HSBC: The Drug World’s Local Bank

HSBC: The drug world’s local bank (Independent, Dec 11, 2012):

HSBC prides itself on being the “world’s local bank”. Yet it could have done without the kind of international exposure that upset United States senators this summer and the one that today resulted in it paying $1.9bn (£1.2bn) to settle a money-laundering probe.

As the senators tell it, and as the prosecutors allege, HSBC was used by a diverse customer base including Mexican drug gangs looking to funnel cash into the US and Iranians seeking to skirt US sanctions.

Yesterday, the Manhattan district attorney’s office said that, starting in the early 1990s, the bank had “moved hundreds of millions of dollars through the US financial system on behalf of Iranian, Burmese, Sudanese, Libyan and other clients”. In the process, it had flouted US sanctions by “concealing the illegal nature of these transactions and deceiving US banks into processing illegal wire payments”.

Separately, in a deferred prosecution agreement with the US department of justice, HSBC admitted to breaches of anti-money-laundering norms as it moved “hundreds of millions” through the US on behalf of Mexican and Colombian drug cartels.

“HSBC’s blatant failure to implement proper anti-money laundering controls facilitated the laundering of at least $881m in drug proceeds through the US financial system,” the US attorney for the eastern district of New York, Loretta Lynch, said.

US assistant attorney general Lanny Breuer added: “From 2006 to 2010, the Sinaloa cartel in Mexico, the Norte del Valle cartel in Colombia, and other drug traffickers laundered at least $881 million in illegal narcotics trafficking proceeds through HSBC Bank USA. These traffickers didn’t have to try very hard.” In all, the bank is accused of failing to monitor over $670bn in wire transfers from HSBC Mexico between 2006 and 2009.

Yesterday, after agreeing to cough up nearly $2bn to bring an end to an investigation that could have further embarrassed the bank, HSBC’s chief executive Stuart Gulliver said: “We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again.”

Under pacts with the US department of justice and other government agencies, HSBC will pay $1.25bn in forfeiture, the largest forfeiture in a case involving a bank, according to reports, and some $655m in civil penalties.

The settlement follows a wide-ranging probe into the movement of suspicious funds through the US financial system, which over the years has seen fines imposed on six large banks. These include Credit Suisse, which in the past agreed to pay more than $500m after authorities accused it of violating sanctions related to Iran, and Barclays, which paid nearly $300m following allegations of illegal transactions with institutions in places such as Cuba, Libya and Iran.

On Monday, Standard Chartered agreed to settle a money-laundering investigation by reaching a pact worth more than $300m with New York regulators, who accused it of moving funds through the US financial system on behalf of Iranian and Sudanese clients by “stripping” the transfers of information that “would have revealed the payments as originating with a sanctioned country or entity”.

HSBC shares rose yesterday as analysts welcomed news of the settlement. Ian Gordon, at Investec, said the agreement removed the “tail-risk” of a much higher payout and was unlikely to lead to a “vendetta against any member of HSBC’s executive team”.

The Financial Services Authority said it would work closely with HSBC to “prevent similar failings occurring in the future”.

The bank will be forced to create a new board committee overseeing issues such as anti-money laundering, terrorist financing and proliferation financing. The group will need to employ an independent monitor to oversee this. HSBC has already reacted to the probe by overhauling its procedures and controls. The company has beefed up its compliance team, hiring Bob Werner from the US Treasury. He will become head of group financial crime compliance and create a global financial intelligence unit at the bank. HSBC has adopted guidelines limiting business in high-risk countries.

Keith Bowman, at Hargreaves Lansdown stockbrokers, said: “HSBC is anxious to draw a line under the affair. Positively for shareholders, the fine has already been largely accounted for, with the figure seen as more than bearable”.

For HSBC investors, the drama is far from over with mis-selling probes and the Libor-rigging scandal still on the horizon. The company’s conduct in Jersey has also been questioned. It said it was investigating the loss of client data there “as a matter of urgency”.

From the world of Mexican drug gangs to the savings pots of ordinary British people and businesses the “world’s local bank” has a job on its hands to restore its reputation.

Too big size matters

HSBC’s record-breaking, money-laundering settlement has highlighted a new aspect of the “too big to fail” issue that has so bedevilled financial regulators since the 2008 crisis, namely the “too big to prosecute” problem.

As news of the deal filtered through, a report in the US suggested the reason authorities decided against indicting the giant bank was because of the risk that criminal indictment against such a critical cog in international banking could have destabilised the broader financial system.

According to the New York Times, given the evidence against the bank, officials spent months debating how to act against HSBC. Options included a potential money-laundering indictment, which would have been disastrous for the firm.

But given the risk that such moves could destabilise HSBC and the financial system they opted instead for a settlement with hefty penalty, according to the report.

The suggestion it wasn’t dealt with as harshly as possible could reignite criticism of regulators and will no doubt revive the debate about how authorities deal with institutions which are too big and enmeshed in the financial system.

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