mechanism.

If looked at from a different perspective the customers that HSBC sought to aid in these fraudulent activities were their clients and as stakeholders HSBC would have an obligation to protect their interests. However, from the larger perspective of the obligations HSBC owed to society and all their stakeholders as a whole it was absolutely irrelevant. This was a conflict of interest. Due to this conflict of interest, even if they were acting to protect their clients it was a breach of their duties as the board as a whole. Conflict of interests especially in case of independent directors may be interpreted as a positive effect as those conflicts bring out the larger interest of the company as against the interests of the administration of the corporation. However, a conflict of interest that puts the interest of the stakeholders at large is a prime example of ineffective corporate governance. This is why the board is needed to be evaluated along with the Chief executive officer on a regular basis. HSBC through the flexible banking laws in Switzerland managed to launder billions for their premier clients for years. This also brings out the disregard that HSBC had for its investors and other stakeholders. The board is kept at the top of the organizational hierarchy and is thus entrusted with the way company resources are mobilized. It is their duty and obligation to mobilize the resources in a way safeguards the investment and remunerates the investors accordingly. Along with that the board is also entrusted with the duty to formulate the internal regulations of the company in a way that best protects employee rights and their interests in the company. The gross fraud observed by the organization over the years establishes that it did not observe its responsibilities towards these stakeholders to the best of their abilities.

Corporate accountability maybe defined as the responsibility of a corporation to make true and accurate representations of its transactions and financial standing (Zadek, Evans and Pruzan 2013). This means that it is the company’s obligation to produce records that are not fabricated. The degree to which an organization’s representations maybe relied upon shows its corporate accountability.  Thus when HSBC denied its stakeholders the true image of the company’s financial standing and the assets it laundered through various shell companies it was in breach of its rightful duty to towards it stakeholders. During the conflict Stephen Green remained the CEO and Chairman of the board. Good corporate governance principles mandate a separation of the board and the executive officer as having the same individual observe both roles would ensure that the person in question has access to discretionary powers. This would invariably lead to arbitrary use and abuse of power. Corporate accountability dictates that the board should have a majority of independent directors as they would act in the best interests of the company. Further if the Chief Executive Officer and Chairman of the board are the same person it puts the person in a position where he can influence both the decisions of the board and dictate terms over management. It is under these circumstances that the Enron scandal was given rise to. The board and the management sanctioned the use of hypothetical future values to raise stock prices and this lead to large-scale investments which finally collapsed and rippled into the global recession of 2006 (Lys, Naughton and Wang 2015).

HSBC also showed its willingness to blatantly not conform to regular norms and standards of good governance by denying the plea deal and opting for trial. The later scandals that have been associated with HSBC are further evidence of this. HSBC to a large extent helped its customers defraud the government and this could not be undertaken without due knowledge and acceptance of the board.

The HSBC official website maintains that it is a staunch observer of corporate governance principles. However, the U.K. parliament has considered tightening regulations governing banking institutions due to regular scandals that its largest banking corporations has been involved in. This especially applies to events such as the “Swiss leaks” which has put the regulations in force under global scrutiny. The HSBC scandals have been an eye-opener for corporate governance authorities around the globe to the need for stronger mandates on a company’s obligation towards its stakeholders. Corporate governance principles are necessary to ensure that corporations observe and adhere to their responsibilities towards the society as a whole.

Under the Financial Services and Markets Act, 2000 the Financial Services Authority has been given wide powers to regulate the banking sector (Singh 2016). This is a step towards better corporate governance but has failed to fulfill its legislative intent as the markets have managed to function fraudulently despite the regulations put in place. It is a strong indicator if anything that a higher degree of scrutiny is required when dealing with corporations especially those that have cross-border functions. As per their duties companies should have statutory requirements for regular evaluation of the competency of the board. If deemed competent then the inclination of interests of the board should ideally be mapped. Once recognized these should ideally be disclosed to all stakeholders. Moreover, a stakeholder feedback procedure should be implemented to ensure that the principles of good governance are imbibed into the various wings of the corporation.

HSBC has displayed a certain degree of inclination towards good governance as it now employs PwC to conduct their audits. Pwc is an auditing institution of repute and brings the bank one step closer to better defined governance principles. These audits also display that the HSBC bank has become less secretive than it has been recoded to be in the past. Thus good governance principles can be seen being implemented. However the scandalous past maintained by the company still places a question on the reliability of these disclosures. The act of willfully concealing their customer’s assets has effectively had a negative impact on the goodwill of the company. The institution once viewed as one of the most successful banking ventures in the world is now hardly synonymous with reliability.

To conclude, HSBC has been regarded as a pillar of banking in the history of financial institutions around the globe. It has been viewed as a safe investment by investors throughout the globe and a safe banking institution for deposits by the public at large. The controversies that have followed the organization have however caused a radical shift in the approach that investors and the public have towards the organization. The organizations continuous involvement in fraudulent activities also lay down the importance for new legislation governing the regulation of the banking sector. Assessing the implications that such activities can have on the global economy, it may be inferred that allowing such institutions to continue transactions without constant vigilance would be a disastrous underestimation of its devastating effects. Implementing strong corporate governance principles would also help HSBC in damaging the loss caused to its goodwill through the constant controversies. In this regard undertaking CSR activities would be the best recourse. The largest banking corporation in the U.K. which was headed by Stephen Green does not necessarily have to dictate the functioning of the corporation for years to come. It was through trusted banking transactions that HSBC molded itself as one of the world leaders in the banking sector and it is through this that it shall rise to its former glory. Thus, HSBC through stronger, more ethical administration can continue to be a trusted premier banking institution.

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