What the HSBC Settlement Means for Taxpayers With Foreign Accounts

IRVINE, CA, December 19, 2012

Dubbed the largest collective settlement in the Treasury Department's history, HSBC Holdings agreed to pay $1.92 billion in fines to U.S. authorities. The penalty assessment was based upon HSBC's conduct in violation of the Bank Secrecy Act and other U.S. sanctions. It has been reported that the bank's breakdowns in anti-money laundering (AML) compliance was particularly egregious, specifically allowing hundreds of million of dollars from Mexican drug cartels to flow through accounts in the United States.

This penalty assessment does not merely flow from a single act but rather a systematic failure to implement and enforce protocols and compliance measures. The Financial Crimes Enforcement Network determined that HSBC: 1) lacked an effective anti-money laundering program reasonably designed to manage risks of money laundering and other illicit activity, 2) failed to conduct due diligence on certain foreign correspondent accounts, and 3) failed to detect and adequately report evidence of money laundering and other illicit activity. Examples of the above include for instance, despite information to the contrary the bank rated Mexico as having "standard" money laundering risk, the lowest of the bank's four possible country risk ratings. In addition the Bank's independent audit program repeatedly failed to effectively evaluate money-laundering vulnerabilities and grossly understaffed personnel required to monitor day-to-day compliance with Bank Secrecy Act requirements.

Foreign correspondent accounts are gateways to the U.S. financial system. As part of their anti-money laundering obligations, U.S. banks maintaining correspondent accounts in the United States for foreign financial institutions must subject the accounts and respondents to certain due diligence measures. HSBC violated this obligation by failing to collect or maintain required due diligence information regarding accounts held by HSBC Group affiliates that were foreign financial institutions.

To reach a fair result, in a deferred prosecution agreement with the Justice Department, the Bank acknowledged its failures and has agreed to take steps to fix the problems. The Bank will retain a compliance monitor and launch a global review of its "know your customer" files, which will cost an estimated $700 million over five years. Know your customer (KYC) refers to due diligence activities that financial institutions must perform to ascertain relevant information from their clients for the purpose of doing business with them. In the AML area, specialized software such as name analysis and risk scoring algorithm software are used to identify potentially suspicious or risky customer accounts, which create "alerts" then tapped for further investigation.

For persons with undisclosed foreign accounts, KYC procedures means the likelihood of discovery is all the greater. Once the IRS identifies an individual for investigation then the Offshore Voluntary Disclosure Program (OVDP) is no longer an option. Only through the OVDP is a person virtually shielded from criminal prosecution and the threat of incarceration. According to Senator Carl Levin, who led the Senate inquiry, "the HSBC settlement sends a powerful wakeup call." Increased transparency and intergovernmental cooperation is a priority with the rise of a global economy. This can be seen through bilateral agreements such as the adoption of the Foreign Account Tax Compliance Act (FATCA) between the United States and the UK, Denmark, and Mexico. Moreover, a premium is being placed on having the resources necessary to facilitate consistent information exchange when it comes to foreign account holders.

If you have unreported foreign accounts and fear that the IRS may soon learn of your activities the Tax Law Offices of David W. Klasing can help you get back into compliance and avoid the impending wrath of the IRS and state taxing authorities. The first step is to determine how severe a problem you have. It could be as simple as filing the missing FBARs and requesting penalty abatement for reasonable cause where all of the foreign income has been duly reported. Or as involved as filing 8 years of amended returns to report the foreign income, 8 years of FBAR's and then guiding you through making a Voluntary Disclosure to the criminal investigations division of the IRS.

To learn more or seek assistance see:
http://www.klasing-associates.com/Tax-Law/FBAR-Compliance-and-Disclosure.shtml

http://www.klasing-associates.com/FBAR-Compliance-and-Disclosure-FAQ/

http://www.klasing-associates.com/Tax-Law/Previous-Voluntary-Disclosure-Program.shtml

At the Tax Law Offices of David W. Klasing, attorney David Klasing offers the services of both a tax attorney and a CPA. Licensed as a lawyer in California and certified in public accounting, he provides businesses and individuals a wide spectrum of services in tax law, business law, estate planning and wills and trusts.

http://www.klasing-associates.com/