HSBC: A Study in Anti-Laundering Blunders

WASHINGTON — HSBC executives lived the nightmare Tuesday that all corporate executives seek to avoid — having a congressional panel make them a poster child for bad behavior.

A Senate panel grilled six executives of the British bank over anti-money-laundering problems that lasted nearly a decade — including running correspondent businesses on U.S. soil that had links to Iran and drug cartels in Mexico. Lawmakers also asked why HSBC's chief U.S. regulator, the Office of the Comptroller of the Currency, did not act sooner to pressure the bank to make improvements.

The executives were contrite, but they could not avoid being turned into an example of what happens when a bank lets its web of global affiliates tap the U.S. financial system without proper controls.

"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. banking rules," Sen. Carl Levin, D-Mich., the chairman of the panel, said. "If the parent corporation of a global bank can't do a better job policing its affiliates, we shouldn't be providing a bank charter to their U.S. affiliate."

Representatives from the bank's parent company and various subsidiaries repeated their apologies for mishaps stretching back to at least 2002, in which affiliates around the world failed to adequately monitor correspondent accounts operated through HSBC Bank USA. The laundry list included cash shipments from HSBC's Mexico bank likely tied to drug cartels, and dealings with a Saudi bank whose founder had suspected links to al Qaeda.

"Some of the things I found frankly took my breath away," Paul Thurston, head of HSBC's retail banking and wealth management group in Hong Kong, said of what he encountered upon taking the helm of HSBC Mexico in 2007. "But every time I found a weakness, I tried to ensure that we took action."

The bank's actions since then have included ceasing the handling of cash dollars in Mexico, closing branches in areas susceptible to money laundering and an ongoing plan to close all HSBC Mexico accounts in the Cayman Islands, he said. More generally, HSBC's U.S. bank subsidiary has announced broad organizational changes to improve its AML program.

"We know we should have done this better, sooner," Thurston said.

The hearing before the Senate Permanent Subcommittee on Investigations coincided with the release of the panel's 335-page report looking into the bank's problems and how they reflect risk from correspondent banking. The report highlighted, among other things, how bank personnel stripped references in transactions to countries facing international sanctions in an aim to grow business and evade the authority of the U.S. Office of Financial Assets Control. As a result, the report said, nearly 25,000 transactions from 2001 to 2007 involved Iran.

"The purpose of this hearing … is not just to make an example of HSBC, as if it were an anomaly. Rather, this hearing is to help Congress understand just what kind of risks this nation faces, and what we should do to reduce them," said Sen. Tom Coburn, R-Okla., the subcommittee's ranking member.

But the subcommittee did not just zero in on HSBC. Levin and Coburn also questioned why the OCC did not do more to force earlier changes at the bank. In the report, the subcommittee called on the agency to have AML enforcement actions reflected in a bank's safety and soundness ratings; the agency has been criticized for taking past steps against HSBC that only affected the bank's consumer compliance ratings.

"Throughout this inquiry, it became clear the Office of the Comptroller of the Currency was aware of many of HSBC's AML weaknesses, which it frequently pointed out," Coburn said. "It was often at a loss, however, to prescribe how HSBC could eliminate the weaknesses. And so its record of enforcement at HSBC resembles a lapdog rather than a watchdog that we sorely need."

Scrutiny over its AML enforcement comes as the OCC has faced elevated scrutiny in other areas. The regulator was at the center of questions over why federal policymakers did not do more to understand what led to JPMorgan Chase & Co.'s well-documented trading loss in its London unit. Just this week it was revealed the Treasury Department's inspector general has looked into instances of ethical lapses by OCC personnel, although the agency has said they "are isolated incidents and do not diminish the highly ethical behavior of thousands of other OCC employees."

"Taken together with our subcommittee's findings in this investigation, these conflicts are startling and suggest Congress should give closer scrutiny to the OCC's actions," Coburn said.

Comptroller of the Currency Thomas Curry acknowledged his agency acted too slowly in addressing the bank's problems. Though the OCC issued a broad cease-and-desist order against HSBC in 2010, Curry said, "with the benefit of hindsight, the OCC could have, and should have taken this action sooner."

Still, most of the hearing focused on why HSBC executives had let the situation get so bad in the first place, and what steps have been taken since.

In one exchange, Levin questioned two key executives — Stuart Levey, the chief legal officer for HSBC Holdings plc, and Irene Dorner, chief executive of HSBC North America Holdings Inc. — about two relationships between HSBC affiliates and questionable clients that predated either executive's arrival at the bank.

In one example, an HSBC affiliate was working with an Afghan bank on an OFAC-sanctioned list with ties to the Taliban. The other example involved a trust account operated through numerous HSBC affiliates for a known Syrian terrorist.

"How would you have reacted if you knew that HSBC was engaged in such a practice and that an HSBC affiliate knew of the HSBC account and didn't report it?" Levin said.

"That would be unacceptable," said Levey, who was a senior Treasury Department official overseeing financial intelligence issues when OFAC designated the Syrian terrorist. "This is exactly the kind of thing that we're trying to change. We're trying to make important compliance information mandatorily shared to compliance officers around the world."

Responding to questions from Coburn, Dorner explained how she has tried to change the culture at the U.S. bank to be more sensitive to compliance issues.

"Senator, I can tell you unequivocally since I have been here that I have fired people for not complying, that I have clawed back … and I have reduced compensation," she said. "Equally, we have celebrated success. We have put compliance officers on our intranet to show people, 'This is where it's at,' that they should be looking at these kinds of standards to drive the way that we do business. It's quite clear that we need to make further changes."