HSBC Holdings Plc, which is under investigation by U.S. regulators for laundering funds of sanctioned nations including Iran and Sudan, is in talks to settle the matter, two people with knowledge of the case said.
The bank, Europe’s largest by market value, made a $700 million provision in July for any U.S. fines after a Senate Committee found it had given terrorists and drug cartels access to the U.S. financial system. That sum might increase, Chief Executive Officer Stuart Gulliver has said.
An HSBC settlement regulators and the Manhattan District Attorney were aiming to conclude as early as September may have been slowed when New York’s banking superintendent accused Standard Chartered of laundering $250 billion for Iran. Regulators had been talking with both banks about universal accords when Benjamin Lawsky on Aug. 6 threatened to revoke Standard Chartered’s license. Deals with the London-based banks next month are still possible, said the people, who asked not to be identified because the investigations are confidential.
“This is an epidemic of banks willfully, consistently violating economic sanctions,” Jimmy Gurule, a former undersecretary for enforcement at the U.S. Treasury, said of sanctioned-nation money laundering. “It calls for more serious sanctions than a monetary fine for an individual bank that does nothing more than harm shareholders.”
HSBC’s $700 million set-aside, if paid, would constitute the largest U.S. settlement reached over such allegations, topping the $619 million in penalties and forfeitures paid in June by ING Groep NV, the biggest Dutch financial-services company. Standard Chartered agreed on Aug. 14 to pay $340 million to settle the New York state matter, an accord that broke a previous pattern of resolving all such U.S. probes at once in a unified agreement.
HSBC’s credit rating outlook was cut by Standard & Poor’s, which questioned whether the lender is too big to be managed effectively in the wake of money-laundering investigations. S&P reduced its outlook on HSBC’s long-term rating to negative from stable, according to a statement yesterday.
HSBC, Standard Chartered and other European banks have been under investigation by U.S. regulators that include the Treasury Department’s Office of Foreign Assets Control, the Federal Reserve and Manhattan District Attorney Cyrus Vance Jr.
The multiyear probe into money-laundering has resulted in settlements with Lloyd’s Banking Group Plc, ABN AMRO Bank NV, Barclays Plc, Credit Suisse Group AG and ING.
Other European banks, including Deutsche Bank AG and Royal Bank of Scotland Group Plc, are cooperating with U.S. regulators in similar investigations, according to other people familiar with the matter. Two French banks, Credit Agricole SA and BNP Paribas SA, are also working with U.S. authorities in similar probes, according to their regulatory filings.
“Here we are at bank number seven, with Standard Chartered, and no individual banker has been held criminally responsible, and that’s a shame,” said Gurule, a professor at the University of Notre Dame. “Checks and balances on banks weren’t working. Bad conduct was going on for years undetected.”
HSBC handled so-called U-turn transactions through U.S. banks that involved funds from Iran to non-U.S. banks, altering its transaction records to obscure information about its clients, according to U.S. Senate testimony in July.
Around 25,000 transactions with Iran worth more than $19.4 billion were made with about 90 percent passing through the U.S., according to an audit by Deloitte LLP. Senate investigators documented similar transactions with North Korea, Cuba, Sudan and Burma, which along with Iran are subject to sanctions administered by the Office of Foreign Assets Control.
HSBC also dealt with al-Rajhi Bank, a Saudi Arabian client whose account the bank closed in 2005 over alleged terrorist financing before reopening it in 2007, according to the Senate testimony.
Christopher Lok, former head of global banknotes at HSBC Bank USA, testified that while al-Rajhi was a “controversial name,” the bank’s group compliance department had reversed earlier concerns and allowed business to proceed. David Bagley, HSBC’s head of group compliance, announced July 17 at the Senate hearing that he would step down.
From 2000 to 2009, HSBC also gave its lowest risk rating to Mexico despite “overwhelming information” that it posed a high risk for drug trafficking and money laundering, Senate investigators wrote in their report.
HSBC, which declined to comment on the matter, said in its 2011 annual report that it “continues to cooperate in ongoing investigations” by the Department of Justice, the Manhattan District Attorney, the Office of Foreign Asset Control, the Federal Reserve and the Office of the Comptroller of the Currency “regarding historical transactions involving Iranian parties and other parties subject to OFAC economic sanctions.”
Erin Duggan, a spokeswoman for Vance, Barbara Hagenbaugh of the Federal Reserve, David Neustadt of Lawsky’s Department of Financial Services and John Sullivan of Treasury’s OFAC unit declined to comment on the matter.
In the prior five settlements, the banks involved agreed to pay or forfeit money under so-called deferred prosecution agreements that mandate improved compliance systems. If the agreement is followed, the banks will avoid criminal prosecution.
Aside from ING’s record payment, ABN Amro paid $500 million in 2010, London-based Barclays paid $298 million in 2010, Zurich-based Credit Suisse paid $536 million in 2009, and London-based Lloyds paid $350 million in 2009.
Some investigations don’t result in such agreements because wrongdoing isn’t found, one of the people familiar with the HSBC case said.
Paris-based BNP Paribas and Credit Agricole have both disclosed probes into potential U.S. sanction violations in their annual reports since 2009, and added new disclosures in 2011 to indicate that outcomes would be difficult to predict.
BNP said in 2011 that following discussions with the U.S. Department of Justice and Vance’s office, it was reviewing operations to see if it has complied with sanction rules of the Office of Foreign Assets Control.
Credit Agricole likewise said in 2011 that it was cooperating with the Manhattan District Attorney and “other American governmental authorities” who sought information about payments in U.S. dollars involving sanctioned countries.
Credit Agricole and Credit Agricole CIB, its investment banking unit, were conducting internal reviews, the company said.
“It’s time to reexamine the audit function of federal regulators,” said Gurule of U.S. regulations meant to enforce sanctions. “It’s bad and the system is not working.”
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