WASHINGTON British bank HSBC (HBC) violated the Bank Secrecy Act in connection with the laundering of money from narcotics drug traffickers in Mexico and intentionally allowed prohibited transactions with Iran and other nations that have been under sanctions, the Justice Department alleged Tuesday.
In court papers filed in federal court in Brooklyn, the federal government said the case against HSBC is related to the laundering of proceeds from narcotics trafficking via the Black Market Peso Exchange - a method by which money launderers convert cash narcotics dollars into Colombian pesos by buying and re-selling wholesale consumer goods.
"The lack of an effective anti-money laundering program at HSBC Mexico and HSBC Bank USA, N.A. contributed to the conduct charged" in the money-laundering case against narcotics traffickers, Justice Department prosecutors said in court papers.
The government alleges that HSBC intentionally allowed prohibited transactions with Iran, Libya, Sudan and Burma. The federal government also said the bank facilitated transactions with Cuba in violation of the Trading With the Enemy Act.
The documents say the prohibited transactions with Iran, Libya, Sudan and Burma took place from 2001 through 2006.
In regard to the Mexican drug traffickers, the bank HSBC USA failed to adequately monitor over $9.4 billion from HSBC Mexico.
The British banking giant on Tuesday issued an apology.
"We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again," said Stuart Gulliver, group chief executive of HSBC.
In a statement of facts, the Justice Department said that "HSBC Bank USA admits" that it violated the Bank Secrecy Act. The law makes it a crime to willfully fail to establish and maintain an effective anti-money laundering program.
The bank "ignored the money laundering risks associated with doing business with certain Mexican customers and failed to implement" an anti-money laundering program "that was adequate to monitor suspicious transactions from Mexico" from 2006 through 2010, the government's statement of facts said.
The government's allegations come as HSBC says it has agreed to pay $1.92 billion to settle the U.S. money-laundering probe. The bank announced on Tuesday that "under these agreements," HSBC will "continue to cooperate fully with regulatory and law enforcement authorities."
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The U.S. stopped short of charging executives, citing the bank's immediate, full cooperation and the damage that an assault on the company might cause on economies and people, including thousands who would lose jobs if the bank collapsed.
Outside experts said it was evidence that a doctrine of "too big to fail," or at least "too big to prosecute," was alive and well four years after the financial crisis.
The settlement avoided a legal battle that could have further savaged the bank's reputation and undermined confidence in the banking system. HSBC does business in almost 80 countries, so many that it calls itself "the world's local bank."
Lanny A. Breuer, assistant attorney general of the Justice Department's criminal division, cited a "stunning, stunning failure" by the bank to monitor itself. He said that it enabled countries subject to U.S. sanction - Cuba, Iran, Libya, Myanmar and Sudan - to move about $660 million in prohibited transactions through U.S. financial institutions, including HSBC, from the mid-1990s through September 2006.
Officials noted that HSBC officers in the United States had warned counterparts at the parent company that efforts to hide where financial transactions originated would expose the bank to sanctions, but the protests were ignored.
HSBC even instructed an Iranian bank in one instance how to format messages so that its financial transactions would not be blocked, Breuer said at a news conference announcing the settlement.
"The record of dysfunction that prevailed at HSBC for many years is simply astonishing," Breuer said.
For the government not to go a step further and prosecute was "beyond obscene," said Bill Black, a former U.S. regulator for the Office of Thrift Supervision who now teaches at the University of Missouri-Kansas City.
"Regulators are telling us, `Yes, they're felons, they're massive felons, they did it for years, they lied to us, and they made a lot of money ... and they got caught red-handed and they're gonna walk.'"
Black disputed the government's concern that indicting HSBC could take down the financial system.
"That's the logic that we get stability by leaving felons in charge of our largest banks," he said. "This is insane."