Tags: hsbc | money | laundering | fine

HSBC to Spend $700 Million on Filtering Clients for Criminal Activity

Tuesday, 11 Dec 2012 12:50 PM

 

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HSBC has agreed to pay a record $1.92 billion fine to settle a multi-year probe by U.S. prosecutors, who accused Europe's biggest bank of failing to enforce rules designed to prevent the laundering of criminal cash.

The U.S. Justice Department on Tuesday charged the bank with failing to maintain an effective program against money laundering and conduct due diligence on certain accounts.

In documents filed in federal court in Brooklyn, it also charged the bank with violating sanctions laws by doing business with customers in Iran, Libya, Sudan, Burma and Cuba.

HSBC Holdings Plc admitted to a breakdown of controls and apologized for its conduct.

"We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes," said Chief Executive Stuart Gulliver.

In an agreement with the Justice Department, the bank will take steps to fix the problems, pay a fine of $1.256 billion, and retain a compliance monitor to resolve the charges through a deferred-prosecution agreement. Including penalties imposed by other agencies, the bank's fines total $1.92 billion. HSBC also faces civil penalties, to be announced later Tuesday.

The settlement offers new information about failures at HSBC to police transactions linked to Mexico, details of which were reported this summer in a sweeping U.S. Senate probe.

Between 2006 and 2010, HSBC ignored money-laundering risks associated with certain Mexican customers and allowed at least $881 million in drug trafficking proceeds, including proceeds from the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia, to be laundered through the bank, according to the Tuesday agreement.

Despite known risks of doing business in Mexico, the bank put Mexico in its lowest risk category, which excluded $670 billion in transactions from the monitoring systems.

"The HSBC settlement sends a powerful wakeup call to multinational banks about the consequences of disregarding their anti-money laundering obligations," said Senator Carl Levin, who led the Senate inquiry.

HSBC said it expected to also reach a settlement with British watchdog the Financial Services Authority. The FSA declined to comment.

U.S. and European banks have now agreed to settlements with U.S. regulators total ling some $5 billion in recent years on charges they violated U.S. sanctions and failed to police potentially illicit transactions.

No bank or bank executives have been indicted. Instead, prosecutors have used deferred prosecutions, under which criminal charges against a firm are set aside if it agrees to conditions such as paying fines and changing its behavior.

HSBC's settlement also includes agreements or consent orders with the Manhattan district attorney, the Federal Reserve and three U.S. Treasury Department units: the Office of Foreign Assets Control, the Comptroller of the Currency and the Financial Crimes Enforcement Network.

THIRD TIME

The settlement is the third time in a decade that HSBC has been penalized for lax controls and ordered by U.S. authorities to improve its monitoring of suspicious transactions. Previous directives by regulators to improve oversight came in 2003 and in 2010.

Last month, HSBC told investors it had set aside $1.5 billion to cover fines or penalties stemming from the inquiry and warned that costs could be significantly higher.

Analyst Jim Antos of Mizuho Securities said the settlement costs were "trivial" in terms of the company's book value.

"But in terms of real cash terms, that's a huge fine to pay," said Antos, who rates HSBC a "buy."

"It has been damaging for the brand, albeit not as bad as it might have been," said Ian Gordon, an analyst at Investec Securities in London.

"Is it absorbable? Yes. Is it significant? Yes. But in the absence of a broader attack on the business structure or individuals, that explains why the market reaction has been relatively muted today and has been since the allegations came out," he added.

HSBC shares closed up 0.56 percent at 644.8 pence in London,

ANTI-MONEY LAUNDERING CONTROLS

HSBC said it had increased spending on anti-money laundering systems by around nine times between 2009 and 2011, exited business relationships and clawed back bonuses for senior executives. As evidence of its determination to change, it cited the hiring last January of Stuart Levey, a former top U.S. Treasury Department official, as chief legal officer.

Under a five-year agreement with the Justice Department, HSBC agreed to have an independent monitor evaluate its progress in improving its compliance.

It also said that as part of the overhaul of its controls, it has launched a global review of its "Know Your Customer" files, which will cost an estimated $700 million over five years. The files are designed to ensure that banks do not unwittingly act as conduits for criminal funds.

HSBC's settlement comes a day after rival British bank Standard Chartered Plc agreed to a $327 million settlement with U.S. law enforcement agencies for sanctions violations, a pact that follows a $340 million settlement the bank reached with the New York bank regulator in August.

Such settlements have become commonplace. In what had been the largest settlement until this week, ING Bank NV in June agreed to pay $619 million to settle U.S. government allegations that it violated sanctions against countries including Cuba and Iran.

Other banks that have reached settlements over sanctions violations are Switzerland's Credit Suisse Group, Britain's Lloyds Banking Group and Barclays, and ABN Amro Holding NV, a Dutch bank acquired by Royal Bank of Scotland Group Plc and a bank consortium in 2007.

In the United States, J.P. Morgan Chase & Co., Wachovia Corp. and Citigroup Inc. have been cited for anti-money laundering lapses or sanctions violations.

HSBC's failings date to 2003, when the Federal Reserve Bank of New York and New York state regulators ordered it to better monitor suspicious money flows. In 2010, a consent order from the Comptroller of the Currency (OCC) ordered HSBC to review suspicious transactions. At the time, the OCC called HSBC's compliance program "ineffective."

In 2008, the federal prosecutor in Wheeling, West Virginia, began investigating allegations that a local doctor used the bank to launder money from Medicare fraud.

Ultimately, the prosecutor's office came to believe the case was "the tip of the iceberg" in terms of suspicious transactions conducted through HSBC, according to documents reviewed by Reuters and reported earlier this year.

© 2014 Thomson/Reuters. All rights reserved.

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