Senators to Issue Stinging Report on HSBC's AML Controls

WASHINGTON — Lawmakers on Tuesday will unveil the results of a yearlong investigation documenting subpar anti-money-laundering practices at global banking giant HSBC and its U.S. affiliate.

The review led by the U.S. Senate Permanent Subcommittee on Investigations, chaired by Sen. Carl Levin, D-Mich., unearthed serious episodes where HSBC's U.S. affiliate had failed to catch money laundering involving drug cartels, and allowed transactions involving terrorists that often bypassed U.S. laws.

HSBC is being used as a case study by the subcommittee to examine money-laundering and terrorist-financing threats associated with correspondent banking, which can often become a major conduit for illicit money flows.

In the subcommittee's 330-page report, expected to be released at a hearing on Tuesday, HSBC Bank USA — which the report refers to as HBUS — is portrayed as failing to do due diligence. The report, which includes copies of internal HSBC records and emails, indicates the company allowed risky clients to move billions of dollars in cash that included drug proceeds. Meanwhile, in certain transactions, references to countries like Iran, North Korea and Sudan were stripped to avoid triggering a U.S. law that prohibits terrorists or rogue nations from using the U.S. financial system.

"HSBC used its U.S. bank as a gateway into the U.S. financial system for some HSBC affiliates around the world to provide U.S. dollar services to clients while playing fast and loose with U.S. banking rules," Levin said Monday. "Due to poor AML control, HBUS exposed the United States to Mexican drug money, suspicious travelers' cheques, bearer share corporations, and rogue jurisdictions."

The 11 witnesses scheduled to testify at Tuesday's hearing include Irene Dorner, president and CEO of HSBC Bank USA; Stuart Levey, chief legal officer for HSBC Holdings plc; and Comptroller of the Currency Thomas Curry.

In an emailed statement, the company said it takes the act of complying with the law "very seriously."

"We will acknowledge that, in the past, we have sometimes failed to meet the standards that regulators and customers expect. We will apologize, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong," the company said.

Levin, speaking to reporters on Monday ahead of the hearing, said apologies aside, accountability by the bank will be essential. He stopped short of specifying enforcement actions or potential firings of key executives tied to the events.

"Apologies are important. They've already been publicly received and I assume will be received tomorrow from HSBC," said Levin. "Promises and commitments to improve are also welcomed. But accountability is essential and that's what's been missing here. HSBC needs to be held accountable for its conduct."

Investigators focused on five areas of abuse at HBUS, including servicing high-risk affiliates, bypassing the Treasury Department's Office of Foreign Asset Control safeguards, ignoring links to terrorist financing, clearing suspicious traveler checks, and offering bearer share accounts.

The investigation found that HBUS had been providing correspondent banking services to another affiliate, HSBC Bank Mexico, which it treated as a low-risk client despite being located in a country with significant drug trafficking challenges.

In other instances, the investigation found there had been several cases where HSBC affiliates had been actively circumventing U.S. safeguards designed to block transactions from terrorists, drug lords, and rogue regimes.

One case showed two HSBC affiliates sending nearly 25,000 transactions involving $19.4 billion through their HBUS accounts over seven years without disclosing the transactions' links to Iran. Separately, investigators also found cases where HBUS had been providing U.S. dollars and banking services to some banks in Saudi Arabia and Bangladesh, despite links to terrorist financing.

In another exhibit, the subcommittee showed that HSBC had cleared $290 million in suspicious U.S. traveler cheques, on behalf of a Japanese bank, for Russians who claimed to be in the used car business.

Levin also pointed to the need for accountability at the Office of the Comptroller of the Currency, which is the regulator of HSBC's main U.S.-based bank.

"Banks that ignore anti-money laundering rules are a big problem for our country. But also trouble is a bank regulator that does not adequately do its job," said Levin. "The OCC has a real opportunity to get this right."

According to the investigators, OCC examiners knew of the bank's weak AML controls for a long time, but were unable to convince more senior officials at the agency to sign off on an enforcement action for six years. When the OCC finally did act, it changed the institution's consumer compliance rating, not any of its safety and soundness ratings, as other regulators traditionally do when it comes to money laundering weaknesses.

As part of the report, the subcommittee recommended that HBUS should reevaluate its correspondent relationship with other HSBC affiliates, and designate certain affiliate accounts that require enhanced monitoring.

Investigators also said HBUS should restrict acceptance of large blocks of sequentially-number U.S.-dollar travelers cheques from HSBC affiliates and foreign financial institutions, as well as close its remaining 26 bearer share corporate accounts and eliminate this type of account altogether.

The report also recommended ways to address shortcomings at the OCC. The subcommittee said the agency should follow the lead of other regulators and treat money laundering as a threat to a bank's safety and soundness, rather than as a compliance issue. The report also said that the OCC should take stronger action when a bank hits a threshold number of AML statutory violations.

"HSBC's compliance culture has been pervasively polluted for a long time," Levin said, adding that "it will take more than words for the bank to change course."

"Just as certain is the need for tough regulation by the OCC," he said.