Finance Committee on Feb. 8th, 2011

[The Chair, Conservative, James Rajotte]

I call the 57th meeting of the Standing Committee on Finance to order.

I want to welcome our guests here this morning.

We are continuing our study of tax evasion and offshore bank accounts, pursuant to Standing Order 108(2).

Colleagues, we will have committee business at the end, but for the first hour and a half we have three witnesses here.

First of all, we have Mr. Scott Bartos, senior vice-president and chief compliance officer with HSBC Bank Canada. Secondly, we have Mr. Scott Michel, president, Caplin & Drysdale. And as an individual, we have Mr. Sohmer, a shareholder with Spiegel Sohmer Incorporated.

Gentlemen, thank you all for being with us this morning. You'll have about seven to ten minutes for an opening statement, and then we'll have questions from members of the committee.

We'll start with Mr. Bartos, please.

[Scott Bartos, Senior Vice-President and Chief Compliance Officer, HSBC Bank Canada]

Thank you, Mr. Chairman.

Good morning, honourable members. I'm appearing on behalf of HSBC Bank Canada. My comments are based on a written statement that has been provided to the clerk. I'm going to refer to that statement as I make my presentation.

I am the chief compliance officer and a senior vice-president of HSBC Bank Canada. I am the senior executive who is responsible for the oversight of the bank's regulatory compliance program.

We appreciate the opportunity to appear today before the committee and to make a statement--

[Thomas Mulcair, NDP, Outremont, QC]

Pardon me, Mr. Chair, but I have a point of order. The witness mentioned a document that he apparently submitted, but we do not have it.

[The Chair, Conservative, James Rajotte]

The presentation is in English only, so we cannot distribute it--unless we have consent.

[Thomas Mulcair, NDP, Outremont, QC]

HSBC didn't provide a French version?

[The Chair, Conservative, James Rajotte]

We don't have a French version of his presentation.

[Thomas Mulcair, NDP, Outremont, QC]

Okay. Merci.

[An hon. member]

[Inaudible--Editor]

[The Chair, Conservative, James Rajotte]

Order, please.

Please continue, Mr. Bartos....

Monsieur Paillé.

[Daniel Paillé, Bloc, Hochelaga, QC]

I think it would be important to point out to Mr. Bartos that he cannot refer to a document we do not have. He did not understand this, since it was only mentioned in French.

[The Chair, Conservative, James Rajotte]

Well, he can refer to a document. I mean....

[An hon. member]

No, he can't.

[Daniel Paillé, Bloc, Hochelaga, QC]

No. We do not have the document.

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Chair, it's not relevant. He can just carry on with this.

[The Chair, Conservative, James Rajotte]

Yes.

I think we should just allow Mr. Bartos to carry on with his presentation.

Mr. Bartos, please.

[Scott Bartos]

Thank you, Mr. Chairman.

We appreciate the opportunity to appear today before the committee to make this statement and to answer any questions you may have about HSBC Bank Canada.

I understand that HSBC has been called today to provide some information about the use of offshore accounts by Canadians. Before providing any specific comments about this particular topic, it is important to place the issue into context. In particular, I would like to provide some background information about HSBC Bank Canada, who we are, and what we do. I also think it's important to understand how HSBC Bank Canada fits into what is known as the HSBC Group. I would also like to touch upon something that is very core to HSBC, and that is our values and how we conduct business. Finally, I will touch briefly on the use of offshore accounts by Canadians.

HSBC Bank Canada is a Canadian bank. We are incorporated here in Canada and regulated by the Office of the Superintendent of Financial Institutions. We are the seventh-largest bank overall in Canada. We were established almost 30 years ago, in 1981, and we've grown to a network of more than 140 branches here in Canada. We have over 8,000 employees. We provide a wide array of financial services to over one million Canadians. These include personal financial services, whether it be financing your house or giving you a loan. We also represent or provide financial services to a number of commercial organizations, whether they are small, medium, or large.

We are very proud to support the communities in which we operate. We have donated over $3 million in the last year to not-for-profit organizations. We have been a strong contributor to the Canadian economy over the last 30 years. In the tax year 2009, we paid over $200 million in federal and provincial income taxes.

So how does HSBC Bank Canada fit within the HSBC Group? The HSBC Group is an international network of local banks that has grown to over 8,000 offices in 86 countries. The HSBC Group has approximately 300,000 employees and over 100 million customers. We're known as “the world's local bank”.

The group is named after its founding member, which was the Hongkong and Shanghai Banking Corporation, established in 1865 to finance the growing trade between China and Europe. The HSBC Group's differentiating strategy is that we invest in faster-growing emerging markets, and use international connectivity to join those emerging markets with mature markets. It is for that reason that we have over 8,000 offices in 86 countries.

I'm going to touch briefly on the core values of HSBC. The HSBC Group is committed to complying with both the letter and the spirit of the law in all jurisdictions in which we operate. In order to achieve this high standard, the HSBC Group has established a number of mandatory policies that apply to all members around the world, including HSBC Bank Canada. These policies include standards that are designed to deter the use of our services for illegal purposes.

Let me give you some examples of the key procedures we use to deter the use of illegal services. We do not establish accounts for anonymous clients. We verify the identity of all of our customers. We know our customers and the intended purpose of their banking relationship. We periodically monitor our customers' accounts' activity to identify transactions that may appear unusual. We have escalation and investigation procedures for transactions that appear unusual.

We cooperate with authorities, including tax authorities, as permitted by law. We report suspicious transactions, as required by law, to the financial intelligence unit know as FINTRAC. We adhere to a mandatory training regime for all of our employees so they're aware of such issues as money laundering, bribery, and our code of ethics.

The HSBC Group does not condone tax evasion by its clients, nor do we participate in tax evasion.

Now I will go to the crux of the issue before the committee, which is the use of offshore accounts by Canadians.

I think it's important to first recognize that Canadians are very fortunate, in that we have the right to live, work, travel, and do business around the world. There are many reasons for Canadians to have bank accounts in other countries, whether it is to buy or maintain property in Florida or another country, or whether it is for a Canadian who is employed by a Swiss pharmaceutical company or a mining company in Latin America. It may be to support a family member who is going to school in Europe, or to support a business that operates in Asia or elsewhere. As a global organization, HSBC supports its clients' ability to do business around the globe.

As HSBC has many offices around the globe, from time to time we refer customers to other countries so they may open up accounts. Let me give you an example of how this works at HSBC.

If we had a Canadian customer who came into HSBC Bank Canada and who had been transferred to work for a Swiss pharmaceutical company, HSBC Bank Canada would not directly open up that account. Rather, we would refer the customer to one of our affiliates--in this case, HSBC Private Bank Suisse. That is a separate legal entity that carries on business in Switzerland. They are governed by the laws of Switzerland. We would refer the customer to that bank. The account would be opened up in accordance with local laws in Switzerland.

As HSBC Suisse and HSBC Bank Canada are separate legal entities, each subject to their own privacy laws, we would not share information about the client, whether the account had been opened, or what sort of account activity was ongoing.

Regardless of where the account is opened, HSBC applies high operating standards and is diligent in ensuring that it complies with applicable laws.

In conclusion, I want to stress that HSBC does not condone tax evasion by its clients, nor does it engage in tax evasion. The bank paid over $200 million in taxes last year.

We fully support the government's efforts to ensure appropriate payment of taxes by all Canadians. At the same time, we also recognize the right of Canadians to conduct business around the world.

In operating our business, we comply with both the letter and the spirit of the law. HSBC's strong commitment to its values was instrumental in permitting HSBC to withstand the recent financial turmoil without receiving any financial assistance in any of the 86 countries in which we operate. We try to adhere to a very high standard of business ethics.

Mr. Chairman, I thank you for the opportunity to provide some information about HSBC. I will welcome questions at the appropriate time.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Bartos.

We'll hear now from Mr. Michel, please.

[Scott D. Michel, President, Caplin & Drysdale]

Thank you, Mr. Chairman.

I am honoured to be a guest of your committee to share my thoughts about issues concerning offshore banking, tax enforcement, and voluntary disclosure.

I intend to very briefly shed some light on the American experience in this area over the last three years in the hope that it will assist you in considering what constitutes effective and efficient tax policy regarding this matter.

The requirements for Americans to report their foreign accounts on their tax returns and other filings have been on the books for many years, but in my 30 years of practice or so we may have seen a few cases from time to time, infrequent criminal prosecutions, occasional audits, and every now and then a voluntary disclosure, largely from an elderly American who had a foreign account and wanted to clean up his affairs before he died so his family didn't have to deal with it.

Beginning in 2007 our Internal Revenue Service and our Department of Justice's tax division began to undertake some very high-profile enforcement activity aimed at Swiss banks--for the most part, at the time, UBS--and at American taxpayers who had failed to report their accounts.

During 2008 and 2009, the U.S. government penetrated the long-standing wall of bank secrecy in Switzerland and sought indictments of Swiss bankers, American taxpayers, and others perceived by our government to have wilfully violated the reporting requirements for foreign accounts or to have assisted Americans in doing so. The media in the United States covered these events aggressively.

What happened was a substantial uptick in the number of American taxpayers who wanted to come forward and make a voluntary disclosure.

For decades the Internal Revenue Service has had on its books a voluntary disclosure policy aimed at giving non-compliant taxpayers a way to come back into the system and avoid criminal prosecution. The policy did not cover civil money penalties—financial penalties that might be imposed on such a taxpayer—but under American law, these penalties theoretically were so high that American taxpayers were discouraged from coming forward.

So a small group of practitioners—I was part of this group—approached the IRS in 2008 and urged them to adopt a settlement initiative that would provide Americans with a clear path to come back into the system and give them a reasonable degree of certainty over what financial consequences they would face for doing so. The program was announced in March 2009, it was updated with procedural and other guidance, and at its conclusion in October 2009, some 15,000 Americans had come forward to acknowledge their previously undeclared foreign accounts.

The program worked reasonably well, especially in the criminal intake phase, when the person would initiate the voluntary disclosure through the criminal investigation division of the IRS. As the cases have moved to the civil side, the program has broken down, and there have been a number of issues that the IRS has had to grapple with in administering the program and processing the cases.

Included in my material is an article that a colleague of mine and I wrote to catalogue some of these problems. We could be here all day to discuss them.

But from these events, I have developed a few thoughts over what would constitute, at least to me, an effective voluntary disclosure policy.

Number one: the policy should provide a clear path without any degree of trickery or risk for somebody to come back into the system and be reasonably assured that they will not be prosecuted for criminal tax violations. If the program does not provide for this type of risk-free approach, it will fail.

Secondly, obviously a taxpayer coming forward must pay tax, must pay interest. The significant issue is what will the penalty liability be for such a taxpayer. In my judgment, there ought to be a balance between a one-size-fits-all penalty, which is clearly very efficient to administer, and a penalty that recognizes that these cases fall across a panoply of conduct. Not everybody is a real tax cheat. There are some people who inherited accounts, who have managed them very passively, who have not benefited from their funds, and who would like an opportunity to attempt to argue for leniency when it comes to a civil penalty.

Third, there is also, at least in the United States, a class of taxpayers who live outside the country. For these people, tax compliance has not been very high. They're not criminals; they generally don't owe tax, because of applicable foreign tax credits. But in my judgment, a policy ought to take into account that there are “foot faults” in compliance that should not be penalized in the same way as real tax cheating.

Fourth, any policy ought to process these cases efficiently and rapidly. One of the things that broke down in the United States was that the IRS sought to audit every amended tax return that came in at the beginning of the program. The system quickly broke down. There was simply not enough time and not enough resources for this to happen.

In my judgment, a program can simply announce that it will spot-check amended returns. Practitioners and clients will then know that this would not be a good time for them to cheat again by filing false amended returns—this would be a foolish thing to do. The returns can be processed quickly; the cheques cashed; and the agents can move on to the next case.

Finally, and what I think to be most important, any successful voluntary disclosure policy should be accompanied by effective and public tax enforcement. I call it the velvet glove and the iron fist.

The IRS and the justice department in the United States have prosecuted maybe 25 UBS account holders; they've prosecuted people holding accounts at other banks; they have prosecuted bankers, lawyers, and investment advisers. Every time they did so, my telephone and the telephones of many of my colleagues would ring off the hook. People would come forward to make voluntary disclosures in response to this public enforcement action.

People who are considering whether to come forward should sense a real risk of what might happen if they don't. In an era where bank secrecy around the world, in my judgment, is fading away, this effective and public prosecution will continue to encourage people to come forward.

Thank you for your attention. I'm prepared to answer any questions you may have.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Michel.

We'll now hear from Mr. Sohmer.

[David Sohmer, Shareholder, Spiegel Sohmer Inc., As an Individual]

Good morning ladies and gentlemen, committee members. My name is David Sohmer, and I practise tax law in Montreal. This morning, I will discuss a topic of national interest. Since I express myself better in English, I ask you to forgive the fact that I will speak only in that language during my presentation.

Sound tax policy should be based on facts, not on fantasy or fiction, and my presentation attempts to provide the committee with facts, from the perspective of a tax lawyer who has been involved with the voluntary disclosure program since its inception.

The following are some of the more important facts contained in my brief.

Firstly, there has been a dramatic shift in the demographics of Canadians who availed themselves of the voluntary disclosure program in the last five years, from baby boomers to the parents of baby boomers. In 2003-04, the main clients were 49-year-old males. Based on an analysis of 51 clients who have engaged me in the years 2009 and 2010, the average age is 72 and the median age is 75 years; 57% are male and 43% are female; and most of the females are widows who have inherited the accounts.

The increased number of disclosures has had little to do with CRA enforcement activities. The increase is almost exclusively due to events that by happenstance occurred in the same timeframe. The first was a change in registration requirements for investment dealers and advisers by the Canadian Securities Administrators. The change was effective as of September 28, 2009, and provided an exemption for foreign banks whose Canadian clients were restricted to those with net financial assets of more than $5 million.

UBS and Crédit Suisse, as well as other foreign banks, contacted their Canadian clients and requested written certification that the clients met the threshold, failing which they would no longer provide dealer and advisory services.

The second factor was the aging of the parents of baby boomers. They have accumulated substantial wealth, and the older they get, the greater their desire to put their affairs in order before they die.

The third was a highly publicized deferred prosecution by the American IRS of UBS.

The fourth was the highly publicized theft of data from LGT Treuhand, a Liechtenstein bank, and from HSBC. The data contained the names of Canadians who held accounts with the banks.

The next important fact is that the era of banking secrecy is not over. Article 26 of the OECD model tax treaty is the international standard and is reflected in the protocol to the Canada-Swiss tax treaty signed on October 22, 2010. Canada must provide the Swiss with the name of the taxpayer and the name of the bank. Fishing expeditions are expressly prohibited. Most golden agers have not deposited or withdrawn funds for over a decade, so Canada is unlikely to know their identity, and the risk of detection is minimal.

The next important fact is that the voluntary disclosure program is being undermined by CRA policy and by the refusal of Quebec to harmonize its program with that of the CRA.

The current CRA practice provides for a predictable set of acceptable outcomes, a critical aspect of a successful voluntary disclosure program. The CRA, however, does not preach what it practices. Its official policy gives voluntary disclosure officers substantial discretion in determining which years should be included in a disclosure. This raises consistency and predictability issues, which will deter taxpayers from disclosing.

The most serious threat to the program is the refusal of Quebec to harmonize its program with that of the CRA. The Ministry of Revenue of Quebec insists on taxing the balance that was in the account six years ago as income earned in that year. This has no legislative authority, and unlike the CRA policy, Quebec refuses to allow its decision to be attacked by administrative appeals or appeals to the courts, even where there is a lack of due process or where the decision is clearly wrong on its merits.

Pursuant to an agreement between the CRA and the MRQ, the CRA provides the MRQ with information relating to disclosures made to it, so a disclosure to the CRA is effectively a disclosure to the MRQ. Since there is little risk of detection, at least in the next five to ten years, it is expected that many Quebec residents whose children reside out of the province will not disclose. Their children will probably disclose to the CRA after they inherit the accounts. The “revenue rule” is a well-recognized rule that the authorities of one state will not assist in the recovery of taxes due to another state. It is clear that the United States will not assist in the recovery of Quebec tax, and it appears that other provinces will not do so either. It is also arguable that the U.S. will not assist in the recovery of federal tax when the liability of U.S. residents' children arises under Canadian law because of an inheritance.

It is estimated that Canadians have $100 billion in offshore accounts. The stars are aligned now as they have never been and as they may never be again. There is a window of opportunity for Canada and the provinces to have tens of billions of dollars repatriated and to realize a significant increase in short-term tax revenue.

The voluntary disclosure program does not encourage non-compliance. Golden agers have not transferred funds offshore for decades, and younger tax evaders are recidivists who do not evade in contemplation of disclosing.

The U.S. and the U.K. have recognized the merits of a pragmatic approach. The American settlement initiative has been described by my fellow witness Scott Michel, a recognized authority on the U.S. voluntary disclosure program, as ranking “in the upper tier of compliance successes ever implemented”.

For bureaucratic paranoia, Quebec-Ottawa friction, and electoral politics to impede a successful voluntary disclosure program is not in the national interest; nor is it in Quebec’s interest.

I'll be happy to answer questions from the committee.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Sohmer.

We'll start members' questions with Mr. Szabo, for a seven-minute round.

[Paul Szabo, Liberal, Mississauga South, ON]

Thank you.

Thank you, gentlemen, for your input.

The common thread to all of your presentations seems to centre around primarily the voluntary disclosure program efforts.

I have one simple question, and I hope to get a very succinct answer from all of you.

If we simply relied on the voluntary disclosure program to address tax evasion and offshore accounts, what would happen to the total of tax not being collected by the home-based country?

[David Sohmer]

From my personal experience, there would be a dramatic short-term increase, with no significant effect on tax compliance.

People who cheat, younger cheaters, will continue to cheat. They don't cheat because they think they're going to clean up the money in the future through a voluntary disclosure program. We're dealing with the elderly who want to clean their affairs up. They're willing to pay a price for it.

[Paul Szabo, Liberal, Mississauga South, ON]

So the tax evasion would continue to increase?

[David Sohmer]

It would continue. The international efforts that are taking place will eventually become effective, but not in the short term.