The
US$28 million fine by Mexican regulators of HSBC's
Mexico subsidiary announced on Wednesday is just
the latest, but may not be the last, blow to hit
the London-based bank for its failure to counter
money laundering. Mexico's National Securities and
Banking Commission said the fine, about half the
subsidiary's 2011 profits, had been paid.
HSBC's failure to act adequately in
various countries, but particularly Mexico, to
counter money laundering through its network was
at the heart of a recent US investigation of the
bank that could lead it to being fined up to $1
billion by US authorities.
Last week, HSBC
issued an apology and its head of compliance
resigned following disclosures by lawmakers in
Washington that the bank had failed to implement
anti-money-laundering
procedures and had
facilitated illicit Iranian transactions,
terrorist activity, and drug proliferation around
the world.
Banking regulators and
customers alike will be disappointed to learn that
this global giant had become a "sinkhole of risk"
that acted counter to the public interest and
pursued financial gain above all.
One of
the world's largest banks, HSBC has more than
7,200 offices and 300,000 employees throughout
Asia, the Americas, the Middle East, and Africa.
In 2011 alone, it garnered profit of nearly $22
billion.
One of its most important
affiliates is in the United States and operates
under the name HSBC Bank USA (or HBUS). With 370
branches throughout the country, HBUS services 3.8
million customers and processes over 600,000 wire
transfers a week, two-thirds of which are
reportedly handled for HSBC affiliates around the
world. Access to the US dollar is crucial to
HSBC's operation.
US lawmakers this month
issued a 335-page report (and 530-page addendum of
evidence) giving excruciating detail about the
bank's failings, in addition to holding a day-long
hearing that included US Treasury and Homeland
Security Department officials and banking
regulators.
HSBC representatives were
grilled, including the famed Stuart Levey, who for
seven years served as Under Secretary for
Terrorism and Financial Intelligence within the US
Treasury Department under presidents George W Bush
and Barack Obama. He now serves as HSBC's chief
legal officer.
During the hearing, in a
dramatic announcement, David Bagely resigned as
HSBC's head of compliance following a 20-year
career at the bank. "HSBC has fallen short of our
own expectations and the expectations of our
regulators," Bagely said. The Congressional
report, along with the testimony of officials,
reads like a pulp fiction novel. HSBC helped
facilitate illicit transactions around the globe
for the better part of the last decade, and its
compliance culture has been "pervasively polluted
for a long time," according to Senator Carl Levin.
In Mexico, the bank deposited billions of
US dollars for Mexican drug cartels and the casas
de cambio that acted as their agents, allowing
them to launder massive amounts of cash that they
smuggled across the US-Mexican border.
HSBC Mexico took dollars, transported them
back to the United States, and deposited them in
HBUS, thus completing the laundering cycle for the
cartels. In 2007 and 2008, HSBC Mexico shipped
over $7 billion in physical US dollars to the
United States, more than any other Mexican bank.
HSBC allegedly acted as a major conduit to
rogue regimes and provided Iran with access to the
international financial sector. From 2001-2007,
the bank reportedly facilitated approximately
25,000 transactions on Iran's behalf, in amounts
totaling $19.4 billion, through HSBC's American
affiliate (which does not include funds
facilitated through other affiliates).
In
an attempt to circumvent US sanctions efforts,
HSBC concealed any link to Iran for 85% of these
transactions.
Senior HSBC officials on
both sides of the Atlantic claimed that they were
not aware, but congress disclosed evidence,
including emails, that demonstrates they were
actually in the loop from a very early stage, and
well understood the risk these transactions posed
to the bank. Lawmakers also presented evidence
that HSBC affiliates tried to circumvent US
sanctions efforts against Sudan and North Korea.
HSBC also provided a robust correspondent
banking relationship to suspect banks around the
globe. For example, it serviced Saudi Arabia's
Rajhi Bank, whose key founder was a generous donor
to al-Qaeda. Rajhi, in turn, provided banking
services to other suspect clients.
Moreover, HSBC America offered banking
services to bearer share corporations, which
provide anonymity by assigning legal ownership to
anyone who has physical possession of the
company's shares. This is a notorious method money
launderers use to raise and move funds. Despite
warnings from US banking regulators, HSBC opened
accounts for 2,000 such corporations over the last
decade.
There are a number of steps HSBC
should take immediately. It should start by
identifying which affiliates are located in
high-risk jurisdictions and implement a robust
anti-money laundering compliance program across
the board. Safeguards should be put in place to
ensure that none of the HSBC banks are doing
business with terrorists, weapons proliferators,
money launderers, or other illicit actors. In
addition, HSBC should not facilitate transactions
for, or do business with, the roughly 250 banks
the Treasury Department has blacklisted for
facilitating nefarious activity.
Other
steps the bank should take include closing down
bearer share accounts. It might also wish to
better share information, both within the HSBC
affiliate structure and with relevant government
officials worldwide. This would go a long way
toward ensuring it is doing its part to curb abuse
of the international financial sector. In today's
interconnected financial world, such measures are
part of the cost of doing business.
HSBC
must revamp its compliance regime across the board
or face the consequences from global banking
regulators, which should include losing its
license to operate if it fails to carry out its
obligations. Global financial institutions must
use every tool in their arsenal to curb the
efforts of those who exploit tainted money. HSBC
is no exception.
Avi Jorisch, a
former US Treasury Department official, is a
Senior Fellow for Counterterrorism at the American
Foreign Policy Council in Washington, DC.
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