“I deeply regret we did not act sooner and more decisively,” Comptroller of the Currency Thomas Curry said at a day-long hearing yesterday of the Senate Permanent Subcommittee on Investigations. He said his agency, which regulates HSBC’s U.S. arm, is partially responsible for letting Europe’s largest bank give terrorists, drug cartels and criminals access to the U.S. financial system and will take “a much more aggressive posture.”
Calling the Office of the Comptroller of the Currency a “lapdog not a watchdog,” Senator Tom Coburn of Oklahoma, the senior Republican on the panel, accused the agency of seeing weaknesses in the bank’s money-laundering safeguards and being “at a loss” to act. Curry, who took office in April, said the OCC will step in when a bank accumulates deficiencies, and has changed its policy to count repeated compliance failures against a bank’s safety-and-soundness rating.
Six current and former executives of London-based HSBC displayed a united front of contrition at the hearing, with compliance chief David Bagley announcing in front of the senators that he will step down from his post. Bagley said his bank “has fallen short of our own expectations.” HSBC shares dropped 1.7 percent to 547.40 pence in London trading yesterday, limiting its gains this year to 11.5 percent.
Risk ‘Sinkhole’
“Some international banks abuse their U.S. access,” said Senator Carl Levin, the Michigan Democrat who heads the subcommittee, saying these transgressions were bad enough to warrant a reconsideration of the bank’s charter. “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. rules.”
Senate investigators focused on New York-based HSBC Bank USA NA as a “nexus” for U.S. dollar services and transfers. Coburn pointed out that HSBC isn’t alone and that “similar problems exist at other banks.”
Paul Thurston, head of HSBC’s retail banking and wealth management unit and former chief of the Mexico unit, said the company is closing the unit’s U.S. dollar accounts in the Cayman Islands, a jurisdiction that Levin said is “known for secrecy and money laundering.”
HSBC bolstered its presence in Mexico in 2002 by buying the nation’s fifth-largest bank, Grupo Financiero Bital SA, better known as Bital. Senate investigators found that Bital had a history of deficiencies in anti-money-laundering controls. Thurston described the business side in the Mexican bank “overriding” its compliance side.
335-Page Report
From 2000 to 2009, HSBC gave its lowest risk rating to Mexico despite “overwhelming information” that it posed a high risk for drug trafficking and money laundering, investigators wrote in a 335-page report accompanied by 529 pages of HSBC e- mails and other documents. Mexican clients included casas de cambio, or currency-exchange firms, which U.S. authorities say often launder money.
Wells Fargo & Co. (WFC)’s Wachovia Bank unit paid $160 million in 2010 to resolve a criminal probe that cartels were using such exchange houses to launder cash.
HSBC’s Mexican bank shipped $7 billion in bulk cash to the firm’s U.S. bank in 2007 and 2008, leaving U.S. and Mexican authorities concerned cartels were the source, the report said.
In 2007, the head of Latin America compliance sent an e- mail to a colleague condemning the Mexican affiliate for “rubber-stamping unacceptable risks,” according to the report.
“What is this, the School of Low Expectations Banking?” the executive, John Root, wrote in the e-mail.
Exit Interview
Leopoldo Barroso, a former HSBC anti-money-laundering director, told company officials in an exit interview that he was concerned about “allegations of 60 percent to 70 percent of laundered proceeds in Mexico” going to affiliates, investigators wrote.
In 2008, the Mexican unit carried a years-old backlog of 3,659 accounts meant to be closed, according to a 2008 e-mail from Warren Leaming, who was an HSBC legal adviser. He said 675 of those accounts were suspected of money-laundering activity.
Some of HSBC’s alleged dealings with state sponsors of terror and Mexican drug dealers were reported in July 2005 by Bloomberg Markets magazine, which documented bank ties to Iran, Libya, Sudan and Syria.
HSBC’s U.S. unit “offers a gateway for terrorists to gain access to U.S. dollars and the U.S. financial system,” according to the subcommittee’s report.
Links Ignored
The lender ignored links to terrorist financing among its customer banks, including Riyadh, Saudi Arabia-based Al Rajhi Bank (RJHI), which had ties to terror groups through its owners, the report said. Mohammad Al Yami, an Al Rajhi spokesman, didn’t respond to an e-mail requesting comment.
The report also cited HSBC’s violations of Treasury Department sanctions on dealings with Iran. The U.S. is seeking to isolate Iran from the global banking system through sanctions enforced by the Office of Foreign Assets Control, or OFAC.
HSBC executives discussed those sanctions in e-mails cited in the report. Bagley wrote after the Sept. 11, 2001 terror attacks that the bank should pay attention to proposed legislation to extend U.S. reach over foreign banks, “particularly if we are unfortunate enough to process a payment which turns out to be connected to terrorism.”
He wrote: “Some of the routes traditionally used to avoid the impact of U.S. OFAC sanctions may no longer be acceptable.”
Iranian Transactions
An outside audit by Deloitte LLP showed that 25,000 transactions totaling more than $19.4 billion involved Iran, according to the report. Of those, as many as 90 percent passed through the bank’s U.S. accounts with no disclosure of ties to Iran, the report shows. Senate investigators documented similar transactions involving North Korea, Cuba, Sudan and Burma.
Bank documents also showed HSBC’s U.S. unit cleared transactions through at least six Iranian banks.
Since 2009, the U.S. Justice Department entered deferred- prosecutions agreements with six banks over OFAC violations, including ING Groep NV (ING), Barclays Plc (BARC), ABN Amro Holding NV, Credit Suisse Group AG (CSGN) and Lloyds Banking Group Plc. (LLOY) Most violations involved stripping information from wire-transfer documentation to hide the role of a banned person or country.
HSBC has said that it’s cooperating with investigations by the Justice Department and other agencies into possible Iran sanctions violations. It’s also cooperating in unrelated probes by the Justice Department and Internal Revenue Service into whether it helped Americans evade taxes through HSBC India.
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