HSBC exposed US to terror fund, money laundering says a panel

The US Senate's Permanent Sub-committee on Investigations, said HSBC was found to be doing business with Al Rajhi Bank, whose key founder was an early financial benefactor of al Qaeda, and also have provided US dollars and services to some banks in Saudi Arabia and Bangladesh despite their links to terrorist financing

Washington: A US Senate panel has accused global banking giant HSBC of exposing the country's financial system to various terror financing, money laundering and drug trafficking activities with transactions worth billions of dollars, due to poor risk control systems at the bank, reports PTI.


Among others, HSBC was found to be doing business with Saudi Arabia's Al Rajhi Bank, whose key founder "was an early financial benefactor of al Qaeda," the US Senate's Permanent Sub-committee on Investigations has said after a year-long probe into the affairs of the global banking major.


The bank has also been accused of indulging in various questionable transactions with entities from countries like Mexico, Iran, North Korea, Saudi Arabia, Bangladesh, Syria, Cuba, Sudan, Burma, Cayman Islands, Japan and Russia.


Specifically, the bank has been alleged to have provided US dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing.


Reacting to the report from the Senate Sub-Committee, HSBC said in a statement that it would apologise for failing to meet regulatory and customer standards in the past.


The bank said it recognises that its "controls could and should have been stronger and more effective in order to spot and deal with unacceptable behaviour."


The Senate Sub-Committee last night released a 17-page summary report of its probe. The entire 330-page report, prepared after a year-long investigation into HSBC, along with more than 100 other documents including bank records and internal emails, is being released at a hearing here today.


The hearing would include testimony from HSBC officials and federal regulators, the sub-committee Chairman and Senator Carl Levin said in a statement.


The bank operates in many jurisdictions with weak Anti-Money Laundering (AML) controls, high risk clients, and high risk financial activities, including in Asia, the Middle East, and Africa, the Senate sub-committee said.


The sub-committee said that HSBC used its US bank (HBUS) as a gateway into the US financial system for some HSBC affiliates around the world to provide dollar-denominated services to clients "while playing fast and loose with US banking rules".


"For decades, HSBC has been one of the most active global banks in the Middle East, Asia, and Africa, despite being aware of the terrorist financing risks in those regions.


"In particular, HSBC has been active in Saudi Arabia, conducting substantial banking activities through affiliates as well as doing business with Saudi Arabia's largest private financial institution, Al Rajhi Bank," the report said.


"After the 9-11 terrorist attack in 2001, evidence began to emerge that Al Rajhi Bank and some of its owners had links to financing organisations associated with terrorism, including evidence that the bank's key founder was an early financial benefactor of al Qaeda.


"In 2005, HSBC announced internally that its affiliates should sever ties with Al Rajhi Bank, but then reversed itself four months later, leaving the decision up to each affiliate.


HSBC Middle East, among other HSBC affiliates, continued to do business with the bank," it added.


The probe further said that "due to poor AML controls, HBUS exposed the US to Mexican drug money, suspicious travelers cheques, bearer share corporations, and rogue jurisdictions."




4 years ago

HSBC also procured Indian rupees and gave it to Habib Bank of Pakistan and transferred some rupee funds to bangladesh

Axis Bank Q1 net profit up 22% but rising NPAs remain concern

Axis Bank reported 22% increase in its first quarter net profit. However, its non-performing assets are showing signs of deterioration which is a serious concern

Axis Bank’s net profit during the quarter ended June 2012 rose to Rs1,154 crore, registering a growth of 22% year-on-year (y-o-y). The bank’s net interest income rose 26% y-o-y to Rs2,180 crore during Q1FY13 from Rs1,724 crore during the same period last year. The net interest margin was 3.37% in Q1FY13, slightly higher compared to 3.28% during Q1FY12. However, over the last few years, its net interest margin has been flat and hardly making significant upwards movement. However, one concern the bank needs to deal with is its rising non-performing assets, which has increased from the previous quarter.

Its operating profit rose 26% y-o-y to Rs1,964 crore during Q1FY13 from Rs1,558 crore during Q1FY12, which is more than its three-quarter y-o-y average growth rate of 21%. It has disappointed on the revenue front, after seeing it grow only 29% to Rs7,818 crore, whereas its three-quarter y-o-y growth rate is 35%. Even though its return on equity is high (20%), its valuation low compared to its bigger peers (i.e. ICICI Bank and HDFC Bank) at an operating profit quoting at little more than five times its market capitalisation. Its low valuation, while cheap, is a cause for concern.

One nagging concern is the non-performing assets. Gross non-performing assets (Gross NPAs) as a proportion of gross customer assets stood at 0.94% as on 31st March 2012.
However, this increased to 1.06%, while net non-performing assets stood at 0.31%, up from 0.25% quarter-on-quarter. However, this number is more or less constant when compared to the same period last year, indicating bank’s difficulty in curtailing it. During the quarter, the slippages were recorded at Rs456 crore which resulted in a closing position of Rs2,092 crore of Gross NPAs as on 30th June 2012, as against Rs1,573 crore as on 30th June 2011. Despite this, the bank’s capital adequacy ratio (CAR) has improved by 50 basis percentage points (bps), to 13.03%, for the current quarter, from corresponding period last year.

It is pertinent to note that the current account portion of the current account savings account (CASA) has been steadily declining, which actually increases the cost of the bank. It has declined by more than 700 bps, or seven percentage points, from 50% it recorded in the 2008-09 fiscal to 43% at the close of the 2011-12 fiscal. According to the company’s press release, the daily average balances, both the current account and savings account put together grew 16% y-o-y, buoyed up by 22% increase in savings bank deposits. If more savings accounts are opened, it means banks will have to spend more money and its costs of funds will increase.

The bank’s loan book grew 30% y-o-y from Rs1,31,900 crore as on 30 June 2011 to Rs1,71,146 crore as on 30th June 2012. However, normalised y-o-y growth in advances would be 21%, adjusting for currency depreciation of roughly 25% during the year and a relatively lower base caused by run-offs in short-term loans in the previous period ended 30 June 2012, said the press release. While its overseas total assets increased by 27% to $6.15 billion, it puts itself more under the risk of exchange rate fluctuations.

One of the major events that took place this quarter was the approval of the demerger of the financial services business from Enam Securities Pvt Ltd. According to the press release, it said, “During the current quarter, pursuant to the order passed by the High Court of Gujarat at Ahmedabad, the equity shareholders and unsecured creditors of the Bank have at their meetings held on 23rd June 2012, approved the Scheme of Arrangement in respect of the demerger of the financial services business from Enam Securities Private Limited to the Bank and a simultaneous sale of such businesses to Axis Sales & Securities Limited, a wholly owned subsidiary of the Bank, with effect from 1st April, 2010. The Bank is now awaiting the necessary approvals under applicable law from various regulatory authorities to the Scheme of Arrangement and consequently, no effect of the acquisition has been given in the results for the current quarter.” Earlier, Enam Securities sold itself to Axis Bank.

The stock reacted negatively to the news and closed down 2.10% at Rs1,023.30 on the BSE.


The Adidas-Reebok saga in India: When the shoe moves to the other foot

We have an unfortunate tendency to simply believe everything the foreign companies tell us. It was so in the case of the Adidas/Reebok episode also, when ‘scam’ figures of Rs8,700 crore were thrown around and published without demur

The Reebok-Adidas episode in India moved from the shocking to the absurd and now appears to be settling down to a more rational case of corporate tax evasion.


The issue was initially positioned by eager PR tactics as a case of fraud to the tune of Rs870 crore by the senior Indian executives in the company post takeover of Reebok by Adidas globally. This was lapped up eagerly by a business media more tuned to swallowing handouts wholesale. The story was next pushed into another level by the ‘mistaken’ addition of an extra zero which converted it into a Rs8,700 crore scam. It has now eventually been scaled down to a few hundred crores as a possible scam.


And of all things, a claim of Rs135 crore worth of damages suffered in a warehouse fire, on the outskirts of Delhi.


A quick re-check with the fire department reveals that there was no major fire of this sort reported in Delhi or around Delhi in the last eight years, and a fire involving so much rubber, plastic, polymer and other fabrics as well as shoes would have left more than a lingering smell over Delhi for weeks.


At a very modest estimate, a 40 ft container would be able to transport about Rs40 lakh worth of shoes. Such a fire would imply 350 such containers. That is nine train loads. Is it the contention of Adidas and Reebok that there was so much of their product, raw material or finished goods, in stock?


So what’s the truth here, and who is playing a fraud on whom? As on date, this is part of the known status:


# The Income Tax Department opines that it may not be a case of corporate fraud, but more likely be a case of tax evasion, to the tune of about Rs140 crore. This is on operations in India of both Reebok and Adidas, pre and post takeover, and as of now does not include the transfer pricing element. Adidas took over Reebok globally, but there is no clarity on what component of the profits from this sale were taxed in India for the India part of the deal.


# The other official entities involved, which include the police, the Serious Fraud Investigation Office (SFIO) and the Registrar of Companies (RoC), are continuing their enquiries and investigations. However, the ROC has come on record stating that Reebok India was not co-operating fully and not furnishing documents. This, reportedly, pertains to trying to establish who the beneficiary owners of Reebok are.


# The auditors, N Narasimhan & Co, as well as KPMG have claimed that they are not auditors to the companies Reebok and Adidas, though the matter is not as simple as that. They have not really provided any further information to back up the claims made by Reebok-Adidas on the fraud. It is interesting to note that the global merger/take-over took place in 2005 but the India merger/take-over was consolidated only in 2011.


# It is also a fact that there appears to be a strange reluctance on the part of Adidas-Reebok to provide more information on this matter after the initial flurry of accusations and announcements which very often bordered on tarring and besmirching the reputation of not just the Indian managers and executives in the company but also cast aspersions on the whole Indian business ethos as a whole.


All this in the face of a simple fact—true turnover of both the companies put together was in the range of a few hundreds of crores every year. Which number is also in doubt now, due to certain excise related issues on discounts and possible violations in numbers, what is known as ‘seconds’. And in large corporate entities like this, there is no way that fraudulent expenses or tax/excise evasions in thousands, leave alone lakhs and crores, can take place without full and tacit knowledge as well as approvals of board-level people as well as accounts and audits.


What actually happens in such cases is like this:


A merger or take-over takes place between two entities situated abroad at mutually agreed terms after lots of due diligences and negotiations. Space is kept open for issues which may crop up, and some margin for error is also kept, but by and large most issues are pre-empted. Space is also kept wide open for “off the record” issues.


The issue that causes problems, however, is taxes on profits derived by any of the parties involved in the merger and take-over. Till the Essar-Vodafone issue opened this, taxes on these profits were avoided by routing the transaction through a wide choice of tax havens. It was assumed that foreign companies, especially western or other developed countries, could do no wrong in this context.


However, in this case also, as the game unravels, it appears that transfer pricing and arms-length provisions have been flouted by all the entities concerned, Adidas, Reebok and the new entity. The long timeline from 2005 till 2011 also saw the introduction of a whole gamut of new rules and regulations globally which impact such take-overs and mergers, especially the taxation on profits aspect.


This appears to be the real issue here. Because, as of now, there appears to be no record or track of taxes paid on profits in India on windfall or otherwise, by virtue of the sale or merger or takeover of Reebok in India by Adidas in India, paid by either of these two entities. The trail, as a simple matter of fact, appears to go cold in the annual report by Adidas for 2011.


The actual details are very complicated, but very briefly bear repeating. No taxes appear to have been paid in India on any part of the merger/take-over. Some insurance frauds appear to be part of the game. And there was a very interesting linkage to the Sports of India which appears to have been removed from the online investors’ report of Adidas too.


The lives and careers of more than a few resident Indian directors and executives who worked at Reebok and Adidas in India have been ruined, the business future of vendors and retailers are in limbo, and there is no sign of any substantial evidence by Adidas-Reebok to prove the allegation of Rs870 crore fraud in India by Indians.


(Veeresh Malik had a long career in the Merchant Navy, which he left in 1983. He has qualifications in ship-broking and chartering, loves to travel, and has been in print and electronic media for over two decades. After starting and selling a couple of companies, is now back to his first love—writing.)




4 years ago

Do not worry ! It will get away as was in case of Vodaphone-Hutchison/Essor etc.
Former F M tried to inroduce a law with tetrospective effect to cover such mergers/take over for taxation purpose, but it was kept inlimbo by the P M and UPA II Govt.

Mohan Siroya


Veeresh Malik

In Reply to MOHAN SIROYA 4 years ago

Dear Mohan Siroya - thank you for writing in, and no, it will not be forgotten.


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