HSBC Holdings PLC is moving to mollify federal authorities investigating how the banking industry has helped U.S. clients evade taxes.
The global banking giant is cutting ties with wealthy American clients who bank offshore, as U.S. prosecutors turn up the heat on the bank to produce information about account holders who may be evading taxes, people familiar with the matter say.
A spokeswoman said the global banking giant will "no longer offer wealth-management services to U.S. resident private clients from locations outside the U.S.," and that American clients "will be better served by our private banking teams in the United States." At issue are hundreds of clients with accounts totaling as much as $100 million, said a person familiar with the situation. U.S. clients need roughly $5 million in assets to qualify for an HSBC private-client account, another person familiar with the situation said.
The extraordinary move comes as the U.S. Justice Department and Internal Revenue Service intensify crackdowns on offshore tax evasion and look beyond the world of Swiss banking for institutions that might be providing places to hide money.
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HSBC wants U.S. clients to do their banking with the lender's U.S. staff.
HSBC is ending the practice of serving wealthy American residents from locations outside the U.S. as a way of cooperating with the U.S. and avoiding the fate of rivals that were fined or threatened with prosecution for assisting tax scofflaws, the people familiar with the matter say. The Justice Department declined to comment.
In a letter sent earlier this month to U.S. customers who have accounts with HSBC India, the bank said it is terminating "private banking services to US persons and certain trusts and non operating companies connected to US persons." Customers have 30 days to close their accounts, according to the letter.
HSBC has been under Justice Department scrutiny since earlier this year, when U.S. prosecutors alleged HSBC India had helped U.S. residents get around paying federal taxes.
HSBC's move to cut off wealthy U.S. clients represents a retreat for an institution that made a splash in the private-banking business in 1999 with the acquisition of Republic National Bank of New York. A new law taking effect in 2011 requires banks with U.S. taxpayers holding offshore accounts to meet stringent and expensive new reporting requirements.
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Bank Customers Face Tough Choices
An HSBC spokeswoman said a team of advisers "will help affected clients through the transition process."
HSBC's move could put its clients in a tough spot. It "presents a significant challenge for many investors and business executives, given the short notice of termination," said Brian Rowbotham, an international tax specialist in San Francisco.
The HSBC move comes amid much broader government scrutiny on tax evasion. In 2009, Swiss bank UBS AG admitted to conspiring to defraud the U.S. government of billions in taxes by helping wealthy Americans hide taxes. As part of a "deferred prosecution" agreement avoiding criminal charges, UBS turned over the names of 4,000 U.S. account holders and paid a $780 million fine for its role as part of a settlement between the U.S. and Swiss governments.
Credit Suisse Group AG said Friday that the Justice Department had notified the Swiss bank that it was a formal target of a criminal investigation into how Swiss institutions allegedly helped U.S. citizens avoid paying taxes. The bank said it was cooperating with the probe. Settlement talks between U.S. and Swiss governments aimed at resolving a wide-ranging U.S. investigation into the Swiss banking system are continuing.
In January, prosecutors indicted a New Jersey businessman on charges he conspired to evade U.S. taxes by hiding offshore accounts in India maintained by HSBC. He pleaded guilty. And in late June, a federal grand jury indicted an HSBC client living in Wisconsin for allegedly filing false tax returns and hiding more than $8.7 million in offshore accounts. The client, a neurosurgeon and a U.S. citizen, pleaded not guilty.
The Justice Department in April asked a San Francisco federal court to let the IRS serve a "John Doe" summons on the Indian unit of HSBC seeking information about possible tax fraud "by people whose identities are unknown." The status of the summons isn't clear.
Federal authorities asked HSBC India to send letters to customers encouraging them to come forward to the IRS, and HSBC has complied with that request via a separate set of letters, said people familiar with the situation. The IRS is offering reduced but still stiff penalties for U.S. taxpayers with secret offshore accounts who voluntarily report them, but that program is to end Aug. 31. The government said it believed "many" of these clients "have hidden their accounts from the IRS."
—Thomas Catan
contributed to this article.
Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com, Evan Perez at evan.perez@wsj.com and Laura Saunders at laura.saunders@wsj.com
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