US fines HSBC $1.92bn for control failures

br hsbc (30628967) REUTERS A bank branch of HSBC is seen in St Helier, Jersey in this November 11, 2012 file photo. HSBC said on December 11 it will pay a fine of $1.92 billion (1.19 billion pounds) in a deferred prosecution agreement with the U.S. Department of Justice over the London-based bank's inadequate compliance with anti-money laundering laws. REUTERS/Stefan Wermuth/Files (JERSEY - Tags: BUSINESS TPX IMAGES OF THE DAY)

Carrick Mollenkamp and Brett Wolf New York

HSBC has agreed to pay a record $1.92 billion (R16.65bn) fine to settle a multi-year probe by US prosecutors, who accused Europe’s biggest bank of failing to enforce rules designed to prevent the laundering of criminal cash.

HSBC admitted to a breakdown of controls and apologised in a statement yesterday, announcing it had reached a deferred prosecution deal with the US Department of Justice.

“We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes,” chief executive Stuart Gulliver said.

“Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters.“

The deferred prosecution agreement could yield new information about a failure at HSBC to police transactions linked to Mexico, sources familiar with the matter said.

Details of those dealings were reported earlier this year in a sweeping US Senate probe.

The Senate panel alleged that HSBC failed to maintain controls designed to prevent money laundering by drug cartels, terrorists and tax cheats, when acting as a financier to clients routing funds from places including Mexico, Iran and Syria.

The bank was unable to properly monitor $15bn in bulk cash transactions between mid-2006 and mid-2009, and had inadequate staffing and high turnover in its compliance units, July’s report said.

HSBC said yesterday that it expected to reach a settlement with the UK’s Financial Services Authority as well.

US and European banks have now agreed to settlements with US regulators totalling some $5bn in recent years on charges they violated US sanctions and failed to police potentially illicit transactions.

No bank or bank executives have been indicted, as prosecutors have instead used deferred prosecutions – under which criminal charges against a firm are set aside if it agrees to conditions such as paying fines and changing its behaviour.

HSBC’s settlement also includes agreements or consent orders with the Manhattan district attorney, the Federal Reserve and three US Treasury Department units.

HSBC said it would pay $1.921bn, continue to co-operate fully with regulatory and law enforcement authorities and take further action to strengthen its compliance policies and procedures.

The settlement is the third time in a decade that HSBC has been penalised for lax controls and ordered by US authorities to monitor suspicious transactions more closely. Regulators ordered it to improve oversight in 2003 and again in 2010.

Last month, HSBC told investors it had set aside $1.5bn to cover fines or penalties stemming from the inquiry and warned that the costs could be significantly higher.

Analyst Jim Antos of Mizuho Securities said the settlement costs were “trivial” relative to the bank’s book value.

“But in… real cash terms, that’s a huge fine to pay,” said Antos, who rates HSBC as buy.

HSBC shares dipped 0.3 percent in early London trading, in line with a slightly weaker European bank index . Its Hong Kong stock rose 0.3 percent.

“It has been damaging for the brand, albeit not as bad as it might have been,” said Ian Gordon, an analyst at Investec Securities in London.

“Is it absorbable? Yes. Is it significant? Yes. But in the absence of a broader attack on the business structure or individuals, that explains why the market reaction has been relatively muted today and has been since the allegations came out,” he added.

HSBC said it had increased spending on anti-money laundering systems by about nine times between 2009 and last year, exited business relationships and clawed back bonuses for senior executives. It cited the hiring last January of Stuart Levey, a former top US Treasury Department official, as chief legal officer, as evidence of its determination to change.

Under a five-year deal with the Justice Department, HSBC agreed to have an independent monitor evaluate its progress in improving its compliance.

It also said that as part of the overhaul of its controls it had launched a global review of its “Know Your Customer” files, which will cost an estimated $700 million over five years. The files are designed to ensure that banks do not act as conduits for criminal funds.

HSBC’s settlement came a day after rival British bank Standard Chartered agreed to a $327m settlement with US law enforcement agencies for violations of financial sanctions on Iran, a pact that follows a $340m settlement the bank reached with the New York bank regulator in August.

Such settlements have become commonplace. In what was the largest settlement until this week, ING Bank agreed in June to pay $619m to settle US allegations that it had violated sanctions against countries including Cuba and Iran.

Other banks that have paid settlements over sanctions violations are Credit Suisse, Lloyds Banking Group, Barclays and ABN Amro.

In the US, JPMorgan Chase, Wachovia and Citigroup have been cited for anti-money laundering lapses or sanctions violations.

HSBC’s failings date to 2003, when the Federal Reserve Bank of New York and regulators ordered it to monitor suspicious money flows better. – Reuters


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