It was reported recently that a U.S. fine for violating federal anti-money laundering laws could cost HSBC Holdings, Europe’s biggest bank, significantly more than $1.5 billion. It was also said that criminal charges could be involved as well. HSBC told Reuters that the U.S. investigation had damaged the bank’s reputation and forced it to set aside an additional $800 million to cover a potential fine for breaches in anti-money laundering controls in Mexico and other violations. It should be noted this provision was in addition to the $700 million the bank put aside in July. Chief Executive Stuart Gulliver said this amount “could be significantly higher,” adding that the latest provision was based on discussions with the various U.S. authorities involved in the probe.
A U.S. Senate report in July criticized HSBC for letting clients shift potentially illicit funds from countries such as Mexico, Iran, the Cayman Islands, Saudi Arabia and Syria. HSBC had admitted earlier in the year that it could face criminal or civil charges as part of the investigation. The London-based bank said that the issue was “shameful and embarrassing” after a report by Congress’ Permanent Subcommittee on Investigations criticized a “pervasively polluted” culture. The report said HSBC’s Mexican operations had moved $7 billion into its U.S. operations between 2007 and 2008. Volume that large suggested it included illegal narcotics proceeds, according to the report. Gulliver, the CEO, said:
The report undoubtedly caused considerable reputational damage to HSBC. The extent to which that has resulted in loss of business is hard to measure, but it has undoubtedly damaged our brand.
The U.S. Justice Department usually resolves corporate criminal cases by imposing fines and requiring changes to a compliance program, but dismisses the charges if all requirements are met. The Justice Department has entered into a number of these agreements this year. The size of the fine expected by HSBC also dwarfs every other similar case, including the previous record set by ING Bank N.V., which agreed in June to forfeit $619 million to resolve allegations that it illegally moved money on behalf of sanctioned entities in Cuba and Iran.
HSBC’s problems involve more than just sanctions issues. Major apparent lapses in money laundering controls, as stated in the Senate subcommittee report, are also involved. Jimmy Gurule, a former top Treasury official who is now a law professor at the University of Notre Dame, observed:
What it reflects is the gravity of the wrongdoing that HSBC is at least implicitly admitting. This case has multiple dimensions and layers of wrongdoing. It transcends economic sanctions.
Reuters detailed in a July Special Report how money-laundering lapses continue to persist at HSBC, with managers allegedly focused on clearing paperwork quickly, rather than uncovering risks. This highlighted the extent of the most serious problems at the bank.
It is unclear whether other pending inquiries into money-laundering issues, including the one at JPMorgan Chase & Co, have the potential to be similar in scope, but U.S. banks have generally avoided some of the larger penalties imposed on foreign banks for sanctions or money laundering violations. The issue involving HSBC is another blow for the reputation of British banks after rival Barclays was fined $450 million in June for rigging Libor interest rates. The industry has also had to set aside more than 12 billion pounds to compensate customers in the United Kingdom for mis-selling insurance products. When you consider the magnitude of the problem, and the duration, it’s clear that something had to be done. Professor Gurule said further:
There’s a whole series of things that came from probably a decade in the 2000 to 2008-09 period that have surfaced now that the industry needs to sort out, remediate, and make sure doesn’t happen again. It will take a chunk of time to clean the system and then it will take a little bit longer than that for trust to be restored more fully.
HSBC reported an underlying profit – after stripping out the impact of disposals and changes in the value of its own debt – in the July-September quarter of $5.0 billion, up from a revised $2.2 billion a year earlier. The financial picture was helped by a bigger-than-expected drop in losses from bad debts and a solid performance by its investment bank arm. Underlying operating expenses rose by 16 percent in the quarter from a year ago due to higher compliance and regulatory costs, which it said amounted to $200 million to $300 million.
HSBC took another $357 million charge for mis-selling payment protection insurance in Britain, lifting the total amount set aside to $2.1 billion. The bank said it paid out $1 billion in compensation. According to Gulliver, more job cuts were likely before the end of 2013 at his bank. Over the past two years, HSBC has cut almost 30,000 jobs. It will be interesting to see how all of this works out.
Contact us today for a free legal consultation with an experienced attorney.
Fields marked *may be required for submission.
If you would like to subscribe to the Jere Beasley Report digital edition, simply visit our Subscriptions page and provide the necessary information or call us at 800-898-2034.
Attorney Advertising - Prior results do not guarantee a similar outcome.