HSBC is a bank. They are also a money launderer. Last week the Senate subcommittee on investigations, part of the Senate Committee on Homeland Security and Government Affairs, issued a report (pdf) and held a hearing, U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History. Contained within is a laundry list, if we can use the pun, of HSBC evil doings and how they mechanically laundry money for drug cartels, terrorists and tax evaders.
This is over a decade past 9/11 and seemingly HSBC has been operating with impunity. One of the conduits for money laundering is correspondent banking. Correspondent banking is when one financial institution provides services to another financial institution to move funds, exchange currencies, cash monetary instruments, or carry out other financial transactions. Even though in 2002, correspondent banking was recognized as a primary method to fund terrorist activities, the doors have not been shut.
Correspondent accounts continue to provide a gateway into the U.S. financial system, and wrongdoers continue to abuse that entryway.
Below is what has been done since 9/11, yet correspondent banking is alive and well.
Before the 2002 Patriot Act, for example, most U.S. banks opened correspondent accounts for any foreign bank with a banking license; now, most U.S. banks evaluate the riskiness of each foreign bank’s owners, business lines, products, clients, and AML controls before agreeing to open an account. They also routinely monitor account activity and wire transfers for suspicious activity, with enhanced monitoring of high risk correspondents. In addition, before the 2002 Patriot Act, some U.S. banks readily opened accounts for foreign shell banks, meaning banks without any physical presence in any jurisdiction; today, in accordance with the Patriot Act’s ban on shell bank accounts, all U.S. banks take measures to ensure they don’t provide services to such banks, the ban on shell bank accounts has become an international AML standard, and the thousands of stand-alone shell banks licensed by the Bahamas, Cayman Islands, Nauru, and other jurisdictions have virtually disappeared.
Welcome to all hail globalization. HSBC, or Hong Kong Shanghai Banking Corporation, is a global bank. They operate in 80 countries. HSBC's United States affiliate is HBUS and and has over 470 U.S. branches. HSBC bank operates in the Middle East, Latin America and touts the ability to interact with HBUS one of their best services. In other words, HSBC by it's nature, uses correspondent banking.
HBUS is not checking or flagging suspicious transfers. AML stands for anti-money laundering and bottom line, HBUS was circumventing those checks. The regulatory body supposed to be flagging violations and recommending criminal prosecutions is the Office of the Comptroller of the Currency, or OCC and what a surprise, they were asleep at the wheel and worse.
The Subcommittee also examined HSBC because of its weak AML program. In September 2010, the OCC issued a lengthy Supervisory Letter citing HBUS for violating federal AML laws, including by maintaining an inadequate AML program. In October 2010, the OCC issued a Cease and Desist Order requiring HSBC to strengthen multiple aspects of its AML program. The identified problems included a once massive backlog of over 17,000 alerts identifying possible suspicious activity that had yet to be reviewed; ineffective methods for identifying suspicious activity; a failure to file timely Suspicious Activity Reports with U.S. law enforcement; a failure to conduct any due diligence to assess the risks of HSBC affiliates before opening correspondent accounts for them; a 3-year failure by HBUS, from mid-2006 to mid-2009, to conduct any AML monitoring of $15 billion in bulk cash transactions with those same HSBC affiliates, despite the risks associated with large cash transactions; poor procedures for assigning country and client risk ratings; a failure to monitor $60 trillion in annual wire transfer activity by customers domiciled in countries rated by HBUS as lower risk; inadequate and unqualified AML staffing; inadequate AML resources; and AML leadership problems.
HSBC, through their affiliates were clearly laundering Mexican drug cartel money. From the report:
Drug traffickers unable to deposit large amounts of cash in U.S. banks due to AML controls, were transporting U.S. dollars to Mexico, arranging for bulk deposits there, and then using Mexican financial institutions to insert the cash back into the U.S. financial system.
Gets worse. From 9/11 the law creates flagging filters for transactions of known people, groups and countries where terrorism, illegal activity was happening. Banks basically figured out ways around these filters, so their wire transfers and transactions were not flagged.
Because the OFAC filter can end up delaying or blocking transactions that are permitted under U.S. law or by other jurisdictions, some non-U.S. financial institutions have used tactics to circumvent it. Common tactics include stripping information from wire transfer documentation to conceal the participation of a prohibited person or country, or characterizing a transaction as a transfer between banks in approved jurisdictions, while omitting underlying payment details that would disclose participation of a prohibited originator or beneficiary.
Literally HSBC and their affiliates are processing transactions from Iran, North Korea, the Sudan, Burma and Cuba. HSBC is especially active with the same Saudi Arabia bank implicated for funding the 9/11 attacks, Al Rajhi Bank.
An outside auditor hired by HBUS has so far identified, from 2001 to 2007, more than 28,000 undisclosed, OFAC sensitive transactions that were sent through HBUS involving $19.7 billion. Of those 28,000 transactions, nearly 25,000 involved Iran, while 3,000 involved other prohibited countries or persons.
From 2007 through 2008, HBMX was the single largest exporter of U.S. dollars to HBUS, shipping $7 billion in cash to HBUS over two years, outstripping larger Mexican banks and other HSBC affiliates.
The report describes other highly suspicious transactions, including the use of good old fashioned travelers checks.
Over the course of a decade, HBUS opened over 2,000 accounts in the name of bearer share corporations, a notorious type of corporation that invites secrecy and wrongdoing by assigning ownership to whomever has physical possession of the shares.
Where were the regulators for HBUS, the HSBC U.S. affiliate? No where it seems. The OCC supposedly labeled their grievous violations a consumer compliance matter. The OCC also has been labeling these violations Matters Requiring Attention instead of the fragrant violations of the law that they are.
At HBUS, the OCC identified 83 Matters Requiring Attention over five years, without once citing a legal violation of federal AML law. It was only when the OCC found HBUS’ entire AML program to be deficient that the OCC finally cited the bank for a legal violation.
Now think about the implications here of a global bank facilitating drug cartels, terrorists and rogue nation-states financially. Then, contemplate how this story hit the press for only a 24 hours news cycle, promptly buried, as is most news, by the recent and latest shooting tragedy.
HBUS was actually confronted with similar problems in 2003. They promised to clean up their act, which of course never really happened as regulators and Congress went away.
HSBC is poster child for global banking money laundering, but assuredly this is going on elsewhere. HSBC is the uber global bank and it's clear from this report, they are operating with no consequence. The OCC has abandoned their post in terms of monitoring and prosecuting the HSBC affiliates' violations. Literally the HBUS was acting as a gateway into the U.S. financial system and advertised, marketed as such.
Of course we will see major action right? Criminal prosecutions, a revoke of HBUS U.S. charter, some sort of shutting down of glorified terrorist and cartel conduit? Ha, ha, think again. Below are the report's recommendations for HSBC.
- Screen High Risk Affiliates. HBUS should reevaluate its correspondent relationships with HSBC affiliates, including by reviewing affiliate AML and compliance audit findings, identifying high risk affiliates, designating affiliate accounts requiring enhanced monitoring, and closing overly risky accounts. HBUS should conduct a special review of the HBMX account to determine whether it should be closed.
- Respect OFAC Prohibitions. HSBC Group and HBUS should take concerted action to stop non-U.S. HSBC affiliates from circumventing the OFAC filter that screens transactions for terrorists, drug traffickers, rogue jurisdictions, and other wrongdoers, including by developing audit tests to detect undisclosed OFAC sensitive transactions by HSBC affiliates.
- Close Accounts for Banks with Terrorist Financing Links. HBUS should terminate correspondent relationships with banks whose owners have links to, or present high risks of involvement with, terrorist financing.
- Revamp Travelers Cheque AML Controls. HBUS should restrict its acceptance of large blocks of sequentially numbered U.S. dollar travelers cheques from HSBC affiliates and foreign financial institutions; identify affiliates and foreign financial institutions engaged in suspicious travelers cheque activity; and stop accepting travelers cheques from affiliates and foreign banks that sell or cash U.S. dollar travelers cheques with little or no KYC information.
- Boost Information Sharing Among Affiliates. HSBC should require AML personnel to routinely share information among affiliates to strengthen AML coordination, reduce AML risks, and combat wrongdoing.
- Eliminate Bearer Share Accounts. HBUS should close its remaining 26 bearer share corporate accounts, eliminate this type of account, and instruct financial institutions using HBUS correspondent accounts not to execute transactions involving bearer share corporations. U.S. financial regulators should prohibit U.S. banks from opening or servicing bearer share accounts.
- Increase HBUS’ AML Resources. HBUS should ensure a full time professional serves as its AML director, and dedicate additional resources to hire qualified AML staff, implement an effective AML monitoring system for account and wire transfer activity, and ensure alerts, including OFAC alerts, are reviewed and Suspicious Activity Reports are filed on a timely basis.
- Treat AML Deficiencies as a Matter of Safety and Soundness. The OCC should align its practice with that of other federal bank regulators by treating AML deficiencies as a safety and soundness matter, rather than a consumer compliance matter, and condition management CAMELS ratings in part upon effective management of a bank’s AML program.
- Act on Multiple AML Problems. To ensure AML problems are corrected in a timely fashion, the OCC should establish a policy directing that the Supervision Division coordinate with the Enforcement and Legal Divisions to conduct an institution-wide examination of a bank’s AML program and consider use of formal or informal enforcement actions, whenever a certain number of Matters Requiring Attention or legal violations identifying recurring or mounting AML problems are identified through examinations.
- Strengthen AML Examinations. The OCC should strengthen its AML examinations by citing AML violations, rather than just Matters Requiring Attention, when a bank fails to meet any one of the statutory minimum requirements for an AML program; and by requiring AML examinations to focus on both specific business units and a bank’s AML program as a whole.
Now think about the above list and the fact HSBC, even after 9/11 has been operating like this for over a decade. One would think HSBC would be facing criminal charges, be broken up, their U.S. affiliate shut down.
Senator Carl Levin (D_MI) in his opening hearing statement said:
Global banks have caused the world a lot of heartache.
That's it? An acknowledgment global banks are running amok, including laundering money for terrorists and drug cartels? Not even a fine, never mind, criminal charges?
Senator Tom Coburn (R-OK) at least said this about the OCC:
Its record of enforcement at HSBC resembles a lapdog rather a watchdog that we sorely need
We do not even see a fine, here, despite the rumors of a $1 billion one coming. What a slap on the wrist that would be too, considering the $22 billion in annual 2011 HSBC profits. Good God, even HSBC's U.S. affiliates' name, HBUS, sounds like a mnemonic to advertise their ability to move and wash money for illegal activities!
Business Insider excerpted the more gory details from the report and says it reads like a James Bond movie, where HSBC is the villain.
What the report reminds us of is the movie, The International. This film was in part based on a true story of another money laundering global bank, the BCCI. What was the moral of the film? They get away with it. Worse, if a few major global players get nailed, there are 50 more international finance rats to take their place. In other words, in spite of this alarming report, we doubt much will happen to clean up the global banking system, especially considering those mealy mouthed recommendations in the face of such damning evidence.
When regulations on Iran tightened in 2003, HBME and HBEU tried to continue doing business with now illegal clients by changing documentation, among other things. 5 Iranian banks took advantage of this to the tune of $500,000 to $1 million a day.