HSBC Nightmares and Money Laundering Dreams

The $28 million fine by Mexican regulators of HSBC’s Mexico subsidiary announced on Wednesday is just the latest, but may not be the last, blow to hit the London-based bank for its failure to counter money laundering. Mexico’s National Securities and Banking Commission said the fine, about half the subsidiary’s 2011 profits, had been paid.

HSBC’s failure to act adequately in various countries, but particularly Mexico, to counter money laundering through its network was at the heart of a recent US investigation of the bank that could lead it to being fined up to $1 billion by US authorities.

Last week, HSBC issued an apology and its head of compliance resigned following disclosures by lawmakers in Washington that the bank had failed to implement anti-money-laundering procedures and had facilitated illicit Iranian transactions, terrorist activity, and drug proliferation around the world.

Banking regulators and customers alike will be disappointed to learn that this global giant had become a “sinkhole of risk” that acted counter to the public interest and pursued financial gain above all.

One of the world’s largest banks, HSBC has more than 7,200 offices and 300,000 employees throughout Asia, the Americas, the Middle East, and Africa. In 2011 alone, it garnered profit of nearly $22 billion.

One of its most important affiliates is in the United States and operates under the name HSBC Bank USA (or HBUS). With 370 branches throughout the country, HBUS services 3.8 million customers and processes over 600,000 wire transfers a week, two-thirds of which are reportedly handled for HSBC affiliates around the world. Access to the US dollar is crucial to HSBC’s operation.

US lawmakers this month issued a 335-page report (and 530-page addendum of evidence) giving excruciating detail about the bank’s failings, in addition to holding a day-long hearing that included US Treasury and Homeland Security Department officials and banking regulators.

HSBC representatives were grilled, including the famed Stuart Levey, who for seven years served as Under Secretary for Terrorism and Financial Intelligence within the US Treasury Department under presidents George W Bush and Barack Obama. He now serves as HSBC’s chief legal officer.

During the hearing, in a dramatic announcement, David Bagely resigned as HSBC’s head of compliance following a 20-year career at the bank. “HSBC has fallen short of our own expectations and the expectations of our regulators,” Bagely said.

The Congressional report, along with the testimony of officials, reads like a pulp fiction novel. HSBC helped facilitate illicit transactions around the globe for the better part of the last decade, and its compliance culture has been “pervasively polluted for a long time,” according to Senator Carl Levin.

In Mexico, the bank deposited billions of US dollars for Mexican drug cartels and the casas de cambio that acted as their agents, allowing them to launder massive amounts of cash that they smuggled across the US-Mexican border.

HSBC Mexico took dollars, transported them back to the United States, and deposited them in HBUS, thus completing the laundering cycle for the cartels. In 2007 and 2008, HSBC Mexico shipped over $7 billion in physical US dollars to the United States, more than any other Mexican bank.

HSBC allegedly acted as a major conduit to rogue regimes and provided Iran with access to the international financial sector. From 2001-2007, the bank reportedly facilitated approximately 25,000 transactions on Iran’s behalf, in amounts totaling $19.4 billion, through HSBC’s American affiliate (which does not include funds facilitated through other affiliates).

In an attempt to circumvent US sanctions efforts, HSBC concealed any link to Iran for 85% of these transactions.

Senior HSBC officials on both sides of the Atlantic claimed that they were not aware, but congress disclosed evidence, including emails, that demonstrates they were actually in the loop from a very early stage, and well understood the risk these transactions posed to the bank. Lawmakers also presented evidence that HSBC affiliates tried to circumvent US sanctions efforts against Sudan and North Korea.

HSBC also provided a robust correspondent banking relationship to suspect banks around the globe. For example, it serviced Saudi Arabia’s Rajhi Bank, whose key founder was a generous donor to al-Qaeda. Rajhi, in turn, provided banking services to other suspect clients.

Moreover, HSBC America offered banking services to bearer share corporations, which provide anonymity by assigning legal ownership to anyone who has physical possession of the company’s shares. This is a notorious method money launderers use to raise and move funds. Despite warnings from US banking regulators, HSBC opened accounts for 2,000 such corporations over the last decade.

There are a number of steps HSBC should take immediately. It should start by identifying which affiliates are located in high-risk jurisdictions and implement a robust anti-money laundering compliance program across the board. Safeguards should be put in place to ensure that none of the HSBC banks are doing business with terrorists, weapons proliferators, money launderers, or other illicit actors. In addition, HSBC should not facilitate transactions for, or do business with, the roughly 250 banks the Treasury Department has blacklisted for facilitating nefarious activity.

Other steps the bank should take include closing down bearer share accounts. It might also wish to better share information, both within the HSBC affiliate structure and with relevant government officials worldwide. This would go a long way toward ensuring it is doing its part to curb abuse of the international financial sector. In today’s interconnected financial world, such measures are part of the cost of doing business.

HSBC must revamp its compliance regime across the board or face the consequences from global banking regulators, which should include losing its license to operate if it fails to carry out its obligations. Global financial institutions must use every tool in their arsenal to curb the efforts of those who exploit tainted money. HSBC is no exception.