Author: CPA Jim
Proofreading: Kyle W
HSBC Holdings plc (HSBC) published its annual financial statements as of 31 December 2020 as a part of FORM 20-F (HSBC’s annual report), filed with the Securities and Exchange Commission in Washington, D.C. 20549 pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, on 24 February 2021[i].
Blocking PCAOB inspections has given rise to reliability issues in HSBC’s financial reporting
PricewaterhouseCoopers LLP in London (PWC UK) gave an unmodified audit opinion on both HSBC’s financial statements and its internal control over financial reporting. However, according to the website of the US Public Company Accounting Oversight Board (PCAOB), Chinese Communist party (CCP) authorities are impeding the PCAOB’s ability to oversee PCAOB-registered audit firms in mainland China and Hong Kong. In HSBC’s situation, its principal auditor PwC HK must rely on its local branch, PwC HK, to perform the audits. Naturally, This work is critical to the formation of HSBC’s financial statements that are filed with SEC, and as such should be within the scope of PCAOB inspections. “The position taken by authorities in mainland China may in some circumstances cause a registered firm located in another jurisdiction to attempt to resist PCAOB inspection of public company audit work that the firm has performed relating to the company’s operations in mainland China. Only in mainland China and Hong Kong, however, is the position of the Chinese authorities effectively an obstacle to inspection of all, or nearly all, registered firms in the jurisdiction”.[ii]
Following National Security Law enforcement and all branches of jurisdiction falling into the hands of the CCP in Hong Kong, the overall operational environment of PwC HK deteriorated, resulting in financial statements that failed to comply with International Financial Reporting Standards (IFRS). Preparation and presentation of financial statements as well as audit work require the exercise of objective evaluation, professional judgement, and scepticism, all of which are disallowed under the purview of the CCP. The UK Financial Reporting Council published a podcast to “discuss why challenge of management and a challenge culture is critical to high quality audits” on 2 March 2020.[i] However, it is apparent that the CCP only concerns itself with obedience of the directives from its central core leader, the General Secretary in Beijing.
Reliability issues of internal control and resulting impact
Therefore, it should not be taken for granted that HSBC financial statements and audit opinions delivered by PwC UK, which should have been supported with sufficient and appropriate audit evidence, are objective nor neutral, nor that HSBC’s internal control on financial reporting is based on criteria established from the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). If internal procedures of a bank are called into question, then further doubt must be cast on the operational and financial reporting of HSBC, including taking deposits, granting loans, and compliance with anti-money laundering requirements, while opening the door to bribery, worker’s rights abuses, outsourcing and accounting fraud. Accounting fraud has traditionally played an important role in covering up all the other problems caused by significant internal control deficiencies.
Financial reporting is an important element of corporate governance aside from risk management and internal control, according to the provisions of the UK Corporate Governance Code issued by the UK Financial Reporting Council. [ii]Given non-inspectable audit work papers by the PCAOB and overall environment in Hong Kong of strong vulnerability to accounting fraud, it should never be taken for granted that the statement on compliance with UK Corporate Governance Code on page 308 of the annual report made by HSBC was not false and misleading.
Questionable loans to customers
The same payment transaction could be accounted for either as expenses or capitalised as assets or settlement of liabilities. Reporting of such transactions are then subject to management’s subjective judgement. If no strong internal control exists concerning financial reporting and payments, including the granting loans and advances to customers, many mechanisms then exist to conceal bribery and graft. For example, payments to a company that is actually controlled by a relative of political exposed persons (PEP) or directly to personal accounts indirectly controlled by PEPs would be debited to loans and advances to customers, especially likely in terms of deals with CCP. Such loans and advances to customers would eventually be derecognized or written off, preceded by charging ECL allowances year on year.
It was shown on the consolidated balance sheet that loans and advances to customers were carried at 1,037.987 billion US dollars as at 31 December 2020 [iii]as the largest item of assets by deducting allowance for expected credit loss (ECL). Other credit provisions include 14 billion US dollars from gross carrying amount 1,052.477 billion US dollars (allowance rate at 1.38%: 14.49/1,052.477×100%), which was indicated on page 165, accounted for 34.78% (1,037.987/2,984.164×100%) of total assets.
According to “Analysis of reported results by geographical regions” on page 108, Those granted in Asia accounted for the largest portion on average for 45.58% (Calculation: 473.165/1,037.987×100%).
[i] Challenging culture in audit firm. https://www.frc.org.uk/news/march-2021/podcast-in-conversation-on-the-frc%E2%80%99s-new-approach
[ii] UK Corporate Governance Code 2018. https://www.frc.org.uk/document-library/corporate-governance/2018/uk-corporate-governance-code-2018
[iii] Consolidated balance sheet. https://www.sec.gov/cgi-bin/viewer?action=view&cik=1089113&accession_number=0001628280-21-003046&xbrl_type=v#
Wholesale analysis of credit risk on page 175 indicated that after adding other debt instruments, such as those at fair value through other comprehensive income, and off-balance sheet financial instruments to loans and advances to customers at amortised cost, those granted in Mainland China (PRC) for 118.163 billion dollars and in Hong Kong (HK) for 452.983 billion dollars accounted for 7.75% and 29.72% respectively.
On page 95 as shown on the graph below, the maturity analysis also informed that most loans were issued in Asia.
However, page 86 explains that the loans and advances granted in HK$ are only 222.138 billion US dollars, indicating that the loans and advances to customers in HK had been granted in other currencies such as US dollars. It was partly verified by a 2019 IMF HK report in the following graph.
Therefore, which customers have been granted loans and advances in HK in US$ rather than in HK$? The CCP has many entities in HK, some of which are listed on the HK Exchange.
HSBC’s Loans to Huawei
Huawei and The China General Nuclear Power Group (CGN) are both military entities designated by the US Department of Defense.
As reported by Yahoo on 11 January 2020 and first appearing on the South China Morning Post, HSBC had taken part in billions of dollars of loans to Huawei because Meng Wanzhou allegedly had deceived the bank about its activities in Iran and put the bank’s economic interests at risk by preventing it from accurately assessing the risks of maintaining a business relationship with Huawei. Based on Meng’s assurances, HSBC had negotiated a US$900 million credit facility for Huawei in 2014, and took part in a syndicate that loaned US$1.5 billion to Huawei in 2015. It was mentioned that,
“HSBC had already been hit with US$1.7 billion in forfeitures and penalties in 2012 as a result of its violation of US sanctions on Iran, Cuba, Libya, Sudan and Myanmar”.[i]
According to a statement of U.S. Department of Justice,
“in 2012 Huawei began a concerted effort to steal information about a robot that T-Mobile used to test mobile phones. In an effort to build their own robot, Huawei’s engineers allegedly violated confidentiality and non-disclosure agreements with T-Mobile by secretly taking photos of the robot, measuring it, and even stealing a piece of it… As early as 2007, Huawei employees allegedly began to misrepresent the company’s relationship with its Iranian affiliate, which is called Skycom. Huawei employees allegedly told banking partners that Huawei had sold its ownership interest in Skycom—but these claims were false. In reality, Huawei sold Skycom to itself. By claiming that Skycom was a separate company—and not an affiliate which Huawei controlled—Huawei allegedly asserted that all of its Iran business was in compliance with American sanctions. These alleged false claims led banks to do business with the company and, therefore, to unknowingly violate our laws.”[ii]
Huawei engaged in genocide in Xinjiang, using AI tech that can identify Uighur individuals as reported by CNBC on 14 January 2021[iii], and is a part of CCP’s Military-Civil Fusion Strategy, as reported by the US Department of State on 12 March 2020.[iv]
HSBC failed to analyse the specifics of the transaction “Huawei sold Skycom to itself” in this respect, due to inherent restrictions of internal control, neglect or intentional collusion with CCP. If HSBC could not analyze such a transaction in detail nor correctly, then one can not expect that that HSBC could present its own financial statement fairly provided that the substance over form principle must be followed for financial statements to be fair.
The sparse details surrounding the transaction were not likely caused by an error in judgment. It was reported by ANS on 16 June 2020 that Pompeo said the CCP had reportedly threatened to punish HSBC and to break commitments to build nuclear power plants in the UK unless the UK allowed Huawei to build its 5G network as an extension of the CCP’s surveillance state. Another article in Gnews depicted the ownership problem of Huawei.[v]
However, if the HSBC retribution by the CCP on these grounds, then it must have had to pay bribes in order to receive preferential loans and accounting. As such, there may be completely false accounting entries processed to prepare its financial statements during this period. Because of HSBC’s misleading representations, it is reasonable to doubt that there may be loans or debts outstanding due to bribery purposes.
HSBC sided with another PLA entity CGN
CGN partnered with EDF Energy on U.K. nuclear construction projects at the Hinkley Point and Sizewell sites, and were also proposing to build a reactor at the Bradwell nuclear site in Essex. The latter company had been incurred a fine of €5 million (about $5.9 million) on Électricitéde France for providing false information about the Hinkley Point C new-build nuclear project in the United Kingdom by The Enforcement Committee of the Autorité des Marchés Financiers.[vi] HSBC advocated for CGN financing, promoting the green bonds of CGN Wind Power.[vii]It was reported on 23 November 2015 by Reuters that 1Malaysia Development Bhd sold power assets to CGN for $2.3 bn, in which HSBC advised on behalf of CGN.[viii]
HSBC financed property price bubbles
According to gross loans and advances by industry sectors over five years on page 138 of HSBC’s annual report, its loans are focused within the real estate industry both for customers’ “first lien residential mortgages” and for suppliers of homes (e.g. real estate developers), increasing year on year.
[i] HSBC’s loans to Huawei. https://sg.news.yahoo.com/huawei-meng-wanzhou-defrauded-hsbc-230407321.html
[iii] Huawei’s role in Genocide. https://www.cnbc.com/2021/01/15/huawei-ai-firms-filed-to-patent-tech-that-could-identify-uighurs-report-says.html
[iv] The PRC’s Military-Civil Fusion Strategy.https://china.usc.edu/us-state-department-prc%E2%80%99s-military-civil-fusion-strategy-march-12-2020
[vii] Green bond. https://www.sustainablefinance.hsbc.com/-/media/gbm/sustainable/attachments/bonds-and-climate-change-2018.pdf
[viii] HSBC advised for CGN. https://www.reuters.com/article/malaysia-1mdb-china-idUSL3N13I2SX20151123
Part of the loans for first lien residential mortgages went to CCP regimes both in PRC and HK. Accompanied with more and more control enforced by the CCP over HK, stamp duties levied on real estate have been increasing in the name of controlling prices to finance suppression of the HK pro-democracy movement.
No doubt that the taxes included in PRC residential property loan principals are not less than those levied in HK, some of which are included in the loan principals of real estate developers, such as land deed taxes levied on acquiring land use rights from the CCP regime. The following graphs illustrate what taxes and at what rate have been levied on PRC properties to finance the CCP tyranny.
The principal of loans granted to customers finally go to developers as consideration for homes except for those taxes paid to CCP regimes. In the PRC, the money of property and land developers from bank loans will be used to buy the rights of land use assets from the regime, which rejects privatization of land and sells such rights deprived from former occupants using force (i.e. forced demolition) funded with the aforementioned tax fund, prepaid money for rights of land use that arose from bank loans of customers, bank loans of the developer itself or its shareholder or equity fund. The Chinese land claimed by the CCP initially in 1949 belonged to the people, but the land’s deposition rights deposition rights have never been granted to them. CCP entities could occupy the land for free, allocating and delivering it to administration agencies. To develop land into real estate yields many taxes, while the loan fund is used to:
Occupy arable land with force resulting in food crises and homeless peasants;
Destroy forests resulting in flood, less carbon dioxide absorption and less production of oxygen, contributing to global warming and “natural” disasters;
Buy steel made from coal and iron ores, many of which are imported from Australia. Such economic activities give the CCP leverage over Australia. In one such case, the CCP took revenge on Australias push to investigate the origin of the coronavirus through ore sanctions. Additionally, some of this ore is produced in Xinjiang and Mongolia where both genocide and environment destruction have been a continuous occurrence. Finally, coal burning and mining continues to increase carbon emission rates.;
Making matters worse, the loans to developers may result in properties unwanted by customers or even uncompleted projects that ultimately lead to resource wastage.
Mortgage loans entitling CCP regimes to immediate access to future tax revenue
Because loans to customers include taxes that are revenues of real estate developers taxed when there’s a transfer of control over the property, the customers bear tax burden of future tax payments immediately. As far as the property developers are concerned, the taxes are prepaid when customers prepay consideration for the properties. As such, in the notes to financial statements of PRC developers, there are many prepaid taxes included in the “Prepayments”, “Other current assets” or “Other assets” account. On page 78 of the 2019 Annual Report of Vanke, it was shown that HSBC took part in Vanke’s investor meetings in 2019 as investors that may be related to borrowings in USD for about thirty billion RMB by Vanke Real Estate Hong Kong via a MTN Programme listed on the Stock Exchange of Hong Kong with interest-bearing at 2.95% to 5.35% per annum shown on page 244 and page 262 of the 2019 Annual Report of Vanke.
As regimes pay out from this fund comprised of such future revenue in the current fiscal year, it comes as no surprise that both the HK police and PRC police are powerful and enthusiastic in installing surveillance systems supported with the most advanced AI technology, supporting Alibaba and WeChat in the collection of privacy information, conducting a BGY campaign to silence western government officials over the HK crisis and Huawei’s security concerns and suppressing HK dissidents.
HSBC not only made CCP regimes capable of collecting future taxes via mortgage loans, but also bought bonds issued by CCP regimes that were in fact granted to future taxes as the bonds had to be repaid with future taxpayers’ money. Page 140 of HSBC’s annual report states that there were 71.1 billion US dollars PRC assets outstanding, including 14.0 billion US dollars PRC Government and official institutions assets.
Property prices include taxes collected ahead time, often decades, inflated by HSBC loans that will leave little cash available for businesses to pay dividends, wages and salaries. Thus, they will struggle to survive in both HK and the PRC. Therefore, the household debt to disposable income ratio increased yearly in both regions.
A YouTube video made by The Economist explained that bank lending, encouraged by propaganda and interest expense deductions in calculating income tax, gave rise to property bubbles. Given limited land supply and property development in HK, property bubbles will only continue to increase rental prices.
Such loans made young people, overwhelmed with loans, both in HK and PRC lose hope and ambition.
After so many taxes irrelevant to economic value creation but to the destruction of the economy are included in loan principal directly or indirectly, how can one count on full recourse of the loan principal and interest? The ECL allowance rate of 1.38% is obviously insufficient to reflect the actual bad debt rate.
Suspected financial fraud on customer deposits
HSBC’s consolidated balance sheet showed that it had deposits under customer accounts for 1,642.780 billion US dollars. After HSBC received deposits from customers, it froze the customer accounts of HK activists, who were acting for the rule of law, democracy and freedom in HK, in the name of observing the HK National Security Law. In essence, this law, illegally put customers’ assets on hold and disregarded the right of citizens over their property. The chart below shows many such examples.
Suspected financial fraud cases committed by HSBC reported by Media
|No.||Name of victims||Media report||Date of report|
|1||Ted Hui Chi-fung, his wife and parents.||Exiled Hong Kong legislator calls for action after HSBC bank accounts frozen[i]||7 Dec 2020|
|2||Cheung Kim-hung||Hong Kong media exec says HSBC accounts frozen after arrest[ii]||27 Aug 2020|
|3||Pastor Roy Chan, his wife and the Good Neighbor North District Church||A Hong Kong pastor tried to protect democracy activists. Now his bank account is frozen[iii]||16 Dec 2020|
|4||Jimmy Lai||Exclusive: Hong Kong police obtain financial records of arrested democracy activists[iv]||26 Jan 2021|
[i] Exiled Hong Kong legislator calls for action after HSBC bank accounts frozen. https://www.theguardian.com/world/2020/dec/07/exiled-hong-kong-legislator-calls-for-inquiry-after-hsbc-freezes-bank-account
[ii] Hong Kong media exec says HSBC accounts frozen after arrest. https://www.france24.com/en/20200827-hong-kong-media-exec-says-hsbc-accounts-frozen-after-arrest
[iii] A Hong Kong pastor tried to protect democracy activists. Now his bank account is frozen. https://www.latimes.com/world-nation/story/2020-12-16/hong-kong-bank-accounts-frozen
[iv] Exclusive: Hong Kong police obtain financial records of arrested democracy activists. https://www.reuters.com/article/us-hongkong-security-banks-exclusive-idUSKBN29V0FY
(The views and opinions expressed in this article are solely those of the author )
The HK National Security Law has never been agreed upon through representation of the Chinese people and the HK police were not acting on the laws agreed on by the HK people. HSBC disregarded such facts and even froze accounts of relatives of pro-democracy activists in HK. On these grounds, HSBC has been suspected of continuously committing financial fraud .
Stakeholder actions in great need
Considering the cases above, the conflict of interest of HSBC due to its investments in debt issued by PRC governments, and the HK National Security Law enforcement system over borders by the CCP through mutual extradition arrangements, other customers and potential customers of HSBC must think twice before making any deposits. Additionally, the current and potential debtholders of HSBC debts, including those presented as “Trading liabilities”, “Debt securities in issue”, “Subordinated liabilities”, etc also should conduct more stringent financial fraud risk analysis and strategy analysis before deciding to continue or withdraw from their business relationships with HSBC.
The auditor of HSBC should also act accordingly, especially considering the fact that HK PwC’s audit working papers are unavailable to be inspected by the US PCAOB. Such restrictions are a far cry from the ethical code of “integrity” and “professional behaviour” and a dereliction of “the responsibility to act in the public interest”.
All the stakeholders of HSBC should take action to take down the CCP and terminate HSBC’s role in CCP totalitarian expansion in order to realize the sustainable development of human society that is at the heart of ESG standards.
 HSBC annual report. https://www.sec.gov/ix?doc=/Archives/edgar/data/1089113/000162828021003046/hsbc-20201231.htm
 PCAOB statement. https://pcaobus.org/oversight/international/denied-access-to-inspections?pg=4
 PCAOB statement. https://pcaobus.org/oversight/international/denied-access-to-inspections?pg=4
 Challenging culture in audit firm. https://www.frc.org.uk/news/march-2021/podcast-in-conversation-on-the-frc%E2%80%99s-new-approach
 UK Corporate Governance Code 2018. https://www.frc.org.uk/document-library/corporate-governance/2018/uk-corporate-governance-code-2018
 Consolidated balance sheet. https://www.sec.gov/cgi-bin/viewer?action=view&cik=1089113&accession_number=0001628280-21-003046&xbrl_type=v#
 PLA entities. https://thenationalpulse.com/exclusive/ccp-collaborator-gates/
 HSBC’s loans to Huawei. https://sg.news.yahoo.com/huawei-meng-wanzhou-defrauded-hsbc-230407321.html
 DOJ actions against Huawei. https://www.justice.gov/opa/speech/acting-attorney-general-matthew-whitaker-announces-national-security-related-criminal
 Huawei’s role in Genocide. https://www.cnbc.com/2021/01/15/huawei-ai-firms-filed-to-patent-tech-that-could-identify-uighurs-report-says.html
 The PRC’s Military-Civil Fusion Strategy.https://china.usc.edu/us-state-department-prc%E2%80%99s-military-civil-fusion-strategy-march-12-2020
 Actual control over Huawei. https://gnews.org/270158/
 Huawei and CCP. https://www.ans.org/news/article-267/us-offers-support-for-uk-new-nuclear-build/
 Green bond. https://www.sustainablefinance.hsbc.com/-/media/gbm/sustainable/attachments/bonds-and-climate-change-2018.pdf
 HSBC advised for CGN. https://www.reuters.com/article/malaysia-1mdb-china-idUSL3N13I2SX20151123
 IMF HK report. https://www.imf.org/~/media/Files/Publications/CR/2019/1HKGEA2019003.ashx
 China Household Debt. https://rhg.com/research/china-household-debt/
 Exiled Hong Kong legislator calls for action after HSBC bank accounts frozen. https://www.theguardian.com/world/2020/dec/07/exiled-hong-kong-legislator-calls-for-inquiry-after-hsbc-freezes-bank-account
 Hong Kong media exec says HSBC accounts frozen after arrest. https://www.france24.com/en/20200827-hong-kong-media-exec-says-hsbc-accounts-frozen-after-arrest
 A Hong Kong pastor tried to protect democracy activists. Now his bank account is frozen. https://www.latimes.com/world-nation/story/2020-12-16/hong-kong-bank-accounts-frozen
 Exclusive: Hong Kong police obtain financial records of arrested democracy activists. https://www.reuters.com/article/us-hongkong-security-banks-exclusive-idUSKBN29V0FY
(The views and opinions expressed in this article are solely those of the author )