An investigation of HSBC Holdings Plc by U.S. tax authorities was stepped up with the government’s request seeking authorization to pursue information on thousands of Americans who may have used accounts in India to evade taxes.
The Internal Revenue Service asked a U.S. judge in Oakland, California, for permission to serve a so-called John Doe summons to get information about Americans using HSBC’s Non-Resident Indians, or NRI, services. The IRS cited the Jan. 26 indictment of client Vaibhav Dahake, who is accused of conspiring with five HSBC bankers to hide Indian accounts from U.S. tax authorities.
“It is not only reasonable to believe, it is abundantly clear that thousands of other NRI clients in the United States may have failed to meet their obligations to disclose those accounts - and pay tax on the income,” Justice Department attorney Stuart Gibson wrote in court papers filed yesterday.
The request signals a sharp increase in U.S. pressure on HSBC, Europe’s largest bank by market value, to cooperate in a widening probe of offshore tax evasion. UBS AG, the largest Swiss bank, avoided U.S. prosecution in 2009 by paying $780 million, admitting it helped Americans evade taxes and disclosing data to the IRS on account holders.
“While we haven’t seen the summons, HSBC does not condone tax evasion and fully supports the U.S. efforts to promote appropriate payment of taxes,” Juanita Gutierrez, a bank spokeswoman, said in an e-mail. “While complying with the law in all the jurisdictions in which it operates, including India, HSBC cooperates with request from U.S. authorities.”
Gutierrez said the bank has been “engaged in a constructive dialogue with U.S. authorities” and hopes the John Does summons matter “can be resolved expeditiously.”
The IRS seeks data from HSBC USA about accounts holders at HSBC India from 2002 to 2010. Through September, about 9,000 U.S. residents were “Premier” clients with NRI deposits of $100,000 or more at HSBC India, and only 1,391 had disclosed their accounts to the U.S. in 2009, according to a court filing by Daniel Reeves, who runs the IRS Offshore Compliance Initiatives Program.
Through December 2009, Premier clients had NRI deposits of almost $400 million, Reeves wrote.
Reeves said the bank helped clients conceal accounts from the IRS through a number of NRI services, citing the Dahake case. His indictment alleges that HSBC bankers said that with an Indian account, no U.S. forms were required, he didn’t have to furnish a social security number, and no Form 1099 reporting the interest income would be filed with the IRS.
Dahake is scheduled to plead guilty on April 11 in federal court in Trenton, New Jersey, court records show.
The U.S. had filed a similar summons in the UBS case. The UBS case helped prompt more than 18,000 Americans to avoid prosecution by revealing their secret offshore assets to the IRS, agency Commissioner Douglas Shulman said April 6 at the National Press Club in Washington. The IRS is using those disclosures to learn about banks, advisers and tax evasion, he said.
“We’re using that data to then pursue the next wave,” Shulman said. “This is a multiyear effort. It’s not going to stop.”
Dahake attorney Lawrence Horn said the HSBC John Doe summons case may serve to draw more people into another voluntary disclosure program that the IRS is offering. He said that if the summons is granted and HSBC complies, “there’s a great likelihood” that the IRS will get the taxpayer names it seeks.
Those HSBC clients will then have to choose whether to risk prosecution by doing nothing or enter the voluntary disclosure program, said Horn, of Sills Cummis & Gross in Newark, New Jersey.
In his filing, Reeves said IRS agents interviewed HSBC India clients. They said NRI representatives told them that if they opened HSBC India accounts, they would not have to pay U.S. income tax on interest earned, and that the bank would not tell the IRS about them. The clients had deposits at HSBC India ranging from several hundred thousand dollars to more than $1 million, Reeves wrote.
Last year, Congress imposed new requirements on foreign banks with U.S. accountholders. The disclosure rules, which take effect in 2013, banks based outside the United States face 30 percent withholding on certain payments from within the U.S. if they do not share certain information with the IRS.
The case is In the Matter of the Tax Liabilities of John Does, 11-cv-01686, U.S. District Court, Northern District of California.