A U.S. Senate investigation into HSBC’s “pervasively polluted” culture reveals that the British multinational banking company exposed the U.S. financial system to money laundering from drug traffickers and terrorists.
On Monday the U.S. Senate Permanent Subcommittee on Investigations released a scathing report on HSBC’s operations and lack of compliance with anti-money laundering regulations.
“HSBC’s compliance culture has been pervasively polluted for a long time,” said Michigan Democratic Sen. Carl Levin, the subcommittee’s chairman.
“In an age of international terrorism, drug violence in our streets and on our borders, and organized crime, stopping illicit money flows that support those atrocities is a national security imperative,” Levin said.
The report stated that HSBC failed to properly monitor $15 billion in bulk cash transactions through high-risk countries between mid-2006 and mid-2009.
HSBC’s Mexican operations, HBMX, were especially scrutinized. From 2007 to 2008, HBMX moved $7 billion into HSBC’s U.S. operations, HBUS, despite warnings from Mexican and U.S. authorities that the money was likely related to narcotics trafficking.
The report found that HSBC knew of lax anti-money laundering practices at the Mexican subsidiary that had dated back to its purchase in 2002. HSMX also had a branch in the Cayman Islands, which in 2008 handled 50,000 client accounts and $2.1 billion in holdings. However, the branch had no staff or offices.
The subcommittee report accuses the company of disregarding terrorist financing links by providing U.S. dollars to banks in Saudi Arabia and Bangladesh that have been linked to financing terrorism since 2001.
The bank is also accused of violating U.S. prohibitions on transactions linked to Iran and other sanctioned countries. The report found that HSBC affiliates engaged in a tactic called “stripping,” which meant they removed references to Iran from records, allowing nearly 25,000 transactions totaling $19.4 billion to be sent through accounts over seven years.
Levin described HSBC as “playing fast and loose” with U.S. banking rules.
The 340-page report comes at the end of a year-long investigation, in which over 1.4 million documents were reviewed and 75 HSBC officials and bank regulators were interviewed.
On Tuesday the subcommittee held a hearing with top HSBC executives and regulatory officials. The congressional panel said it was not treating HSBC’s actions as an anomaly, and was using the lessons to understand how to better protect the U.S. from future risk.
David Bagley, head of group compliance for HSBC, said that he was unable to effectively monitor against money laundering because the mandate of his job was nothing more than an advisory role, which did not allow him to enforce compliance.
“My job was not to ensure that all of these global affiliates followed the group’s compliance standards,” Bagley told the subcommittee.
Bagley then announced that in light of the accusations, he was resigning from his position at HSBC.
The report was also critical of the Office of Comptroller of the Currency, a U.S. regulator, for failing to effectively monitor HSBC.
Oklahoma Republican Sen. Tom Coburn, the committee’s ranking member, said the OCC’s “record of enforcement at HSBC resembles a lapdog rather than the watchdog that we sorely need.”
The OCC had taken no enforcement actions against HSBC despite sending a letter to the bank in 2010 that made clear that the regulator was aware of the substandard anti-money laundering protections.
Levin said the OCC, which is part of the U.S. Treasury Department, “tolerated HSBC’s weak anti-money laundering system for years” and exercised “pretty feeble” enforcement.
Reports have claimed that HSBC is likely to face a fine of around $1 billion. Stephanie Ostfeld, policy adviser for Global Witness, an international NGO fighting corruption, said that this fine would amount to less than five percent of the bank’s pre-tax profits.
“Until the fine is more than just the cost of doing business, the U.S. financial system will remain wide open to terrorist finances, organised crime and drug trafficking”, Ostfeld told The Daily Caller.
“It takes two to money launder,” she added. “Money laundering isn’t a victim of crime. Corruption simply couldn’t take place without the willingness of the financial system to accept the corrupt funds.”
Levin said that although the subcommittee was unable to prosecute regulation violators, the investigation still left a “nagging question” of accountability.