Bulk Cash: HSBC’s Mexican Bank Shipped $7 BILLION In Bulk Cash To The Firm’s U.S. Bank In 2007 And 2008 (Bloomberg)

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From the article:

Bulk Cash

HSBC’s Mexican bank shipped $7 billion in bulk cash to the firm’s U.S. bank in 2007 and 2008. That was more than all HSBC affiliates and other banks in Mexico and left U.S. and Mexican authorities concerned that the volumes could only be supplied by the illegal drug trade, according to the report.


HSBC Probe Shows Bank Allowed Money Laundering (Bloomberg, July 17, 2012):

HSBC Holdings Plc (HSBA) did business with firms linked to terrorism, failed to guard against money- laundering violations in Mexico and bypassed U.S. sanctions against Iran, according to U.S. Senate investigators.

HSBC affiliates worldwide gave terrorists, drug cartels and criminals a portal into the U.S. financial system, the Permanent Subcommittee on Investigations said in a 335-page report yesterday detailing a decade of lax controls. Lawmakers plan to question senior executives from the London-based bank, Europe’s largest, at a hearing in Washington today.

“HSBC sets up a U.S. bank affiliate as its gateway into the U.S. financial system and lets its global network of affiliates abuse that gateway,” Senator Carl Levin, the Michigan Democrat who heads the subcommittee, told reporters. “The failure of accountability here is dramatic.”

Senate investigators focused on New York-based HSBC Bank USA NA as a “nexus” for U.S. dollar services and transfers. Their report will be the basis of a hearing in which senators question senior executives including Irene Dorner, president and chief executive of HSBC North America Holdings Inc., and the U.S. regulators accused in the report of failing to act.

HSBC rose 0.4 percent to 558.9 pence at 8:49 a.m. in London trading. Credit-default swaps on the debt of banking unit, HSBC Bank Plc, were little changed at 137.5 basis points as of 7:46 a.m. in London, according to BNP Paribas SA prices.

“We will acknowledge that, in the past, we have sometimes failed to meet the standards that regulators and customers expect,” Robert Sherman, an HSBC spokesman, said in an e-mailed statement. “We will apologize, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.”

Terrorist Financing

HSBC ignored links to terrorist financing among its customer banks, including Riyadh, Saudi Arabia-based Al Rajhi Bank, which had ties to terrorist groups through its owners, according to the report. Internal documents show HSBC decided to cut ties with the bank before reversing itself under pressure from Al Rajhi, which received shipments of $1 billion in cash from HSBC’s U.S. operation between 2006 and 2010, according to the report.

HSBC’s U.S. unit, with faulty safeguards, “offers a gateway for terrorists to gain access to U.S. dollars and the U.S. financial system,” according to the report. “HSBC has a legal obligation to take reasonable steps to ensure it is not dealing with banks that may have links to or facilitate terrorist financing.”

Mohammad Al Yami, an Al Rajhi spokesman, didn’t immediately respond to an e-mail sent outside of regular business hours requesting comment on the report.

‘Severe’ Deficiencies

HSBC bolstered its presence in Mexico in 2002 when it bought the nation’s fifth-largest bank, Grupo Financiero Bital SA, better known as Bital, which Senate investigators found had a history of “severe” deficiencies in anti-money-laundering controls. At the time, Bital had “no recognizable compliance or money-laundering function,” David Bagley, head of HSBC compliance, wrote in an internal e-mail.

From 2000 to 2009, HSBC gave its lowest risk rating to Mexico “despite overwhelming information indicating that Mexico was a high-risk jurisdiction for drug trafficking and money laundering,” Senate investigators wrote. HSBC’s Mexican clients included casas de cambio, or currency-exchange firms, that were identified in U.S. Treasury Department warnings as hubs for laundering drug 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 through the lender.

Bulk Cash

HSBC’s Mexican bank shipped $7 billion in bulk cash to the firm’s U.S. bank in 2007 and 2008. That was more than all HSBC affiliates and other banks in Mexico and left U.S. and Mexican authorities concerned that the volumes could only be supplied by the illegal drug trade, according to the report.

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.

Leopoldo Barroso, a former HSBC anti-money-laundering director, told company officials in an exit interview that he was concerned about civil and criminal sanctions and that there were “allegations of 60 percent to 70 percent of laundered proceeds in Mexico” going through HSBC’s affiliate, according to the report.

Iran Sanctions

The report also cited HSBC’s violations of Treasury Department sanctions on dealings with Iran, which the U.S. wants to isolate from the global banking system. The sanctions, enforced by the Office of Foreign Assets Control, or OFAC, seek to punish Iran for operating a nuclear program outside international inspection. Internal communications show the U.S. bankers were aware that some of the transactions were linked to Iran in violation of U.S. sanctions.

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 from a list of other prohibited jurisdictions including North Korea, Cuba, Sudan and Burma.

Bank documents also showed HSBC’s U.S. unit cleared dollar transactions through U.S. accounts for at least six Iranian banks.

Deferring Prosecution

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, Manhattan District Attorney’s Office, Federal Reserve and the Office of the Comptroller of the Currency 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.

Many of the Iran transfers described in the Senate report involved so-called U-turn transactions, which were allowed under Treasury regulations before November 2008. Those rules let U.S. banks process dollar payments involving Iran that began and ended with non-Iranian institutions.

In 2005 and 2006, HSBC processed about 1,800 U-turn transactions through a correspondent account at JPMorgan Chase & Co. (JPM) The report quoted an e-mail from HSBC Middle East Deputy Chairman David Hodgkinson, who wrote that HSBC’s U.S. unit was “unwilling to process them for reputational-risk reasons.”

Sufficient Weight

The Senate probe also accuses the OCC, the primary regulator of HSBC’s U.S. bank, of failing to treat repeated findings of violations in money-laundering controls with sufficient weight. The OCC tolerated severe money-laundering deficiencies “for years,” according to the report, while HSBC’s examiners were suggesting action to their supervisors at the agency.

Anti-money-laundering compliance “is crucial to our nation’s efforts to combat criminal activity and terrorism, and the OCC expects national banks and federal thrifts to have programs in place to effectively comply with these laws,” Comptroller of the Currency Thomas Curry said in a statement. The subcommittee made “very thoughtful recommendations in its report, which we fully embrace,” he said.

‘Pervasively Polluted’

“The culture at HSBC was pervasively polluted for a long time,” said Levin, who acknowledged the bank’s cooperation in the investigation. “Its recent change in leadership says that it is committed to cleaning house. That commitment is surely welcome. But tough OCC oversight is essential.”

Levin said the kind of failures HSBC exhibited should be cause for U.S. regulators to consider whether to revoke its charter.

The bank has repeatedly expressed remorse about “unacceptable behavior,” including in a July 10 memo by Chief Executive Officer Stuart Gulliver, who took the helm in January 2011. The company has restructured itself to make compliance a more urgent priority, he wrote, and has bolstered staff devoted to such oversight from 200 to about 1,000.

HSBC’s Sherman, in his statement yesterday, said the bank’s lapses represent “important lessons for the whole industry.”

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