Bank of Rogues

An executive at Europe’s largest bank announced his resignation during a U.S. Senate panel Tuesday following a blistering report on the bank’s failure to police money laundering in its accounts.

HSBC group compliance head David Bagley told the Senate Permanent Subcommittee on Investigations that the bank had “in some important areas failed to meet our expectations and the expectations of our regulators.”

Subcommittee members grilled bank executives and regulators over company emails and other documents that painted a picture of slack controls, deliberate deception, and unheeded red flags that allowed corrupt governments, terrorist organizations and drug kingpins to launder money in the U.S. Subcommittee Chairman Senator Carl Levin said the lack of oversight at HSBC made the U.S. financial system a “sinkhole of risk” for dirty money.

The 340-page report found the bank’s U.S. affiliate, known as HBUS, had a “history of weak anti-money laundering controls,” that was, given the overwhelming volume of transactions the bank handles, a “recipe for trouble.”

The subcommittee also found that HSBC’s U.S. affiliate failed to monitor $60 trillion in money flows and let $15 billion in sketchy bulk-cash transactions go by without the required checks to guard against money laundering.

The report, produced after a year-long investigation involving some 1.4 million documents,  singles out $7 billion in cash dealings with a Mexican affiliate of the bank, known for laundering drug profits.

Regulators warned HSBC to clean up its act in 2003 and ordered it to boost enforcement of anti-money laundering controls required by the Patriot Act. The Office of the Comptroller of the Currency, the bureau in charge of oversight of the U.S. affiliate, failed to take action when it later found the bank had fallen short on its reforms. During the hearing, Thomas Curry, who took over as head of the OCC four months ago, said he regretted the bureau’s inaction.

Rogue Regimes

HSBC had dealings with a host of countries associated with corruption and terrorism, including Myanmar, North Korea, Sudan, Cuba, Iran and Syria.

Levin said HSBC showed a “worrisome willingness” to do business with banks that had terrorist ties.

The Senate investigation found that the bank’s U.S. affiliate conducted transactions involving Myanmar, formerly Burma, in breach of U.S. sanctions. Automated filters failed to pick up on a misspelling of the country’s name, and did not recognize references to Yangon instead of the outdated Rangoon, according to email documents from compliance officers at the company. The report included a purchase of $2.9 million in U.S. dollars by a party connected to Myanmar.

The report said regulators had warned HSBC about U.S. sanction violations in 2005, but took years to close prohibited U.S. dollar accounts with North Korean clients, including an HBUS account with the Foreign Trade Bank of the Democratic People’s Republic of Korea that remained open as recently as April 28, 2010.

HBUS also helped to launder $7 billion in physical cash deposited from Mexico, which investigators said should have raised serious concerns of money laundering. They believe the funds likely came from drug cartels.

The subcommittee’s investigation also found that HSBC held a dollar account in the U.K. for a bank in Syria explicitly established for “The Taliban.”

Levin accused HSBC of turning a blind eye to 25,000 transactions worth $19.4 billion involving Iran. These activities, he said, polluted the U.S. financial system with money used to fund terrorism.

The report indicates that in 2003, HSBC executives were worried about so-called U-turn transactions involving Iran, in which money was sent from foreign banks to U.S.-based financial institutions, and then on to Iran. The transactions allowed Iran to circumvent U.S. sanctions and gain access the U.S. financial system, according to the U.S. Treasury Department. Despite the concerns, HSBC affiliates sent 7,800 Iranian transactions through U.S. dollar accounts in the following year, 90% of which remain undisclosed.

Email records indicated that Michael Gallagher, former executive vice president,  knew about suspicious U-turn transactions at the bank’s U.S. affiliate. Levin asked Gallagher why he did not call someone at the affiliate office and “just raise hell.”

“With the benefit of hindsight, that’s exactly what I should have done,” Gallagher said. “We should have been louder, sooner.”

Slack Regulators

 The Senate report also blasted regulators at the comptroller of the currency for failing to punish HSBC when it discovered violations.

Levin said the OCC conducted 44 examinations of HBUS from 2004 to 2010, and cited 35 serious concerns in 2006 alone. It found monitoring problems and non-compliance with policies – yet ranked the bank’s enforcement as satisfactory.

“We probably did not appreciate the systemic nature of those issues,” said Grace Dailey, former deputy comptroller at the OCC. “We could have and should have taken formal enforcement action, with the benefit of hindsight.”

Levin on several occasions took witnesses to task for saying they regretted poor practices “in hindsight,” because compliance officers and regulators failed to act despite clear evidence of violations at the time.

“Forget hindsight,” Levin said. “This is pretty feeble enforcement.”

Watchdogs React

Anti-corruption experts were cautiously optimistic about the panel’s report — with an emphasis on caution.

Dennis M. Lormel, former Chief of the FBI’s Terrorist Financing Operations Section of the Couterterrorism Division, said, “If HSBC actually implements what they say they’re going to do, that’s going to change this entire industry.” He predicted, however, that it would take decades to change banking culture.

Serious reforms would not stick without major advances in transparency, watchdog groups said.

Stephanie Ostfeld, policy advisor for London-based Global Witness, said the Treasury Department “should require all banks to identify the ultimate owner of all corporate accounts.”

The subcommittee focused its report largely on the bank’s failure to track drug money and terrorist financiers, but gave less attention to the global costs of laundering from corrupt countries. Ostfeld said the World Bank estimates the total cost of corruption worldwide is $1 trillion per year, and shoddy bank oversight enables corrupt dictators to pocket billions of dollars tied to extracting natural resources while perpetuating poverty.

Heather Lowe, legal counsel and director of government affairs at the Washington-based Global Financial Integrity, added that money laundering is not a victimless crime. “It stifles economic growth, it stifles education,” she said. “That’s very much lost in hearings like the one we had today, which focus on numbers and money-laundering laws, and people really lose that human connection.”

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Diana Jean Schemo

Diana Jean Schemo is president and executive editor of 100Reporters, and the founder and co-director of the Double Exposure Film Festival and Symposium, the United States' only investigative film festival.

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