HSBC's Money Laundering Scandal

By Marc L. Ross, CFP, CPA®, CLU® | January 29, 2013 AAA

HSBC Holdings' (NYSE:HBC) agreement to pay a $1.9 billion fine to regulators and enter into a deferred prosecution agreement points to lack of adequate control processes in compliance and anti-money laundering. Given the bank's size, it appears that it and some of its peers are too big to jail because they are too big to fail. The agreement constitutes a warning to the bank to clean up its act and avoids revocation of its charter to operate in the United States. The action was taken by regulators in the belief that a failure of a large financial institution could imperil the world's financial system.

SEE: The Banking System

Why Did These Transgressions Come About?
In the case of HSBC, cost cutting as part of a wide-ranging restructuring of the bank - through selling unprofitable businesses and centralizing its global structure - took a toll on the bank's compliance department. HSBC is not alone in its indiscretion. Standard Chartered (OTC:SCBFF), ING (NYSE:ING), Credit Suisse (NYSE:CS), Royal Bank of Scotland (NYSE:RBS), Lloyds Banking Group (NYSE:LYG) and Barclays (NYSE:BCS), over the past several years, have had to stump up fines for facilitating transactions with rogue nations such as Iran, Libya, Sudan and Myanmar in violation of the Office of Foreign Asset Control (OFAC) sanctions.

With HSBC, Mexico's involvement entailed providing money-laundering services to various drug cartels, including bulk movements of cash from the bank's Mexican unit to the U.S., with little or no oversight of the transactions. It also conducted transactions with Iran, removing references to the country in an effort to conceal them.

Lacking in these instances is a corporate culture that prizes integrity. Enabling the business of drug running and state-sponsored terrorism in the pursuit of profit leads to dire societal consequences. Blame may be placed at the foot of the banks and regulators alike. In the former instance, inadequate anti-money laundering (AML) controls were principally at fault. In the latter, the Office of the Comptroller of the Currency (OCC) failed to crack down on HSBC's deficient implementation of controls. Indeed, prior to 2010 when the OCC cited the bank for many AML deficiencies - including a huge backlog of unreviewed accounts and failure to file Suspicious Activity Reports (SARs) - for the previous six years the agency failed to take any enforcement action against the bank.

SEE: 3 Recent Money Laundering Scandals

Suspect Money Trails Revealed
Immigration and Customs Enforcement agents revealed suspect money trails between HSBC's Mexican and United States operations. In a report pursuant to a year-long investigation into the doings at the bank by a Senate Permanent Subcommittee on Investigations, committee chairman Senator Carl Levin (D-Michigan) proclaimed: "HSBC used its U.S. bank as a gateway into the U.S. financial system for some HSBC affiliates around the world to provide U.S. dollar services to clients while playing fast and loose with U.S. banking rules. Due to poor AML controls, HBUS (HSBC's U.S. affiliate) exposed the United States to Mexican drug money, suspicious travelers cheques, bearer share corporations and rogue jurisdictions."

HBUS provides correspondent banking services, such as fund transfers and currency exchanges, which were the source of illicit flows in the face of weak AML controls. These resulted in violations of the Bank Secrecy Act, Trading with the Enemy Act and other AML statutes.

In addition to paying fines, the bank has hired Stuart A. Levey as its chief legal officer to strengthen internal controls including know-your-customer procedures. HSBC has also clawed back bonuses of certain executives involved in its compliance deficiencies. While a good start, such actions must be underpinned by a culture of transparency.

The Bottom Line
HSBC has been cited in the past and yet committed violations anew. If positive change is to be lasting, so, too, must the culture that fosters it be ingrained throughout the bank. Speaking of his own bank's need to rectify past misdeeds, UBS chief Sergio Ermotti likened cultural change to a journey. Just as every journey may have unexpected twists and turns, HSBC's case has illustrated the consequences of a detour.

At the time of writing, Marc L. Ross did not own any shares in any company mentioned in this article.

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