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FCPA Blog Daily News

« Nordam Settles China Bribes Case | Main | Graft Fears Trigger More Global Enforcement »
Tuesday
Jul172012

Senate Investigators Find Failed Compliance At HSBC

One of the biggest banks in the world just said no -- to compliance.

A report released Monday by the U.S. Senate Permanent Subcommittee on Investigations describes some of HSBC's massive compliance failures. There are no allegations of FCPA violations (although facilitating foreign corruption is a theme). But the other compliance gaps testify to HSBC's failed and irresponsible corporate governance.

Worldwide, HSBC has over $2.5 trillion in assets, 89 million customers, 300,000 employees, and 2011 profits of nearly $22 billion. It was originally the Hong Kong Shanghai Banking Corporation. It now operates in over 80 countries. The parent HSBC Holdings plc is headquartered in London and its CEO sits in Hong Kong.

The main U.S. affiliate is HSBC Bank USA N.A. (HBUS). It operates more than 470 branches, manages assets totaling about $200 billion, and serves around 3.8 million customers.

Here's some of what the Senate investigators found:

Mexican drug money. HBUS didn't do any enhanced due diligence on transactions with the bank's Mexican affiliate, HBMX. In 2007 and 2008, HBMX was the single largest exporter of U.S. dollars to HBUS, shipping $7 billion in cash over two years, outstripping larger Mexican banks and other HSBC affiliates. Mexican and U.S. authorities expressed repeated concern that HBMX’s bulk cash shipments could reach that volume only if they included illegal drug proceeds. The concern was that drug traffickers, unable to deposit large amounts of cash in U.S. banks due to AML controls, were transporting U.S. dollars to Mexico, arranging for bulk deposits there, and then using Mexican financial institutions to insert the cash back into the U.S. financial system.

Prohibited transactions with Iran, Cuba, and other 'X list' countries and persons. From at least 2001 to 2007, two HSBC affiliates, HSBC Europe (HBEU) and HSBC Middle East (HBME), repeatedly sent transactions through HBUS without disclosing links to Iran. HBEU systematically altered transaction information to strip out any reference to Iran and characterized the transfers as between banks in approved jurisdictions. While some at HBUS claimed not to have known they were processing undisclosed Iranian transactions from HSBC affiliates, internal documents show key senior HBUS officials were informed as early as 2001. Other documents show that, from 2002 to 2007, some HSBC affiliates sent potentially prohibited transactions through HBUS involving Burma, Cuba, North Korea, Sudan, and other prohibited countries and persons. From 2001 to 2007, more than 28,000 undisclosed, [Office of Foreign Assets Control] sensitive transactions that were sent through HBUS involving $19.7 billion.

Links to terrorists. After the 9/11 terrorist attack in 2001, evidence emerged that Al Rajhi Bank in Saudi Arabia and some of its owners had links to financing organizations associated with terrorism, including
evidence that the bank’s key founder was an early financial benefactor of al Qaeda. In 2005, HSBC announced internally that its affiliates should sever ties with Al Rajhi Bank, but then reversed itself four months later, leaving the decision up to each affiliate. HSBC Middle East, among other HSBC affiliates, continued to do business with the bank.

Travlers cheques from Russia via Japan. HBUS cleared more than $290 million in bulk U.S. dollar travelers cheques in less than four years for a Japanese regional bank, Hokuriku Bank, despite evidence of suspicious activity. From at least 2005 to 2008, HBUS cleared bulk travelers cheques for Hokuriku Bank on a daily basis, at times clearing $500,000 or more in U.S. dollars per day. They were in denominations of $500 or $1,000, submitted in large blocks of sequentially numbered cheques, and signed and countersigned with the same illegible signature. When HBUS sought more information, Hokuriku Bank declined, claiming to be constrained by bank secrecy laws. HBUS eventually learned that the travelers cheques were purchased by Russians from a bank in Russia, a country at high risk of money laundering. HBUS also learned that the Japanese bank had little KYC information or understanding why up to $500,000 or more in bulk U.S. dollar travelers cheques purchased in Russia were being deposited on a daily basis into one of 30 different Japanese accounts of persons and corporations supposedly in the used car business.

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The 355-page Senate report can be downloaded here.

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