In 2010, the regulator found that HSBC had severe deficiencies in its anti-money laundering controls, including $60 trillion in transactions and 17,000 accounts flagged as potentially suspicious, activities that were not reviewed. Despite the findings, the regulator did not fine the bank.December 10, 2012 By Ben Protess and Jessica Silver-Greenberg Article from NY Times
State and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.
Instead, HSBC announced on Tuesday that it had agreed to a record $1.92 billion settlement with authorities. The bank, which is based in Britain, faces accusations that it transferred billions of dollars for nations like Iran and enabled Mexican drug cartels to move money illegally through its American subsidiaries.
While the settlement with HSBC is a major victory for the government, the case raises questions about whether certain financial institutions, having grown so large and interconnected, are too big to indict. Four years after the failure of Lehman Brothers nearly toppled the financial system, regulators are still wary that a single institution could undermine the recovery of the industry and the economy.
But the threat of criminal prosecution acts as a powerful deterrent. If authorities signal such actions are remote for big banks, the threat could lose its sting.
Behind the scenes, authorities debated for months the advantages and perils of a criminal indictment against HSBC.
Some prosecutors at the Justice Department’s criminal division and the Manhattan district attorney’s office wanted the bank to plead guilty to violations of the federal Bank Secrecy Act, according to the officials with direct knowledge of the matter, who spoke on the condition of anonymity. The law requires financial institutions to report any cash transaction of $10,000 or more and to bring any dubious activity to the attention of regulators.
Given the extent of the evidence against HSBC, some prosecutors saw the charge as a healthy compromise between a settlement and a harsher money-laundering indictment. While the charge would most likely tarnish the bank’s reputation, some officials argued that it would not set off a series of devastating consequences.
A money-laundering indictment, or a guilty plea over such charges, would essentially be a death sentence for the bank. Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.
Despite the Justice Department’s proposed compromise, Treasury Department officials and bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed to potential issues with the aggressive stance, according to the officials briefed on the matter. When approached by the Justice Department for their thoughts, the regulators cautioned about the effect on the broader economy.
“The Justice Department asked Treasury for our view about the potential implications of prosecuting a large financial institution,” David S. Cohen, the Treasury’s under secretary for terrorism and financial intelligence, said in a statement. “We did not believe we were in a position to offer any meaningful assessment. The decision of how the Justice Department exercises its prosecutorial discretion is solely theirs and Treasury had no role.”
After months of discussions, prosecutors decided against a criminal indictment, but only after securing record penalties and wide-ranging sanctions.
The HSBC deal includes a deferred prosecution agreement with the Manhattan district attorney’s office and the Justice Department. The deferred prosecution agreement, a notch below a criminal indictment, requires the bank to forfeit more than $1.2 billion and pay about $700 million in fines, according to the officials briefed on the matter. The case, officials say, will claim violations of the Bank Secrecy Act and Trading with the Enemy Act.
As part of the deal, one of the officials briefed on the matter said, HSBC must also strengthen its internal controls and stay out of trouble for the next five years. If the bank again runs afoul of the federal rules, the Justice Department can resume its case and file a criminal indictment. An independent auditor will also monitor the bank’s progress to strengthen its internal controls, and will make regular assessments on the firm’s progress.
On Tuesday, HSBC said it had “reached agreement with United States authorities in relation to investigations regarding inadequate compliance with anti-money laundering and sanctions laws.” The bank is also expected to reach a settlement over the matter with Britain’s Financial Services Authority, according to a person with direct knowledge of the matter.
“We accept responsibility for our past mistakes,’’ HSBC’s chief executive, Stuart T. Gulliver, said in the statement. “We are committed to protecting the integrity of the global financial system. To this end, we will continue to work closely with governments and regulators around the world.”
The HSBC case is part of a sweeping investigation into the movement of tainted money through the American financial system. In 2010, Lanny A. Breuer, the head of the Justice Department’s criminal division, created a money-laundering task force that has collected more than $2 billion in fines from banks, a number that is set to double with the HSBC case.
The inquiry — led by the Justice Department, the Treasury and the Manhattan prosecutors — has ensnared six foreign banks in recent years, including Credit Suisse and Barclays. In June, ING Bank reached a $619 million settlement to resolve claims that it had transferred billions of dollars in the United States for countries like Cuba and Iran that are under United States sanctions.
On Monday, federal and state authorities also won a $327 million settlement from Standard Chartered, a British bank. The bank, which in September agreed to a larger settlement with New York’s top banking regulator, admitted processing thousands of transactions for Iranian and Sudanese clients through its American subsidiaries. To avoid having Iranian transactions detected by Treasury Department computer filters, Standard Chartered deliberately removed names and other identifying information, according to the authorities.
“You can’t do it. It’s against the law, and today Standard Chartered is being held to account,” Mr. Breuer said in an interview.
HSBC’s actions stand out among the foreign banks caught up in the investigation, according to several law enforcement officials with knowledge of the inquiry. Unlike those of institutions that have previously settled, HSBC’s activities are said to have gone beyond claims that the bank flouted United States sanctions to transfer money on behalf of nations like Iran. Prosecutors also found that the bank had facilitated money laundering by Mexican drug cartels and had moved tainted money for Saudi banks tied to terrorist groups.
HSBC was thrust into the spotlight in July after a Congressional committee outlined how the bank, between 2001 and 2010, “exposed the U.S. financial system to money laundering and terrorist financing risks.” The Permanent Subcommittee on Investigations held a subsequent hearing at which the bank’s compliance chief resigned amid mounting concerns that senior bank officials were complicit in the illegal activity. For example, an HSBC executive at one point argued that the bank should continue working with the Saudi Al Rajhi bank, which has supported Al Qaeda, according to the Congressional report.
Despite repeated urgings from federal officials to strengthen protections in its vast Mexican business, HSBC instead viewed the country from 2000 to 2009 as low-risk for money laundering, the Senate report found. Even after HSBC’s Mexican operation transferred more than $7 billion to the United States — a volume that law enforcement officials said had to be “illegal drug proceeds” — lax controls remained.
HSBC has since moved to bolster its safeguards. The bank doubled its spending on compliance functions and revamped its oversight, according to a spokesman. In January, HSBC hired Stuart A. Levey as chief legal officer to come up with stricter internal standards to thwart the illegal flow of cash. Mr. Levey was formerly an under secretary at the Treasury Department who focused on terrorism and financial intelligence.
On Monday, the bank said it was promoting Robert W. Werner, who oversaw the group at the Treasury Department that enforces sanctions, to run a specially created division focused on anti-money laundering efforts.
Regulators have also vowed to improve. The Congressional hearings exposed weaknesses at the Office of the Comptroller of the Currency, the national bank regulator. In 2010, the regulator found that HSBC had severe deficiencies in its anti-money laundering controls, including $60 trillion in transactions and 17,000 accounts flagged as potentially suspicious, activities that were not reviewed. Despite the findings, the regulator did not fine the bank.
During the hearings this summer, lawmakers assailed the regulator. At one point, Senator Tom Coburn, Republican of Oklahoma, called the comptroller “a lap dog, not a watchdog.”