HSBC Holdings announced Monday it has provisioned an additional $800 million to pay potential U.S. fines related to the ongoing money laundering charges against it, bringing the total to $1.5 billion. The fines are expected to be the largest on record for money laundering and related activities, although the London-based bank is still negotiating a final settlement.
“The third quarter results include an additional provision of U.S. $800 million in relation to the ongoing U.S. anti‐money laundering, Bank Secrecy Act and Office of Foreign Assets Control investigations,” HSBC’s third-quarter summary stated. “We are actively engaged in discussions with U.S. authorities to try to reach a resolution, but there is not yet an agreement. The U.S.
authorities have substantial discretion in deciding exactly how to resolve this matter. Indeed, the final amount of the financial penalties could be higher, possibly significantly higher, than the amount accrued.”
HSBC’s legal issues originated when the Senate Permanent Subcomittee on Investigations found it had allowed terrorists and drug cartels to access U.S. funds by laundering money between 2001 and 2010. The investigation, which continues under the authority of federal and state prosecutors, also concerns whether HSBC allowed sanctioned nations such as Iran, Sudan and North Korea to transfer money through its American subsidiary during a similar time period.
“The problem here is that some international banks abuse their U.S. access,” said Senator Carl Levin, a Michigan Democrat who heads the subcommittee, in opening statements of the HSBC hearing July 17. “Some allow affiliates operating in countries with severe money laundering, drug trafficking, or terrorist financing threats to open up U.S. dollar accounts without establishing safeguards at their U.S. affiliate. The end result is that the U.S. affiliate can become a sinkhole of risk for an entire network of bank affiliates and their clients around the world playing fast and loose with U.S. banking rules.”
The subcommittee’s senior Republican, Senator Thomas Coburn of Oklahoma, agreed with Levin’s statements and cited examples of HSBC’s failure to prevent criminal and terrorist funds from passing through U.S. banking systems. In Mexico, for example, $7 billion flowed from the HSBC Mexican affiliate to the HSBC U.S. affiliate in 2007 and 2008. At that large a volume, law enforcement and regulators have concluded it likely originated from the illegal drug trade. In fact, from 2000 to 2009 HSBC issued its lowest risk rating to Mexico despite evidence it posed a high risk for drug trafficking and money laundering, senate investigators reported.
Furthermore, Coburn stated, HSBC processed U.S. dollar transactions for an Iranian bank without explaining their origin at a time when all payments to and from Iran were legally restricted.
Evidence revealed HSBC allowed what is known as “U-turn” transactions through U.S. institutions that involved funds from Iran to non-U.S. banks—about 25,000 transactions with Iran totaling more than $19.4 billion in total, with about 90 percent passing through the U.S., according to an audit conducted by Deloitte LLP. The senate investigators noted similar transactions with Cuba, Sudan, Burma and North Korea.
“This is why tough anti-money laundering laws are important, if illicit funds can be tracked and stopped, there are fewer places for criminals and terrorists to hide,” Coburn said at the hearing.
HSBC has attempted to rectify its processes since the July hearing. After David Bagley, the bank’s head of compliance since 2002, resigned during the subcommittee hearings, the bank has increased its spending on compliance and oversight. It also hired Robert Warner, who formerly managed the Treasury Department group that enforces sanctions.
“We deeply regret what took place” in the United States and Mexico, said HSBC chief executive Stuart Gulliver in a Nov. 5 press conference. “A number of people have left the bank and have had clawbacks against their compensation.”
During its Nov. 5 financial report, HSBC announced a 50-percent drop in net profit during third quarter–$2.8 billion compared to a $5.5 billion profit in the third quarter of 2011. The bank’s London shares fell by 1.3 percent by market closing.
“The report undoubtedly caused considerable reputational damage to HSBC. The extent to which that has resulted in loss of business is hard to measure, but it has undoubtedly damaged our brand,” Gulliver said.
The bank also recognized the money laundering investigation may lead to corporate criminal and civil charges, as well as fines in excess of the already-provisioned $1.5 billion.