Major bank fined $1.8bn over risk and compliance failures

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An international money laundering scandal has already seen this bank’s chief compliance officer fall on his sword, but more pain is on the way. What can you learn from its GRC blunders?

HSBC has reached agreement with US authorities in relation to investigations regarding inadequate compliance with anti-money laundering and sanctions laws which will see it pay out US$1.921bn ($1.8bn).

It has also agreed to cooperate fully with regulatory and law enforcement authorities, and take further action to strengthen its compliance policies and procedures.

The agreement revolves around the discovery by US authorities that poor anti-money laundering (AML) controls at HSBC exposed the US to Mexican drug money, suspicious travellers’ cheques, bearer share corporations, and rogue jurisdictions. HSBC had put Mexico in its lowest risk category, despite the known risks of doing business in there.

“We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes. Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters,” said HSBC group CEO Stuart Gulliver.

“While we welcome the clarity that these agreements bring, ensuring the highest standards wherever we do business is an ongoing process. We are committed to protecting the integrity of the global financial system. To this end we will continue to work closely with governments and regulators around the world.”

Fixing the flaws

He added that the HSBC board had taken decisive action to direct management to fix past shortcomings as they have come to light over the last few years.

According to an HSBC statement, since 2011 – with new senior leadership teams in place at both HSBC Group and HSBC North America – the bank has taken extensive and concerted steps to put in place the highest standards for the future.

It added that the US Department of Justice had recognised these efforts in the Deferred Prosecution Agreement (DPA) that it agreed to accept from HSBC, stating the following:

“Management has made significant strides in improving 'tone from the top' and ensuring that a culture of compliance permeates the institution. The efforts of management have dramatically improved HSBC Bank USA's and HSBC Group's Bank Secrecy Act/Anti-Money Laundering and Office of Foreign Assets Control compliance programs.”

Remedial measures that HSBC has put in place in the USA over the past several years include:

  • increasing its spending on AML approximately nine-fold between 2009 and 2011;
  • increasing its AML staffing nearly ten-fold between 2010 and 2012;
  • revamping its ‘Know Your Customer’ programme, including treating non-US HSBC Group Affiliates as third parties subject to the same due diligence as all other customers;
  • exiting 109 correspondent relationships for risk reasons;
  • clawing back bonuses for a number of senior officers, and
  • spending over US$290m on remedial measures.

HSBC Group has also undertaken a comprehensive overhaul of its structure, controls, and procedures. A number of these improvements are included in the DPA. Among other measures, HSBC Group has:

  • simplified its control structure, allowing the group to manage risks worldwide more effectively;
  • elevated the role of group compliance and given it direct oversight over every compliance officer globally, so that both accountability and escalation now flow directly to and from HSBC group compliance;
  • created the new role of head of group financial crime compliance and group money laundering reporting officer, who will help to establish a global financial intelligence unit;
  • made other new senior hires with extensive experience handling relevant international legal and regulatory issues, including a new chief legal officer and a new global general counsel for litigation and regulatory affairs;
  • adopted a set of guidelines limiting business in those countries that pose a high financial crime risk;
  • issued a new global sanctions policy using a more extensive and consistent set of lists to screen all cross-border payments;
  • commenced a review of all Know Your Customer files across the entire group – the first phase of this remediation will cost an estimated US$700m over five years, and
  • undertaken to implement single global standards shaped by the highest or most effective anti-money laundering standards available in any location where HSBC operates.

Over the five-year term of the agreement with the Department of Justice, an independent monitor will evaluate HSBC's progress in fully implementing these and other measures it recommends, and will produce regular assessments of the effectiveness of HSBC's compliance function.

The agreement notes that HSBC Bank USA and HSBC Group have “provided valuable assistance to law enforcement”. HSBC conducted multiple extensive internal investigations, voluntarily made employees available for interviews, and collected, analysed and organised voluminous evidence and information.

HSBC has stated that it is firmly committed to putting in place robust standards that will help promote the integrity of the global financial system.

  • Alan Pedley on 15/12/2012 7:15:17 AM

    This is real money laundering and criminal. The CEO and other senior exec's should face prison time.

    Gaming company exec's have done prison time for money laundering in mis-coding credit card transactions to get around US blockade of online gambling despite the US DoJ stating online gaming and poker is not illegal and despite the US commitment in WTO GATS to permit such international trade in service. (The US legislated on the back of Safe Ports Act that it's illegal for financial institutions to knowingly process online gaming transactions).

  • Alan Pedley on 15/12/2012 7:10:39 AM

    The double standards here does not relate to the financial penalty (and yes I think a US bank would be fined for money laundering of this magnitude). The double standard is that this is serious *real* money laundering.

    Whereas, online gambling executives have done prison time and their companies fined for *manufactured* money laundering. Manufactured in the sense that the US - in breach of its WTO GATS commitments made it illegal for financial institutions to process legitimate online gambling transactions (although the DoJ has since released an interpretation that gaming and poker are not illegal). Thus gaming companies mis-coded credit card transactions to get around US blockade.

    These executive spend time in prison on money laundering offences. Clearly the HSBC CEO and others should face criminal sanctions and prison for real money laundering

  • adel alkhatib on 13/12/2012 8:02:12 AM

    if this bank is US bank do you think they pay out one peny l think this is double standards applied in this case.

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