A "pervasively polluted" culture at HSBC Holdings Plc
allowed the bank to act as financier to clients seeking to route shadowy funds
from the world's most dangerous and secretive corners, including Mexico, Iran,
the Cayman Islands, Saudi Arabia and Syria, according to a scathing U.S. Senate
report issued on Monday. While the big British bank's problems have been known
for nearly a decade, the Senate probe detailed just how sweeping the problems
have been, both at the bank and at the Office of the Comptroller of the
Currency, a top U.S. bank regulator which the report said failed to properly
monitor HSBC. "The culture at HSBC was pervasively polluted for a long
time," said Senator Carl Levin, chairman of the U.S. Senate Permanent
Subcommittee on Investigations, a Congressional watchdog panel. The report
comes at a troubling time for a banking industry reeling from a multi-country
probe into the manipulation of global benchmark
rates. Last month, rival
British bank Barclays Plc agreed to pay a $453 million fine to settle a
U.S.-British probe into the rigging of the benchmark interest rate known as the
London interbank offered rate, or Libor. The Senate probe provides a rare look
at how HSBC responded when confronted with numerous cases of suspect money
flows. The report caps a year-long inquiry that included a review of 1.4
million documents and interviews with 75 HSBC officials and bank regulators. It
will be the focus of a hearing on Tuesday at which HSBC and OCC officials are
scheduled to testify. The bank and the regulator are expected to face tough
questions at the hearing about how the abuses were allowed to continue, even
after the OCC took regulatory action against HSBC in 2010. A Reuters
investigation found persistent lapses in the bank's anti-money laundering
compliance since 2010. In an emailed statement, HSBC said the Senate report had
provided "important lessons for the whole industry in seeking to prevent
illicit actors entering the global financial system". The bank said it is
spending more money on compliance and has become more coordinated in policing
high-risk transactions. The report also contained strong criticism of the OCC,
saying the regulator failed to crack down on the bank despite multiple red
flags, allowing money laundering issues "to accumulate into a massive
problem". Thomas Curry, who took over as comptroller less than four months
ago, said in a statement on Monday that anti-money laundering compliance
"is crucial to our nation's efforts to combat criminal activity and
terrorism, and the OCC expects national banks and federal thrifts to have
programs in place to effectively comply with these laws". Curry said the
Senate report had made a number of "thoughtful" recommendations,
"which we fully embrace".
LAX CONTROLS
The failings
and lax controls inside HSBC included an inability to properly monitor $15
billion in bulk cash transactions between mid-2006 and mid-2009, inadequate
staffing and high turnover in the bank's compliance units, the report said. HSBC
ignored risks in doing business in countries such as Mexico, a country rife
with drug trafficking, it said. Between 2007 and 2008, HSBC's Mexican
operations moved $7 billion into the bank's U.S. operations. According to the
report, both Mexican and U.S. authorities warned HSBC that the amount of money
could only have reached such a level if it was tied to illegal narcotics
proceeds. The Senate probe also examined banking HSBC did in Saudi Arabia with
Al Rajhi Bank, which the report said has links to financing terrorism. Evidence
of those links emerged after the Sept 11, 2001 attacks on the United States,
the Senate report said, citing U.S. government reports, criminal and civil
legal proceedings and media reports. In 2004, Al Rajhi sued the Wall Street
Journal, which had published an article about U.S. and Saudi authorities
monitoring accounts. The article referenced Al Rajhi. Al Rajhi said in response
to a WSJ story that it "unequivocally condemns terrorism". Al Rajhi
and the paper settled in 2004. The paper did not pay damages and stated that it
"did not intend to imply an allegation that (Al Rajhi) supported terrorist
activity, or had engaged in the financing of terrorism", the Senate report
said. In 2005, HSBC told its affiliates to no longer do business with the bank,
the report said. Four months later, HSBC officials reversed course, allowing
affiliates to decide whether to continue to do business with Al Rajhi. A Middle
Eastern unit of HSBC continued doing business with the bank, the report said.
HSBC ultimately stopped helping the bank handle certain types of transactions,
and HSBC compliance officials rebuffed other HSBC bankers seeking to maintain
ties to the bank. Then in late 2006, Al Rajhi threatened to yank all of its
business with HSBC unless it regained access to using HSBC's bulk-cash
transaction business, the Senate report said. HSBC agreed to continue to provide
the bank bulk shipments of U.S. dollars until 2010 when HSBC exited entirely
the bulk-cash business.
Officials at
Al Rajhi could not immediately be reached for comment.
U.S.
OPERATIONS
The focus of
the Senate probe was HSBC's U.S. operations, which has its main office in New
York. HSBC used the U.S. unit as a selling point to clients outside the United
States, touting its ability to handle U.S. dollar transactions.
Among HSBC's
problems, the report described the bank's compliance division as unable to
battle the suspect money. High turnover of top compliance officials made it
difficult for reform to take hold, the report said. Employees were
"overwhelmed" by a mounting number of suspect transactions that
needed review.
"We're
strapped and getting behind in investigations," one bank official wrote in
June 2008. By that time, HSBC was cutting costs to offset losses tied to
subprime home loans and the brewing financial crisis. In 2010, one disgusted
top compliance official threw up his hands and quit after less than a year on
the job, according to the report.
Typical of
the problems inside the bank were transactions tied to Mexico, a country the
report said is "under siege from drug crime, violence and money
laundering".
HSBC,
according to the report, helped move money for a Mexican foreign-exchange
dealer called Casa de Cambio Puebla that served as a hub for laundered
proceeds, according to the report.
Between 2005
and 2007, there was a "growing flood" of U.S. dollars moving between
the exchange house and HSBC, setting off red flags inside HSBC. Some bankers
said the transfers were legal. One said the money came from Mexican landscapers
working in the United States and routing money back home to their families.
HSBC
ultimately closed the account in November 2007 after it received a seizure
warrant from the Mexican attorney general seeking money tied to the exchange
dealer, the Senate report said.
DEALINGS
WITH IRAN
Some of the
money that moved through HSBC was tied to Iran, the report said, which would
violate U.S. prohibitions on transactions linked to it and other sanctioned
countries.
To conceal
the transactions, HSBC affiliates used a method called "stripping", where
references to Iran are deleted from records. HSBC affiliates also characterized
the transactions as transfers between banks without disclosing the tie to Iran
in what the Senate report called a "cover payment".
HSBC
"failed to take decisive action to confront these affiliates and put an
end to the conduct," the report said.
Between 2001
and 2007, more than 28,000 transactions were identified by an outside auditor
for HSBC that potentially could have run afoul of laws that prohibit
transactions with sanctioned countries. Of those, 25,000 involved Iran. A
smaller number required additional analysis to determine if violations of U.S.
regulations had occurred, the report said.
At the heart
of HSBC's failings was the fact that it served as a hub for smaller financial
firms needing access to the global banking system, the report said.
In one
example detailed in the Senate investigation, HSBC continued to do business
with one client that admitted to U.S. law enforcement that it had failed to
maintain an effective anti-money laundering system.
The client,
Sigue Corp, was a money processor in California, the report said. In 2008, the
company agreed to a so-called deferred prosecution with the U.S. Justice
Department and other U.S. agencies where it admitted to allowing millions of
dollars of suspect transactions between 2003 and 2005. Undercover U.S.
officers, in a sting, even moved money through the company, explicitly telling
Sigue agents they were moving illegal drug proceeds, the report said.
A day after
the agreement was announced, David Bagley, the head of HSBC compliance, sent a
handwritten note to another bank official, asking, "Obvious question--I
assume they are not our customer." Bagley is scheduled to testify on
Tuesday at the Senate hearing.
In fact,
Sigue was an HSBC customer, and bank officials internally discussed whether to
close the account. One compliance official recommended it should be shut down.
In the end, the bank kept doing business with Sigue.
In 2009, the
Justice Department said Sigue had satisfied the requirements of the agreement
and a criminal case was dismissed.
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