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The United States Senate permanent subcommittee on investigations presided by Sen. Carl Levin(D) and Sen. Tom Coburn(R), conducted detailed investigations on the role of HSBC as a global bank with a U.S. affiliate (HBUS), in providing access to the U.S. financial system for criminals, terrorists and rogue countries. HSBC operates in many countries with weak anti money laundering (AML) controls including countries in Latin America, Asia, Middle East, and Africa, and has high risk clients, as well as high risk financial activities. The subcommittee also examined HSBC because of its weak AML program. In September 2010, the OCC ((U.S. Office of the Comptroller of the Currency) issued a supervisory letter to the effect that HBUS was violating federal AML laws and maintained an inadequate AML program. In October 2010, the OCC issued a cease and desist order requiring that HSBC improve its AML practices.

On July 16 2012, The Senate subcommittee presented its findings "U.S. Vulnerabilities to Money Laundering,Drugs, and Terrorist Financing:HSBC Case History"[1][2] on the anti money laundering (AML) practices implemented at HSBC in general and its US affiiate HBUS in particular. the committee had issued multiple subpoenas and collected and reviewed over 1.4 million documents, including bank records, correspondence, emails, and legal pleadings. Staff conducted over 75 interviews with officials at HSBC Group, HBUS, and other HSBC affiliates, as well as with U.S. banking regulators. HSBC was fully cooperative. Findings include the following

Longstanding Severe Anti Money Laundering (AML) Deficiencies HSBC had severe anti money laundry defficiencies that accumulated over time. Problems include

  • AML leadership problems, inadequate and unqualified AML staffing, and inadequate resources devoted to AML measures.
  • Ineffective methods for identifying suspicious activity and poor procedures for assigning country and client risk ratings including a dysfunctional AML monitoring system for account and wire transfer activity.
  • A backlog of over 17,000 alerts for suspicious activity.
  • A failure to file timely Suspicious Activity Reports with U.S. law enforcement.

Servicing High Risk Affiliates. HSBC Group policy instructed its affiliates to assume that all HSBC affiliates, including those in high risk countries, met the group’s AML standards. For years, HBUS followed that policy and failed to conduct due diligence before opening correspondent accounts for HSBC affiliates. Payments from affiliate accounts held at HBUS, represented 63% of all USD payments processed by HBUS. Problems include

  • a 3-year failure by HBUS to conduct any AML monitoring of $15 billion in bulk cash transactions with HSBC affiliates. The Mexican affiliate HBMX alone shipped $7 billion in cash to HBUS despite Mexican and U.S. authorities expressing repeated concerns over that volume. The concern was that drug traffickers circumventing AML controls in U.S. banks were transporting cash dollars to Mexico and using Mexican financial institutions to transfer the money back to the U.S.
  • A failure to monitor $60 trillion in annual wire transfers by customers from countries rated by HBUS as lower risk.
  • A failure of HSBC Group to alert HBUS for money laundering risks, despite overseeing AML deficiencies at affiliates like HBMX which was known to do business with high risk casas di cambio and high profile clients involved in drug trafficking, showed millions of dollars in suspicious bulk travelers cheque transactions; and because of active resistance by bankers had a huge backlog of accounts marked for closure due to suspicious activity.
  • offering high risk products like U.S. dollar accounts in the Cayman Islands.

Circumvention of OFAC Safeguards. The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issues a list of prohibited persons and countries to block transactions involving terrorists, drug lords, and rogue regimes. Banks that violate these OFAC prohibitions face steep penalties. This "OFAC filter" can, however, also delay or block legal transactions. It was repeatedly brought to attention by HBUS compliance personnel and by HBEU personnel who objected to participating in document alteration that HSBC banks were actively circumventing the U.S. OFAC regulations at HBUS. HSBC Group Compliance did not take decisive action, even though internal documents show that key senior HBUS officials were informed as early as 2001. Cases include

  • Two HSBC affiliates sending nearly 25,000 transactions involving $19.4 billion over seven years through their HBUS accounts without disclosing that the transactions were linked to Iran.
  • Some HSBC affiliates sent potentially prohibited transactions through HBUS involving blacklisted persons and prohibited countries like Burma, Cuba, North Korea, Sudan. HSBC affiliates may also have sent non-U.S. dollar traffic through U.S. servers in which the OFAC filter was not turned on or was restricted.

Disregarding Terrorist Financing Links. HSBC is conducting substantial banking transactions with Al Rajhi Bank, Saudi Arabia’s largest private bank. After the 9-11 terrorist attack, the bank has been linked to financing terrorists, including by evidence that one of the bank’s founder was an early financial backer of al Qaeda. In 2005, HSBC first instructed its affiliates to cut ties with Al Rajhi Bank, then left the decision up to each affiliate. HSBC Middle East, among others, continued to do business with the bank while HBUS severed relations. For nearly two years, HBUS compliance personnel resisted pressure from HSBC personnel in the Middle East and the U.S. to resume business. However, after Al Rajhi Bank threatened to halt all business with HSBC unless it regained access to U.S. banknotes, HBUS provided nearly $1 billion in banknotes until 2010, when the HSBC group decided to stop the U.S. banknotes business altogether. HBUS also supplied U.S.dollars to Islami Bank Bangladesh Ltd. and Social Islami Bank, despite evidence of links to terrorist financing.

Clearing Suspicious Bulk Travelers Checks. In less than four years, HSBC cleared $290 million in U.S. travelers cheques for the Japanese Hokuriku bank. The cheques were in denominations of $500 or $1,000, submitted in large blocks of sequentially numbered cheques, and signed and countersigned with the same illegible signature. The checks benefitted Russians who claimed to be in the used car business.

Offering Bearer Share Accounts. HSBC offered more than 2,000 accounts to bearer share corporations, despite the high risk of money laundering and illicit conduct that results, since their ownership can be readily transferred without a trail. At its peak, HBUS’ Miami office alone had over 1,670 bearer share accounts that held assets totaling an estimated $2.6 billion, and generated annual bank revenues of $26 million. Multiple internal audits and regulatory examinations criticized the accounts for being high risk, but HBUS bankers resisted tightening AML controls, and regulators took no enforcement action. Only after an initiative that concluded in 2011, HBUS reduced its bearer share accounts to 26, most of which are frozen, but maintains a policy that allows the bank to open new bearer share accounts in the future.

Regulatory Failures. Part of HBUS's AML problems resulted from problems with the regulatory oversight by OCC. It permitted nationalbanks to delay or avoid correcting identified problems, and allowed smaller AML issues to accumulate before action was taken. Problems include

  • OCC not treating AML deficiencies as a matter of bank safety and soundness or as a management problem but as a matter of consumer compliance. As a result, AML deficiencies did not lower the ratings that national banks receive as part of their safety and soundness evaluations, and therefore they did not increase the deposit insurance that banks pay for incurring heightened risk.
  • OCC's reporting failures to meet statutory requirements as a “Matter Requiring Attention” rather than as a legal violation. Over five years, the OCC identified 83 such Matters at HBUS, but only when the OCC concluded that the entire AML program at HBUS was deficient, OCC decided to cite the bank for a legal violation.
  • The OCC’s practice of conducting narrowly focused AML examinations of specific banking units without also assessing overall AML program at HBUS.
  • The practice by some OCC examiners to issue Supervisory Letters that sometimes muted AML examination criticisms or weakened recommendations for AML reforms at HBUS.

"Too Big to Jail", $1.92 billion setttlement.

On 11 December 2012, after a multi-year probe by U.S. prosecutors, and the US senate committee hearings, HSBC agreed to pay a record $1.92 billion fine in this money laundering case.[3]. Despite ample evidence of illegal practices, the DOJ decided not to pursue criminal charges but a settlement that, while substantial, is only a fraction of the HSBC profit over 2012. No bankers were charged personally. A conviction for money-laundering indictment or guilty plea, would have severe consequences for the bank,: certain investors like pension funds would have to cease doing business with the bank and it would eventually cost it its charter to operate in the United States. A conviction of one of the world’s largest banks might therefore possibly lead to HSBC's bankruptcy , and ultimately the destabilization of the global financial system[4]. Commentator Glenn Greenwald labeled this argument as "HSBC is "too big to jail"[5]. The New York Times labeled the decision a "dark day for the rule of law."[6].

References

  1. "HSBC Exposed U.S. Financial System to Money Laundering, Drug, Terrorist Financing Risks". United States Senate, The Permanent Subcommittee On Investigations. July 17, 2012. http://4closurefraud.org/2012/07/16/us-senate-report-u-s-vulnerabilities-to-money-laundering-drugs-and-terrorist-financing-hsbc-case-history/. Retrieved 23 December 2012. 
  2. "HSBC Exposed U.S. Financial System to Money Laundering, Drug, Terrorist Financing Risks (press release)". United States Senate, The Permanent Subcommittee On Investigations. July 16, 2012. http://www.hsgac.senate.gov/subcommittees/investigations/media/hsbc-exposed-us-finacial-system-to-money-laundering-drug-terrorist-financing-risks. Retrieved 22 December 2012. 
  3. "HSBC in return for "no admission of wrongdoing or guilt"". Reuters. December 11, 2012. http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211. Retrieved 11 December 2012. 
  4. "HSBC to Pay $1.92 Billion to Settle Charges of Money Laundering". The New York Times. December 10, 2012. http://dealbook.nytimes.com/2012/12/10/hsbc-said-to-near-1-9-billion-settlement-over-money-laundering/. 
  5. Greenwald, Glenn (2012-12-12). "HSBC, too big to jail, is the new poster child for US two-tiered justice system". The Guardian. http://www.guardian.co.uk/commentisfree/2012/dec/12/hsbc-prosecution-fine-money-laundering. Retrieved December 12, 2012. 
  6. "Too Big to Indict". The New York Times. 2012-12-11. http://www.nytimes.com/2012/12/12/opinion/hsbc-too-big-to-indict.html. Retrieved December 12, 2012. 
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