The Federal Reserve Board of Governors has terminated a six-year-old cease and desist order leveled against
The enforcement action was issued after regulators and law enforcement officials discovered that employees at the Lake Forest, Illinois-based bank used inside information about a pair of multibillion-dollar foreign exchange trades involving the British pound sterling in 2010 and 2011 to manipulate foreign exchange markets.
Employees at the bank then used their knowledge about the transactions to make trades in their proprietary accounts that benefited the bank and boosted their bonus pay. They also made misrepresentations to one of their clients, Cairn Energy, to conceal their actions, according to the Department of Justice.
HSBC voluntarily disclosed the misconduct to authorities years later, the Justice Department noted in a January 2018 release, and though the bank's initial cooperation with the Federal Deposit Insurance Corp.'s Office of the Inspector General and Federal Bureau of Investigation was "deficient," it later "improved substantially."
After the fraud was reported, regulators in the U.S. and U.K. investigated the bank's controls around its foreign exchange operations. The Fed found that HSBC's "deficient policies and procedures prevented it from detecting and addressing unsafe and unsound conduct," according to the 2017 enforcement action.
As a result of the action, HSBC agreed to conduct internal audits and reviews, develop new compliance and risk management practices, and face enhanced reporting requirements. It also incurred a fine of $175 million from the Fed and a criminal penalty of $63 million from the Justice Department. The bank also had to pay more than $40 million in restitution to its victims.
The scheme, known as front-running, broached client confidentiality and resulted in the companies paying more in the transactions than they otherwise would have. The bank realized profits totaling more than $46 million from the two transactions, including $8 million from Cairn in 2011, which the bank repaid as part of a direct settlement.
The front-running ordeal led to the bank's then-head of global foreign exchange, Mark Johnson, being tried and convicted of fraud. He was sentenced to 24 months in prison and fined $300,000, according to the Justice Department. Federal prosecutors say Johnson executed the $3.5 billion Cairn trade in a way designed to "ramp" the price of the pound sterling to benefit the bank's proprietary positions.
As part of the Fed's enforcement action, HSBC was required to terminate all other employees involved in the episode and barred from hiring them back in any capacity in the future.
In the 2017 order, the Fed noted that HSBC had already made improvements to its foreign exchange oversight and risk management. But, it concluded, the bank had more work to do.
With the enforcement action now terminated, HSBC will no longer have to provide progress reports on its efforts to improve internal controls or manage risks.
A spokesperson for the bank praised the Fed's decision to end the enforcement action but reaffirmed the bank's commitment to making further improvements to risk management and oversight.
"We are very pleased with the Federal Reserve's decision to terminate the 2017 consent order," the spokesperson said in a statement. "We will continue to build upon the changes that we have already made to our systems, controls and monitoring systems."
