The US authorities are investigating possible tax evasion by the American residents of Indian origin through use of their accounts with HSBC India

The Hong Kong and Shanghai Banking Corporation Ltd (HSBC) has said it may face 'significant' penalties from the US authorities regarding an on-going probe into suspected tax evasion by the US-based clients of its Indian unit, among other cases.

The US tax department is investigating possible evasion of federal income taxes by the American residents of Indian origin through use of their accounts with HSBC India.

In a regulatory filing, HSBC said it is cooperating with the US Department of Justice and the Internal Revenue System (IRS) in their probes into whether certain HSBC companies and employees acted appropriately in relation to certain customers with US tax reporting requirements.

The disclosure was made by UK-based HSBC as part of an update of the on-going "regulatory and law enforcement investigations", along with the bank's first quarter results.

The probe began after one Vaibhav Dahake was charged by the US authorities "with conspiracy to defraud the US by using undeclared accounts in the British Virgin Islands and at HSBC India to evade his income taxes".

As per the court documents filed by the government in that case, certain employees of HSBC Holdings and its affiliates operating in the US had assured Dahake that accounts maintained in India would not be reported to the IRS.

The government had further said HSBC India in 2002 opened a 'representative office' at an HSBC USA office in New York City to enable NRIs living in the US to open accounts in India.

Later in 2007, HSBC India opened a second representative office at an HSBC USA office in California, purportedly "to make banking transactions more convenient for the NRI community based in California," as per the Justice Department documents.

Although HSBC India closed those offices in June 2010, the US government suspected that NRI clients might still access their accounts at HSBC India from the US.

The government had further told the court that "NRI clients have told IRS investigators that NRI representatives in the US assured the clients that they could invest in accounts at HSBC India without paying US income tax on interest earned on the accounts and that HSBC would not report the income earned on the HSBC India accounts to the IRS."

About the case involving its Indian unit, the banking giant said that HSBC Bank USA in April 2011 had received a 'John Doe' summons from the IRS, directing it to produce records with respect to US-based clients of an HSBC Group company in India. "We have cooperated fully by providing responsive documents in our possession in the US to the IRS," it added.

In the US tax parlance, the 'John Doe' summons is one issued by the IRS to a third party to provide information on an unnamed, unknown taxpayer with potential tax liability. The unnamed person is addressed as 'Jon Doe' in such summons.

About another case, HSBC said it had also received in April 2011 a subpoena from the US markets regulator SEC, directing HSBC Bank USA to produce records related to HSBC Private Bank Suisse SA's cross-border policies and procedures and adherence to US broker-dealer and investment adviser rules and regulations when dealing with US resident clients."HSBC Bank USA continues to cooperate with SEC," it said.

The US government is already in talks with its Indian counterpart with regard to an Inter-Government Agreement for implementation of its FATCA (Foreign Asset Tax Compliance Act), which would require the banks and other financial institutions operating in India to share details about their US-based clients including NRIs with the IRS.