U.S. Officials in Hong Kong Gathering FATCA Non-Compliance Data

January 5, 2015 Posted by China Briefing Reading Time: 5 minutes

Editor’s Note: Asia Briefing received the following response from Sovereign Trust (Hong Kong) Limited in connection with our original article and was asked to publish it for clarification:

“Hong Kong and HSBC under scrutiny as US cracks down on American tax cheats” which appeared in the online edition of the South China Morning Post on 5^th January (as ‘HK and HSBC under scrutiny as US widens net’ in the print edition) made reference to an IRS investigation into Sovereign Management and its US-based clients. We wish to make it clear that the Sovereign Management referred to has no connection whatsoever with Sovereign Trust (Hong Kong) Limited or its associated companies within The Sovereign Group. The Sovereign Group is fully compliant with the IRS’s requirements under FATCA and is not aware of any of its companies being the subject of any investigation.

HSBC, Sovereign, FedEx, DHL & UPS all expecting summons from IRS

American IRS officials are said to be carrying out investigative work concerning FATCA transgressions from the American Consulate in Hong Kong, according to a report issued in the South China Morning Post. The article quoted Travis Benjamin, a Partner at the local law firm Deacons, “We’re seeing greater activity of foreign tax authorities, not only those of the US, in investigations and information gathering in jurisdictions across Asia, including Hong Kong and Singapore.”

America’s Foreign Account Tax Compliance Act (FATCA) took effect from July 2014, and U.S. authorities have not been slow in stepping up investigations of international tax evasion by U.S. taxpayers in Hong Kong. FATCA also encourages other governments to share financial data on American citizens living abroad with the IRS, and in return offers reciprocal intelligence on foreign nationals based in the United States. Hong Kong has been viewed with increasing suspicion over the years by the U.S. Government, and the territory has appeared on several countries’ black lists as concerns its status as a tax haven and potential for hiding illicit wealth.

The latest investigation in Hong Kong appears to have been prompted by investigations into accounts held by HSBC in Hong Kong as part of an international web of suspected tax evasion announced on the U.S. Department of Justice website in December. According to this, HSBC Bank USA National Association (HSBC USA) was the subject of an IRS summons, requiring that it supply information on alleged U.S. tax evaders suspected of using international offshore services provider Sovereign Management & Legal to hide overseas assets.

Other banks in Hong Kong and Panama were suspected to have worked with Sovereign Management, and HSBC USA held U.S. correspondent bank accounts for these banks, the department disclosed, stating that such accounts were likely to have records of financial transactions between Sovereign Management and its U.S.-based clients.

FedEx, DHL and UPS are all expected to receive additional IRS summons to provide information on suspected tax evaders, as well as the Federal Reserve Bank of New York, Western Union Financial Services and Clearing House Payments. The IRS investigation has determined that Sovereign Management used these logistics companies to correspond with U.S. clients, and Western Union to transmit funds to and from clients in the U.S. At the time of writing, however, none of the companies have been formally charged.

“We may require clients to provide information relating to their status and provide their consent to the provision of information, in accordance with FATCA regulations,” said an HSBC spokesman. The IRS was tipped off to Sovereign Management’s role in helping U.S. clients evade taxes as a result of information gleaned from a U.S. Drug Enforcement Agency investigation of online narcotics trafficking, according to the U.S. Justice Department.

“The FATCA investigations are not going to go away” says Chris Devonshire-Ellis of Dezan Shira & Associates, “and it is interesting that the U.S. has officials working presumably with permission from the Chinese Government in these investigations. If these investigations are linked to President Xi Jinping’s crackdown on corruption, Hong Kong could be in for a rough ride. If so, we recommend Singapore as an alternative destination for legitimate businesses to establish banking and trade operations, as we have become aware that Hong Kong banks may not wish to open bank accounts for American nationals at this time. Singapore tends to have tougher scrutiny on account holders and is more selective than Hong Kong has been in the past, making it an ideal haven for bona fide traders.”

About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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