HSBC’s grilling

What comes out in the wash

BANKERS to Mexican drug lords, Iran, the Taliban, a Syrian terrorist, Cuba, Sudan, North Korea and Hamas—that was the charge sheet faced by HSBC executives as they became the latest group of financiers to be hauled down to Washington, DC, for public shaming. A scathing 335-page report from a year-long probe was released on July 17th by the Senate’s Permanent Subcommittee on Investigations.

“HSBC’s compliance culture has been pervasively polluted for a long time,” said Senator Carl Levin, who chairs the committee. He claimed that HSBC used its bank in the United States as a gateway into the financial system for illicit money, and he threatened to push for a revocation of the bank’s charter.
Contrition was the primary response. “HSBC’s compliance history,” said Irene Dorner, the head of HSBC’s American bank, “as examined today, is unacceptable.” David Bagley, who headed compliance at the bank, used his testimony to announce he was stepping down.
HSBC’s new chief legal officer is Stuart Levey, previously the Treasury’s undersecretary for counter-terrorist financing and sanctions. Mr Levey said his arrival was one piece of a comprehensive reorganisation under the bank’s new chief executive, Stuart Gulliver. It includes centralising information to enable exposure of suspect clients and transactions that individual country operations had previously hidden from one another.
The bank is also increasing its budget for anti-money-laundering compliance in America to $244m this year, a ninefold increase from 2009. Not before time. The report describes a constant struggle for resources by a compliance department vainly attempting to monitor a vast and expanding number of transactions and regulations in the face of efforts by executives to tamp down costs.
One employee who pushed hard for more resources to address festering problems was sacked because of her efforts. Another, cited in 2009 by the bank’s primary regulator, the Office of the Comptroller of the Currency (OCC), as being unqualified, was promoted.
HSBC’s compliance problems were hardly an internal secret. They were flagged numerous times by regulators but the bank received only the mildest of sanctions in exchange for promises to do better. Senators Levin and Tom Coburn, the two senior members of the committee, slammed the OCC for serving as an ineffectual industry “lapdog”. The Justice Department is pursuing a parallel investigation, and a large fine, relatively speaking (see Free Exchange), is expected.
The report was particularly scathing in two areas. The first was 25,000 transactions, worth $16 billion, that surreptitiously involved Iran, though all identifying markers had been scrubbed, thus violating American transparency laws. The bank’s Mexican operations were also cited, with billions of dollars of drug-money allegedly being transported in cash by the bank through its bulk money-transfer business (since shut down).
In the not-so-distant past, banks typically entered “correspondent” relationships with other banks which needed only to be licensed. Recently, they have been required to become more finicky, particularly in high-risk countries. Senator Levin said HSBC’s American operations should have taken this approach one step further, treating its own affiliates in high-risk regions as it would treat separate high-risk banks. The senator noted that the bank continued to operate in jurisdictions with secrecy laws; he asked whether it could ignore those limitations to meet America’s transparency demands.
This conflict touches on the biggest threat to HSBC. Managerial failings can be corrected, but its greatest asset—its global network and cross-border ties—exposes it to conflicts of law, as politics spills over into commercial activity. Ms Dorner noted that HSBC has recently closed 326 correspondent-banking relationships and 14,000 customer accounts because they failed to meet new standards. That should go some way to mollify critics. Yet there is a risk that the new-found emphasis on compliance will subject legitimate clients to monstrous red tape.
If HSBC can surmount its current troubles, it has extraordinary opportunities. The year-long investigation was cited by the Senate as a test case. There is abundant evidence of other global banks having similar problems. Creating a compliance system that can satisfy regulation will not be cheap or simple. Companies in poor countries may find that their costs for routine transactions soar. But the rare banks that have the scale and the resources to operate in this environment will have a business niche to themselves.