HSBC fined for money laundering

HSBC fined for money laundering

5 March 2013

HSBC paid $4.2bn (£2.8bn) in fines for money-laundering ($1.9 billion) and mis-selling financial products in the UK ($2.3bn) in 2012. For the same period, the bank’s Chief Executive was awarded a near £2m annual bonus for his “strong leadership” in tackling the revelations that led to the US fine.

An investigation by U.S. federal and state authorities found the bank violated federal laws by laundering money from Mexican drug trafficking and processing banned transactions on behalf of Iran, Libya, Sudan and Burma. The settlement, which is a combination of forfeitures and civil penalties, shows that for several years, HSBC channelled hundreds of millions of dollars of the prohibited transactions through its U.S. branch. Here is a summary of the Senate Permanent Subcommittee on Investigation’s main findings against HSBC.

HSBC activities in Mexico

It’s been estimated that, between 2006 and 2010, Mexico’s Sinaloa Cartel, Colombia’s Norte del Valle Cartel and other drug traffickers laundered at least $881 million in illegal proceeds through accounts in HSBC’s U.S. arm. Authorities in both Mexico and USA expressed concern that drug traffickers were able to circumvent the anti-money laundering controls at US banks by transporting US dollars to Mexico, and then using HSBC Mexico (HBMX) to transfer it to the US. But HSBC US (HBUS) classed Mexico in its lowest risk category. This excluded $670 billion in transactions from the monitoring systems and, as a result, failed to properly monitor its transfers and other dealings with it.

HSBC activities in other countries

The Justice Department also charged HSBC with violating sanction laws by doing business with customers in Iran, Libya, Sudan, Burma and Cuba. According to US laws, banks cannot do business with what it regards as the most dangerous individuals and countries, but HSBC frequently avoided these rules. For example, HSBC US (HBUS) carried out 28,000 undisclosed sensitive transactions between 2001 and 2007; the vast majority of those transactions, worth $19.7bn, involved Iran. These transactions violated both U.S. and British law.

Terrorism financing links

HSBC did business with Saudi Arabia’s biggest financial institution, Al Rajhi Bank. The report claims that after the terrorist attacks in the U.S. on 11 September 2001, evidence emerged that Al Rajhi and some of its owners had links to financial organisations associated with terrorism.

Suspicious travellers’ cheques

HSBC cleared large amounts of travellers’ checks, without proper anti-money laundering controls, despite evidence of suspicious activity. Between 2005 and 2008, HBUS cleared $290m worth of US dollar travellers’ cheques which were being presented at a Japanese bank. The daily transactions were worth up to half a million dollars, with large blocks of sequentially numbered cheques being handed over. After prompting from US regulators, HBUS found out that the travellers’ cheques were being bought in Russia, which is considered a country at high-risk of money laundering.

The settlement

HSBC has managed to avoid being criminally prosecuted, which could have blocked the bank’s access to the U.S. banking system. The bank acknowledged it failed to maintain an effective program against money laundering and failed to conduct basic due diligence on some of its account holders.

HSBC agreed to take steps to fix the problems, forfeit $1.256 billion, and retain a compliance monitor. The bank also agreed to pay $665 million in civil penalties to regulators. The bank’s top executives will defer part of their bonuses for the whole of the five-year period, while bonuses have been regained from former and current executives, including those in the US directly involved at the time.

Accountability

The US authorities said HSBC did not face criminal charges because the bank was too big to prosecute and no individuals were implicated. Below is a list of executives who worked for HSBC during the years which have been investigated:

  • Sir John Bond: he left HSBC in 2006 after 45 years. He was chairman of the bank between 1998 and 2006 and chief executive before that from 1998. After leaving the bank, he became chairman of other major companies such as Vodafone (until 2011);
  • Stephen Green: he left HSBC at the end of 2010 to take up a seat in the Lords and become a trade minister for the coalition government. He was chief executive of HSBC between 2003 and 2006 when he was promoted to chairman, the role he held until he joined the government;
  • Michael Geoghegan: he left HSBC as a result of Green’s decision to enter government. He was chief executive from 2006 and hoped to step up to chairman;
  • Sandy Flockhart: he spent four decades at HSBC before retiring in July 2012, just before the US Senate levelled its first accusations about the bank’s operations in Mexico helping to facilitate drug barons. He had been head of the Mexican business from 2002 until 2006.

HSBC bonuses

Despite the settlement, it has been announced that HSBC’s total bonus pool for the year to 31 December 2012 was £2.64 billion. The group chief executive, Stuart Gulliver, received a £1.2m salary, £1.2m benefits, a £2m bonus for 2012, further £5.6m bonuses for previous years, and long-term incentives of £3m in shares. HSBC also paid over 200 of its staff more than £1m each in 2012.

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