Sridhar Ramamoorti, who teaches accounting at Kennesaw State University’s Coles College of Business, and Joseph W. Koletar, a retired FBI senior executive and special agent who has served as principal and director for fraud investigations of Ernst & Young LLP and Deloitte & Touche LLP, last teamed up on a panel at the U.S. Commercial Service’s Discover Global Markets conference held in Atlanta on Nov. 5-6, 2014, to discuss corruption issues in Africa.
In the following invited commentary, they turn their attention to the charges leveled against the Geneva-based private banking unit of the HSBC Holdings Plc currently embroiled in a controversy that has been dubbed “Swiss Leaks.”
Leaked documents to the international press show the bank’s dealings with clients engaged in a spectrum of illegal behavior, especially in hiding hundreds of millions of dollars from tax authorities. They also show private records of famed soccer and tennis players, cyclists, rock stars, Hollywood actors, royalty, politicians, corporate executives and old-wealth families.
According to the International Consortium of Investigative Journalism, these disclosures reveal the intersection of international crime and legitimate business, and they expand what’s known about potentially illegal or unethical behavior in recent years at HSBC, one of the world’s largest banks.
The allegations are being reviewed by the British parliament. The Bank of England’s top regulator Andrew Bailey has told MPs that bosses at HSBC should take personal responsibility for the scandal at the Swiss private bank. Even before the recent revelations, Mr. Bailey has said that fining and firing more individual bankers is a better way to punish bad behavior than hitting banks with crippling fines.
Their commentary follows:
Bankers’ ethics continue to come under assault globally. As if the Wall Street subprime-lending driven meltdown revealing malfeasance in the mortgage industry were not enough, and continuing revelations about the rigging of LIBOR and forex rates wasn’t enough! We now have to contend with the apparently brazen case of HSBC’s Swiss unit systematically helping wealthy clients avoid paying taxes.
A Wall Street Journal article aptly titled “Gulliver’s Travails: CEO at HSBC Takes Heat” we learn about how HSBC Chairman Douglas Flint lamented to British lawmakers that the bank was “…suffering from horrible reputational damage.” Media disclosures in February described how HSBC’s Swiss bank actively aided and abetted clients on evading taxes (despite many of them being prominently featured on U.S. sanctions lists, or those ousted in the Arab Spring). Probable causes for bankers behaving with such impunity include moral hazard, incentives, and rampant conflicts of interest, viz., the “too big to fail syndrome,” need for lifting the veil in tax haven accounts, and separating of the banking and investment roles in financial institutions. Ever since a former HSBC employee first divulged crucial information with French tax authorities in 2008, Swiss prosecutors have raided HSBC’s Swiss offices and are aiding tax fraud investigations in several countries, including the U.S.
The British Parliament’s Treasury Committee subjected HSBC CEO, Stuart Gulliver, to particularly harsh questioning, especially because he has been with the bank since 1980, has served on the Swiss unit’s board since 2007, and became CEO in 2011. Remarkably, a Guardian newspaper article alleged that Mr. Gulliver himself held approximately $7.7 million in a Swiss HSBC account, hardly helping him deflect charges of knowledge and complicity. The Treasury Committee’s tense proceedings were not without instances of understatement and hilarity. When Labour member of Parliament, Michael Kane asked whether Messrs. Gulliver and Flint considered themselves “fat cats,” after a pause, Mr. Gulliver responded, “You would have to define fat cat for me to comment on that.” Later, when another Labour MP asked Chairman Flint why he hadn’t yet dismissed Mr. Gulliver, the rather obtuse response was that “I think Mr. Gulliver is doing an outstanding job.”
With responses like these, it may appear to some that the bank’s leaders are either complicit or clueless. And whatever the case, the culture is more “pliant” than “compliant.” Fraud examiners know anecdotally that 10 percent of employees at organizations are dedicated and honest, another 10 percent are mercenary and opportunistic and will exploit every chance they get to make money from others, and the remaining 80 percent are just waiting and watching the organization’s response to how they handle employee/executive alleged fraud and misconduct. This is why it is extremely important for organizations to act swiftly and decisively whenever allegations of corporate malfeasance and misfeasance come to light.
When the tone from the top is weak or non-existent, employees may well get the sense that “no one is minding the store” and such lack of oversight creates a fertile ground for misbehavior and misconduct. Thus, if employees see that remaining silent about client accounts that raise obvious red flags is to their advantage, and they keep their well-paying jobs, they are likely to turn a blind eye to such risk factors. “Don’t ask, don’t tell” has another advantage in the age of plausible deniability: “Speaking the truth only means that you can’t demonstrably prove I lied.”
There is another important observation we must make in such a context. Despite the Treasury Committee’s desire to learn how the Swiss unit was so passive when it came to client screening, and the seeming complete lack of credible oversight, HSBC has thus far mightily refused to hold any single person accountable for the Swiss unit’s activities. It seems that there is an unspoken agreement among bankers, and even regulators—agree to all manner of fines and penalties, but at all costs do not hold any executive culpable, such that they might get jail time. Until a few executives start going to jail, are we to believe that bankers are unlikely to turn over a new leaf and change their behavior significantly?
Where does this leave the average person to ponder such events? Are allegations proven and true? Or will a lengthy inquiry result in even more “settlements” and promises of future reforms? And will such “reforms” be better than prior efforts?
Such matters seem to be following a circular course, where not much seems to change. Is the average person to buy their ticket to the (Olympic sporting) event and only hope that things get better?
Reference: Patrick, Margot & Colchester, Max (2015). Gulliver’s Travails: CEO At HSBC Takes Heat. Wall Street Journal, Thursday, February 26, 2015: Page C3.
