Rapid growth left HSBC too big to police itself
Steve Slater and Sinead Cruise London
HSBC takes its name from its roots as the Hongkong and Shanghai Banking Corporation, but there has long been a joke inside and outside the firm that the name stands for: “How Simple Became Complicated”.
That complexity in part explains how the London-based bank ended up with the biggest fine ever imposed on a financial firm by US regulators on Tuesday – an eye-watering $1.9 billion (R16.5bn) – after a lengthy US probe showed sweeping problems at the bank.
Lax controls had left HSBC as the “preferred financial institution” for drug traffickers and money launderers, US prosecutors said this week.
The concern is that HSBC, Europe’s biggest bank, with more than 60 million customers across 84 countries, is unable to adequately monitor all its operations, a task made harder by its history of patchwork acquisitions.
HSBC said it had spent hundreds of millions of dollars to bolster compliance and simplify its control structure to address the lapses in anti-money laundering controls, mainly in its Mexico and US operations, which led to stinging criticism from politicians and the record punishment.
“[Chief executive] Stuart Gulliver is doing a good job looking after the group, but at the end of the day, it is an absolutely massive bank with branches everywhere; it is impossible to guarantee that there isn’t something going on somewhere,” said Jane Coffey, the head of equities at Royal London Asset Management, an HSBC shareholder.
Gulliver restructured HSBC shortly after taking over at the start of 2011, setting up global businesses and functions to improve communication and operations across the group. In the past, national heads ran all its businesses within each country, which could result in problems going unnoticed.
In a scathing report on the bank published in July, US Senator Carl Levin said the bank needed to improve its internal sharing of information to help cut down on illicit activity.
In Mexico, where HSBC became one of the top banks with the 2002 purchase of Grupo Financiero Bital, a rapid expansion meant problems were missed. Between 2007 and 2008, HSBC’s Mexican operations moved $7bn into its US operations, and both Mexican and US authorities warned that the sum could only have been so high if it was tied to illegal narcotics proceeds, the US Senate report said.
In early 2008, a Mexican drug lord referred to the bank as the “place to launder money”, US prosecutors said this week.
Unlike the London interbank offered rate (Libor) interest rate rigging scandal that rocked UK rival Barclays earlier this year and forced its chairman and chief executive to quit, HSBC’s fine has not prompted calls for senior management to step down.
Stephen Green, who was chief executive and then chairman from June 2003 until December 2010, is now UK Trade Minister and has faced calls to explain what he knew. He said in July that he shared HSBC’s “regrets” about the failings. Michael Geoghegan was chief executive from May 2006 until the end of 2010, and has not taken on any major new role.
Critics say the failures highlighted this week show the scale of the task facing Gulliver; he has simultaneously to improve returns for investors, meet tougher global regulations, cut costs and stay on top of potential problems. – Reuters