Oral evidence: Tax avoidance and evasion: HSBC, HC 1095
Oral evidence, 9 March 2015.
Witnesses
Stuart Gulliver, Chief Executive, HSBC Holdings plc, Chris Meares, former Group General Manager and CEO, HSBC Global Private Banking, and Rona Fairhead CBE, Independent non-executive Director, HSBC, gave evidence.
Chair
Welcome. Thank you very much for appearing in front of us this afternoon—you’re having a bit of a busy time. Can I start with you, Mr Gulliver? Just as a bit of background, you have a UK passport, don’t you?
Stuart Gulliver
Yes, I do.
Chair
Presumably, you own a property here in the UK.
Stuart Gulliver
Yes, I do.
Chair
And do you vote in UK elections?
Stuart Gulliver
I do.
Chair
Do you consider yourself a high net worth individual?
Stuart Gulliver
Since my compensation is a matter of public record in the annual report and accounts, of course I do.
Chair
Why do you call it compensation, not salary or income?
Stuart Gulliver
Pay.
Chair
Pay? I can’t think what you’re being compensated for. So you are a high net worth individual. You have been one for some time?
Stuart Gulliver
I have indeed, and I have been UK tax resident since 2003. I pay millions of pounds of tax to HMRC at the top rate each year, as I should.
Chair
Do you get advice on wealth management?
Stuart Gulliver
My tax returns are managed by a law firm. Since I am the CEO of a bank, most of my net worth is invested in HSBC’s stock, and the dividends on those shares, and any capital gains on those shares, are also taxed here in this country.
Chair
But you are clearly aware of advantages of banking offshore?
Stuart Gulliver
As a matter of record, I am Hong Kong domiciled, as you know, Madam Chair, so I clearly have overseas assets in Hong Kong.
Chair
And, indeed, you did take advantage of one of most secretive jurisdictions, Panama, which the OECD has said has the least protection anywhere in the world against money laundering?
Stuart Gulliver
As I have said before to the Treasury Select Committee, the reason for setting that Panamanian company up was to create privacy for me. It created no tax advantage and no financial advantage whatsoever. It was also 17 years ago, when I was resident and working in Hong Kong. That structure has since been changed. That account was moved into my own name in 2009, because in 2008 I became a main board director of HSBC and by definition at that point my compensation was a matter of public record. So it was set up for reasons of privacy and no nefarious reasons whatsoever. There was no tax advantage, in terms of either the UK or the Hong Kong tax authorities, from that structure. It was purely for privacy.
Chair
So are you asking us to believe that you did nothing other than receive money from HSBC? You made no use whatsoever of that account in Panama other than for receiving money from HSBC.
Stuart Gulliver
The account was in Switzerland, not in Panama. The structure’s a nominee structure and yes, I am saying to you that there was no tax evasion or tax avoidance from any Government anywhere in the world in that structure.
Chair
Right. You used Mossack Fonseca as the agent to help to set up your Panamanian enterprise—Worcester Equities Inc. Did you know at that time that Mossack Fonseca is also the agent to Rami Makhlouf, who is the bagman for Assad and the richest and most powerful business man in Syria, and that Mossack Fonseca also helped him to establish an entity, Drex, from where he funnels his ill-gotten gains and which is now on the EU sanctions list? Did you also know that two Zimbabwean companies were the clients of Mossack Fonseca and are now on the US sanctions list, including one Ridgepoint, which was owned by another bagman, this time to Mugabe? They are a well known provider of shell companies, and your directors in the company, from what I have seen at Companies House, are anonymous. Did you know all that?
Stuart Gulliver
No, I did not. I dealt with a relationship manager at the private bank in Switzerland, and at the time I opened the account it was actually the British Bank of the Middle East, not HSBC Republic. I dealt with the RM. I was completely unaware from whom the private bank sourced the company.
Chair
I’m surprised you weren’t aware, because of course HSBC Private Bank, from what we have seen in a number of the e-mails, used Mossack Fonseca to set up structures elsewhere, didn’t they, Mr Meares?
Chris Meares
If I could just mention that I took over as CEO of Group Private Banking in November 2006 and by that time HSBC had owned a couple of private banks in Switzerland for a long time. We had policies, procedures, all set up for that. When I took over, I became fully aware that the use of companies by Swiss private banks was quite common. A lot of customers asked for companies, for various reasons. I think all of the private banking industry in Switzerland were using companies.
Chair
All I want to establish at this point is that you regularly used Mossack Fonseca—or Mr Gulliver and other clients.
Chris Meares
I’m not aware that it was regularly them. I think they used lots of providers.
Chair
Okay. Can I just say this to you, Mr Gulliver, because I read the evidence that you gave last week in the Treasury Select Committee? We have established this afternoon you’re an Englishman. You have chosen to domicile in Hong Kong. You’re paid through Holland, which is a low-tax jurisdiction, into a secret bank account in Switzerland, set up for a company which is based in Panama and which is a shell company, with anonymous directors. And it’s set up for you by an agent who is presently being raided, as I understand it, by the Germans and whose clients include some of the most really vile and unsavoury characters in the world, from Syria and Zimbabwe. How can I, as an HSBC client, have confidence in somebody like you for me to use your bank?
Stuart Gulliver
None of the facts you have set out, Madam Chair, are correct. I am paid onshore in the UK, into a bank account in the UK. Tax is deducted by PAYE. I pay the full top rate of UK income tax on my global earnings for HSBC. The account in Switzerland was opened 17 years ago. It was actually changed into my own personal name. I am paid onshore in the UK and remain tax-resident in the UK. I stayed on in the UK when the board asked me to be group CEO, because actually I felt this was the right place to run HSBC from, because it’s in the right time zone. The group CEO’s office, at that point, was in Hong Kong. It would have been very straightforward for me to return home to Hong Kong, but I stayed here and remained UK tax resident for a further five years, so far, and therefore my personal tax arrangements were in no way put in front of the importance of serving HSBC. I am afraid that the characterisation you have just made is inaccurate. I am paid in the UK, onshore in the UK, and it is paid as a PAYE deduction. My shares in HSBC, and their dividends, are taxed in the UK. Any capital gains arising from anything I sell are taxed in the UK.
Chair
You are now taxed in the UK, but it is correct to say that you did have a shell company in Panama with no named directors—agents as directors—set up by Mossack Fonseca. None of that is incorrect, unless you are paying into a secret bank account but you are trying to get us to believe—I think it stretches the imagination a little—that there was no other reason for that than secrecy. You could have set up an account in a north of England building society if you had wanted secrecy. You didn’t have to have this intricate system.
Stuart Gulliver
Madam Chair, I was resident in Hong Kong and working in Hong Kong at the time.
Chair
I have no doubt that there is a good building society in Hong Kong, too.
Stuart Gulliver
These funds were after deduction of tax owed to the Hong Kong Government. That is not the arrangement today. It was 17 years ago. I have been UK tax resident since 2003.
Stephen Phillips
In evidence to the Treasury Select Committee last week, your own chairman accepted that these arrangements, although they may well have been put in place 17 years ago and are no longer used, have caused reputational damage to the bank. Would you agree with that?
Stuart Gulliver
I would say that my inability to convince anyone that these arrangements were not put in place for reasons of tax evasion has clearly caused reputational damage to the bank, but the fact is that I comply with the tax laws.
Stephen Phillips
So the answer to my question is that, yes, you agree that the emergence of these arrangements, by which you were previously paid through a Panamanian company with a private account in Switzerland, has led to reputational damage to the bank. Do you agree?
Stuart Gulliver
I would say that the innuendo with which the media has covered this has, yes.
Stephen Phillips
Mr Gulliver, we will get on a lot faster if you give a straight answer to a straight question. Do you agree with me that it has caused reputational damage to the bank?
Stuart Gulliver
I would agree with you that it has caused reputational damage to the bank in some quarters, yes.
Stephen Phillips
Are you the appropriate person in those circumstances to remain as the chief executive officer of HSBC?
Stuart Gulliver
I believe I am because my tax affairs are in order, and I have carried out widespread root-and-branch reforms to HSBC in the five years that I have been group CEO, which is also a matter of record. In terms of actually tightening HSBC, making it a simpler business, making it a business that actually follows the highest standards of money laundering controls, knowing our customers and tax transparency, substantial root-and-branch reforms have taken place. If you look at the track record of what I have done, I would argue that I am.
Stephen Phillips
I am not questioning your track record in any way—I am not in a position to do that. You have accepted, and it is the case, that reputational damage has been caused to the bank. Wouldn’t the sensible thing for the board be to ask you to stand aside and place someone in your position who is above reproach?
Stuart Gulliver
I think that is a matter for the board and the shareholders. It is not for me to comment. I am committed to finishing what I began five years ago in a firm that I have served for 35 years and that I believe has 257,000 excellent colleagues, whom I am proud to lead. It is a 150-year-old global British company, and I would like the chance to finish what I have started. It is for the board and the regulators to decide.
Stephen Phillips
I have one final question on Panama. You wanted to keep your affairs private from your colleagues. Your compensation, pay, remuneration, or whatever you want to call it, was not a matter of public record. That is your explanation. Why pick to be paid through a company incorporated in Panama, which has been known since the 1970s as a jurisdiction where you cannot know the beneficial ownership of companies that are incorporated there? Why not pick some other jurisdiction? Who told you that Panama was a good idea? It seems to me to have been a terrible idea.
Stuart Gulliver
With the benefit of hindsight, it clearly looks that way, but at the time I dealt with the RM—this was 17 years ago and I was a fairly junior member of staff in Hong Kong, but I was being paid a level of compensation about which I wanted some privacy. I did not select Panama.
Stephen Phillips
You obviously did select Panama. You might have done it on somebody else’s advice, but you did select Panama, Mr Gulliver, didn’t you?
Stuart Gulliver
Well, clearly, yes.
Stephen Phillips
What other options were you given at the time? Liberia?
Stuart Gulliver
I have no recollection, from 17 years ago, of the menu of choices.
Stephen Phillips
But the documents must exist, presumably. You must have retained them for tax purposes.
Stuart Gulliver
The documents showing what other choices there were? I don’t think there would be such things.
Stephen Phillips
Yes, the documents showing the offer that was made to you in order to keep this bank account secret: “Here are the options that are available to you.” Do you not keep documents from 17 years ago giving you advice in relation to your tax affairs?
Stuart Gulliver
I have documents in relation to my tax affairs, but not the choice of the nominee structure that was put in place.
Chair
Can I just have a bit of clarity? You were fairly junior—how much did you put into the Panama account?
Stuart Gulliver
I think that The Guardian have the number: it was $7.5 million.
Chair
For a very junior person in HSBC, that stretches my credulity, unless I am completely out of an understanding of salaries rather than compensation—$7.5 million seems a hefty sum.
Stuart Gulliver
Sure, I would agree, but I have served the company for 35 years. At that point, I had been in the firm for 17 or 18 years.
Chair
Okay, let me go to Mr Meares. The other week, at the Treasury Committee, Mr Flint said: “I believe in personal accountability and I do believe people should be held responsible for what they have direct oversight over when they have failed, yes”. Mr Ruffley then asked about Mr Meares and Mr Bannister, the heads of the Swiss private bank, and whether those two individuals should be held responsible. Mr Flint said that they “certainly bear fairly direct responsibility for what went on in the private bank during their stewardship, yes”. You are getting shafted. Do you want to tell us anything about that?
Chris Meares
Thank you, I will. Obviously there were a few responses at the Treasury Select in between those various questions. What the chairman quite clearly said is that both Bannister and I were at times heads of the global private bank, not Switzerland. He made that point. We were global heads, based in that—
Chair
Hang on a minute, within your responsibility was the private bank. Let’s get that clear. In the structure, the private bank was answerable to you.
Chris Meares
Absolutely. I was sitting in London, responsible for private banking in 90 different locations around the world. Switzerland was one of those.
Stephen Phillips
In terms of revenue generated, it was by far the largest, wasn’t it Mr Meares? It was 2% of HSBC’s entire profit at that stage.
Chris Meares
Switzerland was about 30% of the private bank.
Chair
But it was a large part of the increase in profits.
Chris Meares
Yes. To be clear, it was a global role. I did not spend my whole time in Switzerland. In fact, I probably spent about 20% of my time there.[1]
Mr Burrowes
But were you responsible for it?
Chris Meares
I had responsibility for supervising the Swiss bank. I was not the day-to-day manager.
Mr Burrowes
Were you personally accountable for what happened?
Chris Meares
I was not personally accountable for the individual actions of the individuals in Switzerland, but I absolutely—
Mr Burrowes
So you disagree with Mr Flint, do you?
Chris Meares
But I absolutely share responsibility for the events if any of these reported practices happened on my watch, and for what happened on my watch.
Chair
Mr Meares, let me quote to you again what was said at the Treasury Committee. It is not shared responsibility. There seems to be a lot of sharing and nobody taking individual responsibility. I am giving you the opportunity to have your say here, at this Committee. What was said at the Treasury Committee is that you bear “fairly direct responsibility”—not shared responsibility—“for what went on in the private bank”. Is that true? Are you responsible?
Chris Meares
I had responsibility for global private banking and any control failings that happened during the time that I was running the private bank, which was from the end of 2006 to 2011.
Stephen Hammond
Do you accept that these are control failings?
Chris Meares
I have been retired for three and a half years, and I am relying largely on some reports in the press, but I believe that these were control failings. The bank had acquired—
Chair
What do you mean by control failings?
Chris Meares
Well, the bank had acquired the Swiss bank in 1999. It had been run for seven years before I actually took the global role. As part of running that bank, we put in policies, procedures, manuals, systems—we put the whole risk framework into place and we improved it over time. I think what happened was that none of this activity that has been reported was picked up by our systems. None of it was picked up and flagged to me, sitting in London, to say that we had an issue.
Chair
Okay, we’ll go through this a little bit. I am going to give you one more chance, because Mr Gulliver and his colleague Mr Flint were saying the other week that you are the fall guy. Are you saying to us this afternoon that you are the fall guy—that you accept direct responsibility—or are you hiding, in the same way as Mr Gulliver and Mr Flint, and others, are doing: that it is collective responsibility and you are not individually responsible? I am really giving you the opportunity for you to defend yourself, Mr Meares. It is a great opportunity.
Chris Meares
Thank you very much. I think I already said, just in responding to the last question, that I absolutely take responsibility for the control failings that may have happened during my period of being CEO of group private banking.
Chair
Personally.
Chris Meares
I was in that personal role, so I take—
Chair
Do you accept personal responsibility?
Chris Meares
So I take responsibility for control failings that may have happened—you have got to be aware that I am not aware of most of these events that were reported in the press.
Mr Burrowes
Mr Flint said they—meaning you and others—“certainly bear fairly direct responsibility for what went on in the private bank during their stewardship.” Do you agree?
Chris Meares
I think I have responded to that question.
Mr Burrowes
So do you agree?
Chris Meares
I have responded. I have said—
Mr Burrowes
This particular question is whether you agree with Mr Flint that you bear fairly direct responsibility for what went on in the private bank during your stewardship.
Chris Meares
I have already said, I think, that I—
Mr Burrowes
Can you answer my question? Do you agree with that?
Chris Meares
I have said that I take responsibility—
Mr Burrowes
No, no. I am asking you particularly. Do you bear fairly direct responsibility for what went on in the private bank during your stewardship? Yes or no?
Chris Meares
I think I have answered that question.
Mr Burrowes
Please say it again. I may have got it wrong.
Chris Meares
I will say it again. I take responsibility for what happened during that period.
Mr Burrowes
Once again, do you bear fairly direct responsibility for what went on in the private bank during your stewardship? Yes or no.
Chris Meares
Fairly direct. Am I not taking more than fairly direct responsibility? I am taking responsibility for control failings that happened.
Mr Burrowes
I am doing you an injustice. Avoiding the issue of “fairly”, do you take direct responsibility for what went on in the private bank during your stewardship? Yes or no?
Chris Meares
I take responsibility for the control failings that happened—
Mr Burrowes
Yes or no? I need you to say yes or no.
Chris Meares
I do not really see the—
Mr Burrowes
It is my job to ask the question and you can answer. So I am asking the question do you accept direct responsibility for what went on in the private bank during your stewardship?
Chris Meares
I take fairly direct responsibility for what happened in global private banking during my stewardship. I do not—
Chair
Mr Meares, just say yes or no. I think that would really help our proceedings. We are stuck here. Either yes or no.
Chris Meares
I think I used exactly the words you said, but it has to be taken into context, in that I was running the global private bank. I do not take fairly direct responsibility for the individual actions of people in Switzerland that I was not aware of what they were up to.
Stephen Hammond
Who was responsible? If you were the global head—the global CEO—of private banking, and you take responsibility for what happened on your watch, but you do not take responsibility for what people were doing in Switzerland, who actually does take responsibility?
Chris Meares
I think, with all due respect, what happened was that the chairman actually said at the Treasury Select Committee that the group operated in a very federated structure, so the answer to that—
Chair
I am going to interrupt you. We want to come back to this. We are giving you a final opportunity to answer Mr Burrowes’s question.
Chris Meares
I thought I answered it.
Mr Burrowes
Do you accept that you bear direct responsibility for what went on in the private bank during your stewardship?
Chair
Yes or no.
Chris Meares
The answer is no, I do not take fairly direct responsibility for what happened in the Swiss bank at the individual account level, but I take responsibility for what happened at the global level.
Mr Burrowes
Again, what was accepted by Mr Flint: do you accept “personal accountability”, that “people should be held responsible”—he is referring to you”—when “they have direct oversight over when they have failed”?
Chris Meares
Sorry, Mr Burrowes, could you repeat that question?
Mr Burrowes
Mr Flint said, “I believe in personal accountability”. I assume you do as well. He said “I do believe people should be held responsible for what they have direct oversight over when they have failed.” He was then asked whether “Mr Meares and Mr Bannister were the heads of the Swiss private bank.” He said: “The head of group private banking globally, much more than just Switzerland.” In other words, he was making the point that people should be held responsible when they have direct oversight over when they failed. You were in the position of having direct oversight. Do you agree?
Chris Meares
To answer that question, I took responsibility for the oversight of control failings, absolutely. What I will not do—you used the word accountability. What I was not accountable for were some of the individual actions in the Swiss bank that I was wholly unaware of at that time.
Chair
We will come back to your awareness.
Mr Burrowes
During your stewardship of the Swiss bank, were you aware of any hint that tax evasion was going on?
Chris Meares
During my stewardship—
Chair
Why don’t you just say yes or no?
Mr Burrowes
Did you get any hint of any tax evasion?
Chris Meares
No. It was quite clear. We had a clear policy that tax evasion is illegal.
Chair
So you didn’t know that tax evasion was going on?
Chris Meares
We had quite a clear policy that tax evasion is illegal.
Mr Burrowes
I’m fine on the policy, but I am asking you whether you, directly, had any hint of tax evasion under your watch of Swiss HSBC.
Chris Meares
No. When I took over, nothing was flagged up in that respect. When I got to learn about UK tax issues in the private bank, it was in 2010, when HMRC met the bank.
Mr Burrowes
Okay. So when Swiss bankers were routinely handing over large sums of cash to visiting clients, were you aware of that?
Chris Meares
I wasn’t.
Mr Burrowes
You were not aware of that at all. Were you aware of any marketing of tax avoidance strategies to wealthy clients?
Chris Meares
I was not aware of those marketing strategies.
Mr Burrowes
Were you aware in 2005 of the proactive contacting of clients to suggest ways of avoiding a new tax levied on Swiss savings accounts?
Stephen Phillips
I hope Mr Burrowes will forgive me—he asked whether you were aware that the Swiss private bank, and no doubt other private banks as well, were marketing tax avoidance schemes to HSBC clients. The answer to that must be yes, surely. You were aware that they were marketing avoidance schemes, because those are not illegal.
Chris Meares
Avoidance schemes, sorry. But actually, the Swiss private bank and HSBC were not—I don’t think the Swiss private bank was marketing a scheme.
Mr Burrowes
You don’t think so or you don’t know? I am not asking for your interpretation of a scheme.
Chris Meares
Your follow-up question was about 2005. Just to be clear, I was not running the private bank in 2005. That all predated my time.
Mr Burrowes
During your watch, then, were you aware of any marketing of tax avoidance strategies or schemes?
Chris Meares
I am aware, because there was something that has been talked about as being tax avoidance that is in the UK, where the UK private bank was involved in some film finance schemes.
Mr Burrowes
I appreciate that those were film investment ones.
Chris Meares
And that has been found to be a tax avoidance scheme, so the answer to that question is yes.
Mr Burrowes
Was that during your watch?
Chris Meares
That was during my watch.
Mr Burrowes
When you came before the Treasury Select Committee in 2008, you were asked various questions by Mr Thurso. You said that if you got “any hint that there is tax evasion,” you would deal with it, and: “We prohibit our bankers from encouraging or being involved in tax evasion.” Do you stand by that statement?
Chris Meares
Correct, I stand by that statement. That was a truthful statement.
Chair
We will come back to that.
Dame Anne McGuire
Can I bring you back to your comment about control failures? Was the system of hold-mail accounts a control failure?
Chris Meares
Not at the time.
Dame Anne McGuire
Perhaps, just for the record, you could explain what you understand a hold-mail account to be, so that we share the understanding.
Chris Meares
When I became involved as the global head of private banking at the end of 2006, hold-mail accounts had existed in the Swiss private banking industry for many, many years. The Swiss private bank provided hold-mail accounts. In some other parts of the world, hold mail was provided, and in some parts it was not. It was a service that some clients asked for and received.
Dame Anne McGuire
Right. What would you think was the purpose of a client wanting to have that service? Once they lodged money in a private bank, they did not want any communication with that organisation or to know how their money was doing. It was quite literally—well, not literally—a Chinese wall between them and part of their wealth. What is the purpose of that?
Chris Meares
My understanding of hold mail was that it was there, or could have been there, for a variety of reasons.
Dame Anne McGuire
Give us a hint about what sort of—
Chris Meares
So it was about confidentiality and security. A lot of these people were worried about their wealth being known and kidnapping. A lot of people had multiple homes so they were not always going to be present at the home that the mail may be delivered to, and they may have gone to pick up the mail when they went to Switzerland or another place.
Dame Anne McGuire
But it was not just about picking up mail was it? It was about picking up bits of money as well.
Chris Meares
I am not aware of those individual—I was supervising the private bank in the UK and I was not aware of any of those individual actions that clients may take.
Dame Anne McGuire
Do you think that a hold-mail account, as well as all those other quite creditable reasons that you put before the Committee today, could be used as a vehicle to avoid or evade tax?
Chris Meares
I don’t know. But in hindsight, what the group has changed, in changing many of the procedures is, it has now stopped that as a practice and a service.
Dame Anne McGuire
Maybe this is a question for Mr Gulliver: when did HSBC stop the hold-mail accounts?
Stuart Gulliver
The review started in 2012 and finished in 2013. There were 14,868 clients with hold-mail in the Swiss bank. There are now 12.
Dame Anne McGuire
12,000 or 12?
Stuart Gulliver
12. It went from 14,868 to 12.
Dame Anne McGuire
So why did it take you so long to stop the hold-mail accounts?
Stuart Gulliver
We started a big root and branch reform of the private bank in 2011. We have done a tax transparency review of all the clients, the hold mail, bearer shares, asset under management, and use of external asset managers. There has been a significant reform and it is a multi-year process.
Dame Anne McGuire
Why did it take you so long to get rid of the hold-mail accounts for all but 12 of your clients? Was it the fact that some of the information was in the public domain and causing, as Mr Phillips suggested, reputational damage to your bank?
Stuart Gulliver
I started to change HSBC when I became Group CEO. The trigger was the money laundering events in Mexico, which said to me that the loose federal structure that we had had and some of the businesses that were taking place were no longer fit for purpose. We needed to change the way the firm was run. The work that was done in the private bank was part and parcel of that. A vast array of activities, of which this was one, was taking place across the group. The data theft itself was not the trigger. It was the realisation that, having grown exponentially in the 2000s by acquisition, the DNA and culture of the firm had been diluted. We needed to change to a unitary model and centralise control.
Dame Anne McGuire
Can I ask you the same questions that I asked Mr Meares? Do you think that one of the reasons for hold-mail accounts was to evade or avoid tax?
Stuart Gulliver
That is why we have stopped it. Yes, I do believe—
Dame Anne McGuire
You did think that it was?
Stuart Gulliver
I would agree that there is a higher probability that hold mail indicates areas of concern that we, as a bank, should take note of. Therefore, we have significantly—we have gone from 14,868 to 12. The 12 have all got valid reasons, most of which are because they are very old actually.
Sir Amyas Morse
Just to clarify a bit on the acquisition of lots of banks, if I may? Presumably, when HSBC acquired those banks, you must have carried out very thorough due diligence. I imagine that must be so. You must have understood the nature of the business, what services they offered and what risks were inherent. I mean, you would not just buy them without knowing, surely, what you were buying and what risks you were bringing to the group. I find that hard to believe.
Stuart Gulliver
First, I was not on the board at the time that the acquisitions were made, but—
Sir Amyas Morse
I am just asking for information.
Stuart Gulliver
Of course. The amount of due diligence that you can carry out on a listed bank is actually quite limited. If it is a listed company, all its data are meant to be in the fact that it does half-yearly, quarterly or annual reporting to a stock exchange. All the banks we acquired were regulated by top-notch regulators, had their accounts done by one of the big four and were all listed, so the amount of due diligence that you could carry out at a customer level was incredibly limited. One of the shortfalls of banks buying banks is you on-board the previous owner’s anti-money laundering and “know your customer” deficiencies. The other thing I think it would be fair to say is that all these acquisitions then ran into the largest financial crisis since the 1930s. You are right that there was a due diligence, but it is quite limited when it is a publicly listed company.
Sir Amyas Morse
Just to follow on, when you were making your case for acquiring these banks, would I be right in thinking that you had in mind synergistic opportunities that would come from having wider coverage? There must have been a reason why you bought them; presumably there was a business opportunity there.
Stuart Gulliver
Again, we are looking back at history and it is difficult for me to speak as of that moment. But yes, absolutely—these acquisitions took place after the Asian financial crisis. To be fair to the chairman and CEO of the day, they were looking to diversify away from HSBC being over-exposed to Asia. So there was a series of acquisitions—Household, Republic, Bital in Mexico, etc.—that were about shifting the focus from having over-exposure to Asia. So there was a diversification strategy, in addition to which some other investments were made in mainland China at that point in time, into Ping An and Bank of Communications; they were absolutely done for business reasons. The thinking behind Republic was that in Asia-Pacific there was tremendous wealth creation, and therefore purchasing a leading private bank, which Republic was at the time, would make sense. Also, Republic had a domestic US business, mainly in the north-east of the country, particularly a branch network in Manhattan, which would enhance our commercial banking activities within the USA. So, absolutely, there was a logical business reason for doing these deals.
Chair
The way you do business, if you have a big corporate and you know there are some individuals of high net worth sitting at the top of that corporate structure, you will try to entice them in to be your customers, won’t you? That would be a sensible marketing thing for you to undertake.
Stuart Gulliver
That is actually what we have turned the private banking business back to. You are probably aware that we have gone from 30,000 accounts in Swizterland to 10,000, and what we are attempting to do is move things back so that most of the customers in our private bank should already bank with us, either as big companies—as you say, the chief executive, chairman, chief financial officer—or they are entrepreneurs who have built up an SME and then list it, IPO it, trade-sell it, because then you have your “know your customer” and anti-money laundering detail, as you will have banked them for 25 years. That was always the Asian private banking model. The difference was the shift when we bought Republic.
Stephen Phillips
If one goes back to 2010, are you saying that at that stage the private bank, particularly in Switzerland, was not interested in attracting individuals of high net worth in order that it could also obtain, for other parts of the bank, their corporate business too?
Stuart Gulliver
I would say that the bank was a loose federation and that that was unlikely to be as prevalent as it is today.
Chair
But it would be a reason, would it not, Mr Gulliver? It must have been.
Stuart Gulliver
Oh, yes. The reason for owning a private bank is to get the vertical integration. This will sound terribly full of jargon, but there is the value creation; if you bank SMEs, you bank big companies and pick up their private wealth too.
Stephen Phillips
As a result of which, does it not beggar belief that nobody outside the private bank in Switzerland knew the unlawful activities that were going on in Switzerland on behalf of these individuals of high net worth, who have been attracted in and whose companies are banking with other parts of HSBC and are having other HSBC services?
Stuart Gulliver
No. The point I have just made is that, post-2010 for the Swiss private bank, we began to run it on the same model as the rest of the group, which is as you described.
Chair
And pre-2010, there was no activity? I can’t believe it; it’s such an obvious link. It’s a pretty basic principle, isn’t it?
Stuart Gulliver
Of course, and as you can see from what we’ve done in the last five years, we are now running the private bank as a completely integrated part of HSBC. And we are going from 150 countries, where there were private banking clients, down to 38, which are 38 in which we have large commercial banks. So, yes, it is being managed the way you would have imagine it always should have been managed, but it is now.
Chair
But I cannot believe that pre-2010 there was no synergy between your private banking for high net-worth individuals and your corporate banking. It may not have been as efficient as it is now, but there must have been a synergy, which means that you must have known in the UK what that was.
Mr Burrowes
Mr Meares is desperate to come in. You were part of that loose federal—
Chris Meares
I will answer that question. I think the important distinction here is that we did not know, if we were sitting in London and an individual chose not to tell us, that they had a private Swiss bank account. We would not learn of that fact, because the Swiss management and the Swiss relationship managers had a very strict confidentiality and secrecy rule. So if I met somebody who said, “I’ve got an account with your bank in Switzerland,” I would be aware that they had a Swiss bank account. I was sitting in the UK, and I full well know the—
Chair
With respect, Mr Meares, that is not what we are asking. What we are asking is this. I would have thought it standard banking practice that if you have a corporate client, you will want to try to attract the people at the top of that corporate client—the high-net-worth individuals—to be your private clients. That builds a much stronger relationship. What you are asking us to believe is that you only started doing that after 2010.
Chris Meares
No, we did do it.
Stuart Gulliver
In Hong Kong, Singapore and London, that is exactly what we were doing; in Switzerland, less so.
Q86Chair
But you were perhaps encouraging British corporate—
Stuart Gulliver
I do not know the extent to which we were doing it, but I can tell you now, today, that we are—
Mr Burrowes
Mr Meares will know.
Chris Meares
Certainly, between 2006 and 2011, if a corporate customer of the UK bank said, “I would like a Swiss bank account for all these various reasons,” then I would know. There were maybe a few who told me in the whole of that time that they had one, or that we had been involved. So I would know because they had told me, and I would also know that it was my duty, if I had—
Stephen Phillips
Forgive me, Mr Meares. The relationship managers for those corporate clients will naturally be talking to natural persons—to individuals—at the top of those corporate clients. One of the things that they will be saying is, “We”—that is, HSBC, a global group of banking solution companies—“can also help you with your personal banking and in dealing with your tax affairs, and I can put you in touch with people in the private bank in Switzerland, Jersey and Guernsey who can help with that.” Some executives at the top of HSBC’s corporate clients must have taken advantage of that, yes?
Chris Meares
No, not necessarily. But we did not give advice on their tax affairs.
Stephen Phillips
I want to come back to Mr Gulliver. The trouble, Mr Gulliver, is that you, by which I mean the organisation HSBC, are asking this Committee, as indeed HSBC asked the Treasury Committee, to accept that Switzerland was off on a frolic of its own and that nobody in London knew what was going on. The difficulty that we have with that—at least, I have, in my own mind—is that I cannot believe that nobody knew about the unlawful actions that were taking place in Switzerland. If they didn’t know, they jolly well should have done. What we have essentially got, it seems to me, is blind-eye knowledge: holding the telescope to the blind eye so that you in London didn’t see what you suspected was going on in Switzerland. What is your answer to that?
Stuart Gulliver
I can only comment for the time I have been group chief executive, which is since—
Stephen Phillips
You were on the board before that.
Stuart Gulliver
The holdings board would know, through the audit committees and the risk committees at a very high level, the activities of the private banking business. I did not have executive responsibility for private banking. I was running global banking and markets.
Chair
Did you know, Ms Fairhead? You were on the audit committee, and your attendance was very good; you missed one meeting. Did you know?
Rona Fairhead
No, we did not. We would have—
Chair
Why didn’t you know?
Rona Fairhead
As you can imagine, I have gone through all the audit committees and I have gone through the board, and it was a question of whether any evidence was brought to our committee of the practices that we are now talking about. The answer is absolutely no. I look at the oversight. If you look at the role of the audit committee and the board, we are in an oversight role—we are not executives—but what we have to make sure is that there are clear policies in place. Pretty much from the moment I arrived at the bank—so early 2005—we demanded a tax policy framework which basically said, “It’s about the substance, not the letter, of the law.” So we looked at the policies we had in place, and we were assured that those were best in class. We looked at what we had in terms of oversight and management. We had management on the ground. The head of the Swiss bank was on the ground. Above that person was the group private bank, and above that was obviously the executive.
Chair
Where was Mr Meares? Do you hold Mr Meares responsible?
Rona Fairhead
Can I go where I think the responsibility lies? I think, first and foremost, that the people who are most culpable are those people who evade taxes. I think that is where the illegality happens, and they are the most culpable. I also hold accountable the front line, who were breaching the policies of the bank. We had clear policies in place, and if they breached those policies I held them accountable. I also hold accountable the management in-country the most, because they should have created a control environment. As you move up—you are shaking your head, but honestly—
Chair
I just think, you are getting paid £10,000 a day, but I don’t know what you do for it.
Rona Fairhead
I don’t recognise that number. We can go to that at another point. That is not—
Chair
Well, it’s true, isn’t it?
Rona Fairhead
No, it’s absolutely not true.
Chair
Well, you get £500,000—
Rona Fairhead
Do you want to go to that, or shall I talk about the oversight? We, as an organisation, have very clear oversight. We accept that there is a conduct issue here and that people were breaching policy, but we would expect management to be in place to make sure that those policies were complied with. When we go into responsibility, we have a public process whereby the remuneration committee of the bank will look at what has happened. The further that you go away from the actual event itself—you have to accept that there is a proximity point. We will withhold payment to people who we think have accountability. We have done that in the past, even if there is no direct—
Mr Jackson
Can we get back to the substance, please, rather than this panacea?
Rona Fairhead
I am sorry; this is the substance.
Mr Jackson
Can I ask you a specific question? Did you sign off bonus payments in this part of the bank?
Rona Fairhead
The remuneration committee signed off bonus payments. They signed off bonus payments after input from the audit committee. We currently have a financial systems vulnerability, which is trying to identify bad actors outside that might harm the bank, and the risk committee, to make sure that any of these control breaches are taken into account.
Mr Jackson
Okay. Can I ask you this specifically? I know Mr Hammond wants to get in. In the presentation to the investors and analysts of HSBC Holdings in 2007, there was a very interesting document entitled “Profit by Country”. There is a reference on the second page to Switzerland. It says that the “24% increase in pre-tax profit reflected strong…performance in Switzerland and growth in Asia.” That is the first time Switzerland is specifically mentioned. It says that the increase between 2006 and 2007 in gross profits in dollars is 56%, from $305 million to $475 million. My question is this. Surely, if you are looking at bonuses relating to the executives involved in that part of the business, you would be questioning the veracity of that and how that profit came about.
Rona Fairhead
Absolutely.
Mr Jackson
You were not.
Rona Fairhead
Yes, we would be. We would be looking at the underlying growth of that. We now have incentive plans that have a longer period of pay-out, which I think is appropriate and correct. In those cases, we would look at how genuine—
Mr Jackson
We are talking about 2007.
Rona Fairhead
We are looking at 2007; I know that. That would be looked at. At the audit committee, we used a report that was created by one of the US regulators, called the red flags review—I think it was back in 2003-04—which talked about red flags to watch out for. One was growth that was unexpected, so the growth had to be explained, as to why that growth was more than the market growth. On the issue of the presentation, the amalgamation of these disparate private banks into HSBC, with the control systems that we put in place and the customer relationships that we had, justified higher growth.
Mr Jackson
So you asked the question, “Why did you have a 56% rise from $305 million to $475 million?”
Rona Fairhead
We would have asked a question if there was excessive growth—what we thought was higher growth than market growth.
Mr Jackson
Incidentally, by comparison, Panama rose 121%, in terms of its gross, and China went up very significantly. The United States, by comparison, went down 130% to a minus figure. My question is, were you looking behind those figures—
Rona Fairhead
We would have asked the questions.
Chair
About evasion and avoidance, would you?
Rona Fairhead
I can say that there was never any evidence brought to—
Chair
Did you ask the question about evasion and avoidance contributing to the high profitability? Did you ask the question?
Rona Fairhead
Yes. We had a clear policy about evasion—
Chair
Did you ask the question, Ms Fairhead? You’re full of policy.
Rona Fairhead
I find it an odd question, because I would find it absolutely unacceptable that anybody took part in tax evasion, or assisting it, therefore everything we expected to be done would be in line with policy and we had not just—
Chair
So you never asked the question.
Rona Fairhead
Yes, we did. We did through different ways. So we had the management in place, we had internal audit, external audit, and we had regulators in on our sites. Our expectation was that if anything untoward was discovered there it would be highlighted to us. If you ask anybody in the bank who attended those committees, we were absolutely unyielding if we thought that issues were not being escalated and if we thought that people were not aware of the risks; we were absolutely on top of them—
Chair
You were so on top of it that you did not uncover it until the Falciani leaks were leaked—so on top of it.
Rona Fairhead
We had management structures, we had oversight, we had an independent board in Switzerland and we had an audit committee in the group private bank with experts from outside. I think it is reasonable to ask non-executive directors in an oversight role to rely on the structures in place, provided that the policy is there, the people look like they are aware of the risks and are on top of things, and all of the other processes are not flagging up issues. Where there are issues, they are addressed.
Nick Smith
Did you ever ask about the so-called hold mail accounts, which have been identified as being highly problematic and likely to be a problem? Did you ever ask about those and how many there were?
Rona Fairhead
Look, the Swiss private bank, as we said, was less than 2% of HSBC. We had a massive agenda—
Nick Smith
But there 14,000 of them, we were told, so did you ask about that?
Rona Fairhead
My expectation was that everything we did would have been in line with policy; if it were not, it would have been. I cannot recollect, we might have covered hold mail, but I doubt it. That—
Nick Smith
But there were 14,000 of them just in Switzerland. Did you not ask about them, because they were likely to be about subterfuge?
Rona Fairhead
We have 50 million customers, with billions of transactions every year. There is a question, going down to that level, that that is what the executives are there for—they are there to challenge that. If you come to the level that we—
Nick Smith
Hold on. You were responsible for risk and audit. We have been told that these particular accounts were problematic, so why did you not ask about that? That is what Mr Gulliver has said.
Rona Fairhead
What do you mean, problematic?
Nick Smith
They were highly problematic, in fact—that is what Mr Gulliver said, didn’t you, sir?
Stuart Gulliver
Yes, I did.
Rona Fairhead
Yes. So if I go to what we did ask as an audit committee—
Chair
Can you reconcile something? It is quite interesting. Mr Gulliver told us that the systems were not in place—that that is what he has been doing in the last five years. You are telling us, “Actually, we had these fantastic systems in place. We were so full of systems, but we never challenged beneath them.” So either the systems were not in place, as Mr Gulliver is asserting, and therefore governance was weak, or the systems were in place and you simply failed to use them in a way to identify what was going on You cannot have it both ways. Who is right out of the two of you?
Rona Fairhead
Our belief at the time was that the policies were in place, the structures were in place and the people were in place—
Chair
But Mr Gulliver does not agree with that.
Rona Fairhead
With the benefit of hindsight, what we would say, and as Mr Gulliver has also pointed out, it did not take this leak to identify that—
Chair
But they were not in place, Ms Fairhead, were they? They were not in place.
Rona Fairhead
A number of issues were coming up and, when we look at the reason, the bank used to be done very much on a geographic basis, with very limited control functions across. We relied, in the bank, on two things: the strength of that management on the control side; and the culture of HSBC, which was widely regarded as being of high integrity. Mr Gulliver pointed out the truism that as we acquired more businesses, it became more complex. The breakdown came in terms of the culture, and there were a huge amount more standards in terms of money laundering and tax transparency which we were complying with. The net result was that we said, “We have actually got to a stage where this structure is no longer fit for purpose.” It had been fit for purpose for over 130 or 140 years, but it was no longer. That was when the board said a couple of things: they required that we had to simplify the business because it was becoming too complex, and we had to put those structures in.
Chair
We know about that. Ms Fairhead, I am going to bring in Stephen Hammond, but I have to say to you that if it was fit for purpose there would not have been, so far, £135 million of tax evasion. There was tax evasion to the UK, and goodness knows where in the rest of the world. To say that that was fit for purpose is just a nonsense.
Rona Fairhead
I agree that we were horrified when we discovered that, but I can assure you that absolutely no evidence of tax evasion—we had independent experts—was raised.
Stephen Hammond
That brings me to my first question. You said earlier on that you had gone through all the records of the committee—
Rona Fairhead
I have.
Stephen Hammond
And there is no suggestion in any of those records, throughout any of that period, that there was any action that was in any way untoward.
Rona Fairhead
I am not saying that there was no untoward action. We had one unauthorised trading that I can remember in the private bank, and we were on it like a—it was not that there was none, but I am saying in the area of tax—
Stephen Hammond
But, broadly speaking, there was no hint of a systemic failure.
Rona Fairhead
There was no hint of any systemic failure.
Stephen Hammond
You have rightly described the normal functions of how an oversight committee would work. So, as non-executive directors, you must say that the blame lies with the executive directors for this failure.
Rona Fairhead
As I have said, I think that the primary responsibility is with the person who evaded the tax—
Stephen Hammond
Well, that person is being marketed to by your relationship manager—
Rona Fairhead
But the people who broke our policies I would hold the most culpable.
Stephen Hammond
That brings us squarely back to Mr Meares, I am afraid. As global CEO of private banking, you are responsible, and you are asking us to believe that you are responsible for the overall failing but not the individual action. Who was the CEO who reported to you from the Swiss bank?
Chris Meares
In the Swiss bank there were two individuals during my time.
Stephen Hammond
How often did you meet those people?
Chris Meares
Just to be clear, there was a change in CEO in 2008 after I had come in. We spent 2007 recruiting a new CEO.
Stephen Hammond
How often did you meet those people?
Chris Meares
I met them at least quarterly, because we had quarterly board meetings. I would probably meet—probably monthly.
Stephen Hammond
Are you now saying broadly that the reason why this failing happened was because these people lied to you?
Chris Meares
I am not saying they lied; I am just saying that they did not flag up this issue. It did not come up through the board and it did not come up through them that there was this issue.
Stephen Hammond
Do you think that they knew what was going on?
Chris Meares
I don’t know whether they knew. I cannot answer that. I cannot speak for them.
Stephen Hammond
You do not think that the CEO of HSBC Swiss private bank knew what his relationship managers were undertaking as operations. Is that what you are asking us to believe?
Chris Meares
I cannot categorically say to you yes or no.
Chair
You are responsible, Mr Meares. Come on—answer a few questions. You are all so ruddy evasive. All you are doing is evading. You are evading the evasion.
Chris Meares
I just cannot speak for them.
Stephen Hammond
It is either that, or it is a jolly good job that Mr Gulliver is in charge and a shame that he was not in charge before, because it is complete managerial incompetence. To be fair, I have worked in similar organisations to yours, and there were certainly much more stringent systems and reporting systems than you are asking us to believe. Your CEO in Switzerland did not know what his relationship managers were doing.
Chris Meares
The CEO in Switzerland will have been operating that bank, and I do not think that they will have known the individual discussions with a client and so on.
Stephen Hammond
They must have sanctioned the overall processes that were going on—the overall policies and the way that relationships would happen.
Chris Meares
I think they would have sanctioned overall policies, yes.
Stephen Hammond
And they did not flag that up to you.
Chris Meares
They did not flag up that there were any issues in this respect.
Stephen Hammond
They did not think that what they were doing was in any way incompatible with tax law.
Chris Meares
They were operating in Switzerland under Swiss law, and that is how they were running that bank at the time.
Chair
You knew how Swiss law operated at the time, didn’t you?
Chris Meares
I do not know Swiss law in detail at all.
Chair
Did you not realise why people had bank accounts in Switzerland?
Mr Stewart Jackson
It is because of the cheese and the chocolate.
Chris Meares
There are many reasons why people have accounts in Switzerland. You have heard from HMRC that two thirds of the customer base had no case to answer and had reasons for having those accounts. To say such things about everybody who has an account in Switzerland would not be right.
Stephen Hammond
I have two final questions. Do you think the practices that HSBC Swiss private bank undertake, or were undertaking at that time, are any different to the practices undertaken by other private banking in Switzerland at that time?
Chris Meares
I would have thought that what the Swiss private bank did was in common with a lot of the industry at the time.
Chair
You don’t know, because you did not know anything about it, did you?
Chris Meares
I did not say that. How can you know what other Swiss banks are doing unless you are working inside them? I was not working inside them.
Stephen Hammond
I take your answer, but surely it would have been fair, as a CEO, and considering where a large of your income comes from, to have looked at what your competitors were doing and how they were acting.
Chris Meares
They would have known what the competitors were doing.
Stephen Hammond
Either the practices were similar or they were not.
Chris Meares
I think they were probably operating in common with a lot of the Swiss private banking industry.