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Feds outline HSBC ties to laundering, drug money

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."

U.S. defends deal with British bank

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."

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Breuer defended the government's agreement with HSBC. He said that U.S. employees in particular seemed duped by criminal enterprises taking advantage of HSBC oversight policies that over decades became increasingly lax.

Court documents showed that the bank let over $200 trillion between 2006 and 2009 slip through relatively unmonitored, including more than $670 billion in wire transfers from HSBC Mexico, making it a favorite of drug cartels and money launderers. HSBC Bank USA at the time rated Mexico in its lowest risk category.

Top executives who felt "the pressure of the bottom line" continually cut staff that might have discovered how criminal enterprises were taking advantage of the bank, Breuer said.

Officials noted that the deal for the first time resulted in U.S. court supervision of a foreign banking institution and lengthy monitoring of a radically changed bank that had changed all its top management.

Before the government stepped in, HSBC used only one or two compliance officers to monitor its banknotes business - the wholesale buying and selling of bulk cash around the world - even though the business is highly vulnerable to money launderers.

Despite the high risk, discrepancies and suspicious activity in banknotes transactions were not reported from July 2006 to July 2009, when the banks' compliance staffing was at its worst.

In March 2008, when 13,000 to 15,000 suspicious wire alerts were generated per month by such transactions, only four employees were around to review them, according to court papers. HSBC Bank USA now has 430 employees reviewing suspicious wire alerts.

"I think it's a disservice to suggest that anyone's getting a pass here," Breuer said.

Asked repeatedly why no bank executives were being prosecuted, Breuer said, "I'm not here to defend HSBC." Yet, he added: "Our goal is not to bring HSBC down."

He said to do so would affect the economy and cost thousands of people their jobs. He said no criminal charges would be brought unless it could be proved that executives purposely tried to let criminal organizations launder money.

Other officials noted that some of what was going on may have violated U.S. laws but not the laws of Britain or other nations where HSBC employees were carrying out their work.

The bank's CEO, Stuart Gulliver, said that it accepted responsibility for its mistakes and was "profoundly sorry." He added: "The HSBC of today is a fundamentally different organization from the one that made those mistakes."

U.S. Attorney Loretta Lynch in Brooklyn said the bank's "blatant failure" to implement proper anti-money laundering controls permitted drug organizations in Mexico to launder at least $881 million in drug proceeds through the U.S. financial system. Court documents show that HSBC expanded its banking links with Mexico in 2002 when it acquired Mexico's fifth-largest bank with approximately 1,400 branches and 6 million customers. According to the documents, HSBC's head of compliance acknowledged at the time that what became HSBC Mexico had "no recognizable compliance or money laundering function ... at present."

Besides forfeiting $1.25 billion in its deal with the government, HSBC also agreed to pay $665 million in civil penalties, including $500 million to the Office of the Comptroller of the Currency and $165 million to the Federal Reserve. The U.S. said the United Kingdom's Financial Services Authority was pursuing a separate action.

It was not the first time that the bank has gotten in trouble with American authorities. In July, a Senate subcommittee on investigations criticized HSBC for lax controls that allowed money laundering.

Sen. Carl Levin, D-Mich., accused the bank of "playing fast and loose with U.S. banking rules."

In the middle of the hearing, HSBC's head of group compliance, David Bagley, acknowledged "some significant areas of failure" in the bank's compliance, then broke from his prepared testimony to resign.

At the same Senate hearing, the head of the Office of the Comptroller of the Currency, Thomas Curry, found fault with his own agency. It "could have and should have" addressed problems at the bank sooner, he said.

Money laundering by banks has become a target for U.S. law enforcement. Since 2009, Credit Suisse, Barclays, Lloyds and ING have all paid big settlements related to allegations that they moved money for people or companies under U.S. sanction.

The money-laundering affair is the latest scandal to strike the banks since the 2008 financial crisis.

Standard Chartered, another British bank, signed an agreement with New York regulators on Monday to settle a money-laundering investigation involving Iran with a $340 million payment.

HSBC should easily be able to absorb the $1.9 billion penalty issued this week. It turned a profit of $17 billion last year alone.

John Martin, the director of U.S. Immigration and Customs Enforcement, said the settlement resulted from a five-year investigation that included the study of 9 million documents.

"Money is what makes the world of organized crime go around," he said. "HSBC got into a bad place."

Gulliver assumed the CEO job Jan. 1, 2011, but has been at the company since 1980. In late 2010, when Gulliver was preparing to take the CEO job, the bank shook up top management.

"After the financial crisis, I believe customers are thinking more carefully about who they trust with their wealth and savings," Gulliver said in a statement at the time.

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