Senate Report Reveals Numerous Sustained AML Deficiencies at HSBC

Jul 19, 2012   

On July 16, 2012, the =Senate Permanent Subcommittee on Investigations released a 335 page report detailing numerous and sustained AML regulatory compliance deficiencies over the past decade at London headquartered banking giant HSBC. HSBC is Europes largest bank with over $2.5 trillion in assets, 89 million customers, and 2011 profits of nearly $22 billion. The report was released ahead of a July 17, 2012 hearing at which HSBC executives are scheduled to testify. The effects of the Senates report have been immediate. On July 17, 2012, HSBCs head of compliance, David Bagley, announced during his Senate testimony that he will be resigning from his position with the bank. A copy of the Senate Subcommittees report can be read here.

In its report, the Senate Subcommittee focused on five areas of AML regulatory compliance deficiencies at HSBC which impact correspondent banking in the U.S. These areas include: 1) establishing U.S. correspondent bank accounts for foreign high risk affiliates without conducting proper due diligence; 2) circumventing Office of Foreign Asset Control (“OFAC”) regulations to facilitate transactions that would otherwise be prohibited; 3) providing correspondent services to foreign banks with links to terrorism; 4) clearing bulk U.S. dollar travelers cheques despite signs of suspicious activity; and 5) offering high risk bearer share corporate accounts. The report found that many of these violations occurred because of HSBCs understaffed and undertrained AML compliance department.

Since 2002, U.S. law has required that all U.S. banks conduct due diligence reviews before opening any U.S. correspondent account for any foreign financial institution, including a U.S. banks foreign affiliates. However, the report found that despite this law, HSBC instructed its U.S. affiliates to assume that all HSBC affiliates met HSBCs AML standards and to open correspondent accounts without additional due diligence. The report found that this lack of due diligence was particularly problematic in regards to correspondent accounts established for HSBCs Mexican affiliate. The report found that HSBC ignored multiple warnings from both U.S. and Mexican regulatory officials regarding the lack of AML controls at HSBCs Mexican affiliate. Regulatory authorities were concerned that Mexican drug cartels were laundering money by circumventing U.S. bank AML controls by moving U.S. money into Mexico, bulk depositing such money into HSBC Mexican banks, and then re-injecting the money into the U.S. financial system through correspondent accounts. As a result of HSBCs lack of controls, between 2007 and 2008, HSBCs Mexican affiliates moved $7 billion in cash to the U.S. despite being warned that bulk cash shipments of that volume from Mexico could only occur if they included illegal drug proceeds.

The report also found that HSBCs foreign affiliates took deliberate actions to circumvent OFAC prohibitions on transactions with sanctioned nations such as Iran, Cuba, and the Sudan. According to the report, HSBCs European affiliate systematically altered transaction information to strip out any references to the sanctioned nations and characterized such transactions as transfers between banks in approved jurisdictions. As a result of such actions, between 2001 and 2007, HSBC participated in 28,000 undisclosed transactions with OFAC prohibited entities involving a total of $19.7 billion.

The report also found that the bank ignored links to terrorist financing among its customer banks including Al Rajhi Bank of Saudi Arabia, which had known ties to terrorist groups through the banks owners. The report found that HSBCs actions offered a gateway to U.S. dollars and U.S. financial institutions for terrorists and terrorist financing.

The Senate Subcommittee also detailed HSBCs clearing of suspicious bulk travelers cheques for foreign banks with inadequate AML controls in place finding that HSBC continued to maintain a correspondent relationship with the foreign affiliates despite knowledge of the foreign banks lack of AML controls. The report criticized HSBC for its use of bearer share accounts. Under the rules of a bearer share account, bearer share corporations do not have to register shares in the names of the shareholders. Instead, the ownership of bearer shares is assigned to whoever holds physical possession of the shares. Thus, these shares can be passed person to person in secrecy. The report also noted that HSBC continued this practice despite multiple auditors and regulatory examiners advising the bank to discontinue the use of such accounts.

The report went on to criticize the failures of the Office of the Comptroller of the Currency  (“OCC”) in its regulation of HSBCs activities. First, the report found that because the OCC treats AML deficiencies as a customer compliance issue and not a bank safety and soundness issue, AML deficiencies rarely lower the safety and soundness evaluation ratings of U.S. banks. Second, the report discussed OCCs practice of not citing to a statutory or regulatory violation in its issuance of Supervisory Letters when a bank fails to comply with its AML program. As explained by the report, “by consistently treating a failure to meet one or even several of these statutory requirements as a ËœMatter Requiring Attention instead of a legal violation, the OCC diminishes the importance of meeting each requirement, sends a more muted message about the need for corrective action, and makes enforcement actions more difficult to pursue if an AML deficiency persists.”

The Senate Subcommittee report highlights the need of all financial institutions to properly staff, train, and supervise their AML compliance departments in order to meet their rigorous legal and compliance requirements. If you have questions pertaining to anti-money laundering compliance, the BSA, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.