It was the summer of 2007 and I wanted to open a bank account. Passport and utility bill in hand, I went to my local HSBC branch. The staff scrutinised both items carefully, fixed me in the eye and declared that the utility bill was out of date.
I glared back at them, argued in vain and returned an hour later with a new bill and a sneaking admiration for a bank that appeared to take the “know your customer” regulations seriously.
Little did I know what was happening in other parts of HSBC. According to reports by The Guardian, BBC and other media outlets, when I was trudging home to find a more recent gas bill, clients of HSBC’s Swiss bank were enjoying more accommodating treatment.
Blatant tax dodgers were seemingly accepted as clients without question. There were also serious compliance problems, as we discovered in 2012, over drug dealers thought to have washed illegal proceeds through its Mexican business and shadowy figures who used the bank to circumvent US rules to prevent dealings with Iran and North Korea. HSBC paid a $1.9bn fine to US authorities to settle these matters.
HSBC’s travails from Acapulco to Zurich are a microcosm of the banking industry’s problems. Hot topics such as governance, the universal banking model, investor behaviour, shareholder value, management culpability and the emergence of tax as a political battleground are contained in HSBC’s Swiss and American misadventures.
Governance within universal banking is the central problem. HSBC says it is a different organisation now, and it certainly was not the only one involved in such matters — but these geographically diverse incidents illustrate the problems of managing a global bank. Business customs and cultures vary, a point HSBC used to make in its advertising.
Bringing staff together from diverse backgrounds to serve the needs of local markets while simultaneously adhering to head office’s minimum standards of behaviour is an immense management challenge. It requires the right tone from the top, rigorous enforcement and the right behavioural drivers, such as appropriate reward structures.
Even if you have put all this in place — which HSBC says it has — it is such a hard feat that investors will continue to price in the risk of regulatory sanctions when they evaluate universal banks.
This is ironic, since the pressure to cut corners comes from investors themselves. Maximum danger arises when top management is under pressure from shareholders to increase profits and dividends. These are the times when the wrong message can easily be passed down the reporting line, leading to corners being cut and managers looking the other way as they strive to meet targets. As Jack Welch, the former General Electric chief and sometime high priest of shareholder value, told the Financial Times in 2009: “Shareholder value is a result not a strategy.” Banks could do worse than to put that on their T-shirts.
The HSBC case also raises the question of how we judge the recently departed generation of UK bank chiefs. Few left with plaudits but developing events change how we evaluate them.
Compare, for example, the reputation of Bob Diamond — Barclays chief during the period in question and long the industry’s whipping boy — with HSBC’s senior management of the day. The former, for all Barclays’ faults, built the UK’s only globally credible investment bank and kept Barclays out of state ownership in the financial crisis. Despite these achievements, he had his collar felt by the Bank of England when Barclays paid $450m to UK and US authorities after admitting to having manipulated the Libor interest rate benchmark.
At the time, meanwhile, HSBC’s chiefs were widely praised for navigating the banking crisis. They accepted plaudits, and outgoing chairman Stephen Green was ennobled, while the company quietly flourished on the back of drug money and aggressive tax avoidance. History may come to reassess the batting order of these and other leaders.
There is one potentially important side effect of the latest scandal: the involvement of HSBC’s Swiss private bank in aiding and abetting what seems to have amounted, at the least, to aggressive tax avoidance will keep these issues high on the political agenda.
There are signs the balance between legitimate tax avoidance (as a duty to shareholders) and paying a fair tax bill (as a duty to society) is tipping towards the latter. In the UK, the Labour opposition is likely to make sure this remains a lively topic ahead of the general election in May. US President Barack Obama’s 2016 budget plan to tax offshore profits is also dividing along party lines.
We may yet hear more about Switzerland and its banking laws before these debates are settled.