Banking: US DOJ petitions court to order HSBC USA to disclose HSBC India records to IRS

The Department of Justice has filed a petition seeking leave to serve what is known as a "John Doe" summons on HSBC USA.

The whole purpose of a "John Doe" summons is to provide court authority for what is known as a "fishing expedition." A fishing expedition, in litigation, is where a party demands information without having sufficient knowledge or evidence to specify what information is sought.

Therefore the DoJ's case is simple: it suspects that US citizens hold bank accounts with HSBC India and that those accounts are used for, inter alia, tax evasion.

The DoJ has no direct authority over HSBC India. Further, HSBC is head-quartered in the UK. However, HSBC has operations in the USA and the DoJ alleges that HSBC India opened a "representative office" in the USA in the premises of HSBC's US operations in New York in 2002 and then a second representative office in 2007 in California.

The purpose, it is alleged, was to attract business from the USA's large population of NRIs - a term coined in India for "Non Resident Indians" and widely used across the financial sector.

Representative offices are used by all manner of banks around the world: they are not permitted to conduct banking business but merely to operate as introducers to their parent. In return for this "marketing office" function, representative offices are subject to a much lower regulatory burden than a branch or subsidiary. The DoJ alleges that the California office was opened "to make banking transactions more convenient for the NRI community based in California."

In June 2010, HSBC closed the representative offices. The DoJ argues that the accounts - which are held at HSBC India - remain accessible from the USA.

The DoJ's case arises, in part, from an indictment handed down in January this year against Vaibhav Dahake of Somerset, New Jersey in which he is charged with conspiracy to defraud the USA by "using undeclared accounts in the British Virgin Islands and at HSBC India. It is alleged that Vaibhav Dahake held undeclared overseas accounts from 2001 onwards. When the indictment was handed down, it was said that he had been assisted by an un-named UK based bank and rumours circulated that it was HSBC. There is little or no surprise there: US authorities have been targeting large foreign banks for some years and HSBC is known to be a prime target.

IRS Commissioner Douglas Shulman says “This summons request is focused on obtaining more information to help us determine if additional actions are needed."

The DoJ alleges that "employees of HSBC Holdings plc and its affiliates operating in the US assured Dahake that accounts maintained in India would not be reported to the IRS."

Further, the DoJ says "According to the petition documents, NRI clients have told IRS investigators that NRI representatives in the United States assured the clients that they could invest in accounts at HSBC India without paying U.S. income tax on interest earned on the accounts and that HSBC would not report the income earned on the HSBC India accounts to the IRS."

That is two separate issues: HSBC India is under no obligation to report the holdings of US Taxpayers to the US authorities. Therefore, if those comments are true, then there is no fault.

However, US Taxpayers have a duty to report their own overseas assets to the US authorities. If the allegations are true, then there is fault.

Which raises the question of jurisdiction. HSBC in the USA is not, even on the DoJ's case as presently disclosed, directly involved save as the provider of office premises and, presumably, technology services. If the DoJ's case is correct, then anyone who shares an office with a third party would automatically become liable for that third party's actions or, at least, subject to investigation including dealing with fishing expedition requests.

The DoJ says that "if approved, the John Doe summons would direct HSBC USA to produce records identifying U.S. taxpayers with accounts at HSBC India, many of whom are believed by the government to have hidden their accounts from the IRS."

In short, it would be an attempt to force the US operations of an international bank to obtain and disclose information relating to a sister company - over which it has no authority - and its customers.

In this way, the order sought is a significant extension of the orders in relation to UBS in which the accounts were handled by a US subsidiary of the Swiss bank and, therefore, there was direct lines of sight and authority within the bank.

One of the most active banks in marketing to the NRI sector is Citibank which has conducted an extensive marketing campaign specifically aimed at that business. The DoJ has not issued similar proceedings against Citibank.