Wednesday, 22 November 2017

A New Regulatory Approach for the Accounting Industry, But Same Old Results

The second post today is a short follow up from a post earlier in the year that looked at the leniency of the deterrent selected for the accounting industry. In that post we looked at how the SEC and the Financial Reporting Council (FRC) were handing out ‘record fines’ of £5m here or $6 million there, something which onlookers noted was ‘less than half a day’s work’ for these top-four Auditors. Therefore, you can imagine this author’s delight when reading the headline in the Financial Times yesterday that a ‘review recommends larger fines for accountancy firms’; yet, regular readers of Financial Regulation Matters know that there was no such delight, because the rest of the article could have been written without one having read it.

Obviously, the article goes on to confirm that, as suspected, the increase in fines was not really worthy of a headline, if the increase even goes ahead at all. In the report commissioned by the FRC and led by for Court of Appeal Judge Christopher Clarke, it was mentioned that as a starting point the firms should not be able to profit from wrongdoing (although they stated that identifying that profit may be difficult owing to the nature of the business of auditing) and that ultimately the ability to fine firms should be significantly increased. The article in the FT makes the obvious comparison between largest penalties attributed by the FRC and the FCA, with the FRC’s being £5.1 million and the FCA’s being £284 million – in reality, the FCA’s level of fines also needs to be addressed. The most startling sentence in the article – ‘the most controversial measure proposed by the review would enable the regulator to fine large accounting firms by more than £10m’ – is perhaps indicative of where the regulatory framework is up to. Whilst Clarke rightly notes that the smaller fines like we have now are probably just recognised as ‘the cost of doing business’, it is unlikely that fines of £10 million will fare much differently, something with Professor Ramanna calls the ‘800-pound gorilla’ in the room.

Unfortunately, if we were to look at actions rather than words, then this report is particularly poor. Not to judge Clarke’s intent, but looking at the actions paints a picture whereby the capability of a regulator to control an industry which is inexplicably linked to corporate wrongdoing is called into question, and the result of extensive investigation is that they should raise their fines by a total of £5 million at a time, against companies that post revenues in the billions and profits in the hundreds of millions. Right now is the time for regulators to work via actions rather than statements, but unfortunately this report does exactly the opposite, and the auditing industry will have taken notice – what message would then have received? Business as usual….


Keywords – Accounting, Auditing, Financial Regulation, Financial Reporting Council, Fines, Crime, White Collar Crime, @finregmatters

“Economic Murder” and the Reality of Economic Cycles

One does not have to search for long in the archives of Financial Regulation Matters to find criticism of the Conservative Government. Whether the focus is on the increase in food banks, tax avoidance, elitism, siding with business over the public, or a level of privatisation that is forcing the U.K. into a corner it will struggle to get out from, there has been no shortage of criticism. However, the first thing to note is that today’s post is not, nor the blog moreover, pro-Labour (or, in fact, any political party); Labour are simply just as culpable as their Conservative brethren. To demonstrate this point, today’s post, the first of two, will look at the recent ‘landmark study’ that suggested the Conservative Party’s austerity measures have caused upwards of 120,000 deaths, unnecessarily, since embarking upon this attempt to recoup the losses caused by the financial sector; yet, the analysis will do so from within the parameters of the need to understand economic cycles.

With the Conservative Party taking power in 2010 as part of a Coalition Government it effectively controlled, austerity measures have been ruthlessly implemented across a wide range of British society. Whilst it is expected that the Party would go after the poorest first, traditionally speaking, this era was, and still is, defined by the broadening of that net to the middle-classes. It is on that basis that Johnathan Watkins et al produced the research paper Effects of health and social care spending constraints on mortality in England: a time trend analysis, which was made publically available via the British Medical Journal. The paper is based upon statistical analyses regarding spending levels in two specific categories: public expenditure on health (PEH) and public expenditure on social care (PES), with PES suffering greatly in the hands of the Tories. Yet, whilst the paper ultimately calls for an increase in PES, which seems obvious but is supported by statistical evidence, the media have found delight in picking up on certain elements of the report. The Independent takes the lead with the extracted phrase of ‘economic murder’, whilst continuing by affirming that whilst mortality rates declined between 2001 and 2010, they rose sharply in the following years; the study suggests that, based on the trends identified, there would be 152,000 austerity-related deaths between 2015 and 2020 – 100 a day – mostly because the majority of these people will be reliant on social care rather than health care. Yet, the authors of the paper were keen to temper their findings, expectedly, and stated ultimately that the paper cannot prove ‘cause and effect’, only ‘association’, which was highlighted by critics of the paper like Local Councils who suggested the statistical background of the research could not be relied upon. This all makes sense, but in reality it should be no surprise that savage cuts, across the board, have led to an increase in the mortality rate.

For the Tories, figures like these are par for the course. This is demonstrated in the callousness of some of their most senior figures, and in the recent ‘gaffe’ made by Chancellor of the Exchequer Philip Hammond with his ‘there are no unemployed people’ remark on a morning political TV show. Whilst the comment was, in reality, taken out of context – Hammond was discussing the effect of technological innovations on sectors in different eras, although the claims made by some that actually Britain does not have an unemployment problem can be easily dismissed – the comment was ‘bad for the optics’ in a world where, apparently, that is all that matters. Just two days out from today’s Budget, the timing could not have been worse for Hammond in theory, but in reality it matters very little. This is because the focusing upon who said what and when is nothing more than a distraction from the reality of the situation – the systemic reality. Let us take a step back from Tory-bashing for one moment, and let us look at the Labour Party’s role in this situation where disabled people are being forced to climb stairs to prove their disability, and young families with young children are being forced into food banks after having their benefits effectively suspended for six weeks. Since the 1980s up until the Financial Crisis, of which Labour Governments played an active part (from 1997 to 2010), financial entities within the City of London were actively deregulated, with the Labour Party overseeing the final ten years of the project to extract more wealth from society then has been witnessed before – the Crisis cost the U.S. more than $22 trillion, and the U.K. £7.4 trillion which, if it were not for the heart-breaking human cost would be almost laughable figures. Labour played its part in this system, and they are as much to blame as anybody else; this is not to put the blame on any one particular group, because the political elite is now paying for their subservience to the financial elite by way of record numbers of politically disengaged and disenfranchised citizens.

Ultimately, it is important to have some perspectives when phrases like ‘economic murder’ are being put forward. Yes, the Conservative Party is at the forefront of the attack upon society, but we must focus on what they represent more than what they actually do. Doing this will allow people to predict the effects of economic cycles, rather than find themselves caught up in the crossfire. When the next boom comes around, and credit is flowing free again, society needs to reject the allure of an easy and commercialised life in the knowledge of the damage that is inevitably lurking around the corner; whether this happens is anybody’s guess, but history tells us that, at some point, we will see this all again.


Keywords – Austerity, Conservative Party, Labour Party, Politics, Business, Poverty, Economics, @finregmatters

Friday, 17 November 2017

Carillion in Crisis

Today’s second post looks at the ever-developing story that the British-based multinational construction firm Carillion has today issued its third profit-warning since July, in addition to its suggestion that it is about to breach conditions attached to loans that it is accountable for. With the increasing utilisation of so-called ‘Public Private Partnerships’ and ‘Public Finance Initiatives’, as discussed in a recent post here in Financial Regulation Matters, it is worth discussing the potential effect that this financial bombshell will have; will it cause the socially-integrated company to begin to spiral and ultimately fail, or will it be the latest demonstration of a company that is ‘too big to fail’, as one onlooker has suggested today.

Carillion is proving to be synonymous with this particular period of Britain’s economic history, with the firm winning a number of lucrative and highly-visible contracts, including skyscrapers in Manchester, and of course the infamous HS2 high speed rail project as part of an overall £6.6 billion contract (to all of those involved, not just Carillion); the company is also responsible for the Royal Opera House in Oman, the Yas Viceroy hotel in Abu Dhabi, the redevelopment of the Tate Modern building, GCHQ, Brampton Civic Hospital in Canada and the Library of Birmingham, amongst other projects. However, despite these contractual successes, all is not rosy at Carillion’s headquarters, with many stating that a number of high-risk projects have resulted in the recent malaise for the company. In the Summer, the time of its last profit warning, it was identified that four projects in particular, in conjunction with the need to divest from Canada and the Middle-East, were causing the company serious problems; the company is feeling the effects of loss-making contracts, late-paying contracts, and a building sector that is being squeezed by the economic environment. Three projects in the U.K. – The Royal Liverpool Hospital, the Midland Metropolitan Hospital, and a road project in Aberdeen – are understood to have heavily contributed to the recent £375 million write-down that is at the heart of the spiralling financial health of the company.

For a company that survives upon large-scale grandiose plans, usually by states demonstrating their financial health, the inherent uncertainty that defines the post-2016 (and realistically the post-Crisis) world can be a deathblow if the company is not diversified enough to protect itself – it is for this reason that the company has been divesting from its Canadian and Middle-Eastern projects, whilst also moving the bulk of its business into the facilities management business which, according to the Financial Times now represents almost two-thirds of its entire revenue stream. Yet, the drop in share price, particularly when viewed in relation to its share price when it buoyantly attempted to takeover one of its main rivals Belfour Beatty, means that the company has witnessed its share price fall from 340p in 2014 to 117p today. Ironically, the predicament the company finds itself in has led to speculation, which is being fuelled by a merciless short-selling campaign, that the company itself is now particularly vulnerable to a takeover. However, whilst these facts, figures, and opinions all point to a company in freefall, the reality may be much different.

A piece in today’s Independent discusses how, four year ago, the National Audit Office declared Carillion ‘too big to fail’ because, in effect, it had been allowed to attach itself to the very infrastructure that underpins British society – hospitals, transport, schools, and the military were all reliant upon Carillion to offer their services, for a price. Furthermore, the company is being woven into society even further despite its poor performance, with the contract for its involvement in the HS2 project being awarded just days after one of its most troublesome profit warnings earlier this year. The article in question asks whether knowledge of this arrangement affects the decision making in the firm, and in reality that is a question that need not be answered – knowledge that you are too big to fail has to have an impact upon decision making, whether knowingly or otherwise. Yet, the problem is representative of a much larger social issue, and that is political short-termism.

HS2 was George Osborne’s signature contribution to society, but he left shortly after championing it. Theresa May, now at the helm, is being bombarded with a number of crucial problems like the ever-stuttering Brexit negotiations; has she the capacity to tackle this growing systemic problem of PPP-providers being on the brink of failure? Quite frankly, the obvious answer is ‘no’, with the consequence of that being that to kick this problem further up the road when she will have left Office quickly becomes the best possible option. Companies like Carillion, that are interwoven within society, rely upon this political short-termism to survive and prosper, because for Carillion to fail now would be a problem the country simply cannot afford. So, yes, knowing that one is ‘too big to fail’ has an effect, and it has an effect of everyone.


Keywords – Construction, Carillion, Brexit, Business, Politics, Finance, @finregmatters.

Saudi Arabia Exposes itself to ‘Rating Addiction’

This very short commentary, the first of two posts today, reacts to the news that Standard & Poor’s (S&P), the world’s leading credit rating agency, is to open a branch in Riyadh, the capital of Saudi Arabia. Only very recently did we discuss the recent developments within Saudi Arabia here in Financial Regulation Matters and, as part of that push to reorganise under the ‘Vision 2030’ banner which is being developed by the Crown Prince, the oil-rich state is attempting to move into the financialised marketplace more; the effect of this will be remarkable for the growth of the country, but will also open it up to the iniquities of the marketplace that plague their Western colleagues; the parasitic emergence of S&P just before Saudi Aramco is floated and the country begins its move away from petro-dollars is no coincidence. The question, then, is what exactly is the country letting itself in for?

S&P received approval to locate to Riyadh this time last year, and plans are underway to bring the rating giant to the epicentre of Middle-Eastern prosperity. S&P Global Ratings President John Berisford was clear in his understanding of this when he stated that the Saudi regulator’s (the Capital Markets Authority - CMA) ‘ambitious enabling program presents significant opportunities for the country and investors alike’. The managing director also confirmed that as Saudi Arabia’s capital markets evolve with the changing strategy, there is ‘prime potential for greater debt issuance’ which creates a ‘significant opportunity for S&P’. However, the IMF’s suggestion that there is ‘hardly any liquidity [in Saudi Arabia] as most investors are of the buy and hold nature’ confirms that this move is not for the benefit of Saudi investors, but for international investors to flood the Saudi marketplace with investment. The obvious response to all of this is ‘so what?’ – it is to be expected that the private company seeks to take as much advantage of a new opportunity as possible; this is absolutely true. The real issue lays with the approach of the Saudi leadership.

Saudi Arabia’s push to move away from oil-dependency makes complete sense in light of the fact that the resource is a finite resource. Yet, what they are exposing themselves to in doing so is something which they have likely not encountered before. The mercenary nature of the large rating agencies means that the Saudis are introducing the perfect cocktail for financial ruin to their border, and further, by way of a clear thirst to encourage investment, and a regulatory framework that has no experience of dealing with these venal companies. The pressure the CMA will be under to allow the rating agency as much flexibility as it can with its methodologies, it approach and its compliance, will be considerable owing to the need for the turnaround to work. Then, further, as this author discusses in a forthcoming article and monograph, the country will be catapulted into a vicious cycle of what is known as ‘rating addiction’ whereby the agencies become systemically intertwined and, effectively, remove themselves from deterrent and punishment.

So, what may be the answer for the Saudis? The push to change direction is valid, but it must be done with great care, and in this particular field that does not appear to be the reality of the situation. The regulators are beckoning, even seducing these companies into the country whilst what they should be doing is developing the strongest framework possible, based upon foreign experience and assistance, so that their fragile social revolution is protected from the iniquities of the marketplace. There is a great risk for the Saudi leadership in constructing and executing this social revolution, and they would be minded to take great care when inviting the fox to the hen house.


Keywords – Saudi Arabia, Credit Rating Agencies, Business, Politics, Middle-East, Finance, @finregmatters

Thursday, 16 November 2017

Goldman Sachs’ Chief Raises the Issue of Referenda

In this post, the focus is on the issue of referenda, again, in the context of the British Electorate’s decision to secede from the European Union in 2016. We have looked at the issue of ‘Brexit’ on a number of occasions here in Financial Regulation Matters, for obvious reasons, but only really once from a systemic/theoretical viewpoint. Yet, in light of comments today from one of the most influential business leaders in the world, it is perhaps timely to revisit the issue once more and look more systematically at the issue of referenda and their effects.

In this modern world where direction is presented via a Tweet, Lloyd Blankfein, the CEO of Goldman Sachs, delivered a telling tweet earlier today that will surely have an effect upon development in the U.K. In his Tweet he stated that there was ‘lots of hand-wringing’ from CEOs regarding Brexit, and that with the Brexit decision being so ‘monumental and irreversible’, ‘why not make sure consensus [is] still there’? Effectively, Blankfein is asking why, with such an incredibly effectual decision, one capturing of consensus was and still is considered to be enough – and it is a good question to ask. As business seeks clarity whilst reorganising themselves in case that clarity never arrives, this raising of the ‘multiple referenda’ argument is worth focusing on, and we shall do that in continuation of the previous post in Financial Regulation Matters cited above. To begin with, the concept of multiple referenda is discussed in the Centennial to the Parliament Act 1911: The Manner and Form Fallacy article written by Professor Rivka Weill in 2012, and represents a good starting point. In the article Weill, citing Bruce Ackerman, states that one particular model for conducting referendums is to establish a multiple referenda model, whereby the referendums are ‘spaced years apart with constructed deliberation, on the same topic before recognising that the People have spoken’. Interestingly, Weill pairs this point with the fact that, as a rule (and certainly in the case of Brexit), referendums are not binding for a reason i.e. they are meant to be consultative. Ultimately, Weill discusses how, when writing in 2012, Britain is slowly developing into a nation that promotes the use of referendum to decide constitutional changes, and with 2016 having passed we can say safely that this is certainly the case; as Weill says, the referenda has become a favoured ‘tool of a popular sovereignty model’.

Yet, referenda do have a number of competing positive and negative elements to them. Setala mentions how whilst referenda can be seen as a direct threat to even the largest of majorities within a given nation, it is also the case that referenda can be viewed as an excellent vehicle for increasing the participation of citizens in key areas of constitutional politics, ultimately constituting a ‘step towards [the] further democratisation of societies’. It is also true, however, that the method with which the referendum is delivered is particularly influential, with overwhelmingly intense referendum campaigns leading, usually, to an ‘issue-based’ voting pattern; the EU referendum could certainly be described as intense. The inclusion of large and influential figures into the campaign, ranging from private donors like the infamous Arron Banks, to the whole spectrum of elite politicians, is representative of a long-standing mistrust in the efficiency, effectiveness, and legitimacy of referenda as a tool for democracy; Tierney discusses how, for many, referenda are merely a ‘democratic chimera, symbolising popular power when in reality direct democracy acts as a cover for elite manipulation’ (Tierney’s discussion of the usage of referenda by Napoleon Bonaparte to take control of the French State is illuminating).

With regards to Blankfein’s statement regarding a second referendum with respect to Brexit, there are perhaps three questions (amongst many others) which stand out. Firstly, should there be another referendum? There are perhaps two issues that relate to that, with the first being that for those who voted Leave and continue to support that decision, a changing of the parameters of the game (for want of a better word), could be incredibly impactful upon faith in the democratic system. The second issue is that the decision to leave was taken over a year ago, and the U.K. has triggered Article 50 – there have been a lot of decisions taken on the back of that announcement, and to undo that process could also be particularly impactful (particularly upon such a fragile society). Another issue would be the potential effect upon those who campaigned for Leave upon facts and figures that have been proven to be purposefully misleading (think the big red bus); would there be any repercussions? Yet, another perhaps larger question is why have another referendum anyway? If the concern is regarding the manipulation of democratic processes, then having another referendum means that there is just another opportunity to have the process manipulated. It goes without saying that lobbying forms would jump into action if even the weakest of second-referendum rumours began to develop. This point leads to the obvious point, and that is that the Leave/Remain referendum was simply not binding. The question then is why such a slender majority was considered enough to take such a monumental decision. Surely, and rationally, a simple majority was an inappropriate measure for action; to use the regulations governing companies for example, for the most influential of decisions that a company can take, a special resolution is often required i.e. more than ¾ must approve the decision for it to take effect – apparently, the direction of private companies is more sacrosanct than the direction of a country. Blankfein’s message is an interesting one, but unfortunately a safe one that only adds to the problems – he knows full well that his ‘idea’ is particularly late and will not be acted upon. The real question we need to ask is why the decision to act on such a slender majority was taken in the first place; regrettably, that is a question that has too many answers.


Keywords – Brexit, Politics, Referendum, Banking, Goldman Sachs, Constitution, democracy, @finregmatters.

Lessons from the “Paradise Papers” Leak

It has been nearly two weeks since the news broke that yet another offshore law firm’s accounts had been hacked and subsequently leaked. After the ‘Panama Papers’ scandal that broke in 2016, this latest leak – the so-called ‘Paradise Papers’ – has the capacity to engulf a large number of particularly influential and recognisable people. Yet, it is worth questioning a. what this leak actually portrays, b. what the effect of the leak may be, and c. what the leak tells us about the larger picture? To answer those questions, the following seeks to introduce the leak, and provide some context for the claims that are consistently emanating from it.

The so-called ‘Paradise Papers’ leak, which is the catchy title being given to the leak of documents from a Caribbean-based Law firm called Appleby (its ‘fiduciary’ arm is called ‘Estera’ after a recent management buyout), is the second-largest document data leak, with the so-called ‘Panama Papers’, derived from the Law firm Mossack Fonseca, holding that unfortunate honour of being the largest data leak on record (2.6 TB of files were released then, as opposed to 1.4TB from Appleby). However, some perspective is required within a world were sensationalism is currently the order of the day. So, firstly, what is the reality of offshore investing, and does that relate to these stories of, seemingly, widespread tax avoidance? Secondly, what can we take from these leaks with regards to the ‘bigger picture’?

Offshore investing, in very general terms and in order to provide a realism check, is legal. The ability to invest one’s funds offshore, traditionally in a small jurisdiction that does not have the most sophisticated regulatory structure, is noted as being a viable and useful investment strategy for a number of reasons. Whether it is to diversify one’s exposure to risk, to protect one’s assets from political variabilities (like war or political instability, for example), or to protect against market volatility, there are a number of benefits to investing offshore. However, ‘investing offshore’ masks a number of variances which really should be revealed: offshore investing may relate to an investment fund being ‘domiciled’ abroad, which is legal, but offshore investing is sometimes cited when people attempt to remove their income from tax authorities, which is not legal. Whilst some who are caught in the crosshairs of this latest scandals have not, necessarily, been accused of operating illegally, it is really the close connection between the business and political elite and these tax-avoiding schemes which is causing the scandal to have such an impact. Whilst allegations of illegality will likely be forthcoming, at the moment the focus is on both a. proximity between the scheme and the elite, and also b. the issue of declaration, as witnessed by the story enveloping Lord Ashcroft at the moment. Yet, the proximity-issue points to a much larger issue, and one which, rather regrettably, is difficult to paint in a positive manner.

The former British Prime Minister, David Cameron, once opined that tax avoidance – in relation to the comedian Jimmy Carr being outed as using an aggressive tax-avoidance scheme – is ‘morally wrong’, with his successor, Theresa May, vowing to combat tax-avoidance almost immediately after taking office. However, the first point to note is that it will be incredibly interesting to hear Theresa May’s responses to this latest leak, one which puts some of her Party’s most revered figures in the centre of the scandal (one doubts she will be as forthcoming this time – more on this below). The second point is more abstract; the absolutely incredible amount of people and corporations caught up in this scandal can only tell us one thing: tax avoidance, or at least doing everything possible to reduce one’s tax burden, is inherent within society (particularly, rather obviously, for those with large reserves of funds). This should not really be revelatory, but the response to the Paradise Papers suggests that maybe it is. This latest instance of proof that influential people systematically ‘game the system’ should be the spark that initiates deep-rooted reform of the market-centred society we live in, but one should be able to realise how fanciful that thought is when looking at the impact of the Panama Papers.

Yet, the development of a story that is just over 10 days old continues unabated, with more and more of the elite being linked to the scandal. Billionaires like Robert Kraft, sports stars turned celebrities like Gary Lineker, Lewis Hamilton, and performers like Shakira, Nicole Kidman and Madonna have all been caught up in the scandal to varying degrees. Furthermore, it was stated above that it would be interesting to hear of Theresa May’s views on the scandal, speaking from a British perspective, and that interest was only heightened today by the news that ‘Theresa May’s Husband has “serious questions to answer” on tax avoidance’; Business Insider leads with a story this evening that ‘investment advisors Capital Group, where Mr May is a relationship manager, used offshore law firm Appleby to arrange investments in tax havens’. Quite what Mr May does in his role as ‘relationship manager’ of a private equity firm, at the same time as being the Husband of the Prime Minister of the United Kingdom, is not quite revealed by the publication, but certainly adds another dimension to the unfolding scandal. Furthermore, it is probably more proof, if proof were needed, that tax evasion, tax avoidance, high finance and high politics are essentially all one and the same. Yet, a massive story published today regarding a ‘landmark study’ that links Conservative-driven austerity to over 120,000 deaths since 2010 that could have been avoided if wealth was not being systemically extracted from society – quite a time to break a story after the scandal that confirmed the widespread removal of private funds from national tax authorities. The report regarding the links between austerity and increased mortality rates will be covered in a future post, but for now it is enough to say that this Paradise Papers scandal should be garnering far more action, far more anger, and ultimately far more effectual change than it is doing; as to why that is, one must look to the system for answers.


Keywords – tax, Paradise Papers, Business, Politics, Celebrities, Finance, Law, Capitalism, @finregmatters

Tuesday, 14 November 2017

French Regulators Hit HSBC for €300 million for Tax Evasion, With More to Follow

Today’s short post serves to review the recent movements of French regulators aiming to crack down on large-scale tax evasion taking place in and through its jurisdiction. Le Parquet National Financier (PNF) are France’s largest financial regulator in terms of financial-based crime, so equivalent really to the Serious Fraud Office in the U.K., and we looked at their work recently here in Financial Regulation Matters with regards to their investigation of Airbus and its potential involvement in widespread bribery. Today, however, we will review their recent work with regards to tax evasion, which is particularly pertinent given the recent ‘Paradise Papers’ scandal which will be the focus of tomorrow’s post.

For HSBC, one of the world’s largest and most widespread banks, this specific problem today stems from the group’s Swiss Private bank arm, and relates specifically to claims that it helped wealthy clients evade taxes – it was claimed that more than €1.6 billion’s worth of assets were a part of the scheme. The scheme was uncovered and revealed by a ‘leaker’ – HervĂ© Falciani was convicted in absentia late last year for ‘aggravated industrial espionage’ – in 2009 by way of a seizure of a multitude of documents from his computer. The documents, we now know, were particularly damning, so much so that today HSBC ‘accepted the alleged facts of the case’ outright and has agreed to pay €300 million to settle the issue, which comes on top of an inconsequential £28 million fine from Swiss authorities for ‘organisational failings’ seems as tax evasion technically is not illegal in that country. Of course, the Bank is adamant that accepting the facts does not mean that the Bank is guilty of wrongdoing, which is the standard line, but it is unlikely that the other countries that have also initiated investigations based upon the ‘leak’ will be deterred by the refusal to accept guilt – in fact, it will likely be the opposite, with American, Spanish, Belgian and Argentinian authorities rumoured to be developing similar cases against the Bank. Yet, in reality, today’s news should come as no surprise, as HSBC is, unfortunately for them, beginning to become synonymous with this type of behaviour. In 2015 the British elements of the Bank came under pressure for their failings, and last year were considered fortunate to have escaped criminal prosecution from the HMRC regarding negligence over the monitoring of illegal activities. Also, in a previous post in Financial Regulation Matters in March this year, we looked at how the bank is consistently linked to these schemes, particularly in reference the ‘Global Laundromat’ scandal which has not really received the attention it surely deserves. Yet, whilst HSBC is synonymous with these aspects, the PNF are also focusing on another major player in the field: UBS.

In March, it was reported that the PNF were attempting to settle with UBS for more than €1 billion for the very same crime – assisting wealthy clients evade tax authorities. However, commentary at the time suggested that the figure was so high that UBS really had no choice but refuse to settle, with the consequence then being that the Bank was facing criminal charges which could see it fined up to €4.9 billion. This is an interesting development, because whilst UBS’ local rival Credit Suisse settled with US regulators for $2.5 billion in 2014 and UBS settled for only $780 million and a DPA (deferred prosecution agreement), it appears now that the PNF have UBS in their sights and are attempting to land a serious blow in the fight against tax evasion, which is to be welcomed. There has not been much development in this story of late, but this case and its obvious complexity may see the story drag on for a few more years at least –one thing is for sure, and that is the revelations stemming from this case could be particularly damaging for UBS.

Ultimately, the move by the PNF today signals an intent which is both required and timely. In conjunction with other efforts in Europe, the U.K., and the U.S., this push to use legal powers to bring criminal actors to account is welcomed, although the UBS case is probably of particular importance if it does conclude with a near €5 billion fine for UBS – the reason is that raising the bar will hopefully raise the bar for their regulatory counterparts across the world, so the illegal act of assisting in tax evasion can become a very costly business indeed. Whilst $300 million is small change for a Bank like HSBC, this can be seen as an aperitif for the big case against UBS, and on that basis we can say that today’s settlement represents somewhat of a success, particularly if other authorities begin to take action against HSBC like they are rumoured to be doing – these are interesting times for the regulation of tax evasion.


Keywords – HSBC, UBS, Tax Evasion, PNF, France, Banking, Switzerland, Fraud, Industrial Espionage, @finregmatters.