In 2012, global banking giant HSBC was smacked with a record fine of US$1.9bn as a settlement to allegations of being a money laundering pipeline for terrorists, drug lords and rogue nations.
As part of the penalty, the US Department of Justice issued a 5 year deferred prosecution agreement – forecast to end soon – under which an independent monitor will assure the bank comply with and “fully implement” the necessary anti-money laundering measures.
The allegations stemmed from a stretch of inaction and failures to implement money laundering controls between 2004 and 2010, with their “pervasively polluted” operating culture as the US Senate puts it.
The bank’s egregious failures and stunning oversight to comply with anti-money laundering laws exposed the US financial system to hundreds of millions in drug related money flowing into the US and hundreds of millions more from transactions with sanctioned regimes through their subsidiaries.
HSBC escaped criminal prosecution by a decision from US authorities who saw it a less preferable option compared to the US$1.9bn fine. Proceeding with criminal charges was in nobody’s favour as it would have resulted in revoking HSBC’s US banking license and set off a chain reaction of unwanted events.
It starts off with the banking behemoth terminating all its operations in the US and with the US, thousands will lose their jobs, the institution’s reputation and prospects will enter a state of jeopardy, and the world financial system will destabilize. A string of “collateral consequences” that the US authorities do not want to take a chance with.
Poor standards and loose regulations
Assistant attorney general Lanny Breuer said “I don’t think anyone is alleging that HSBC was the mastermind of the scheme” but instead, the “incredibly lax” monitoring was to blame.
In a US Senate report published in July 2012, HSBC was heavily criticised for its money laundering controls. The report alleged that despite Mexico’s notorious money laundering and drug trafficking problems, its US operations failed to label their Mexican accounts as high risk clients and thus, allowed US$7bn in drug-stained bank notes to funnel into the US.
They also sidestepped US safeguards designed to block off terrorists, drug lords and rogue regimes from performing illegal transactions and supported Saudi Arabian banks linked to terrorist financing with US dollars and banking services.
Furthermore, they approved an amount of US$290m in “obviously suspicious” US travellers’ cheques within a short 4 year period, cheques which turned out were bought from high risk money laundering Russians.
HSBC was not the sole entity that was called out. Harsh criticisms also faced one of US’s primary bank regulators, the Office of the Comptroller of the Currency. They allowed the issues “to accumulate into a massive problem” by failing to clamp down on HSBC even with all the red flags they were showing.
The banks in Mexico were also thought to fail at implementing an anti-money laundering programme to fight against the serious risks of operating in the country because they were “severely understaffed”.
It was stated that “a complex scheme known as the black market peso exchange (BMPE) was used to launder cash”.
After the verdict was out, HSBC apologised for their admitted lack of anti-money laundering oversight and sacked all senior staff involved in the scandal.
Bob Werner, a former senior official at the US Treasury’s Office of Foreign Assets Control was also tasked to take on the newly created role of Head of Group Financial Crime Compliance at the bank and put in charge of enforcing HSBC’s anti-money laundering and sanctions compliance systems from that point on.
Updates since then
With HSBC reporting a slump in 2016 profits of 62%, chief executive officer Stuart Gulliver said the bank is still in midst of uncovering more regulatory problems with their much improved internal policing, adding that the business has “been able to identify more bad actors in our 37 million customer base”.
He also stated that it is “quite normal” for a bank of HSBC’s size – with operations in 70 countries and 240,000 staff – to come across issues like these.
American lawyer Michael Cherkasky was the appointed independent monitor for the 5 year duration and was reported to have raised concerns about clients with links to terrorism (including Isis).
An official summary report made public in April 2015 expressed worry surrounding HSBC’s processes, revealing “in certain instances the monitor believes that HSBC Group’s progress has been too slow,” even going further to add that in some aspects their “historical cultural deficiencies continue to pervade its operations today”.
On February 21 2017, the bank iterated the concerns brought forth by Cherkasky on “instances of potential finance crime that the DoJ (Department of Justice) and HSBC are reviewing further and on-going systems and control deficiencies that in (the monitor’s) view raised questions as to about whether HSBC is adhering to all its obligations under the US DPA”.