HSBC faces a massive fine for failing to properly implement anti-money laundering controls in the US, following an explosive hearing in which the bank's head of compliance for around a decade, David Bagley, resigned in front of the Senate.
The Senate's subcommittee on investigates had focused on five areas of abuse by the bank:
- "Servicing High Risk Affiliates". HSBC’s US subsidiary, HBUS, took some responsibilities from its Mexican one, and "treated it as a low risk client, despite its location in a country facing money laundering and drug trafficking challenges", as the Senate put it. As just one example of a red flag which ought to have been raised, the Mexican bank shipped $7bn in physical U.S. dollars to HBUS from 2007 to 2008, outstripping banks even twice its size. The Senate alleges that HSBC should have known that this money was likely to come from drug sales.
- "Circumventing OFAC [Office of Foreign Assets Control] Safeguards". Non-American HSBC subsidiaries actively circumvented government-imposed safeguards "designed to block transactions involving terrorists, drug lords, and rogue regimes", by, for example, sending "nearly 25,000 transactions involving $19.4 billion" through HBUS accounts over seven years without disclosing those transactions’ links to Iran.
- "Disregarding Terrorist Financing Links". The Senate argues that HBUS shouldn't have been banking in Saudi Arabia and Bangladesh due to the high volume of terrorism-related financing that occurs there.
- "Clearing Suspicious Bulk Travelers Checks". Over four years, HSBC cleared $29m in "obviously suspicious" travelers cheques for an unnamed Japanese bank, for the aid of Russians "who claimed to be in the used car business".
- "Offering Bearer Share Accounts". HSBC offered thousands of accounts to companies which practice "bearer share dealing", where the equity in the company is legally owned by whoever holds ("bears") the share certificate. For obvious reasons, these stocks are hugely useful for money laundering because their ownership can be transferred without creating any sort of trail.
On the one hand, it is impossible to actually say whether or not HSBC engaged in money laundering themselves. The circumstantial evidence makes it seem highly likely that customers of theirs did, and their failure to perform proper checks means that those customers got away with it for much longer than they ought to, but it remains unclear if HSBC actually knew that they were doing it.
Of course, what HSBC did know is that they weren't properly checking. And if you want to allow something without actually allowing it, the best way to do so is loudly announce "I'll just be closing my eyes and sticking my fingers in my ears for the next five minutes, and I certainly wouldn't want anyone to do anything illegal in that time".
Just like the Libor scandal, most of what HSBC is in trouble for actually happened half a decade ago. The bank itself was aware of problems with its Mexican subsidiary in 2007, when it sent in a high-level executive, Paul Thurston, to clear up the mess, but its taken a full decade for the Senate's investigations to bear fruit. Now that they have broken cover, though, HSBC is in for a rough ride indeed.